What is the EU for? Every seven years, its leaders formulate a quantitative answer when they set out the bloc’s long-term budget. Now more than ever, they need to get it right.
The EU is facing some of the greatest challenges in its history, including defending against a belligerent Russia, combating climate change and making the investments required to boost lagging competitiveness. However, individual countries lack an adequate incentive to deliver such crucial public goods when the benefits extend beyond their borders.
Other unions — such as Australia, Canada and the US — address this coordination problem by handing some responsibilities to a federal government, along with budgets that tend to amount to 20 percent or more of gross national income. Not so the EU. Its powers are severely restricted, and its long-term budget for 2021 to 2027 amounts to only 1.1 percent of gross national income (GNI). This preserves member states’ sovereignty, but also limits what they can achieve together.
Consider defense. Europe urgently needs to ramp up its military capabilities, but the EU treaty leaves this function to individual states. The result is inadequate scale and interoperability — 12 types of main battle tank, for example — as well as uneven spending on a priority that benefits all. If member states instead pooled resources, they could exploit joint procurement and economies of scale to achieve their goals more quickly and cheaply.
So, why do they not do that? Some states — notably Germany and the Netherlands — worry that their money would be misspent. To an extent, they have a point: For example, the EU’s largest current expenditure is income support to farmers — a poorly targeted form of welfare that leaks into land prices and fosters cronyism.
However, the solution is not so simple as “less Europe.” Citizens tend to view the EU favorably and want it to do more. By one estimate, a more complete union could add a cumulative 18 percent to annual economic output in a decade, but to realize those benefits, the bloc’s budget must focus on the areas where it can deliver the most value, shedding items that do not belong and providing adequate funding for those that do.
This would not require the resources of a traditional federal government. A budget focused on true EU-wide public goods — such as research, environmental protection and cross-border power-grid connections — might cost 2.4 trillion euros (US$2.8 trillion) from 2028 through 2034, or 1.7 percent of gross national income, think tank Bruegel said. That does not include defense, for which funds could be separately pooled from national budgets, preferably financed with jointly issued bonds.
Ideally, revenue would come from dedicated sources such as customs duties and positive-incentive fees (on countries that underinvest in defense, for example). Spending should be tracked with an emphasis on public benefit — not whether a road was built, but whether it helped people get where they wanted to go.
The European Commission’s proposal for the 2028 to 2034 financial framework takes some steps in the right direction, focusing more on legitimate priorities and measurable results. However, it is still an underwhelming start to what promises to be two years of haggling. Even the small increase over the current budget — about 0.2 percent of GNI, more than half of which is debt service that did not exist before — already faces vehement opposition from Germany. Agriculture subsidies remain a big chunk of spending.
The EU must do better, and quickly. Bold action now can help attract the trillions of euros in private investment needed to achieve the continent’s security, growth and environmental goals — and counter the rise of far-right populists, who garnered more than one-quarter of votes in the most recent European Parliament elections.
If Europe’s leaders do not seize this opportunity to demonstrate what the EU is for, they might not get another.
The Bloomberg Editorial Board publishes the views of the editors across a range of national and global affairs.
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