Making social science accessible

18 Aug 2023

Economy

Europe

Iain Begg examines longstanding tensions surrounding the priorities of the EU budget, which have been brought to the fore by novel funding programmes such as Next Generation EU.

Two of the more iconic images of UK-EU relations are Mrs Thatcher hand-bagging her fellow government leaders to secure ‘my money back’ from the EU budget and that red bus during the 2016 referendum campaign.

Today, the EU budget may no longer be a concern for the UK, but its capacity to foster acrimony in the EU is undiminished, and new twists to the story continue to surface.

Part of the UK’s legacy was to turn budget negotiations into a contest about net contributions and net receipts, with finance ministers all armed with spreadsheet primed to show how much they gained or lost from proposed changes. Despite the many challenges for which an EU budgetary response might provide solutions, the result was to lose sight of which EU public goods would contribute to solving them.

Instead, the concept of juste retour (connoisseurs of French will note that the expression has a double meaning: ‘fair’ return and ‘exact’ return) dominates the discourse. With the Brits gone, the pantomime villains today are the ‘frugal four’ – Austria, Denmark, Sweden and The Netherlands – who are all anxious to curb the EU budget. But all member states have to share the blame for the dominance of the juste retour mentality.

The many incompatible demands on what the EU budget should fund can be portrayed as a trilemma. Net contributors are concerned primarily with keeping the aggregate budget low, limiting the cost to their taxpayers. Net recipients and certain sectoral interests want to protect their current allocations, while some actors (not least the EU institutions) want to extend funding to new areas. As with any trilemma, two out of three is the most that can be achieved.

In successive multi-annual financial frameworks (MFF), agreed since 1988, strong evidence of a status quo bias is evident, with agricultural support and Cohesion Policy (largely targeted at regional development) dominating EU spending, despite all the new demands on EU policy ranging from countering climate change to dealing with a succession of crises.

Yet after criticism of how little the EU was able to do to mitigate the global financial crisis of the late 2000s, the irony is that outside the formal budget, the EU has found novel ways of taking action. Funds were created to bail out Greece, Ireland, Portugal, and Cyprus during the sovereign debt crisis of 2009-15. A Facility for Refugees in Turkey was quickly set up and launched in January 2016.

In 2020, the massive Next Generation EU (NGEU) programme was launched as a reaction to the pandemic. It is not a conventional fiscal stimulus programme (such as those launched by the Trump and Biden administrations), immediately injecting public money into the economy, but tried instead to favour longer-term aims, by focusing on two of the Union’s over-arching priorities: investing in the green and digital transitions.

The novelty of NGEU was, to allow the EU to borrow to finance its policies, going well beyond what had long been in place through the independently capitalised European Investment Bank. The latter provides loans for economic development projects and, like any bank, relies on the interest paid by its borrowers to sustain its operations.

By contrast, the largest proportion of NGEU is for grants to recipients and will require the EU not only to pay the interest on its borrowing, but also to repay the loans over the next 35 years. Although NGEU is temporary, future EU budgets will have to set aside amounts for loan servicing and repayment. Moreover, the cost of the former has been exacerbated by the recent rise in interest rates.

In 2020, when NGEU was launched, the EU could borrow for next to nothing, but with interest rates in Europe now around 4%, the EU will find (as the British government has already found) that the debt service burden risks crowding out other expenditure at a time when many member states are themselves facing budgetary stress and will be more than usually reluctant to send more money to Brussels.

All this further complicates the trilemma outlined above, but is far from the only cause for concern. A first is that the main source of revenue for EU is what is referred to as national contributions, remitted by national treasuries, despite the Treaty (Art. 311, TFEU) stipulating that it shall be financed wholly from own resources.

The national contributions are, in this context, deemed to be own resources. However, many would argue that true own resources would be taxes or discrete revenue streams hypothecated to the EU level (customs duties already fulfil this function, but account for barely 10% of EU revenue). For the best part of four decades, a search has been on to identify potential resources for this purpose, but those hunting for the holy grail may well feel they are closer to finding it.

Many proposals have been floated only to be turned down by the member states, for example a tax on text messages, a financial transactions tax or (most recently) the proceeds of a carbon border tax. However, part of the NGEU agreement is to match future debt repayments with new own resources. The trouble is, as the Commission conceded in a recent update, that ‘discussions on the proposal made in December 2021 have made limited progress’.

Second, the proliferation of funding mechanisms outside the traditional EU budget has led the European Court of Auditors to refer (in the sub-title of a recent report), rather sharply, to the EU’s finances as ‘a patchwork construction requiring further simplification and accountability’. It is undeniably an accurate critique and also flouts several principles supposed to govern the EU’s finances, as we have set out in a recent report.

The third problem is legitimation. The European Parliament and the Council of Ministers, together, constitute the EU budgetary authority, responsible in particular for agreeing the EU annual budget. But for many of the new off-budget mechanisms, including NGEU, the Parliament has a much lesser role in both decision-making and scrutiny.

With a mid-term review of the 2021-27 MFF now underway and new funds expected to be created for Ukraine, budget tensions will be high on the EU agenda in the coming months. Watch this space.

By Professor Iain Begg, the European Institute, London School of Economics and Political Science.

This blog draws on a longer piece by the author titled ‘The EU’s Increasingly Complex Finances: A Ticking Bomb?’, which can be found here.

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