How the European Union Corrupted Eastern Europe

The inflow of EU money into Eastern Europe is playing a questionable role in narrowing the gap that new member states in Eastern Europe and the more affluent parts of the EU.
May 26, 2014 • Commentary
This article appeared on the National Review (Online) on May 26, 2014.

Thanks to the funding from the European Union (EU), the countries of Eastern Europe are an increasingly attractive destination for cyclists. In the Czech Republic, hundreds of millions of Euros, predominantly from EU’s structural funds, have been used to create a network of some 25 thousand miles of cycling trails. In Slovakia’s Northern region of Orava, a brand new network of 155 miles of cycling trails set in a picturesque countryside connect the local villages with those in neighboring Poland.

While a boon for cyclists, the inflow of EU money into Eastern Europe is playing a more questionable role in narrowing the gap that new member states in Eastern Europe and the more affluent parts of the EU. Critics of development aid, such as William Easterly of New York University, have long argued that foreign aid directed to badly governed countries in the developing world can worsen corruption and cronyism, and foster authoritarian rule. Although the magnitude of the problem is different, EU funds are exercising a similarly nefarious effect on governance and politics in Eastern Europe.

Between 2014 and 2020, the EU is planning to spend over €350 billion to help narrow the disparities between member states. It does so through several ‘funds’: the European Regional Development Fund, which is the largest of them and which supports the building of infrastructure and job‐​creation; the European Social Fund, which purports to help the unemployed and the disadvantaged, mostly by providing training programs; and the Cohesion Fund, which was set up in 1994 to provide funding to the poorest member states.

The inflow of EU money into new member states has been estimated at around 4 percent of their GDP. It is not a free lunch, however. European countries are co‐​financing the projects and provide the bulk of the administrative support to the program. Slovakia’s Institute of Economic and Social Analyses (INESS) estimated in 2011 that each euro coming from EU’s structural funds is matched by up to 90 cents coming from the national budget.

The economic effects of such aid are not obvious. Even if one believes that the inflow of funds helps stimulate aggregate demand, “it is unclear whether the EU funds are crowding out or augmenting domestic spending,” as an IMF study put it. Crowding out is a serious concern in areas of transport and logistics, where private companies that have been doing profitable business without any government support suddenly face competition from new, EU‐​funded firms.

Many of the EU‐​funded projects seem to be of marginal value and are overpriced. With €16 million spent on each mile, the short, just 12‐​mile Lyulin highway connecting the Bulgarian capital Sofia with the nearby city of Pernik counts as one of the most expensive roads on the continent. The construction of the road — which required digging numerous tunnels because of the inauspicious terrain — was delayed and marked by corruption allegations. At some point, the European Commission temporarily froze the funds because it suspected embezzlement.

Or, as CEE Bankwatch, a public watchdog, reported, in the city of Kolín in the Czech Republic the EU provided support to the reconstruction of a railway bridge in order to facilitate water navigation on the river Elbe. According to the watchdog, “too little water transport is expected to justify the project, construction costs are prohibitively high, and the sole company participating in the tender procedure was awarded the contract.”

Last year, Slovakia’s Ministry of Social Affairs spent €100 thousand of an EU grant to combat unemployment for the purchases of pens and disposable raincoats. While relatively trivial in size, it seems representative of the waste that has been unearthed by journalists.

The inflow of EU funds into countries with weak institutions does not mean just wasteful spending but also breeds corruption. The impact may be hard to quantify but is very visible. Before joining the EU, Eastern European countries had made significant progress in reducing cronyism and corruption — mainly because of the numerous reforms they had to adopt in order to qualify for EU membership in the first place. After the accession, not only did the progress come to a halt but some measures of corruption actually deteriorated.

Slovakia, for example, ranked 57th on the 2004 edition of Transparency International’s Corruption Perception Index. By 2013, it moved down to 61st place. The Czech Republic, in turn, fell from 51st to 57th place. The situation is even worse in Romania and Bulgaria, where checks on corruption and outright theft are weaker. In 2008, the European Commission had to suspend the disbursement of any aid because of the extent of corruption and organized crime that surrounded the inflow of EU funds.

Identifying and proving specific instances of corruption and embezzlement of EU funds is often difficult, yet the anecdotal evidence is telling. According to a report by a group of Eastern European think tanks, in the Czech Republic, companies with bearer documentary securities — in which ownership is anonymous — tend to be 23–70 percent more profitable than other joint‐​stock companies. Between 2008–2013, such companies were awarded public procurement contracts worth at least € 5.6 billion, including EU funds. Also, around € 7.3 billion were awarded to companies in jurisdictions with high levels of privacy protection — so‐​called ‘tax havens’ — some of which had traceable connections to local politicians.

While Aleš Řebíček was the Czech Minister of Transport from 2006–2009, the construction company Viamont, which he had founded, received over € 500 million from the EU structural funds to improve railway infrastructure around the country. Viamont’s shares are anonymous and the Minister did nothing to refute the allegations that he had a stake in the company at the time when the tender was awarded. Similar cases — involving politically connected companies, botched procurement tenders, or sometimes outright fraud — can be found throughout the region.

Eastern European politicians say that they are determined to fight corruption surrounding the disbursement of EU funds. Such statements often strain credulity, as the region has made little progress in improving the mechanisms of control that would be independent of political control. With an inflow of money that can be used for patronage, governing politicians in member states are the biggest beneficiaries of the status quo. That is consistent with the observed degree of politicization of the EU funds. Instead of permanent secretaries, the disbursement funds are typically controlled by political appointees who are replaced after every election.

Cynics say that the status quo also benefits those who advocate tighter forms of European integration. Richard Sulík, former Speaker of Parliament in Slovakia and a vocal euroskeptic, does not mince words. According to him, “[political elites are] being corrupted by the EU funds in order to shut them up and make sure they pass any stupid piece of legislation that comes here from Brussels.”

Whether the funds are a plot to buy loyalty to the European project in Eastern Europe or just a well‐​intentioned but mismanaged program, they do not seem to be working. The funds neither seem to be creating economic prosperity nor are they effective at fostering popular support for the European idea. Public confidence in the EU is at historical lows in many Eastern countries and, throughout the continent, anti‐​EU populists are expected to make significant gains in the forthcoming European election. Maybe it is time for a rethink.

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