ECONOMY

Extra EU funds is big achievement, but absorbing them will be tough

Prime Minister Antonis Samaras succeeded last week in securing Greece more European Union funds for the 2014-20 period than proposed by the European Commission. In doing so, he may have won another battle in the quest for putting the economy into a growth orbit, but not the war. At least not yet. To win the war for growth, the coalition government will have to make some fundamental changes in the way large transfers from the EU budget are put to work. The focus on absorbing as much EU money as possible is justified for a country in dire fiscal straits, but increasing the effectiveness of these funds is even more important for generating sustainable growth.

Following marathon talks between EU leaders at the last summit, Greece is going to get up to 18.3 billion euros from the bloc’s common budget between 2014 and 2020, which is more than the 11.2 billion euros proposed by the Commission, though less than the transfers allocated in the 2007-13 budget. Greece is going to receive 14.5 billion euros from the community support framework (ESPA) and another 1.8 billion for rural development.

Moreover, the country may get an additional 2 billion euros between 2017 and 2020 after the European Commission reassesses the EU budget allocation for all country members to take into account significant deviations in gross domestic product between 2012 and 2014-15.

Taking into account the reduction in the overall EU budget for the first time ever, the increase in the number of countries eligible for a piece from the EU budget pie and the use of pre-crisis Greek GDP level for calculations, the outcome is generally speaking positive for the country.

Of course, the overall transfers fall short of the sums allocated in the 2007-13 period, which amounted to over 20 billion euro from structural and cohesion funding and about 21 billion through the Common Agricultural Policy (CAP). The CAP included direct payments and interventions of 17 billion euros and about 4 billion allocated for rural development with most of the money being disbursed to farmers.

There is no question the large transfers from the EU budget are important for concrete reasons. First, they help reduce the budget deficit and contribute to growth by co-financing public investment spending at a rate of 95 percent for the EU and a mere 5 percent for Greece. Second, they help improve the current account balance. Third, they are a source of liquidity at a time when the country has lost access to markets and is relying on EU/International Monetary Fund bailout programs to fund its needs.

According to some analysts, income gains from the standard EU transfers have averaged at 2.5-3 percent of GDP annually over the 2007-12 period. These gains are bound to be smaller in coming years given the new, smaller allocations to Greece from the EU common budget.

It is easy for anyone to see the benefits of the EU funds fully absorbed by Greece and therefore the emphasis on absorption is justified. This is more so when some funds, which had been allocated to the country in the 2007-13 EU budget and amount to billions of euros, are at risk and may be lost if the relevant project contracts are not signed by year-end, according to people with knowledge of the situation.

However, the pressure to absorb the EU funds fast may be somewhat self-defeating. This is because a good deal of money is directed toward financing various projects with doubtful results but the pressure of time makes it almost impossible to cancel the projects, change their structure and repeat the bidding process once again, not to mention likely legal challenges by bidders. According to critics, many projects and programs are designed to boost the incomes of the stakeholders of the companies undertaking them rather than provide significant added value to the economy in the medium term.

Channeling the EU funds into more productive investments with the goal of propping up the country’s potential output necessitates a drastic overhaul of the existing infrastructure. The overhaul should ideally include the closure of state entities responsible for designing and assessing programs funded by the EU and setting up new organizations in their place with mostly new staff to sever ties with vested interests. Still, this drastic overhaul requires time as well, although some experts contend it could take just a month or two for the new organizations to be up and running.

Of course, there is also the middle-of-the-road way, where the existing organizations are revamped with new experts hired and put in key positions and internal processes are changed to better design programs and evaluate bids. However, resistance to change from within the entities may prove an insurmountable hurdle in this case.

So Greece may breathe a sigh of relief after securing up to 18.3 billion euros from the EU common budget for the 2014-20 period. However, it will have to face the dilemma of either speeding up the absorption of EU funds to help close the budget hole and boost public investments or increasing the effectiveness of the funds by overhauling the existing infrastructure and processes, which requires more time. The government has the last word and may also decide to take the middle way described above. However, in this writer’s view, the best strategy is the clear strategy.