The debate on the EU budget after 2013 gets underway

A draft Commission communication on reform of the EU budget has been widely leaked yesterday. The full communication is expected to be published next month in response to the consultation exercise on the EU budget which was mandated as part of the Inter-Institutional Agreement in May 2006 on the EU medium-term financial framework (MFF) for the 2007-2013 period. It is not, in itself, a proposal for the next MFF to start in 2014 which will be the prerogative of the new Commission when it takes up office at the start of next year, and which will not be presented until the first half of 2011. Nonetheless, the forthcoming communication sets out the choices facing Member States as they prepare for these negotiations in a clear fashion.

I discussed some of these choices in my paper to the recent ESRI/FFS Annual Budget Perspectives conference. On the expenditure side, the make-up of EU budget expenditure in 2013 will be roughly one-third for CAP income and market support measures, one third for cohesion policy, and one-third for everything else – rural development, research and external actions being the most important.

There is broad support for shifting the composition of budget expenditure towards meeting some of the global challenges facing the EU, including addressing issues of energy security, climate change, competitiveness, migration and projecting a more ambitious global European presence. The key principle is that budget spending should only be undertaken where it can be shown that there is a clear European value added over national spending.

However, given that all Member States will face severe public finance constraints as they enter the budget negotiations, there is little likelihood that the overall EU budget will be increased in percentage terms. The leaked communication makes clear that the money will be found by reducing the share of EU spending on farm income and market support where the rationale for European funding is hard to find. It suggests that overall spending on agricultural support could be maintained through co-financing by Member States (at present, all income and market price support payments are 100% funded by the EU budget).

Ireland needs to debate now its expenditure priorities for the next MFF. Ireland will be a net contributor to the EU budget during the next MFF period, although the country will probably continue to be a net recipient of EU funds under the agricultural budget heading. This creates an unfortunate bias in our negotiating strategy. Although Ireland might benefit more, for example, from a well-designed EU research programme or energy security policy, a narrow focus on minimising our net transfer to the EU budget in the next MFF will encourage our negotiators to seek to maximise the agricultural share of the budget. Indeed, this bias is not unique to Ireland but influences all Member States in their approach to the budget negotiations.

In my ESRI conference paper, I noted the proposal floated by some economists to formally separate the allocation decisions in the budget framework from their impact on a Member States’ net budget transfers. The proposal is based on acknowledging that Member States (or, at least, their Finance Ministries) do care about their net balance positions. For the Commission and European Parliament, this is heresy because it seems to formalise the juste retour principle which they see as anathema to the European principle.

In fact, the proposal is designed to do precisely the opposite, it wants to remove the principle of national self-interest from the negotiations on the EU budget. Unless this proposal or something similar is adopted, the budget negotiations in 2011 and 2012 will degenerate into an unseemly haggling over net budget balances with the huge risk that the next EU budget framework will continue much of the status quo. This would be a tragedy both for the EU and for Ireland.

4 thoughts on “The debate on the EU budget after 2013 gets underway”

  1. Anyone here know why Irish banks have lost 30% of their market cap in three days, or why this doesn’t seem to be making news?

  2. @Kieran

    I can only quote what RTE say:

    “Dublin’s ISEQ index of Irish shares closed down more than 6.5% this evening, with the two main banks suffering heavy losses. Traders said this was partly due to worries that the launch of the National Asset Management Agency could take several more weeks, leaving Bank of Ireland with not enough time to raise new capital this year.”

    Another triumph for IrishEconomy.ie.

  3. We seem to have been NAMAised, once again, on this thread. The point of my previous post is that the CAP defence lobby seems to be limbering up while there is little evidence of similar support for the budget allocation needed to support increased EU cohesion both internally and in its international activities. This does not augur well for the achievement of a sensible outcome to the budgetary process.

    Ironically, the calls for non-CAP spending are likely to be particularly strident in the areas of climate change and energy security. The EU has allowed itself to be suckered (for the first time) into providing investment funding in this area in the European Energy Programme for Recovery (EERP) – as part of its fiscal response to the global downturn. This is an area where an appropriate mix of competition, regulation and taxation policy could deliver the necessary private sector investment, but the Commission has lost the plot on the programme to complete the internal markets in electricity and gas. EU funding (combined with national co-funding) is likely to crowd-out this investment and lead to sub-optimal otucomes. In addition, allocating extra funding to this area will reduce the allocation to other areas that have a genuine, and beneficial, EU dimension and that might not be realised by national government or private sector involvement.

    I suppose it was ever thus…

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