EU funding paradox: Lithuania is not rich, but cheap and will thus get less

So far, Lithuania has been one of the European Union member states, which received more than it paid into the common budget. This situation should continue in the next financial cycle, however after it, Lithuania’s balance might turn negative.

Swedbank chief economist Nerijus Mačiulis says that such a scenario would be a gift to Lithuania. Meanwhile, Luminor bank chief economist Žygimantas Mauricas lists the paradoxes, why Lithuania will receive less from the EU budget than it could.

“Lithuania is going to receive less in the next financial cycle not because it is rich, but because it is cheap,” he said.

Some lose, some gain

Based on European Commission data, in 2016, Germany (21 billion euro), France (21 billion euro) and Italy (15 billion euro) contributed the most to the EU budget. Meanwhile, Spain (12 billion euro), Italy (12 billion euro) and France (11 billion euro) received the most from it.

Lithuania contributed 0.33 billion euro to the EU common budget and received 1.48 billion euro from it in 2016.

Considering each country’s balance, the greatest donor to the EU is Germany. In 2016, it received 11 billion euro less from the budget than it contributed. After Germany there is France (-9 billion euro) and the UK, which chose to depart (-6 billion euro).

Poland (+7 billion euro), Romania (+6 billion euro) and Greece (+4 billion euro) benefited the most. Lithuania’s balance was +1.14 billion euro.

The cohesion policy funding for Lithuania should contract by a quarter in the 2021-2027 EU budget. According to European Commission representation in Lithuania media relations group head Agnė Kazlauskaitė, it is currently still difficult of talking of total sums for each state because states are offered not only the so-called funding envelopes based on separate policy branches, but states will also receive EU funding based on various EU programmes.

“Ones such as Erasmus+, Horizon, Life and so on. Funds received based on these programmes will depends on the state projects’ competitiveness because the projects are selected by competition,” she said.

A gift to Lithuania

N. Mačiulis emphasised that in 2021-2027 Lithuania will still receive more from the EU budget than it will contribute.

“Speaking of further in the future, it is a possible, but only a little that Lithuania’s GDP per capita will reach 100% of the EU average within the coming decade and Lithuania will no longer be a recipient of support, but a donor, who will back weaker EU member states,” he said.

Commenting on EC data on separate countries’ balances, N. Mačiulis noted that one should look at not only absolute numbers, but also relation to GDP.

“For Lithuania to turn from a receiver of support to a total donor, that is to say a country that contributes more to the EU budget than it receives, the country’s GDP per capita based on purchasing power parity must reach 100% of the EU average,” he said.

Based on the economist, such a scenario would be a gift to Lithuania.

“I truly would like to believe that we can reach such a level of development within a decade, but it is unlikely.

Few EU member states have managed such a miracle. Even looking at Slovenia, Slovakia and the Czech Republic – states, which attract a great deal of foreign direct investment to high added value industry and produce a great number of cars. For example, based on the production of cars per capita, Slovakia is almost the first in the world. However, its GDP per capita still does not reach 90% of the EU average,” N. Mačiulis explained.

He also added that the road to being one of the most developed states is very difficult and is impossible through solely foreign investment.

“One needs a quality education system, suitable innovation environment, suitable cooperation between science institutions and business. All the things where we are currently weak. Continued convergence, closing on the EU average will be very slow. This means that support will gradually decrease, but we will not yet see the happy day when we live without EU support,” the economist said.

According to N. Mačiulis, the risk is not a decline in EU support, but that the country is unable to develop to the point where it could make do without it.

“There are a large number of EU member states, which have completely failed to close in on the EU average for several decades. These are Portugal and Greece, where the progress halted at the 80% margin. This is the largest risk and fear, not that we will no longer receive support for road laying or other tasks,” he said.

Paradoxes in sharing

As Ž. Mauricas noted on his Facebook profile some time ago, in the next financial cycle, Lithuania will receive less funding not because it is rich, but because it is cheap.

“The focus is on countries where GDP per capita exceeds 75% of the EU average receiving less structural EU support, but GDP is not calculated as nominal (this metric is only 49% of the EU average in Lithuania), but based on purchasing power parity, that is to say with price differences considered.

Since statistically prices in Lithuania are the lowest in the entire Eurozone, then our GDP rises from 49% to 78% and exceeds the 75% mark. The 700 euro net earnings we have statistically turn into 1.1 thousand euro and become more significant than the Greek’s 917 euro or the Latvians’ 733 euro.

Thus regardless of our wages being the lowest in the entire Eurozone, we will receive less support than countries where the nominal GDP and wage are far larger because Lithuania is “cheap”,” the economist explained.

Ž. Mauricas also noted that an even greater paradox is that GDP is calculated for separate regions, but price levels – for the entire state. Hence, due to “large” prices, poorer regions of expensive states will also receive more EU support than Lithuania.

“For example, Sicily and Andalusia, where wages are twice that of Lithuania,” he said.

The greatest paradox, the economist states, is that Lithuania is cheap in essence because it has low public service (especially healthcare and education) prices.

“For example, goods prices in Lithuania are only 10% lower than in Greece, private sector services – 28% and public sector services – 33%. And another paradox is that the prices are compared under the premise that the consumption basket for all countries is the same, thus while Lithuanians spend 36% of their expenses on cheap services, calculations are under the premise that they spend 50%, that is to say – the EU average, thus the overall price level in Lithuania is artificially shrunk. If the comparison was done based on the Lithuanian basket, the country’s price level would be 70% of the EU average, not 63% and support for Lithuania would not be decreased,” Ž. Mauricas summarised.