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ABSTRACT
European Union (EU) funds flowing into budgets of public sector organizations of its member states should be additional to their nationally funded expenditures. To investigate this additionality principle systematically, we develop a new empirical method. Our main hypothesis is that some of the EU-funded projects are crowding out national public expenditures. Not being able to reject the hypothesis would be consistent with violating the additionality principle. To test the hypothesis, we examine how EU funding translates into actual spending of relatively comparable municipalities of the Czech Republic. We innovatively match the municipal authorities’ budgetary data on EU-funded expenditure projects with their other, nationally funded, expenditures. We find no systemic crowding out of national public expenditures by EU funds at the level of operational programmes in the Czech municipalities’ data, which is consistent with no evidence of violating the additionality principle. Nonetheless, going down to the municipal level enables us to show how the results can pinpoint individual cases of EU fund’s potential mismanagement in Czech municipalities. Overall, we provide the first evaluation of the additionality principle at the level of individual recipients of EU funds and in doing so we develop a methodological approach potentially applicable to other fund recipients.
Acknowledgements
The authors would like to thank Annie Bartoň, Marek Havrda, Vladimír Kváča, Filip Pertold and Jiřina Svitáková for their useful comments on an earlier version of this research.
Disclosure statement
No potential conflict of interest was reported by the authors.
ORCiD
Petr Janský http://orcid.org/0000-0001-6499-9923
Tomáš Křehlík http://orcid.org/0000-0002-7801-3325
Notes
1. We understand that according to Council of the European Union (Citation2006), if a member state fails to prove by 30 June 2016 that it has complied with the principle of additionality, the Commission may make a financial correction, that is, penalize the country for not complying with the principle. We believe that the reader understands that our intention is neither to make anyone pay penalties, nor show whether the Czech Republic fails the additionality criterion formally (the EU has its own procedures described below for that), but to test a hypothesis that is related to the additionality principle.
2. We focus here only on the financial dimension of crowding out, although crowding out might also be taking place institutionally. Specifically, we hypothesize, but do not empirically test, that EU funds might lead to the creation of a parallel structure. Future empirical research should test whether EU funds can contribute to the development of a technocratic structure parallel to the national civil service, which focuses on the implementation of EU funds but substitutes or complements the rest of the (national) civil service in ways that might be harmful, especially in the long term.
3. EU-funded projects mostly require co-financing from national budgets (and sometimes from private firms). We do not deal with the issues of co-financing in this current research, although we consider it an interesting matter for further research, including from the point of view of its possible negative effects. It should be interesting to estimate the extent of the co-financing required and to investigate its potential role as a risk factor for public budget debt (or debt in private firms). The co-financing also implies that the negative effects of EU funds might be greater than the funds themselves suggest, and that we could allow for their higher value due to the co-financing (however, the co-financing might also mitigate the negative effects by lowering the moral hazard). The co-financing could also contribute to the crowding out (co-financing of mostly investment projects crowds out the other and wage expenditures). In addition, the need for co-financing can occur suddenly due to the complex nature of the evaluation of EU funding, and this puts additional pressure on public budgets (which can in turn result in low absorption of EU funds).
4. Investment costs are meant in a broad sense, as defined by the EU, that is, they may include investment into human capital.
5. Investments include total expenditure on IT, machinery, buildings and other durable property with a value above 1200 EUR.
6. Operational costs include services, rent, non-durable property purchase, gas, electricity and heating.
7. In addition, there might be substantial time inconsistency between the actual costs and funding provision (i.e. funds provided only after costs have been incurred), which objectively restricts the ability to study the effect in larger detail.
8. Structural expenditure includes all sources of finance at the national, regional and local levels, as well as spending undertaken by other public service bodies that are not part of those sources. In addition, public enterprises’ expenditure can be included, though member states were not obliged to include it. In any event, member states needed to state explicitly which administrative levels and public enterprises were included in or excluded from the calculations; the national co-financing of Cohesion Fund projects was eligible expenditure and had to be included.
9. The reference years according to which the additionality targets for the period 2004–2006 were set were individually agreed by the Commission and the member state concerned, but were always two or three subsequent years selected from the period 1999–2002.
10. More specifically, the report states that, indeed, the target level of national structural expenditure is set on the basis of the forecasts on GDP growth available ex-ante. Member States, which expect higher GDP growth rates, tend to envisage higher investments as their economy leaves more room for additional structural expenditure.Over the period 2004–2006, the real GDP growth exceeded the initial forecasts in all the Member States concerned by this document. Higher GDP growth meant additional financial resources available for the public sector and, therefore, more room to undertake new investments not planned when the target level of expenditure was set.