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EU Budget- Time for Another Grand Bargain? Dr. Robert Zbíral Palacký University Olomouc.

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Presentation on theme: "EU Budget- Time for Another Grand Bargain? Dr. Robert Zbíral Palacký University Olomouc."— Presentation transcript:

1 EU Budget- Time for Another Grand Bargain? Dr. Robert Zbíral Palacký University Olomouc

2 Contents of the lecture EU budget in crisis Why is it in crisis? How to reform it?

3 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“

4 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)

5 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 purpose- resulting in path dependency –Importance of critical juncture

6 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

7 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.“

8 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

9 Why is the EU budget in crisis? EU spending categories in percent of EU GDP (1961-2005) Source: Le Cacheux, 2005, p. 4.

10 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?

11 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)

12 Why is the EU budget in crisis? Juste retour calculations (2004, as a percent of GDP) Source: European Commission 2005, 13.

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

14 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

15 How to reform the budget? Source: European Commission, 2000 (p. 38), 2003 (p. 132). EU spending in percent of EU GDP (1961-2002)

16 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

17 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

18 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

19 Commitment EC proposal June Lux. proposal 5/12 British proposal Agreed perspective H.1: Sustainable growth471379369380 1a. Competitiveness for growth and employment13372 1b. Cohesion for growth and employment339307297308 H.2: Protection and management of natural resources405378367 Of which agriculture: market expenses and direct payments301295293 H.3: Citizenship, freedom, security and justice251110 H.4: EU as a global partner9550 H.5: Overheads29504950 Commitments total1025871847862 Commitments in % GDP1. Source:, 2006. Allocation –Again the new financial perspective brought miserable results and lacks both efficiency and legitimacy

20 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

21 How to reform the budget? Source: European Commission, 2005 (p. 134). EU revenue categories in percent of total revenue (1971-2005)

22 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

23 How to reform the budget? Source: Based on Cattoir, 2004, p. 42.

24 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

25 Conclusion Are my proposals realistic or only wishful thinking recommendations? Has the time come for another grand bargain?

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