Systemic Corruption a Problem for Nearly Every Country in EU

Economic losses are in excess of $150 billion per year, according to a recent report.

Feb 7, 2014 at 10:04AM

There is a hiccup in the European Union's economy regeneration plan: someone is taking a bite out of the bottom line. 

For the first time in EU history, a report has been conducted to determine the level of corruption in all 28 member states. Shockingly, nearly every country in the EU reports at least some measure of systemic corruption. While the incidence of this is minimal in some of the major economies of the organization (e.g., Germany and France), citizens in more than half of member states report that they are affected by corruption on a daily basis. 

Why is this happening?

In states that are historically more afflicted by corruption, many are blaming a failing judicial system. This is especially true in states such as Bulgaria and Romania, where EU officials are claiming conflicts of interest are preventing the effective combat of domestic crime.

There is an additional culprit, and one that seems more suitable in a Hollywood plot than economics: organized crime. With an estimated 3,000 networks existing in Europe, the face of organized crime is changing. Organizations such as the Italian Mafia have reinvented themselves to be "white collar" criminals, according to the BBC, abandoning classic extortion to move into more sophisticated money-making methods. 

These methods, from shell company usage to business infiltration to siphoning off EU-given funds, are not unique to this single organization. With so many networks active, the EU fraud detection agency Olaf has found itself completely overmatched. The additional barrier of unresponsive member states makes this challenge nearly insurmountable. 

Taking a closer look at the numbers

This is not the first time evidence of significant corruption has manifested itself in the EU. 2009 saw allegations that over $1.5 billion had been siphoned away from the organization's Structural Fund (utilized to reduce income disparity). Last year almost $9 billion in funds were cited as "misspent." While organization officials note that this should not become a euphemism for corruption, auditors found evidence of widespread accountancy breaches; for example, farmers citing adjoining forests as pasture lands so as to receive increased funding. 

Though the losses claimed seem hard to reconcile, the report put out by the EU Home Affairs may justify such a high figure. If one considers even one of the three most vulnerabe sectors cited (health care, urban development, and tax administration), then the figures may even be lower than they truly are. 2010 saw estimated losses of $56 billion, losses that were forecast to rise further over the following years. Even assuming a modest increase in money lost (and reports since then have not noted any reform in the area), this would account for half of reported losses this year already. 

Urban development and tax fraud levels are similarly growing. Add in the accusations of systemic bribery and connections between corruption and the aforementioned organized crime, and when the entire picture is considered, things may look impossible to overcome.

Problems will continue to persist as long as member states hamstring EU-connected organizations. Given the currently under-performing economies of several EU members, failing to address these issues now only encourages further losses in the future. This is not to suggest that member states need to surrender more economic sovereignty, but as losses approach and exceed the nominal budget of the entire European Union administration, member states are only hurting themselves. 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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