A structural funding solution to the crisis?

Over on his Telegraph blog noted economist Andrew Lilico has come up with an original idea for tackling the eurozone crisis. Lilico suggests using the existing structural funds programme to distribute further funding to the struggling PIIGS, thereby helping to boost GDP growth and stabilize the sustainability of their debt burdens (and appease markets about this point).



Credit to Lilico for coming up with an original and constructive idea (and we’re always interested in outside the box thinking) but there does seem to be a few issues with putting the structural funds to work in this manner.



First, the record of the Structural funds doesn't inspire confidence. Most of the evidence - including OECD reports and the influential Sapir report for the Commission - suggests that the impact of structural funds is inconclusive at best, with the causality and the counter-factual tough to prove (See here, here, here, here and here). In places such as Ireland and to a lesser extent Spain, the funds have had a positive economic impact (in Ireland because they effectively financed the government's pro-growth measures). However, in Italy, Greece, Portugal and Belgium (Wallonia) it's far less clear what the funds have achieved. The picture is particularly bleak in southern Italy.



But even assuming that the structural funds have had a positive impact on the GDP of some countries previously, it is very possible that this time around they could be lost in the black hole of fiscal consolidation and potential recession in the PIIGS. This relates to another point: the funds are simply wholly unequipped to serve as a backstop in a debt and solvency crisis. There are numerous technical features of the structural funds which would need to be completely revamped for them to be fit for such a purpose, to name but a few:

- Co-financing would have to be scrapped since the PIIGS can’t afford to part finance any structural funds projects (due to the liquidity crisis which this is aimed at tackling, clearly a catch 22). This is holding back disbursement at the moment and will do until it is removed completely, however, it is the only form of conditionality which is attached to these funds.



- To get the Germans to pay, another form of strict conditionality (which is to replace co-financing) would have to be introduced, possibly some form of austerity target, although then it ceases to be structural funding and becomes budget support. Given the PIIGS history of missing targets (including structural funds targets), its unclear whether this would make accessing the funds any easier and would throw up similar problems as the ones we’ve seen with disbursement of the bailout funds.



- The disbursement criteria would have to be completely changed. The current region-based (NUTS) system linked to Gross Value Added isn’t in any way designed to deal with liquidity and solvency crises (it’s based on long-term regional convergence). Again this means completely over-turning the structural funds. Why not just start from scratch with a purpose built mechanism if this is the way you want to go?



- The aim of the proposal seems to be to boost short term economic growth and help PIIGS deal with liquidity issues and budget problems, as such it would need to be a flexible and short term mechanism. Putting aside whether this is really achievable given EU bureaucracy, such a mechanism would not fit into the current EU budget framework which is negotiated in sever year blocks. (Trying to negotiate how to allocate the new funds within the structural funds framework, which relates to economic convergence, would most likely be hellish and long winded, neither of which is needed right now).



- The European Parliament – a hotbed for rent-seeking – would also need to be stripped of its effective veto over the long-term EU budget if such a mechanism were ever to be effectively implemented.

Ultimately, Lilico is looking for an existing conduit to centrally distribute funds to the PIIGS which will help economic growth, thereby bypassing some of the tricky economic and political debates which have been raging on - not least in Germany. The idea essentially requires a mechanism for transferring budget support to these countries with some limited conditionality. This can never really be done by structural funds - without effectively creating a whole new policy - and would lead us back to the same old questions and problems relating to monetary transfers during this crisis, just as we’ve seen with Eurobonds, the EFSF and the ECB, now wouldn’t it?



At the end of the day, alas, there's no short cut to a fiscal union - and it will come with a huge political cost no matter how we twist and turn it.