On the near future financing of the EU

Change will be gradual, though potentially profound

2017-02-04

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Reform in the European Union typically involves a long period of reflection and deliberation. To explore the possibilities provided by the Treaties. Evaluate the overall political climate and the position of Member States. Assess the likely impact of the reform. Such gradualism can prove an impediment under certain circumstances though it typically improves the openness of the European integration process.

A case where reform is proceeding at a slow yet steady pace is on the EU’s system of own resources and the corresponding budget, formally referred to as the Multiannual Financial Framework (MFF). In February 2014, an inter-institutional body representing the European Commission, the Council of the EU, and the European Parliament, started its work on the current and future financing of the Union. This entity is known as the High Level Group on Own Resources (hereinafter referred to as “HLGOR”).¹ A few weeks ago it delivered its final report, which contains a number of interesting findings and ideas that could already inform the negotiations for the next MFF (prior to 2020).

In the present article, I analyse—and comment on—its main points. That granted, I do recommend studying the original documents to gain a full grasp of the technicalities involved.²

A few words about the MFF

The work of HLGOR is conditioned by the peculiarities of the MFF. It is about examining the state of play and identifying areas of improvement within the overarching constraints of the current legal-institutional order.

Unlike the budget of a nation state, the MFF is designed for the medium term horizon. Currently that is set to seven years, while it should be “at least five” as per Article 312 of the Treaty on the Functioning of the European Union (TFEU). It is mostly geared towards investments and the redistribution of resources between Member States (cohesion funds, agricultural policy, etc.). It is ill suited for short term measures to address an economic downturn, nor can it be properly adapted to rapidly evolving states of affairs—a ‘crisis’ of sorts.

The MFF consists of contributions from Member States. It is adopted on the premise that the Union cannot run any budget deficits and, hence, cannot accumulate any public debt. This balanced budget policy is further reinforced by the fact that the EU does not have the power to borrow money from financial markets. Fiscal neutrality, or else ‘fiscal discipline’, is an inherent feature of the Union’s budget.

Changing the approach post-Brexit

A major contribution of this report is on matters of methodology and conceptual clarity. It does admit that the notion of “own resources” remains subject to varying interpretations. The Treaties, Article 311 TFEU in particular, provide little guidance. That same article does, nonetheless, offer scope for further action on the political front, by stipulating the following:

The Council, acting in accordance with a special legislative procedure, shall unanimously and after consulting the European Parliament adopt a decision laying down the provisions relating to the system of own resources of the Union.

Unanimity is never easy to achieve. Every country has veto power, so a grand compromise is always needed. A spirit of consensus is a prerequisite for moving towards the optimal. Historically that has never been the case, in part due to the negotiating stance of the United Kingdom.

With Brexit on the horizon, this would be the ideal moment to revise the current approach, deprecate some of its least useful features, in particular budgetary readjustments such as the UK rebate (a calculation whereby the UK receives back a portion of its contributions).³ The MFF would be refashioned as a tool for mutually beneficial situations rather than be an arena where one country’s win is conceived as the others’ loss.

It is paramount that “own resources” be defined in concrete terms, preferably accompanied by numerical indicators. Contributions to the EU budget have heretofore come in the form of (i) custom duties on agricultural imports from third countries, (ii) a percentage of VAT revenue collected by Member States, and (iii) an amount proportional to the Gross National Income of each country. The GNI-based contribution is the only one favoured by governments as it is the fairest in terms of burden sharing. The others have all sorts of technical difficulties, such as one country importing more than others, or not having an equally effective tax regime.

Due to the lack of a common methodology, contributions to the MFF are often counted as a cost on the national budget, a fiscal transfer to the supranational level, even though the Member State could never actually claim ownership over them. Polysemy has far-reaching implications, especially on negotiating positions where the multiplying effects of EU spending, or EU membership more broadly, are completely disregarded. As the HLGOR executive summary highlights (emphasis mine):

What is striking and unsustainable is that, when it comes to the basic data that each Member State uses to define its position in budgetary negotiations—its budgetary balance—European added value is completely ignored. Budgetary balances are calculated by simply offsetting what a Member State is allocated on the expenditure side with its national contributions. Under this method, every euro spent in one country is considered a ‘cost’ for everybody else. It therefore entirely ignores any European added value stemming from EU policies that benefit some or all Member States. Calculating one’s own ‘benefit’ from the EU budget is not what is being condemned here; it is a natural or at least inevitable endeavour. What is misleading and causes damages to the EU and the Member States themselves is that a narrow and lopsided indicator becomes the only measurement of a cost-benefit relation

Methodological changes are considered necessary for reframing the debate and the [typically acrimonious] negotiations involved. To the present author this is a sound point of view, even though its merit seems to stem from its political shrewdness rather than its purely technical rigour. Sceptics could indeed raise all sorts of ostensibly technical objections to such notions as “European added value”, not least on grounds of fostering perverse incentives, rewarding the ‘wrong’ policies, and the like.

A change in method is, first and foremost, a political commitment to do things differently. That, nonetheless, is not a paradigm shift, but one of outlook. It would still be contingent on intergovernmental policy making to arrive at an optimal outcome. National interests would thus continue to be prioritised over the good of the system at-large, for that is the platform on which national governments are elected (e.g. the German Chancellor does not get voted by—nor is accountable to—Spanish citizens).

It would require amendments to the Treaties on matters of fiscal policy to enact genuine reform, in particular by granting the Union its own fiscal capacity to raise taxes, run deficits, issue debt-based financial instruments, adapt to cyclical economic changes, etc. Still, little progress is better than none.

Differentiated integration and the euro area budget

The EU is a system of multiple degrees of integration, rather than a unified whole. For instance, the countries that share the euro are more integrated on monetary and macroeconomic issues than those that continue to have their own currency. The Treaties provide for such differentiated integration through the notion of “enhanced cooperation”.⁴ Members States that are willing and able to further mutualise their competences over an area of policy can opt to do so, using EU institutions in the process, provided certain conditions. Recent examples are the European Stability Mechanism Treaty and the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.

Differentiated integration poses major challenges on budgetary management. A mismatch emerges between the Union-wide scope of the MFF and the narrower focus of whatever ‘front-runner’ group. It is against this backdrop that alternative forms of financing were developed amidst the euro crisis, such as the European Financial Stability Facility which operated under the ‘troika’.

The Union’s priorities are thus severely hampered in their ambition. The problem is exacerbated in times of crisis, when the EU wants to act but its prior budgetary commitments prevent it from realising its potential. Major issues such as migration, defence, and macroeconomic stabilisation, often require adaptability to evolving circumstances. The MFF is not designed for that, nor can it cater to the needs of possibly concurrent instances of enhanced cooperation.

The High Level Group on Own Resources dedicates a good part of its final report on this issue, for it affects both the revenue and spending sides. It does propose a number of technical ways with which to provide the EU with extra funds resulting from enhanced cooperation. Again, the overarching theme is that solutions exist. What is needed is the political will to proceed accordingly. And that ultimately comes down to the balance of power within the EU’s intergovernmental platforms, in particular the European Council.

Which brings us to the issue of a potential budget for the euro area: an item discussed, though not analysed in the HLGOR final report. Much has been said about the need for revising the Treaties in order to endow the EMU with a genuine fiscal capacity. While there is truth to such views, they do not preclude the possibility of a proto-budget developed within the existing framework, in line with the principle of enhanced cooperation. Just as the European Stability Mechanism is a new institution meant to provide for emergency funding in times of financial duress (its shortcomings notwithstanding), a new European Treasury could be established to perform functions such as short-term macroecononomic stabilisation through the use of automatic stabilisers (mostly transfer payments to cover rising unemployment benefits and relevant costs, so that these do not put further pressure on an already hard-pressed national budget—effectively easing the deficit and making any spending cuts less deflationary).

The Economic and Monetary Union’s incoherence needs to be addressed. Ongoing efforts on the banking union present a partial answer. The fiscal front is where things look less promising. It is a missed opportunity for the HLGOR not to elaborate in further detail on its position about the prospect for a euro area budget. One would expect more substance on that set of issues, especially since the peculiarities of the budget would have direct implications on the concomitant decision-making and accountability arrangements. If, for instance, a European Treasury were designed as an institution outside the Treaties, whose membership would only encompass the current euro area countries, then one would expect a counter-party “Euro Area Assembly” to be set up in order to provide for parliamentary scrutiny. The European Parliament as a whole, representing all of the EU rather than the euro area in particular, would not be best suited for that role. Furthermore, this would have a direct effect on the European Semester and how economic governance develops within and outside the euro area.

Gradual reform

This is how EU politics tend to work. It all starts with a period of reflection and deliberation. National governments and other stakeholders will have the chance to express their own views or ‘sensitivities’ and put forward their [counter-]arguments. A consensus will emerge. On that basis some progress will be achieved. Given though the potential for differentiated integration, consensus need not encompass all Member States. A strong majority will suffice.

The creation of the High Level Group on Own Resources is a case where the EU wants to provide the impetus for such a period of reflection. The final report of the HLGOR is not a fully fledged policy document. It rather stands as a formal opinion that presents pragmatic options towards the refinement of the next Multiannual Financial Framework (starting after 2020). The report does not raise high hopes nor does it make any bold statements. There currently is little desire to proceed with sweeping reforms, especially on the overall design of the Economic and Monetary Union.⁵

Regarding the HLGOR suggestions, these are in the right direction. They seek to tackle some of the most evident shortcomings of the EU’s budgetary modus operandi. The method itself and the concepts involved, like “own resources”, will have to be standardised further. Brexit and the resulting abolition of the UK rebate, present a unique opportunity to do things differently. Whether any of those insights have any material effects on policy remains to be determined.

The budgetary reality of the EU is that everything ultimately rests on the collective will of the Member States. Intergovernmental policy formulation is primarily about the synthesis of competing national agendas. What emerges tends to be a ‘good’ compromise under the circumstances. Whether it is for the overall good of the EU at-large, understood as the most rational and efficient approach for policy-making at the supranational level, is of secondary importance.

What we as citizens gain from the publication of the HLGOR final report is an insight into how progress is achieved in the EU. The actual content of that document cannot provide a definitive guide as to what one may expect from the negotiations over the next MFF. We can see the intentions and use them as a criterion for judging responses to them. Ultimately though, we have to remain firmly rooted in the actuality of EU politics, which is largely contingent on the balance of power within the European Council and is, therefore, guided by realpolitik rather than lofty ideals and technical recommendations.

1. Official website of the High Level Group on Own Resources. [^]

2. Here is the executive summary (pdf) of the High Level Group on Own Resources. The full report (pdf) is here. [^]

3. For a primer on the UK rebate, read this analysis by Gianluigi Vernasca. Published on June 6, 2016. [^]

4. Enhanced cooperation is enshrined in Article 20 of the Treaty on European Union. It is specifically about areas of policy where the Union has shared competence with the Member States. For more on the distribution of competences (what is “shared competence”?) refer to The distribution of competences in the EU. It is a chapter from my free book Little Guide to the European Union. Published May 9, 2016. [^]

5. For my views on the possible future of the EMU, see What future for the euro area?. Published December 23, 2016. [^]