Seminar report - The future of the EU Budget

06 Dec 2016 - 10:19
Source: Flickr / DarkReptile

Between dream and reality

The EU faces several important challenges (e.g. lower growth, migration crisis) that require joint action. The present budget is not capable of effectively tackling these challenges and is in need of reform. In addition, the impact of Brexit on the budget will be felt particularly after the current MFF ends in 2020. This all occurs in the context of rising Euroscepticism and populism which will create significant pressures on national governments during the negotiations, limiting their room for maneuver.

The aim of the seminar was to have an open and frank discussion about the ideal MFF and the political realities that partially restrain effective action. The seminar took place under the Chatham House rule.
The two panels have discussed the main reasons why a budget reform is necessary, presented several ideas for budgetary reform and listed the priorities, including an assessment to what extent budgetary reforms are realistic.

An overview of EU budgetary issues
The EU budget is a complex problem. In a sense the MFF is a simplification of the many different points of view and is a temporary peace treaty that all policy actors are unhappy about. The system of the national envelopes is hindering the effectiveness of the EU budget. In order to assess the effectiveness of the budget the concept of European Added Value (EAV) is often used. But in fact, there is no sensible definition of EU added value, rather, it is the outcome of a long policy and political debate.

Instead of focusing on the EAV, the budget should be evidence-based, more agile, more efficient and more transparent. Concretely this can be achieved by, firstly, reconsidering the timetable of the MFF and to agree on certain core principles before going to the negotiation table. Secondly, making a comprehensive spending review where the EC makes realistic evaluations of spending policies and develop simpler and more coherent funding arrangements. All this to have a clear story about the what, how and why of the EU budget. In this way we can increase the trust of citizens. If the budget is complicated and non-sensical, like it is now, there is no surprise there is low trust in the EU (budget).

Reform process
The budget is path dependent and the national priorities, the roles the central players are playing, the script and the drama have become quite predictable. There appears to be no common understanding about the flaws and weaknesses of the system, and therewith, no agreement on reforms and what to modify. The only unifying link between the member states and the institutions is that they all share the common interest of having a MFF. A new MFF is more important than a better one.

There are two ways in how the MFF can be changed. One way to change the system is to change paths (fundamental change), the other is incremental change. The picture of fundamental change means to start the negotiations from scratch (headings, own resources). Then we need a new logic and a new rationality to define and justify this new framework. Usually the theory of fiscal federalism is used as a starting point. In the case of fundamental change, and according to theory of fiscal federalism, the EU would not fund the structural funds or the CAP, but they are enshrined in the Treaties and as such would need a treaty change. This is politically very difficult.

The second picture is to stay on path and to give up the idea to overhaul the EU budget. This means to have only small changes and within the policies. This would mean to prolong the current MFF structure and volume and predominantly make changes inside the policies. Many of these small steps have been made in the past, but further progress can be made. For example, the EU should develop a consistent interpretation of priorities, focus more on growth and employment, make Cohesion and CAP more efficient by extending the principle of co-financing or the use of revolving funds and further reduce non-allocative spending such as the direct payments or the structural funds for rich regions. Lastly, the EU could combine the structural funds more closely with structural reforms of the Member States in the framework of the European Semester.

Change within the headings and financial instruments
The budget has been reformed profoundly, but not during the MFF negotiations. The headings have remained relatively similar in size, but several policies within the headings have been reformed profoundly. The countries today are obsessed with net balances, but the net balances today mean something different today than before. The introduction of financial instruments in the budget are beneficial for the net contributors (more affluent) member states, who see a large part of the investments generated by the financial instruments flowing in their country. As such, spending inside the official EU budget and part of the MFF is becoming a smaller element of EU spending due to the many financial instruments and ‘satellite-funds’ operating outside the budget. One thing where the EU budget would need to make more sense is that public sector money needs to go to places where the private sector does not go. Currently the investment arm of the EU (through the financial instruments or the EIB) are all risk-averse, crowding out private investments.

The EU has to become the budget that has the right incentives. With all the controls on correct budgetary spending we do not focus on the right objectives. To what extent is change possible? There should be a fundamental revision on spending with a reprioritization on smart, sustainable and renewable growth. The EU budget should move from a redistribution mechanism to structural development. In doing that, the EU budget should become more evidence-based, more flexible, efficient and more transparent. The upcoming MFF negotiations again will be long and difficult and this time there might be a chance that there will be spill-over from other files, putting the MFF at the core of EU discussions on solidarity.