European Union Subsidies Luxury Bike Shacks and Other Follies

Each year, the European Union dishes out massive amounts of money. Often, funding goes to ill-conceived or unnecessary projects. But there may be a way out of the waste.

Holtland, a town in Germany's north-western Ostfriesland region, is four meters (13 feet) above sea level. It boasts a church, an elementary school, two grocery stories, 2,200 inhabitants -- and a generous benefactor in Brussels.

Uwe Themann, the 49-year-old head of the town council, is proud to show off his hometown, and for good reason. Thanks to generous payments from the EU's coffers, Holtland has been thoroughly prettified. Everything in this small town, from the village square to the town hall, the kindergarten and the building where the fire department stores its equipment, has been tweaked and smoothed over to look like something straight out of a picture book of what little German villages ought to look like.

A network of narrow, red-and-gray cobbled streets and bike paths weave in and out of this bucolic composition of red brick and steep rooflines. At first asphalt was good enough for Holtland, but when local politicians discovered that Brussels would assume half the cost of improvements, money was suddenly no object. The streets and bike paths, it should be mentioned, are largely empty.

Even the town's old mill is in full working order once again, thanks to EU subsidies. But because it doesn't fulfill the EU's strict hygiene requirements, it can no longer be used to mill grain. But the piece de resistance stands at the entrance to the town, on Highway 436. The structure consists of red brick walls, thick beams and a tiled roof covering benches, a telephone booth and a village map in a glass case. The stylish little building is a glorified bike rack.

From Sicily to the Arctic Circle

"We really wanted to build just a simple shelter with a few bike racks," says Themann, the town council head. But Brussels wasn't handing out subsidies for uncomplicated little buildings to house bikes. To qualify, local officials kept inflating the project until they arrived at the €150,000 ($199,500) cost of building the current brick lodge -- the threshold to qualify for a grant under the EU's Village Renewal Program.

Towns and villages like Holtland are everywhere -- at least wherever Brussels ends up sending its subsidies. From Sicily to the Arctic Circle, from Fuerteventura to Vilnius, EU subsidies are being used to give villages complete face-lifts, deposit landscaped traffic circles on green meadows, site concrete biotopes along river banks and slice multi-colored bike paths through forests and cities. There are literally thousands of projects, many tiny, a few gigantic. Their combined cost runs into the billions.

Whatever happened to empty government coffers? The lack of funding for daycare centers, management problems in schools, universities filled to capacity? And what about the European mountains of debt?

As far as the EU is concerned, such concerns may as well not exist. There is little evidence of the dire financial straits of most EU countries at the organization's headquarters in Brussels. The problem there is not any particular lack of anything -- rather it is a problem of excess. Ingeborg Grässle, a member of Germany's conservative Christian Democratic Union (CDU) and a budget expert in the European Parliament, is appalled to realize that Brussels is willing virtually "unlimited cash" onto just about anything.

No idea seems too off-the-wall, no project too remote to be considered by Brussels. The only real hurdle is that a proposed project must fit into one of the hundreds of EU support programs used to finance ventures as diverse as street theater in Northern Ireland, farms in Scandinavia, film festivals on the Mediterranean, red-and-gray sidewalks made of composite paving stones in the Polish hamlet of Niedzica-Zamek -- and that luxury bike shed in Holtland.

Self-sustaining money cycle

It's all being paid for under a budget item with the cryptic name "Cohesion for Growth and Employment." In the next seven years, Brussels plans to dole out the enormous sum of €347 billion allocated to the program. It's the EU's second-largest subsidy program after farm subsidies.

The funds are in fact intended to support underdeveloped regions and bring them up to European standards in the long term. To fund the program, all EU members pay contributions into a common fund based on their ability to pay; the resulting pot is then used to support the economically weaker members. The logic behind the idea is that the wealthy nations will also benefit in the long run through higher exports.

That's the theory. But in practice the European Commission, European Parliament, and member states have created an absurdly self-sustaining money cycle. Not just the needy but also the politically powerful -- those who apply the most pressure -- are cashing in on the program. Billions of euros are being frittered away "stupidly and pointlessly," says Helmut Seitz, a Dresden economics professor who complains that the program lacks a clear plan or even effective control over the use of its vast resources.

It would take radical financial reforms to put a stop to this squandering of EU funds. But few are interested, at least for now. Indeed, most politicians and EU administrators alike have had little difficulty coming to terms with the system. The member states have already negotiated the painstaking details of how the money is to be allocated between now and 2013. For example, Poland will receive about €10 billion a year from the EU pot until 2013, while the Germans are entitled to just under €4 billion.

But unlike the Poles, the Germans will be asked to pay substantial sums into the system first, creating an absurd give and take. Of the €18 billion Berlin sends to Brussels, about €12 billion comes back to Germany through various sources. Of course, that money is then earmarked for programs conceived in Brussels or investments approved by Brussels.

Where they are needed least

"The system is completely ridiculous," says CDU expert Grässle. "We send money to Brussels and receive a large share of it back, along with program rules and implementation requirements that end up directing the funds to places where they are needed least."

In recent years, for example, word got around in Germany's industrial Ruhr region that Brussels is most likely to approve projects that promise to create jobs in high-tech, software or the media. The grotesque result is that the Ruhr region is now filled with expensive but largely unused "foundation centers" and "media parks." Many are now empty.

Other projects are even the subject of investigations. That was the case with the HDO animated film center in the central German city of Oberhausen, built at a cost ranging into the double-digit millions. After a series of scandals -- and as many fruitless attempts to save it -- the center finally filed for bankruptcy in 1998.

One of the most bizarre monuments to the absurdity of the subsidies programs is located in Brand, a town in the Spreewald region near Berlin. On the site of a remote former Soviet military airfield, Tanjong, a Malaysian conglomerate, has built Tropical Islands, an indoor water park on an unprecedented scale. The huge building is about 360 meters (1,181 feet) long, 210 meters (689 feet) wide and 107 meters (351 feet) tall. It could easily hold eight soccer fields, the Eiffel tower on its side or New York's Statue of Liberty upright.

Instead it contains swimming pools with white sandy beaches, large water slides, saunas, playgrounds, restaurants and stages for entertainment. What's been missing so far in what the park's owners call an "authentic tropical paradise" is a sufficient number of guests. The park's operators had expected close to 2.5 million visitors in the first year, but no more than a million actually turned up. They now hope to turn the business around with new park attractions.

If the Tropical Islands park goes under, says Elisabeth Schroedter, a Green Party member of the European Parliament, at least €17 million in subsidies, mainly from the EU's coffers, will have been wasted on "an economically and environmentally questionable project." That would be in addition to the €42 million already sunk into the giant building. Before being turned into an indoor water park, the building was meant to house a factory for Cargolifter, a manufacturer of giant cargo blimps. But the company went bankrupt in 2002.

Germany's east isn't the only part of Europe where these types of bad investments have already cost EU taxpayers billions. In southern Italy, for example, Brussels invested roughly €800 million in a project to modernize and electrify the railway network. The results of a 2002 review of the project were astonishing: Before it began eight years ago, "just under half" of the route network was electrified. According to official EU figures, the electrified portion of the network upon project completion was "50 percent."

What is more, three-quarters of all railways in southern Italy are still single-track lines. What exactly happened to the EU's €800 million is a matter of conjecture, but apparently a significant portion of the money quickly ended up in disreputable hands. Italy's tax investigators, the Guardia di Finanza, write in their annual report that the EU was defrauded of €433 million in subsidy money in Italy in 2006. The unreported number is likely to be much higher, and not just in Italy.

Glorified Village Barbeque Pit

Even when the Mafia and corrupt officials are not involved, subsidy money doesn't necessarily end up at its intended destination. In the poorer EU member states -- Poland, the Czech Republic, Greece, Bulgaria and Romania -- a lack of eligible projects and of the necessary expertise to apply for funds means that only a fraction of the money Brussels has earmarked for these countries can in fact be spent. In the 10 new EU member states, for example, only 26 percent of the subsidy funds set aside for them could be disbursed between May 1, 2004 -- the date they joined the EU -- and September 2006. This was not for any lack of effort by officials in Brussels to get rid of the money. In an audit report, the European Court of Auditors concludes that, during Poland's EU adjustment phase, about 35 percent of subsidies for road construction ended up in economically questionable projects, "solely for the purpose of ensuring that the funds would be used up."

Wealthier regions with strong economies are more likely to know the ins and outs of qualifying for subsidy money, but this doesn't necessarily mean that they spend it more wisely. For example, between 2002 and 2006 the southern German state of Baden-Württemberg collected €320 million from the European Social Fund for training programs for the unemployed. It was enough money to train every unemployed person three or four times over, and yet unemployment remained a problem in what is often seen as a model state.

The recipients don't always end up benefiting from Brussels' munificent gifts. It isn't rare for villages, cities or entire regions to find themselves wandering into a bargain trap. In most cases, recipients are required to match the EU subsidies euro for euro with their own funds.

It was a lesson Hamelin, the northern German city famous for its role in the folk tale The Pied Piper of Hamelin, learned the hard way. Thanks to European subsidies, Hamelin was able to develop a museum-like tourism project called The Renaissance Experience World. Its director, Carsten Bartsch, still raves over what he calls an "exciting cultural history project."

Assuming that there was plenty of money to go around, says Bartsch, the city decided to go all out with its small museum, building "five historical scenes along the Weser River" and opting for the most costly and elaborate technology it could find. But the project's operators never managed to get a handle on the technology. Some of the high-tech equipment malfunctioned at the opening ceremony, in front of 400 invited guests, and continued to experience problems down the road. Meanwhile, the costs of the venture skyrocketed.

"Infrastructure dismantlement"

The city, the surrounding counties and the state of Lower Saxony were repeatedly called upon to dig into tax funds to avert the constant threat of bankruptcy. Instead of the estimated €2 million, Hamelin's Renaissance adventure has already consumed €18 million. And instead of attracting an estimated 185,000 annual visitors, the museum barely brought in 20,000 in the first year. Director Bartsch hopes for a turnaround in 2009 -- without incurring even more losses.

Many local authorities that enjoyed the EU's largesse for years are now facing an unexpected long-term consequence: They can no longer afford to pay the operating costs of the oversized sewage treatment plants and waste incinerators they once built with EU subsidies. To solve these and similar problems, 10 European regions, including the eastern German states, are now calling for new financial support from Brussels to help cut the megalomania of past years down to manageable size. This new harebrained scheme is called "infrastructure dismantlement."

The subsidy system has spun out of control, says Joachim Ragnitz, the director of the Department of Structural Economics at the Halle Institute of Economic Research in eastern Germany. Ragnitz's criticism is that subsidy decisions -- over recipients, amounts, durations and justifications -- are often a product of chance. According to Ragnitz, reasonable indicators are just as rare as effective monitoring of projects.

The origins of this lunacy date back many years, to a time when subsidized projects were small and modest. In its earlier days, the EU needed money to promote "economic and social cohesion" and "harmonious development of the community." Smaller funds were set up for these purposes. For example, the European Social Fund (ESF) was established in 1960 to improve the mobility of workers in the common market. The European Regional Development Fund (ERDF) followed 15 years later, when the British insisted on its creation as a condition of their joining the EU in 1975. Their argument at the time was that because the agriculture sector in Britain was relatively small, the country could not expect to receive significant payments from the EU agricultural fund. The ERDF was created as a mechanism to offset high contributions by countries like Britain.

Established in 1992, the so-called Cohesion Fund was intended primarily to finance cross-border infrastructure projects. What in fact ensued was an almost explosive buildup of funds. In 1987 the EU spent €3.3 billion on all its structural and regional projects. Five years later that number had jumped to almost €19 billion, and by 2005 it reached €42 billion. The reasons do not lie in the growth of the organization alone, as officials in Brussels like to argue.

Selling votes for projects

Instead, this massive increase is the result of a completely failed financial policy, a lack of capacity for reform and successful extortion efforts by individual member states. One of the EU's birth defects is that the European Council must vote unanimously when ratifying important decisions. This enables member states to essentially sell their votes on certain projects in exchange for hefty packets of subsidies. In 1985, for example, Greece, in return for its vote in favor of Spain's and Portugal's accession to the EU, received roughly €2 billion from the "Integrated Mediterranean Program," which was created solely for this purpose. In 1988, the EU paid Spain, Portugal and Greece several billions as "compensation" for supposed "burdens" resulting from their integration into the free market.

This constant horse-trading has caused budgets to balloon year after year. Even the heads of state of the EU's wealthiest countries have not exercised restraint in the haggling over benefits and special regional subsidies, knowing full well that almost everything will be approved. This approach may drive up the cost by a few billion euros, but it plays well to voters at home when politicians can brag over having achieved the best possible results for their country in tough negotiations with 26 other national leaders.

Many politicians, says Markus Pieper, a German Christian Democrat and member of the European Parliament, complain about the "windfall gains" and "poor efficiency" of the EU subsidies programs. But what it comes down to, says Pieper, is that he and his counterparts from a mining region in Poland sit together on a regional committee. The only thing that binds them, he admits, is the desire for "more money for all!"

The financing system will be thrown out of joint when the British get their way and the EU's agricultural policies are revamped. When that happens, and subsidies to farmers are reduced, the regional, social and cohesion funds will be called upon to come up with vast sums of money to make up the difference, while EU funding levels will remain unchanged.

The prospect has prompted politicians like Pieper to suggest that the organization should abandon its policy of allocating funds to satisfy equitable distribution requirements, but should instead target its support toward selected "growth poles." Internally, however, experts have long been discussing the more radical solution of converting EU financing to a net payment system.

Investing billions more effectively

Under this approach, Germany and the other net contributors would only pay into the EU budget the difference between the sums they send to Brussels today and what they get back from Brussels, that is, their "net contributions." This would have no effect on the distribution of the financial burden among member states.

It would also cause the Brussels budget to shrink, but that too would not present a problem. The only change would be that net contributors would pay for European agricultural and research subsidies, shoulder the cost of the EU's common foreign and development policy, and shell out the funds for developing economically backwards regions within the 27 EU member states. In short, it would ensure the continued existence of everything that is organized on a European level.

For Germany this would mean contributing about €6 billion instead of the current €18 billion to the EU budget. It would enable Berlin and the German states to decide for themselves how many bicycle paths to pave, how many museums to furnish and how many bridges or water parks to build with the €12 billion in savings -- or perhaps to come up with ways to invest their billions more effectively.

Years ago Reinhold Bocklet, the then Bavarian Minister for Federal and European Affairs, was promoting the net solution. "What Bocklet supported would be more advantageous," says Emilia Müller, who holds Bocklet's post today. Unfortunately this is "not feasible." The major "net recipients" in the EU game of Monopoly -- Spain, Poland and Greece -- are concerned that their convenient meal ticket could be jeopardized if its true extent became all too obvious.

The CDU in Baden-Württemberg has now submitted a petition to the national party convention in the hope of achieving a majority within the party and then in Germany's governing coalition, to "finally get rid of this sending-money-to-Brussels-and-then-getting-it-back system," says CDU activist Grässle. According to Grässle, the net contributor principle the state party hopes to achieve is "not against, but for Europe." The current, absurd system of redistributing funds, she argues, generates widespread skepticism about Europe, because too many subsidies in too many places are being spent on what is obviously "excessive nonsense."

Glorified village barbeque pit

As reasonable as they sound, these ideas are unlikely to hold sway, and stories like the one that transpired in the village of Betheln in Lower Saxony will continue into the future. A few years ago Werner Achilles, a 62-year-old Social Democrat, heated up the local election campaign with his slogan: "We're building a barbeque pavilion." The strategy paid off. Achilles became mayor, scraped together €18,000 and was ready to start construction. But then he heard about EU subsidies.

In his application for the EU funds, Achilles used the fact that there are two long-distance bike paths in the next town and two nature preserves on the horizon to argue that the barbeque pavilion would "promote rural tourism." By the time generous subsidies were approved and the EU imposed its own costly specifications to bring the project in line with its subsidy structures, the glorified village barbeque pit ended up costing €120,000.

But at least Betheln isn't unhappy. Thanks to the EU, the local arm of the Social Democratic Party, the fire department and other groups now have a perfect party house at their disposal, complete with thermopane windows, a glazed fireplace, a bar, a barbeque and enough space for 60 people. The luxury pavilion is also the ideal spot for large family gatherings. But tourists are rarely sighted. Barbeque aficionado Achilles thinks a Frenchman might have passed through town once. But he can't say for sure, because it was only hearsay.

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