József Papp is professor emeritus at Corvinus University. Two earlier piece of his were published in Hungarian Spectrum (“The Dutch with No Hatred toward Hungarians” and “Hungarian Economy is Distorted and Disorientated by Grants”). The present article is an English translation of his opinion piece titled “Mi lett volna, ha az összes uniós támogatást az államadósság törlesztésére fordítjuk?” which appeared in the opinion column of G7 Ekonomi.
Net contributor countries of EU funding in the European Union spend huge amounts to enable former socialist countries, which joined the EU in 2004 and after, to catch up and bring their economies up to par, as well as to adopt the core values of Western civilization. Based on the experiences of 17 years, we can conclude that this noble intention has been implemented with lots of controversy; corruption has been inexorably present in the allocation of EU grants, a significant proportion of the funds has been stolen, liberal democracy has been openly vilified by some of the leaders of beneficiary countries, and illiberal democracy has been built up from the resources provided by the net contributor countries. This is, of course, a rejection of the system built on the rule of law.
Traditionalists in folk costumes in the Csárda Museum of Kondoros renovated from government and EU grant / Photo: MTI/Tibor Rosta
This has been possible because the mechanism used to allocate the funds is fundamentally wrong and completely incompatible with the logic of a liberal market economy. Handing out free money to profit-oriented enterprises is the original sin. It’s never fair and square. It is unjustifiable why one receives money while the other does not.
Handing out free money spoils those giving money and the recipients equally, it serves as a hotbed of corruption even under the strictest rules. Having seen a few decades ago the low efficiency of redistribution in a socialist planned economy, where the central element was handing out subventions and subsidies, I was truly stunned to learn that the allocation of EU grants was following the same pattern. Back in 2009, I already suggested that it would be far more beneficial to spend EU grants in assisting newly joined countries to meet the Maastricht criteria – mostly to reduce public debt – instead of fattening government-backed companies which are unable to become competitive in the market..
It was truly shocking for me to realize that while annually more than one thousand billion HUF in EU grants is flowing into the country, almost the same amount is being wasted as interest paid on public debt. Would it not better serve the public interest if the interest burden paid on public debt would be reduced from EU funds and the money saved this way be used fairly to the benefit of all?
I and my idea were browbeaten even by my friends: EU rules do not allow for debt repayment from EU grants. However, the development potential of an organization lies in its ability to innovate and correct bad practices. Others have the view that, with interest rates becoming more and more favorable, there is no point in repaying debt since the lighter interest payment can be provided for from the flourishing economy. As we will see, the ratio of interest burden as a percentage of GDP decreased indeed until 2019, but it needs some explanation (and this might even be worth another article) why this index is still higher in comparison to more developed EU states with a similar debt rate and why we still have to waste each year more than a trillion forints of public funds.
And now, let us see how things would look if we had repaid the public debt from EU grants. To understand the issue in its complexity, the following table summarizes the macro data required to illustrate the annual changes in EU grants, as well as the interest costs. The timeline of EU grants has been downloaded from the EU website. To convert data provided in euros, I had to collect the GDP data also in euros; by calculating the ratio of grants per GDP, I was able to determine the size of the grants in Hungarian forints. It is important to note that the records of EU grants are shown as gross amounts; the Hungarian contribution (which in 2019 for example was HUF 356 billion) is not deducted from it. To calculate the annual public debt in forints, I had to use the debt rate (public debt/GDP).
The amount of EU funding received by Hungary and the debt interest paid from the Hungarian budget in the years 2014-2020
As can be seen from the table, indeed, in the past 17 years since joining the EU, the total of EU grants received (HUF 21,054 billion) almost exactly matched the amount spent on interest during the same term (HUF 18,996 billion).
As a matter of fact, no extra resource has been created! The total of EU funds allocated, while creating a huge bureaucracy burdened with faceless corruption, the same amount that has been allowed to seep out from the budget, like from a leaky bag.
We would be much better off had we spent this huge amount received from the EU on repaying public debt! The next table demonstrates how the expectable public debt would have changed had EU grants been used to reduce the capital ratio of public debt.
The assumed public debt was calculated by first deducting the EU grants received from the debt amount of 2004. Then in each year I added the difference between the relevant year’s and the previous year’s debt and from this amount I deducted the relevant year’s EU grants. In order to calculate the hypothetical interest amount, I determined the average annual interest rate on the actual government debt, thus multiplying the value of the reduced government debt for the year, to see what the interest rate would have been had we paid back public debt from the grants.
The public debt that could have been repaid from EU funding and its interest in the years 2004-2020
Well, indeed, we could have achieved significant savings, we would have had to pay six trillion (5,897 billion) forints less interest, the public debt would have been halved (to 19,311 billion from 38,767 billion), and the debt rate would have been reduced from the current 81.2% to 40.4%! These are damning data indeed. Contrary to the current practice, where interest payments practically erase EU grants, in the system I propose a new resource equivalent to a third of the EU funds received over the 17 years would have been generated in the Hungarian budget and the country’s macroeconomic indicators would have improved dramatically.
Debt repayments from EU grants would have come with additional positive effects:
- High public debt and the associated unreasonable interest payment obligation in fact means living off our future. The obligation of the current generations is to leave as little burden on the upcoming generations as possible. Therefore, it would be a nice and noble gesture to use EU funds for debt reduction. On top of that, as a result of repayment and the subsequently improving macroeconomic indicators, decreasing public debt could be financed with much lower interest rates. Thus each and every year more and more extra budgetary resources would be generated.
- Neither Brussels nor the member states would have to maintain this huge bureaucracy to allocate, manage, and control grants. Huge costs could be saved.
- As there would not be free money handouts, along with significantly reducing costs arising from shamelessly overpriced public procurements, urges to commit abuse would disappear. As a Hungarian, I feel ashamed that so much of the public funds can be stolen in this country, but also for allowing a situation in which people can be dominant players in the economy whose performance does not justify such a role. Many of us would feel way better and Hungary would be an excellent place in this world if it were not spoiled by this pervasive corruption.
- These savings could also be left with the taxpayers. That is why paying off public debt would ensure the fairest way to utilize the EU’s sources. In the second half of the 2010s, savings from interest would have reached HUF 600 billion, allowing VAT to be reduced by 3 percent. In Hungary, the majority of tax revenues comes from VAT. In 2019, for example, this value came to HUF 4,532 billion, dwarfing all other revenues. The high VAT rate is not good for the economy, and the performance level of the Hungarian state does not justify collecting a 27 percent value added tax – the highest rate in Europe – for every end-user transaction.
- Saving on interest rates could provide a good basis for the transition to the sustainable development path announced by the EU. Climate objectives have been demonstrated to have a positive impact on the economy. Moreover, if the extra resources generated by decreasing interest rates were used to provide for tax incentives to reach energy efficiency and transition to renewable energy, the savings in energy costs – zero overhead – would trigger spillover effects (in one of my articles I called this the Munchhausen effect) that would really put Hungary on a new and sustainable energy path. A sophisticated system of tax incentives could attract gigantic amounts of private capital to achieve these goals. Based on this capital currently used to finance high public debt, Hungary could become a model country for climate neutrality.
Given the deepening controversies between Brussels and the Hungarian government, which does not promise us much at all, thinking long term and if we are not excluded or do not quit, it would make sense to revamp the mechanism for using EU funds. Especially now, when public debt as a result of the economic fallout caused by the pandemic is sky high again, exceeding 80% of the GDP.
Why should we give up on the positive effects of this new practice and stick to what we know for sure is not good?
August 2, 2021
Blog posts by Eva S. Balogh also appear in Hungarian at https://ujnepszabadsag.com/