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Poor European states face clash over future aid funds

Friday, 5 Oct 2012 | 9:25 AM ET

By Jan Lopatka and Martin Santa

BRATISLAVA, Oct 5 (Reuters) - Poor European Union states must fight hard to prevent richer members from cutting development aid for the rest of this decade or growth across the entire bloc could be undermined, the head of the EU executive said on Friday.

Backed by the European Commission, the beneficiaries of so-called cohesion funds are heading for a clash with Germany, Britain and other donor countries who want to trim the EU's running costs while they implement tough austerity programs at home.

Used for projects ranging from building roads to improving schools and job training, the funds are meant to lift the living standards of poorer Europeans but they have also become a by-word for waste and corruption.

At a meeting in Slovakia's capital, prime ministers from recipient states mostly in the EU's poorer ex-communist east threw their weight behind a Commission proposal to slightly increase spending in the bloc's 2014-2020 budget.

Commission President Jose Manuel Barroso said they would face a hard task convincing the biggest contributors, who want to slash the budget by 10 percent, or some 100 billion euros.

"What we need in Europe is to create conditions to return to growth. And the European budget is the most important instrument at the European level for financing investment in growth," Barroso said.

"We should be under no illusion: tough debate lies ahead...

Ultimately, you will have to convince the other member states of justifications of positions you have adopted."

GROWTH VERSUS CONSOLIDATION?

The Commission will push at a Nov. 22-23 summit to raise the EU budget over the whole time frame by 62 billion euros to 987 billion, or 1.03 percent of GDP, with the view that the talks need to be completed by the end of the year.

The biggest proportion of the EU budget is still spent on farm subsidies, although the commission is proposing that can drop to 37 percent of spending, from 41 percent last year. Cohesion funds should amount to 36 percent, or 376 billion euros over the seven-year period.

Germany is the biggest net contributor, paying 9 billion euros per year. Poland, the biggest net recipient, got 10.9 billion euros last year, followed by Greece, Hungary and Spain.

Barroso argued against those who say EU spending cuts are warranted because of the economic crisis and said that spending funds in the poorer members would create demand and growth across the 27-member group and help government finances.

"We are living in times of fiscal consolidation, but precisely because we need to achieve fiscal consolidation, we need to have an ambitious policy for growth," he said.

"The euros spent on cohesion are not just for the benefit of the countries that receive those funds, they are also investment that supports other parts of Europe."

It is likely that both sides will have to give something up. Even the Czech Republic, part of the informal group that met in Bratislava, sees the need to focus on keeping aid flowing to the very poorest regions, with the possibility of cutting subsidies to the better-off areas, as advocated by some of the donor states.

There is also controversy over how the money is spent.

The Commission temporarily halted all aid flows to the Czech Republic this year, citing doubts over how the funds are used. Several high-level public servants have been charged or jailed for graft tied to projects that use EU funds.

Brussels is also mulling suspending funds to Hungary if Budapest does not present it with an acceptable plan to cut its budget deficit to below the bloc's ceiling of 3 percent of gross domestic product.

Many of the EU's newer members in the emerging East have also tapped only a fraction of the funds earmarked for them because of administrative bottlenecks, inefficiency and other reasons.

Barroso warned recipients to streamline the process quickly or risk cuts.

"Faster absorption of EU funds will limit the risks of loosing money," he said.

(Writing by Michael Winfrey)

((jan.lopatka@thomsonreuters.com)(+420224190474)(Reuters

Messaging: jan.lopatka.thomsonreuters.com@reuters.net))

Keywords: EUROPE BUDGET/