Opinion

A Radical Way Out of the EU Budget Maze

It can be tempting to treat European budgetary discussions as a fairly inconsequential distributional game. But with the EU's role increasingly focused on the provision of public goods, in accordance with its values and priorities, this would be a mistake.

By: Date: February 26, 2020 Topic: European Macroeconomics & Governance

In 2003, I co-authored a report on the future of the European Union – the Sapir report – in which we observed that the expenditures, revenues, and procedures of the EU budget were all inconsistent with the Union’s objectives. We therefore advocated a radical restructuring of what had become a “historical relic.” Seventeen years later, little has changed.

Two years ago, when negotiations on the budget for 2021-2027 started, I pointed out that the outcome would reveal what the EU is really up to, but that after high-drama bluffing, bullying, blackmail, and betrayal, such negotiations usually result in minimal changes. And here we are: we have had bluffing, bullying, blackmail, and betrayal, not least on the occasion of the inconclusive EU summit of February 20-21, and Europe appears to be headed for minimal changes.

Such an outcome would be dreadful. True, the EU’s budget is not what usually defines it. Europe’s integration has proceeded by establishing a legal system, common institutions, a single market and currency, and joint policies for competition, trade, and climate, rather than through joint spending programs. The lion’s share of its budget goes to transfers to poorer regions and farmers, which may or may not be useful but do not characterize what today’s Europe is about. It is therefore tempting to treat the EU’s budgetary discussion as a fairly inconsequential distributional game: Europe’s pork barrel.

But that would be wrong. Europe’s defining issue is no longer integration through trade and mobility, or even the strengthening of the euro. As I argued in a recent report with Clemens Fuest of CESifo Munich, the EU’s role is increasingly the provision of public goods at European rather than national level, in accordance with its values and priorities. Concretely, the defining issue for the EU is whether to act forcefully in fields like climate-change mitigation, digital sovereignty, research and development in transformative projects, development cooperation, migration policy, foreign policy and defense. In such fields, the question is not whether Spain will gain more than Poland, or whether Dutch citizens will end up paying more the French, but whether there is added value in joint policies.

As matters stand, however, the EU is starting from an absurdly distorted approach to public goods. Some member states are interested only in what is in it for them, while others consider only what it may cost them, and still others care only about collateral damage to their cherished policies. What Europe loses in the process is an opportunity to get serious about its stated priorities and to confront the urgency of joint action.

A fundamental principle of public economics is that efficiency and distribution issues should be separated to the extent possible. Whether a policy delivers value and how its benefits are distributed are both important issues, but they must be distinguished. Separation can never be absolute, because the provision of public goods has distributional consequences: an increase in defense spending, for example, benefits weapons-producing regions. But this only reinforces the point: no one wants security policy to be decided by the arms lobby.

The EU budget negotiation mechanism should be designed to give member states an incentive to aim both at collective efficiency and cross-country equity, but not to make one the hostage of the other. At present however, Poland fights for the regional development funds and France for the Common Agricultural Policy, regardless of these programs’ intrinsic value, because they benefit from them. By the same token, the frugal four (Austria, Denmark, the Netherlands, and Sweden) have committed to resisting any meaningful increase in the budget, irrespective of what is done with the money. The result is deadlock.

The way out of the impasse is to choose a negotiation procedure that addresses efficiency and distribution separately. To the great dismay of devoted federalists, who (rightly) claim that the very notion of net budgetary balance is economic nonsense, negotiations nonetheless end up deciding how much each member state will pay and receive over the seven-year period covered by the budget. If contributions are too high or benefits too low, a “rebate” is agreed on, which ensures that the net balance is at the desired level. But since no one is very proud of this sort of murky horse-trading, it is left for the last, late-night or early morning discussion. As shown by Zsolt Darvas of Bruegel, the result is muddled and its complexity defies imagination.

To break the deadlock, Charles Michel, the president of the European Council, should propose to turn the table and start afresh with the setting of each country’s net balance. It would be agreed that Poland, because it is poorer, would receive €X billion more each year than what it is paying into the budget; Germany, because it is richer, would pay Y billion more; and so on. With properly defined net balances set in stone, no state would have an interest to fight for a policy whose only value is that it benefits from it, because any additional net benefit (or cost) would be automatically offset through a lump-sum transfer. This would shift attention to the policies’ intrinsic value rather than their distributional effects.

True, the debate over the overall size of the EU budget would remain. There would still be a row between partisans of higher spending and advocates of frugality. But this is a necessary debate that should not be eschewed. Those who think that there is value in European public goods would have to convince their partners – and also pay their fair share. The difference, not a minor one, is that they would argue on the basis of added value and efficiency, not direct pecuniary interests.

After another failed negotiation, Michel tweeted on February 21 that, “as my grandmother used to say, in order to succeed you have to try.” European leaders would be wise to follow his grandmother’s advice.


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