The Controversial EU Cohesion Policy Falls Short

8 MINS READFeb 14, 2015 | 14:01 GMT
The Controversial EU Cohesion Policy Falls Short
A tram passes the giant euro symbol outside the European Central Bank headquarters in Frankfurt.
(Hannelore Foerster/Getty Images)

Funding will not be enough to halt the political fragmentation in the European Union. This is especially the case with the European Union's Cohesion Policy, a series of investment programs for the bloc's poorest regions and one of its most expensive policies. The idea behind these programs is that all members of the continental bloc would eventually rise to the same level of economic development. This equality would in turn solidify the legitimacy of the continental integration process. But Europe's economic and political crisis has shown that decades of integration and billions of euros' worth of EU investment have created only limited political and economic cohesion in Europe.

In many countries, corruption and domestic constraints prevent cohesion funds from going where they would be most useful. More important, the EU Cohesion Policy was designed for times of economic prosperity. Though the policy involves significant amounts of money, it is a fraction of what many Southern and Eastern European countries need to solve their financial problems and social crises. Brussels could threaten to withdraw cohesion funds as a means of pressuring rebellious countries, but such coercion is not the same thing as cohesion.

The Cohesion Policy includes several funds of different sizes and goals that invest in areas as diverse as infrastructure and social policies, with the common objective of reducing economic and social disparities among EU members. EU member states and the EU Parliament define the size and rules of these funds at the beginning of each budgetary period (in the European Union, budgets are debated every seven years) and allocate to countries annually. The budget for the Cohesion Policy for 2014-2020 is 351.8 billion euros ($401 billion) — a third of the bloc's total budget, making the Cohesion Policy the European Union's second largest program after the Common Agricultural Policy.

Cohesion policy programs are relatively new to the European Union. They evolved progressively from a redistributive mechanism based on quotas for each member state to a regional policy based on global goals and priorities. These policies assume that economic liberalization and political integration need to be accompanied by policies aimed at achieving cohesion among member states.

As integration deepened in the 1960s, European leaders began to discuss policies to reduce development inequalities in the bloc. A decade later, at least two factors accelerated the debate. The first was the economic malaise of the early 1970s, which reignited the issue of unequal development in the European Community. The second was enlargement: The accession of the United Kingdom, Denmark and, particularly, Ireland (a country that was poorer than its community peers) accelerated the introduction of regional funding.

The enlargement of the European Community was a turning point for another reason: As the continental bloc grew bigger, European officials encountered the question of creating a "European identity" intimately linked to the legitimacy of the entire integration process. Consequently, cohesion policies contain an element of propaganda to communicate the virtues of continental integration.

Like the accession of Ireland in the early 1970s, the accession of Portugal, Greece and Spain in the 1980s brought about redesigns in the cohesion policy to assist the new (and relatively poorer) members of the bloc and to base the allocations on ranges of development rather than fixed quotas. These changes also had a political intention, as the European Community was interested in raising the quality of life in the countries where dictatorships had ended and social cohesion remained fragile. During these years, these programs became larger, and co-decision mechanisms between national governments and supranational institutions were introduced. The mid-2000s led to additional reforms, this time to face the challenges created by the new member states from the east, most of which were considerably less developed than EU members in the west.

The Main Beneficiaries

In order to qualify to receive funds, regions in each country are classified as "less developed" (areas where GDP per capita is less than 75 percent of the EU average), "in transition" (areas where the GDP per capita is 75-90 percent of the EU average) and "more developed" (areas where GDP per capita exceeds 90 percent of the EU average). Depending on an area's classification, the European Union can provide 50-85 percent of the total financing of a project (the poorest regions get the highest co-financing rates). The potential beneficiaries of these funds include public institutions, companies, universities and nongovernmental organizations.

For the 2014-2020 period, the largest portion of the money — 182 billion euros — will go to "less developed" regions, which represent 27 percent of the population in the continental bloc. These regions include most of Poland, the Baltic States, the Czech Republic, Slovakia, Hungary, Romania, Croatia, Slovenia, Bulgaria and Portugal, as well as southern Italy and northern Greece.

For many countries, cohesion funds are a key part of their economies. In places such as Poland, Romania, the Czech Republic, Slovakia and Hungary, allocations from the EU cohesion funds for the 2014-2020 period equal 2-3 percent of the country's GDP. In absolute terms, Poland is the winner; it has been allocated 77.6 billion euros, the highest figure in the European Union. Hungary is the winner in terms of allocation as a percentage of GDP; cohesion funds represent 3.2 percent of Hungary's economy. Estonia, Slovakia and Lithuania have the highest allocations per capita, while the Netherlands, Denmark and Luxembourg have the lowest allocations both per capita and relative to GDP.

But qualifying for EU funding does not translate to an ability to absorb the funds. Member states in Southern and Eastern Europe still experience difficulties in spending this money. In some cases, these countries lack the domestic capacity to co-finance the projects supported by the European Union. In others, national and local authorities lack the know-how and institutional framework to successfully apply for funds. There are also cases where the bureaucracy is so excessive that it discourages potential applicants.

This creates a paradox: Some of the poorest countries in the European Union are also the countries less able to absorb the funds allocated to them. However, there are differences from country to country. For example, Lithuania managed to absorb more than 90 percent of the money it was allocated between 2007 and 2013, but Romania only absorbed slightly more than 50 percent.

Management and Control

Like the Common Agricultural Policy, the Cohesion Policy is controversial. Some critics characterize the Cohesion Policy as too complex and lacking clear goals. Others highlight the difficulty of seeking economic liberalization among 28 countries while pursuing solidarity and economic cohesion. Critics have also argued that substantial amounts of money still go to countries with GDPs above the continental average. Others point out the European Union's perennial struggle to find a balance between designing plans at the supranational level and letting member states manage them at the national, regional and municipal levels.

In addition, monitoring these investments (or the lack thereof) traditionally has been controversial. With hundreds of thousands of projects being approved, managed and to a large extent supervised by 28 national governments and thousands of regional and municipal governments every year, full control of the use of the money is virtually impossible.

Accusations of corruption are common and include allegations that public officials in member states were bribed to award EU-sponsored contracts and companies have reported inflated costs. In the years leading to the EU crisis, numerous reports indicated that some infrastructure projects were undertaken simply because money was available — such as the construction of airports in Spain that would soon be abandoned for lack of use.

A Political Tool?

With so much money involved, the Cohesion Policy is an important political battleground in the European Union. Every seven years, member states debate a new budget for the continental bloc, and the Cohesion Policy is a key part of the discussion. The debate is generally long: The EU Commission makes a proposal, which is then voted on by member states and the EU Parliament. Countries fight on many fronts, including the headline figure and their national allocations. Europe's financial crisis has affected cohesion funds; in the last round of negotiations in 2012 and 2013, large economies such as Germany and the United Kingdom successfully pushed for a smaller EU budget.

The European Union can use cohesion funds as a negotiation tool as well, because Brussels is allowed to suspend funding for countries that fail to meet their deficit targets. However, the decision has to be made by countries voting by qualified majority and has rarely been used. Brussels exercised the threat for the first time in early 2012, when the EU Commission threatened to suspend payments for some cohesion funds projects in Hungary. The formal reason for the threat was Budapest's failure to reduce its deficit, but the incident occurred as tension was rising between the government of Prime Minister Viktor Orban and the EU Commission. Eventually, Budapest and Brussels compromised, and Hungary announced a handful of corrective actions in its budget.

Cohesion funds become particularly important in times of crisis, when member states' loyalty to the European Union is tested. The process of continental integration evolved quickly when the bloc kept its promise of economic prosperity. With the economic crisis casting doubts over that promise, many countries are reassessing their positions in the bloc. Cohesion money is a likely factor in these assessments. For countries such as the United Kingdom or Denmark, leaving the European Union would not mean a substantial loss of EU-related money (as they get little in terms of agricultural or cohesion funds). But for countries such as Greece, Hungary or Portugal, EU-sponsored investment is a substantial part of their economic and political calculations. Similarly, countries such as Bulgaria and Slovakia are constantly attempting to balance between Russia, which they depend on for energy imports, and the European Union, which they depend on for subsidies.

Despite these considerations, cohesion programs have failed to achieve their main goal: creating a more economically homogeneous Europe. Evidence of vast economic gaps between Southern and Eastern Europe and more developed nations in Northern and Western Europe are readily apparent. Record high unemployment levels, especially among the youth, plague countries such as Spain, Portugal, Italy and Greece, and massive emigrations occur in countries such as Poland, Romania and Bulgaria to Western Europe. The rise in political parties that criticize the European Union and propose to reverse the process of continental integration is another symptom of the lack of cohesion. Though many governments in the EU periphery will keep the cohesion funds in mind when assessing their national priorities, fragmentation in the European Union will continue.

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