Opinion

What does Europe care about? Watch where it spends

The European Union says it wants to focus on new priorities. First it will have to cut spending in sectors that have long enjoyed support.

By: Date: May 14, 2018 Topic: European Macroeconomics & Governance

This article was published first by Bloomberg, on March 21st 2018.

Bloomberg view

“Don’t tell me what you value,” Joe Biden once said. “Show me your budget, and I’ll tell you what you value.”

He wasn’t talking about the European Union, obviously, but it’s a great line that’s as telling today in Europe as it was when he used it to criticise Washington Republicans in 2008.

Negotiations on the next seven-year budget cycle lasting from 2021-27 began recently. The European Commission says an enlarged trillion-euro ($1.23 trillion) budget will reflect new EU priorities, from better external border protection and defence provisions to digital upgrades. But that will require cuts in sectors that are traditionally well-funded, including agriculture. The friction between old priorities and new ones is bound to result as negotiations get more advanced. If you really want to know what the European Union cares about – and how serious it is about future integration – then watch who wins those budget battles.

Most European leaders strongly support an expansion of the EU’s role in the protection of borders, the integration of immigrants, military cooperation and investment in upgrading digital infrastructure. Yet, these will be costly and support for increasing funds is quite limited. In the current multi-year budget, the EU (minus the UK) spends roughly 200 billion euros on these priorities. To make a difference on these issues, another 120 billion euros will be needed at the very least, according to our analysis.

That would mean beefing up the current European border guard from 1,000 to 3,000 staff. And that’s not the more ambitious of three scenarios we’ve mapped out (see table below).

bruegel budget calculations eu scenarios

In the current budget plan, roughly three-quarters of the money budgeted is spent on support for farmers and on transfers to help achieve parity in living standards among regions. The former Common Agricultural Policy is essentially an income support scheme directed at large farmers. It has been shown to be largely ineffective in making European agriculture more environmentally friendly, and it does not primarily support the truly poor farmers. Meanwhile, the transfers to support regional convergence of living standards also receive mixed grades in terms of their effectiveness.

To show that Europe’s priorities have shifted would require a significant shift in spending from agriculture and support for convergence to border security, digital infrastructure and other modern requirements. Yet taking away money from these established and vested interests will be difficult. For example Ireland, a recipient of abundant agricultural funds, has already vehemently expressed its opposition to any cuts. Meanwhile, the central European countries such as Poland fear losing out on convergence support. But even in rich countries such as Germany, the east German states have already made loud noises to prevent any cuts on regional funding.

The pain of reassigning funds will also be sharpened by Brexit. The UK is one of the most important net payers into the EU budget: for the current seven-year budget plan it pays roughly 73 billion euros more than it receives. For the next budget period – and assuming all spending and revenues were to grow with national income – the gap arising from Brexit would have been 93 billion euros.

Of course, the UK is still scheduled to pay for its existing liabilities, which amounts to an estimated 17 billion euros for the next budget period. If it wants to have more market access to the EU, which ultimately remains the most important market for the UK, I would also expect the country to pay some form of a fee that could amount to perhaps 10 billion for those seven years. All the same, Brexit leaves a hole in the EU budget.

One option for funding new priorities while limiting cuts would be to raise more money from EU member countries. The current budget stands at 1% of the EU’s gross national income and, as the European Commission is requesting, this could be lifted to above 1.1%. This option, however, faces fierce resistance from the Netherlands, Austria and other net contributors.

At least economic growth will ease pressures somewhat. Nominal income, according to Bruegel estimates, should grow by around 28% in this seven-year period. Part of the spending shift can be achieved just by freezing the funding for agriculture and cohesion in real terms. Still, that won’t cover it all. If the EU is serious about its professed new priorities, it will need a larger budget with some very different spending allocations from the past.


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