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pc_2012_20_budget_

pc_2012_20_budget_

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Published by: Bruegel on Nov 23, 2012
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ISSUE 2012/20NOVEMBER 2012
THE LONG-TERM EUBUDGET: SIZE ORFLEXIBILITY?
BENEDICTA MARZINOTTO
Highlights
The EU is in the process of negotiating its 2014-20 financial framework. Failureto reach an agreement would imply a delay in the preparation of the strategicplans each member state puts together to explain how it will use Structural andCohesion Funds. Even if solutions are found – for example annual renewals of the budget based on the previous year's figures – there will be political and ins-titutional costs. EU leaders have too often and too forcefully advocated the useof the EU budget for growth to be able to drop the idea without consequences.The overwhelming attention paid to the size of the budget is misplaced. EU lea-ders should instead aim to make the EU budget more flexible, safeguard it fromfuture political power struggles, and reinforce assessment of the impact of EU-funded growth policies.To improve flexibility a commitment device should be created that places theEU budget above continuous political disagreement. We suggest the creation of a European Growth Fund, on the basis of which the European Commissionshould be allowed to borrow on capital markets to anticipate pre-allocated EUexpenditure, such as Structural and Cohesion Funds. Markets would thus be afactor in EU budget policymaking, with a potentially disciplining effect. Atta-ching conditionality to this type of disbursement appears legitimate, as capitaldelivered in this way is a form of assistance.
Benedicta Marzinotto
(benedicta.marzinotto@bruegel.org) is a Research Fellow atBruegel. The author acknowledges excellent research assistance by Erkki Vihriala.
Telephone
+32 2 227 4210info@bruegel.org
www.bruegel.org
BRUEGEL
POLICY 
CONTRIBUTION
 
THE LONG-TERM EU BUDGET:SIZE OR FLEXIBILITY?
BENEDICTA MARZINOTTO, NOVEMBER 2012
02
BRUEGEL
POLICY 
CONTRIBUTION
1. European Commission(2012a).2. Council of the EuropeanUnion (2012).3. European Council (2012).
THE NEGOTIATIONS ON THE 2013 EUROPEANUNION BUDGET
came to a stalemate after memberstates failed to reach an agreement on thedisbursement of unpaid bills for 2012.Negotiations on the EU budget for 2014-20 alsorisk collapse. In both cases the problem is adisagreement between the net contributors andthe net recipients about the absolute size of thebudget. While tensions over the size of the budgethave a long history, this time is different becauseEU leaders have too often and too forcefullyadvocated the use of the EU budget for growth tobe able to drop the idea without incurring politicaland institutional costs for the EU as a whole.The Multiannual Financial Framework (MFF, 2014-20) negotiations should be finalised by December2012 to allow time for the legislative phase fromJanuary to May 2013. Failure to reach an agreementon the 2014-20 budget implies, among the variouscosts, a delay in the preparation of the strategicplans each member state puts together to explainhow it intends to use Structural and Cohesion Funds.This Policy Contribution reviews the discussionabout the size of the EU budget. we suggest thatthe discussion is plagued by ideological differ-ences and by the failure of EU leaders to discusswhat type of growth they want, when they useStructural and Cohesion Funds for investment. Thebattle over size is one with no future and isunlikely to solve fundamental ambiguities aboutthe role of the EU budget. EU leaders shouldinstead prioritise a more flexible EU budget, thatis safeguarded from future political power strug-gles, with reinforced impact assessment of EU-funded growth policies and conditionality. To atleast partly address these priorities, we suggestthe creation of a flexible
European Growth Fund
that would allow the European Commission toborrow on capital markets to advance the dis-bursement of EU money typically used to financeinvestment (ie Structural and Cohesion Funds).
THE SIZE OF THE EU BUDGET FOR 2014-2020
The 2014-20 MFF negotiations revolve chieflyaround the size of the EU budget. Three broadcamps can be identified. The Friends of BetterSpending coalition includes Austria, Finland,France, Germany, Italy, the Netherlands andSweden, and argues for the explicit use of thebudget for growth and competitiveness and a sizethat should not exceed 1 percent of EU GNI. TheFriends of Cohesion coalition groups togetherBulgaria, Cyprus, the Czech Republic, Estonia,Greece, Hungary, Latvia, Lithuania, Malta, Poland,Portugal, Romania, Slovenia and Spain and isgenerally supportive of the EuropeanCommission’s MFF proposal. In a more isolatedposition, the United Kingdom is arguing forsignificant downsizing of the budget and isthreatening to exercise its veto power.The European Commission proposed a budget for2014-20 worth roughly €1033 billion incommitment appropriations (1.08 percent of EUgross national income). Including off-budgetitems, the proposal reaches a figure of €1093billion (1.14 percent of EU GNI)
1
. TheCommission’s proposal is rather conservative andimplies, in real terms, a small cut in the size of thebudget down to 1.08 percent from the 1.12percent of EU GNI of the current 2007-2013 MFF.Capping the budget at 1 percent of EU GNI impliesa cut of €75 billion from the formal Commissionproposal, but a much larger cut of €135 billionwhen accounting for all off-budget items. On 29October 2012, the Cypriot EU Presidency tabled adraft proposal that drops close to €60 billion fromthe Commission proposal (after discounting forthe reclassification of some budget items)
2
.Another proposal, from European CouncilPresident Herman Van Rompuy, goes for a deepercut in the order of about €81 billion from thecomprehensive Commission draft budget
3
.
THE LONG-TERM EU BUDGET: SIZE OR FLEXIBILITY?
Benedicta Marzinotto
 
Differences in the proposals do not justify riskingthe suspension of EU spending in 2014 when theMFF is due to start. But the size of the EU budget ischarged with political symbolism. Over-focusingon its size diverts attention from more importantissues and some missed opportunities. First, EUleaders have been advocating the use of EU fundsto spur growth and employment during the crisis;at the same time they have failed to agree on whatkind of economic growth they wanted. Second, thefight about expenditure ceilings is predicated onthe assumption that EU funds are ineffective orunable to generate added value, which has yet tobe shown convincingly. Third, and linked to theprevious issue, the EU has failed to deliver a rigor-ous impact assessment of EU cohesion policy, anexercise that should precede any discussionabout budget size. Fourth, the obsession with sizesignals a fundamental disbelief in the effective-ness of the conditionality that will be attached tothe disbursement of cohesion spending.There is another reason why failure to reach a dealon the long-term EU budget, and the recent break-down of the negotiations for the 2013 budget, areself-inflicted political and institutional costs for theEU as a whole. The deadlock undermines the so-called ‘Compact for Growth and Jobs’, which wasdesigned to show the EU's commitment to sup-porting economic growth in the face of criticismabout the excessive focus on austerity. Agreed atthe European Council of 28-29 June 2012, theGrowth Compact
4
was a political commitment toquickly spend about €120 billion from unusedStructural and Cohesion Funds, and from Euro-pean Investment Bank (EIB) loans, especially incrisis countries
5
. Agreement by EU leaders toencourage faster absorption, swiftly followed byrefusal to pay into the EU budget to allow theactual disbursement of EU funds marks the deathof the Growth Compact and possibly of future pan-European initiatives for growth.While during the crisis the EU was concerned thatsome member states seemed unable to absorbavailable EU funds, attention has now shifted tothe supply side. The use of EU funds for growth,especially growth in the countries that do not havenational resources to finance investment, cannotsucceed unless a mechanism is put in place thatallows for their rapid disbursement. In addition,
03
BRUEGEL
POLICY 
CONTRIBUTION
Benedicta Marzinotto
THE LONG-TERM EU BUDGET: SIZE OR FLEXIBILITY?
4. See http://www.consil-ium.europa.eu/uedocs/cms_ sdata/docs/pressdata/en/ec /131388.pdf.5. European Council(2012c).6. The evidence on thegrowth effects of EU cohe-sion policy is mixed, seeMarzinotto (2012); Santos(2008).
the disbursement of funds should be conditionalon the presence of an appropriate institutionalframework (eg respect of EU single marketdirectives). Finally, once the funds have beendisbursed, assessment of their impact should berigorous and the withdrawal of funds couldbecome possible if they have been usedinappropriately (eg it is clear that they are notused for investment but rather for consumption).
WHAT TYPE OF GROWTH?
Tensions over the size (and the composition) of the long-term EU budget are a constituent part of any MFF negotiation. Some negotiators assumeimplicitly that the Common Agricultural Policy(CAP), which is to a great extent just a form of income support to the benefit of producers,represents a dead weight the EU has to carry fromone period to the other because of strong politicallobbying by some member states andconsiderable institutional inertia. This is toosimplistic. First, the CAP has not been stable. Theshare of the EU budget devoted to supportingfarmers has progressively decreased whilespending on competitiveness and cohesion hasgrown (see Figure 1). Second, not all agree on thedesirable objective of Structural and CohesionFunds, which are supposed to be, whether rightlyor wrongly, the most productive expenditures of the EU budget
6
. And yet, while the EU has longadvocated the use of the EU budget for growth, ithas failed to agree on what type of growth.
        1        9        5        8        1        9        6        2        1        9        6        6        1        9        7        0        1        9        7        4        1        9        7        8        1        9        8        2        1        9        8        6        1        9        9        0        1        9        9        4        1        9        9        8        2        0        0        2        2        0        0        6        2        0        1        0
1009080706050403020100
C
A
PStructural
 
and
 
Cohesion
 
Funds
Figure 1: CAP versus Structural and CohesionFunds as % of total EU budget expenditures
Source: Bruegel based on European Commission (2009,2012b).

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