Why make a risky investment in Europe, when you can take a similar risk with the prospect of higher returns in the developing world? With corruption levels rising, this is the question that threatens to discourage investment in the Eurozone.
A new study by the European Commission (EC) has estimated that increasing corruption in the Eurozone since the region’s sovereign debt crisis in late 2009 is having a devastating impact on European business activity. The report, released February 3, 2014, calculated that corruption now costs the EU around €120 billion in lost tax revenues and foreign investment, a figure only slightly less than the annual EU budget.
The cost of rising corruption is manifesting itself through three principal trends: increasingly limited participation in public tenders for government contracts; a growing discrepancy between perception and reality of corruption levels; and international reputational damage discouraging foreign investment.
The EC report estimates that a third of companies that could theoretically take part in public tenders for government contracts are prevented from doing so because of corruption. Sixty-nine percent of the 7,842 businesses canvassed in the survey reported that paying bribes and exploiting political connections were the easiest ways to obtain certain public services – most notably in the healthcare, construction, development and tax administration sectors.
This is reducing the number of companies willing or able to engage in bidding for government contracts. Left in the pool are those who either are actively engaging in corrupt practices or have weaker governance regulations, thus creating a self-perpetuating cycle of corruption. Research from the University of Spain indicates that in the area of public procurement, costs added to a contract as a result of corruption amount to around 20-25 percent of the original contract. Few business are willing to meet this.
The second strand of the problem relates to the widening gap between perception and reality in terms of the business ethics and governance climate in Europe. Although EU member states have fairly high levels of anti-corruption legislation in place, there is a large degree of variance between regulation and enforcement – both between states and within states .
Certain countries (Slovenia and Croatia) have taken new initiatives to encourage transparency and combat corruption, whilst others (Sweden, Denmark, Finland and Luxembourg) confirmed expectedly low levels of corrupt practices in the EC report. Despite this, the report noted that respondents in Germany, the Netherlands, Belgium, Estonia and France felt corruption was a ‘widespread problem’ despite a very low number of people, 2 percent, who reported actually having to pay a bribe.
Intra-European variance in tackling corruption is understandable, but the danger is that a lack of clear distinction between reality and practice damages the European market, within and between member states. Insufficient protection for whistleblowers fuels the perception that certain countries or sectors may be riskier than they actually are, stagnating the flow of investment in the region.
The third component of the challenge from growing corruption is the wider reputational damage that may occur. Weak regulation and enforcement of anti-corruption legislation in certain areas is discouraging foreign investment in public procurement projects within the European economy. Traditionally, investment in emerging markets is considered riskier, but with higher returns. If, as the ongoing series of corruption scandals seems to illustrate, the investment risk of the EU is also growing, why take similar levels of risk at a lesser rate of return?
There are clear ways in which recent growth in the cost of corruption can be reversed, and indeed several steps have been taken by member states. For example, to tackle regional variation in corrupt practices, Slovakia has introduced a framework for external monitoring of public spending. The Open Local Government initiative, run by Transparency International, ranks 100 Slovak towns according to a set of criteria based on transparency in public procurement, access to information, availability of data of public interest, public participation, professional ethics and conflicts of interest. Similarly, both Portugal and Croatia have introduced national databases centralising public information on public contracts.
That said, for many economies still considering themselves – rightly or wrongly – to be in ‘recovery,’ investing in control mechanisms, public databases and external review processes may not be considered a priority. Ironically, if they do not make it one, they risk adding to the economic burdens from which they are striving to escape.