The EU Budget’s Outsize Political Role

BRUSSELS – The European Commission is now in the process of formulating the next Multiannual Financial Framework (MFF), a medium-term budget framework that fixes the European Union’s revenues and expenditures, including how much should be allocated annually to each objective and each country. The next one starts in 2014 – and much more than money is at stake.

The debate over the next year will be significantly influenced and constrained by national interests. Member states, facing serious fiscal problems of their own, are unlikely to agree to pay more to the EU budget, which will thus probably remain at 1% of EU-wide GDP, as in the previous MFF. But this is no excuse to give up on overhauling the budget’s role in EU governance.

The EU budget is unlike any other. First, size is not everything. The budget’s potential goes well beyond its face value. For example, under the Medium-Term Financial Assistance (MTFA) facility, the EU provides liquidity to non-eurozone members in balance-of-payment difficulties and, more recently, also to eurozone countries. It does so by using implicit EU budget guarantees to raise capital on financial markets. Thus, indirectly, the budget has enabled leveraging of financing in order to support crisis countries – an expression of European solidarity that has gone fully unnoticed.

Second, size relative to the recipient country’s GDP is far from trivial. Over 2007-2013, the new member states receive funds equivalent to about 20% of their GDP, while Greece and Portugal receive close to 8% and 12% of GDP, respectively. At the country level, EU funds – if appropriately employed – are a powerful instrument for growth-enhancing reform.