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2.4.1. What is the relative size of the European budget?

The European budget for 2007 adopted by the European Parliament on the 14th of December 2006 represents a global amount of 126.5 billion euros, which makes 257 euros per inhabitant of the Union.  For 2007 it is equivalent to 1.08% of the GDP of the EU and about 3% of all the expenditure of the public administrations in the EU (all levels of power mixed up).  In the United States the budget of the Federal Government accounts for nearly 60% of all the public budgets. This simple comparison shows how far the European Union is from being a federal state and suggests that the model towards which it is evolving is more like that of a “federation of Nation-States”, which was how Jacques Delors* put it.

In this budget, the appropriations for the running of all the European institutions accounts for only 5.5% of its total. So the “Brussels bureaucracy” frequently attacked by the nationalist or anti-Europe parties costs each European citizen scarcely 14 euros per annum. About 60% of this money allocated as running costs goes to pay the staff of the European institutions, who are no more numerous than the employees of the City of Paris.  On the other hand, 94.5% of EU expenditure is the cost of action from which European citizens, the Member sStates and other countries (including developing ones) benefit.

2.4.2. How has the budgetary revenue of the EU developed?

In order to finance its expenses the European Union has its “own resources” the overall amount of which is currently no more than 1.24% of the Gross National Income (GNI) of the EU.  Legally, these resources belong to it and do not depend on voluntary contributions from Member States.  They are collected on behalf of the EU by the Member States, who pay them into the community budget.  These own resources are of three types (the figures below are from the forecasts for 2007):

• The “traditional own resources” (TOR) consist essentially of customs duties (including the agricultural levies) collected on imports of products from non-EU countries by the Member States, who keep 25% as collection charges. At present they bring in to the EU about 17.3 million euros, or 15% of the total revenue: over 25 years this portion has fallen by nearly a half commensurately with the reduction in customs tariffs and agricultural  levies pursued within the context of international trade negotiations.
• The resource based on value added tax (VAT) is a uniform percentage (initially 1%) applied to the harmonised basis of assessment for VAT of each Member State. At present the VAT resource also accounts for 15% of total revenue.  It had become the preponderant item (up to 66% of total revenue in 1992) to the point where it made the EU’s finances appear more and more inequitable, since they relied essentially on a tax on consumption.  A search for greater fairness in the distribution of the charge led to the reforms of 1988 and 1992, which reduced the relative weight of the VAT resource (by reducing the maximum rate of the VAT levy and by putting a ceiling on its basis of assessment of 50% of GNI to prevent less rich Member States paying a share disproportionate to their capacity to pay).  A third type of resource was also introduced.
• The resource based on Gross National Income (GNI) is a uniform percentage (0.73% in 2007) applied to each member.  It helps to balance the budget, since the rate of it is fixed each year in the budgetary procedure, so as to finance the difference between the amount of expenditure of the year and the product of the other own resources. Although only something of a support element, it is now the most important source of income and represents nearly 70% of the total, or 80 billion euros. Its share in the total budgetary revenue of the EU has grown with time.

This development has helped to make the EU’s finances fairer, because the GNI resource is the one which best guarantees proportionality between the wealth of each member state and its contribution to the European budget. Nevertheless, the debate on the distribution of the charges has remained very bitter. Member States have got into the annoying habit of focusing on their “net contribution” to the European budget, working out the difference between what they pay to the European budget and what they get out of it through the various common policies, mainly the agricultural and regional policies.  According to this simplistic calculation, there are “net contributors” and “net beneficiaries”, the former regularly complain about being one and the latter obviously want to remain one.      

This way of going on has two major drawbacks. On the one hand, it leads the member states and their public opinion deliberately to ignore the indisputable, albeit non-budgetary, advantages that they get from EU membership. On the other hand, it makes the idea of solidarity enshrined in principles of the European project look a bit empty.  In both cases it leads to people losing sight of “the common European interest”.      

2.4.3. How is the EU’s budgetary expenditure on the CAP shared out?

Between 1968 and 1975, the Common agricultural Policy (CAP) absorbed between 72% and 93% of the European budget. The preference given to regional finance1 in 1975 progressively reduced the CAP’s share: regional development is intended to reduce the disparities among the different States and regions.  In 2005, the CAP was still taking 43% of the budget, and regional development 37%, and this left relatively little room for manoeuvre to the other policies of the European Union:  4.4% for foreign policy in 2005, 2.6% for research, 1.1.% for transport and energy,  1% of the information society and 0.8% for education.

The Sapir Report*, which came out in 2003 and was written by a group of 8 experts at the request of the President of the Commission, described the European budget as a “historical relic”. Its authors felt that the structure of this budget did not meet the economic needs prevailing at the dawn of the 21st Century, and particularly the requirements of education and training, research and development and investment and innovation.  Some reforms introduced over the last few years have taken account of these preoccupations.

First of all, in view of the cost of enlargement in particular (structural aid and direct agricultural aid to new members) as well as the severe criticism from the developing countries, whose agricultural output is undermined by the CAP subsidies, the European Council decided in October 2002 to hold agricultural expenditure at the 2006 level for the whole of the period 2006-2013, with only a 1% annual increase to take account of inflation. This stabilisation of the CAP budget would not have been achieved without the profound reforms made to it beforehand.  The McSharry reform of 1992 had already lowered the prices guaranteed to farmers, compensating them for these reductions by direct aid to producers, proportional to the size of their holdings, and that of  2003 went even further by “uncoupling” production from aid and replacing most of the direct aid to farmers by one single payment per farm, irrespective of output.

2.4.4. How is the budgetary expenditure of the EU for regional development shared out ?

In 2004 the Commission proposed re-targeting regional development on growth  and employment; making all the Member States benefit from it together, and assigning a total allocation of 330 million euros to it for the period 2007-13, representing a rise of more than 30% of its budget between 2007 and 2013. This means  not only another tilting of budgetary resources away from the CAP, whose budget is frozen, and towards  regional development, but it also involves a profound reorientation of the latter, which becomes a “policy of cohesion” and has three reformulated objectives assigned to it as from 2007.  This proposal of the Commission has been integrated into the new “community strategic orientations” adopted in July 2005 within the framework of the “Lisbon strategy”.       
Objectives   Regional  development (former)     Policy of cohesion (new)

 

Objectives	Regional  development (former)	Policy of cohesion (new)
No.1	Aid to regions behind in development	Economic convergence of less developed regions.
No.2	Aid to regions undergoing economic and social conversion	Regional competitiveness and  employment
No.3	Training and employment	Territorial cooperation

The new objective No. 1 is not unlike the old one.  The novelty arises with objective No. 2.  The old one concentrated aid on predefined geographical areas..  With the new objective No. 2 all the areas not covered by the “convergence” objective – including some that were covered by the old No. 1 objective but are no longer covered because of the enlargement of the EU – are eligible to benefit from the “competitiveness” objective; it is up to the Member countries to present a list of regions for which they will submit programmes of regional development.  These programmes must be aimed at “increasing the competitiveness and attractiveness of regions in anticipation of economic and social changes and in support of innovation, the society of knowledge, the spirit of enterprise, environmental protection and risk-prevention.  Moreover …… it is appropriate to encourage, on the basis of the European strategy for employment, the adaptability of workers and companies and the development of employment markets geared towards people’s integration into society.

 

2.4.5. How is the budgetary expenditure of the EU shared out on the basis of these reorientations as from 2007?

To a degree, the expenditure budget for 2007 reflects this new orientation.  Set at 126.5 billion euros in commitment appropriations, it provides, in particular:

1.  in order to increase competitiveness and cohesion, develop Europe’s growth-potential  and foster prosperity in the Union’s regions:

• 35.3 billion to be paid to the less developed regions of the  27 member EU, under the convergence objective  of the policy of cohesion
• 10.2 billion under the competitiveness and employment objective
• 5.9 billion to research and innovation (+5.4%)
• I billion to transport and energy networks (+32.9%)
• 0.9 billion to education and training (+31%)

2. in order to protect natural resources by modernising agriculture and encouraging rural development and a healthy environment:

• 42.7 billion (+0.6%) for the CAP in the strict sense (direct aid and support of markets)
• 12.4 billion (+3%) for rural development
• 0.2  billion (+17.9%) for environmental protection.

3.  in order to confirm the EU’s role as a player on a world scale and reinforce stability and prosperity beyond its borders: 

• 1.2 billion (+6.5% ) for aiding candidate and potential candidate countries in the Balkans
• 1.4 billion (+11.1%) for aiding neighbouring countries to the East and to the South  (“neighbours policy”)
• 2.2. billion for other developing regions  (Central Africa, Asia and Latin America)

4.in order to promote citizenship, freedom, security and justice:

• 0.6 billion (+12.8%) for security and justice:
• 0.6 billion for endowments to help the ordinary citizen, including culture, youth and public health.

Finally, the administrative expenditure for all the institutions of the EU will come to 6.7 billion (+4.5%) in 2007.

2.4.6. What tasks of common interest are insufficiently financed by the present budget?

The figures given above indicate that, in the 2007 budget, expenditure oriented towards the future (particularly on the environment, education and training and transport and energy) must increase significantly.  But this will be from a very low starting point compared with the resources which the CAP and the pursuit of the objective of cohesion still swallow up. And not only that!  The funds distributed through the channels of these two programmes too often appear to be the subject of a “grab what you can” feast in which each country seeks above all to increase or keep its share of the cake without much consideration for “the common European interest”.

There are several areas where most of the Member States of the EU would do well to take unified action beyond what the European budget currently allows:

• The stabilisation of economies in the European zone: the economic diversity of this zone means that divergences in economic situations can occur there.  In the United States (see 2.3.1.) the size of the federal budget guarantees that help is automatically moved to any region suffering some sort of external shock unexpected and peculiar to itself. Such a transfer mechanism does not exist in the EU, given the modest size of its budget.  An “interregional economic stabilisation fund” could be set up, supplied through levies on countries in danger of their economies  “overheating”, who could  contribute temporary budgetary help to countries in recession, enabling the latter to meet the requirements of the stability pact ( see 2.3.2.)  without having to impose austerity measures on themselves, which could make the recession worse.
• Energy policy: for its supplies of oil and natural gas, in particular, Europe depends largely on the outside and on the interdependence of the energy distribution networks inside Europe.  The Member States of the EU have an obvious common interest in diversifying their sources of supply and making them as secure as possible, as well as in searching actively for substitutes among sources of renewable energy.  
• .Protection of the environment: the 200 million euros allocated to this item in the 2007 budget appear well below what is required, faced as we are with common problems like: the rise in temperatures and drought threatening Mediterranean regions, the  pollution of rivers crossing several countries (the Danube in particular) and the safety of nuclear power stations.
• Research and development:  This sets the conditions for the conduct of energy policy and environmental protection, in particular. The coordination of European programmes of research and the encouragement of mobility of researchers among the universities and research centres in Europe are two very obvious areas where specifically European action is justified.

2.4.7. What are the possible paths to be followed in increasing the European budget?

Among the paths that could be envisaged, the following are the most frequently mentioned:

• Increasing the VAT resource  (see 2.4.2) by raising the percentage deducted as a levy.  This course of action offers the dual advantage of relying on an already existing tax (so no ad hoc administration needs to be set up) and of offering a very wide taxable base, which is consumption.  However, the existence of a zero rate in some countries and the considerations of fairness mentioned earlier, reduce the prospects of increasing this resource in European budgetary revenue.
• Imposing a levy  on company tax:  this would involve harmonising the bases of this tax, because they are not harmonised at present (see 2.3.4 ).
• A tax on energy:  this option would be all the more interesting since it could be integrated into the European energy policy, which largely remains to be constructed, and it could also be one of the tools of an environmental-protection policy.
• A European tax, which would be levied directly on the taxpayer without going through the national budget.  This would have the indisputable advantage of establishing a direct link between the European citizens and the EU, so strengthening the latter’s political legitimacy. However, in order to be accepted by the public, this new tax would have to meet one of the two following conditions:

It would have not to increase the overall tax burden on the European taxpayer.  This condition, which for national governments would mean agreeing to transfer an additional share of their tax-raising powers to the European institutions, would certainly be hard for some of them to take;

It would have to be tied to a very visible and appreciated action by the EU. In the opinion surveys a majority of people say they are ready to pay for more safety, mobility, a healthier environment, better mastery of globalisation and, if the  European Union can offer them such guarantees, they would not be against such a tax:  it would be the lever for action by the Union in the realms (see 2.4,4 above) where it is more qualified to act than the national governments and better placed to pursue the common European interest.