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Transatlantic Blog

EU funding is closing European businesses

The EU Structural Funds program is the European Union’s redistributive mechanism aimed at reducing the inequalities in development between different EU member states. Wealthy EU members, such as Germany and (for two more years) the UK, pay more to the EU than they receive in benefits. In turn, poorer nations receive these funds in order to stimulate domestic industries. The budget for European Structural and Cohesion Funds totaled €347 billion between 2001 and 2013.

But do these programs, which the EU promotes as virtually the lone vehicle of growth to newer EU counties, meet their basic goals? Do they have exclusively, or mostly, positive effects? How do their costs compare to their benefits? And most importantly, how should people of faith think of this centrally planned program of international wealth redistribution?

EU funds sap entrepreneurship

Ironically, the worst casualties of the EU program have been their intended beneficiaries: entrepreneurs in Central and Eastern Europe. It is an open secret among Polish economists that the EU structural funds intended to support start-ups in Poland have caused the extinction of entire sectors of the Polish economy. How did this come about? The unintended consequences should have been apparent from the outset.

Entrepreneurs who wish to start their own business may apply for a grant of several thousand euros. Initially, they may obtain the advice of expert business consultants and, occasionally, a monthly allowance for a certain period on top of the grant. This allowed these firms to sell their products at less than market price. Since this artificially interfered with the price structure, competitors in the same sector of the same territory could not compete against the EU-subsidized firms. In the end, many declared bankruptcy.

But their loss was not to be their rivals’ gain. When the period of EU support ended, the managers had not learned how to do business under normal market conditions. They could not operate without the protection and guidance of the state and eventually, the new businesses went bankrupt as well. Economists observed this pattern in the research and development sectors in northwestern Poland, but the problem is systematic. The same mechanisms are at work in other regions that “benefit” from similar European programs.

EU funds: Some terms and conditions apply

If the problem is that EU funding tilts a level playing field, why do other start-ups not also apply for these programs? To begin with, several of these programs do not promise equal access to all EU residents. Many of them are addressed to a specific group of people like long-term unemployed, women, people over the age of 50, people with special needs, etc. This creates a situation where those who do not belong to any of these groups are less favored by the government and, as a result, handicapped when they try to operate in the market. The procedures also require a certain level of skill and knowledge of the recipient, making it more difficult for the (admittedly rare) untutored genius to thrive.

It bears remembering that these funds are granted by the political class, not businessmen – a division even deeper in the EU than in the U.S. The funds are distributed, from start to finish, by bureaucrats according to guidelines created by other bureaucrats. This procedure does not guarantee an effective allocation of funds. Instead, it rewards firms whose leaders are well-connected to the political establishment – or willing to bribe its members.

Side effects of EU "help"

Aside from market distortion, the funds share the weaknesses of other social programs implemented throughout the world. One of them is the program’s operating costs. As the money travels from taxpayer to recipient, it must go through a complex bureaucratic structure. In Poland, for instance, in 2014, almost 12,000 people were employed in the institutions that implement programs related to the EU structural funds. This consumed approximately 1.5 percent of the funds received.

This also affects the political dynamics of recipient nations. The enormous number of employees guarantees political support for the EU. Simply put, it is difficult to envision public employees or their family members voting for a political party that would be in favor of significantly reducing the European structures’ involvement in sovereign national economies, nor for tax cuts that would reduce overall spending (which would put their colleagues out of work). In general, this makes the nations less inclined toward the dynamism that produces a thriving economy.

Instead of boosting economic activity, European structural funds add to their recipients’ debt. Every project financed by these programs requires the beneficiary institution to put up matching funds. These are often taken from the government. Moreover, the institution is required to pay for the project by itself, and only later does the EU program partially reimburse the expenditure, sometimes far less than the money invested. The firm must bear the cost of preparing its paperwork and documentation, regardless of whether the EU ever awards this funding.

Catholic social teaching has addressed these concerns with warnings and prescriptions that Brussels would do well to take to heart.

A brief moral assessment of wealth redistribution

Roman Catholic social teaching admits that the free market is an institution of social importance because of its ability to multiply the production of goods and services. (See Pope John Paul II’s Laborem Exercens as but one example.) The Compendium of Catholic Social Teaching also says that the free market is the most efficient instrument for utilizing resources and effectively responding to human needs. At the same time, the Catholic Church teaches that when public authorities do take action, their policies must be consistent with subsidiarity and inspired by the principle of solidarity. The same document warns that “solidarity” without subsidiarity can easily degenerate into a welfare state.

The allocation of European structural funds, however, disregards the principle of subsidiarity. The decision of how to distribute the resources amassed from across the EU is made by the top level of EU governing structures by people who have, at best, a very weak connection with the recipients. The fact that the structural funds are used by EU authorities as a bargaining chip in the current political debate against the weakest economies entirely negates the principle of solidarity. The lack of transparency in awarding the funds also tends toward a crony capitalism rather than a virtuous capitalism, understood as “an economic system which recognizes the fundamental and positive role of business, the market, private property, and the resulting responsibility for the means of production, as well as free human creativity in the economic sector,” as Pope John Paul II wrote in Centesimus Annus.

It is clearly time to reconfigure EU economic policies so that they focus on the human person and his needs, instead of being a tool in a cynical political game.

(Photo credit: Reuben G. Brewer.  This photo has been cropped and modified for size. CC BY-SA 3.0.)


Marcin Rzegocki is a Ph.D. student at the Warsaw School of Economics.