Europe's Budget a Missed Opportunity

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The European Commission published its proposals for the 2014-2020 EU budget at the end of June. The British media were incensed about proposals for new 'EU taxes', a planned nominal rise in EU budget spending at a time of austerity and alleged threats to the British rebate. However, rather than focusing on the British net balance, the Cameron government should make a strong and constructive case for thorough budget reform. The Commission's proposals are a missed opportunity.

In a joint letter from last December, the British, German, French, Dutch and Finnish governments demanded that the next 'Multiannual Financial Framework' (MFF) for 2014-20 should keep total EU spending at 2013 levels in real terms. The European Parliament hit back in June 2011, demanding a budget increase of at least 5 per cent. The Commission's proposal states, somewhat lamely, that it has "sought to strike the right balance between ambition and realism" and suggests to cap spending at 1 per cent of EU GDP as in the past while moving (or keeping) some spending items outside the official budget framework. If only the 'on budget' spending is counted, the Commission's proposals are in line with the five member states' demands, but if the 'off budget' money is included the Commission has sided with the Parliament. At 2 per cent of total EU public spending, the EU budget is "stuck between being so small as to be economically irrelevant and big enough to harbour shock horror stories", in the words of one former British negotiator (quotes are from a recent CER seminar on "Reworking the EU budget").

However, it is not so much the overall size of the budget that matters but whether EU money is spent on political priorities in a way that adds value. The Commission's proposals more or less perpetuate the budget priorities of the 2007-13 MFF. While this will please most member-states, it will hardly help the EU to address new challenges such as innovation and research, fighting climate change, dealing with the euro crisis and migration or helping the democratic and economic transition in Eastern Europe and Northern Africa.

The two biggest spending blocks in the 2014-20 MFF will remain the same: structural (or cohesion) funds for regional developments and the common agricultural policy (CAP), with both receiving around 36 per cent of total EU budget spending (although cohesion funds would for the first time be slightly bigger than the CAP).

In theory, cohesion policy is a good example of what European co-operation should be all about: redistributing income and wealth from richer parts of Europe to poorer parts. However, the structural funds are still allocated in a way that even regions in the richest member-states get money. Economists (and some Commission officials) have long advocated to focus cohesion money on the poorer member-states, perhaps those with a GDP of less than 90 per cent of the EU average. Instead, the rich countries insist that their budget contributions get 'recycled' via Brussels back to their own less advantaged regions. Many politicians claim that such transfers are needed for political legitimacy and fairness. Surely there are better ways to ensure that richer countries benefit from the EU budget, such as spending on innovation.

The Commission proposals are similarly timid when it comes to the CAP. Not only does spending so much EU money on farmers make little sense as the share of Europeans working the land continues to decline. But the CAP even fails on its own account: too much money now goes to the biggest land-owners. With food prices near all-time high, this EU budget would have been the perfect opportunity for radical CAP reform. "Even the Americans are reducing farm support", explains one British food producer, "if we do not reform the CAP now, then when?". The Commission should have proposed phasing out the 'single farm payment' (income support that goes to all farmers) while maintaining rural development spending. There should also be a gradual shift towards more national co-financing.

With a much-reduced CAP and re-focused cohesion funds, the EU budget could increasingly go towards issues that the EU declares a priority.

Climate change is one such priority. According to the Commission, EU expenditure for climate programmes will rise to at least 20 per cent of the total - but it gives no details on how it plans to achieve this. Rather than making aspirational statements, the Commission should have made concrete proposals.


Another area that should get more money is external affairs. Only €100 billion are earmarked in the Commission's proposal. Although the biggest increase is foreseen for neighbourhood policies, the money will not be enough for the EU to implement its ambitious new neighbourhood policy that it started drawing up in the wake of the Arab spring. Similarly, the €8.7 billion foreseen for dealing with migration is inadequate for a European immigration policy that would help to save the Schengen area of free movement.

The EU should also spend more on its economic priorities. Allocated amounts for R&D and innovation are supposed to rise from €55 billion in the last MFF to €80 billion in 2014-20. This is welcome but still inadequate for a continent whose future prosperity will depend on staying at the technological frontier. For the first time, the EU budget will contain a sizeable pot of money for infrastructure investments: the €40 billion of the new 'connecting Europe facility' are supposed to attract a multiple in public (for example from the European Investment Bank) and private investments (perhaps from pension funds) to improve European transport, energy and communications infrastructure. However, about half of the €40 billion will go to transport infrastructure - an area where waste has been a big problem in the past. The money would be better spent on information and communication technology in the EU's less developed countries and on constructing an EU-wide energy market and preparing for the addition of large amounts of renewables to the European power sector.

Alas, the chances that the 27 EU governments will agree on radical budget reform before 2014 are slim. European budget talks are always heated but today's political environment is particularly toxic. First, most EU nations are in the process of pushing through painful budget cuts at home and want the Commission to do the same (to its credit, the Commission suggests to cut its staff by 5 per cent but since administration accounts for only 6 per cent of total EU spending, this will be largely symbolic). Second, the Lisbon treaty has given the European Parliament new powers over the budget process, which - if recent moves are anything to go by - it will use to push for higher spending. "The European Parliament is full of spokespeople for individual policy interests whose demands will add up to more than the available budget money", predicts one British journalist.

Third, the euro crisis has left many people in the richer EU countries opposed to any kind transfers to poorer countries. The grants earmarked for cohesion in the EU budget are peanuts compared with the loan guarantees in the rescue packages put together for Greece, Ireland and Portugal. Yet in the minds of many Europeans, these blend into one. In particular Germany, traditionally the 'paymaster' of Europe, will be in no mood to throw in extra billions to lubricate a compromise on the EU budget. Finally, with presidential elections due in France next year, the chances that Paris will move on CAP reform are slim. In London, meanwhile, Prime Minister Cameron will be under heavy pressure from his eurosceptic party base to retain the British rebate and keep budget spending low. A bilateral deal whereby France keeps its farm payments while Britain retains its rebates would allow for a compromise but spell the death knell for EU budget reform.

The Commission has added further fuel to the political fire by making some bold proposals for new 'own resources', EU jargon for money that the Union collects directly for the EU budget, for example from customs duties or sugar levies. The Commission now wants member-states to discuss whether the EU could raise money from a new VAT levy and from a financial transaction tax. A German diplomat calls the proposals simply "not acceptable" while a British one dismisses them as an "amusing distraction". A financial transaction tax would impact heavily on the UK - disproportionately so in the view of the UK government. Since any new own resources need unanimity among the 27 governments, the chances of the Commission's proposal making it into the new MFF are close to zero.

The Commission's proposals succeed in trying to please as many political masters as possible. The price that Brussels has paid for this is an unambitious, backward looking budget package. A European Union that must deal with a public finance crisis, an unstable neighbourhood, diminishing legitimacy and declining global competitiveness must do better. And David Cameron should provide the leadership. France has a presidential election in 2012, and Germany a federal election in 2013, so President Sarkozy and Chancellor Merkel are boxed in by the demands of electioneering. UK foreign secretary William Hague - no fan of Brussels - has said that the EU should do more to control climate change. So the British government should argue that significantly more should be spent on climate control, and significantly less on the CAP, and that if genuine budget reform is on the table, the UK rebate is up for re-negotiation.

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