A Better EU Budget

BRUSSELS – Stopping Europe’s economic decline and overcoming its competitiveness crisis will require radical solutions. But European Union leaders remain fixated on old priorities – a lack of vision evident in negotiations over the EU’s 2014-2020 Multiannual Financial Framework (MFF).

Once again, short-term national interests are taking precedence over the need for a forward-looking, flexible, and efficient EU budget. The European Parliament, which for the first time must approve the MFF, should use its new-found influence to uphold the EU-wide public interest and offset the blinkered, vested interests of individual member states.

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In a climate of budgetary restraint, it is unsurprising that the European Council agreed earlier this year to reduce the EU budget by 3.4% relative to the 2007-2013 MFF. But, with austerity under fire and EU countries looking to encourage spending, the Council should also consider the budget’s shape, ensuring that the MFF does not impede future growth and investment.

For example, the proposed budget slashes funding for cross-border infrastructure projects, including the expansion of high-speed broadband networks into rural areas and the development of transport and energy infrastructure. But the EU can add considerable value by coordinating transnational infrastructure projects, thereby achieving economies of scale and avoiding a duplication of national spending. Europeans would benefit directly through improved Internet access, lower energy costs, and more efficient transport links.

Likewise, in order to lay the foundations for future economic growth, the EU should nurture new, sustainable industries and innovative small and medium-size enterprises – not cut funding for important research programs like Horizon 2020. Innovations in renewable energy, for example, are essential to improving energy security and preserving Europe’s standing as a global leader in combating climate change. Given that renewable energy is one of the world’s fastest-growing sectors, such investment could have a significant impact on future GDP growth and job creation.

Meanwhile, agricultural subsidies and cohesion funds, which were cut by 11% and 8%, respectively, relative to the previous MFF, still account for almost two-thirds of total spending. While these areas are important, their allocations should be reduced further to create space for growth-enhancing investments.

Another major problem is the MFF’s lack of flexibility. A priority review during the budgetary term would enable the EU to adapt its annual budgets to changing circumstances and reallocate unspent money where it is needed most.

Moreover, the current structure of the EU’s annual budget carries financial risks. For example, many projects are completed toward the end of the budgetary cycle, generating a backlog of unpaid bills in the MFF’s later years. If they are not addressed through an MFF-amending budget, they risk fueling a run-up in debt.

While the Council eventually agreed to cover the difference in the 2012 budget, an even greater shortfall is forecast for this year – and many member states are unable to oblige the Commission’s request for an additional €11.2 billion to cover these outstanding liabilities. Now, the European Parliament is insisting that all unpaid bills should be settled before the next budgetary cycle begins.

To be sure, the EU budget contains flexible instruments, such as the EU Solidarity Fund, which provides emergency assistance after natural disasters. But these tools have not always been used as effectively as possible. Disbursal of relief funds to help Italy rebuild after severe floods in 2011 took almost a year, owing to politicization in the Council.

Even without the delays caused by political interference, such instruments are inadequate. Scope to adapt the MFF as a whole is needed, not least to ensure its legitimacy. It should include a comprehensive and binding revision clause ensuring that the state of public finances and collective investment needs are reassessed at the halfway point. This would give the next European Parliament – and the voters who elect its members – the influence over the EU’s long-term budget that a democratic system requires.

Agreement on budgetary priorities should be achieved in the Council through qualified majority voting, so that a single country cannot hijack the process. A “sunset clause” would prevent the Council from blocking subsequent revisions by, say, stipulating that the budget would revert to 2013 levels if no review were conducted by the specified date.

In the long term, the MFF’s timing should be adjusted to coincide with the European Parliament’s mandate, and the EU’s excessive reliance on national contributions should be reduced. As trade liberalization has diminished the EU’s income, mainly derived from customs duties, individual countries have increasingly sought to minimize their net contributions.

Bargaining between member states leads to lowest-common-denominator budgets that appease vested interests but fail to support EU member states’ shared ambitions. Europe thus ends up losing, and the true benefits of EU membership are not fully realized. Add to that the way deals are reached – behind closed doors and without adequate democratic oversight – and it is not surprising that Europeans’ views of the EU are becoming increasingly negative.

A system based on the EU’s own resources would reduce tension between contributors and beneficiaries and ease pressure on member states’ budgets. Existing proposals include a “Robin Hood” tax on financial transactions, a share of the profits from the EU’s carbon emissions-trading scheme, or a larger take from value-added tax receipts. But the Council has left this potentially contentious subject out of recent discussions.

That is precisely the problem. Political leadership calls for vision and courage. Postponing important decisions leads to an inefficient budget shaped by competing national interests. Without a responsive budgetary policy that focuses on the EU as a whole, the MFF negotiations will provide plenty of high drama and fine rhetoric, but few real benefits that might boost Europe’s recovery.