The proposed EU budget for payments during 2014-2020 to be €908bn has yet to be agreed by the European Parliament, and MEPs have already signalled their disagreement with the figure agreed between governments last week. Some in parliament are threatening to hold the ballot in secret to reduce the impact of pressure from each government on ‘their’ MEPs. The European Commission, who wanted over €1tn to be agreed, are none too happy either. Is there a decent case for a higher budget?
To provide some context, in just six weeks in 2008 the USA spent $1.1tn towards saving the banks: this equivalent EU budget has to last over 60 times longer; yet deal with the real-world aftermath of the banking crisis across Europe’s regions as well as usual business.
There was a strong case for EU regional policy even before the global banking crisis in 2008 and the Eurozone crisis from 2011. Writing in 2007, Harvey Armstrong notes that imbalance in wealth between the richest and poorest EU region was by a factor of over 12 and in unemployment rates it was by a factor of 10. The recent economic recession will have made these imbalances worse, especially in terms of youth unemployment.
The classic economic approach to regional imbalances between different countries is a choice between (a) currency exchange rate movements, usually a devaluation to make the region more competitive, and (b) transfers of funds from richer regions through public spending on benefits, services, infrastructure and subsidy.
In right-wing politics there is also a third approoach: (c) to require incomes in the poorer regions to drop in order to attract companies to relocate from richer regions on cost grounds. The three problems with this more-low-income approach are that: the markets for the sales made by companies remains mostly in the richer regions so there are higher transport costs; the richer regions have clusters of supply chains and skills which companies rely on and cannot be moved; and that people in the poorer regions, especially those with high skills, will leave in large numbers to work in richer regions, leaving the poorer region even more dependent on money transfers, both private and public.
So, going back to the two choices of exchange rate devaluation or transfer funding, the problem for countries with poor regions which are within the eurozone is that devaluation is currently not an option. However, if the transfer funding to assist regional development is insufficient, then the pressure for countries with the poorest regions to take a radical step and leave the eurozone may become unstoppable.
Another radical approach would be to concentrate the EU regional funds on the very poorest areas, similarly to the existing Cohesion Fund, and to argue that countries elsewhere (‘the north EU’ in crude terms) must deal with their regional imbalances themselves. For the UK this would increase our net contribution and for poorer regions in the UK it would leave them to rely on funds from Westminster alone.
Throughout the EU, not just in northern countries, public opinion is moving away from supporting the EU project. If the choice is between staying in a job and staying in the euro, we should not be surprised to see growing public pressure in poor regions to leave and devalue.
Finally, there is the distant option of modifying value added tax. VAT is known to be itself regressive, taking proportionately more funds from poorer regions than richer ones. Poorer regions could pay less or zero VAT, similar to existing EU arrangements for the ‘outermost regions’, however this would alter the net contributions of richer countries, itself a strong political issue. Book:
Harvey Armstrong, (2007) Regional Policy, (in) Ali M. Agraa, The European Union: Economics and Policies, 8th Edition, Chapter 22 pp421-440.