The EU budget and the risk of a “lost decade”

The EU functions through three distinct, but linked modes of governance. The traditional core approach is regulatory (in the widest sense), exemplified by the single market, the euro and the range of policies that underpin them. Second, there is co-ordination of national policies – which has expanded significantly since the creation of the euro and the launch of the Lisbon strategy.

The third mode of EU economic governance is direct spending which, by contrast, has played a fairly marginal role in recent years. Indeed, despite the changes introduced in successive Multi-annual Financial Frameworks, the budget remains concentrated on the same two policy areas – agriculture and cohesion – as it was twenty years ago. Although some spending from the EU budget was included in the European Economic Recovery Package, it was not large enough to make a meaningful macroeconomic difference. Using the EU budget as part of the funding package for the European Financial Stability Facility agreed in May 2010 was a potentially more momentous development, although it remains to be seen whether it was a one-off or the harbinger of a new approach.

Despite being subject to a review that was supposed to be conducted in 2008/9 (and for which the leitmotif was that there should be “no taboos”), the budget has also suffered from a lack of political attention, mostly because other policy priorities always seem to take precedence. Initially, it was securing ratification of the Lisbon Treaty, especially after the Irish “No” vote. Then it was the exigencies of the financial and economic crises. More recently, the “Greek crisis” and the risk of contagion spreading to other Member States saw the bulk of the political effort over the last six months focused on how to improve policy coordination at EU level and agree on more effective regulatory mechanisms: the resulting van Rompuy proposals are now on the table.

At long last

But so, too, is the oft-postponed Commission Communication on the budget review, published on the 19th of October. The intention of the review was to examine the principles on which the budget was to be based, and not to be the first round of negotiations about money.

This was never going to be an easy distinction to make, but the Commission Communication does indeed focus on what to spend the money on rather than how much should be allocated. In particular, it suggests that the budget should be concentrated on core policy areas, interpreted principally as the “Europe 2020” strategy captured in the “smart, sustainable and inclusive” formula for EU growth. Special emphasis is given to the scope for EU level spending to support the EU’s capacity for growth.

The question now is whether the conclusion of the review will pave the way for a radical modernisation of the budget as the third arm of economic governance, contributing more emphatically to the ambitious goals the Union has set itself for the next decade and to forestalling a “lost decade”.

History does not offer much encouragement, and the Communication ultimately gives only limited guidance. It makes a compelling case for placing innovation at the heart of the budget and ensuring that more resources are available for new policies, including action to deal with the threat of climate change. But it also argues for persevering with EU spending on agricultural policy and a cohesion policy that offers resources to all Member States, paying little heed to the merits of a more concentrated cohesion policy.

Indeed, there is a danger of turning cohesion policy into an all-purpose instrument for delivering “Europe 2020” that could detract from its core role in supporting economic development of less-favoured regions. Nor does the Communication give a clear sense of whether a pronounced shift in the balance of EU spending is justified. It is easy to understand why it has taken this line and why it wants to avoid discussing money – but it is not necessarily the best recipe for decisive reform.

Budgeting from Mars

It is tempting to imagine what sort of EU budget would emerge if a consultant from Mars were given a blank sheet of paper and asked to design a suitable package to promote the long-term growth and well-being of the EU. The said consultant would almost certainly start by asking what the most pressing challenges are and, once these were identified, which level of government would be best-placed to respond to them.

Some are bound to transcend what can be done effectively by regions or even entire Member States acting alone – the most obvious of which are acting to address climate change and developing long-term solutions to energy needs that combine sustainability and a substantially reduced dependence on politically volatile suppliers.

Achieving a 30% reduction in carbon emissions, as is envisaged in “Europe 2020”, will be demanding, yet it is broadly accepted that the EU will subsequently have to aim for still larger abatement of carbon emissions. Mitigating carbon emissions must not, however, be seen purely as a cost, because there are undoubted business opportunities associated with a shift to a “greener” paradigm involving extensive use of new technologies. In this regard it is important to distinguish three categories of technologies:

  • Those that are known and proven, but which need to be more effectively diffused and scaled up in a way that reduces marginal costs and thus improves incentives to adopt them;
  • Those for which the science is broadly understood, but which need to be further developed as part of an innovation strategy to become commercially and socially viable;
  • The “blue-skies” ideas that will provide breakthroughs capable of reconciling long-term energy needs with environmental sustainability.

For all three directions for technological advance, the rationale for support from the EU budget is the classic one that Member States acting alone will find it harder to appropriate the benefits of investing in them, and will thus be led to under-invest. Consequently, a persuasive case exists for EU level funding.

Landing in EUrope

The trouble in all of this is that the debate on the EU budget is trapped in its own past. A good example of both the magnitude of the political challenge and the poverty of the debate is an editorial published in The Times on 25 October 2010, just days before the European Council expected to agree major reforms of European economic governance. For The Times, what David Cameron ought to use all his guile to achieve is not a shift in spending priorities, but preservation of the UK rebate.

One of the hopes expressed in the Communication (and one that it is easy to share) is that, by switching to some new form of authentic “own resource” rather than direct contributions from Member States, the debilitating obsession with net contributions will diminish. Sadly, this could well prove disingenuous: however much purists rail against the notion of juste retour, every Finance Minister at the negotiations will anticipate to two decimal places what the net cost or benefit to his or her country of any new MFF will be.

By then, it will be important to offer an alternative and ambitious rationale for EU expenditure proper: the Communication is a start, but the signposts should be moved more decisively.

Our Martian consultant would be tempted to embark on a rocket home if asked to reconcile a) the continuing demands for sizeable proportions of a budget amounting to barely 1% of EU GDP to be spent on agricultural policy and cohesion policy in richer regions, with b) the many new demands around grand challenges.

Quite simply it cannot be done, and the clear implication is that it is time for hard choices to be made. Will the decision-makers in all European capitals rise to this challenge?

This article was originally published in the bepa monthly brief, the monthly newsletter of the Bureau of European Policy Advisors of the European Commission. Thanks to the editors for allowing a reproduction.

Photo Courtesy NASA/JPL-Caltech

Iain Begg

About Iain Begg

Iain Begg is a Professorial Research Fellow at the European Institute, London School of Economics and Political Science. His main research work is on the political economy of European integration and EU economic governance. He has directed and participated in a series of research projects on different facets of EU policy and his current projects include studies on the governance of EU economic and social policy, the EU’s Lisbon strategy, the social impact of globalisation and reform of the EU budget. Other recent research projects include work on policy co-ordination under EMU and cohesion policy.