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DIVERSITY IN THE CONVERGENCE PROCESS OF ACCESSION COUNTRIES Urmas Varblane University of Tartu

This article discusses the growing dependency on EU structural funds in the Baltic countries and the need for exit strategies as funding gradually decreases. It highlights the importance of improving fund utilization to support long-term productivity growth. The article argues that the Baltic nations should prepare exit strategies to finance research with lower EU cohesion support. It compares EU structural funds with the Marshal Plan and emphasizes the aim of reducing regional disparities in income and wealth. The Multiannual Financial Framework and budget allocations for regional policy are also examined. The article presents data on EU support to the Baltic countries and the positive role of EU funds during crises. Suggestions for survival with declining EU funding are proposed, stressing the necessity of complex decisions for sustainable finance post-reduction.

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DIVERSITY IN THE CONVERGENCE PROCESS OF ACCESSION COUNTRIES Urmas Varblane University of Tartu

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  1. EU STRUCTURAL FUNDS IN THE BALTIC COUNTRIES – GROWING DEPENDENCY AND EXIT STRATEGIES 4th Meeting of Baltic-Nordic Independent Fiscal Insitutions 11th of June 2018, Riga Urmas Varblane DIVERSITY IN THE CONVERGENCE PROCESS OFACCESSIONCOUNTRIES Urmas Varblane University of Tartu

  2. Short message of the article • Article argues that the Baltic countries overlook the additionality principle of the EU cohesion policy • Structural funds are replacing the Baltic countries’ own funding • During the current EU programming period 2014 - 2020 • the exit strategies should be prepared by the governments of • Baltic countries in order to be able to finance research with • significantly lower support from EU cohesion funds • Urgent need is to improve the quality of use of the EU support funds by all three countries in order to support long-run productivity growth and increase the competitiveness of the Baltic countries.

  3. Why EU structural funds? • EU structural funds vs. Marshal plan(officially European Recovery Program) after VWII • US gave $13 bn (approx.$120 bn. in current value) to help rebuild European economies since1948 • Aim of the EU cohesion policy – to reduce regional disparities in income, wealth and opportunities • “Cohesion policy, also known as regional policy, encompasses EU action to address economic and social imbalances, and to help less-favoured regions to compete within the single market”The Multiannual Financial Framework 2014-20 - European Union Committee • BUT - It is intended to be a supplementary andtemporaryfunding • Four main principles as cornerstones: concentration, programming, partnership and additionality.

  4. Available budget.Financial allocations 2014-2020 Funding for regional and cohesion policy in 2014-2020 amounts to €351.8 bn CF ERDF

  5. Planned allocation of EU structural funds for the Central and Eastern European (CEE) members of EU during two programming periods between 2007-2020

  6. EU support 2014-2020 – average annual allocation per capita (left scale) and as of GDP (%) (right scale)

  7. Average of net EU contributions as % of GNI in CEE countries, 2000-2016

  8. EU net supportto Baltic countries2004-2016(annualoperatingbudgetarybalance, % GNI)

  9. Net revenue of Estonia received from the EU budget (as of GDP) between 2000-2016 Calculations using data from the EU financial report dataset, 2018.

  10. Positive role of EU funds in Estonia during the crisis • AllowstoincreasethebudgetWITHOUT INCREASING PUBLIC SECTOR DEBT • Duringeconomiccrisistheacceleratedused of EU fundswasanimportantbufferin Estonia (+400 mill. EUR) whichcoveredreduction of taxrevenues (by 400 million) in 2009 budget • Maintainsability of publicsectortoinvest – around 70-75% • Represents/replacesthegovernementregionalpolicyinruralareas

  11. Estonian GDP growth 2002-2013 and EU net support (% of GDP) During the deep crisis support from EU funds 5% of GDP Strong support afterwards EU support GDP growth

  12. EU support and budget deficit as % of GDP Estonia vs Hungary

  13. EU support and budget deficit as % of GDP Latvia vs Lithuania

  14. Structural funds and national co-financing (% of total public investment, average of 2010-2012). 60-80 % of all Baltic countries public investments were financed by EU funds

  15. Plan of using EU funds in the public sector investments of Estonia 2016-2020 (mln.EUR) Allikas.Riigikontroll 2017

  16. Funding of research and development expenditures of Latvian higher education 2000-2014 by sources (mill. EUR). Source: calculations from dataset of the Central Statistical Bureau of Latvia, 2015

  17. Funding of research and development expenditures of Estonian higher education 2000-2015 by sources (mill. EUR). Funding of research and development has doubled from 80 mill in 2008 to 150 million in 2014 BUT share of EU funding increased from 12 % to 54 % Sources: calculations from dataset of the Statistics Estonia, 2016 and Estonian Research Agency, 2016.

  18. Funding of research and development expenditures of Lithuanian higher education 2000-2014 by sources (mill. EUR). Source: calculations from dataset of the Statistics Lithuania, 2015

  19. The results of the case of higher education could also be extended to other fields which have been eligible for EU support • Throughout this period all three Baltic countries have shifted the funding of different strategically important expendituressuch as research and development, education and infrastructure within their state budget from their collected tax revenues to EU support. • Question - whether it is a sustainable approach • Shows the necessity of complex decisions to be taken in the future if European Union funding from structural funds is eventually reduced.

  20. Ways of Exit – How to Survive with Declining EU Funding • Acknowledge that a very high dependency on European Union funding is a problem in all three Baltic countries • to elaborate an exit plan - how to cope with the situation where EU funding is gradually reducing • As the EU funding period of 2014-2020 will be with high probability the period with the biggest amount of support for Baltic countries - urgent need to improve the quality of use of EU support funds by all three countries • position the EU funds for areas which support long-run productivity growth and increase the competitiveness of their economies. • It is not sufficient to mention the building of knowledge-intensive economies as the goal. The key elements must also be financed- human capital creation, research and development activities and innovation must be among the priorities of the budgets

  21. Budget deficit Ranking of countries by public debt 2017 3rd quarter

  22. National Audit Office of EstoniaAudit –report:“Financing public functions from the European Union funds“ Dec.2017 • Whichtasksfundedcurrentlyby EU funds must becontinuedduringthenext EU budgetaryperiod; • Howmuchfundingisneededforthesetasks; • Consideringthereduction of the EU funding -howisplannedthefunding of thesetasks; • What are theconsequences of reduction/ finishingthefunding All ministrieswereaskedtoanswer and obtainedresultsweresummarised

  23. Activities/tasks funded by EU during period 2014–2020 and evaluations of ministries about the need to continue the funding during the next period (in millions of euros)* Need for funding Mill.EUR unclear ends growing reduced Remains unchanged Estonia is receiving 2014–2020 From EU cohesion funds In total ca 3,2 billion euros Ministries opinion – they want to contiunue with 3 billion euros funding

  24. The composition of goverment institutions investments into information technology by the source of funding (EU and domestic) EU funding

  25. Examples of activities – funding REMAINS UNCHANGED 2021-2027 a. • creation and renewal of telecommunication infrastructure • digital literacy • reconstruction and renewal of road infrastructure Currently funded from EU sources ca 1 billion EUR

  26. Examples of activities – funding must INCREASE 2021-2027 a. • Retraining of labour • Internationalisation of research and highereducation • Exportpromotion • Return of peoplewithspecialneedsbacktothelabour market • Creation of environmentallyfriendly transport systems • Reconstruction of railways • Modernisation of schoolsystem Currentlyfundedfrom EU ca 600 million euros

  27. Examples of activities – funding REMAINS BUT IN REDUCED QUANTITIES 2021-2027 a) • Support totheentrepreneurship • Investmentsintowatersystemsreconstruction • Creation of ICT infrastructureinschools • Currentlyfundedfrom EU ca 950 million euros

  28. Less financing no change more needed Not clear Future need TOTAL Source EU % of EU

  29. Requirements of the National Audit Office • To present as the part of the Estonian state budget strategy for 2019-2022 a detailed information - how Estonia is preparing for the decline of EU funding 2021-2027 • what is the current use of EU funding in financing different functions of the state • how is planned to finance these actvities under condtions of declining EU funding • create a timeframe of major decisions to be taken in order to plan the use of EU funding for 2021-2027 • Ministry of Finance together with other ministries should accelerate the analysis of the use of EU funds during the current financing period • Start to renew the development programmes of the country

  30. Conclusion • Importance of EU funds has heavily increased and turned into addiction • With EU funding we are trying to compensate insufficient ability to generate governement revenues - EU funds are playing dominating role as the source of investements (in all three Baltic countries) • EU funding allows to continue current economic policy and governance and postpone any major changes • Acknowledge that overreliance on EU funds is a problem • EU funds should be used in order to increase ability of economy to generate income – from 2022 investment capability without EU support

  31. Conclusions • Thewholeschemeofusing EU fundsbetween 2014 and 2020 shouldbeoverlooked a) Theproblemswhich need tobe solved are betweenministries(growthofcompetitiveness, employmentgrowth, innovationasthesourceofproductivitygrowth …) b) Coordinationbetweendifferentministriesclearly need tobeimproved(e.g. inEstoniancasestrengthentheroleoftheStrategyUnit at theGovernment Office of Estonia) c) Bottomupapproach – usetheexpertiseofentrepreneurs – e.g. Howtousethesmartspecializationapproach d) Clearlysimplifytherulesofusing EU funds - couldprovidefreetimeastheresource

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