eu budget- time for another grand bargain? dr. robert zbíral palacký university olomouc

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)


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 purpose- resulting in path dependency

– Importance of critical juncture


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


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.“


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


EU spending categories in percent of EU GDP (1961-2005)

Source: Le Cacheux, 2005, p. 4.


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?


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)


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


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


Source: European Commission, 2000 (p. 38), 2003 (p. 132).

EU spending in percent of EU GDP (1961-2002)


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


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


Source: Eurobarometer no. 63 (Standard), 2005, p. 28

•Other priorities:•Lisbon strategy goals- also need investments•EU as a global actor

CommitmentEC proposal

June Lux.proposal

5/12Britishproposal

Agreedperspective

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

Commitments total 1025 871 847 862

Commitments in % GDP 1.24 1.06 1.03 1.045

Source: Euractiv.cz, 2006.

Allocation– Again the new financial perspective brought miserable results and lacks both

efficiency and legitimacy


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


Source: European Commission, 2005 (p. 134).

EU revenue categories in percent of total revenue (1971-2005)


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


Source: Based on Cattoir, 2004, p. 42.


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?

eu budget- time for another grand bargain? dr. robert zbíral palacký university olomouc

Documents

lecture eu budget

eu budget time

eu budget grand bargain

eu input

eu peterson

success budget quarrels

eu spending categories

percent of eu gdp