EU Budget- Time for Another Grand Bargain?
Dr. Robert Zbíral
Palacký University Olomouc
Contents of the lecture

EU budget in crisis

Why is it in crisis?

How to reform it?
EU budget in crisis
Sapir report (2003): „EU budget is a historic
relict“
 Little macroeconomic impact
 Revenue side defects

– Representation with no taxation

Procedural issues
Valery Giscard d´Estaing: „There is a real
problem in this area.“
 European Parliament called for „the need for
reforming, updating and simplifying the
budgetary principles and procedures“

Why is the EU budget in crisis?


Not easy to perform a causal analysis
Justification for the EU budget:
– To fund common policies
– To balance gains and losses from European
integration
– Cohesion
– Club subscription

Hierarchy of negotiations in the EU
(Peterson):
– history-making decisions (grand bargains)
– systemic level (policy-setting decision making)
– meso-level (policy-shaping decision making)
Why is the EU budget in crisis?

Theoretical framework of historical
institutionalism (Pierson)
What is an institution: „either a single or complex
set or rules which govern the interaction of political
actors, ie guiding principles which both prescribe
and proscribe behaviour and are set out in the
forms of prescription- either formally established
or tacitly understood“ (Stacey and Rittberger 2003:
860)
– Institutions might survive their original purposeresulting in path dependency
– Importance of critical juncture
Why is the EU budget in crisis?

First EU budget grand bargain: Treaty of
Rome
– Provisions not too detailed
– Main justification: balance losses and gains
– Explanation of Liberal intergovernmentalism
(Moravcsik)
– All rules part of the Treaty- changes by unanimity
only
• Spending side became locked-in

System of „own resources“ adopted in 1970
Why is the EU budget in crisis?





Impact of the first enlargement in 1973
Efforts to change the rules in 1970s (Britain)
Increasing ambitions of the European
Parliament
Reforms agreed at the Fontainebleau
summit- no mitigation of the problems
The Commission (1987):
„The Community is at present faced with a
budgetary situation which can only be
characterized as being on the brink of bankruptcy.“
Why is the EU budget in crisis?

1957 grand bargain no longer sustainable

Changes in governance mode in the EU
– Input from Jacques Delors and the Commission

New budget agreement reached (1988)
– Substantive elements of the bargain
– Procedural elements of the bargain
– New institutionalization of the agreement
Why is the EU budget in crisis?
EU spending categories in percent of EU GDP (1961-2005)
Source: Le Cacheux, 2005, p. 4.
Why is the EU budget in crisis?

Budget quarrels of 1992
– Constitutionalization of groups called „net payers“ and „net
receivers“
– External pressure lead to success

Budget quarrels of 1998-9
– Shadow of the Eastern enlargement
– Jean Luc Deahene: „Nobody wants to pay more, some want
to pay less, nobody wants to get less and we all have to
spend more for enlargement.“
– Again external pressure contributed to mission accomplished

Budget quarrels of 2004-6
– Do we have to go over it again?
Why is the EU budget in crisis?

General observations from these facts
– Institutionalization of the rules since 1957
– Agreement in 1988 secured the stabilization
– Negative development: accounting logic (juste retour)
• No economic justification for „fair return“
• Despite that it has been accepted by all (also an
institutionalized rule)

So which of the mentioned four justifications of the
EU budget is the most important one?

Are we facing a „joint decision trap“? (Scharpf)
Why is the EU budget in crisis?
Juste retour calculations (2004, as a percent of GDP)
Source: European Commission 2005, 13.
How to reform the budget?

Theoretical considerations
– Allocation of spending and revenues competences
between the EU and the Member states is crucial
– Theory of fiscal federalism (Oates)
• Central level should have the budget competence in
order to:
– Internalize externalities
– Avoid internalities
– Exploit economies of scale
• But take in account the heterogeneity of preferences

First variable called efficiency, second
legitimacy, we add a third one: political
support for the reforms
How to reform the budget?

Size of the budget
– Small compared to classic federations, large
compared to international organizations
– Size of the budget one of the most institutionalized
rules
– Solidarity among Europeans low to justify large
transfers of money (no demos)
– Legitimacy prevails here over efficiency- budget
shall remain around 1.5 percent of EU GDP
How to reform the budget?
EU spending in percent of EU GDP (1961-2002)
Source: European Commission, 2000 (p. 38), 2003 (p. 132).
How to reform the budget?

Expenditures
• Three functions that the central government could
provide in the budget sector (Musgravian branches):
– Redistribution
• Between states, regions, individuals
• Interpersonal not likely in the EU (big heterogeneity of
interests)
• Interstate and interegional redistribution already pursued
in the EU (regional and cohesion policies)
– Not efficient, too many goals
– Financial perspective 2006-13 missed the opportunity for
reforms
How to reform the budget?

Expenditures
– Stabilization
• Protection of the federation units against the economic
shocks
• The EU budget not high enough to provide this function
(legitimacy not met)
– Allocation
• Wide spectrum of government's activities
• Reforms of CAP necessary
• What public goods should be provided on the EU level?
– Sectors where the economies of scale and danger of free
riding are the highest plus high legitimacy
How to reform the budget?
Source: Eurobarometer no. 63 (Standard), 2005, p. 28
•Other priorities:
•Lisbon strategy goals- also need investments
•EU as a global actor

Allocation
– Again the new financial perspective brought miserable results and
lacks both efficiency and legitimacy
Commitment
June
Lux.
proposal
EC
proposal
5/12
British
proposal
Agreed
perspective
H.1: Sustainable growth
471
379
369
380
1a. Competitiveness for growth and
employment
133
72
72
72
1b. Cohesion for growth and
employment
339
307
297
308
H.2: Protection and management of
natural resources
405
378
367
367
Of which agriculture: market
expenses and direct payments
301
295
293
293
H.3: Citizenship, freedom, security
and justice
25
11
10
10
H.4: EU as a global partner
95
50
50
50
H.5: Overheads
29
50
49
50
1025
871
847
862
1.24
1.06
1.03
1.045
Commitments total
Commitments in % GDP
Source: Euractiv.cz, 2006.
How to reform the budget?

Revenues
– Currently four sources of income
– Problems with the system:
•
•
•
•
The EU has no real financial autonomy
System is not transparent
Principle of non-discrimination (Art. 12 TEC) not met
Driver behind the „juste retour“ logic
How to reform the budget?
EU revenue categories in percent of total revenue
(1971-2005)
Source: European Commission, 2005 (p. 134).
How to reform the budget?

EU tax
– Historical comparation
– Two options hot to structure the tax
– It has to meet the two defined conditions:
• Efficiency
–
–
–
–
Sufficiency
Stability
Low operating costs
Efficient allocation of resources
• Legitimacy
–
–
–
–
Horizontal equity
Vertical equity
Fair contributions
Visibility
How to reform the budget?
Source: Based on Cattoir, 2004, p. 42.
How to reform the budget?

EU tax
– How viable are these proposals?
• Recent support from important politicians
• Concrete steps from the EU institutions
• Discussions at the Constitutional Convention
– Article 53:
1) The Union shall provide itself with the means necessary to
attain its objectives and carry through its policies;
2) Without prejudice to other revenue, the Union's budget
shall be financed wholly from its own resources
Conclusion

Are my proposals realistic or only wishful
thinking recommendations?

Has the time come for another grand
bargain?