Fabio Balboni - 06/ 2011

The European Union (EU) budget for 2011 is set at €126.5 billion, or 1% of the EU Gross National Income (GNI). Peanuts, as some people (particularly around Brussels) often argue. The Italian budget for the same year, for instance, is more than 6 times bigger. However, for a combination of economical and political reasons, the EU budget recently became a major subject of debate across many European capitals. One reason is that the cheque that the Member States write each year to the EU is significant: in 2009 (the latest year for which there are publicly available figures) Germany and France contributed to the EU budget around €20 billion, Italy €15 billion, with the United Kingdom and Spain following at short distance. In times of large cuts to public expenditure required by the EU Stability and Growth Pact, limiting that bill has a huge prize in terms of cuts that can be avoided at home. In the Italian case for example, it would have helped quite a bit to achieve the €25 billion cuts announced last year for the 2011 budget, or the further ones announced earlier this year. Another, maybe less obvious, reason is that, by re-distributing money across EU countries, the EU budget creates some net recipients and net contributions. And the debate about what is the right level of net transfers between countries is not one that can be solved overnight (which is why the Commission desperately tries to avoid it, neglecting the concept of net balances). But what is exactly the EU budget? The EU budget works in a different way than all national budgets: commitments are set over a 7-years programming period, called Multiannual Financial Framework (MFF) or more simply Financial Perspective (FP). The last FP was negotiated in 2005 for the period 2007-2013. Once commitments are set, each year the Commission has to propose a level of payments (a substantial chunk flows from previous years’ commitments), and the European Parliament and the Council have agree on that. This is usually a long (and contentious) process starting in April and ending (when lucky) with the conciliation process between the Parliament and the Commission in November. Last year the Commission proposed a 6% increase for the 2011 EU budget. With an eye on the cuts at home, the Council agreed only an increase of 2.91% (a figure which then became very famous). The European Parliament reiterated the request of a 6% increase, and maybe in the past we would have ended up somewhere in between. But this time the newly elected UK Government led a coalition of “budget disciplinarians” MS out of the negotiation room, and the conciliation between the Council and the Parliament failed. Then, in December, the Parliament eventually accepted the 2.91% increase. The negotiation for the 2012 EU budget just started and, once more, it could be long, given that some MS already said that the Commission’s requests (a 4.9% increase from 2011) were unacceptable. However, the moment everyone is waiting for is when, at the end of June, the Commission will announce its proposal for the next Financial Perspective (2014-2020). The main issue at stake is again the size of the budget. Following the 2010 December European Council five MS (Germany, France, UK, Netherlands and Finland) issued a joint letter calling for a real freeze in payments over the next FP. Poland, like most of the net recipients, asked for an increase of the EU budget. The European Parliament (whose role in the next FP negotiation is still not clear give the ambiguity of the Lisbon Treaty) recently joined them, asking for a 5% increase in commitments. Given that Germany, France, UK, Italy and Spain alone contribute to over 2/3rd of the budget, finding a compromise might not be easy. The size of the budget is not, however, the only problematic issue. One other is the future of the Common Agricultural Policy (CAP) and the Structural and Cohesion funds (SCFs), the two biggest items of expenditure. While all the net contributors broadly agree on limiting the size of the budget, they do not necessarily agree on where the axe should fall. France and the Netherlands called for significant cuts to the cohesion funds going to the rich Member States, while Germany and Italy would like to maintain them, to protect their receipts in Eastern Germany Ländern and Mezzogiorno. All new Member States would like to see an increase of the cohesion funds they receive, to finance the catching up process with the rest of the EU. As regards the CAP, France leads the team of supporters (last year Sarkozy declared he would be ready to trigger a “crisis in Europe before accepting the dismantling of the CAP”), with Italy also asking for an “adequate” support to all EU farmers. Others, particularly in Northern Europe, would like to see substantial cuts to the CAP budget. Secondly, there is the issue of whether (and how) to address new priorities, such as Climate Change, and how much to invest in the areas of expenditure where the EU should really bring value added (infrastructure, research, etc.). Unfortunately, those are also the areas that implemented more slowly in the current FP, and the Commission will have to justify higher requests. Then there is the issue of new own resources. The Commission (and most of all the European Parliament) would like to introduce a new “EU tax” to finance the budget, but many Member States expressed scepticism. Finally, there is the issue of budgetary corrections, i.e. the discounts that some of the largest net contributors get on their contributions. The most famous is the UK “Rebate”, agreed in 1984 and worth around €4 billion in 2011. Last year, in June, the budget Commissioner Lewandowsky told to a German newspaper that the conditions have changed from 1984 (when the UK was one of the poorest countries in the EU) and the UK “Rebate” is “no longer justified”. The UK Chancellor followed shortly, declaring in September that "we are not going to give way on the rebate [...] people better know that at the beginning of the process or they are certainly going to discover it at the end." But the UK “Rebate” is not the only correction: Germany, Sweden, the Netherlands and Austria also have (smaller) corrections. Differently that the Rebate, which is permanent, these will have to be re-negotiated for the next FP. From all this, it is immediately clear how difficult is the Commission’s task in a few weeks time. The good news is that the waiting time is almost over. The bad is that there is no guarantee that the FP negotiations will end up in glory (and also on time for 2014...); the FP has to be agreed by unanimity, and MS positions seem quite distant. One key variable will be how much each MS really “needs” the EU budget, from an economical and most of all a political perspective, as this will affect how determined they will be to close the deal quickly. Certainly the new MS do, for cohesion, so does France for CAP and probably also Italy and Germany for their cohesion funds. But the overall impression is that, with the enlargement process (almost) completed, the EU budget is less “needed” now than it was in the past. Other key players like Spain completed their catching up process and might not be eligible for cohesion funds in the next FP, so they could become more concerned about their contributions. Also, with important elections coming up (France, Italy), and coalition Governments throughout Europe including Euro-sceptics parties (UK, Finland, Netherlands to name a few), it is not so evident that the people locked in the negotiating room will want (or will be allowed...) to make the necessary compromises to achieve a common position. Given these premises, the Commission should probably regard it as a good outcome for its June proposal if all the Heads of State will sit around a table and discuss it, as some might decide instead to forego the trip to Brussels and save money towards the reduction of their national deficits.

Fabio Balboni has a PhD in Law and Economics from the University of Bologna