Europe’s added value: changing the discourse

Especially after the launch by the Commission of its draft proposal for the Multi-Annual Financial framework (MFF), the EU enters a debate on how its budget could and should be shaped in the future to serve its citizens. Such debate will last many months and will involve a number of key stakeholders like the European Parliament and the Member States. Just looking at the budget (or the costs side) without considering the benefits common EU policies bring risks leading to biased and, above all, sub-optimal trade-offs.

To help prevent this, BEPA has undertaken an investigation into how and where EU actions, policies, and in particular expenditure can add value to its citizens and Member States – above and beyond, that is, the crude operating costs involved. It has done so only through a limited number of examples of common policies – but one which already paints a revealing picture. This research focuses primarily on the macro impact of broad policy schemes and complements the staff working document prepared by the Secretariat-General; now attached to the Commission’s proposals for the MFF.

To start with, it is worth reminding that the EU budget amounts to less than 1% of the Union’s gross national income (GNI), i.e. a small fraction of government spending at national level, which ranges – among the 27 – from 30% to over 50% of GNI.

Nonetheless, testing the added value of EU spending is a useful exercise that enhances the accountability of institutions to citizens and Member States alike. As President Barroso outlined in his letter to the President of the European Parliament of 26 November 2010, European added value is “a key test to justify spending at the EU […]. The Commission will also fully take into account the European added value as well as the synergies between the EU and national budgets for specific policies, and the corresponding savings, in its proposals on the next Multiannual Financial Framework”.

Over the years, some Member States have used the notion of “fair return” (juste retour) as a political argument, especially when negotiating their contributions to the EU budget. In accounting terms, however, the notion is questionable. Researchers have demonstrated why and how such calculations lack rigour and are at times even meaningless. More fundamentally, they have pointed out that European integration is not a zero-sum game in which amounts “paid” or “received” by Member States net out – especially given the specific value that integration creates.

Furthermore, it is highly debatable whether policies that have a non-economic goal (for instance, redistribution, environmental protection, security, freedom of movement) should be assessed solely in terms of economic cost/benefit analysis. President Barroso’s letter stressed i.a. that “the value added of a political project cannot be reduced to a balance sheet”.

Large as they may seem, the payments made by the “net contributor” Member States generally amount to less than 0.5% of their GNI. In 2000–9, the one with the largest net contribution as a share of its economy was the Netherlands’: it amounted to 0.40% of GNI. The next largest “net contributors” (Sweden, Denmark, Luxembourg) reached 0.31/0.34% of their respective GNIs.

Such sums are dwarfed by the benefits of the EU to Member States. Among the 15 examples of EU added value identified and assessed by BEPA, several yield larger benefits individually than the total costs of the EU budget. For instance, evaluations by various research and academic organizations suggest that the added value of the Single Market alone is at least 2.15% of GDP; that of competition policy 3.2%; the liberalisation of air travel 4%; and the euro 10% of GDP. Overall, it is undeniable that the benefits of the Union to the Member States far outweigh the material costs of the EU budget.

For example(s)

If one delves more deeply, the following examples highlight three types of impact:

  • key policies at the core of a Europe-wide open, free, competitive and innovative single market: single market policies, trade policy, competition policy, enlargement, the euro, freedom to work across Europe, and research and innovation policies. If one assumes that adding up the individual effects of these policies is representative of their combined impact, their total added value is in the region of 10–20% of GDP;
  • sectoral policies, such as airline travel and air traffic management, telecommunications and energy. Adding up the individual effects of deregulation and network interconnection policies in these sectors would gives an estimated added value of 5% of GDP;
  • policies with regional or local impact: these include cohesion policies as well as the sheer incidence of European institutions on regional economies. For instance, Objective 1 funds boosted the growth of convergence regions by 12% from 1995 to 2006; and the European institutions contribute 13% to the economy of the Brussels region.

While data on the impact on labour markets is incomplete, the cumulative effect of these selected examples amounts to at least 12 million extra jobs, or about 5% of EU-27 employment.

Needless to say, all these common policies also bring huge non-economic benefits – such as increased personal freedom across Europe, stronger solidarity between European regions, more effective action against climate change, bigger clout in global negotiations and, last but not least, a more peaceful and secure Europe.

Combined with some country-specific information (such as net contributions to the EU budget), these examples can help convey a first rough picture of not only the nominal costs but also the real benefits of EU policies.

Net indirect benefits for some net contributors

Germany, to start with, is a leading exporter in and to Europe, with more than 85% surplus balance realised within the single market. Every fourth job in Germany is dependent on exports. The positive effect of the euro, in particular, on the German economy has also been remarkable. German exports to the euro zone grew impressively over the years thanks to that: 3% per annum from 1990 to 1998, 6.5% from 1999 to 2003, and 9% from 2004 to 2007.

Often neglected are also the benefits that the UK derives via the central role that the City of London plays across Europe, especially in wholesale banking and financial markets. Such a role is greatly facilitated by EU regulations on free trade of services and the European passport, i.e. the principles of mutual recognition – which allows financial services operators legally established in one Member State to provide their services in other ones without further authorisation requirements. London’s financial sector and exports make a large contributor to the UK’s balance of payments: trade in services with EU-27, in particular, has been in surplus for five of the last six years, growing strongly to record a net surplus of £ 9.2 billion in 2009. On top of that, the City employs more than 300 000 people in Greater London.

For its part, the Netherlands benefits significantly from the EU’s enlarged single market in two ways. First, Dutch exports represent 84% of its GDP (2008), more than 80% of which is directed towards European countries. The Dutch Central Plan Bureau estimated the contribution of the Single Market in the range of 4 to 6% of GDP (2008), equalling 1500 to 2200 EUR per inhabitant per year. Second, the Port of Rotterdam prides itself to be the gateway to Europe, and indeed has seen its throughput increase by 50% since the introduction of the Single Market in 1992. In 2010 the economic importance of the Port of Rotterdam can be expressed in (in)direct added value of 22.2 billion EUR (3.3% of GDP) and (in)direct employment for 145 000 people.

These selected examples show how much value the EU already adds to all its citizens and Member States – and how much more can come in the future. The fresh debate on the MFF is a perfect opportunity to explore new ideas and new trade-offs.

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

 

Baudouin Regout

About Baudouin Regout

Baudouin Regout joined the BEPA in February 2011 as an Adviser on economic and financial/banking questions. Before, he has worked for 17 years in the private sector, in banking and in consulting with McKinsey&Co. He established and led the McKinsey Global Institute in Europe. He was educated at the Solvay Business School of Brussels and Stanford University, where he graduated with a Master of Business Administration (MBA). He started his career in banking in Belgium, with bank Degroof in the M&A and corporate finance department. After his MBA, he joined McKinsey&Co, the leading global strategic and business consulting firm, and worked first in New York, then in Washington DC, and finally in Brussels. During his 13 years at McKinsey&Co, he focused on two areas: consulting for banks, mostly in corporate and investment banking, and leading research with the McKinsey Global Institute.