13 December 2023

Bruegel's Buti: When will the European Union finally get the budget it needs?

Even 20 years ago, the European Union’s budget was being described as a “historical relic” (Sapir et al, 2004). It remains outdated and is not fit to face the EU’s current policy challenges: the green and digital transition, wars in Ukraine and the Middle East, and migration, among others. 

In addition, much more is now expected from the EU than previously. Member countries ask the EU to help find solutions to old and new problems. Future enlargement, which could bring the EU to 35+ members, will further increase demands on the budget.

To meet expectations and tackle current and future challenges, the EU budget thus needs radical reform, on both the revenue and expenditure sides.

Like any other budget, the EU budget can be analysed through: (i) its size, (ii) its composition, and (iii) its contribution to macroeconomic stability. For political, institutional and legal reasons, the EU has had been adjusting the budget at the margin, without major changes to any of these areas:

• The EU budget has remained at 1 percent of EU GDP since the end of the 1980s (about €160 billion to €180 billion annually). Only in response to the pandemic was EU expenditure expanded in an unconventional way, through the creation of the Recovery and Resilience Facility (RRF), the core of the NextGenerationEU (NGEU) post-pandemic recovery programme. The RRF is outside the Multiannual Financial Framework (MFF, the EU’s seven-year budget cycle), and is scheduled to expire in 2026.

   

• In terms of composition, the share of budget that goes to the Common Agricultural Policy and cohesion funds has eroded gradually but the structure has remained broadly unchanged. Legal and institutional loopholes have been exploited to adjust the budget, but in an ad-hoc fashion, rather than systematically.

   

• The EU budget notoriously falls short in its contribution to cyclical stabilisation, in part because of its small size and the fear that countries would not create sufficient fiscal space if they knew the EU would come to the rescue in the event of a negative shock. Most of these concerns are misplaced, as they could be addressed through appropriate criteria to be eligible to benefit from EU support. However, it is debatable whether limited political capital should be invested upfront in creating a central stabilisation instrument.

   

It is time to overhaul the EU’s public finances, though for this to be done, certain political and institutional conditions are necessary.

Embracing a European public goods logic

A reformed budget should embrace a European public goods (EPGs) approach, meaning that it should focus on spending in areas where the EU can bring real added value. EPGs can be classified into ‘true’ EPGs that are financed and delivered at EU level, and projects pursuing EU priorities financed by the EU, but for which delivery is done at national level (Buti and Papacostantinou, 2022).

In the true EPG category, projects should in principle be politically less contentious than other forms of EU spending, for at least two reasons. First, they undercut arguments about juste retour, or net balances, according to which each EU country tends to subtract how much money it contributed to the EU budget from how much it got back, without considering wider impacts of spending. Second, true EPGs would remove the risk of moving to a ‘transfers union’. Hence, spending on true EPGs should reduce tensions between ‘creditor’ and ‘debtor’ countries. ..

 more at Bruegel

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