"Bad times, hard times, this is what people keep saying; but let us live well, and times shall be good. We are the times: Such as we are, such are the times."



Saturday, 30 January 2010

BAILOUT? HOW ABOUT NOT BAILING US IN?

I just came across details of EU expenditure for 2008 (released in November) here. Note the EUR8.5bn of funds the EU pumped into Greece.



My main concern with all this money is this. No government can turn down EUR8.5bn of free cash. But what if the benefits of this money are not what they appear to be, and what if there is a hidden downside?

A recent study of the effects of EU structural funds has found  that their effects on Foreign Direct Investment (FDI) can be effectively less than zero, if the quality of a country's institutions is low. As the authors state:

 The empirical findings are consistent with the findings of previous studies regarding the determinants of FDI and indicate that the impact of EU Structural Funds on FDI inflows critically depends on the institutional quality of the receiving countries. For countries with high quality institutions the EU Structural Funds have a positive impact on FDI, for countries with low quality institutions the impact will be negative.
Worse, a simple search on Google Scholar corroborates the authors' claim  that their findings are in line with the corpus of research on the matter.

Does Greece have low quality institutions? Another recent study finds that we do (the second-worst in fact among old EU members, second only to Italy), and in fact quality has fallen substantially since 2006. So in fact, the EU is crowding out private investment in Greece by continuing to give us money despite our poor .
government record.

But perhaps it is possible that EU funds themselves have an effect on the quality of our institutions, transforming our civil administration to an even more bloated bureaucracy responsible for (mis)allocating this bonanza of free money. I compare this to the effect of aid on governance in the third world - as Dambisa Moyo claims, a government with access to free cash is less accountable to its own citizens, with disastrous political and economic effects. A recent study suggests that the effect of aid pre-1997, when anti-corruption conditionalities were added to aid mechanisms worldwide in a robust way, was to increase corruption or leave it unchanged. EU funding is not thought of as aid, and so conditionality is virtually unknown, so there is reason to believe its effects on Greece have not been benign. Of course, the EU too has started to think twice on this, as in the case of Romania and Bulgaria. The answer has been, as with African aid recipients, conditionality and intense monitoring.

Now the commission notes that these are not the worst offenders. According to Transparency International, Greece is almost level with Romania in perceived levels of corruption. So why not apply the same reasoning to us?

Perhaps it's a matter of the relative flows of EU funds. Our own figures suggest that in 2008 the Government's EU funds made up 16.5% of our regular government income. So in fact, about one sixth of the power of the average citizen to hold our government to account has effectively been usurped by Brussels and, as EU funding is not conditional, it has been handed back to the incumbent government. Worse still, as the chart below clearly shows, the amount of EU funding has risen in precisely the same years (2007 and 2008) that the quality of our institutions has fallen. We're being rewarded for poor governance.

So here's an idea for Brussels. Stop bailing us in. Then you are going to be less likely to have to bail us out.

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