Europe's Budget Battles Pit East Against South

(Bloomberg View) -- Eastern Europe has been on the receiving end of European Union largesse ever since it joined the bloc. But eastern members likely have a big fight on their hands as the bloc's establishment attempts to link further aid to compliance with its vision of European values.

There are many fault lines in Europe, but when it comes to battles over money, it's east versus south. The Financial Times has reported that in the next seven-year budget, to be presented on May 2, the Commission plans to shift "tens of billions of euros" from countries such as Poland, Hungary and the Czech Republic to crisis-hit southern European nations such as Greece and Spain. The cohesion part of the budget, according to the London paper, will now become a "cohesion and values" category, directly linking outlays officially meant for nations with less than 90 of the EU average gross national income per capita to compliance with tenets such as the rule of law, democracy and human rights. Since the EU is openly worried about how these values are treated by the nationalist governments of Hungary and Poland and about the eastern European united front against EU-approved refugee quotas, better-behaved southern nations are the obvious targets for redistribution. 

German Guenther Oettinger, in charge of the EU's budget affairs, hasn't confirmed that this is how the budget will be rearranged. "Really?" was his sarcastic reply to the FT piece. But he needn't play coy; there is clearly support for that way of thinking. "It is also the moment to consider how the link between EU funding and the respect for the EU's fundamental values can be strengthened," the Commission remarked in a February paper written for the benefit of member states' national leaders. 

The EU budget isn't large. This year's commitments reach 160.1 billion euros ($195.5 billion), but it's only about 2 percent of the total spending by EU governments and 1 percent of their gross national income. And yet, the EU pays out enough in absolute terms to make its contributions important to specific economies.

Since 2004, when eastern European countries joined the EU, they have been the focus of its cohesion efforts while Italy -- the country that has recently borne the brunt of refugee arrivals -- has been, and remains, a net contributor.

Europe's Budget Battles Pit East Against South

On recent reporting trips to Poland and Hungary, I heard from both government and independent economists that with less cohesion funding from the EU, these countries' impressive economic growth would stall. Hungary in particular received, on a net basis, the equivalent of 4.5 percent of its economic output in EU subsidies in 2016, the latest year for which data are available. Cuts to cohesion funding could spell disaster for the nationalist eastern European governments' economic policies, designed to improve the lot of the poorest citizens in the least developed areas -- not coincidentally, also the nationalists' core electorate.

In both Hungary and Poland, the governments are fiscally conservative: Cutting external debt is one of their most important goals as they strive for more economic sovereignty. So the social programs they have approved, including generous assistance to families -- in line with the nationalists' demographic goals -- could be severely undermined by lower EU inflows. For example, one of the key reasons the Law and Justice Party (PiS) retains popularity in Poland -- a benefit of 500 zlotys ($145) a month to families with two children, or even with one child if family income is low -- costs some 5 billion euros a year. In 2016, Poland received 7.12 billion euros from the EU on a net basis. Cut even half of that and the family subsidy will create a major hole in the Polish budget.

The eastern European governments will fight this every step of the way. Zoltan Kovacs, chief spokesman for the Viktor Orban government, told me in Budapest:

The money we get from the EU is not a gift. We're getting money because we opened our markets in a disadvantageous position: Our firms were less competitive and not as well-capitalized as western European ones, and that's still the case. It's inevitable because it's the nature of integration, but compensation is due. We see the heroic efforts, trying to connect the cohesion funds to other issues, but hang on, under the EU treaties they have nothing to do with each other. If that money's not coming, it will mean the rules have changed.

Polish government officials have made the same point, describing cohesion funds as a means of compensating Poland for its economic colonization by western European banks and firms.

On the one hand, it doesn't make sense for the EU to help prickly nationalist parties channel money to their voter base so they can keep consolidating their power over courts and media and, ultimately, reducing the competitiveness of elections. On the other hand, trying to displace the nationalists by cutting their funding would be a transparently hostile act against governments that have strong voter support. And it's worth considering how they could respond.

The Polish and Hungarian governments will likely seek to recoup the money through special taxes, a practice pioneered by Orban after his return to power in 2010. Retail, media, energy and financial companies have had to pay levies on assets and revenues to fund the Orban government's social programs, and these levies are likely to increase to make up for any shortfall in EU funding. Nationalists could also retaliate by tilting their formidable propaganda machines against the bloc and become even more intractable in their dealings with it. Those kinds of disputes aren't what the EU needs before its Brexit scars -- including budgetary ones -- even begin to heal.

Confining action to a few symbolic cuts may alienate the southern Europeans. Greece, with 20 percent unemployment, and Italy with more than 10 percent -- both forced to deal with throngs of Middle Eastern and African immigrants who arrive by sea -- are perhaps in more need of EU funding than the east European countries with their labor shortages and border fences. 

If Oettinger's proposal for the 2021-2027 budget stirs up this hornet's nest, and it almost certainly will, the approval process -- which requires a unanimous vote by national leaders as well as the consent of the European Parliament -- can stretch out for years, beyond the life span of the current Commission, whose mandate runs out next year. It can also hurt the EU more that the amount of money involved would warrant. To get economic cohesion right, the EU needs more political cohesion, and at this point, it's not forthcoming.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website

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