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The EU’s finances: time for genuine change?

Iain Begg / May 2024

Image: Shutterstock

 

If the usual sequencing is adhered to, the European Commission would be expected to produce its proposals for the next Multi-annual Financial Framework (MFF) within the next twelve months. Lengthy Member State wrangling will then take over until a compromise deal, paring back some of the more radical Commission suggestions, is agreed in time for the new MFF to be adopted, probably in 2027.

What has been striking about the succession of MFF deals since the approach was launched in 1988 by the Delors Commission is how stable the main features of the EU’s finances have been, with the bulk of the spending devoted to direct payments to farmers and Cohesion Policy. A status quo bias has been strongly in evidence.

Could this time be different? There are certainly reasons to believe so. First, the agreement in 2020 of the Next Generation EU (NGEU) package, while not quite the ‘Hamiltonian moment’ some had hoped for, was a ‘crossing of the Rubicon’ in allowing the funding of EU policies through debt, rather than conventional revenue mechanisms.

The borrowing has ramifications for future EU budgets because interest will have to be paid and debt amortised, potentially crowding out other spending and constituting a second reason to believe the time is ripe for a more fundamental rethink of the EU’s finances. Formally, NGEU is temporary and some national capitals are signalling that it should not be repeated, but already the Ukraine Facility agreed in February 2024 has added to the ‘galaxy’ of EU funding mechanisms. Moreover, NGEU debt will remain a charge on future EU budgets for three decades.

Pressures to recast EU spending to reflect the priorities of the next decade are the third motivation for change. Defence and other security policies, a greater EU role in funding green policies and, more generally, an emphasis on authentic EU public goods are just some of the areas in which more extensive EU funding could be justified. Yet it would be naïve not to expect a backlash from those currently benefitting from EU spending.

The big question, therefore, is how. Member States struggling to keep their own public finances in order will be loath to raise their contributions to the EU. One answer might be to assign new revenue sources to the EU (known as ‘own resources’), although the temptation for Member States would be to use any such revenue to cut their direct payments to Brussels. Indeed, a prior question is whether a meaningful rise in EU spending would be politically acceptable.

Alternatively, debt-funded EU spending could become a permanent feature of the financial landscape. Doing so would require enduring solutions to how the costs of debt are accommodated. Meeting the costs of debt from future budgets when the European Parliament, as one arm of the EU budgetary authority, has at most a limited say on new borrowing mechanisms (in contrast to its central role in agreeing annual budgets and approving the MFF) also poses problems of legitimation.

Key principles governing the EU budget, notably unity (having a single budget), universality (no hypothecation of revenue to specific purposes) and balance (requiring revenue to match spending) could also have to be rethought. While much has happened without Treaty change, including the original adoption of the MFF approach in 1988 – only subsequently formalised in the Lisbon Treaty – the European Court of Auditors, the European Parliament and think-tanks have been critical of the proliferation of off-budget financing mechanisms and associated governance provisions, all of which have led to complexity in the EU’s finances.

A further EU enlargement EU could well occur during the next MFF, adding to the urgency of a fresh approach. Four areas for reform should be prioritised. First, tough decisions are needed about how much should be funded at the EU level. The EU budget has hovered around 1% of EU GDP for decades, but the level has been driven more by Member State reluctance to confer on budgetary competencies on the EU level than economic logic.

Second, more than a third of a century on from the 1988 Delors model, the mix of EU spending is overdue for revision. It will not be easy, but the emphasis should be on public goods for which the EU is manifestly the most appropriate level of governance. Third, debt funding of EU policies should be both normalised and consolidated to ensure that appropriate choices are made on the best combination to achieve desired results.

Enhanced legitimation should be the fourth priority. To ordinary citizens the EU’s finances are opaque and few know how the taxes they pay translate into EU spending. The side-lining of the European Parliament on debt mechanisms exacerbates the problem and should be reversed. In all this, political courage will be needed.

Iain Begg

Iain Begg

May 2024

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