Blog Post

EU budget, Common Agricultural Policy and Regional Policy – en route to reform?

As the debate on the EU 2021-2027 Multiannual Financial Framework gains momentum, we look at the major budget items and their effectiveness. The challenge for the future budget is to design spending programmes that are more efficient, effective and fair.

By: Date: February 22, 2018 Topic: European Macroeconomics & Governance

The future of the EU budget will be a central topic for discussion at the informal European Council meeting on Friday, February 23.

Key issues are at stake: how to change the composition of spending to deliver the most European value-added, while considering new priorities? Should the revenue side of the EU budget be amended? Should EU27 countries compensate for reduced UK contributions?

On February 14, the European Commission published its contribution to the informal European Council meeting. As the Commission considers changes in EU priorities and presents a number of options about the size and composition of EU spending, in this post we look at the literature on the effectiveness of the most important EU budget items.

The 2014-2020 Multiannual Financial Framework is financed by EU Member States’ contributions and customs duties on imports from outside the EU. This money is used to carry out common European policies. Figure 1 shows the budget allocation across different policy themes.

The Structural and Cohesion Funds are used to implement the EU Regional Policy (sometimes called Cohesion Policy). Together with the Common Agricultural Policy (CAP), they account for 72% of EU spending, with €775 billion. “Competitiveness for growth and jobs” is the third biggest component, with €142 billion. This theme includes several well-known programmes such as Horizon 2020 (for Research & Innovation) and Erasmus+.

With €66 billion, “Global Europe” includes the EU foreign policy instruments – notably aid, neighbourhood policies and other external actions. “Security and citizenship” covers domestic issues such as health, consumption, justice and asylum – totalling €18 billion. Finally, after excluding the Common Agricultural Policy, “Sustainable Growth: Natural Resources” is allocated €11 billion, mostly for Maritime Affairs and Fisheries. The Common Agricultural Policy and the Regional Policy are by far the biggest components of the EU budget. We therefore look at these in turn.

The Common Agricultural Policy has a budget of €408 billion for the period 2014-2020. This money mostly goes to the European Agricultural Guarantee Fund (EAGF, 77%) and the rest goes to the European Agricultural Fund for Rural Development (EAFRD, 23%). The EAGF is used to provide income support to agricultural producers (€294 billion expected for 2014-2020) and intervene in case of adverse shocks on agricultural markets (€18 billion expected). The underlying rationale for such a policy is that the European agricultural sector is crucial for the food supply of EU citizens. Through the “greening” and “cross-compliance” conditions on subsidies, it attempts to incentivise best practices with regards to environment and animal welfare. The EAFRD’s mission is to help rural communities develop and diversify economically, by funding regional projects.

Given the importance of this policy, its efficiency, effectiveness and fair distribution are crucial. In fact the Commission’s communication highlights that 80% of direct payments go to 20% of farmers, and calls for better targeting.

To our knowledge, no independent evaluation encompassing all aspects of the CAP has been undertaken in recent years. Nevertheless, some studies suggest inefficiencies in bettering environmental impact and biodiversity. More fundamentally, the attempted studies often point to the need to collect more data and to make CAP evaluations more systematic. A recent report by the European Court of Auditors found the CAP’s “greening” policies to likely be ineffective at improving European agriculture’s climate impact. A review of the Member States’ implementation of the CAP raises concerns about its impact. It highlights that the priorities chosen are ill-advised and the implementation is often problematic.

The Regional Policy has a budget of €367 billion for the period 2014-2020, allocated between the European Regional Development Fund (ERDF, 55%), the European Social Fund (ESF, 23%), the Cohesion Fund (20%) and, sometimes included, the Youth Employment initiative (1%). These funds are the main instruments to ensure cohesion and convergence among EU regions: alongside Member States, they co-fund economic development projects drawn up by regions. These projects must demonstrate how they contribute to progress on a broad range of objectives – from research and development activities and small- and medium-sized enterprises, to public administration and social inclusion – meant to fulfil the Europe 2020 strategy. The underlying objective of this policy is to reduce the socioeconomic disparities within the EU.

In order to stimulate convergence within the Union, the ERDF and ESF have separate budget subdivisions for different regions based on their GDP per capita. €185 billion is set aside for “less developed regions” (with GDP-per-capita [GDP/cap] of less than 75% of the EU average). “Transition regions” (with GDP/cap between 75% and 90% of the EU average) receive €36 billion. “More developed regions” (with GDP/cap above 90% of the EU average) receive €56 billion. Figure 2 shows which region is eligible for what category of funding.

Figure 2: Classification of EU regions according to development

Source: Eurostat Regions & Cities Illustrated, Bruegel, showing available data for Europe. Orange areas are “Less developed regions”, dark yellow areas are “Transition regions”, light yellow areas are “More developed regions” and grey areas are regions for which 2015 data is unavailable.

Contrary to the CAP, the Regional Policy has been subject to many independent evaluations. The growth and convergence effect of projects sponsored under the Regional Policy is generally found to be positive, but small and conditional on other regional characteristics. Importantly, it seems these funds are less effective where regional institutions and policies are already performing poorly and in socioeconomically less-developed regions. More recently, the small positive effect from Regional Policy has been found to be short-lived.

Therefore, there are major question marks about the effectiveness of both the EU’s agricultural and regional policies, none of which are addressed in the Commission’s communication.

The key challenge that EU leaders will face is in breaking the inertia in EU budgeting and to identify the spending programmes  that best correspond to citizens’ objectives, and to bring European value-added in an efficient manner that member states would not be able to provide on their own.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

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

Blog Post

How could net balances change in the next EU budget?

The gap between payments into the EU budget and EU spending in a particular country has importance when EU spending does not constitute European public goods, or there are risks for their improper use. I estimate that the Juncker Commission’s proposal for the next seven-year budget would lead to big reductions (as a share of GNI) in the net payments to most central European countries, while the changes for other countries seem small

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: January 23, 2020
Read article More on this topic More by this author

Opinion

European capital markets union, by rule and by choice

While the euro is now a leading global currency and the European Central Bank has become a comprehensive banking supervisor, Europe’s markets have been treading water.

By: Rebecca Christie Topic: Finance & Financial Regulation Date: January 23, 2020
Read article

Blog Post

Incorporating political risks into debt sustainability analysis

DSA applies to crisis countries only, but an early warning system identifying vulnerabilities is relevant for all countries. A more general, less stringent, debt vulnerabilities analysis (DVA) could be used to assess countries’ debt management policies and identify vulnerabilities, without leading immediately to policy consequences. A more general framework could also incorporate political risks that are significant determinants of debt dynamics

By: Stavros Zenios and Andrea Consiglio Topic: European Macroeconomics & Governance, Global Economics & Governance Date: January 22, 2020
Read article More on this topic More by this author

Blog Post

European green finance is expanding, a discount on bank capital would discredit it

If EU banks are to mobilise a greater share of loans for sustainable projects they will need a reliable policy framework, clear internal performance targets and the relevant skills. A discount on bank capital underlying such assets is neither justified nor likely effective. A comprehensive review of how climate risks are reflected in prudential regulation is nevertheless in order

By: Alexander Lehmann Topic: Energy & Climate Date: January 15, 2020
Read article Download PDF More on this topic

Policy Contribution

Market versus policy Europeanisation: has an imbalance grown over time?

This Policy Contribution tests the hypothesis that an imbalance has grown in Europe over the last few decades because markets have integrated to a greater extent than European-level policymaking, potentially creating difficulties for the democratic process in managing the economy. This hypothesis has been put forward by several authors but not so far tested empirically.

By: Francesco Papadia and Leonardo Cadamuro Topic: European Macroeconomics & Governance Date: January 9, 2020
Read article More on this topic More by this author

Blog Post

How much will the UK contribute to the next seven-year EU budget?

This post estimates the United Kingdom’s net contribution to the 2021-2027 EU multiannual budget at close to €20 billion, taking into account the most significant items of the financial settlement according to the October 2019 EU27-UK draft withdrawal agreement.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 16, 2019
Read article Download PDF More on this topic More by this author

Working Paper

A new look at net balances in the European Union's next multiannual budget

Whenever the European Union’s budget is discussed, much of the political focus is on net balances – whether countries pay in more than they receive – rather than on the broader overall positive effects of EU spending. The largest net contributor countries have sought to limit their contributions, leading to the build-up of an ad-hoc, complex, opaque and regressive system of revenue corrections.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 12, 2019
Read article More on this topic More by this author

Podcast

Podcast

What's inside the European Green Deal?

President Ursula Von der Leyen has presented her European Green Deal before the European Parliament. How will it work? What are its implications? And will it make Europe carbon neutral by 2050? Nicholas Barrett asks  Simone Tagliapietra what's inside the Green Deal.

By: The Sound of Economics Topic: Energy & Climate Date: December 11, 2019
Read article More on this topic More by this author

Blog Post

The European Green Deal needs a reformed fiscal framework

The European Green Deal should include a sustainable investment strategy that will help citizens change behaviour and companies switch technologies. But to finance it, the EU will have to increase the flexibility of its fiscal rules to encourage member states to invest in the transition.

By: Grégory Claeys Topic: Energy & Climate Date: December 10, 2019
Read article More on this topic More by this author

Blog Post

Who pays for the EU budget rebates and why?

A complex system of EU budget revenue corrections has been developed since the mid-1980s. I quantify their impacts: which countries pay and benefit from it and by how much and highlight several anomalies. The best solution would be to reform EU budget spending to provide only European public goods and eliminate all rebates. But if that’s not possible, then at least the rationale for the rebates should be spelt out clearly, and a transparent system built on clear principles should replace the current ad hoc, complicated, non-transparent and regressive system.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 4, 2019
Read article More on this topic

Blog Post

Cross-border, but not national, EU interregional development projects are associated with higher growth

Our calculations reveal that places where EU regional development projects bind together participants from different countries experience higher economic growth. Purely national interregional projects, on the other hand, are not associated with such benefits. The results hold across regions of different levels of income and consider the effects of other growth-determinants. Cross-border projects might bring efficiency gains, unlock synergies and provide knowledge transfers, boosting activity, with gains going beyond the projects’ scope. Cross-border projects could provide perhaps the only rationale for the continued cohesion/regional funding of more developed regions.

By: Zsolt Darvas, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: October 14, 2019
Read article More by this author

Blog Post

Questions to the High Representative and Vice-President-designate Josep Borrell

Josep Borrell, the incoming High Representative and Vice-President-designate must explain how von der Leyen’s ‘geopolitical Commission’ intends to adapt to a global landscape dominated by an intensifying rivalry between Washington and Bejing.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance, Global Economics & Governance Date: September 30, 2019
Load more posts