Time to start measuring the impact of EU funds on the economy

Experts have been repeating for years that it is not the amount of money obtained from the EU which is of key importance, but the pro-development way of utilizing it.

In 2013, the Polish Prime Minister Donald Tusk celebrated in Brussels the negotiated amount of EUR106bn for the period 2014-2020 with a cake made of edible euro banknotes. If Poland doesn’t want to look like a mindless consumer of EU funds experts stressed that the key is not the amount of money received from the European Union but the pro-development methods of utilizing it.

In May 2016 the new financial perspective of the European Union (commonly known as the “seven-year budget”) is formally functioning for its second year. For now, however, we certainly shouldn’t say that the new funds from Brussels have given Poland an impulse to accelerate economic growth. According to information provided in March 2016 by Jerzy Kwieciński, the deputy Minister of Development, so far Poland has only spent PLN3bn from the new perspective.

The politicians are aware of more than one year of delay in the launch of the EU funds. The plan of the deputy Prime Minister, Mateusz Morawiecki, is mainly based on the EU funds and sets the goal of the full activation of EU money in the middle of this year. After that the probability of a positive impact of the EU funds on the Polish economy will undoubtedly increase. However, Poland should be able to measure whether the Polish economy actually accelerated with the predicted momentum thanks to the funds (and therefore, whether the funds were put to good use).

Paradoxically, even though everyone is emphasizing that the funds are supposed to contribute to Poland’s development and not be spent for the sake of spending alone, it takes a lot of effort to find specific data linking the process of investing the EU funds with the data on economic growth and employment in Poland. Experts, politicians and journalists usually operate with macroeconomic figures, for example, they talk about the value of the agreements contracted so far with the beneficiaries of the EU funds or the amounts of individual operational programs.

For example, the Plan for Responsible Development provides the established allocations of money for the specific operational programs (e.g. EUR27.4bn for “Infrastructure and Environment”, EUR8.6bn for “Smart Development”, etc.). There are no estimates showing how many jobs will be created or how GDP growth can accelerate due to the spending of the EU funds in accordance with the priorities set out in the minister’s plan. Also, the references to the previous EU perspective included in the plan do not relate to previously published evaluations which provide reliable information on the spending of funds impact on specific economic figures (it would be interesting if the government’s plan accounted for such data, not only in relation to Poland but also to other countries of the European Union).

Others didn’t count either. Even one of the world’s largest consulting firms, KPMG, in its regular report on the use of EU funds in 2007-2013 failed to go beyond the hardly ambitious information about the level of contracted funds or information about the amount of funds that individual countries received from the EU.

It would seem that the effectiveness of spending of EU funds is of crucial importance. We know little about it because of the underdeveloped systems of evaluation, indicating how European funds – in the scale of Poland at a local and regional level – affect indicators such as economic growth and employment (what does the slogan of “growth and jobs” popular in EU policies mean in practice?). Even if such data is available somewhere, in the media only simple information dominate – how much of the funds Poland has received and how much has already been spent. There is no information about their impact on the economy or specific targets which are to be achieved. The complaints that EU funds do not contribute enough to Poland’s development are not supported by exact figures (an exception are data and forecasts concerning expenditures on research and development in relation to GDP).

The problem of the impact of funds on GDP

Despite all that, there are some papers discussing the impact which the EU funds have had on the whole of the Polish economy so far. In July 2014, the European Commission published the “ Sixth report on economic, social and territorial cohesion”. According to the report “cohesion policy in the 2007–2013 period made a substantial contribution to growth and jobs. It is estimated that it increased GDP by 2.1% annually in Latvia, 1.8% a year in Lithuania and 1.7% in Poland in relation to what GDP would be without the investments it has funded.” The authors of the report believe that the EU funds allocated for 2007-2013 will still have a strong impact on the economy in the year 2022. Then, thanks to the “old” funds, the Polish economy will grow by an additional 4.1 percentage points, which will be the third best result – after Latvia and Lithuania – among the 17 largest beneficiaries of the cohesion policy included in the comparisons.

This long-term positive impact on GDP is a result of a quite optimistic assumption that the funds will permanently increase the competitiveness of a given country. But, according to the report, the impact of the EU funds on the acceleration of the economy will paradoxically be lower during the given financial perspective because it will only be an effect of a short-term increase in demand (in Poland, let us recall, it was 1.7 percentage points of growth in 2013 compared with 4.1 percentage points in 2022).

Other data on the impact of EU funds on the Polish economy can be found in the analysis of the Civil Development Forum (FOR) published in October 2013 “(…) Some of Poland’s expenditures within the scope of the Common Agricultural Policy have been assessed as anti-developmental and stopping economic growth in the least developed regions. Poland’s development is also hindered by the allocation of the EU funds not in the areas where they would bring the greatest benefit for the economy and citizens, even though politicians fighting for the granting of the greatest possible amount of funds to Poland should negotiate try to prevent this. For example, in 2007-2013, the European funds for the digitization of the administration accounted for 0.8 per cent of the total EU funds allocated to Poland and 6.6 per cent of the money received by Slovakia (…).”

FOR quotes forecasts published by Janos Varga and Jan in’t Veld in 2009. According to them the EU funds for cohesion policy alone were supposed to increase Polish GDP in 2005-2011 by about 1.1 percentage points annually. “Meanwhile, studies published by the Ministry of Development indicate that the funds from the EU in this period increased the Polish economy, according to the first model by an average of 0.4 percentage points annually, and according to the second model by about 0.7 percentage points annually. This shows that in Poland the EU funds don’t significantly increase the GDP growth rate. Without them the growth rate would be similar.”

One of the rare cases where Polish media, including the biggest dailies Rzeczpospolita and Gazeta Wyborcza, have published forecasts of the impact of the EU funds for 2014-2020 on the Polish GDP is the report of Erste Group from March 2014. According to the authors of the report, Jan Jedlička and Katarzyna Rzentarzewska, during the implementation of the funds the Polish GDP will grow at an average rate of 3.6 per cent per year instead of 3.1 per cent (which means an acceleration of 0.5 percentage points). The funds will have the biggest impact on the Romanian economy (where the average GDP growth will be higher and will amount up to 4.3 per cent annually instead of 3.5 per cent), whereas the Czechs will record the smallest impact of the funds (2.9 per cent instead of 2.6 per cent).

The experts also emphasized that the countries of the Central and Eastern Europe will, to a large extent, spend EU money on the development of roads and railway infrastructure. They recommended, however, to also focus on R&D as a tool which could help the economies of the region in the long term. Interestingly, the experts of Erste Group did not write in their recommendations about the need for these states and the EU to monitor the real impact of funds on the economy, but that the EU should motivate the states to absorb the funds as quickly as possible by reprimanding the governments. Therefore, even the economists involved in the assessment of the impact of the funds on the economy suggest that what is important is the amount and speed of spending of the funds alone, and not the quality of their use in the context of the whole economic situation.

The discrepancies in the calculations of the impact of EU funds on the economy are therefore large (in Poland ranging from 0.4 to 1.7 percentage points of additional GDP growth annually). Then there are the discrepancies regarding the perspective for 2014-2020. Economists working on the commercial market estimate the impact in Poland at the level of 0.5 percentage points, while the EU is hoping for 2.3 percentage points. In both cases – the previous and current perspectives – the EU forecasts are distinguished by greater optimism.

Impact on employment

Getting back to the European Commission’s report, it is worth noting that according to Brussels in the previous perspective Poland was also the European leader in terms of the impact of the funds on employment. EU funds increased employment by 1 per cent annually, while in Slovakia and Latvia by only 0.4 per cent. One may wonder whether employment growth of 1 per cent is actually a lot. In the fourth quarter of 2010, the number of employed persons reported by the Central Statistical Office, calculated according to the BAEL methodology (as opposed to the Central Statistical Office’s usual data, it includes all forms of employment and economic entities, and not just FTEs in companies employing more than 9 persons) amounted to 15,557,000.

One per cent of this number is 155,570 people. It is the population of a medium-sized Polish city. On the other hand, according to the same Central Statistical Office data, the number of employees in the fourth quarter of 2011 compared with the previous year was only 0.36 per cent bigger, rather than 1 per cent, even though at that time the Polish economy began to recover after the global financial crisis. This of course is only a superficial analysis but it shows that the EU may overstate the impact of its funds on employment, and therefore it is a further proof of the EU’s excessive optimism, alongside with the forecasts of changes in GDP.

Besides, in terms of employment, the European Commission’s forecast for the following years presented in the report on cohesion is even more optimistic than the one concerning the budget perspective for 2007-2013 (and more precisely for 2007-2016). As a result of EU funds, and this applies to the previous ones, employment in Poland in 2022 will increase by 1.8 per cent compared with 2021.

Due to this Brussels – which is another concrete fact rarely found in the Polish media – boasts of its real success: “Between 2007 and 2012, the European Regional Development Fund (ERDF) created nearly 600,000 jobs. This is equivalent to almost 20% of the estimated job losses in the same period, since the onset of the financial crisis. The ESF helped 5.7 million people find employment and almost 8.6 million to obtain qualifications, while Member States reported that it had contributed to over 400,000 business start-ups or people becoming self-employed,” states the report.

In the local context, from which we should begin if we want to analyze the context of the whole country, the so-called employment efficiency indicators seem extremely interesting for drawing conclusions on the impact of the European funds on employment. It allows measuring proportion of the participants of a given professional activation program co-financed by the EU that found employment for at least three months within three months after the completion of the training. Comparing these indicators – derived from different projects, places and periods – would allow an assessment as to whether the forms of assistance aimed at the unemployed and subsidized by the EU are effective and meet the needs of both the participants and the local labor market.

Unfortunately, at present there is no database which would allow a comparison of the employment efficiency indicators in programs implemented, for example, in various Polish voivodeships. Usually we have to search for specific evaluations of the programs on the internet sites of the local labor offices. One of the few available pooled analyses is the one concerning the Kujawsko-Pomorskie Voivodeship, published in 2014. It indicates that among 502 participants of the surveyed EU-funded projects for so-called “people at risk of social exclusion”, half (51 per cent) have taken up any gainful employment. “About one-third (32 per cent) started working in accordance with the definition used in the calculation of the employment efficiency indicator.” This result is not very impressive.

A report entitled “Are the effects of the EU Cohesion Policy for the Polish regional labor markets worth their costs?” published by Zbigniew Mogiła, Marta Zaleska and Janusz Zaleski, that is based on macroeconomic simulations, shows that – for example – in 2008 the cost of creating one job as a part of the cohesion policy in Poland reached up to EUR62,295. The economists have also noted that the cost of creating one job from EU funds is equally high, both in the affluent Wielkopolskie Voivodeship, as well as in the less developed Warmia and Mazury.

Having regard for the necessity of monitoring the process of investing EUR106bn (PLN441bn), as well as the excessive, perhaps even biased, optimism of forecasts prepared by Brussels, it is worth noting that Polish politicians, media and economists should focus more on a careful assessment of the real impact of the EU funds on our economic results, and not on the individual “attractions” resulting from the funds, which are detached from the broader context (e.g. the fact that the voivodeships had to come up with their own so-called “smart specializations”).

The fact that studies of the impact of the EU funds on the economy are published and discussed so rarely and that politicians focus on the individual amounts and programs confirms the sad truth about Polish short-sighted approach to the funds – Poland simply want to gorge herself with them. It is not the speed of spending of EU funds, the level of contracted funds, or even the number of participants in the EU-funded projects which is the most important but rather the real impact of EU programs on the labor market and the overall condition of the economy.