by Simon Tilford
The institutional weaknesses of the eurozone have been laid bare. The attempt to run a common monetary policy without a common treasury has failed. Investors do not know what they are buying when they purchase an Italian bond – is it backstopped by Germany or not? The best credit must stand behind the rest, or bear runs, such as those that have derailed Greece, Ireland and Portugal and which threaten to do the same to Italy and Spain, are inevitable. Debt mutualisation alone will not save the euro, but without it the eurozone is unlikely to survive intact.
The eurozone’s July 21st summit was a small step forward. Leaders agreed to lower interest rates on loans made by the European Financial Stability Fund (EFSF) and they recognised that Greece’s debt burden is unsustainable. But this fell far short of what is needed to arrest the deepening crisis in the currency union. Borrowing costs remain unsustainably high for many eurozone economies, and not just those in the periphery. For example, the economic growth potential of Spain and Italy has fallen to as little as 1 per cent, but their borrowing costs exceed 6 per cent. By contrast, German sovereign yields have fallen sharply, lowering the public and private sectors’ borrowing costs. This is a recipe for further economic divergence and insolvency, not the urgently required convergence.
To prevent this, the eurozone has to have a ‘risk-free’ interest rate. The struggling economies need lower borrowing costs, or they will suffocate economically (and political support for eurozone membership will evaporate). Only the mutualisation of debt issuance will generate the low (risk-free) interest rate needed to enable them to put their public finances on a sound footing and lay the basis for a return to economic growth.
All eurozone countries should therefore finance debt by issuing bonds which would be jointly guaranteed by all member-states. The obvious problem with eurobonds is moral hazard: how to prevent fiscally irresponsible countries free-riding on the credit-worthiness of other member-states. This is the understandable fear of countries such as Germany and the Netherlands.
A possible solution to the problem of moral hazard would be for member-states to issue debt as eurobonds up to a certain level – for example, 60 per cent of GDP – but be individually responsible for any debt above it. This would give countries with high levels of public debt an incentive to consolidate their public finances. Had the eurozone introduced such a system from the outset, it could well have worked. But it is too late for that now. For a number of economies, the additional borrowing would simply be too expensive. A better solution would be for a new, independent fiscal body to establish borrowing targets for each member-state and for a European debt agency to issue eurobonds (up to a certain level) on behalf of the member-states.
How would these rules be designed? A dogmatic target of budgetary balance four years hence irrespective of a country’s position in the economic cycle would achieve little: targets are meaningless if they are impossible to implement. These fiscal rules would have to be set with reference to the cyclically-adjusted fiscal position for each member-state. The OECD already produces estimates for these. Member-states will have to be permitted to run deficits when their cyclical positions demand it. Inappropriately pro-cyclical fiscal policies and ruinous interest rates would depress economic activity and with it the investment needed to boost productivity.
Careful thought would need to be given to the composition of the new fiscal body. A board of 17 people, one from each eurozone economy, would be unwieldy, and unlikely to win the support of the eurozone’s principal creditor countries. At the same time, a board dominated by the creditor countries would be unlikely to win the backing of the debtor countries. A board of nine economists, from the big eurozone economies, the European Commission, the ECB and the OECD might form a good basis.
The eurozone, of course, has a poor record of enforcing fiscal rules. To ensure that there is no repeat of this failure, there would have to be strong penalties for non-compliance. If a country deviated from its fiscal targets, it would not be allowed to borrow the additional funds at the risk-free rate. Instead, it would have to borrow under its own rating, which in the case of the fiscally weaker countries would be more expensive. To provide additional incentives to abide by the borrowing rules, the ECB could refuse to accept debt issued under national ratings as collateral. Alternatively, a new EU financial regulator could handicap own country bonds by requiring banks holding them to set aside more capital.
Fiscal rules of the type envisaged (and a new body to enforce them) would not necessarily require a treaty change. But various creditor countries rightly fear that the adoption of eurobonds will push up their borrowing costs and constitute a transfer union. Opponents of eurobonds may eventually come around to seeing them as the least bad option. The risk is that by the time they do, it could be too late to save the euro from a partial break-up: what could work if adopted promptly could be ineffective in six months’ time.
Opponents need to be persuaded as soon as possible that this is the least costly option for them. Eurobonds would certainly be a cheaper option for core countries than the underwriting of loans to struggling member-states, which essentially involves throwing good money after bad: they will book large losses on these EFSF loans. These losses will only increase if, as seems possible, some of the countries currently in receipt of EFSF loans end up having to leave the eurozone and default on their debt.
Simon Tilford is chief economist at the Centre for European Reform.
Thursday, July 28, 2011
Wednesday, July 20, 2011
Marine Le Pen and the rise of populism
By Charles Grant
Since becoming leader of France’s Front National in January, Marine Le Pen has started to shift her party away from the far right. She has not only dropped the overt racism and Islamophobia of her father but also adopted hard-left economic policies. “Left and right don’t mean anything anymore – both left and right are for the EU, the euro, free trade and immigration,” she said when opposing me in a recent dinner debate on the future of Europe in Paris. “For 30 years, left and right have been the same; the real fracture is now between those who support globalisation and nationalists.”
The debate – organised by The KitSon, a Paris think-tank – was off-the-record. But I can repeat some of her comments, since they echoed what she had already said on-the-record elsewhere. She is a tall, strong-looking woman and an effective debater. She speaks pithily and sometimes with humour.
She presents her party as a nationalist force – in British terms, the United Kingdom Independence Party rather than the British National Party. In its hostility to the EU and to immigration, the Front National has much in common with Austria’s Freedom Party, the Danish Peoples’ Party, the True Finns, the Sweden Democrats and Geert Wilders’ Party for Freedom in the Netherlands. Populist, illiberal parties are flourishing in the most sophisticated, liberal societies of Northern Europe.
Although Le Pen is changing her party’s brand, she is no Gianfranco Fini: he led his party away from neo-fascism towards the pro-European centre of Italian politics. Le Pen’s European policies remain extreme: she urges France to leave not only the euro but also the EU. Her economic platform is one of national economic autarky: she wants to protect France from globalisation by erecting high tariff barriers. Her economic platform is in fact quite close to that of Jean-Pierre Chevènement, the veteran anti-European and former Socialist minister. Earlier this month she appealed to Chevènement to work with her – but he rebuffed her advances.
Le Pen’s line on the euro and the EU may be extreme, but given the mess that Europe is in, her views may not cost her votes among those who want to kick the Paris and Brussels elites for their (apparent) complacency, smugness and incompetence. She wants France to leave the euro so that it can devalue and become more competitive. While China and the US benefit from being able to devalue, she said, the eurozone suffers from low economic growth. “To save the euro we are asking the Greeks to make huge sacrifices through austerity, and soon we will ask the same of people elsewhere, even in France. The euro will lead to war.”
When I responded that devaluation would destroy the French people’s purchasing power, she said that only ‘BCBGs’ (short for bon chic bon genre, that is to say the fashionable middle class) would complain about devaluation; they buy the foreign goods and holidays that would cost more, whereas most poor people buy things made in France (a point that is highly debatable).
She complained about sovereignty draining away to Brussels and said that we live in a Union Soviétique Européenne. The EU represents the interests of big financial groups, she said, and encourages immigration in order to put downward pressure on salaries. She said that her country needs a French agricultural policy, rather than a Common Agricultural Policy, since the CAP was giving too much aid to Central Europeans.
“The EU has been built on Anglo-Saxon principles of everything being available to be bought or sold.” Ultra-liberals run the EU, she said, and will not let the French protect their industries. “Without protection we cannot be competitive against China, since we don’t want to work 20 hours a day.”
When I said that rather than trying to compete directly with China, France should go up market and produce goods and services that the Chinese cannot, she argued that they could now beat France in any industry – as they were doing by building high-speed trains. I responded by praising the prowess of France’s world-beating companies in areas such as luxury goods, agribusiness, energy and aerospace – so she joked that the best proponents of Sarkozyism came from Britain.
The obvious critique of her line on the EU is that France, on its own, is rather small compared to China and other emerging powers, and that it therefore needs the EU to amplify its voice in the world. But she had no truck with that argument, saying that France on its own had a big voice. “I am a gaullienne, and the general would be horrified to see the EU today…I want an association of sovereign nation-states; that would allow us to influence Russia and the wider world.” And when I suggested that the EU had the merit of constraining German power, she said Germany already dominated the EU. “When Germany has a constitutional problem, we change the EU treaty; but if France has a problem, we have to change our constitution.”
Le Pen wants France to leave NATO. When I pointed out that France would then have to raise defence spending enormously, in order to enjoy a comparable level of security to that provided by NATO today, she was unfazed. “We are not Botswana, if we want to play a big role in defence we can, and in any case defence spending is good for the economy.”
During two hours of debate she said nothing that sounded racist. The closest she came was this: “I am not against immigration, France has always accepted foreigners. But it should not lead to lower salaries. And in employment we should prioritise jobs for français de souche.” That could be translated as people of French stock.
I think Le Pen is right when she says that the main political divide in Europe is between nationalists and globalisers. But the solutions that she offers to complex problems are far too simple. Her language resonates with the common man: she is on the side of the little people against foreigners, international bureaucrats and big capitalists. And her economic nationalism goes down particularly well in France, a country that is probably more hostile to globalisation than any other European country.
But there are obvious gaps in Le Pen’s thinking. She has nothing to say about global governance, or what to do about transnational threats such as organised crime, climate change, proliferation or international terrorism. And she would be a more effective critic of globalisation if she acknowledged that in certain respects France does nicely from it. When I told her that France benefited hugely from foreign direct investment – it gets more FDI than any other country in Europe – and that French companies did very well from investing in other member-states, like Britain, she had very little to say.
Opinion polls suggest that Marine Le Pen has a good chance of getting into the second round of the May 2012 presidential election – as Jean-Marie Le Pen did when he won more votes than the Socialists’ Lionel Jospin in 2002. According to some polls, the second round would pit the Socialist candidate – almost certain to be either François Hollande or Martine Aubry – against Le Pen. Of course, she would not win the second round. As in 2002, the centre-left and the centre-right would combine to keep out a Le Pen – only reinforcing her view that Sarkozy and the Socialists are the same. But in any case, I do not think she is serious about exercising power, at least for now. If she was serious, she would have to start compromising on some of her economic and international policies, and she shows no signs of doing so.
But even without formally winning office, she – like her equivalents in Austria, Denmark, Finland, the Netherlands and Sweden – is shaping the political debate in her country. Politicians on the centre-right have toughened their line on immigration, lest the Front National steal too many of their votes. And very few French politicians on the centre-right – or the centre-left – have a good word to say about the EU.
Charles Grant is director of the Centre for European Reform
Since becoming leader of France’s Front National in January, Marine Le Pen has started to shift her party away from the far right. She has not only dropped the overt racism and Islamophobia of her father but also adopted hard-left economic policies. “Left and right don’t mean anything anymore – both left and right are for the EU, the euro, free trade and immigration,” she said when opposing me in a recent dinner debate on the future of Europe in Paris. “For 30 years, left and right have been the same; the real fracture is now between those who support globalisation and nationalists.”
The debate – organised by The KitSon, a Paris think-tank – was off-the-record. But I can repeat some of her comments, since they echoed what she had already said on-the-record elsewhere. She is a tall, strong-looking woman and an effective debater. She speaks pithily and sometimes with humour.
She presents her party as a nationalist force – in British terms, the United Kingdom Independence Party rather than the British National Party. In its hostility to the EU and to immigration, the Front National has much in common with Austria’s Freedom Party, the Danish Peoples’ Party, the True Finns, the Sweden Democrats and Geert Wilders’ Party for Freedom in the Netherlands. Populist, illiberal parties are flourishing in the most sophisticated, liberal societies of Northern Europe.
Although Le Pen is changing her party’s brand, she is no Gianfranco Fini: he led his party away from neo-fascism towards the pro-European centre of Italian politics. Le Pen’s European policies remain extreme: she urges France to leave not only the euro but also the EU. Her economic platform is one of national economic autarky: she wants to protect France from globalisation by erecting high tariff barriers. Her economic platform is in fact quite close to that of Jean-Pierre Chevènement, the veteran anti-European and former Socialist minister. Earlier this month she appealed to Chevènement to work with her – but he rebuffed her advances.
Le Pen’s line on the euro and the EU may be extreme, but given the mess that Europe is in, her views may not cost her votes among those who want to kick the Paris and Brussels elites for their (apparent) complacency, smugness and incompetence. She wants France to leave the euro so that it can devalue and become more competitive. While China and the US benefit from being able to devalue, she said, the eurozone suffers from low economic growth. “To save the euro we are asking the Greeks to make huge sacrifices through austerity, and soon we will ask the same of people elsewhere, even in France. The euro will lead to war.”
When I responded that devaluation would destroy the French people’s purchasing power, she said that only ‘BCBGs’ (short for bon chic bon genre, that is to say the fashionable middle class) would complain about devaluation; they buy the foreign goods and holidays that would cost more, whereas most poor people buy things made in France (a point that is highly debatable).
She complained about sovereignty draining away to Brussels and said that we live in a Union Soviétique Européenne. The EU represents the interests of big financial groups, she said, and encourages immigration in order to put downward pressure on salaries. She said that her country needs a French agricultural policy, rather than a Common Agricultural Policy, since the CAP was giving too much aid to Central Europeans.
“The EU has been built on Anglo-Saxon principles of everything being available to be bought or sold.” Ultra-liberals run the EU, she said, and will not let the French protect their industries. “Without protection we cannot be competitive against China, since we don’t want to work 20 hours a day.”
When I said that rather than trying to compete directly with China, France should go up market and produce goods and services that the Chinese cannot, she argued that they could now beat France in any industry – as they were doing by building high-speed trains. I responded by praising the prowess of France’s world-beating companies in areas such as luxury goods, agribusiness, energy and aerospace – so she joked that the best proponents of Sarkozyism came from Britain.
The obvious critique of her line on the EU is that France, on its own, is rather small compared to China and other emerging powers, and that it therefore needs the EU to amplify its voice in the world. But she had no truck with that argument, saying that France on its own had a big voice. “I am a gaullienne, and the general would be horrified to see the EU today…I want an association of sovereign nation-states; that would allow us to influence Russia and the wider world.” And when I suggested that the EU had the merit of constraining German power, she said Germany already dominated the EU. “When Germany has a constitutional problem, we change the EU treaty; but if France has a problem, we have to change our constitution.”
Le Pen wants France to leave NATO. When I pointed out that France would then have to raise defence spending enormously, in order to enjoy a comparable level of security to that provided by NATO today, she was unfazed. “We are not Botswana, if we want to play a big role in defence we can, and in any case defence spending is good for the economy.”
During two hours of debate she said nothing that sounded racist. The closest she came was this: “I am not against immigration, France has always accepted foreigners. But it should not lead to lower salaries. And in employment we should prioritise jobs for français de souche.” That could be translated as people of French stock.
I think Le Pen is right when she says that the main political divide in Europe is between nationalists and globalisers. But the solutions that she offers to complex problems are far too simple. Her language resonates with the common man: she is on the side of the little people against foreigners, international bureaucrats and big capitalists. And her economic nationalism goes down particularly well in France, a country that is probably more hostile to globalisation than any other European country.
But there are obvious gaps in Le Pen’s thinking. She has nothing to say about global governance, or what to do about transnational threats such as organised crime, climate change, proliferation or international terrorism. And she would be a more effective critic of globalisation if she acknowledged that in certain respects France does nicely from it. When I told her that France benefited hugely from foreign direct investment – it gets more FDI than any other country in Europe – and that French companies did very well from investing in other member-states, like Britain, she had very little to say.
Opinion polls suggest that Marine Le Pen has a good chance of getting into the second round of the May 2012 presidential election – as Jean-Marie Le Pen did when he won more votes than the Socialists’ Lionel Jospin in 2002. According to some polls, the second round would pit the Socialist candidate – almost certain to be either François Hollande or Martine Aubry – against Le Pen. Of course, she would not win the second round. As in 2002, the centre-left and the centre-right would combine to keep out a Le Pen – only reinforcing her view that Sarkozy and the Socialists are the same. But in any case, I do not think she is serious about exercising power, at least for now. If she was serious, she would have to start compromising on some of her economic and international policies, and she shows no signs of doing so.
But even without formally winning office, she – like her equivalents in Austria, Denmark, Finland, the Netherlands and Sweden – is shaping the political debate in her country. Politicians on the centre-right have toughened their line on immigration, lest the Front National steal too many of their votes. And very few French politicians on the centre-right – or the centre-left – have a good word to say about the EU.
Charles Grant is director of the Centre for European Reform
Monday, July 11, 2011
The new EU budget: A missed opportunity
by Stephen Tindale
The European Commission published its proposals for the 2014-2020 EU budget at the end of June. The British media were incensed about proposals for new ‘EU taxes’, a planned nominal rise in EU budget spending at a time of austerity and alleged threats to the British rebate. However, rather than focusing on the British net balance, the Cameron government should make a strong and constructive case for thorough budget reform. The Commission’s proposals are a missed opportunity.
In a joint letter from last December, the British, German, French, Dutch and Finnish governments demanded that the next ‘Multiannual Financial Framework’ (MFF) for 2014-20 should keep total EU spending at 2013 levels in real terms. The European Parliament hit back in June 2011, demanding a budget increase of at least 5 per cent. The Commission’s proposal states, somewhat lamely, that it has “sought to strike the right balance between ambition and realism” and suggests to cap spending at 1 per cent of EU GDP as in the past while moving (or keeping) some spending items outside the official budget framework. If only the ‘on budget’ spending is counted, the Commission’s proposals are in line with the five member states’ demands, but if the ‘off budget’ money is included the Commission has sided with the Parliament. At 2 per cent of total EU public spending, the EU budget is “stuck between being so small as to be economically irrelevant and big enough to harbour shock horror stories”, in the words of one former British negotiator (quotes are from a recent CER seminar on “Reworking the EU budget”).
However, it is not so much the overall size of the budget that matters but whether EU money is spent on political priorities in a way that adds value. The Commission’s proposals more or less perpetuate the budget priorities of the 2007-13 MFF. While this will please most member-states, it will hardly help the EU to address new challenges such as innovation and research, fighting climate change, dealing with the euro crisis and migration or helping the democratic and economic transition in Eastern Europe and Northern Africa.
The two biggest spending blocks in the 2014-20 MFF will remain the same: structural (or cohesion) funds for regional developments and the common agricultural policy (CAP), with both receiving around 36 per cent of total EU budget spending (although cohesion funds would for the first time be slightly bigger than the CAP).
In theory, cohesion policy is a good example of what European co-operation should be all about: redistributing income and wealth from richer parts of Europe to poorer parts. However, the structural funds are still allocated in a way that even regions in the richest member-states get money. Economists (and some Commission officials) have long advocated to focus cohesion money on the poorer member-states, perhaps those with a GDP of less than 90 per cent of the EU average. Instead, the rich countries insist that their budget contributions get ‘recycled’ via Brussels back to their own less advantaged regions. Many politicians claim that such transfers are needed for political legitimacy and fairness. Surely there are better ways to ensure that richer countries benefit from the EU budget, such as spending on innovation.
The Commission proposals are similarly timid when it comes to the CAP. Not only does spending so much EU money on farmers make little sense as the share of Europeans working the land continues to decline. But the CAP even fails on its own account: too much money now goes to the biggest land-owners. With food prices near all-time high, this EU budget would have been the perfect opportunity for radical CAP reform. “Even the Americans are reducing farm support”, explains one British food producer, “if we do not reform the CAP now, then when?”. The Commission should have proposed phasing out the ‘single farm payment’ (income support that goes to all farmers) while maintaining rural development spending. There should also be a gradual shift towards more national co-financing.
With a much-reduced CAP and re-focused cohesion funds, the EU budget could increasingly go towards issues that the EU declares a priority.
Climate change is one such priority. According to the Commission, EU expenditure for climate programmes will rise to at least 20 per cent of the total – but it gives no details on how it plans to achieve this. Rather than making aspirational statements, the Commission should have made concrete proposals.
Another area that should get more money is external affairs. Only
€100 billion are earmarked in the Commission’s proposal. Although the biggest increase is foreseen for neighbourhood policies, the money will not be enough for the EU to implement its ambitious new neighbourhood policy that it started drawing up in the wake of the Arab spring. Similarly, the €8.7 billion foreseen for dealing with migration is inadequate for a European immigration policy that would help to save the Schengen area of free movement.
The EU should also spend more on its economic priorities. Allocated amounts for R&D and innovation are supposed to rise from €55 billion in the last MFF to €80 billion in 2014-20. This is welcome but still inadequate for a continent whose future prosperity will depend on staying at the technological frontier. For the first time, the EU budget will contain a sizeable pot of money for infrastructure investments: the €40 billion of the new ‘connecting Europe facility’ are supposed to attract a multiple in public (for example from the European Investment Bank) and private investments (perhaps from pension funds) to improve European transport, energy and communications infrastructure. However, about half of the €40 billion will go to transport infrastructure – an area where waste has been a big problem in the past. The money would be better spent on information and communication technology in the EU’s less developed countries and on constructing an EU-wide energy market and preparing for the addition of large amounts of renewables to the European power sector.
Alas, the chances that the 27 EU governments will agree on radical budget reform before 2014 are slim. European budget talks are always heated but today’s political environment is particularly toxic. First, most EU nations are in the process of pushing through painful budget cuts at home and want the Commission to do the same (to its credit, the Commission suggests to cut its staff by 5 per cent but since administration accounts for only 6 per cent of total EU spending, this will be largely symbolic). Second, the Lisbon treaty has given the European Parliament new powers over the budget process, which – if recent moves are anything to go by – it will use to push for higher spending. “The European Parliament is full of spokespeople for individual policy interests whose demands will add up to more than the available budget money”, predicts one British journalist.
Third, the euro crisis has left many people in the richer EU countries opposed to any kind transfers to poorer countries. The grants earmarked for cohesion in the EU budget are peanuts compared with the loan guarantees in the rescue packages put together for Greece, Ireland and Portugal. Yet in the minds of many Europeans, these blend into one. In particular Germany, traditionally the ‘paymaster’ of Europe, will be in no mood to throw in extra billions to lubricate a compromise on the EU budget. Finally, with presidential elections due in France next year, the chances that Paris will move on CAP reform are slim. In London, meanwhile, Prime Minister Cameron will be under heavy pressure from his eurosceptic party base to retain the British rebate and keep budget spending low. A bilateral deal whereby France keeps its farm payments while Britain retains its rebates would allow for a compromise but spell the death knell for EU budget reform.
The Commission has added further fuel to the political fire by making some bold proposals for new ‘own resources’, EU jargon for money that the Union collects directly for the EU budget, for example from customs duties or sugar levies. The Commission now wants member-states to discuss whether the EU could raise money from a new VAT levy and from a financial transaction tax. A German diplomat calls the proposals simply “not acceptable” while a British one dismisses them as an “amusing distraction”. A financial transaction tax would impact heavily on the UK – disproportionately so in the view of the UK government. Since any new own resources need unanimity among the 27 governments, the chances of the Commission’s proposal making it into the new MFF are close to zero.
The Commission’s proposals succeed in trying to please as many political masters as possible. The price that Brussels has paid for this is an unambitious, backward looking budget package. A European Union that must deal with a public finance crisis, an unstable neighbourhood, diminishing legitimacy and declining global competitiveness must do better. And David Cameron should provide the leadership. France has a presidential election in 2012, and Germany a federal election in 2013, so President Sarkozy and Chancellor Merkel are boxed in by the demands of electioneering. UK foreign secretary William Hague – no fan of Brussels – has said that the EU should do more to control climate change. So the British government should argue that significantly more should be spent on climate control, and significantly less on the CAP, and that if genuine budget reform is on the table, the UK rebate is up for re-negotiation.
Stephen Tindale is an associate fellow at the Centre for European Reform.
The European Commission published its proposals for the 2014-2020 EU budget at the end of June. The British media were incensed about proposals for new ‘EU taxes’, a planned nominal rise in EU budget spending at a time of austerity and alleged threats to the British rebate. However, rather than focusing on the British net balance, the Cameron government should make a strong and constructive case for thorough budget reform. The Commission’s proposals are a missed opportunity.
In a joint letter from last December, the British, German, French, Dutch and Finnish governments demanded that the next ‘Multiannual Financial Framework’ (MFF) for 2014-20 should keep total EU spending at 2013 levels in real terms. The European Parliament hit back in June 2011, demanding a budget increase of at least 5 per cent. The Commission’s proposal states, somewhat lamely, that it has “sought to strike the right balance between ambition and realism” and suggests to cap spending at 1 per cent of EU GDP as in the past while moving (or keeping) some spending items outside the official budget framework. If only the ‘on budget’ spending is counted, the Commission’s proposals are in line with the five member states’ demands, but if the ‘off budget’ money is included the Commission has sided with the Parliament. At 2 per cent of total EU public spending, the EU budget is “stuck between being so small as to be economically irrelevant and big enough to harbour shock horror stories”, in the words of one former British negotiator (quotes are from a recent CER seminar on “Reworking the EU budget”).
However, it is not so much the overall size of the budget that matters but whether EU money is spent on political priorities in a way that adds value. The Commission’s proposals more or less perpetuate the budget priorities of the 2007-13 MFF. While this will please most member-states, it will hardly help the EU to address new challenges such as innovation and research, fighting climate change, dealing with the euro crisis and migration or helping the democratic and economic transition in Eastern Europe and Northern Africa.
The two biggest spending blocks in the 2014-20 MFF will remain the same: structural (or cohesion) funds for regional developments and the common agricultural policy (CAP), with both receiving around 36 per cent of total EU budget spending (although cohesion funds would for the first time be slightly bigger than the CAP).
In theory, cohesion policy is a good example of what European co-operation should be all about: redistributing income and wealth from richer parts of Europe to poorer parts. However, the structural funds are still allocated in a way that even regions in the richest member-states get money. Economists (and some Commission officials) have long advocated to focus cohesion money on the poorer member-states, perhaps those with a GDP of less than 90 per cent of the EU average. Instead, the rich countries insist that their budget contributions get ‘recycled’ via Brussels back to their own less advantaged regions. Many politicians claim that such transfers are needed for political legitimacy and fairness. Surely there are better ways to ensure that richer countries benefit from the EU budget, such as spending on innovation.
The Commission proposals are similarly timid when it comes to the CAP. Not only does spending so much EU money on farmers make little sense as the share of Europeans working the land continues to decline. But the CAP even fails on its own account: too much money now goes to the biggest land-owners. With food prices near all-time high, this EU budget would have been the perfect opportunity for radical CAP reform. “Even the Americans are reducing farm support”, explains one British food producer, “if we do not reform the CAP now, then when?”. The Commission should have proposed phasing out the ‘single farm payment’ (income support that goes to all farmers) while maintaining rural development spending. There should also be a gradual shift towards more national co-financing.
With a much-reduced CAP and re-focused cohesion funds, the EU budget could increasingly go towards issues that the EU declares a priority.
Climate change is one such priority. According to the Commission, EU expenditure for climate programmes will rise to at least 20 per cent of the total – but it gives no details on how it plans to achieve this. Rather than making aspirational statements, the Commission should have made concrete proposals.
Another area that should get more money is external affairs. Only
€100 billion are earmarked in the Commission’s proposal. Although the biggest increase is foreseen for neighbourhood policies, the money will not be enough for the EU to implement its ambitious new neighbourhood policy that it started drawing up in the wake of the Arab spring. Similarly, the €8.7 billion foreseen for dealing with migration is inadequate for a European immigration policy that would help to save the Schengen area of free movement.
The EU should also spend more on its economic priorities. Allocated amounts for R&D and innovation are supposed to rise from €55 billion in the last MFF to €80 billion in 2014-20. This is welcome but still inadequate for a continent whose future prosperity will depend on staying at the technological frontier. For the first time, the EU budget will contain a sizeable pot of money for infrastructure investments: the €40 billion of the new ‘connecting Europe facility’ are supposed to attract a multiple in public (for example from the European Investment Bank) and private investments (perhaps from pension funds) to improve European transport, energy and communications infrastructure. However, about half of the €40 billion will go to transport infrastructure – an area where waste has been a big problem in the past. The money would be better spent on information and communication technology in the EU’s less developed countries and on constructing an EU-wide energy market and preparing for the addition of large amounts of renewables to the European power sector.
Alas, the chances that the 27 EU governments will agree on radical budget reform before 2014 are slim. European budget talks are always heated but today’s political environment is particularly toxic. First, most EU nations are in the process of pushing through painful budget cuts at home and want the Commission to do the same (to its credit, the Commission suggests to cut its staff by 5 per cent but since administration accounts for only 6 per cent of total EU spending, this will be largely symbolic). Second, the Lisbon treaty has given the European Parliament new powers over the budget process, which – if recent moves are anything to go by – it will use to push for higher spending. “The European Parliament is full of spokespeople for individual policy interests whose demands will add up to more than the available budget money”, predicts one British journalist.
Third, the euro crisis has left many people in the richer EU countries opposed to any kind transfers to poorer countries. The grants earmarked for cohesion in the EU budget are peanuts compared with the loan guarantees in the rescue packages put together for Greece, Ireland and Portugal. Yet in the minds of many Europeans, these blend into one. In particular Germany, traditionally the ‘paymaster’ of Europe, will be in no mood to throw in extra billions to lubricate a compromise on the EU budget. Finally, with presidential elections due in France next year, the chances that Paris will move on CAP reform are slim. In London, meanwhile, Prime Minister Cameron will be under heavy pressure from his eurosceptic party base to retain the British rebate and keep budget spending low. A bilateral deal whereby France keeps its farm payments while Britain retains its rebates would allow for a compromise but spell the death knell for EU budget reform.
The Commission has added further fuel to the political fire by making some bold proposals for new ‘own resources’, EU jargon for money that the Union collects directly for the EU budget, for example from customs duties or sugar levies. The Commission now wants member-states to discuss whether the EU could raise money from a new VAT levy and from a financial transaction tax. A German diplomat calls the proposals simply “not acceptable” while a British one dismisses them as an “amusing distraction”. A financial transaction tax would impact heavily on the UK – disproportionately so in the view of the UK government. Since any new own resources need unanimity among the 27 governments, the chances of the Commission’s proposal making it into the new MFF are close to zero.
The Commission’s proposals succeed in trying to please as many political masters as possible. The price that Brussels has paid for this is an unambitious, backward looking budget package. A European Union that must deal with a public finance crisis, an unstable neighbourhood, diminishing legitimacy and declining global competitiveness must do better. And David Cameron should provide the leadership. France has a presidential election in 2012, and Germany a federal election in 2013, so President Sarkozy and Chancellor Merkel are boxed in by the demands of electioneering. UK foreign secretary William Hague – no fan of Brussels – has said that the EU should do more to control climate change. So the British government should argue that significantly more should be spent on climate control, and significantly less on the CAP, and that if genuine budget reform is on the table, the UK rebate is up for re-negotiation.
Stephen Tindale is an associate fellow at the Centre for European Reform.
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