More harm than good: the danger of EU grants

By Dr John Meadowcroft

It is generally assumed that one of the benefits of UK membership of the European Union is the receipt of funds from the various EU grant-giving bodies, such as the European Social Fund, the European Regional Development Fund, and the European Social Cohesion Fund. Indeed, today it is standard practice for A-Level economics textbooks to list grants from such funds as one of the principal economic benefits of UK membership of the EU.

It is the case that each year the UK receives millions of pounds in grants from these various EU funds; in the present year alone the UK will receive grants worth £5.7 billion in total. ¹ The Highlands and Islands Scotland European Regional Development Fund Programme, for example, was recently awarded €121 million over five years by the EU to improve the ‘competitiveness’ of the Highlands and Islands of Scotland. Every year more modest projects and enterprises all around the UK receive smaller grants from the EU to promote economic development or tackle deprivation that add up to many billions of pounds.
While a small number of individuals and groups may derive some short-term benefit from these grants, in the long-term they are harmful to the UK and should be considered a cost of UK membership of the EU.

The money that the UK receives in grants from the EU is not simply a ‘gift’ from the Commission or the other Member States. Rather, it is a partial repayment of the billions of pounds that the UK contributes to the EU each year. These funds are extracted as taxes and duties from profitable businesses, but are then largely repaid as grants to unproven or unprofitable enterprises.

Economic development in the poorer regions of the UK should not come from EU grants to businesses or industries that are failing or to new enterprises unable to attract commercial investment. That was the policy followed by the UK government in the 1960s and 1970s that led to deep economic recession in many parts of the UK – something from which many regions have never truly recovered.

Whether it is paying people to dig coal that no one wants to buy, giving them money to build cars that no one wants to drive or funding the manufacture of hi-tech components that no one wants to install, in the long-term such an economic policy can only undermine prosperity.

Supporting businesses or industries that are failing for ‘social’ reasons deepens the divisions between those parts of the country that stand on their own feet and those that require special support. As the prosperous regions develop, the rest require more and more grants just to keep up. This creates more serious problems for the future. When the cost of supporting an industry finally becomes too great to continue, its closure causes even greater misery than would have been the case if it had not be sustained for so long.  This occurs because other sectors of the economy and regions of the country have developed in the interim, making catch-up and competitiveness even harder to achieve.

EU grants come with an enormous opportunity cost. Bright, intelligent people who could be developing business ideas to meet the needs of people in the marketplace instead devote their time to meeting the demands of grant-giving bureaucrats in Brussels. Unsustainable businesses are sustained and unviable enterprises are launched, all the while drawing physical, human and social capital away from potentially profitable endeavours that would truly build long-term economic prosperity.

In the late 1990s, for example, the EU gave a number of large grants to manufacturers of superconductors, both in the UK and in other European countries, precisely as the bottom fell out of the superconductor market. Private sector investors refused to support these industries, but nevertheless millions of pounds were taken via taxation from successful, profitable enterprises and wasted in supporting businesses that were no longer commercially viable. Today these businesses have all closed and the people who once worked in them have nothing to show for all the EU grants given to create a sustainable future for them.

Taking money from successful businesses and giving it to failing ventures or those with no track record of success undermines the UK economy. It is a good rule of thumb for economic development that any enterprise that cannot attract commercial investment to start-up or maintain trading will not be successful in the long-run. To fund such enterprises hinders rather than helps economic development. The EU grants system specialises in doing just this – at great cost to the UK economy and, in particular, to the people in the poorest regions of the country who come to be reliant on the false hope of EU grants.

If the money that the UK receives every year in EU grants was simply not extracted from the UK in the first place, but was left in the hands of already successful and profitable businesses, it could be used by private enterprises to endogenously create sustainable economic growth. As well as saving the substantial cost of the bureaucracy required to collect the revenue and administer the grants, the money would only be invested in commercially viable enterprises with a genuine prospect of long-term success.

If it is believed that government assistance is needed to tackle deprivation or social problems in a particular locality, then this is surely best financed and managed by those closest to the ground and directly accountable – local authorities or national governments – than by remote and unaccountable EU officials and politicians.

The millions of pounds of grants that the UK receives from the EU every year should be considered a cost of EU membership, not a benefit. They represent another reason why the UK should pursue a future outside the European Union.

References:

1. Figures taken from Statement on the 2007 EC Budget, May 2007, HM Treasury, Cm 7090.
http://www.hm-treasury.gov.uk/media/2/8/ecbudget220507a.pdf