Brexit and Cohesion Policy: How Much Will It Cost?

With Brexit, the EU will lose its 3rd most important net contributor (see table here) and this is creating quite a headache for Brussels (see this FT article, for example). One third of the EU budget is spent on regional redistribution, which takes place mainly through Cohesion Policy. How much do the various countries stand to lose due to Britain's exit from the EU?

A recent analysis of the Institute for Strategy and Analysis in Bratislava (available in Slovak here) addresses this issue by forecasting the future income per capita and unemployment for all EU countries, and computing the resulting Cohesion Policy payments. This is based on the assumption that the EU budget will be reduced after the UK's departure (i.e. the other net contributors will not be asked to pay in more) and that these cuts will be equally spread across all spending categories. Several observations are noteworthy.

First, the changes in Cohesion Policy allocations, predicted for 2021-27, are sizeable, and not always negative (see table below). The main determinant of country-specific allocations is the relative economic performance: the countries set to do well economically will see their receipts go down while those lagging behind will get more.

Second, the contribution of Brexit is relatively modest for most countries (see the last column in the table). The main loser from Brexit will be Estonia, for a rather peculiar reason. The departure of the UK from the European Union will bring down the average income per capita somewhat, making all remaining countries appear slightly richer when compared to the EU average. As a result of this, Estonia will pass the threshold corresponding to 75% of the EU average per-capita income if Brexit happens while it would be predicted to stay below were the UK to stay in the EU. This threshold is of crucial importance when determining eligibility for Cohesion Policy funding: the regions below the 75%, classified as less developed, are the main recipients of funds, while those above the 75%, the so-called transition regions, receive much less. All of Estonia is just one NUTS2 region, so passing this threshold affects all of the country.

Third, some countries stand to improve their Cohesion Policy allocation as a result of creative regional planning. Dividing a region that is about to cross the 75% of the EU average threshold into a relatively rich part and a relatively poor one can help avoid that the whole region moves into the higher category. Lithuania has done just that: it split into two new regions in order to avoid that the whole country moves into a higher category just like Estonia. The regions that used to encompass the capitals of Poland and Hungary were similarly divided.

The figure below depicts the expected changes in the status of European NUTS2 regions, with and without Brexit.

	2021-27 with brexit		2021-27 without brexit
Member  state	Difference relative to 2014-20	Ratio relative to 2014-20	Difference relative to 2014-20	Ratio relative to 2014-20	Attributable to brexit
BE	+202.07	110.00%	+202.07	110.00%	0.00
BG	-253.86	96.58%	-253.86	96.58%	0.00
CZ	-8393.72	61.22%	-7981.15	63.12%	-412.58
DK	+41.32	110.00%	+41.32	110.00%	0.00
DE	-4684.43	74.36%	-4318.22	76.36%	-366.20
EE	-1590.55	55.00%	-477.28	86.50%	-1113.27
IE	-140.12	86.26%	-87.09	91.46%	-53.03
EL	+1524.52	110.00%	+1524.52	110.00%	0.00
ES	+2794.19	110.00%	+2794.19	110.00%	0.00
FR	+1476.32	110.00%	+1476.32	110.00%	0.00
IT	+3168.63	110.00%	+3168.63	110.00%	0.00
CY	+10.81	101.54%	+36.27	105.16%	-25.46
LV	-74.93	98.30%	-74.93	98.30%	0.00
LT	-396.58	94.09%	-344.40	94.87%	-52.18
LU	+3.96	110.00%	+3.96	110.00%	0.00
HU	-3473.31	83.88%	-3473.31	83.88%	0.00
MT	-318.60	55.00%	-318.60	55.00%	0.00
NL	+101.46	110.00%	+101.46	110.00%	0.00
AT	+66.79	106.83%	+97.83	110.00%	-31.05
PL	-8962.74	88.34%	-8962.74	88.34%	0.00
PT	-2341.17	89.03%	-1687.42	92.09%	-653.75
RO	+2254.11	110.00%	+2254.11	110.00%	0.00
SI	-455.33	84.88%	-392.75	86.96%	-62.58
SK	-1409.71	89.76%	-1275.29	90.74%	-134.41
FI	+18.63	101.43%	+69.30	105.31%	-50.68
SE	-210.78	88.05%	-209.59	88.12%	-1.19
HR	-1422.59	83.19%	-1422.59	83.19%	0.00

Diaspora Voters

Turkey's ruling party, AKP, has been sending its politicians to meet with Turkish voters in a number of European countries with large Turkish diaspora populations. These countries are not exactly thrilled about a foreign government engaging in political campaigning on their soil. Germany, Austria and the Netherlands, in particular, voiced their displeasure.

Turkey is holding a referendum on a new constitution, which would turn its political system into a presidential one and substantially increase the powers of president Erdogan. Given that Erdogan has been displaying rather Putinesque authoritarian leaning lately, this is worrying.

Turkish voters living abroad can participate in the referendum, and Erdogan and AKP are keen to make sure that they support the constitutional change. There are more than 4 million Turkish citizens in Europe, so the diaspora voters can potentially make a difference.

The Netherlands, in turn, is holding an election in which immigration is the big topic. Turkey sending its foreign minister there less then a week before the election was not particularly considerate. For the Netherlands, not allowing his plane to land was stupid. It gives Erdogan an opportunity to call them Nazis and to score additional points with his voters. It likewise gives Wilders, the PVV leader, an opportunity to say 'I told you so'.

There are, however, deeper issues behind all this. These days, people increasingly live, often for extended periods, in a country other than the one in which they were born and whose passport they carry. It would be a shame if the Turkish constitutional referendum created a precedent that would result in disenfranchisement of diaspora voters. Poland, for example, has seen a few million of its citizens leave during the last 10 years or so. Greece, Italy, Spain and Portugal also have large diaspora populations. Should electoral meetings for their benefit also be banned?

Moreover, migrants living in Western Europe are exposed to generally liberal and tolerant norms and values. Some of those values can be transmitted to their friends and family back home, and/or reflected in their voting behavior. In my research with Orla Doyle on voting behavior of Czech and Polish migrants, we show that those in countries with greater tradition of democracy and economic freedom are more likely to vote for parties supporting democracy and market economy (see link). Antonio Spilimbergo finds a similar democracy-supporting effect of sending students abroad (link). Mahmoud, Rapoport, Steinmayr and Trebesch (link) and Ruxanda Berlischi (link) consider Moldovan migration to the West and argue that it helps spread democracy and increases support for a pro-EU (rather than pro-Russia) orientation, respectively. Finally, Nikolova, Roman and Zimmermann (link) show that emigration from Bulgaria and Romania helps spread pro-social attitudes to their friends and families left behind.

Authoritarian countries are usually very reluctant to allow their citizens to travel abroad or even to have access to information about how things are elsewhere. The Soviet Union and other communist countries made it very difficult for their citizens to travel to the West. Communism in East Germany famously ended after East Germans were finally allowed to visit West Germany. The threat to authoritarian regimes is not only that people will want to leave, but also that they will see, with their own eyes, that things can be done differently. North Korea therefore not only prevents its own citizens from traveling abroad but also closely guards foreign visitors and stops them from interacting with the locals. It also punishes its citizens for watching South Korean TV.

Diaspora voters can serve as an important conduit of liberal norms and attitudes. Why stop them from serving in this role?

Angry White Old Men

At the beginning of the Industrial Revolution, British weavers tried to smash the machines in newly built textile factories. These so-called Luddites felt that mechanization of production threatened their livelihood and their traditional way of life. When a machine threatens to replace the man, the man breaks the machine.

These days, we see something similar. The threat comes not from machines, but from new modern technologies and globalization: ICT and the sharing economy, coupled with free trade and ever greater migration flows. Those who feel threatened today are predominantly white, old and male. The threat that they face is that their jobs get shipped off to China or Eastern Europe or that they get replaced by an immigrant or a smartphone app.

The angry white old men don’t break things. Instead, they attend rallies against immigrants and vote for politicians who promise to make their countries great again.

They are mainly men. Low-skilled men work in sectors that are particularly threatened by free trade, immigration and automation: manufacturing, construction and agriculture. Low-skilled women, in contrast, tend to prefer service and public-sector jobs, in which employment prospects are safer. In fact, they may even benefit: an immigrant who comes to Europe to work on a construction site will need to buy bread and milk in the local shop and get haircut from a local hairdresser.

They are mainly white: previously they were the dominant and privileged group and now they increasingly see themselves becoming the underclass, outflanked by the more successful minorities.

And they are old, as older workers are more likely to possess skills that are of little use in today’s modern economy. The young have invested in education, which gives them a competitive edge over the less-skilled immigrants and overseas workers, and they are sufficiently tech savvy to participate in and benefit from the spread of new technologies.

Take taxi drivers as an example. The typical London cabbie is a white male in his 50s, drives an ancient looking black cab, does not possess much formal education but has acquired the Knowledge (familiarity with London’s streets and alleys), and is usually grumpy. If you use your smartphone to hail an Uber, you’ll probably get a cheerful young guy from Romania or the Middle East who will rely on GPS to get you to your destination. In a Toyota Prius.

In the past, such men would work all their life, retire on a defined-benefit pension in their early to mid 60s, and then die shortly thereafter due to ailments brought about by a lifetime of hard work and overindulging in smoking, drinking and fatty food. Not anymore. With their jobs off-shored or taken up by immigrants, they face long old age on benefits, then on modest defined-contribution pension. And one can’t even smoke in pubs anymore.

At the same time, the young are too busy doing well to have kids. And this is why the angry white old men are becoming more influential. In the past, their gripes would be outweighed by the more numerous young. Not anymore. We are moving closer to the point where the median voter will be an angry white old man. When that happens, expect more nasty electoral surprises to happen. Pegida, Brexit and Trump represent just the dawn of the new political paradigm.