Monday, 3 March 2008

EU Funding and Greek GDP Growth

The question of the role of EU funding to total GDP in Greece has been raised in the recent exchange of emails with Mr. Napoleon Linardatos. I decided to do my own analysis based on public statistics to try to determine the relative weight of EU funding to GDP and GDP growth. My initial estimate was that at present, EU funding is not more than 1% of GDP.

Total EU Funding under the 3rd Community Support Framework (CSF) and the Cohesion Funds amounted to a total of EUR 25.9 billion, with absorption scheduled between 2000 and 2006. This amount was to be matched by EUR 11.7 bln of public spending, and EUR 10.6 bln in private spending, for a total of EUR 48.3 bln.

As seen from this table, total EU funding amounted to 54% of total allocated investment funding in this period, and 69% of all allocated EU and public sector investment.

In order to comparing this to GDP (market prices) over the same time period, we have three options:

1. Compare actual disbursement to GDP: I am unable to find the actual disbursement figure on the Ministry of Finance, Statistics Service, or 3rd CSF Managing Authority websites.

2. Distribute 100% of funding in a linear manner, i.e. take the total amount of EUR 25.9 bln and divide by 7 years, leading to a disbursement of EUR 3.71 bln per year.

3. Distribute the 3rd CSF amount actually absorbed by the end of 2006, which was 58% of the total. In this case, we take 58% of EUR 25.9 bln, and distribute equally over 7 years.

The table below shows the effect of EU funding as a share of GDP using these two methods:

I find that the method of linear absorption of 58% of the total is a more realistic figure, since it’s well-known that Greece is behind in absorption. If disbursement does not actually take place, then this value does not accrue to GDP figures.

As seen here, EU funding share to GDP fell from 1.6% in 2000 to 1% in 2006. Given the rate of GDP growth and the size of the 4th CSF, this number is likely to fall further in the future.

Given this relative weight of EU funding to Greek GDP, it is unlikely that EU resources play a material direct role in current GDP growth, which has averaged between 4.2% and 3.8% in real terms in the last 6 years. Where EU resources are invaluable are in instilling a strategic, long-term planning framework for economic development in Greece. The promise of funding creates a commitment to a long-term plan which cannot easily be changed by incoming governments. Together with European Monetary Union and the Maastricht conditions on inflation, public debt and annual deficits, this provides a rational macroeconomic framework for government spending and growth.

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