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New Open Europe briefing: Bringing EU regional policy back to the UK could save £4.2 billion

24 Jan 2012

Open Europe has today published a new briefing looking at the arguments for and against the EU’s involvement in regional spending in Britain and other member states. Between 2007 and 2013, Britain will pay in around £30bn to the EU’s so-called structural and cohesion funds, but get back just under £9bn.

Of the UK’s overall contribution to the funds, 70% goes to other member states, 25% is redistributed within the same UK region in which the funds were raised, and only 5% is redistributed between richer and poorer regions within the UK. While there is a strong case for having an EU regional policy to assist the poorer member states that have joined the EU since 2004, the briefing notes that the participation of richer member states merely creates a circular flow of money which adds costs and channels funds away from where they can have the biggest comparative impact.

Most UK regions are also short-changed by the structural funds by paying in more than they get out. For example, the West Midlands, which has the lowest disposable income per capita in the UK, pays £3.55 to the structural funds for every £1 it gets back.

If the UK and other richer member states were to pay for their own regional policies and the use of the remaining structural funds was limited to poorer EU member states – as was the policy of the previous Labour Government – this could save the UK up to £4.2bn over seven years, assuming that the next EU budget takes a similar shape as the current one. If this money was re-invested in the UK regions, along with the amount that is currently spent via the EU, the receipts of each UK region should increase by around 45% compared to the amount of grants they currently get.

Open Europe's analyst and lead author of the report, Pawel Swidlicki, said,

“Limiting EU regional spending to poorer countries would be a win-win situation for both Britain and Europe. It would channel more cash to the newest member states and allow the UK to spend exactly the same amount on its regions as it does now, with the option of adding the several billion that it would save from streamlining the structural funds. It would also eliminate a range of additional costs and allow the Government to radically improve the targeting of funds towards poorer areas and to viable projects.”

“The Coalition government should match the pledge made by the previous Labour Government and seek to bring regional policy back to the UK. The economic, social and democratic arguments clearly point in favour of this policy option.”

To read Open Europe's report, "Off Target: The case for bringing regional policy back home", please click here: http://www.openeurope.org.uk/Content/Documents/Pdfs/2012EUstructuralfunds.pdf

Executive Summary

- In 2003, the then UK Chancellor, Gordon Brown, said that the time was ripe to “bring regional policy back to Britain.” However, the Coalition has dropped the previous Government’s commitment to devolve regional spending to the UK and to focus EU structural funds exclusively on the less developed EU member states.

- Over the 2007-2013 EU budgetary period, the UK is contributing roughly £29.5bn to the EU’s structural and cohesion funds, and getting back around £8.7bn, making it the third largest net loser from the funds, after France and Germany.

- The structural funds can have a positive impact in individual cases, if combined with good public administration and pro-growth policies, as the example of Ireland in the 1990s shows. However, there is no conclusive evidence that the structural funds have had an overall positive economic effect on Europe’s economy. There is still a number of problems with the funds, including few links between funding and results.

- Most fundamentally, involving all member states in EU regional spending, irrespective of their relative wealth, is economically irrational. As the Commission itself has admitted, this exercise creates “considerable administrative and opportunity costs.”

- First, it can channel funds away from where they can have the most comparative impact, as richer member states already attract investment, which, at worst, can be crowded out by the structural funds. Secondly, in richer member states, the structural funds mostly serve to redistribute income within the same regions. We estimate that of the UK’s overall contribution, 70% goes to other member states, only 5% is redistributed across regions, with the remaining 25% being redistributed within the same region in which the funds were raised. This begs the question what the added economic value of the structural funds is for Britain.

- Of the 37 regions in Britain under the EU’s classification system, 35 are net contributors to the structural funds, with only West Wales and Cornwall net beneficiaries. This means that some relatively poor areas lose out substantially.

- For example, we estimate that the West Midlands, which has the lowest disposable income per capita in the UK, pays £3.55 to the structural funds for every £1 it gets back. Merseyside, which has a disposable income of 88% of the UK average, pays in £2.88 for every £1 it gets back. All the regions in the North East pay in more than they get back, as does Northern Ireland (£1.58 for every £1 it gets back). All sub-regions in Scotland are likewise net losers from the structural funds.

- Some regions that are under the UK average for disposable income per capita pay far higher contribution ratios than those above the average; for example Devon (94% of the average) pays £6.58 for every £1 it gets back while Herefordshire, Worcestershire and Warwickshire (105% of the average) pays £4.49.

- As proposed by the Labour Government, limiting the funds to EU member states with income levels below 90% of the EU average could create a win-win situation. Such a move would instantly make the funds easier to manage and tailor around the needs of the poorest regions in the EU. We estimate that 22 or 23 out of 27 member states would also either pay less or get more out of the EU budget, as the funds are no longer transferred between richer member states. This option could therefore attract strong political support in many capitals.

- To illustrate: if this policy had been adopted for this EU budget period (2007-2013), France would have emerged as the biggest winner from focussing the funds on the poorer states, cutting up to €12.8bn from its net contribution to the EU budget over seven years. The UK comes second, saving up to €5.1bn (£4.2bn) over seven years. Importantly, all new member states would have seen a rise in the amount of subsidies they receive (except for Slovenia under one possible scenario), with Poland gaining the most.

- Italy, Spain and Greece would all lose out substantially, but they are already set to get a smaller share of EU subsidies as recent enlargements continue to erode their net receipts. More importantly, to cope with the eurozone crisis, these countries need far more responsive and targeted support than is currently being offered by the structural funds.

- Devolving regional policy should involve the Coalition promising to ring-fence the £8.7bn that it currently spends via the EU structural policies for continued regional and regeneration spending around Britain. In addition, it could pledge to re-invest its projected saving of up to £4.2bn under the 90% threshold back into regional development. This would mean that virtually all UK regions would experience a rise in the amount of subsidies they receive by around 45%. For example, Cornwall could get an additional £207 million over seven years under such an arrangement.

- However, the UK must also make sure that it replaces the structural funds with something that works radically better. This could include adding a second pillar to the existing Regional Growth Fund which would see potential projects competing for an enhanced pot of cash. Rather than the current raft of, at times contradictory objectives, the disbursement should be more heavily premised on which project has the strongest business case. Focus would be on results, rather than getting the money out of the door, as is often the case at present.

NOTES TO EDITORS

1) For more information, please contact the office on 0044 (0)207 197 2333, Mats Persson on 0044 (0)779 946 0691 or Pawel Swidlicki on 0044 (0)796 607 0172.

2) Open Europe is an independent think-tank calling for reform of the European Union. Its supporters include: Lord Leach of Fairford, Director, Jardine Matheson Holdings Ltd; Peter Cruddas, CMC Markets Plc; Lord Wolfson, Chief Executive, Next Plc; Hugh Sloane, Co-Founder and Chief Executive, Sloane Robinson; Sir Stuart Rose, former Chairman, Marks and Spencer Plc; Jeremy Hosking, Director, Marathon Asset Management; Sir Henry Keswick, Chairman, Jardine Matheson Holdings Ltd; Sir Martin Jacomb, former Chairman, Prudential Plc; Lord Sainsbury of Preston Candover KG, Life President, J Sainsbury Plc; Michael Dobson, Chief Executive, Schroders Plc; David Mayhew, former Chairman, JP Morgan Cazenove.

For a full list, please click here: http://www.openeurope.org.uk/Page/Supporters/en/LIVE

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