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