Opinion

The EU’s Seven-Year Budget Itch

On February 23, EU members began negotiations on the bloc's multiannual financial framework for 2021-2027. But, with all countries focusing on net balances – how much they receive minus how much they pay – will the composition of spending bear any relation to the EU’s stated priorities?

By: Date: March 1, 2018 Topic: European Macroeconomics & Governance

This article was also published by Project Syndicate.

público logo

It’s theatre season in the European Union. The play, called budget negotiations, is performed every seven years. It pits the EU’s spenders against its savers, donors against receivers, and reformers against conservatives. After the actors have exhausted themselves with bluffs, bullying, blackmail, and betrayal, everybody agrees on minimal changes. Each government claims victory and EU public spending is set in stone until the next performance.

Drama aside, however, watching the negotiation of the multiannual financial framework, as it is called, is a deeply depressing experience. All countries view it from the perspective of net balances – how much they receive, less how much they pay – without regard for the intrinsic value of spending. And, because wasting money at home is regarded as better than usefully spending it elsewhere, the composition of expenditures bears no relation to the EU’s stated priorities. In 2003, “the Sapir report” on Europe’s economic system called the EU budget a historical relic. Things haven’t improved much since then.

Theater season opened on February 23, when EU leaders held their first talks on the 2021-2027 framework. Optimists hope that it will end before the European Parliament election in June 2019. Realists expect it to last until the actors run out of time – that is, the end of 2020.

Seasoned European observers play down the significance of the show. They note that it is not primarily money, but regulatory policies – governing competition, subsidies, consumer protection, financial safety, or trade – that define the EU. Its budget represents about 2% of total public spending in the EU, and it has actually decreased over time, from 1.25% of GDP in the 1990s to about 1% in the current period. The US federal budget, by contrast, amounts to 20% of GDP. So why bother with a budget that remains small and misused? The EU has bigger problems to solve, critics say.

But this time, there are four reasons why the discussions matter, and why complacency would be misplaced.

The first is Brexit. Because the United Kingdom was a net contributor, it will leave a €15 billion ($18.5 billion) funding gap and force the EU to decide whether to substitute missing revenues or to cut spending. Adding to the drama, the misers’ bloc to which Britain belonged has fractured, with Germany indicating a willingness to be generous, while the Netherlands and Sweden are adamant they will not contribute a penny more.
Second, there is a growing gulf between money and politics. Poland’s net receipts from the EU amount to €10 billion annually, making it the leading beneficiary of the EU budget. But the Polish government’s priorities, and even values, are “increasingly at odds with those of the EU. It opposes taking in asylum-seekers, it faces a European Commission-initiated procedure for threatening the independence of the judiciary, and it has shocked Europe with a law criminalizing allegations concerning Poles’ “complicity in the Holocaust.

These actions have led German Chancellor Angela Merkel to suggest that conditionality be imposed for access to EU funds. This potentially explosive discussion can be avoided only if the EU is willing to shut up and pay, as some in Poland (and also in Hungary) demand. In that case, however, the EU would risk a different explosion. After all, for how long will citizens in the rest of Europe be willing to open their wallets only to be slapped in the face?

The third reason this theatre season is so important is that Europe’s strategic environment calls for new priorities. From Ukraine to the Middle East, Libya, and the Sahel, the EU’s immediate neighbourhood is either unstable or in turmoil. Meanwhile, the United States no longer “provides the reliable shield to which Europeans had grown accustomed. The EU grew up in a world where it could safely concentrate on its own prosperity. That world is gone.
What we are facing is a redefinition of EU public goods, and this must entail deep budgetary consequences. The European Commission has bravely put “some numbers on the table. It proposes to spend about €3-4 billion per year more on border security and a still-modest €5 billion per year on defense, as well as increases for research, innovation, and the Erasmus program. It also envisages annual spending cuts for regional aid and agriculture that could reach €30 billion.

Numbers, at this stage, merely flag issues. But the Commission’s boldness is justified. Regional policy and agriculture comprise nearly three-fourths of the EU budget, and both are questionable. Regional policy fueled eurozone booms in the pre-crisis years, but provided little help to struggling countries afterwards. And it is not granular enough to address the consequences of trade opening for local communities. The Common Agricultural Policy is increasingly ill-suited to guide the transformation of a much more diverse EU farm sector. To recalibrate them and thereby finance new priorities would be fully justified.

The last reason why budget issues matter this time around is that French President Emmanuel Macron has opened a new discussion about establishing a specific eurozone budget. The prime justification for creating one is not that certain public goods should be reserved to the EU’s eurozone members, but that a common fiscal instrument would cushion country-specific shocks and complement the European Central Bank’s monetary policy when facing common shocks. Whereas the EU budget performs no significant macroeconomic role in cross-country stabilization or in aggregate terms, as it does not record surpluses or deficits, the opposite would be expected from a eurozone budget.

There is no agreement yet on the contours of such a budget, especially as Germany is wary of creating a channel for cross-country transfers and joint borrowing. But this does not mean that the discussion has no future. If the EU27 prove unable to agree on sensible reforms of their budget, the eurozone’s 19 members (which include neither Poland nor Hungary) could gradually move toward creating their own. The EU budget would eventually morph into it, or become a small relic.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic More by this author

Blog Post

On Modern Monetary Theory

An old debate is back with a kick. The discussion around modern monetary theory first gained traction in the economic blogosphere around 2012. Recent interventions in the US and UK political arenas rekindled the interest in the heterodox theory that is now seeping into mainstream debates.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 11, 2019
Read article More on this topic

Blog Post

Whose (fiscal) debt is it anyway?

The authors map how much fiscal debt is in the hands of domestic and foreign holders in the euro area. While the market for debt was much more international prior to the crisis, this trend has since been reversed. At the same time, central banks have become important holders of fiscal debt.

By: Maria Demertzis and David Pichler Topic: European Macroeconomics & Governance Date: February 6, 2019
Read article More on this topic

Blog Post

The higher yield on Italian government securities is becoming a burden for the real economy

Francesco Papadia and Inês Gonçalves Raposo have recently written on Italian fiscal policy and the increase in the spread between Italian (BTP) and German (Bund) government. Since then, two developments have taken place: one good, and one bad. This blog post reviews them.

By: Francesco Papadia and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 5, 2019
Read article More on this topic More by this author

Opinion

The EU needs a Brexit endgame

Britain and the EU must try to preserve the longstanding economic, political, and security links and, despite the last 31 months spent arguing over Brexit, they should try to follow a new path toward convergence.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: January 31, 2019
Read article More on this topic More by this author

Opinion

What does a possible no-deal Brexit mean?

With Brexit getting closer, it is still extremely difficult to predict which one of the possible outcomes will materialise. Guntram Wolff examines what exactly it would mean for the UK to 'crash out' of the EU, for both parties.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 24, 2019
Read article Download PDF More on this topic

Policy Contribution

Equity finance and capital market integration in Europe

Facilitating the financing of European companies through external equity is a central ambition of European Union financial regulation, including in the European Commission’s capital markets union agenda. Against this background, the authors examine the present use of external equity by EU companies, the roles of listings on public markets, and the regulatory impediments in national laws. They assess to what extent EU market integration has overcome the crucial obstacle of shallow local capital markets.

By: Inês Goncalves Raposo and Alexander Lehmann Topic: Finance & Financial Regulation Date: January 17, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: The economics of no-deal Brexit

Bruegel director Guntram Wolff is joined by senior fellow Zsolt Darvas to rake through the possibilities and probabilities inherent in a no-deal Brexit scenario, covering trade, the Irish border, citizens' rights and the EU budget.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: January 16, 2019
Read article More by this author

Blog Post

What 2019 could bring: A look inside the crystal ball

Economic performance prospects in Europe, the US and Asia in 2019. We start off by reviewing commentaries and predictions about the euro zone, which many commentators expect to perform below potential as uncertainties continue to dampen a still robust recovery.

By: Michael Baltensperger Topic: European Macroeconomics & Governance, Global Economics & Governance Date: January 14, 2019
Read article More on this topic More by this author

Blog Post

EU budget implications of a no-deal Brexit

A no-deal Brexit would mean the UK’s contributions to the EU budget fall to zero as of March 30th 2019. The author here calculates an estimate of the budget shortfall that would have to be covered in this case, and how the burden would fall across different member states.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: January 14, 2019
Read article Download PDF More on this topic More by this author

Policy Contribution

The implications of no-deal Brexit: is the European Union prepared?

The author, based on a note written for the Bundestag EU Committee, is exploring the possible consequences of a no-deal Brexit for the EU, assessing preparations on the EU side and providing guidance on the optimal strategy for the EU, depending on the choices made by the United Kingdom.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 14, 2019
Read article Download PDF More by this author

Parliamentary Testimony

German Bundestag

The implications of no-deal Brexit: is the EU prepared?

Hearing on Brexit in the EU Committee of Bundestag on 14 January 2019, exploring the possible consequences of a no-deal Brexit for the EU and assessing preparations on the EU side.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, German Bundestag, Testimonies Date: January 14, 2019
Read article More by this author

Podcast

Podcast

Director’s cut: Wrapping up 2018

With 2018 drawing to a close, and the dawn of 2019 imminent, Bruegel's scholars reflect on the economic policy developments we can expect in the new year – one that brings with it the additional uncertainty of European elections.

By: The Sound of Economics Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Date: December 20, 2018
Load more posts