Most independent observers agree that the EU's budget no longer reflects its main tasks and policy goals. Aid to agriculture, a declining sector, consumes over 40 percent of spending and little is spent on the future or on fields in which the EU must assume new responsibilities, such as internal and external security.
Moreover, contributions from national budgets constitute the vast majority of revenues. Member state governments consider these revenues "their money" and compare them to "their receipts." Thus, EU budget negotiations are framed exclusively in terms of what national treasuries have to pay and what farmers and regions at home receive. European citizens have no clear perception of the union's total cost and are only interested in preserving transfers in their favor indefinitely.
The increasing detachment of the budget from the union's objectives is sustained by decision-making procedures that authorize the European Council, representing member governments, to take all the important decisions according to a rule of unanimity, with the European Parliament and the European Commission confined to a minor role.
ILLUSTRATION: MOUNTAIN PEOPLE
Negotiations for the new multi-year fiscal framework for 2007-13, already underway, are not tackling the issue, because the longer-term interests of the EU are absent from the negotiating table. Neither of the two proposals on the table makes sense. The Commission is proposing to increase budgetary appropriations to 1.24 percent of the EU's combined gross national income. Without cuts in spending on agriculture, this would increase the national contributions of net payers to unsustainable levels, with scant value added to common policies.
In contrast to the Commission, the stated intention of a growing number of member states is to limit appropriation commitments to 1 percent of GDP. This would squarely shift most of the adjustment burden onto structural funds, a sure harbinger of bitter rows between old recipients and new entrants.
What kind of budget makes sense? Agricultural spending is a major distorting factor in the EU economy; therefore, all price support and subsidies should be scrapped. Payments to farmers to keep them out of poverty should be shifted onto national budgets.
Substantial resources must continue to be devoted to promoting income convergence among the poorer member countries. However, support should be limited in time and phased out as countries enjoy rising standards of living as a result of integration. To this end, eligibility should be based on objective, transparent criteria of relative economic and social development.
The EU's role in fostering productivity gains, economic growth, and employment should increase, with as much as a quarter of spending from the EU budget devoted to human capital and research. Research spending should be made more effective by scrapping bureaucratic management by the Commission and Council and opening all national research funds to EU-wide competition. Substantial resources will be needed for the union to play its full role in the world and to provide strong security inside and outside its borders.
Altogether, this does not seem to require a major increase in the union's resources: 1 percent of aggregate GDP would suffice to perform these tasks.
On the revenue side, reform should rescind all links between national treasuries and the EU budget, so that the cost of Europe is made directly visible to the union's citizens. National tax systems should "dedicate" to Europe the revenue from one particular tax. Efficiency and equity require that this tax be levied on a broad base, harmonized at the EU level, and set at a modest rate.
A small surcharge on the existing VAT is the best, and, indeed, the only feasible, solution. A flat rate of around 2 percent throughout the union would cover all financing requirements. The receipts for all purchases subject to VAT would show the amount paid to the EU, making citizens aware of their contribution, which would be transferred automatically to union accounts and would no longer be shown on national budgets.
To achieve these reforms, a new decision-making procedure is required to ensure that EU-wide, not national interests, dominate the process. Decisions concerning both the multi-year framework and annual budgets should be taken by majority voting in the Council and Parliament, based on a formal proposal by the Commission, leaving decisions about the overall resource ceiling to the Council of Ministers and member states. This will require changing the EU's Constitutional Treaty once it enters into force.
Moreover, it would be useful to synchronize budgetary decisions with the Parliament's electoral terms. The EU budget should become a main theme in European Parliament election campaigns, increasing voter interest and thus turnout.
Amending the Constitutional Treaty will not be feasible until 2009. But a lot could be achieved now if the European Parliament sends out the right political signals in the ongoing budgetary negotiations. It should tell the Council that it will accept a lower ceiling on overall spending, but that it will want to have a greater say over the composition of spending.
By accepting the ceiling on total expenditures, the European Parliament would gain credibility with governments and the electorate. In exchange, it will have a right to affirm its role in deciding what European public goods should be financed from the EU budget.
Daniel Gros is Director of the Center for European Policy Studies (CEPS) and Stefano Micossi is Director General of Assonime and a member of the Board of Directors of CEPS.
Copyright: Project Syndicate
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