EU Structural and Cohesion Funds need root and branch reform

Members of the European Parliament are refusing to approve the EU’s 2009 accounts because of irregularities in the way structural funds have been spent by Member States. The European Parliament’s Budgetary Control Committee this week demanded assurances from the European Commission that action will be taken against those EU countries that have mismanaged EU money before it agrees to “sign off” the accounts. Since the European Parliament is the so-called “discharge authority”, effectively relieving the Commission of its management responsibilities for the 2009 budget, this is no idle threat.

It is a novel idea to many, but the European Parliament is assuming the role of a scrupulous auditor and that has set it on a collision course with both the European Council and the European Commission. It’s not the first time that the Parliament has threatened to block the discharge. In 2008, a third of paid-out EU funds were declared as not having been managed according to European Commission rules. However this latest “bras-de-fer” is more likely to force the Commission to take much tougher action. If it does not - and the administering of structural funds continues unreformed - then the whole funding system could un-ravel.

The cohesion and structural fund system of the EU is vast. Designed to aid the poorest regions and sectors of Europe, the funds make up 35% of the EU's annual €130 billion budget. There is some evidence that they do have the effect of protecting the most vulnerable regions in Europe. However, what are we to make of an Elton John concert in Italy funded from structural funds to the tune of €1m and a Slovakia local soccer team funded by €600,000 earmarked for integrating the Roma community? Clearly there is abuse and it is widespread. It reflects badly on the EU which is invariably blamed for misspending rather than the Member State. It’s true that 80% of structural funds are jointly managed by the European Commission and Member State authorities but, in reality, the Commission has very few resources to monitor EU spending on national projects and initiatives. For the little credit the European Commission gets for projects that work and are well-run, they attract much more criticism for a culture of corruption and mismanagement that is seemingly beyond its control.

Would it be in the EU’s interest then to repatriate structural funding to the Member States? The Commission has jealously guarded its spending powers – but at what price? It takes the blame when it is not being tough enough with Member States where spending controls have been lax – and yet when it does take action, it only sours relations with the Member States. It’s a lose-lose situation.

Back in 2003, the then UK Chancellor of the Exchequer, Gordon Brown raised the prospect of “repatriating” structural funds. He believed the policy would be in line with the principle of subsidiarity – under which decisions are devolved to member states where possible. However, the idea was quickly dropped. The UK went onto agree a settlement of €308bn for structural funds for the period 2007-13, €9.4bn of which went to the UK.

It was recognised that for all its faults, structural funding was still important for the single market to function. Its aim is to correct economic imbalances between the wealthiest and poorest regions in Europe by funding job creation schemes in areas hit by industrial decline. It is arguably now even more important to have more cohesion in the EU in order to save the single currency from being vulnerable to further shocks.

However, the failings of the EU funding regime are too serious and too many to ignore. The whole system needs re-calibrating. The Centre for European Policy Studies has said, “In a climate of austerity, this will be a very serious point. The EU can only defend the structural funds if you can justify them and show that you are not misusing them.”
Of course, a number of Brussels insiders will just dismiss this as an over-reaction. Error rates are on the decline – and the Court of Auditors in November last year concluded that in most policy areas, over 95% of payments in 2009 were made correctly. However, MEPs have said that this is an unrepresentative sample of mostly small northern countries.

The Parliament wants Member States to provide assurances that adequate controls are in place but only four countries – Denmark, the UK, the Netherlands and Sweden – have agreed to submit any national management declarations. MEPs are hoping that the Commission will apply further pressure on Member States while they hold out from signing off the 2009 accounts. The Commission is trying to make the case for salvaging most of the structural funds for the next spending round 2013-2020 and MEPs playing hard-ball over the discharge does not help. Or perhaps it could be a blessing in disguise for the Commission: A chance for root and branch reform of structural funding? The huge regional disparities in the single market and in the Eurozone do require public investment programmes that generate local growth in areas abandoned by the private sector but the structural fund system is failing to meet the challenge – and is becoming more of a burden to the European Commission.