EU budget debate: Some one trillion euro questions and answers

The negotiations over the future EU budget for 2014-20 are well underway now, often being described under the epitaph 'EU budget battle'.

We tolerate no blood-letting on the pages of Bankwatch Mail. So Keti Medarova-Bergstrom, Senior Policy Analyst at the Institute for European Environmental Policy, and Pawel Swidlicki, Research Analyst at Open Europe, instead put their heads together to identify why and where EU budgetary spending has got it wrong in the past and propose how roughly one trillion euros can better serve Europe's environment, economy and people in the next funding period.

European decision-makers – lay down your budget weapons and listen!

This article is from Issue 53 of our quarterly newsletter Bankwatch Mail

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Keti Medarova-Bergstrom

Europe’s future challenges are very different from when the EU budget was first created. They include globalisation, climate change and an aging society as well as the ongoing economic and debt crises. Most of this agenda is not sufficiently reflected in the EU budget. The preoccupation with the scale of the EU’s resources continues to overshadow more important discussions on substance, resulting in only incremental changes.

The central question for the EU budget is spending it in the right way on the real priorities. The budget simply hasn’t kept pace with the changing needs of Europe and now the goal is re-alignment. There is a lot to play for.

Of course size matters too but a compromise on this is a political certainty, and the protracted and self-interested rows can distract from the substance. This discussion needs to be led by a focus on areas of outstanding EU 'added value', where the EU can complement national expenditure. Areas of longer-term strategic relevance, such as research, innovation and infrastructure are key. Without a well-managed, better targeted and quality-focused EU budget many of the EU’s objectives will not be achieved.

Now there is a historic opportunity to set the EU on a path to a low carbon and resource efficient economy – building recovery on a longer term vision. This requires investment in appropriate infrastructure, including cross border measures, on energy supply and conservation, on training and human capital, innovation and research.

There are enormous investment requirements in improved electrical transmission and renewable energy on their own, some identified in the chronically under-funded SET plan. There is a growing body of evidence that indicates that investing in climate and resource intelligent measures can deliver multiple benefits for different policy areas, including security of energy supply.

Climate change is real and the impacts are already unfolding. Any expenditure that is not climate-proofed runs the risk of wasting scarce public money. The EU is in a good position to assist member states with stepping up action to promote 'win-win' solutions and ensure better targeting of spending that delivers genuine EU added value. This requires the underlying logic for intervention to be revisited thoroughly, and more stringent criteria adopted for priority-setting in each of the different funding mechanisms.

Currently, though, such a debate is not happening and the risk of perpetuating business as usual is increasing.

A second and necessary step would be to embed certain safeguards and procedural requirements in the future EU budget. More weight needs to be put on ex-ante conditionality, effective monitoring and securing the desired outcomes; with less weight on an ex-post control system. Such a move would promote better performance and quality of spending.

The EU is facing complex, interlinked problems, that require knowledge-intensive governance. Blindly cutting back 'administrative burden' can lead to higher overall inefficiencies in decision-making. In many cases the EU is in a comparatively better position to handle certain policies, including the single market, aviation, strategic rail, food safety etc than the sum of national authorities acting individually. Appropriate EU action can be cost-saving for member states, rather than cost-increasing. Therefore, possible administrative ‘costs’ should be seen as ‘investment’ in improving the implementation and result-orientation of future spending.

A focus on results means accepting some well-considered administration, not necessarily freeing the member states to spend as they wish.

Pawel Swidlicki

I agree with you that the EU budget fails to reflect the ways in which the world has changed since the EU was first established, with the bloated and inefficient Common Agricultural Policy probably the best example of this. It is vital that the debate on its substance – well represented in academic, business and journalistic circles – is finally properly reflected at the EU policy-making level.

Unfortunately, due to the number of vested interests dependent on EU spending and the EU institutions’ (and some member states') bias towards the status quo – partially driven by fear that reform would undermine their competencies – means that this is a real struggle.

However, I think that the size of the budget is just as important as its substance, not least at a time when national budgets are under unprecedented strain. In the Eurozone in particular, tough austerity packages are being imposed at the behest of the Commission, which then perversely demands an increase in its own budget. This is unsustainable not only financially, but also politically, especially given that there is ample scope for savings at the EU level.

You mention re-aligning the EU budget with Europe’s priorities and ensuring that spending delivers ‘EU added value’, both of which I wholeheartedly agree with, but this must also include a critical examination of what these terms mean. For example, while there is a benefit to pooling EU expertise and spending on innovation, research and development – an area of the budget that should be increased – there is no benefit to having the EU involved in regional development in all EU member states. It makes sense for the EU to assist infrastructure in the new member states, but there is no reason for regions in countries like the UK, Sweden and Luxembourg to send their tax revenues to Brussels only to receive it back with strings attached.

You mention the large scale energy and infrastructure projects that Europe will need in the future and undoubtedly there is a role for the EU to play in terms of funding and coordinating niche research projects, and also in terms of facilitating the exchange of best practices. However, I’d be very wary of locking policy objectives and funding at the EU level for two reasons.

First, the EU’s track record in delivering such large-scale projects is very poor, with its global navigation satellite system (Galileo) and Thermonuclear Experimental Reactor projects experiencing significant delays and/or cost overruns. Second, locking energy policy at the EU level leaves little scope for member states to adjust their own national responses to climate change and energy provision – a crucial policy area – if they feel this is necessary.

In terms of better safeguards, more effective monitoring and ex-ante conditionality, these are all welcome goals, as under the current system responsibility falls into a black hole somewhere between the EU and national governments to the detriment of taxpayers.

Every item of EU expenditure needs to be scrutinised to determine whether it delivers added value. The priority is of course the ‘big ticket’ items such as the agricultural subsidies and the structural funds, both of which need to be radically slimmed down and refocused. But many of the smaller items – the European Parliament’s ‘communications’ budget to take but one example – also need to be looked at to show that the EU budget cannot remain untouched by the world evolving around it.

Keti Medarova-Bergstrom

I agree that the size of the EU budget is indeed a very important issue, especially in the current context of austerity and debt crises; at a political level, unfortunately, this discussion usually comes at the cost of a healthy discussion on priorities and substance.

Both of us argue that ‘EU added value’ is a critical criterion that should guide future spending. However, the problem is that there is no common agreement or definition of what this actually means in practice. In fact, one of the problems is that the various Commission proposals on the post-2013 EU funding instruments interpret EU added value in different ways. Often this concept is used to justify current patterns of spending rather than introducing a yardstick for a serious approach to re-focusing and priority-setting. This points to the need for more operational criteria for what is meant by EU added value. Such an exercise would be valuable, even at this stage.

Let’s take the issue of climate change and energy. You argue that action on climate change and energy should not be locked in to the EU level. There is indeed a rationale for national intervention in a wide variety of fields and circumstances, for example bottom up climate adaptation responses are likely to be more effective if they are tailored to specific local conditions, needs and institutions.

However, we have now committed to joint EU action in several important areas, including a combined effort to meet mitigation targets. This makes sense within a single market where competitiveness considerations inhibit governments from acting alone. EU level action will deliver higher added value and potential savings in many spheres, for example promoting low-carbon infrastructures, particularly across borders and/or kick starting riskier innovations which are likely to be underfunded by national governments alone or by the private sector.

Further to this, of course there is a lot of EU spending which is not only inefficient but also inherently in contradiction with EU policy objectives. For example, supporting carbon intensive developments (eg, fossil fuels extraction or road based transportation) can be in conflict with long term climate and decarbonisation objectives.

EU added value, therefore, should be understood not only in relation to better alignment of spending to EU objectives but also by ensuring greater policy coherence.

You mention implementation delays and mismanaged projects. Unfortunately, these are not limited only to EU projects and I have never suggested additional large-scale Euro projects, simply a more forward looking approach to national investment receiving EU support. While I would not argue for inflating administrative budgets, I stress that investing in soft measures such as new skills, training, improving the knowledge base and governance tools are vital as they can improve implementation and reap efficiency benefits in the long-term.

Pawel Swidlicki

It is often said that EU politics exists in its own unique bubble removed from the real world, and unfortunately the negotiations over the EU budget – both the 2013 annual budget and the 2014-2020 financial framework – are in danger of lending credence to this claim.

Given the spiralling debt crisis and the resulting austerity and reform packages implemented in member states, there could not be a better or more appropriate time for the EU institutions and member states to take radical and innovative action on the budget – both in terms of size and substance – and I'm pleased that this is something we both agree on.

Alongside the high-level political discussion which needs to occur, EU and national civil servants need to simultaneously look critically at current spending priorities in order to determine where they have helped to stimulate jobs and growth, where they have had no overall effect and where they have been actively harmful. This exercise would hopefully go some way to identifying the currently nebulous concept of 'EU added value'. For example, as I said in my first response, there is added value in funding infrastructure schemes – including in the low carbon sector – in the new member states which could not otherwise be delivered, but less so in wealthier member states.

Indeed, our research has found that in the most crisis affected countries , and Spain in particular, EU funding contributed to the overheating of the construction sector by flooding it with extra money, with the country still struggling to clean up the mess from the resulting financial bubble. Across Europe many projects have been funded via the EU budget which are now under-utilised or abandoned altogether, including a new airport in Spain. Such projects were funded more due to the fact that there was money available, and less due to the existence of a genuine economic need.

The crisis affected countries in particular need more flexible and more targeted EU funding instruments than what the structural funds can offer, especially in terms of restricting their labour markets. Yet this has barely been reflected in the Commission's proposals.

Instead, the prevailing school of thought seems to be that the mere act of spending money will somehow deliver jobs and growth, ignoring the very different records that EU funding has had across member states and even across regions within member states.

I agree that in some areas there is also a coherence gap between EU policy and EU spending, such as between supporting carbon intensive developments while also funding – and legislating for – low carbon alternatives. Another good example is the EU funding anti-smoking health campaigns while at the same time providing subsidies to tobacco farmers. Many of these instances are the result of effective lobbying and special pleading by vested interests, and it is an area where the European Parliament really needs to step up its game.

On a final note, while I also agree with you on the need to invest in skills, training and innovation, a parallel review must take place into EU regulations – not least in the area of social and employment law – to ensure that EU funding and EU policies work in tandem and do not serve to undermine one another as is sometimes the case.

Keti Medarova-Bergstrom

Indeed, there is evidence showing several cases where there has been a big pot of money available for the wrong things. But let's not forget that more than 80 per cent of the EU budget is managed at national and regional levels. Decisions on spending priorities under two of the main segments of the budget, Cohesion Policy and Rural Development, are not made in Brussels but mainly in national capitals.

Theoretically, a more place-based agenda should be pursued where development opportunities, built on robust assessments, capitalise on local assets and develop indigenous potentials. Often, however, decision-makers, especially at lower levels of governance, tend to opt for solutions and traditional infrastructure projects, based on inflated traffic forecasts and poor cost-benefit analyses. Your example from Spain is an excellent illustration of this. Once again, this points to the need for greater EU level coordination of spending with a reinforced use of ex-ante conditionalities geared towards improved results. Blindly cutting back on EU administrative capacities therefore would not be helpful.

'Additionality' of EU spending is also key. In other words, funds should only be used to address existing market failures, deliver public goods and complement existing national/private funding, rather than crowding it out.

One option to address this is to strengthen the ex-ante assessment of investment needs in order to maximise the benefits of EU spending. Another helpful development would be to move towards the greater application of financial instruments (eg, loans, guarantees and equity) compared to traditional grant-based support. Arguably, due to their revolving nature, financial instruments could incentivise better quality projects, mobilise additional public/private capital and reinvest the profits/revenues in new projects. If properly designed and with associated risks being well managed, financial instruments could offer better value for money in certain instances.

It is interesting that we both agree on a number of fundamental issues even though we come from different perspectives. We both point to the urgent need for genuine reform of the EU budget. Similar aspirations accompanied the 2007 EU Budget Review process that was originally initiated as a 'no taboo' process aimed at revisiting every element of EU spending. The mood and good intentions however have changed over time. As demonstrated at the last General Affairs Council that took place on 24 September in Brussels, member states are as divided as ever on their positions regarding the future MFF. Regrettably, this could produce close to a zero-sum game for the European economy, citizens and the environment.

In conclusion, even though it is small in size compared to national budgets, the EU budget remains a critical tool that should be used to facilitate competitive and greener development pathways in Europe. Now is the time to be bold, the time for EU leaders to make firm commitments on EU spending priorities with at least 20 per cent of the overall MFF concentrated on low carbon and climate resilient developments. In the current economic context, the stakes are simply too high to revert to a business-as-usual approach yet again.

Pawel Swidlicki

You are correct to point out that many of the actual spending decisions are made at the national and local level, but in fact the truth is slightly more complex because the money comes from Brussels with various strings attached.

While some of these are necessary, for example to counteract fraud, many restrict what national authorities and member states can spend their own taxpayers' money on. For example, we found that in the UK's Cornwall region EU funds could not be used to assist the niche food sector even though this was an industry with huge growth potential in an economically disadvantaged area. I would argue this requires less EU co-ordination and more scope for wealthy member states – while still contributing to the common pot – to be able to finance and execute their own regional development policies.

Another problem at present is the lack of clarity where responsibility lies for spending decisions, with accountability all too often disappearing into a black hole somewhere between Brussels and national capitals. The most extreme manifestation of this are some of the absurd projects financed with EU cash, such as the ski slope built on Bornholm, a flat and temperate Danish island. When the media highlighted the case, both EU and Danish officials blamed each other for the lack of appropriate scrutiny. While similar examples of waste and poor decision-making can of course be found in national spending, at least it is easier to exercise more control and scrutiny over the latter.

We both agree that 'additionally' is an important criterion, especially in the context of delivering public goods. This is why we have proposed a radical transformation of the CAP from a vehicle for delivering billions of euros in subsidies to farmers, landowners and organisations – many of them already very wealthy – to an EU-wide system where funding is premised on the ability to deliver environmental benefits such as biodiversity. This could be delivered at the same time as cutting the cost of a policy area that is wildly out of sync with the social and economic realities of 21st century Europe.

I would also agree with a greater role for ex-ante and ex-post conditionality, albeit it with the caveat that this would be most effective in combination with more simplified objectives. At the moment EU funds suffer from a range of objectives, some of which, as you also pointed out earlier, can be in direct conflict with one another. In this context your proposal for diversifying funding instruments away from only using grants is interesting and deserves to be explored in greater depth.

A quick point regarding EU spending on 'administration' – of course this should not be cut back blindly. Yet while also enabling the essential functioning of EU institutions, far too much spending under this heading is directed towards dubious vanity projects. While the overall sums may be small in the context of the overall budgets, we are still talking about millions of euros at a time when member states are cutting back essential services, something which is politically unsustainable.

In conclusion, I think it is possible to have an EU budget that is smaller, and yet delivers far better value for European citizens, businesses and the environment. It is encouraging that despite coming from different perspectives and not agreeing on all the details, we agree that the status quo of the EU budget is unacceptable and that it is time for radical action.

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