EUROPE : THE SEVEN - YEAR HITCH / THE FINANCIAL TIMES ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

August 21, 2011 10:57 pm

Europe: The seven-year hitch

By Joshua Chaffin and Jan Cienski

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Promenade prominence: the beachfront walkway leading to the pier at the Polish Baltic town of Miedzyzdroje was refurbished with EU funding, one of many smaller such projects acrossthe continent. Poland and other recent entrants face a struggle to keep such aid flowing

In the south-east corner of Poland, along the Wisloka river, the European Union has literally helped to clear the stench of poverty. Where sewage once flowed directly into open ditches, 600km of modern waste pipes now convey it to 10 water treatment plants, thanks to a €47m ($67m) project paid for mostly by the EU.

“Without these funds, the project would have been impossible,” says Stanislaw Slawniak, who oversaw the construction. “Some of these localities are very poor, with almost no industry, which makes it very difficult for them to raise the money.”

 

The sewage project is just one example of the €67bn bounty of EU development grants Poland has won since it joined the bloc in 2004 – money that has been used for projects big and small, from the construction of a superhighway between Warsaw and the German border to a refurbished boardwalk in the seaside Baltic resort of Miedzyzdroje.

Thanks in part to such largesse, the country’s economy has shaken off the Soviet-era rust to become one of Europe’s most robust growth stories – even as much of the rest of the continent is mired in recession and austerity. Officials boast that they preside over Europe’s biggest building site.

The Polish economy is expected to grow by 4 per cent this year. Not surprisingly, Poles are now more enthusiastic about the EU than people in any other member state, according to opinion polls.

Yet as talks get under way on the EU’s next long-term budget, a question mark hangs over all the cranes and scaffolding: can Poland and the other central and eastern European countries that joined the bloc in 2004 and 2007 expect that cash to keep flowing?

The answer will come into focus over the next 18 months, as 27 member states and assorted institutions fight to put their stamp on the roughly €1,000bn the bloc will spend during the seven-year period from 2014 to 2020. The results of that exercise could shape the world’s largest economy for years to come as it seeks to emerge from an unrelenting debt crisis that has sapped its momentum and left even stalwart supporters struggling to define its future.

It will not be pleasant. Even in the best of times, the EU’s multi-annual budget negotiation has played out as a proxy for the cross-border continental conflict the bloc was created to end.

This budget fight looks set to be more fraught than ever. When the current edition was being hashed out seven years ago, the newer members could count on buoyant economies in western Europe and the broad optimism surrounding the bloc’s eastward expansion, which would unify a continent cleft in half by the second world war. But, after more than a year of economic crisis – and with no clear end in sight – both are now in retreat.

“The euro crisis has left many people in the richer EU countries opposed to any kind of transfers to poorer countries,” writes Stephen Tindale, an associate fellow at the Centre for European Reform, in a recent review of the budget. In the minds of many Europeans, Mr Tindale argues, development funds to help poorer regions and national economic bail-outs had become one and the same.

Elzbieta Bienkowska, who as Poland’s regional development minister has overseen much of the EU-financed construction boom, acknowledges the growing backlash. “Of course we are afraid,” Ms Bienkowska says. “But this is our task: to confront and convince all European members that this is [also] a policy for them.”

Traditionally, the main battle lines have been drawn between the large member states in western Europe, particularly France versus Britain. The former has been the chief defender of the Byzantine system of agricultural subsidies that has fattened its farmers and represents one of the EU’s foundations. With less agriculture of its own, the UK has been determined to have those subsidies scrapped.

Failing that, Britain’s sine qua non has been preserving the multibillion-euro rebate that is supposed to compensate for the gap between what the country pays to Brussels and what its citizens get back. It is only partly in jest that José Manuel Barroso, president of the European Commission, the bloc’s executive arm, quips that the EU cannot afford a shorter budget period because the exercise is simply too painful to endure more than every seven years.

But the emergence of a Polish-led group of newer member states is now threatening to open an eastern front in the budget battle. Moreover, there is more than just money on the line for Poland. The budget battle is seen in Warsaw as an opportunity to fulfil its ambition of joining the EU’s biggest powers at the top table. Poland is, after all, now the EU’s seventh largest economy.
“This is seen as a sort of maturity test in Europe,” says one Polish diplomat.

The early signs do not bode well. Britain’s David Cameron, prime minister of a country that has traditionally seen itself as a close ally of the central and eastern European member states, has made cutting the EU budget the overriding focus of his policy on Europe. That is leading many in Brussels to speculate that his scalpel will be aimed more at development funds this time rather than support for French agriculture.

Indeed, well before Mr Barroso published his proposal for the budget last month, the EU’s biggest member states were already manoeuvring to carve up the budget in their favour. As early as December last year, Mr Cameron upended a summit meeting devoted to the Greek debt crisis to recruit France and Germany to sign a letter urging the commission to freeze spending. Germany had already endorsed a French call to protect the common agricultural policy.

In central and eastern Europe, worried diplomats see the outline of a plan to raid the element of the budget that they hold dear – the development aid, or structural and cohesion funds. “Cohesion policy is the biggest loser,” a senior Hungarian diplomat says of Mr Barroso’s proposal.
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To supporters, cohesion funds are the lifeblood of EU expansion. Through investments in roads, airports and other infrastructure, they help poorer regions catch up to more affluent ones, binding the union together and bolstering its economy.

Ireland and Spain were transformed by the programme in the 1970s and 1980s. To critics, though, the development funds are the sort of lavish EU spending that is prone to mismanagement and corruption.

At first glance, Mr Barroso’s cohesion proposal appears generous. It weighs in at €376bn, or 37 per cent of that total – an increase from 35 per cent in the current budget. But a closer inspection suggests that there may be less money for the new member states.

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Included under the cohesion budget is a new €40bn “connectivity” fund to build cross-border infrastructure projects. Several diplomats from the new member states suspect the fund will disproportionately benefit high-speed railways and pipeline connections in the old member states.

A proposed change in the eligibility rules would make it easier for wealthier regions to grab a share of the funds, as well. A new cap on funding for each member state and tough new conditions are also being viewed by many in the east as a way to keep more money in the west.“The mood is much worse than it was seven years ago,” the Hungarian diplomat laments. “I expect very tough fights.”

Even as Poland’s prized structural and cohesion funds face a revamp, Mr Barroso’s budget proposal would keep French-backed agricultural spending as its biggest line-item, accounting for some 40 per cent of the overall pot. That has prompted criticism from many analysts that the Commission has failed to seize on the crisis to shake up the budget and channel more money into the kind of innovative, growth-enhancing projects he so frequently touts as Europe’s future.

“I saw it, and I felt like: ‘I’m looking at the same thing as last time’,” Jorge Nunez-Ferrer, an analyst at the Centre for European Policy Studies, a Brussels think-tank, says of his reaction to Mr Barroso’s proposal.

In fairness to Mr Barroso, even critics acknowledge that it is almost impossible to craft a budget that squares the competing – and often conflicting – demands of 27 different member states as well as an increasingly assertive European parliament. “I think this is as revolutionary as you can be in Europe,” says Alexander Stubb, Finland’s minister for European affairs, who notes that agriculture spending was steadily shrinking as a percentage of the whole. “The Commission should be thanked for what it put on the table.”
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As they prepare to defend their interests in Brussels, the newer member states can take heart that they are better represented in the EU capital than ever before – particularly Poland, which has emerged as the region’s de facto leader by virtue of its size and economic strength.

In a sign of how important it sees the budget fight to its national standing, Poland was able to secure the Commission’s budget portfolio for Janusz Lewandowski, the country’s former privatisation minister and long-time MEP. Its role in the debate will also be heightened by the fact the negotiations have commenced during the country’s first turn holding the EU’s six-month rotating presidency. Warsaw has already sought to use that platform to present itself as a European success story brought about by the power of cohesion funds.

More than its own development, though, Poland’s most compelling argument may be that cohesion funds also benefit the wealthy member states that bankroll them, since their companies tend to snag many of the biggest contracts to build infrastructure projects. An oft-cited study commissioned by Ms Bienkowska’s ministry claims that for each euro in cohesion funding spent in Poland, the 15 older members receive 36 cents in the form of additional demand for their goods and services.

Austria’s Strabag and the Polish-Portuguese consortium Mota Engil Central Europe are building parts of the S3 expressway running north-south along Poland’s western border.
Mota Engil is also building part of the S17 express road in eastern Poland, as is the Polish-Spanish consortium Budimex-Ferrovial Agroman. These and other new highways that are upgrading one of the worst road systems in Europe should also make it faster and cheaper for big exporters such as Germany to zip their products around the bloc, the Poles argue. “This is a huge benefit for the other countries,” says Ms Bienkowska.

But many of the EU-funded projects are much smaller – and more difficult to value. In Miedzyzdroje, the Baltic seaside town near the German border, for example, benches and bronze imprints of obscure Polish stars of music and movies now line the beachfront walkways that was refurbished with €2m in EU funding. “It’s supposed to pull people into town,” Henryk Nogala, the town clerk, says hopefully.

Over the next 18 months, fellow member states will judge whether that was European money well spent.

BRITISH VERSUS FRENCH BENEFITS: Barroso puts the UK rebate under pressure and Cameron on the back foot

Two weeks before José Manuel Barroso, the European Commission president, unveiled his proposal for the bloc’s next long-term budget, he paid a visit to Downing Street to huddle with David Cameron, writes Joshua Chaffin.

The message he delivered at the end of June, say those in the know, was that he understood the UK prime minister’s concerns about the budget – even if he would not be able to satisfy them all. So British diplomats were “gobsmacked”, to quote one, when Mr Barroso eventually presented a proposal that trampled all over the UK’s red lines.

By their mathematics, the budget would amount to an 11 per cent increase over the freeze Mr Cameron had demanded, or an extra €105bn ($151bn) over seven years. It also calls for a tax on financial transactions to fund the Union – sure to fall disproportionately on the City of London.

Worst of all, Mr Barroso vowed to undo the one thing Mr Cameron and other British Conservatives hold sacrosanct in their dealings with Brussels: the budget rebate negotiated by a handbag-waving Margaret Thatcher at a 1984 Fontainebleau summit in France. It was intended to address the imbalance between what the UK paid into the budget and what it received in return. But, said Mr Barroso: “The time has come to reform the system of rebates.”

The Commission’s offer of a new “corrective mechanism” may sound, on the face of it, appealing. The UK would receive a lump sum of €3.6bn for each of the next seven years – roughly equal to what it receives under the current rebate and far more than any of the EU’s other net contributors.

The catch, say analysts and diplomats, is that the guarantee secured by Mrs Thatcher would be broken – turning a permanent rebate into a shakier benefit that Mr Cameron and his successors would have to renegotiate every seven years. British diplomats insist that they will reject any offer that affects the permanence of the rebate.

Still, just by putting the rebate on the bargaining table, Mr Barroso may succeed in forcing Mr Cameron on to the defensive, thus making the UK more likely to give ground elsewhere.

“David Cameron is in a tough spot,” says Jorge Nuñez Ferrer at the Centre for European Policy Studies, a Brussels think-tank. “I think the Commission knows that the rebate is so important to the UK that you can actually get a lot of other things you want just by letting them keep it.”

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Copyright The Financial Times Limited 2011.