€392 billion cohesion fund

EU floats radical change to how it funds poorer members

The €392 billion cohesion fund could be transformed into a money-for-reforms model.

BY GREGORIO SORGI

Countries may soon have to meet targets in return for their share of a large part of the EU budget under far-reaching plans drawn up by the European Commission.

Until now, the bulk of so-called cohesion funding, which was worth €392 billion over the period from 2021-2027 and aimed at helping boost growth in Europe’s poorer regions, has been paid according to agreed criteria rather than as a carrot for meeting targets.

But in a document signed off by the bloc's 27 commissioners on Wednesday and reported earlier in the day by POLITICO, the EU's executive raised the prospect of strings being attached to the funding in a wholesale way for the first time.

“There is broad support for performance-based funding,” the Commission wrote. It is still to come up with a formal proposal. Once it does, governments will have their say.

Ukraine and the Western Balkans have changed the debate

Cohesion funding makes up a large chunk of the EU’s €1.2 trillion seven-year budget and is aimed at narrowing the gap between richer and poorer regions. All of the EU's poorest countries, from Portugal in the west to Hungary and Bulgaria in the east, have benefited hugely from the financing, which largely focuses on environment and transport infrastructure, such as new highways.

Reform is on the agenda because in the back of their minds EU officials are preparing for the bloc's possible expansion to Ukraine and countries of the Western Balkans, where much of this cash would be used to help them catch up economically with existing members.

In recent years, the EU has struggled to persuade some countries, notably Hungary and Poland, to stick to democratic standards and have withheld some funding but in very limited ways. Making cohesion financing dependent on reforms from the start of a country's membership could make it easier to keep governments on the straight and narrow.

It won't be a simple thing to achieve though.

“In principle it [conditionality] can be a remedy, but in practice it’s super difficult,” said Zsolt Darvas from the Brussels-based think tank Bruegel, adding that past systems linking cash disbursements to specific targets have been cumbersome.

Frugal countries, mainly from northern Europe, have long argued that current cohesion spending — that is currently hugely skewed toward regions in southern, central and eastern Europe — is inefficient, he said.

Red tape and strict audits

The model would extend a similar format to the rules attached to the EU's post-pandemic fund that was agreed in 2020 to soften the economic fallout from Covid-19.

Under that scheme, Brussels linked cash transfers to the adoption of domestic reforms.

There may be some pushback however as it was criticized heavily by some governments. The disbursement of cash under the recovery fund was riddled with red tape because of strict audits and controls, Darvas said.

Current cohesion programs include a proportion of spending linked to targets, but member countries have been reluctant to tap this pot, said an EU official who was granted anonymity to speak freely.

In its report the Commission wrote that a cash-for-reforms model might potentially “accelerate financial implementation, and increase the result orientation of the policy.”

The EU executive indicated that the “performance-based” approach in the post-pandemic fund encouraged EU states to adopt reforms and “reward[s] progress along the way.”

But the EU doesn’t want to replicate the recovery fund model precisely. The document encourages more involvement of local communities and stakeholders — something that is lacking under the post-pandemic fund, according to critics.

The text also stresses the need for strong audit and control systems. The EU’s auditing watchdog criticized the recovery fund for its allegedly weak anti-fraud checks.

The report will feed into an upcoming discussion on the makeup of the EU's seven-year budget, which will come into force in 2028. The Commission will make a formal proposal that will have to be unanimously approved by national capitals before then.