Budget negotiations are key to future image of EU

On February 5th Herman Van Rompuy put out a video message (http://tvnewsroom.consilium.europa.eu/event/video-messages-of-herman-van-rompuy/eu-budget-negotiations-the-bigger-picture-must-not-get-lost) which made an admirably concise plea for a budget to focus on jobs and particularly jobs for young people and also insisted on moderation, which he surprisingly defined as a real terms cut. This would imply that the demands of the UK, Sweden and the Netherlands in terms of expenditure discipline would be met or even exceeded.

Budget is small in relative terms,but high in absolute terms

As a percentage of national budgets (about 2%) the EU budget is much smaller than implied by the claims of over-centralisation of power. It has remained at around 1% of gross national income (considered a fairer measure than gross domestic product) over the last 20 years well below its allowed maximum of 1.24% of GNI. To have done this during a period when the EU has expanded to include 12 new countries almost all well below the 75% of average income threshold which entitles them to substantial funding to help catch up, and when a monetary union has been created for 17 member states, an embryonic diplomatic service has been set up and effective measures for criminal justice have been put in place is a significant achievement.

The gains in terms of both political stability and prosperity from the single market are not possible to measure but surely hugely outweigh the costs of the EU. Nevertheless when expressed in absolute terms, the amounts are large enough to become politically contentious, at a time when all countries are having to make cuts which are causing large scale public redundancies, closures of hospitals, and other public services like libraries. The UK, France and Italy are currently spending about €16bn (£13bn) in gross terms and €6bn (£5bn) in net terms in contributions to the EU budget.

Some but not all is all is well spent

Some of this money is very well spent. There is huge over-demand for the 11% of the total EU budget spent on boosting collaboration between EU countries (and sometimes also other countries) on scientific research and the development of new technologies. This is money well spent on boosting the EU’s economic potential and ability to thrive in the face of competition from rapidly growing economies like China and India. A strong plea for this spending to be maintained was made on February 5th in a letter to the Financial Times by leading British scientists. Another area of money well spend is co-operation on justice mainly criminal justice, which takes up just 2% of the budget. According to the British Association of Chief Police Officers (ACPO) if, as is being considered, the UK were to opt out of the European Arrest Warrant (EAW) just one of about 20 important EU measures in the field of criminal justice, the result would be “fewer extraditions, longer delays, higher costs, more offenders evading justice and increased risks to public safety”.

Slightly lower in terms of money well spent is the category of administration which absorbs 6%. At 0.06% of national income this is good value for underpinning the benefits of a rules-based single market with a level playing field evened by the enforcement of rules on competition. Yet at a time of austerity the pay and privileges of the upper tiers of the Commission which exceed those of leaders of national governments look excessive.

The largest items of spending are agriculture and regional policy. Agricultural spending, narrowly defined to standard income support for farmers amounts to 27% of spending. If the EU were starting from scratch this might see excessive, but there has been a continuing decline from about 70% when the UK joined the EU in 1973 and most of the spending no longer supports (ie increases) prices as it used to. There is however an additional item called rural development environment and fisheries which absorbs 10% of the total. This is almost as much as is spent on research and innovation and yet its purpose. It includes the very different objectives of environmental conservation or improvement and diversification to non-farming economic activities. It is a category which at least merits careful scrutiny.

Focus of regional spending should be on job creation

But the category which needs most attention is the 37% spent on helping the poorer or most economically troubled regions. This spending has in the past been heavily focused on infrastructure, which does not necessarily bring fundamental economic development. What is most needed is to foster the development and expansion of new micro, small and medium businesses which having already  been responsible for the great majority of job creation across the EU in recent years have the best potential to provide employment opportunities in southern European regions where rates of youth unemployment often exceed 50%.


2 thoughts on “Budget negotiations are key to future image of EU

  1. Am annoyed with myself for not having read this on Thursday when you sent it, since it would have saved me from bothering to read the media noise over the past few days around the EU negotiations. In effect, the deal was done (as ever, or at least as most times, in these things) before the photo ops and posturings. I had not realised that Van Rumpoy (sorry about my atrocious continental spelling) had already dropped the hint. He would hardly have dared to do that unless he was pretty confident that it would go through.
    Your relative numbers are also interesting – especially to a (moderate) sceptic on the EU like myself. I have always realised that, relative to the costs of unemployment and health and education budgets, the EU is a drop in the bucket. But no harm in having the miniscule relative size of that drop highlighted. This does not invalidate the case for tightening EU efficiency and “bangs for bucks” wherever you can, but it does put the EU debate in perspective. The budget negotiations are not the main issue. Fiscal and monetary harmonisation is surely the issue. For significant further harmonisation is the logical outcome of the commitment to defend the euro at all costs. In which case, your side has to convince my side that such harmonisation (which will lead to a version of “federal” Europe with specific European constraints on the fiscal and monetary freedom of individual members) is the necessary price to pay for long term economic survival in a world of global trading blocks. In my amateur and increasingly distanced take on economics, I still do not understand why it is necessary to be part of a wider block in order to gain the benefits from free international trade. In theory at least, these benefits flow from transparent trade agreements in which tariffs are minimised and confined to sectors which can be justified on development cycle grounds (the old protection for nascent Tanzanian weaving industry argument). Provided that international bodies such as the WTO remain alert to threats of beggar-my-neighbour tariff policies and can mobilize majority interest in transparent, tariff-minimising agreements (as should be the case since everyone now understands how the dynamics of comparative advantage work to maximise GDP per head) then why do you need to belong to a trading block, especially one in which the fluidity of economic resources between constituent parts is as limited as in Europe? Perhaps I am showing an ignorance of how the WTO and its related trade and tariff negotiations operate in the real world. It may be that increasingly WTO deals are stitched up between trading blocks with small individual states (such as Austria and Norway and Switzerland and Chile, to name four that just come into my head) suffering competitive disadvantage as a consequence. But the onus is upon the EU proponents to provide evidence (preferably statistical and anecdotal) to support this contention. Otherwise, my side will always counter that an independent state which enters into WTO-style negotiations prepared to do intelligent deals focused solely on its own industrial, commercial and economic priorities is at no disadvantage relative to a subsidiary member of a larger entity.

  2. Hello Jamie, to counter your well-argued point: It’s not just about EU proponents v opponents, but how the world has changed and what works or must be made to work. Surely it’s more effective for a country like the UK which relies on global markets to be part of a multilateral set-up which shares most of its interests, than spending huge amounts of time and public money negotiating umpteen bilateral deals, which can take ages, lead to an impossible array of targets/agreements for businesses (including importers) to cater to, and often relies on stronger partners getting their way with weaker ones (with the UK being the former in some cases, but also the latter).

    “WTO-style negotiations” are multilateral. They are hard to drive forward but impossible to avoid. In a world of global supply chains, a country setting off “to do intelligent deals focused solely on its own industrial, commercial and economic priorities” either overestimates its own strength and has not understood how borders have shifted, or is merely pandering to short-term political interests, with business and consumer long-term interests (in large and small countries) losing out. Such countries end up having to look for support from other countries in the end. Like in yesterday’s rain-soaked rugger, solo runs against big players only get you so far.

    The EU is and should be far more than a free trade zone, that’s the reality of it, as Charles’s article points out very clearly. The EU has lost its way quite a bit in this crisis, and needs to find its feet again (as Charles has also written). Europe has plenty of problems to overcome, but solving them, rather than ducking them, is what clever leaders should be trying to do. Even if in their own self-interest.

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