european union budget reform ||

European Union Budget ReformInstitutions, Policy and Economic CrisisG. Benedetto; S. MilioISBN: 9781137004987DOI: 10.1057/9781137004987Palgrave Macmillan

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European Union BudgetReform

Institutions, Policy and Economic Crisis

Giacomo BenedettoSimona Milio

European Union Budget Reform

10.1057/9781137004987 - European Union Budget Reform, Edited by Giacomo Benedetto and Simona Milio

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Also by Simona Milio

FROM POLICY TO IMPLEMENTATION IN THE EUROPEAN UNION: The Challenge of Multilevel Governance System


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European Union Budget ReformInstitutions, Policy and Economic Crisis

Edited by

Giacomo BenedettoDirector of European Studies and Lecturer in Politics, Department of Politics and International Relations, Royal Holloway, University of London, UK

Simona MilioAssociate Director, Social and Cohesion Policy Unit, London School of Economics and Political Science, UK


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Editorial matter, selection and conclusion © Giacomo Benedetto and Simona Milio 2012All remaining chapters © respective authors 2012Foreword © Stephen Wall 2012

All rights reserved. No reproduction, copy or transmission of thispublication may be made without written permission.

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Contents

List of Figures viii

List of Tables ix

Foreword by Sir Stephen Wall x

Preface xii

Acknowledgements xiv

Notes on Contributors xv

List of Abbreviations xviii

1 Introduction: A History of the European Union Budget and the Possibilities for Reform 1

Giacomo Benedetto1.1 History of the budget 41.2 Thinking on budgetary reform 81.3 Structure of the volume 15

Part I The Politics of Budget Reform

2 Negotiations of the European Union Budget: How Decision Processes Constrain Policy Ambitions 23

Sara Hagemann2.1 Checks and balances 242.2 European Union public spending – on what? 282.3 The rules of the game 342.4 Concluding remarks 36

3 Budget Reform and the Lisbon Treaty 40 Giacomo Benedetto

3.1 Decision-making in the European Union 423.2 Changing financial powers under the Lisbon Treaty 433.3 Discussion and concluding remarks 55

v


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vi Contents

4 European Growth Policies in Times of Change: Budget Reform, Economic Crisis and Policy Entrepreneurship 59

Robert Kaiser and Heiko Prange-Gstöhl4.1 Shaping the European Union budget for growth

policies in times of crisis 594.2 Policy entrepreneurship in times of economic crisis 634.3 European growth policies in times of crisis at

European Union and national levels 664.4 Policy entrepreneurship and strategic choices 754.5 Concluding remarks 76

5 The Lisbon Treaty, the Financial Crisis and Exit from Budget Gridlock 79

Charles B. Blankart and Gerrit B. Koester5.1 Budget deadlock and the Lisbon Treaty 815.2 A way out of the budget deadlock based on the

Lisbon Treaty 855.3 The financial crisis and the European Union budget 885.4 Concluding remarks 95

Part II Public Spending and Budget Reform

6 Reform of the European Union Budget: Implications for the Common Agricultural Policy 103

Alan Greer6.1 How much? On what? 1046.2 Why? What is the Common Agricultural Policy for? 1096.3 The Lisbon Treaty, CAP reform and the budget

post-2013 1126.4 Concluding remarks 119

7 Challenges for the Future of the Structural Funds 122 Simona Milio

7.1 Cohesion and the size of the budget 1257.2 Cohesion Policy, 1988–2006 1297.3 Cohesion Policy, 2007–13: challenges

and shortcomings 1337.4 Recommendations for the Multiannual Financial

Framework, 2014–20 1427.5 Concluding remarks 147


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Contents vii

8 Foreign and Security Policy in Austerity Europe: Budgetary Aspects of the Development of the Common Foreign and Security Policy and Common Security and Defence Policy 151

Alister Miskimmon8.1 The evolution of the European Union as an

international actor 1548.2 The impact of the budget review 1568.3 Developing the Common Security and

Defence Policy 1638.4 National security and defence policy cooperation 1658.5 Concluding remarks 168

9 Conclusion: Budget Policy, Past Experience and the Future 171

Giacomo Benedetto and Simona Milio9.1 Policy implications for the Multiannual Financial

Framework 1729.2 Review and previous experience of budgetary

agreements 1779.3 Future reform 1869.4 Possible consequences of the reform 189

Bibliography 193

Index 207


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Figures

2.1 The domestic preference aggregation process prior to EU-level budget negotiations 26

3.1 The Budgetary Procedure of 1975 483.2 The Budgetary Procedure of the Lisbon Treaty 495.1 Development of the EU budget by policy area 807.1 Evolution of expenditure in Cohesion Policy

and Common Agricultural Policy 126

viii


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Tables

3.1 Effect of the Lisbon Treaty (Article 312 TFEU) on powers of reform over the Multiannual Financial Framework 47

3.2 Effect of the Lisbon Treaty (Articles 314–15 TFEU) on the use of powers of budgetary reform on the annual budget and provisional twelfths 50

3.3 Effect of the Lisbon Treaty (Articles 317–25 TFEU) on the reform potential of the rules on implementation and audit 52

3.4 How the Lisbon Treaty facilitates reform or reinforces the status quo 53

5.1 Votes of net receiver states and net payer states in the Council under the rules of the Treaty of Nice 2004–13, EU27 82

5.2 Votes of net receiver states and net payer states in the Council under the Lisbon Treaty, EU27 84

5.3 Level of EU own resources and payment appropriations, 2007–13 91

6.1 Agriculture and rural development budget, 2010 1067.1 Overview of the Financial Perspective, 2007–13 1287.2 Overview of the new Multiannual Financial Framework,

2014–20 1297.3 Structural Fund Contributions 1989–93, 1994–9,

2000–6, 2007–13 1307.4 European Union allocation, 1989–2006 1317.5 Division of funds allocation, 1989–2006 1327.6 List of regions with GDP per capita below

75 per cent of EU average 1367.7 Cohesion Policy, 2007–13 1387.8 Percentage of Structural Fund Expenditure – EU

Objective 1 1417.9 Total proposed commitment ceilings 2014–20 – Cohesion

Policy 1429.1 Spending across frameworks, 2000–13 and Commission

proposal, 2014–20 180

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Foreword

‘Money is the root of all progress’, or so my former boss, Foreign Secretary and erstwhile British Chancellor, Geoffrey Howe, used to say when I worked for him in the late 1980s. And it is true, as the authors of this authoritative and imaginative book say, that without its budget the EU would be little more than a free trade zone.

The EU’s budget is small in relative terms but it is one of the great-est sources of dispute within the Union and the one where an unre-solved argument about the nature and purpose of the whole project still bubbles angrily away.

Because of the EU’s history and genesis, agriculture still takes a dis-proportionate share of spending, foreign policy a tiny one. Defence tasks done in the name of, and with the approval of, all the member states are financed by the individual countries, which take on the burden and the risk. The British treat their rebate as a totemic sym-bol of fidelity to the legacy of Margaret Thatcher, forgetting that it was she who said that it should last only for as long as the problem of Britain’s inequitable net contribution lasted. Other member states make their own hard-headed calculations asking, not what they can give to Europe but what Europe gives, or does not give, to them. Disaffection with the European Union has grown in some member states as they have moved from being net beneficiaries to net con-tributors to the budget.

The authors make a powerful case for reform and offer solutions. But the budget argument is a microcosm of a much bigger issue. The federal union that Monnet envisaged seemed, long before the British joined, a lost cause. Almost all the EU’s member governments paid lip service to it but, as the conception and execution of the Maastricht Treaty showed, the future members of the euro zone funked the issue when the British opt-out gave them a free hand to design a true pol-itical union. They built a largely inter-governmental arrangement which explicitly ruled out fiscal transfers between rich and poor.

Solidarity between the member states of the EU has been more than a slogan, even if imperfectly executed through the Union’s

x


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Foreword xi

policies and through the Structural Funds. Now, in the crisis facing Europe, it finds its greatest test. Unless economic and fiscal discip-line are also accompanied by the evolution of a transfer union, in which the rich countries give to the poor then, with the erosion of cohesion, will come the dissolution of coherence and relevance. If we want to build a stepping-stone and not a stumbling block then budgetary reform is one essential step.

Stephen WallLondon, February 2012


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Preface

The European Union is the world’s largest single market consisting of half-a-billion citizens and consumers. Its political institutions exercise executive, legislative and judicial power over that market but the EU’s budget is fixed at little more than 1 per cent of the collective gross national income of its member states. While 98 per cent of public money in European Union member states is spent at national, regional or local level, approximately 2 per cent is spent from the European Union’s budget. Use of this limited budget for the purpose of added value has always been contentious. This volume looks at how some of that money is spent and how reform of the budget might proceed. It concludes that the prospects for fundamen-tal change of the budget for the period starting in 2014 are weak.

A tension between (richer) contributing member states and (poorer) recipient member states has always characterised the history of the budget of the European Union. Since the establishment of the Common Agricultural Policy, the European Union and its predeces-sor, the European Economic Community, have engaged in budgetary expansion to meet certain ends. The net contributors accepted this expansion for reasons that included cost effective added value and the guarantee of more efficient economic integration, although the tension remained. Alongside these traditional tensions, newer ones have emerged. The first is the effect of the European Union’s enlarge-ments to Central and Eastern Europe of 2004–7, which has increased the number of states both with a potential power to block budget decisions and (being poorer) with a greater demand on redistribu-tion. The global economic and euro zone crises since 2008 constitute a second tension. The economic crisis created demand for continued redistribution and for investment in the public goods of economic innovation, for example via an increase in funds for research and development. These demands are faced by counter demands in many quarters for the practice of national austerity to be applied at the European level. Third, contributor member states have also become reluctant to continue providing finance due to problems with the absorption capacity of redistribution in the poorer member states.

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Preface xiii

Fourth, the Lisbon Treaty actually reinforces the power to block agreement on fundamental change in the budget.

The volume is the product of two workshops on European Union budget reform. The first was held in February 2009 at Royal Holloway, University of London, on the subject of the European Union budget review of 2008–9. Most of the chapters began life as papers for that meeting. The papers at that time analysed the process of budget review in a context that was still largely free from the effect of the economic crises that had commenced during the previous autumn. A second workshop held at the London School of Economics in June 2010 addressed the more recent implications of the ratification of the Lisbon Treaty and the negotiations for the next Multiannual Financial Framework of the European Union for the years 2014 to 2020.


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Acknowledgements

This publication would not have been possible without the help of various individuals and institutions. These include firstly Amber Stone-Galilee, Senior Commissioning Editor in Politics, and Liz Holwell, Assistant Editor in Politics, at Palgrave Macmillan.

We are particularly grateful to the European Commission’s London office and to Royal Holloway, University of London for each having co-funded our initial workshop of February 2009 on the EU budget review of 2008–09 (ref: COMM/LON/2008/01). We also acknowledge the generosity of the European Institute at the London School of Economics, with particular regard to the encouragement of Damian Chalmers, for having made possible our second workshop of June 2010. Thanks are also due to Albena Kuyumdzhieva, Ana-Iuliana Postu, Annie Pym and Nora Siklodi at Royal Holloway.

We are grateful to the following colleagues for their feedback in response to our papers at those two workshops: Robert Ackrill, Martyn Bond, Vasco Cal, Brendan Donnelly, Simon Hix, Dermot Hodson, Jim Rollo and Fiona Wishlade.

Finally, our thanks go to each of the contributors to this volume: Charles Blankart, Alan Greer, Sara Hagemann, Robert Kaiser, Gerrit Koester, Alister Miskimmon and Heiko Prange-Gstöhl.

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Contributors

Giacomo Benedetto is Director of European Studies and Lecturer in Politics at Royal Holloway, University of London. His areas of research include the EU budget, EU decision-making and parliamen-tary politics. He has published in these areas and on party-based Euroscepticism in Comparative Political Studies, Journal of Common Market Studies, Journal of European Public Policy, Party Politics and the Review of International Organizations.

Charles B. Blankart is Senior Professor at Humboldt-University, Berlin and Permanent Guest Professor at the University of Lucerne. His research interests are in public finance and public choice. Two of his recent publications are Blankart, C. B. and Margaf, S. (2011) ‘Taxing Expats. Instrumental versus Expressive Voting Compared’, Swiss Journal of Economics and Statistics 147(4): 461–78 and Blankart, C. B. (2011) ‘An Economic Theory of Switzerland’, CESifo Dice Report, Journal for Institutional Comparisons 9(3): 74–82.

Alan Greer is Reader in Politics and Public Policy at the University of the West of England, Bristol, UK. His main research interests are in the field of public policy analysis and governance, especially relat-ing to agriculture, food and climate change. His publications in this area include Agricultural Policy in Europe (2005) and ‘Agricultural Policy’, in Michael Woods (ed.) New Labour’s Countryside: Rural Policy in Britain since 1997 (2008).

Sara Hagemann is Lecturer in EU Politics at the London School of Economics. Her research interests include negotiations in domes-tic and international political institutions, parliamentary politics, transparency in political systems, and EU governance and policy-making. She has published in academic journals such as European Union Politics, Journal of Common Market Studies and Journal of European Public Policy, as well as in a number of books and volumes edited by leading academics.

Robert Kaiser is Acting Chair of Political Science at the University of Siegen, Germany. He holds a doctoral degree from the University

xv


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xvi Notes on Contributors

of Duesseldorf and a post-doctoral degree (Habilitation) from the University of Munich. His research is focused on comparative politics, innovation and industrial policies as well as on processes of Europeanisation. Recent publications include: ‘The Organization of Policy Coordination in Multi-level Spaces: Implications for EU International S&T Policy’, in Prange-Gstöhl, H. (ed.) (2010) International Science and Technology Cooperation in a Globalized World. The External Dimension of the European Research Area; with Prange-Gstöhl, H. (2010) ‘A Paradigm Shift in European R&D Policy? The EU Budget Review and the Economic Crisis’, Science and Public Policy, 37(4): 253–65; and Le budget européen à l’heure de la crise. Positions alle-mandes relatives au CFP 2014–2020, Note du Cerfa 89, Institut français des relations internationales, Paris, October 2011.

Gerrit B. Koester works in the economics department of Deutsche Bundesbank. His research focuses on public finance, public choice and fiscal policy. Recent publications include ‘The Impact of Fiscal Policy on Economic Activity Over the Business Cycle – Evidence from a Threshold VAR Analysis’ with Anja Baum, Deutsche Bundesbank Discussion Paper: Economic Studies No 03/2011 and ‘Does Wagner’s Law Ruin the Sustainability of Public Finances in Germany?’ with Christoph Priesmeier, Deutsche Bundesbank Discussion Paper: Economic Studies No 08/2012.

Simona Milio holds a PhD in European Studies from the London School of Economics, where she is Associate Director of the Social and Cohesion Policy Unit. She has recently published a book, From Policy to Implementation in the European Union: The Challenge of Multilevel Governance System. On this topic she has published in West European Politics and Regional Studies. She has also authored several evaluation reports for the European Commission and the Italian government on cohesion policy implementation.

Alister Miskimmon is Senior Lecturer in European Politics and International Relations at Royal Holloway, University of London, where he directs the Centre for European Politics. His research inter-ests include the foreign and security policy of the European Union, German foreign policy and strategic narrative in international affairs. Recent publications include (with Simon Green and Dan Hough) (2011) The Politics of the New Germany and ‘The Common


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Notes on Contributors xvii

Foreign and Security Policy of the European Union’, in D. Bailey and U. Wunderlich (eds) (2010) The Handbook of European Union and Global Governance, 121–30.

Heiko Prange-Gstöhl is a policy officer at the European Commission’s Directorate-General for Research and Innovation, Brussels. Before joining the Commission in October 2004 he was, inter alia, a senior researcher in international comparative politics at the Technical University (TU) Munich and guest lecturer in International Political Economy at Humboldt-University Berlin. He holds a degree in Economics from the University of Bremen, a PhD in Political Science from the Martin-Luther-University Halle-Wittenberg and a post-PhD degree (Habilitation) in Political Science from the TU Munich. Recent publications include International Science and Technology Cooperation in a Globalized World: The External Dimension of the European Research Area as editor (2010), and with Robert Kaiser (2010) ‘A Paradigm Shift in European R&D Policy? The EU Budget Review and the Economic Crisis’, Science and Public Policy 37(4): 253–65.

Sir Stephen Wall is former British Ambassador to the EU and author of the Official History of Britain and the European Community, 1963–1975.


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Abbreviations

BoP Balance of PaymentsCAP Common Agricultural PolicyCFSP Common Foreign and Security PolicyCOMAGRI European Parliament Agriculture and Rural Development

CommitteeCSDP Common Security and Defence PolicyDG AGRI European Commission Directorate-General for

Agriculture and Rural DevelopmentEAGGF European Agricultural Guidance and Guarantee FundECFR European Council on Foreign RelationsEEAS European External Action ServiceEFSM European Financial Stability MechanismEIB European Investment BankEP European ParliamentEPC European Political CooperationERDF European Regional Development FundESDP European Security and Defence PolicyESF European Social FundEU European UnionEU15 The EU of 15 Member StatesEU27 The EU of 27 Member StatesFIFG Financial Instrument for Fisheries GuidanceFP7 Seventh Framework Programme for research,

technological development and demonstration activities

GDP Gross Domestic ProductGNI Gross National IncomeMEP Member of the European ParliamentMFF Multiannual Financial FrameworkNATO North Atlantic Treaty OrganisationOECD Organisation for Economic Cooperation and

DevelopmentOLAF Office de lutte anti-fraude (EU Anti-Fraud Office)PPP Public–Private Partnership

xviii


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List of Abbreviations xix

QMV Qualified Majority VotingR&D Research and DevelopmentSAPS Single Area Payment SchemeSPS Single Payment SchemeTEC Treaty establishing the European CommunitiesTEU Treaty on European UnionTFEU Treaty on the Functioning of the European UnionUK United KingdomVAT Value Added Tax


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1

1Introduction: A History of the European Union Budget and the Possibilities for ReformGiacomo Benedetto

The budget of the European Union (EU)1 is small yet controversial. For the period of 2007–13, during seven full years, it amounted to € 821 billion (in the prices of 2004), equivalent to 1 per cent of the collective national wealth or gross national income (GNI) of the EU’s 27 member states. Article 311 of the Treaty on the Functioning of the European Union (TFEU) establishes a maximum ceiling that cannot rise above 1.24 per cent of GNI. This is agreed unanimously by the governments. Moreover, the EU budget must always be in balance. To put these amounts in perspective, the average level of public spending by European governments is equivalent to 45 per cent of gross domestic product (GDP), or more during a reces-sion. Spending by the EU is therefore equivalent to approximately 2 per cent of public spending, with 98 per cent taking place at national, regional or local levels.

The controversy of this limited budget lies in its providing redistri-bution mainly to the agricultural sector or depressed regions to ensure agreement on the integration of European markets. It also funds the regulatory activities of the EU, which extend from the market to areas such as social, environment and consumer policies. It is these types of spending that prevent the EU from being merely a free trade area. The opponents of the budget criticise perceived waste and inefficiency but may in reality oppose the EU being more than a free trade area.

The long-term budget of 2007–13 is subdivided as follows. Thirty-six per cent goes to cohesion policy, notably assistance to the


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2 Giacomo Benedetto

less-developed countries and regions of the EU, 34 per cent goes on direct payments for agriculture and fisheries, 9 per cent covers rural development and environmental spending, and 9 per cent is allocated to ‘Competitiveness for Growth and Employment’, which includes innovation, research and development (R&D) and trans-port. The remaining headings are ‘Global Europe’ (foreign policy), which accounts for 6 per cent of spending; administration, which accounts for a further 6 per cent; and ‘Citizenship, Freedom, Security and Justice’, which accounts for 1 per cent.

Calls for change in the budget are based on percentages and amounts. Sometimes they focus more on indirect policy objectives, such as achieving economic innovation (a public good), which may depend on how money is spent rather than actual amounts. Calls for reforms or reductions in the Common Agricultural Policy (CAP) are common, as it has been the largest area of budgetary expenditure. Its opponents claim that it is wasteful and distorts world markets. While some wish to cut the budget as an end in itself, others wish to use cuts in agricultural spending to finance other new policy areas, such as support for economic innovation. However, the beneficiaries of the CAP have always mobilised to protect its share of the budget, guaranteeing its continuity. Given the complicated structure and rules of the EU budget, this volume evaluates the chances of reform in the period after 2013.

The EU’s annual budget is passed within the limits set in what is known as the multiannual financial framework (MFF). Before the Lisbon Treaty, the MFF was known as the financial perspectives. The MFF is agreed for a period of seven years, currently 2007–13, with its successor commencing in 2014. The MFF is agreed unanimously by the member states and the European Parliament (EP). Amending the MFF also requires unanimity and this is part of the reason for why the EU budget changes little at most of the negotiating rounds.

Since the establishment of the European Social Fund (ESF) in 1958 and the CAP in 1962, the EU has expanded the budget to meet certain ends. The wealthier contributor member states had always accepted this expansion due to cost effectiveness and the guaran-tee of more efficient economic integration. For example, running a single agricultural policy may cost less and be more efficient than 27 different agricultural policies at the national level, while com-pensating a sector that may otherwise oppose European integration.


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What are the particular challenges for the budget in the period lead-ing to 2014? Alongside traditional tensions between states that are net contributors and those that are net recipients, newer tensions have emerged. The first is the effect of the EU’s enlargements to Central and Eastern Europe in 2004 and 2007, which has increased the number of states both with a potential power to block budget decisions and (being poorer) with a greater demand on redistribu-tion. The second is the effect of the global economic and euro zone crises, which has created demand for continued redistribution and investment in public goods to support economic innovation. This is faced by contradictory demands from some member states for the practice of national austerity to be applied at the European level. Third, contributor member states have also become reluctant to con-tinue financing in the light of the problems of absorption capacity of redistribution in the poorer member states. Fourth, the Lisbon Treaty, vaunted as a simplification for the EU, actually reinforces the power to block agreement on fundamental change in the budget.

The need to agree to a new multiannual budgetary package by the end of 2013 provides an opportunity for change. In concluding the package for the years 2007–13, the governments of the member states invited the European Commission ‘to undertake a full, wide ranging review covering all aspects of EU spending, including the CAP, and of resources, including the UK rebate, to report in 2008/9’.2 The goals for reformulating the financial structures after 2013 for an EU consisting of 27 member states and a population of half a bil-lion, and which now includes new decision-making rules inserted by the Lisbon Treaty of 2009, were ambitious. In this book, the authors evaluate the prospects for fundamental change under these condi-tions. However, we conclude that those prospects are weak.

While there has always been tension between different interests in budgetary politics, the background to the negotiations for the post-2013 budgetary period is unique. The bitterness of the clash in the debate between contributors and recipients has accentuated due to the entry of significantly poorer member states in the enlargements of 2004 and 2007. In order to guarantee longer-term stability for the budget that division needs to be addressed. Matters are further com-plicated by a large number of wealthier member states that have sig-nificant recipient sectors, notably agriculture, as well as a haphazard system of rebates or discounts for some but not all of the wealthier


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4 Giacomo Benedetto

net contributors. The negotiations for the period after 2013 are also unique in other ways. As mentioned above, these start with the effects of global economic crisis since 2008 and the contradictory desires for Europe to deliver stimulus for economic growth through both subsidy and provision of public goods at the same time as a desire for domes-tic and European-level austerity. In terms of institutional politics, a new European Commission for the second time under the leadership of Jose Barroso took office in February 2010 and commenced negoti-ations on the new package in 2011, under the new rules introduced by the Lisbon Treaty. The conclusion of the book assesses the nature of the Commission’s proposals published in the summer of 2011 for a budgetary freeze for payments set at 1.00 per cent of the EU’s GNI.

In the light of long-term budget controversy and the tensions dis-cussed above, the book looks at the prospects of the future budgets for two areas of traditional expenditure, agriculture (in Chapter 6) and cohesion (in Chapter 7), and two areas of new spending, the public goods to support areas of economic innovation such as R&D (in Chapter 4) and European foreign policy (in Chapter 8). It contrib-utes to the debate and broader aspects of EU budgetary reform and is unique in integrating institutional questions with those of spending. Besides the effect of ratification of the Lisbon Treaty, the institutional factors include the differing modes and levels of policy-making in the EU, and the interests of member states and EU institutions in the negotiations. Ratification of the Lisbon Treaty reduces the ability to set agendas to reach agreement in favour of strengthening veto pow-ers thus making agreement less likely. Coupled with the effect of the global financial crisis, we ask whether these institutional changes will have an effect on spending and policy.

Sections 1.1 and 1.2 of this introductory chapter provide a history and theory of the development of the EU budget. Section 1.2 also assesses the nature of some of the proposals for reforming the budget that have materialised in the political science and economics literature. Section 1.3 provides a summary of the chapters that comprise the volume.

1.1 History of the budget: how we got to where we are

In the early years of the EU, its budget was agreed annually on the basis of national contributions. In this way, the EU’s early


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Introduction 5

financing was similar to that of other intergovernmental or inter-national organisations. At first, the budget was mainly adminis-trative but the establishment of the ESF and, in 1962, of the first part of the CAP in the form of the European Agricultural Guidance and Guarantee Fund (EAGGF), led to resource problems. Where would the money come from? In 1965, Charles de Gaulle instigated the so-called Empty Chair crisis, of leaving France’s seat at inter-governmental meetings empty until a number of demands were met by the other member states. These included the insistence of unanimous decision-making among the governments when mat-ters of national interest were discussed as well as concerns over the financing of the CAP. Ironically the intergovernmental Gaullists supported the setting up of a supranational own resources system (Rittberger 2005) for the financing of EU spending, since the CAP would favour French interests and require financing. The other five member states (West Germany, Italy, Belgium, the Netherlands and Luxembourg) were concerned that national parliaments surren-dering budgetary powers to an unaccountable body, the European Commission, could lead to a legitimacy deficit (Rittberger 2005). The eventual solution was to create the original budgetary proced-ure of 1970, which allowed the EP to exercise a degree of control over the budget. Rather than democratisation, the concern was to provide a check and balance against the Commission, and the EP served this purpose. Originally, EU revenue or own resources were financed through agricultural and customs levies but this proved insufficient to meet demand. In 1978 a component of own resources based on value added tax (VAT) contributions was phased in, while direct national contributions were phased out. This had the advantage for national governments of disguising the ‘cost’ of the EU. It took until 1988 before a component based on GNI was fully developed, according to which each member state contributes a percentage share of its GNI to the own resources of the EU. This is in addition to the customs tariff and VAT contribu-tion. The history of EU revenue shows that radical changes have been achieved even under the conditions of unanimity among the governments. The problem is that unanimously agreed procedures require unanimity for further amendment, thus making them dif-ficult to reverse. The consequences of newly adopted budgetary and legislative procedures in the EU have often been unforeseen,


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6 Giacomo Benedetto

making governments cautious of endorsing further reform in the future (Rittberger 2005).

During the 1970s and 1980s a major budgetary struggle took place, which for the first time involved the EP and the government of the United Kingdom (UK) as the new protagonists. The origins of this struggle lay in the problematic design of the budget reform of 1970. The EP found that it had no influence over most expenditure other than the power to veto the entire annual budget of the EU, a power which it exercised for the budgets of 1980 and 1985. The direct elec-tion of the EP since 1979 had clearly emboldened it, allowing it to believe that its legitimacy had been enhanced. Meanwhile, the cre-ation of own resources and a European supranational budgetary pol-icy that embedded the CAP in 1970 was unacceptable to the British. These path-dependent features were impossible to change without unanimity among the governments, so that problems persisted, thanks to institutional lock-in (Lindner 2006). It is helpful to recall that unanimously made agreements can be modified only by further unanimity.

Unanimity then can be reached among the governments to make changes but may result in a decision of the ‘lowest common denomi-nator’. Since the establishment of independent revenue for the EU in the form of own resources, member states have agreed unanimously for reform even if the result is nobody’s first preference. The key fea-ture of this path dependence is that a better and more rational alter-native exists; however the policy follows an unaltered path because the short-term costs of diverting from it, in this case by reforming the expenditure or revenue, prevent reform.

In 2007, the VAT levy was reduced from 0.5 to 0.3 per cent. Discounts were also introduced for large net contributors on their VAT contributions and GNI transfers to compensate them for not receiving a rebate or ‘correction’ as generous as that allocated to the UK.3 Own resources were reformed for the start of the most recent financial perspective in 2007. At the time of writing own resources consist of three planks:4

traditional own resources, of which 99 per cent are drawn from 1. a common external customs tariff on imports from third coun-tries.5 Traditional own resources account for about 12 per cent of EU revenue;


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Introduction 7

a levy of 0.3 per cent on national VAT, which accounts for about 2. 11 per cent of EU revenue;a contribution from each state equivalent to 1.23 per cent of its 3. GNI, which accounts for the remaining 76 per cent of EU revenue.

The financial perspective (or MFF) is another key institution of the budget. The Inter-Institutional Agreement of 1988 ended the period of flux in EU budgetary relations that had commenced in the 1970s (Laffan and Lindner 2010; Lindner 2006) by meeting the demands of the EP and the member states that had joined the EU since 1973. Laffan and Lindner (2010) refer to the period preceding it as that of the intergovernmental ‘de Gaulle budget’. This is the consequence of the ‘Empty Chair’ crisis instigated by de Gaulle, the CAP, the creation of own resources and the budget treaty of 1970. After its first direct election in 1979, the EP became an interloper in budg-etary battles and rejected the annual budgets for 1980 and 1985, attempting to change the status quo by consolidating its spend-ing priorities. The agreement of 1988 signalled a move from the old ‘de Gaulle budget’ to a pro-integration ‘Delors budget’ (Laffan and Lindner 2010). As explained above, it allowed the Commission, Council and EP to adopt seven-year multiannual budgets. In 1988, an effect of the Inter-Institutional Agreement was to alter budgetary priorities according to the preferences of some of the newer member states, for example, Greece, which had joined in 1981, and Spain and Portugal, which became members in 1986. Change was agreed by leaving the CAP largely untouched at the same time as doubling expenditure on the European Regional Development Fund (ERDF), of particular benefit to Greece, Ireland, Portugal and Spain. Besides its recipients, many of the ERDF’s contributors believed that it would assist in financing the creation of the internal market that had just been approved in the Single European Act (Carrubba 1997), whether due to the financing of economic development or merely as a side-payment. According to Lindner (2006) the power balance and stabil-ity for future agreements under the MFF are unlikely to change under the Lisbon Treaty. Indeed the new rules may make the MFF even more stable and difficult to reform as explained in Chapter 3. The budgetary history of the EU since 1988 has been significantly more stable than that experienced previously (Lindner 2006). Chapter 3 asks whether, after the Lisbon Treaty, use of the annual budget as a


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8 Giacomo Benedetto

trigger for reform will be more or less likely than in the past. To what extent does the Lisbon Treaty transform budgetary and other powers of the EU such that budgetary outcomes are likely to change? The results of the MFF negotiations of 2011–13 may provide an answer to this question.

1.2 Thinking on budgetary reform

While Section 1.1 introduced the history of the development of EU budget policy, this section introduces the theory and likelihood of budgetary reform. First of all it discusses the problems of the budget and its reform, before reviewing some of the proposed solutions in the literature.

Reform of the EU budget has always been problematic as it is caught up in conflicting views of what kind of European integra-tion should take place, as well as in 27 differing national views of the role of public spending. Lindner (2006: 6) highlights four key features. First among these is the political importance of EU expendi-ture. Although it may be little more than the equivalent of 1 per cent of national wealth or less than 2 per cent of total public spending, its symbolism is significant. Without it, the EU would be little more than simply a free trade area. While negative integration is about de-regulating markets to facilitate free trade, often at considerable social cost, positive integration can take two forms: it can establish new regulation to improve environmental and social standards; and it can provide funds for public spending either as side-payments to buy off sectors that might otherwise block market integration, or for investment so that markets can expand. These recipient sectors, like agriculture and distressed regions, exercise significant political power at EU and national levels, allowing them to secure such side-payments.

The second feature highlighted by Lindner (2006) is the calcu-lation of costs versus benefits that penetrates meetings between the national governments, which try to agree budgetary reform and affect the national discourse on EU membership (something addressed by Hagemann in Chapter 2). A member state’s position as a winner or loser from the EU budget is highly visible. Yet many of the ‘losers’ who are net contributors gain from market integration and are only compensating potential victims of that integration through


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Introduction 9

side-payments (Carrubba 1997). Third, there is the question of ‘what kind of Europe’. Is the EU a means to provide positive integration and solidarity or is it only about de-regulation and free markets? Fourth, there is conflict over the balance of national and European author-ity. This conflict coincides with the previous questions of ‘what kind of EU is envisaged’ and the division between net contributors and net recipients. The EU’s revenue through the euphemistically named ‘own resources’ is intergovernmental, controlled by a unanimous Council. Although the system of GNI percentage transfer from each member state is based on ability to pay, it is also explicitly state-based. The counterpart is an expenditure regime that is European, controlled by the Commission and amended by the EP, and yet car-ried out by national governments.

What are the bases of the demands for reform? First of all, own resources are based primarily on ability to pay, which makes them unpopular with some net contributors. Each member state transfers the equivalent of 1.23 per cent of its national wealth to the EU. As shown in Section 1.1, this accounts for around 76 per cent of EU revenue. Per head of population, the Netherlands only contributes more than Bulgaria because its GNI per capita is higher. As a percent-age of their GNI each member state contributes the same. In terms of direct payments, the net contributors benefit far less from redis-tribution. In their proposals for change to own resources starting in 2014, the EP and Commission have supported a gradual replacement of the GNI contribution with a financial transactions tax. The hope is that this would detract from the situation where member states calculate their net balances. However, at least one wealthy member state preoccupied with net balances is currently even more opposed to a financial transactions tax. After GNI transfers, a less clear sys-tem of external tariffs and VAT transfers accounts for the rest of own resources. Furthermore, unequal discounts or rebates on contribu-tions are available for some but not all net contributors. The system is opaque and exemplifies the argument of Ackrill and Kay (2006) that reform of the EU’s budget happens not through changing or abolishing rules and institutions, but through adding yet another layer to all the pre-existing layers.

Second, the division of spending appears difficult to shift. During 2007–13, 70 per cent of spending is direct redistribution – almost equally divided between cohesion on the one side and CAP and


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10 Giacomo Benedetto

fisheries on the other. Some net contributors benefit significantly from this redistribution, which is Europe-wide rather than being tar-geted on the poorest. The EU adopts policy commitments to support economic innovation and new technologies, yet directs compara-tively little funding to such ends. The paradox of the EU budget is that it is both too much and too little. Too much is directed to redis-tribution and too little is invested in public goods that can provide a collective benefit for the European economy.

Neither the establishment of own resources in the treaty of 1970 nor the reform of 1988 that set up the financial perspectives recon-ciled the tensions between net contributors and recipients. It seems unlikely that the effect of EU enlargement since 2004, the global financial crisis and the negotiation of the new MFF by 2013 will suc-ceed in providing that reconciliation, though some change may be possible.

The Lisbon Agenda of 2000 could have been a major focal point for change in the EU budget. The Agenda’s ambitions of establishing the EU as the world’s most innovative area for technology and the new economy by the year 2010 were dashed. Demands are still present in the form of the ‘Europe 2020’ programme for reforms to encourage a more competitive economy supported by public goods spending. Public goods are broadly defined as expenditure where there is a col-lective benefit that is not about redistribution, which would therefore exclude the CAP and most of cohesion policy. There is no accepted definition for public goods investment, but it usually includes invest-ment in R&D as well as innovation. During the round for negotiat-ing the previous financial perspective in 2005 to 2006, there was no significant shift in spending priority despite some increase for R&D and other aspects of competitiveness, which totalled no more than 9 per cent of spending. According to Schild (2008), the odds of shift-ing financial priorities in the consensus (and multiple veto) system of the EU are low. Institutional rules that encourage entrenchment are therefore part of the problem besides the more obvious weight of veto players, who can block any change. For Schild (2008), look-ing at the roles of the Commission, Council and EP, political con-text and the sequence of decision-making account for the fact that budgetary reform happened more radically and more rapidly in the few years immediately following 1988 than was ever the case after the mid-1990s. The Single European Act was ratified in 1987 and


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Introduction 11

was to establish an internal market by 1993. The need to finance the creation of that market was part of a pro-reform context in 1988 in a way that may not apply to the post-enlargement EU of the global financial and euro zone crises.

The principle of fiscal federalism is that states in a federation retain control of most of their tax receipts and contribute revenue to a federal authority whose expenditure provides collective gains on a more cost-effective basis than would be the case at state level. For Heinemann et al (2010) and Osterloh et al (2009), the EU budget does not conform to those norms. Redistribution occurs but there is little provision of public goods that enhance economic growth. The latter are blocked by a common pool problem, since spending maximums, or ceilings, imposed by the rules of own resources and the financial perspectives and MFF create incentives for overspending on redistri-bution and under-spending on public goods. Osterloh et al (2009) argue that it is necessary to find a solution to this, which would also take account of the British ‘correction’ or rebate, replacing it with a generalised correction mechanism. The British ‘correction’ had been agreed in 1984 as compensation for the British government’s relative over-contribution to the EU budget. The threat of national veto has prevented its abolition in more recent times.

In terms of the logic of fiscal federalism providing grounds for reform, Heinemann et al (2010) explain that revenue can be based on equivalence or ability to pay. GNI transfers make up 76 per cent of the EU’s revenue and are based on the ability to pay. VAT and customs contributions distort that rationality, while the British ‘correction’ is the largest distortion, now extended to Germany, the Netherlands, Austria and Sweden. The ‘correction’ is regressive since only certain wealthy states but not others benefit from the discount. Further the British have an interest in retaining the status quo since their ‘cor-rection’ is linked to the continuation of the CAP (Heinemann et al 2010: 63).

So what is holding back reform? Mayhew (2009) identifies the problem of multiple veto players and an impenetrably complicated system of own resources and refunds in hindering progress. While the call for expanding the EU’s commitments to spending on public goods is laudable, public goods spending is treated just like redis-tribution when member state governments calculate their net posi-tions for a domestic audience. And yet the case for public goods is


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compelling, whether it is to finance R&D, or the training of fron-tier police on the EU’s common external land border to the East or maritime border to the South. Attempts to focus on policy-based spending addressing public goods fails because the recipients of agricultural or regional development funds fear that they will have to finance any increase in public goods spending through cuts in redistribution. This has become acute since the absorption capacity, which is the ability of recipients to administer and correctly spend EU funds, has been called into question. Reluctance of the contribu-tors to fund absorption incapacity and reluctance to accept cuts in distribution among its recipients leads the net contributors to impose very inflexible ceilings in expenditure so that additional funds for public goods are impossible. During the negotiations for the previ-ous spending package during 2005–6, the British government led a club of net contributors who were potentially beneficiaries from public goods spending in trying to reduce the spending ceiling to 1 per cent of GNI. After a bitter struggle that included a rejection of the draft financial perspective by the EP, the agreement of 2006 finalised a ceiling for payments of 1.00 per cent of GNI. Aware of the danger of multiple and mutual vetoes from all sides at the outset, the European Commission re-proposed this level of 1.00 per cent, rather than something higher, in its plans for the MFF of 2014–20 tabled in June 2011.

There are several suggestions in the literature for how to break through this (De la Fuente and Doménech 2001; Rant and Mrak 2010). Rant and Mrak (2010: 367) suggest that strong external pres-sure due to global issues such as food safety or economic crisis could force the issue. There is a need to aim either at the concept of net balances – that does not count the benefits of market integration for wealthier net contributors – or for a reform of the redistribution in order to eliminate the political need for rebates or ‘corrections’.

Heinemann et al (2010) propose ‘incentive channelling reforms’, which would divide the budget to overcome the incentives for pro-tecting the CAP. Since the CAP rewards richer member states with high agricultural productivity, its financing could be separated from the rest of the budget on the basis of the concept of ‘gross value added’ in agricultural production. Contributions to CAP financing would rise in proportion to productivity, eliminating redistribu-tion through CAP. The CAP could also be part-financed by member


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Introduction 13

states thus reducing incentives for its perpetuation although exist-ing recipients from CAP will veto this. However, this does not offer a solution to the threat of veto, since it is easy to imagine that a mem-ber state whose agricultural production is less efficient but depend-ent on the CAP would block such a reform. France and to some extent southern Germany have large agricultural sectors that can be inefficient and yet both countries are significant net contributors to the budget.

According to Heinemann et al (2010), an alternative solution is to embrace the concept of pre-defined net positions. The status of a member state as a net contributor or recipient would be publicly rec-ognised and made clear in the management of revenue and spend-ing. Significant net contributors could then be compensated for ‘over-contributing’ in a more transparent way than happens under the system agreed between 2007 and 2013 for the UK, Germany, Netherlands, Sweden and Austria. Borrowing a proposal from De la Fuente and Doménech (2001), Heinemann et al (2010) suggest that member states should agree on the total level of redistribution and that net balances should be inversely correlated to income lev-els, so that poorer member states contribute less and receive more. Spending programmes would take effect without looking at con-tribution levels, following which a correction mechanism would ensure that the agreed distributions between member states are accurate. Spending on public goods and spending on explicit redis-tribution through the structural funds could be excluded from the correction mechanism.

A further alternative could be a reverse correction mechanism (Heinemann et al 2010), whereby a revenue minimum or ‘floor’ rather than a revenue ‘ceiling’ is established for member states with a GDP per capita above the EU average. This would encourage those wealthy member states that benefit from the CAP to challenge it so as to reduce their penalisation through the revenue ‘floor’. Heinemann et al (2010) argue that many supposedly logical strategies for reforming the budget fail to consider the constraints that conserve the status quo. By embracing pre-defined net balances and attempting a reform that encompasses revenue and spending, the fixation with net bal-ances and juste retour, the notion of getting back what has been put in, could be more efficient in terms of outcome, while making the provision of public goods more attractive.


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While the proposals of Heinemann et al (2010) appear the most compelling, no definite solution to overcoming the veto of a sin-gle member state that anticipates a loss is proposed. As is revealed in Chapter 3, failure to agree a new MFF through the single veto of a member state results automatically in the continuation of the amounts pertaining to the final year of the previous package. If the status quo is preferred over any of the alternative options by just one member state, reform can be blocked.

In this volume, Sara Hagemann as well as Charles Blankart and Gerrit Koester contribute to this debate. Hagemann advises EU-level actors to try to understand the role of domestic veto players in each member state, and to use a flexible interpretation of the treaty rules in overcoming predictable obstacles. Blankart and Koester suggest the creation of a supplementary budget for financing public goods, using a mechanism that can avoid irreversible lock-in of the kind that has occurred with other areas of spending like the CAP in the 1960s.

What can we learn from the experience of 2005–6 in terms of agendas, outcomes and divisions between the member states and the EU institutions? In 2005, the Commission knew it had to engage the member states in a debate about future priorities of the EU (Linder 2006: 208), in the light of enlargement and, given the Lisbon Agenda, the role of public goods expenditure. As the proposer, the Commission understood that it could more effectively set the agenda by avoiding discussion of budget cash in advance. The negotiations were more similar to those of the previous round, which concluded in 1999 than they were to the Delors I and Delors II negotiations referred to earlier. The Commission proposed

changing the budget headings of policy areas to place emphasis 1. on new priorities such as the Lisbon Agenda, Area of Freedom, Security and Justice, and EU external actions;no change in the CAP, based on an agreement of 2002, thus clev-2. erly postponing reform of the CAP until 2013;an institutional agreement for more flexibility between head-3. ings;an increase in payments from 1.07 to 1.14 per cent of GNI with no 4. change to own resources of 1.24 per cent;a modification of the UK ‘correction’ and its extension to other 5. member states.


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Introduction 15

Some of these proposals were clearly negotiating positions, notably the suggested rise in spending to 1.14 per cent of GNI, since the position of some of the net contributors was well known. The Commission’s proposed freeze for payments at 1.00 per cent for 2014 to 2020 is all the more notable. In 2005, however, it was some of the same net contributors who supported a re-orientation of spend-ing in favour of the public goods of the Lisbon Agenda, Freedom, Security and Justice, and EU external policy. By proposing a reform and extension of the UK ‘correction’ to other member states, the Commission sought to drive a wedge between the net contributors. The final result of the financial perspective of 2007–13 differed from the essence of the Commission proposal only in reaching a settle-ment for payments of 1.00 per cent of GNI rather that the 1.14 desired by the Commission or the 0.95 preferred by the net contributors.6

In anticipation of the discussions during 2005–6, Lindner (2006: 209) identified the following divisions between the actors: net con-tributors versus beneficiaries; old versus new beneficiaries of struc-tural funds, with Italy and Spain demanding a phasing-out of funds until 2013; a UK ‘correction’ versus a generalised correction mecha-nism with the UK credibly threatening a veto; new budgetary policies (such as public goods) versus the status quo, where it was felt that new priorities were positive but not at the expense of the CAP or cohesion policy; the EP versus the European Council; and finally, CAP reform versus continuing adherence to the 2002 agreement to protect the CAP, which had the crucial support of the German government.

Similar divisions have already resurfaced in the budgetary debate for 2014–20, as a reading of the submissions to the Commission’s consultation of 2008–9 shows.7 During the negotiations, these divi-sions will interact with the budgetary effect of the euro crisis and the wider global financial crisis, the increased likelihood of veto power that results from the Lisbon Treaty, increased demand for public goods that would further economic resurgence, and the long-term damage of absorption incapacity of EU funds destined for traditional redistribution.

1.3 Structure of the volume

Whether concerned with decision-making or spending, the chapters consider the key themes in the new world of the EU budget discussed


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above: the effects of the EU’s recent and future enlargements, the global economic and eurozone crises, and the effects of the Lisbon Treaty in ensuring the continuity of the status quo.

The book is divided into two parts. Part I consists of four chap-ters that address institutional questions of how to take account of the heterogeneity of each member state’s positions (Sara Hagemann), what kind of solution or hindrance the Lisbon Treaty provides for budgetary decision-making (Giacomo Benedetto), the obstacles for a new growth policy given the climate of austerity currently pervad-ing the EU (Robert Kaiser and Heiko Prange-Gstöhl) and how to con-struct a supplementary budget geared to collective public goods as a means to overcome the mutual vetoes of contributors and recipients (Charles Blankart and Gerrit Koester).

Chapter 2 by Sara Hagemann proposes a solution to the danger that past deadlock on budgetary matters and threats by national governments to impose non-negotiable ‘red lines’ will repeat them-selves during the 2011–13 negotiations. The actors at EU level would benefit if they no longer viewed member state governments as unitary actors. While governments have their own divisions, the effect of checks and balances in domestic politics should not be underestimated. Coalition partners in national governments and institutions such as national parliaments often exert pressure on a government not to compromise. In these circumstances, and given that the rules of the Lisbon Treaty reinforce the budgetary status quo, actors are advised to use as broad an interpretation of those rules as possible.

Chapter 3 by Giacomo Benedetto looks at the Lisbon Treaty, which made considerable changes to the budgetary powers of the EU and asks whether those changes will assist reform of the budget. Benedetto reveals that the EP gained some power over the long-term budget and, together with a majority of the member states’ govern-ments, may now determine the rules for budgetary implementation and scrutiny. However, there will be a new and strong bias for main-taining the current division of spending in the MFF since non-agree-ment between the governments on a new package will mean that the pre-existing agreement will be rolled over indefinitely. The new annual budgetary procedure also weakens the EP’s ability to reform the budget. This finding contrasts with usual expectations that equality between the Council and EP amounts to a gain in powers


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Introduction 17

for the EP. This is proven by the initial failure to agree an annual budget for the year 2011.

In Chapter 4, Robert Kaiser and Heiko Prange-Gstöhl offer a pes-simistic note to assess the future of EU spending policy on growth policies, including R&D. The budgetary review of the Commission, economic crisis and negotiation of a new budget offer a unique focal point for EU policy priorities. In the light of the economic crisis there are calls from national actors for EU-level austerity alongside con-tradictory demands for investment in economic growth and public goods to support the EU’s new ‘Europe 2020’ strategy, which has replaced the Lisbon Agenda of 2000. Looking to the future, Kaiser and Prange-Gstöhl compare national levels of EU growth strategy between Germany and Sweden, which they define as ‘innovation leaders’, the Netherlands, an ‘innovation follower’, and two states whose innovation is either moderate or ‘catch-up’, respectively Spain and Poland. Each of these member states has differing prior-ities in terms of commitment to public goods, making the future uncertain.

In Chapter 5, Charles Blankart and Gerrit Koester agree with Benedetto that the adoption of the Lisbon Treaty does not change the status quo in budgetary politics in a direction that would favour reform. While Kaiser and Prange-Gstöhl are pessimistic about the development of policies to foster economic growth, Blankart and Koester offer a solution. Net recipients and net contributors exercise a mutual veto on changing the budget. Part of this is that net recipi-ents block the expansion of spending on public goods, such as R&D, because they know it can be financed only through a reduction in the redistribution from which they benefit. Other contributors to the budgetary debate leave a gap by glossing over the veto power of any single member state that may prefer the status quo to any of the alternatives. Blankart and Koester fill this gap. Their solution is to establish a supplementary budget for public goods using the Lisbon Treaty’s powers for enhanced cooperation. Such a budget could avoid institutional lock-in of a new status quo through the participating member states setting it up unanimously for a given time period. On expiry, the continuation of such a budget would require unanimous re-approval. Destinations for funding of this kind under the condi-tions of economic crisis would include loans and investment in pro-grammes to support new economic growth.


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Part II of the book focuses on the EU spending policy areas and their future after 2013. It comprises three chapters that contribute to the debate on the likely effects of the next MFF on areas of spend-ing in the light of the institutional, political and economic contexts. Agriculture has been the largest and most controversial budget pol-icy whose future is discussed by Alan Greer. Simona Milio addresses cohesion policy, which is the equal of the CAP in terms of spend-ing and redistribution. Alister Miskimmon addresses a newer area of expenditure, the Common Foreign and Security Policy/Common Security and Defence Policy (CFSP/CSDP). The Lisbon Treaty trans-forms budgetary and other powers of the EU such that each of these areas is likely to be significantly affected.

In Chapter 6, Alan Greer examines the basis of the CAP in asking how much will continue to be spent, on what, and why. Within the budgetary politics of the EU, the CAP has been the most significant recipient of funds and criticism. Greer investigates where this places it in the context of the budgetary review itself during 2008–9, which had been a precondition of British acceptance of the previous budg-etary agreement in 2005, as well as considering the implications of EU enlargement, the status quo bias of the Lisbon Treaty and the effect of the economic crises since 2008.

In Chapter 7, Simona Milio analyses the budget for EU structural funds, which remains a source of bitter arguments among member states. Net contributors and recipients have taken opposite sides in the reform debate, with each camp able to block a qualified majority if it wishes. The main problem is not merely the disparity in contribu-tions, but the distribution of funds and whether economic and social policy integration occurs. In the negotiation of the next MFF, cohe-sion policy faces the twin challenges of improving solidarity towards new member states, while modifying its objectives along social lines. From these two challenges emerges a concern for the quality rather than the level of spending. The chapter explores whether there may be consensus between contributors and recipients to shift expendi-ture towards social aspects, while integrating complementary national and EU funding within the context of ‘renationalisation’. The latter is the proposed return of regional development subsidies to the national level at least for the wealthier member states.

In Chapter 8, Alister Miskimmon analyses the effect of the glo-bal economic crisis on the financing of EU Foreign and Security


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Introduction 19

Policy. The Lisbon Treaty has placed further demands on this area of spending due to the enhanced status of the High Representative and the creation of the European External Action Service (EEAS). France, Germany and the UK are crucial member states in the for-mation of EU external relations, whether as budgetary, military or personnel contributors. While the budgetary review of 2008–9 asked how the EU could finance an international role for itself, the Lisbon Treaty establishes the EEAS without indicating its sources of finance. Finally, Miskimmon addresses the question of the ‘added value’ of collective action in foreign policy and concludes that its financing will be more easily achieved if it be can be defined as a public good.

Chapter 9 concludes the volume by placing the areas of spending examined in the context of the global economic crisis and political pressures faced by actors in the negotiations. It presents a series of policy outcomes for each of the chapters, examines previous budget agreements and shifts in the balance of EU expenditure, and provides an analysis of likely outcomes for reform of the budget and their unintended consequences. Although the Lisbon Treaty reinforces continuity, and despite reluctance to increase or reduce the level of overall spending, significant shifts in policy have been achieved in the past and could be repeated alongside more informal changes.

Notes

1. The early names for the EU were European Coal and Steel Community and the European Economic Community. However, in this book they will mostly be referred to as the EU for the sake of simplicity.

2. Official Journal of the European Union, C 139 of 14 June 2006.3. The VAT levy is reduced to 0.225 per cent for Austria, 0.15 per cent for

Germany and Sweden, and just 0.1 per cent for the Netherlands. The VAT levy is capped for those member states whose consumer spending exceeds the equivalent of 50 per cent of their GNI such that the 0.3 per cent levy would not exceed 0.15 per cent of GNI. This protects less prosperous states where a larger proportion of GNI is spent on essential items. A refund on the GNI levy is made to the Netherlands of €605 million per year at 2004 prices and to Sweden at €150 million per year financed by all 27 member states through their GNI contributions. The British ‘correction’ amounts to the equivalent of 66 per cent of the British net contribution, from which is excluded the British share of non-CAP contributions to new member states. This is financed by the other 26 member states through their GNI contributions although the share paid to the UK by Austria, Germany and the Netherlands is cut by 75 per cent.


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4. Official Journal of the European Union, L 163 of 23 June 2007.5. The member state levying the tariff at the EU’s external border keeps 25

per cent of the tariff and passes 75 per cent of it to the EU. Tariffs on sugar producers account for the remaining 1 per cent of traditional own resources.

6. Official Journal of the European Union, C 139 of 14 June 2006.7. Member states’ national governments, Contributions to the Public

Consultation, European Commission Reforming the Budget website: http://ec.europa.eu/budget/reform2008/issues/read_en.htm [accessed 30 November 2011].


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http://ec.europa.eu/budget/reform2008/issues/read_en.htm

Part I

The Politics of Budget Reform


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The EU governments are faced with significant difficulties in tackling the consequences of the economic and financial crises, both in own domestic arenas and collectively at the EU level. While the EU budget is rather inconsequential in size and impact in this context, the 2014–20 multiannual budget negotiations will be of significance: a reformed and ‘efficient’ budget agreed by all 27 governments would reflect ambition, unison and credibility in a time where such signals are much required. It will also be an important tool for achieving some of the overall strategic priorities of the EU agenda for the years ahead. However, previous negotiation rounds have been marred by political and institutional gridlock. In a situation of economic hard-ship and an enlarged number of Union members now fully engaged in negotiations it will become even more pronounced that new steps are required for securing improvements in coming budgets.

This chapter argues that three aspects are largely unaccounted for in existing analyses of EU budget negotiations and, hence, their predicted outcomes. First, it is necessary to pay close attention to the checks and balances imposed at national level on governments. EU negotiators may be able to address and meet individual govern-ments’ bargaining positions differently if they are not treated as uni-tary actors in the Brussels bargaining game. Second, policy-makers’ use of economic terminology for justifying policy priorities begs for

2Negotiations of the European Union Budget: How Decision Processes Constrain Policy AmbitionsSara Hagemann

23


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24 Sara Hagemann

greater scrutiny. Third, as the new treaty text continues – and for-mally strengthens – a strong status quo bias for the negotiations, broad interpretations of these rules are the only possibility for EU representatives to achieve a reformed budget.

This chapter will seek to outline and discuss these three aspects of the budget negotiation process: it is argued that – if taken into account – these issues can result in very different predicted outcomes than other-wise expected from standard bargaining models. The chapter also argues that accommodating these issues may indeed enable EU decision-mak-ers to improve on the link between EU budgetary tools and policy pri-orities: Section 2.1 discusses checks and balances imposed at national level on governments, influencing the formulation of governments’ policy positions (or, indeed, the formulation of ‘red lines’). Section 2.2 focuses on the rationale behind governments’ ‘justifications’ for when an area requires EU public spending. It will do so by drawing on the contributions that governments submitted to the Commission during the 2008–9 consultation process. In light of the conclusions from the first two sections, Section 2.3 discusses the consequences of the for-mal rules laid out in the Lisbon Treaty, and considers how the treaty’s enforced status quo bias may be overcome by EU’s ‘deal brokers’.

2.1 Checks and balances

As described in the introductory chapter to this book, a review of the EU’s seven-year budgetary framework was conducted in 2008–9, intended to inform and result in specific recommendations for the next budget negotiation round between EU governments. The rea-son for the review was that the last negotiations that completed in late 2005 for the 2007–13 budget package resulted in several gov-ernments’ explicit criticism of the outcome. Negotiators voiced relief that a deal had been possible at all, but indicated general dissatisfac-tion that neither the individual interests of governments nor overall policy ambitions for the EU were properly reflected in the agreed budget posts. Necessary reform of several areas was stalled due to the need to reach a consensus agreement.

Nevertheless, the following budget review did not result in a set of recommendations for radical changes to the MFF, whether the current one or any future budget deals. In fact, the review did not result in much at all: the final stages of the review coincided with


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Negotiations of the European Union Budget 25

the election ‘campaign’ for a new European Commission as well as elections in sight for a number of key member states. Hence, it was deemed politically necessary to leave the review process with a sum-mary of the opinions and positions obtained during the consultation process with member governments and external actors, rather than a resulting Commission recommendation to the governments regard-ing process and content for changes to the current budget framework as well as the forthcoming MFF.

Now, whether the Commission would have taken a strong ‘reform-ist’ position in a different political context is of course a hypothetical question. But the 2008–9 review process was initially presented as if driven by such an ambition (European Commission 2007). In this way the review was perceived as a testing ground for how far the member states are willing to go in future negotiations, where the Commission will have to maintain a difficult balance between significant reform of the budget while also ensuring the consent of all 27 governments.

A great challenge imposed on the Commission negotiators in this regard is that – apart from the restrictive decision rules at the EU level (which Giacomo Benedetto explores in Chapter 3) – member states are often constrained by internal decision-making processes prior to their presentation of country positions at the EU level. This point is usually not explicitly addressed in the literature or policy debates, yet in effect limits the political mandate to negotiate at the bargaining table in Brussels: government negotiators may have lim-ited room for manoeuvre due to restrictions imposed e.g. by strong parliamentary committees in their national systems, from multi-party coalition agreements, or by regional or local authorities with significant influence on budgetary negotiations. The result is a dif-ference in negotiation positions by the various heads of states and ministers when commencing negotiations in Brussels.1 While some come to the negotiation table with a carefully crafted mandate from the ruling majority in the national parliaments and with agreements secured with coalition parties (in multi-party systems), others enter the negotiations with the anticipation of difficult tasks when having to ‘defend’ and secure approval of negotiation outcomes once back in their own parliaments.2

Figure 2.1 illustrates this process.However, a focus only on the preference aggregation process

ex ante to the actual negotiations in Brussels would be an incomplete


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26 Sara Hagemann

analytical account of the budget bargaining game. Ex post demands on member state negotiators are often very high in terms of bring-ing back evidence of success to their parliaments and constituen-cies, and these demands are very present at the actual decision stage as well (referred to as ‘backward induction’ in political science litera-ture). In this respect, the measure of success is often reduced to the best possible monetary deal in terms of net contributions known as juste retour, rather than focusing on the wider policy priorities. Especially for political systems where negotiation mandates are not pre-arranged in their national parliaments ahead of Brussels deci-sion processes, the pressure not to compromise has proven very strong.

The results of such ex ante and ex post restrictions are predictable: a strong focus on juste retour, and the reluctance of any member states to consider any additional funding for EU-level priorities, for exam-ple greater investment in public goods when the CAP and structural funds are protected. In turn this impacts the likelihood of reaching a deal. In effect, it turns the negotiations into a zero-sum financial game, where any expenditure allocated to a specific country must reduce another’s and where any additional funding for one policy area must reduce the funding for others. With 27 veto powers to

Figure 2.1 The domestic preference aggregation process prior to EU-level budget negotiations

Negotiating position ofgovernment n

Governmentn ’s policypriorities

Domesticinterestsgroups’

preferences

Formal andinformal veto

players


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appease, there is a strong bias towards the current status quo, with the existing budget seen as the benchmark against which the out-come is compared.

Needless to say, the focus on juste retour also has a negative impact on the effectiveness of spending. Trying to determine ex ante how much each country will receive in expenditure ties spending to cer-tain policy areas, regardless of changing circumstances and needs, or how the money is spent. In a modern, interdependent economy, ear-marking expenditure for countries or regions seems increasingly meaningless, with companies and individuals operating across bor-ders and benefiting from expenditure elsewhere.

Another apparent result partly owing to the governments’ con-strains imposed by national political demands is that there is a pre-vailing tendency of focusing only on areas where the EU already has competences and expenditure rather than considering wider priori-ties. This creates difficulties in dealing with new priorities, an issue that is aggravated by the current rather rigid budget structure, which fixes expenditure in budgetary posts. Nevertheless, recent develop-ments in areas such as climate change, energy and foreign policy, as well as the hard-felt consequences of the financial and economic cri-ses, have emphasised the need for rethinking and restructuring the EU’s ability to also react to new challenges, currently not sufficiently captured by either regulatory or budgetary mechanisms. In this vol-ume, Charles Blankart and Gerrit Koester also discuss the constraints on public goods spending in Chapter 5, and in Chapter 8, Alister Miskimmon highlights the difficulties with the financing of policy obligations recently assumed by the EU, such as financing the estab-lishment of the EEAS.

Lastly, the preference aggregation process described here – from national parliamentary checks and balances on governments’ man-date all the way to the negotiation outcome in Brussels – furthermore implies that there is no representation of the EU common good by default. Member states usually have narrowly defined interests, and although these may have positive spill-over effects for other member states or policy areas, there is no guarantor of EU public goods as such. The roles of the European Commission and the EP are com-paratively smaller to the decision powers of the 27 governments and the result is a general undervaluation of European common interests


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28 Sara Hagemann

as the wider EU common good is incompletely represented in the negotiations against the governments’ priorities.

Observing these limitations imposed on the bargaining process even before negotiations have formally been initiated at the EU level suggests that the sequence of interactions is of great importance. While the process of policy formulations and the definition of bud-get priorities for each individual government is surely a lengthy one, these formulations are done in the manner of backward induction, leaving little room for a ‘holistic’ approach to the final outcome: negotiating expenditure, revenue and strategic priorities behind closed doors as a ‘package’ almost guarantees that most attention is focused on net contributions. Member states have a significant incentive to pre-empt negotiations by reaching agreement on signif-icant expenditure areas before the actual decision stage, further lim-iting the responsiveness of the budget to changing policy priorities.

2.2 European Union public spending – on what?3

This section discusses how the rhetoric used by government repre-sentatives and EU negotiators reflects the constraints imposed by national as well as EU-level actors and interests when formulating their policy priorities for the MFF. It shows that a widespread and inaccurate use of economic concepts for justifying individual gov-ernments’ policy objectives adds to the complexity of negotiations. Without engaging in normative reflections over specific budget posts or general priorities, it is suggested that a clearer distinction between why EU spending might be necessary from a political, economic, social or environmental standpoint may provide a more structured basis for the political decisions on what policies should be funded at the EU level.

The Commission’s 2008–9 budget review document stipulated that current policy drivers and future challenges should be at the centre of any future budget. The budget review aimed ‘to see how the budget can [ ... ] be shaped to serve EU policies and to meet the challenges of the decades ahead’ (European Commission 2007a). To achieve such a budget, it is important to establish that the statement of applying a policy-driven approach presupposes a particular under-lying way of thinking about public spending. It represents a focus on the concrete outcomes of EU spending (most often measured


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according to utilitarian principles), rather than attaching most value to, for example, achieving further integration and coordination at the EU level. While this outcome-focused approach has become more common in recent years, it is a significant departure for EU policy. European integration has often been characterised by creat-ing mechanisms for cooperation and coordination as a means for furthering integration, with the impact of policy at times becoming apparent only later down the line. A policy-driven budget, and in general a focus of EU policy on outcomes, implies more attention being paid to implementation and delivery, including the appraisal, monitoring and evaluation of policy outcomes. This requires a sig-nificant focus on the evidence-base of policy, including potential economic justifications for policy interventions.

In a large number of the submissions to the 2008–9 budget review,4 references were made to the need for a focus on EU policy priorities and, in particular, to advance and fund European public goods. For example, the Italian submission made public goods central to what the EU should focus on: ‘As a general rule, the EU budget should favour the supply of “public goods”, i.e. those goods whose bene-fits cannot be appropriated from would-be private investors and/or where the national scale may be inefficient. In this case, there is a risk of under-production of those goods, which leads to reduced pro-ductivity of the economy as a whole’ (Government of Italy 2008). The Finnish government submission notes that ‘If the EU budget is to generate the added value called for by the European Council, the structure of the budget must be revised to enable the Union to focus on supporting growth, competitiveness, expertise and innovations in policy areas where it is able to operate more effectively than the member states, and to produce European level public goods, such as internal and external security and protection of the environment.’

Examples of public goods cited by governments in budget review submissions included safety, external border control, high environ-mental standards (Government of Cyprus), environment, ecology, food safety standards, animal welfare, rural development (in the con-text of the CAP) (Danish Government), measures providing material and immaterial infrastructure and actions aiming at modernising services and markets, in order to strengthen a particular region’s capacity to attract capital business and jobs, and improve citizens’ quality of life (in the context of cohesion policy) (Italian Government),


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30 Sara Hagemann

Life+ and rural development policy (Swedish Government), road, public transport, water treatment and the environment and public goods produced by farmers (Irish Government).

Some non-state actors who submitted their contributions to the consultation process went even further. GKI Economic Research Co. claims that ‘There are European public goods (such as the European Single Market, the Lisbon Strategy, energy, the environment, enlargement, Trans-European networks, etc.) that have to be funded at the level of the EU.’ This contribution also notes a further range of policies which can be regarded as public goods, such as policies dealing with ‘global challenges like climate change, energy supply and ageing’ and regional challenges ‘such as common border con-trol along the external frontiers of the EU [and] the European neigh-bourhood policy aimed at ensuring stability in the regions adjacent to the EU’.

Most often, the ‘public goods’ term is used in the debate of the future of the CAP but, here, the usage of the term can differ signif-icantly. Some argue that the CAP or elements of it are providing a public good while others cite the CAP as an example of a policy area which does not. Often, certain elements of the CAP are highlighted as public goods. In its submission the Scottish Government ‘notes the UK Government’s view that EU spending on agricultural sup-port should be reduced. There is certainly a strong case for pub-lic spending to be better focussed on specific schemes that can be shown to deliver public goods in line with the EU’s own strategic priorities.’

The above examples make it quite clear that a large number of the actors involved in the budget negotiations lack clarity in setting out what exactly is meant by a European public good. Some of the contri-butions simply equate public benefits with public goods: ‘In relation to both cohesion policy and the CAP, we believe there should be a stronger emphasis on payment in return for public benefits (“public goods”) with measurable outcomes.’ This ‘catch-all’ usage of the term public goods distracts from the development of a genuine under-standing and analysis of the role and importance of EU public goods from an economic perspective.

In economics, public goods have a much more specific definition – they constitute one of a narrow set of market failures where the state might need to intervene to correct the workings of the market


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to prevent a sub-optimal outcome, implying that government action can lead to an overall enhancement of economic efficiency.

Questioning what is or is not a European public good is not a mat-ter of semantics: using this term implies that there is a specific under-lying economic justification (in this case to achieve higher economic efficiency) for government action. Labelling policies as European public goods invokes an economic justification for action, implying that only through EU-level action can the benefits of a public good be delivered to member states or citizens. If these policies truly deliv-ered public goods, it would be difficult to consider them inadequate for support at European level (Zuleeg 2009).

An examination of public goods is central to producing an ‘effi-cient’ budget outcome. As the Confederation of Swedish Enterprises puts it, ‘Defining potential economies of scale and EU public goods is an important part of assessing the added valued and should be one of the major tasks of the budget reform. Experience should be drawn from past budget allocation, measuring and following up objectives to see what areas have brought European value added, such as inno-vation projects and other policies that promote free movement across EU borders’ (Confederation of Swedish Enterprises 2008).

The broad thrust of most definitions is that a European public good is one which can be provided effectively only at the European level (if the resources were made available). The concept of European pub-lic goods is often used synonymously with the term ‘EU added value’, i.e. that there are certain policies where acting at the European level can add value over and above what could be done at the member state level. For example, the Hungarian Government submission to the budget review stipulates that one criterion to recognise European value added is, ‘policies that produce European public goods (e.g. in case of the CAP: food safety, landscape, safeguarding the rural com-munities, animal welfare, reducing air-pollution etc.)’ (Government of Hungary 2008).

Many descriptions of public goods at EU level also reflect the subsidiarity principle with the argument often invoking a kind of inverse subsidiarity, arguing that the EU level is the most appropri-ate level of dealing with a particular challenge. For example Antonio Martino, then Italian foreign minister, stated that ‘It’s wise to con-centrate on the really big measures, what I call European public goods: Those goals that can be pursued only at European level.’5


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32 Sara Hagemann

In some instances, there also seems to be an implicit judgement that action at member state level has been insufficient and/or ineffective and that a collective European response is now needed to correct member state failings.

There are many challenges which can be addressed only at the EU level, but achieving a policy-driven budget will be possible only if the rationale behind the financial mechanisms is coherent. Of course, economic objectives, such as effectiveness and efficiency, are not the sole reason for EU action in many policy areas. Due to the complex-ities with the economic justifications alone, this chapter will suggest a theoretical framework that divides the underlying principles driv-ing EU public spending into four categories.

2.2.1 Values and principles

Values and principles can be a motivation for EU action. European inte-gration – ‘an ever closer union among the peoples of Europe’6 – can be a value in itself, based on the belief that European integration can overcome conflict and division. Barriers to EU integration, and a lack of cooperation and common action, stand in the way of achieving this goal. While integration can be achieved through ‘low politics’ mecha-nisms (principally economic integration), realising economic benefits is not the final goal of EU policy and spending. Policy spill-overs within and across policy fields can be an underlying rationale for action in economic policy fields. If taking this point of view, economic object-ives can be sacrificed for the greater good of further integration, poten-tially justifying, for example, the introduction of funding mechanisms to encourage more reluctant member states to integrate further.7

2.2.2 Sectoral interests

In common with all political systems, the EU’s objectives might also reflect a range of different vested interests. This can include the economic, environmental or social interests of certain groups (for example, bureaucrats, farmers, environmental pressure groups or businesses) who are electorally powerful or have developed mecha-nisms to influence policy-making (e.g. lobbying) (Coen (ed.) 2007; Curtin 2003). Vested interests of a wide range of actors can create inertia in the budget: once a policy with attached spending is cre-ated, any reform or change will be strongly opposed by those directly benefiting from it.


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Politicians might also pursue certain policies to gain re-election or to extend their political power. In recent years, the EU has become more ‘political’ with decision makers more closely tied into political processes (cf. Hix 2008; Hix and Høyland 2011), which might have strengthened this rationale for EU spending.

2.2.3 ‘Statehood’ policies

In recent years, the argument has been made that individual mem-ber states lack critical mass politically, especially in foreign relations (e.g. Hill and Smith 2005). The argument is that the clout of the EU when acting together is greater than the sum of its parts. For exam-ple, in international trade negotiations the EU negotiates and acts as a single bloc, providing a powerful negotiation position. The cross-border nature of certain policy areas also makes it difficult for indi-vidual member states to act on their own. Combating international terrorism, dealing with organised crime, managing cross-border pol-lution, infectious diseases and natural disasters all require a degree of European and/or international coordination.

2.2.4 Environmental and social rationales

Finally, action might also be based on environmental and social objectives.8 Reducing income disparity (between and within coun-tries) by redistributing funds from richer to poorer member states and regions is already present at EU level: cohesion policy is, in part, a transfer from richer parts of the EU to poorer ones, aiming to achieve higher growth in poorer regions. Overall, at European level, this transfer should increase ‘utility’ (the satisfaction or benefit derived from consumption) as poorer regions will gain more utility than the richer ones will sacrifice.9

At the European level, this argument is often couched in the term of ‘solidarity’, with the aim of ensuring that all parts of Europe develop economically. This argument has also been applied inter-nationally to spending on international development aid (cf. Orbie and Versluys 2008). There is a clear redistribution element in these transfers, aiming for equity rather than economic efficiency.

For many EU policies, a range of different rationales can be identi-fied. Taking cohesion policy as an example, there are also economic reasons for this spending, as the interdependence of EU economies means that the stimulation of economic development in one area will


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34 Sara Hagemann

have positive knock-on effects on others. There is thus a range of dif-ferent reasons for having EU policies and for spending money at the EU level. Economic objectives, such as effectiveness and efficiency, are not the sole reason for EU action in many policy areas. Which of the ‘rationales’ are used for justifying public spending matters to decision dynamics: negotiations over a policy preference regard-ing effectiveness of ‘statehood policies’ are inevitably different from negotiating vested sectoral interests or a true public good. Blurring boundaries between these terms result in a confusion of their varying benefits/costs to the populations. It also suggests a collective inability to agree on common principles guiding the budget priorities, which calls into question the general attempt to produce a more ‘efficient’ budget, not to speak of accountability of the political decision proc-ess. EU Commission representatives may hence find it of interest to disseminate the governments’ wish lists in future negotiation rounds according to these economic, political and social rationales in order to preserve some policy-driven structure to the decision process, and attempt to achieve the much desired ‘efficient’ outcome.

2.3 The rules of the game

As a last topic, this chapter will attach a few remarks to the imple-mentation of the Lisbon Treaty. Chapter 3 by Giacomo Benedetto will go through the changes to the formal rules in detail,10 but here the focus will be on the consequences of the new treaty base in rela-tion to the issues raised in Sections 2.1 and 2.2 of this chapter.

The treaty stipulates that the multiannual budgetary agreement for the first time becomes legally binding, and thereby increases its formal weight as a budget planning mechanism. A new provision furthermore clarifies that:

Where no Council regulation determining a new financial frame-work has been adopted by the end of the previous financial frame-work, the ceilings and other provisions corresponding to the last year of that framework shall be extended until such time as that act is adopted. (Article 312)11

This is likely to reinforce the status quo bias. When this provision will come into force is still somewhat uncertain, but most likely it


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will apply to the current financial framework rather than subse-quent financial perspectives. This would imply the continuation of the budget from 2013 if no agreement has been reached by the end of that year. If this is the case, it would mean that the reference point for many member state negotiators will be the final expendi-ture in 2013, which will differ significantly from average spending over the full financial perspective 2007–13. Hence, and as discussed in Section 2.1, the incentives to pre-empt negotiations over cer-tain sensitive budget posts are eminent, not least through spending reductions in the annual budgets of 2012 and 2013. The balance of agricultural spending between old and new member states will also have changed significantly.

There are three further changes in the Lisbon Treaty which might affect the debate and negotiations over the next years. First, the treaty defines that the budgetary framework must cover at least a five-year period, but does not stipulate further the exact duration or the alignment of the budget cycle with the political and policy cycles of the EU (cf. Hagemann and Zuleeg 2008b). There is little connection between the budget process and political processes at the European level. With the limited role of both the Commission and the EP, and no synchronicity of the budgetary cycle with elec-tion or appointment cycles, there is no real political responsibility, legitimacy or accountability for the budget at the EU level. One can of course question whether such mechanisms would be required or even desirable, granted the fact that decision powers rest with the nationally elected governments (cf. Moravcsik 2002). Yet, bearing in mind the conclusions from Section 2.1, this chapter will take the position that national scrutiny of governments’ negotiations in Brussels will inherently be restricted in nature both due to discon-nected, closed process of EU budget negotiations and to the naturally biased interests of national and regional decision-makers. Hence, the possibility of aligning political and budgetary cycles at the EU level could be considered as one way to enhance accountability as well as to ease conflicts and gridlocks caused by the current division of ‘national vs. EU level interests’.

Second, and linked to the above, the treaty now formally men-tions the EP’s powers in the multiannual budgetary negotiations and stipulates that ‘The Council shall act unanimously after obtaining the consent of the European Parliament, which shall be given by


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36 Sara Hagemann

a majority of its component members’. It remains to be seen how this provision will take effect in practice, and the text suggests that the Parliament still has a limited influence since it merely has to give its consent by a simple majority vis-à-vis the European Council’s unanimity rule. But there is little doubt that in future the European Council will be under greater pressure to take into account the Parliament’s decisions on size and expenditure, since it will be diffi-cult to significantly change a Parliament proposal presented prior to the Council agreement. Also, Members of the European Parliament (MEPs) involved in the budget will surely not miss the chance to make use of these increased powers; previous experiences have dem-onstrated the Parliament’s ability to exploit the very limits of the treaty base when it comes to complying with formal rights of voicing its opinion (e.g. Hix 2002).

Lastly, one aspect not included in the new Treaty is how policy initiatives evoked under the newly introduced enhanced coopera-tion mechanism will be financed. Much uncertainty surrounds which policy initiatives could be the first to be introduced under these rules. However, the decision on how to finance any such pol-icies will be left until after the final agreement on a new multian-nual budget. This could cause longer-term problems for such a policy mechanism.

2.4 Concluding remarks

This chapter has outlined a number of issues which deserve greater scrutiny by the academic literature and which could be considered of merit for decision-makers involved in the future budget negoti-ations, noting the requests for reforming budgetary decision-making procedures to deliver a budget which fits with EU policy priorities. It concludes with a general remark that in order for both member states and the EU as a whole to win in the long run, the governments can-not regard the negotiation process as a war of ‘red lines’, leaving all responsibility for achieving a coherent outcome to selected ‘brokers’ (the Commission, the EU Presidency, the President of the European Council).

Most of the governments submitted their contributions to the Commission’s consultation process during the autumn of 2008 and Spring 2009, and while the support for the Commission’s approach


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was widely emphasised, few of the governments’ contributions included actual details for a ‘policy-driven’ budget rather than a bud-get constructed to accommodate individual government’s priorities. In addition, one worry voiced by EU budget experts is whether the current economic climate will result in a willingness to discuss the big questions necessary for a fundamental budget reform or indeed could have a negative effect on the governments’ preferences and the negotiation process for the next MFF. Indeed, while the Commission’s MFF proposal of June 2011 still uses rhetoric that stresses a need for significant changes on both the revenue and expenditure side, the content and extent of their proposals indicate that expectations should not be raised too high.

This chapter will conclude with the argument that the current economic crisis could be seen as a political ‘window of opportunity’ to bring about real changes. Decisions concerning the EU budget have consequences not only for the detailed spending and financing of each budgetary heading, but also for the EU’s long-term political and economic strategies. They have knock-on effects for current and future social, economic and environmental policies which may not be directly reflected in this limited budgetary framework.

Hence, it is crucial that the EU has a decision-making mechanism which can produce a more rational, priority-driven budget. In order to achieve this, synchronised budgetary and political cycles of the EU institutions may help to also further the legitimacy and account-ability of the negotiation and adoption of budget agreements. The EP and the Commission are pressed to deliver a new MFF in their first days in office or towards the end of their term. This is the case at the moment and the implications are evident.

Individual governments’ demands (the so-called red lines) and pre-negotiated agreements are also problematic and cannot be allowed to determine the outcome of future budgetary agreements, if reform is really to take place. One way of achieving this could be through a complete separation of the formulation of long-term strategies from the detailed haggling over specific budget posts. Even a com-plete decoupling of negotiations about financing from negotiations over expenditure is worth considering. This might prevent a process where the governments have pre-determined positions and a narrow focus on juste retour. Negotiating expenditure, revenue and strate-gic priorities behind closed doors as a ‘package’ almost guarantees


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38 Sara Hagemann

that most attention is focused on net contributions. Member states have a significant incentive to pre-empt the negotiation by reaching agreement on significant expenditure areas before the negotiations, further limiting the responsiveness of the budget to changing policy priorities.

Lastly, the national level formulation of country positions and pri-orities must also be addressed to achieve a more satisfactory and effi-cient outcome. Hence, timing and sequencing of budget negotiations are crucial.

At the moment the main concerns of governments and policy-makers are how to aid both private and public interests in the unfold-ing economic turmoil. Their attention is therefore not aimed only at the EU’s budget negotiations, but rather at coordination mecha-nisms between national interventions. Still, as the rapid, short-term government actions are translated into longer-term policy and bud-get priorities at both national and EU levels, the EU budget inevitably increases its importance as an economic – and in particular – as a political tool.

Notes

1. Cf. (Tseblis 2002) for an analysis of veto players at domestic and EU level.

2. For analyses of national parliamentary scrutiny of EU negotiations, please refer to e.g. Holzhacker (2002) and Neuhold, C. and de Ruiter, R. (2010).

3. Previous versions of the discussion in this section have been presented in publications co-authored with Fabian Zuleeg. Please refer to Hagemann and Zuleeg (2008a; 2008b). See also Zuleeg (2009).

4. Each of the contributions to the budget review are available on the Commission’s website: http://ec.europa.eu/budget/reform/issues/read_en.htm

5. International Herald Tribune, ‘A Call to Pursue “European Public Goods”’, June 1994.

6. Preamble, Treaty of Rome.7. Please refer to the Introduction of this book for the argument that the

budget is not about redistribution as much as side-payments to secure market integration (also cf. Carrubba 1997).

8. The strict distinction between environmental, social and economic poli-cies, or indeed between different types of economic policies such as fiscal, structural and supply side policies, is becoming more and more difficult to maintain. Many policies contain multiple objectives, for example retrain-ing people to work in eco-industries, financed by fiscal stimulus money


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http://ec.europa.eu/budget/reform/issues/readen.htm

http://ec.europa.eu/budget/reform/issues/readen.htm


and channelled through the structural funds would be hard to classify in a specific policy category.

9. Based on the marginal utility of consumption (the utility derived from consuming an additional unit) being higher for people on lower incomes.

10. cf. Chapters 3 and 5 for discussions of the new rules for the MFF as well as adoption of the annual EU budget.

11. Treaty on the Functioning of the European Union.


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The changes made to the budgetary powers of the EU in the Lisbon Treaty were the most significant since the budget treaties of 1970 and 1975. Under the rules of the Lisbon Treaty, member states and the EP will try to agree a new MFF, the long-term budget, for the years 2014 to 2020. Under new rules, they will also try to agree the EU’s annual budgets and may try to reform the EU’s system of revenue or own resources. While annual budgets used to allow the EP and Council to exercise leverage over each other in spending, own resources deter-mine the amounts available to spend. Both of these affect negoti-ations on the MFF

Past experience suggests that some member states will dig their heels in during the negotiations to extract concessions and the pres-sure for austerity in the formation of national budgets gives this cre-dence. There has always been a pattern of member states threatening to block change by using their veto in budgetary and other fields in the EU. Despite expectations that the Lisbon Treaty facilitates deci-sion-making, this may not be the case for several reasons. Firstly, the actual rule changes of the Lisbon Treaty may make budget reform more difficult. Second, EU enlargements since 2004 have increased demand on the budget as well as the number of member states who can threaten to protect current arrangements that suit them. Third, the global economic and eurozone crises have elicited national responses rather than European responses from key member states that seem keen to apply national-level austerity to the European level. While the continuation of traditional spending policies of agricul-ture and cohesion (see Chapters 6 and 7 by Alan Greer and Simona

3Budget Reform and the Lisbon TreatyGiacomo Benedetto1

40


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Budget Reform and the Lisbon Treaty 41

Milio) is challenged by the legacy of under-spending and absorp-tion capacity, it seems that a large number of member states will vote to block changes to those spending policies. In turn this leaves little room for the expansion of public goods spending as a way to invigorate the European economy. Robert Kaiser and Heiko Prange-Gstöhl in Chapter 4 analyse this problem, while Charles Blankart and Gerrit Koester in Chapter 5 suggest some solutions. Given these constraints, what difference do the new rules of the Lisbon Treaty make? Although the Lisbon Treaty re-balances powers between the European Commission, EP and the Council, budgetary reform is no more likely than in the past as this chapter explains. In some ways reform of the budget becomes more difficult.

Under Article 314 of the new treaty, the EP has rather less power than under the old treaty in determining outcomes in the annual budgets. The Commission, Council and EP, however, all benefit from a ‘collective efficiency and legitimacy gain’.2 The new budgetary pro-cedures of the Lisbon Treaty are easier to understand. In some ways they establish equality between the EP and Council in the annual budget, in part compensating the EP with new powers in certain fields to match a loss of powers in others. Ease of understanding does not however make reform more likely. The deadlines for agreement are in fact tighter, leaving less time to find compromise. The find-ings in this chapter contrast with usual expectations that equality between the Council and EP amounts to a gain in powers for the EP such that a reformist EP is more likely to secure changed outcomes. The initial failure to agree to an annual budget for the year 2011 demonstrates that equality amounts to a loss in the EP’s capacities to pursue reform.

The term ‘reform’ in this chapter is defined in the broadest sense as change. A reform can completely reconfigure the budget, it can increase or reduce overall spending or it can reallocate spending in favour of one policy area at the expense of another. Section 3.1 of the chapter will look at some of the literature on legislative politics in the EU that is relevant to budgetary decision-making. The rest of the chapter then analyses, in turn, the gains and losses in power and the new opportunities for the EP, Council and Commission across the fields of own resources,3 the MFF, annual budget and implementation of the budget.4 A concluding discussion is offered at the end that the power of veto increases and the ability to


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propose solutions is diminished. In Chapter 2 Sara Hagemann and in Chapter 5 Charles Blankart and Gerrit Koester suggest solutions to the increased budgetary deadlock that Lisbon makes possible.

3.1 Decision-Making in the European Union

The budgetary changes brought in by the Lisbon Treaty (Treaty on the Functioning of the European Union – TFEU) are very extensive in rebalancing the powers between the Council, the EP and the European Commission. The literature disagrees on the effects and purpose of the budget. For example, Carrubba (1997) argues that, rather than providing redistribution as an end in itself, the budget delivers side-payments to secure integration of European markets that might otherwise face opposition from economically vulnerable sectors or member states. This differs from the view of Kauppi and Widgren (2009) that, while the governments try to limit revenue, the EP is motivated by ‘benevolent objectives’ to influence spend-ing notably in regional development. The question then is whether the very real change to the budgetary powers of the EU institutions will change those fundamental outcomes or make it easier to achieve reform.

When negotiations over future decision-making procedures take place, negotiators try to improve their chances of achieving favour-able policy outcomes. Tsebelis and Garrett (2000) analyse the differing versions of EU legislative procedures, with respect to the contrasting powers of the EP, Council and Commission. They conclude that fol-lowing the Amsterdam Treaty, the EP and Council became ‘co-leg-islators’ under the codecision procedure, a very significant increase in powers for the EP. In contrast, I argue that achieving a procedure similar to codecision for the budget was not an advantage for the EP and will not increase the likelihood of budgetary reform because the EP had a greater chance to achieve this before the Lisbon Treaty. That said, will it make reform more or less likely?

At a time of first agreement, rules can be locked-in so they are difficult to change. This is what occurred with the budget in 1970 (Lindner 2006), which met the requirements of the then six member states. As the EU grew to include the UK, Ireland and Denmark, the budget rapidly encountered the opposition of both the British gov-ernment and the EP, ensuring high levels of conflict. The uncertainty


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over the potential cost of changing rules and the relatively low cost of maintaining the pre-existing rules prevented change.

Despite the extension of codecision to new policy areas during the drafting of the EU Constitution and Lisbon Treaty, a reform to curtail some of the budgetary powers of the EP and Commission was carefully crafted by the governments. Any meaningful reform of the EU budget will result in the identification of a minority of visible losers, or in damage caused by their veto, which would carry a cost for the EU. By preventing reform, such a cost will not be paid.

3.2 Changing financial powers under the Lisbon Treaty (TFEU)

This section analyses the changes to each of the financial proce-dures (own resources, the MFF, the annual budget and provisional twelfths, and measures for implementation and audit). Tables 3.1 to 3.3 illustrate the changes in those powers for the EP, Council and Commission with regard to the MFF, annual budget and budgetary implementation and audit. Figures 3.1 and 3.2 illustrate those pow-ers with respect to the changes in the rules for the annual budget. Table 3.4 summarises how the Lisbon Treaty either assists budgetary reform or reinforces the current structure (making reform more dif-ficult than previously).

3.2.1 EU revenue: own resources

The revenue of the EU is guaranteed through a system of ‘own resources’ rather than national (essentially voluntary) contributions. The system was established in the Budget Treaty 1970 and has on occasion been altered. Own resources consist of three planks. The first of these is ‘traditional own resources’ derived mainly from the common external customs tariff, which accounts for approximately 12 per cent of EU revenue. The second is the VAT levy, whereby a pro-portion of VAT collected in each member state is transferred to the EU, currently 0.3 per cent. The VAT levy accounts for approximately 12 per cent of EU revenue. The third and most substantial plank is a direct transfer from each member state equivalent to 1.23 per cent of its GNI, with discounts for some net contributors. The GNI transfers account for around 76 per cent of the EU’s revenue.


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Reform of own resources has always required the unanimous approval of the member states. Although unanimity is difficult to achieve, reforms have been agreed in the past. The Lisbon Treaty leaves the system for reforming the EU’s own resources as effectively unchanged. On the basis of a Commission proposal, the Council will unanimously decide changes to own resources after consult-ing the EP. The EP gains the power of consent over implementation measures of any change to own resources.5 This is not a power to reject changes to own resources, only to reject their implementing measures. The power of the EP to dictate details of implementation appears unimportant and yet implementation could affect transi-tion periods and details on the collection of new sorts of revenue by the EU. Obstructive behaviour by the EP could have effect on the ability of the EU to spend. The initial rejection of the annual bud-get for 2011, the first time a budget had been rejected since 1985, was due to the EP and Council failing to find agreement on the principles of the reform of budgetary implementation and reform of own resources.6 The revenue system of the EU has always been contentious and the continuing exclusion of the EP from its reform led to rancour.

Reform driven by national governments is possible. Previous reform was agreed in 1999 at the same time as the ‘Agenda 2000’ budget reforms that prepared for the EU’s enlargement. The own resource that comes from VAT contributions was reduced in stages from 1.0 per cent VAT to 0.75 per cent in 2002 and to 0.50 per cent in 2004. The most recent reform further reduced the VAT contribu-tion to 0.3 per cent in 20077 and was agreed together with the MFF of 2007–13. In 1999, the proportion of EU own resources delivered through direct transfers as a proportion of member states’ GNI was commensurately increased (Nava 2000: 145).

3.2.2 The Multiannual Financial Framework

The MFF is the long-term budget, within whose limits annual budg-ets for the EU must be agreed. An Inter-Institutional Agreement between the Council, Commission and EP established the MFF’s pre-decessor, the financial perspective, in 1988. The procedures for the MFF before and after ratification of the Lisbon Treaty are illustrated in Table 3.1. Before the Lisbon Treaty, the Commission and Council would agree on a long-term budgetary package usually for a period of


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seven years. Member state governments would reach accord unani-mously and the EP could exercise a right of veto only. The three insti-tutions could set an amendable ceiling for expenditure to allow some flexibility in case of need, for example in a recession or response to a natural disaster.

The Lisbon Treaty makes the MFF no easier to amend unless the Council uses a passerelle8 to decide it by the ordinary legislative pro-cedure, which is the new name for codecision. Before Lisbon, EU revenue was capped at a maximum level yet the ceiling for spend-ing was flexible. Since the Lisbon Treaty was ratified, Article 312(3) now sets absolute ceilings on spending, which constrains flexibil-ity in the annual budget: ‘The financial framework shall determine the amounts of the annual ceilings on commitment appropriations by category of expenditure and of the annual ceiling on payment appropriations.’

Before Lisbon, the old Article 272(9) TEC (Treaty Establishing the European Community), now deleted, allowed for a maximum and actual rate of increase in the budget to be agreed annually by the Commission, Council and EP:

A maximum rate of increase in relation to the expenditure of the same type to be incurred during the current year shall be fixed annually for the total [non-compulsory] expenditure ...

The Commission shall ... declare what this maximum rate is ... If, in respect of [non-compulsory] expenditure ... the actual rate

of increase in the draft budget established by the Council is over half the maximum rate, the EP may, exercising its right of amend-ment, further increase the total amount of that expenditure to a limit not exceeding half the maximum rate.

Where the European Parliament, the Council or the Commission consider that the activities of the Communities require that the rate determined according to the procedure laid down in this par-agraph should be exceeded, another rate may be fixed by agree-ment between the Council, acting by QMV, and the European Parliament, acting by a majority of its Members and three fifths of the votes cast.

The MFF now sets the maximum rate of increase and the treaty does not foresee increases (Table 3.4). Previously, increases needed


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the consent of a qualified majority in the Council; now they will require unanimity among the governments agreeing the MFF. These provisions reduce the power of the Commission and those who wish for some budgetary flexibility, while they increase the power of those who wish for more rigidity in spending. They were a contributing factor to the initial rejection of the 2011 annual bud-get at the conciliation stage. In the autumn of 2010, the EP unsuc-cessfully tried to reinstate its power to influence a maximum rate of increase by inserting amendments to that effect in the draft annual budget.9

If there is no agreement over a new MFF, the existing one will be carried over with its spending ceilings, reinforcing the status quo.10 The Council is anxious to limit revenue, yet unable or unwilling to reallocate or reduce spending on traditional priorities. It is unlikely that the Lisbon Treaty will change this since own resources and the multiannual budget continue to require unanimity for changes to be made.

How will the MFF be decided from now on? Article 312(2) pro-vides the answer: ‘The Council shall act unanimously after obtain-ing the consent of the European Parliament.’11 This may give some extra proposing powers to both the Commission and EP. Previously an agreement required mutual accord between the Commission and Council and a subsequent ‘take-it-or-leave-it’ veto power for the EP. The EP could try to use this new power of prior consent as if it were a power of proposal and it could modify its internal Rules of Procedure in order to do so.12 This would be in addition to its existing power to reject the MFF, which it exercised as recently as January 2006.13

The MFF will last for ‘at least five years’14 and could be made to coincide with the terms of office of the EP and Commission. The EP would therefore have greater legitimacy in seeking to influence the content of successive frameworks in granting or withholding its consent to the spending programme. In Chapter 2, Sara Hagemann discusses issues of timing and sequencing in relation to the possi-bility of a five-year budgetary cycle, which could make reform more likely. Having already used its veto power over the budget package in 2006, in an era of budgetary retrenchment, the EP could do so again in 2013.


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3.2.3 The annual budgetary procedure and provisional twelfths

The changing powers brought to the annual budgetary procedure under the Lisbon Treaty are the subject of extensive analysis by Benedetto and Høyland (2007). These are summarised in Table 3.2 and Figures 3.1 and 3.2. How do these changes affect the division of power between the institutions and likelihood that veto power by one or other institution may trigger reform elsewhere or, failing that, merely reinforce the current organisation of spending?

Laffan and Lindner (2010) refer to the period before the Inter-Institutional Agreement of 1988 as that of the intergovernmental ‘de Gaulle budget’, matching the interests of the governments of the six founding member states. The Inter-Institutional Agreement of 1988 signalled a move from the old de Gaulle budget to a more inte-grationist budget. It addressed the concerns of the EP, by stabilising expenditure for periods of up to seven years, increasing the ERDF and allowing the EP to reject the long-term budget. These significant changes were possible due to the EP’s obstinacy in the use of the

Table 3.1 Effect of the Lisbon of Treaty (Article 312 TFEU) on powers of reform over the Multiannual Financial Framework

Change Reform? EP

5-year cycle + + + 0 0

EP consent before agreement + + 1 0 –

National ratification abolished

+ + + + 0

Constitutionalisation of MFF – 2 2 2 +

Ceiling on spending – – – – +

No agreement => continuity – – – – +

– Reduced powers to secure reform.+ Increased power to secure reform.0 No change.1 Pro-reform if both Commission and EP are reformist.2 Loss of power for those in favour of budget flexibility.

Source: Author’s interpretation of the Accord interinstitutionnel, du 29 juin 1988, sur la discipline budgétaire et l’amélioration de la procédure budgétaire and Article 312 TFEU.


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annual budgetary procedure in 1980 and 1985, which included use of the power of veto. Does the Lisbon Treaty make use of the annual budget as a trigger for reform more or less likely than in the past (Tables 3.2 and 3.4)?

As under the old procedure, the Council adopts or amends the Commission’s proposed budget by QMV.15 The net loser here is the EP. It may amend by absolute majority16 in a single reading, otherwise the budget is adopted. A conciliation committee convenes if in second reading the Council fails to accept all of the EP’s amendments.17 If the conciliation committee agrees to a text, the budget is accepted unless at least one of the institutions actively rejects that text, while the other institution fails to act.18 Whereas under the old procedure, the Council and EP could impose decisions against the will of the other respectively on compulsory and non-compulsory expenditure,19 sub-ject to an overall EP rejection by the rather high requirement of a two-thirds majority, the new Article 314 replaces this with a proced-ure similar to codecision. This means that both institutions must agree with each other on everything, with either easily exercising a power of rejection at conciliation – by a large enough minority of governments in the Council to prevent a qualified majority or by a simple majority in the EP’s delegation. Amendments are more diffi-cult to pass, while rejections of the entire budget are easier.

Figure 3.1 The Budgetary Procedure of 1975

Compulsory expenditureCommission

Non-compulsory expenditureCommission

No QMV No QMVNo budget Council 1st Reading-(by 5 October)-Council 1st Reading No budget

QMV QMV

EP 1st Reading(45 days) EP no action EP no action EP 1st Reading (45 days)

EP simple majorityEP absolute majorityIncrease spending

QMVNo QMV againstCouncil 2nd Reading

(15 days)Council 2nd Reading (15 days)

Non-increaseNo QMV against

QMV to change

EP no action EP 2nd Reading (15 days)

EP3/5 majority to re-approve

Adopted unlessEP 2/3 majority to rejectthe budget as a whole

Therelevant

part of thetotal

budgetconcluded


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The procedure adopted at Lisbon increases the power of the Council with regard to the EP as an analysis of the provisional twelfths mech-anism reveals. Article 273 TEC (315 TFEU) specifies what follows if the annual budget is rejected: ‘a sum equivalent to not more than one twelfth of the budget appropriations for the preceding financial year may be spent each month in respect of any chapter ...’

Under the old treaty, in the temporary, monthly budgets of provi-sional twelfths, the EP could overrule the Council by a three-fifths majority on proposed increases in non-compulsory expenditure. The EP could vote in favour of a decrease or a further increase within the ceiling set by the financial perspectives, which for

Figure 3.2 The Budgetary Procedure of the Lisbon Treaty

* If QMV in Council subsequently rejects the agrees outcome of the Conciliation Committee and the EP still accepts with a single majority, the joint text is adopted and EP can re-impose its first reading amendments by three-fifths’ majority within two weeks.

** Returns to the Commission if there is no agreement on Conciliation, or the joint text is rejected by an absolute majority in the EP or by QMV in Council while the EP fails to act.

Commission

Council 1st reading (Until 1 October)

QMV

EP no actionEP 1st Reading

(7 weeks)Adopted

EP absolute majority

QMV in favour ofEP amendments

Adopted Council 2nd reading (10 days)

No QMV in favour of EP amendments

EP simple majorityCouncil QMV*No agreement

Failure** Conciliation(3 weeks)

Adopted (2 weeks)


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actual payments is 1.00 per cent of GNI during the period of 2007 to 2013. Under the Lisbon Treaty, this power is reduced to blocking increases or voting for decreases only, but is extended to all areas of expenditure.

The new Articles 314 and 315 entrench the current budgetary continuity (Tables 3.2 and 3.4). As explained above, amendment to the annual budget is more difficult and overall rejection is easier.

Table 3.2 Effect of the Lisbon Treaty (Articles 314–15 TFEU) on the use of powers of budgetary reform on the annual budget and provisional twelfths

Change Ref

orm

?

EP

Co

mm

issi

on

Co

un

cil

QM

V

Co

un

cil

un

anim

ou

s

EP and Council co-equal, rejection easier, amendments more difficult

– – – – 0

Increasing what was compulsory expenditure

1 + 0 – –

Decreasing what was compulsory expenditure

2 – 0 0 0

Amending what was non-compulsory expenditure

2 – 0 + 0

Commission amendment until conciliation 3 4 + 4 0

EP empowered to cut any spending under provisional twelfths

1 + – – –

EP loses power to increase what was non-compulsory expenditure under provisional twelfths

2 – 5 + +

– Reduced powers to affect reform.+ Increased powers to affect reform.0 No change.1 Pro-reform if EP is reformist and Council is anti-reform.2 Anti-reform if EP is reformist and Council is anti-reform.3 Pro-reform if Commission is reformist.4 Pro-reform if the institution agrees with a reformist Commission.5 Anti-reform if both EP and Commission are reformist.

Source: author’s own interpretation of Article 272 and 273 TEC, and Articles 314 and 315 TFEU.


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Previously, the EP could reject an annual budget if it wished to push for reform or to disapprove of the Council’s control over compulsory expenditure, knowing that by a three-fifths majority it could safe-guard all its gains in the field of non-compulsory expenditure during the application of monthly budgets under provisional twelfths. The EP now has the ability only to cut those temporary monthly budg-ets. The Council and EP both gain veto power at the expense of the power of proposal to set agendas. This undermines the likelihood of reform.

The fate of the annual budget for 2011 exemplifies this redistri-bution of power. In the draft budget for 2011 the Commission pro-posed an increase of 5.9 per cent in spending. The Council reduced this figure to 2.9 per cent. The EP in its single reading introduced amendments restoring the Commission’s figure of 5.9 per cent and stipulating a greater role for itself in the inter-institutional politics of the MFF for 2014–20, reform of own resources and setting the max-imum rate of increase. The Lisbon Treaty specifically excludes the EP from the latter two areas.20 Although, at the conciliation committee, the EP reduced its demands for a budgetary increase to the Council’s figure of 2.9 per cent, the Council rejected the EP’s policy amend-ments. Previously, only the EP had a power of veto and at that by a two-thirds majority.

Prior to the Lisbon Treaty, each institution could overrule the other respectively on compulsory and non-compulsory spending. If the EP had been able to veto the 2011 budget under the old rules, it would have been able to safeguard a 5.9 per cent increase in spending on its areas that used to be ‘non-compulsory’, which was nearly everything except agriculture, fisheries and foreign policy, during the applica-tion of a month-by-month budget. If it opted not to reject the bud-get, the EP could still, under the old rules, overrule the Council in increasing non-compulsory spending. Under the new rules, the EP’s only available tactic in the monthly budgets would have been to cut spending in areas prioritised by the governments.

In the end, this power was unused since a new annual budget was agreed a few weeks after the failed conciliation of November 2010. The final result was a 2.9 per cent rise and a non-binding undertak-ing by the Council and Commission presidencies to consult the EP on the MFF and own resources, and to prepare supplementary budg-ets for 2011 if the need arose to honour spending requirements.21


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The Council and Commission merely offered the EP something which is already in the Lisbon Treaty; articles 311 and 312 require the Council and Commission to consult the EP on changes to own resources and the MFF, while supplementary budgets are granted in any case if circumstance requires them. This case shows that the EP’s chances of achieving budget reform through amendments to the annual budget against the wishes of the Council are signifi-cantly reduced.

3.2.4 Rules for implementation

The Lisbon Treaty spells out some provisions on the implementation of the budget, which mostly make reform easier to achieve (Tables 3.3 and 3.4). The EP and Council gain power by receiving evaluation reports from the Commission on its expenditure.22 This is in addi-tion to the receipts of accounts and financial statements that were already the case beforehand.

Table 3.3 Effect of the Lisbon Treaty (Articles 317–25 TFEU) on the reform potential of the rules on implementation and audit

Change Ref

orm

?

EP

Co

mm

issi

on

Co

un

cil

QM

VC

ou

nci

l u

nan

imo

us

Ordinary legislative procedure for budget implementation and audit (art. 322)

+ + + + –

Trilogues constitutionalised (art. 324) + + 0 0 0

Supremacy of EU anti-fraud measures over national administration of justice (art. 325.4)

+ + + 0 0

Commission forwards self-evaluation besides just accounts (art. 318)

+ + 0 + +

Commission implements budget ‘with the member states’ (art. 317)

– 1 1 1 1

– Reduced powers to affect reform.+ Increased powers to affect reform.0 No change.1 Member states or Council gain at expense of Commission and EP but only subject to

scrutiny by Anti-Fraud Office (OLAF), Court of Auditors and EP Budgetary Control Committee.


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Table 3.4 How the Lisbon Treaty facilitates reform or reinforces the status quo

Pro-reform Anti-reform

OWN RESOURCES (Art. 311)Implementation of reform: EP consent and QMV in Council

MULTI ANNUAL FINANCIAL FRAMEWORK (Art. 312)

No unanimous agreement on new framework results in continuity of status quo

Council alone decides maximum rate of increase by unanimity, ceiling for spending as well as revenue

ANNUAL BUDGETARY PROCEDURE (Art. 314)

EP and Council co-equal: rejection easier through either failing to agree

Amendments more difficult to pass since EP and Council must agreeShorter time horizons for negotiating annual budget

PROVISIONAL TWELFTHS (Art. 315)

EP gains right to cut all provisional twelfths

EP loses right to increase non-compulsory expenditure (anti-reform if the EP is pro-reform)

IMPLEMENTATION AND DISCHARGE

Ordinary legislative procedure replaces consultation of EP and unanimity for implementation of the budget, auditing and rules for financial officials (Art. 322)

Commission implements budget no longer on its own but ‘in co-operation with member states’ (Art. 317) creating deadlock on reform as member state budgetary management becomes accountable to EP and Court of Auditors

Budgetary trilogues are constitutionalised (Art. 324)

Supremacy of EU anti-fraud measures decided by ordinary legislative procedure over national criminal law and administration of justice (Art. 325.4)

EP and Council to receive evaluation reports from Commission, besides accounts and financial statements (Art. 318)


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Financial regulations and procedures to establish and implement the budget, as well as for the auditing of accounts, and rules for financial officials of the institutions were previously subject to the consultation procedure, with the Council deciding unanimously and the EP being merely consulted. These regulations are shifted to the ordinary legislative procedure,23 making the EP an equal partner of the Council, which will also decide by QMV. Indirectly this enhances the powers of the Commission as an agenda-setter, since it may pitch proposals for such regulations at a point that would otherwise have been vetoed by a single government. Assuming that improved audit powers lead to reform, this is a reformist change.

Moreover, trilogue negotiations between the presidencies of the EP, Council and Commission on financial matters are constitution-alised.24 This guarantees the status of the EP and Commission in negotiations concerning own resources, the MFF, annual budget and budgetary implementation.

Under Lisbon, national criminal law and the national admin-istration of justice are no longer exempt from the supremacy of anti-fraud measures to tackle fraud against the EU budget that are decided by the ordinary legislative procedure.25 This extends the power of the EP, Commission, European Court of Justice and Court of Auditors over national administrations, allowing reform of the audit process to take place that may otherwise be opposed by national governments.

In one respect only, the provisions on implementation of the budget in the Lisbon Treaty reinforce the status quo: the Commission will no longer implement the budget on its own, but ‘in cooperation with the member states’.26 Shared responsibility between the Commission and the governments in implementing the budget makes the govern-ments equally accountable before the EP, the Court of the Auditors and OLAF (the Commission’s anti-fraud office) in how they manage EU expenditure at a national level. The potential for conflict here could make reform more difficult.

Although the rules for implementation move in a reform direction that may meet the preferences of the EP and a qualified majority of governments, they provide a less easy indication to the ability of the EP or governments to secure real changes to the nature and amounts of EU spending itself.


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3.3 Discussion and concluding remarks

The changes to the financial provisions of the EU under the Lisbon Treaty are complicated. In some fields, the EP, Council and Commission each lose power, being compensated with gains in power in other areas. There is a collective gain in simplifying most of the procedures but this has no effect on the likelihood of reform. Indeed the tighter time frame for agreeing the annual budget creates complications of its own and makes disagreement more likely.27 The EP is of course not always an agent for reform. For example, it may favour inefficient spending, which would still be budgetary change. However, if the EP favours a reform that specific national interests oppose, it now loses its leverage on the annual budget and provi-sional twelfths in order to secure it.

The Commission gains marginal extra influence over the annual budget. Despite the tighter time frames, it may propose amendments until the convening of the conciliation process. That the Commission has to share implementation of the budget with the member states may block reform. Budgetary accountability of national governments in front of the EP and Court of Auditors creates the potential for con-flict. A significant push in favour of reform could be the application of the ordinary legislative procedure for approving regulations to implement the budget although these would still require the agree-ment of both the EP and a qualified majority of the governments.

Previous budgetary reform from Delors I in the late 1980s to Agenda 2000, a decade later, was pioneered by the Commission, though always supported by powerful national governments. The outcomes of those budgetary deals matched the preferences of the EP. When the EP is dissatisfied it is prepared to use its veto powers as in 1980, 1985 and 2006. This balance will not change.

The new annual budgetary procedure takes away the leverage of Council and EP over each other. It means that the EP can no longer use its previous power of amendment or veto as a credible threat to extract concessions on longer-term budgets. Amendments become more difficult to pass and outright rejection of the annual budget becomes easier for both Council and EP, and with a greater penalty for the EP in doing so as shown in the case of the annual budget for 2011. The EP can no longer secure its amendments to increase what was non-compulsory expenditure by reintroducing them under


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provisional twelfths. The weakening of the EP’s powers of amend-ment undermine the Commission’s proposals for reform if the EP and Commission share a common view as in the autumn of 2010. Reform to the long-term budget in the future is not impossible; it just requires the support of a unanimous Council in the MFF.

With regard to the MFF, the EP becomes a partner in setting agen-das. As the formal initiator the power of the Commission increases over multiannual budgetary planning, alongside the EP’s power of prior consent. Whereas the Council used to have more power than the EP over multiannual budgetary planning and implementation, the EP had greater power over the annual budget and provisional twelfths. The powers of the Council and the EP have been equalised with the exception of own resources and the continuation of unanimity for the governments to agree the MFF. Although the EP gains some proposal power over the MFF, the reality of the survival of unanimity among the governments makes agreement as difficult as ever to reach, not least since failure to agree an MFF means the previous one is rolled over indefinitely, creating a strong incentive for non-agreement among governments who wish to protect pre-existing interests. The continu-ity of the mutual veto of the Council and EP over the MFF, and its new extension to the annual budget and implementation of changes to own resources make stalemate more probable than reform.

The new budgetary rules make no difference to the likelihood of fundamental reform to the EU budget of the kind that happened with the creation of own resources in 1970 or the MFF of 1988. Indeed if the EP is an agent of reform, that reform now becomes more unlikely given the weakening of the EP’s powers to influence matters through the annual budget and provisional twelfths. It is telling that the objectives of the EP’s unsuccessful amendments in the autumn of 2010 were greater control over budgetary planning and making sure that existing policy priorities were properly financed.28 In the light of greater pressure on an EU budget that is not growing, a lar-ger number of member states with demands and veto powers since enlargement in 2004, domestic pressure for austerity as a result of the financial and eurozone crises, and a strong constituency among many governments for protecting expenditure on agriculture and cohesion, it is easy to conclude that the rule changes of the Lisbon Treaty make reform of the EU budget, particularly in the direction of public goods spending or overall increases or decreases, improbable.


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Notes

1. I am grateful to Bjørn Høyland for permission to reproduce Figures 3.1 and 3.2 from our co-authored article, Benedetto and Høyland (2007).

2. Hix (2002) applies this term in analysing the empowerment of the EP under the Amsterdam Treaty. In some cases, governments were willing to grant further power to the EP if, in doing so, simplified procedures resulted in greater efficiency and legitimacy.

3. Articles 269 TEC; 311 TFEU.4. Articles 275–280 TEC; 318–325 TFEU.5. Article 311 TFEU.6. BUD/2010/2001: 2011 budget all sections.7. Official Journal of the European Union, L 163, 23 June 2007.8. This is a mechanism which allows a policy area to be moved from unani-

mous decision making to the ordinary legislative subject to a unanimous vote in the Council. A period of six months then follows during which any single national parliament may veto the move. See Article 18(7) TFEU. Although a new treaty is not required to implement the passerelle it is difficult to imagine that it could be agreed in the near future. Because its use is so unlikely, I have excluded it from the analysis of this chapter.

9. BUD/2010/2001: 2011 budget all sections.10. Article 312(4) TFEU.11. Article 312(2) TFEU.12. See Hix (2002) for examples of how the EP used its Rules of Procedure to

push its modest powers of codecision granted by Maastricht to the limit.

13. In January 2006 the EP rejected the draft MFF in which the Council had fixed spending at no higher than 1.045 per cent of GNI. In May 2006, the EP approved a new draft that increased spending to 1.05 per cent.

14. Article 312(1) TFEU.15. Article 314(3) TFEU.16. Article 314(4) TFEU. An absolute majority in the EP means over half the

total number of MEPs so absent or abstaining MEPs have the same effect as voting ‘no’.

17. Article 314(5) TFEU. The conciliation committee is the joint committee of the EP and the Council, which tries to negotiate a joint text when there is disagreement under the ordinary legislative procedure or the budget procedure.

18. Article 314(7)a TFEU.19. The different procedural rules for compulsory and non-compulsory

expenditure are abolished by the Lisbon Treaty. Compulsory spending included agriculture, fisheries and aspects of foreign policy. Almost eve-rything else was deemed non-compulsory.

20. Article 311 TFEU; Deletion of Article 272(9) TEC.21. Interviews with official of the budget committee, European Parliament,

20 June 2011 and Letter of Viktor Orban, Prime Minister of Hungary, to the Eurpean Parliament, 10 March 2011.


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22. Article 318 TFEU.23. Article 322(1) TFEU.24. Article 324 TFEU.25. Article 325(4) TFEU.26. Article 317 TFEU.27. Interview, official at Directorate-General Budgets, European Commission,

23 June 2011.28. BUD/2010/2001: 2011 budget all sections.


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4.1 Shaping the European Union budget for growth policies in times of crisis

The economic and financial crisis evoked some turbulence in the EU. While Europe’s economy recovers rather slowly, the currency crisis forced the Eurogroup to set up a €780 billion safety fund in order to stabilise the euro. At the same time, most member states were forced to enact comprehensive national austerity measures whose impact on their economic performance is unpredictable. In Europe ‘the politics of crisis management’ (Boin et al 2005) has increasingly interfered with ‘normal’ European politics aimed at re-aligning EU policies with future needs.

In this chapter we go beyond the mere analysis of a certain ‘budget heading’, but rather want to investigate what the shift from ‘normal’ to ‘crisis’ politics will mean for the future policy support-ing economic growth. We argue that in times of economic crisis strong national policy reactions of member states are more likely than without such a crisis and that, therefore, long-term EU strat-egies such as the budget review and the Europe 2020 initiative, which should under normal conditions boost growth policies and the expenditure for them, are more likely to be undermined, mean-ing that the originally agreed political rationale for a shift in the EU

4European Growth Policies in Times of Change: Budget Reform, Economic Crisis and Policy EntrepreneurshipRobert Kaiser and Heiko Prange-Gstöhl1

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60 Robert Kaiser and Heiko Prange-Gstöhl

budget towards growth policies (as expressed through the budget review and the Europe 2020 strategy) can more easily be circum-vented (by national short-term reactions). However, the extent to which such short-term considerations prevail over long-term strate-gies is in turn strongly influenced by the capability of the European Commission to act as a policy entrepreneur, that is its skills to keep long-term (pan-European) goals on the agenda and take advantage of the changing environment (for example by using the situation as a ‘window of opportunity’ to expand the scope of its political arena/competences).

In terms of normal politics, the budget review was supposed to be a key instrument for strategic reorientation (European Commission 2010d). For the first time ever, the European Commission was invited by the Council ‘to undertake a full, wide ranging review covering all aspects of EU spending’ (Council of the EU 2005, point 80) at the midst of the MFF 2007–13. This mid-term review covers highly controversial issues such as the financing of the CAP, the EU’s over-all financial resources and the redirection of funds in favour of the so-called growth policies, that is policy areas that are in general con-sidered as being core to sustainable economic growth, international competitiveness and job creation in a knowledge-based society, such as research and innovation policies, including innovation-related regional policies2 (Tobin, 1964; Freeman and Soete 1997; Cantwell 1999). Its outcome was originally considered a major step in the preparation of the next MFF.

Besides the budget review, we will, secondly, show that the shape of the budget for growth policies cannot be decoupled from the EU’s new long-term strategy ‘Europe 2020’ (European Commission 2010b), as a follow-up to the Lisbon Strategy where growth policies are core, and the economic crisis. In particular the economic crisis is likely to have an effect, for example, on the role of the forthcom-ing EU Framework Programme for Research and Innovation Funding (European Commission 2011a) within the next MFF, taking into account that the crisis might not only be a threat to research and innovation policies but could also provide new opportunities to pro-mote research and innovation as the main driving force for economic recovery. In its proposal for the next MFF the Commission proposed a budget of €80 billion for research and innovation (European Commission 2011b).


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European Growth Policies in Times of Change 61

Under conditions of normal politics the budgetary review could have affected European growth policies particularly in so far as the review may have led to a political pre-determination of negotiation positions for the next MFF (Kaiser and Prange-Gstöhl 2010). This is due to two procedural decisions the Commission made in advance of the review process.3 The first decision concerned the realisation of comprehensive policy-level evaluations in key EU spending areas, such as the CAP, the cohesion funds and also the Seventh Framework Programme for research, technological development and demonstra-tion activities (FP7). The mid-term evaluation of FP7 was concluded in November 2010 (European Commission 2010f). The expert group that conducted the evaluation proposed a number of instruments that could strengthen the European Research Area (ERA) in the future. They also claimed that funding for EU research should at least be maintained at current levels even under the conditions of the crisis.

The second decision was, in 2007, to launch a broad public con-sultation process on the budget review. Although the Commission ensured that the review shall not propose a new Financial Framework, member states’ governments have nevertheless stated their priorities and interests during the public consultation. This procedure could have helped the Commission to legitimise proposals at a later stage hinting at the statements member states have already put forward. Commentators assumed that ‘by inviting the European Council to adopt decisions on the basis of the final report, the 2008–9 review offers member states the possibility of making unpopular decisions on the next financial perspective well before the start of negotia-tions, thus free from the political pressures that characterise the period of negotiation’ (Rubio 2008: 14).

However, these expectations got weaker during 2009–10, as the publication of the budget review – due to its postponement from the expected date in the first half of 2009 to the second half of 2010 – ran in parallel to the start of the actual preparations for the next MFF. In May 2010 the Commission had set up a Commissioner’s group on the ‘Budget Review and the next Multiannual Financial Framework’, chaired by the President and involving several Commissioners in charge of major expenditure polices. This group has prepared the College decisions as regards both the budget review and the propos-als on the next MFF.


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The negotiations on the next MFF, which formally started with the publication of the Commission’s proposal on 29 June 2011, will cer-tainly take place in a delicate context in particular due to the tense economic situation in many member states. The revenue side of the EU budget is under particular scrutiny as very complex and perceived as unfair, with a mix of different resources, derogations and excep-tions. Correction mechanisms are based on debatable net balances calculations and do not result in fair contributions. The EP is very much in favour of reforming the revenue side (European Parliament 2011). As regards the expenditure side traditional cleavages between net-payers and net-receivers have certainly been intensified since the last EU budget was negotiated between the two enlargement rounds of 2004 and 2007. Therefore, the Commission was in a dilemma to come up with a MFF proposal delivering the right balance between political ambition and realism, while taking account of the political and economic circumstances resulting from the economic crisis.

We will first outline our theoretical considerations on the above mentioned role of the European Commission as policy entrepreneur (Section 4.2). Our key argument is that in a time of crisis political actors may not only push for change in the specific policy area con-cerned, but will also advocate for institutional adaption in order to avert similar developments in the future. In principle, a crisis opens up a window of opportunity for policy entrepreneurship both in terms of new conceptual and structural solutions. In times of ‘nor-mal politics’ the role of the policy entrepreneur mainly rests with the European Commission that tries to broker its ideas and long-term strategies mostly in formal agenda-setting processes based on its monopoly of initiative. In less stable phases, however, we can expect a more competitive relationship between the European Commission and the member states’ governments, which should be eager not only to retain control of the crisis management at the European level, but also to maintain some freedom of action for crisis prevention at the national level. In such situations, the agenda-setting process will be much more informal while the Commission’s monopoly of initiative becomes less important.

In Section 4.3 we will therefore sketch EU and member states’ growth policies and confront them with what we call ‘normal politics’ or ‘politics as usual’ pursued in the context of the Lisbon Strategy and its successor, the Europe 2020 strategy. As regards the


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national level we explore our argument exemplarily with respect to Germany, the Netherlands, Poland, Spain and Sweden. These five member states show a significant diversity among their innova-tion systems in terms of structure (for example R&D infrastructure, patterns of technological specialisation) and performance. While Germany and Sweden belong to the so-called innovation leaders, the Netherlands is an ‘innovation follower’ while Spain is considered a ‘moderate innovator’. Poland belongs, as the majority of new mem-ber states from central Europe, to the group of ‘catching-up coun-tries’ (European Commission 2009a). Only Sweden exceeds the 3-per cent-target the EU has set in 2002 for spending in R&D as a propor-tion of the GDP. The performance of the laggards such as Spain did not improve since 2002. They continue to devote just 1.2 per cent of their GDP to R&D (Tilford and Whyte 2010: 22). One can expect that variations in structure and performance of national systems would lead to different policies as a reaction to the financial and economic crisis (for example Kaiser and Prange 2005).

In Section 4.4 we will show that the economic crisis creates a ‘dilemma situation’ which is, on the one hand, characterised by competition of entrepreneurial activities both by the European Commission and the member states while, on the other hand, the risk of suboptimal solutions will increase as both sides act under enormous public pressure to agree on appropriate measures. Based on this key assumption we will end with conclusions on the possible future shape of EU growth policies.

4.2 Policy entrepreneurship in times of economic crisis

The concept of policy entrepreneurship aims at providing explana-tions for the existence and the (sometimes unexpected) outcome of agenda-setting processes in which a political actor (the policy entre-preneur) succeeds in proposing and pushing through his problem solution strategy even against the anticipated resistance of other political actors whose agreement is needed for implementing this solution. In order to do so, a policy entrepreneur has to have some specific actor qualities as well as the capacity to make use of them through strategic actions. According to Kingdon (1984: 189f.), there are three main actor qualities: (1) his status as a recognised expert


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and a serious leader who acts in the interests of others or has an authoritative decision-making position; (2) his negotiation and net-working capabilities which are mainly based on the combination of technical expertise and being political savvy; and (3) his persistence in the political arena which provides him with the opportunity to wait for a policy window and to make use of it when it opens up. Based on these qualities the policy entrepreneur is able to initiate change through the coupling of at least two of three separate and independent streams within a political system which ‘carry’ descrip-tions of problems, a number of possible strategies for the solution of the problem and a political event which render the agreement on such a strategy more likely (such as election results or interest group campaigns).

For the study of EU politics Kingdon’s concept of the policy entre-preneur is quite useful as it clearly allows for the characterisation of the European Commission as a potential policy entrepreneur. It is not only equipped with the required information and technical resources; it also has the prime role in formal agenda-setting pro-cedures and it has established a comprehensive system of standing and ad-hoc committees as well as expert groups which allow for the early coordination of legislative proposals with representatives from the member states and with private actors. The assumption of the coupling of multiple streams as a precondition of change is, in con-trast, of less significance for the analysis of European politics. This is mainly because of the fact that processes of agenda-setting in the EU are much more complex phenomena than in national political sys-tems. Within the EU the differentiation between formal and infor-mal processes of agenda-setting is essential. In the former case, the European Commission is the ‘natural’ agenda-setter because of its monopoly of initiative for Community legislation. In the latter case, however, the member states’ governments – acting collectively as the European Council – have at least an equivalent capacity (Moravscik 1995). This does not necessarily mean that the entrepreneurial power of the European Commission is less distinct in informal agenda-setting processes. On the contrary, in cases in which the problem allows for networking and alliance building with private interest groups or subnational actors it still should be strong, especially if the problem is associated with a high amount of uncertainty and/or if the political situation has changed rapidly (Sandholtz 1992).


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It is therefore useful to distinguish between the institutional entre-preneurial capacity of individual EU organisations and the given political situation in which policy entrepreneurship might occur. The current economic and financial crisis meets only one of these two conditions. European policy-makers certainly act under a signif-icant lack of knowledge about the possible medium- and long-term consequences of the economic downturn and the instability of the euro. But the nature of the problem also makes it not very likely that the European Commission will mobilise private actors to support its position vis-à-vis member states’ governments, because the EU lacks the resources at least to tackle the financial crisis.

Two further aspects support the assumption that under the con-ditions of the current crisis the policy entrepreneurship capacities of the European Commission are limited while the entrepreneurial role of the European Council could increase. The first aspect is again related with the nature of the problem. The European Commission is not only the prime initiator of Community legislation, but also ‘guardian of the treaty’ and thus responsible for the compliance of the member states with the rules of the Stability and Growth Pact. Given the fact that by June 2010 the Commission had initiated the so-called excessive deficit procedures against 24 of the 27 member states it inevitably has to admonish them to exercise stronger budg-etary discipline at the national level. This, in turn, provides member states’ governments with a plausible argument against a signifi-cant increase of the EU budget in the future. As a consequence, the Commission is not in a very good position to advocate in favour of higher investments into European growth policies.

The second aspect concerns the gradual transition of the European Council from an informal forum of the Heads of State and Government to the EU’s future control centre. With the enter-ing into force of the Lisbon Treaty, the European Council gained the status of a formal institution of the EU, which ‘shall provide the Union with the necessary impetus for its development’ (Article 15 TEU). The Treaty also foresees that the European Council shall meet twice every six months with the option to convene special meet-ings if ‘the situation so requires’. In the first six months of 2010 the European Council met already four times while the first European Council’s president, Herman van Rompuy, has proposed to convene the European Council at least ten times a year. This second aspect


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obviously reflects the growing coordination needs between the Heads of State and Government especially in view of the euro crisis. But it also seems to indicate that the member states’ governments send a clear message when they agreed, in principle, to strengthen the coordination of their national economic policies at the European level (that is the EU’s new ‘economic government’).4 And the mes-sage is that this process will take place only under the condition of the reinforcement of the intergovernmental dimension of European integration.

The Lisbon Treaty also increased the member states’ influence on the annual implementation of the budget. According to Article 314 the EP and the Council now enjoy equal rights in the decision on expenditures of the EU while the Treaty eliminates the traditional distinction between compulsory and non-compulsory expenditures (Bux 2009). Consequently, the Parliament gained some power in terms of decisions on what have been compulsory expenditures in the past, but suffered a loss in view of its final decision power regard-ing non-compulsory expenditures.5

From a theoretical point of view it is the nature of the current economic and financial crisis (that is primarily the lack of economic coordination and the identification of the excessive national budget deficits within the problem stream) and the character of the pos-sible solutions (that is the creation of an economic government and national austerity plans within the policy stream) which increased the entrepreneurial capabilities of the member states’ governments while institutional reforms enacted by the Treaty of Lisbon (that is the formal acknowledgement of the European Council as an EU institution and the establishment of a president of the Council within the politics stream) facilitated the linkage between the three streams.

4.3 European growth policies in times of crisis at European Union and national levels

4.3.1 European Union level

In 2004, the so-called Kok-Report provided a major impetus for European growth policies. The report requested governments to give research and innovation policies a core role in reforming their economies. In 2002, the EU had set a target of 3 per cent of GDP


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to be invested in R&D across the Union by 2010. Reacting to the Kok-Report, the European Commission proposed the re-launch of the Lisbon Strategy of 2000 (European Commission 2005a) based on three pillars:

A more attractive place to invest and work: Extend and deepen 1. the internal market, improve European and national regulation, ensure open and competitive markets inside and outside Europe, expand and improve European Infrastructure.Knowledge and innovation for growth: Increase and improve 2. investment in R&D, facilitate innovation, the uptake of informa-tion and communication technologies and the sustainable use of resources, contribute to a strong European industrial base.Creating more and better jobs: attract more people into employ-3. ment and modernise social protection systems, improve the adaptability of workers and enterprises and the flexibility of labour markets, invest more in human capital through better edu-cation and skills.

Since 2005, the Commission has introduced several initiatives to facilitate progress of the strategy. In October 2005 the Commission described 19 fields of action for the EU and the member states through which to achieve the goals of the Lisbon Strategy in the area of research, technological development and innovation. These initia-tives included legal measures to improve technological development, a better use of public procurement to support research and innova-tion, the use of the structural funds in the area of research and inno-vation as well as improving the access for small- and medium-sized enterprises to financial means (European Commission 2005b).

Additionally, in 2006 the Commission had adopted a 10-point action plan targeted at strengthening in particular the innovation capacity of the EU. The proposed measures reached from requesting the establishment of an open and free labour market for research-ers and a new patent strategy to the announcement of open cohe-sion policies for innovative measures at regional level (European Commission 2006a; 2006b).

It has been argued that the Lisbon Strategy did not deliver as regards research and innovation (for example European Commission 2009b; Tilford and Whyte 2010). Europe’s relative position in research and


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innovation in the world is still strong but losing ground in particu-lar in relation to new global players, such as China, India, Brazil, South Africa, Indonesia (European Commission 2009b). Moreover, Europe did not make any progress in reaching the 3-per cent-target set in 2002. R&D spending in Europe is below 2 per cent, compared to 2.6 per cent in the US and 3.4 per cent in Japan, mainly as a result of lower levels of private investment (European Commission 2010b).

At the same time Europe has since 2008 suffered from the finan-cial and economic crisis. The EU GDP fell by 4 per cent in 2009, industrial production dropped back to the levels of the 1990s and 23 million people – or 10 per cent of the EU’s active population – are unemployed (European Commission 2010b: 5). In December 2008 the European Council reacted and approved a European Economic Recovery Plan, equivalent to about 1.5 per cent of the GDP of the EU (around €200 billion). The Recovery Plan foresees specific actions, emphasising innovation and the greening of EU investment. The plan has set out a programme to steer action to ‘smart investments’ in future skills, in energy efficiency, in clean technologies to boost sec-tors such as construction and automobiles in the low-carbon markets and in infrastructure and interconnection. The idea behind this was that the EU’s recovery plan should reinforce the Lisbon Strategy by increasing investments in R&D and innovation. The Commission’s intention was to join public and private forces in order to intensify R&D activities. Regarding the EU level, the recovery plan foresees three major components:

First, three public–private-partnerships (PPPs) to support innova-1. tion in manufacturing in particular to foster the transition to the ‘green economy’ (European Commission 2008a: 16). In this respect, the EU will initiate measures that will invest roughly €7 billion in view of a ‘European green cars initiative’ (worth €5 billion), a ‘European energy-efficient buildings’ initiative (worth €1 billion) and a ‘factories of the future’ initiative (worth €1.2 billion). The EU contribution will be €1.5 billion (€500 mil-lion for each PPP).Second, the Commission announced that the European Investment 2. Bank (EIB) will accelerate the implementation of its financial instrument to support R&D, that is, the Risk Sharing Financing


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Facility, in order to stimulate greater participation by the private sector (European Commission 2008a: 14). The Risk Sharing Financing Facility is a joint instrument of the European Commission and the EIB to improve the financing of large research projects and research infrastructures. FP7 allocates an amount of €1 billion to the Facility for the period 2007–13 to ena-ble loans of up to €6 billion for research projects.As a third activity the recovery plan proposed improving energy 3. interconnections and broadband infrastructure. Regarding broad-band infrastructure, the objective is to reach 100 per cent cover-age of high-speed internet in Europe by 2012 to promote rapid technology diffusion. To achieve this, the Commission proposed to mobilise €5 billion for the years 2009 and 2010 by revising the MFF (European Commission 2008b: 17).

The European Economic Recovery Plan will provide €3.98 billion for energy projects and €1.02 billion for broadband infrastructures and challenges as defined in the health check of the CAP. Of these €5 billion, only $2 billion (for energy projects) will be generated through a change in the MFF, that is, a shift of funds from ‘Preservation and Management of Natural Resources’ to ‘Competitiveness for Growth and Employment’. The remaining €1.98 billion will be financed through a specific budget procedure (compensation mechanism), while the funds for broadband and new CAP challenges are made available mainly through a budget amendment (Council of the EU 2009a).

In March 2010, still under the impression of the crisis, the new Barroso-II-Commission came up with a follow-up plan to the Lisbon Strategy, called ‘Europe 2020 – A strategy for smart, sustainable and inclusive growth’ (European Commission 2010b). As one of its three priorities Europe 2020 is aiming at strengthening knowledge and innovation as drivers for future growth. Europe 2020 also keeps the original Barcelona 3-per cent-target for investment in R&D. Seven so-called flagship initiatives – three of them directly linked to the priority to strengthen knowledge and innovation – have been set up to operationalise the new strategy.

As was the case for the Lisbon Strategy the European and the national levels should work in partnership when implementing the new strategy. To set out the framework for the strategy at the member


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state level, the Commission has adopted proposals for integrated guidelines in April 2010, one of those dedicated to R&D and innova-tion (European Commission 2010c). On the basis of the guidelines, member states draw up National Reform Programmes annually in the autumn setting out in detail the actions they will take under the new strategy, with a particular emphasis on efforts to meet the national targets.

The realisation of the Innovation Union flagship initiative is core to the Europe 2020 strategy (European Commission 2010e). The flagship should focus research and innovation policies on big societal challenges, such as climate change, energy and resource efficiency, food security, health and demographic change. The Innovation Union will aim at completing the ERA, enhancing joint programming with member states and regions, improv-ing framework conditions for business to innovate (for example by creating the single EU Patent and a specialised Patent Court), launching ‘European Innovation Partnerships’ between the EU and national authorities and stakeholders, and strengthening and fur-ther developing the role of EU instruments to support innovation, including notably structural funds and rural development funds.6 The Innovation Union combines supply- (for example financial instruments, including the further re-orientation of structural funds, extended cooperation with the EIB) and demand-side (e.g. intellectual property rights, standards, public procurement, pos-sibly new regulatory measures) measures. In particular European Innovation Partnerships, which will build on existing initiatives including joint programming, lead markets, the Knowledge and Innovation Communities of the European Institute of Innovation and Technology, and PPPs under the Recovery Plan, will have an impact on EU research and innovation policies by focusing addi-tional FP7 money in 2012 and 2013 towards certain core themes and objectives.7

4.3.2 Member state level

To elucidate national positions on growth policies under ‘normal’ conditions, that is before the economic crisis (‘politics as usual’), we empirically focus first on the public consultation organised by the Commission between September 2007 and April 2008 (European Commission 2007a).


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We look at the statements issued by the member states’ govern-ments in the areas of funding instruments, research topics, the amount of funding, including the possible re-allocation of funds, and research and innovation policy targets. We focus on govern-ments’ contributions as they, firstly, should allow us to map the field in which consensus on consequences of the budget review might be reached. And second, taking into account the governments’ positions sheds light on the room for manoeuvre that exists for the European Commission to develop proposals for future growth policies.

As concerns research and innovation funding instruments some governments identified a need to strengthen the implementation of joint research programmes with other public or private actors, while others considered it necessary to achieve greater synergy between the EU Research Framework Programme, the Competitiveness and Innovation Programme and cohesion policy. There have also been some statements from member states that stressed the principle of excellence for the selection of EU-funded projects, arguing that an added value is ensured only if funds are allocated on the basis of fair competition to ensure that the best projects win.

Secondly, the public consultation clearly revealed that there is an emerging consensus on the growing significance of a relatively small number of research topics. Among them certainly are climate friendly technologies and new energy technologies for which the large majority of member states’ governments supports more invest-ments. Given the positions of most member states and the EP, the budget review would have almost certainly resulted in a much higher investment in the development of ‘low carbon technologies’.

Thirdly, a large number of member states’ governments as well as the Commission and the Parliament called for an increase of fund-ing allocated to research. However, during the consultation proc-ess many member states’ governments insisted that the EU budget should focus on financing only those activities which ensure a suf-ficient European added value based on subsidiarity and proportion-ality principles.

As concerns the possible re-allocation of funding across budget lines the consultation process demonstrated that there is widespread support for a re-orientation of EU expenditures that would lead to reductions in spending on agriculture and increased spending on ‘research technologies, innovation and energy’ (European Parliament


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2009a: 5). Some member states’ governments articulated support for the assignment of a much greater part of the budget to projects devoted to competitiveness and innovation. Financial means in the area of research and innovation are also most likely to increase even without an explicit re-allocation across budget lines. In a communi-cation on the cohesion policy the European Commission expressed the expectation that structural policy investments for R&D and innovation will ‘increase sharply’ even during the current funding period (European Commission 2008c: 9).8

Finally, the consultation process has shown that the European added value gains importance as the guiding principle for the deter-mination of R&D policies at European level. Accordingly, many mem-ber states’ governments took the opportunity of the consultation to share their views about R&D policy targets and initiatives that meet the requirement of providing such an added value. Member states associated an obvious European added value with the goals to sup-port cutting-edge research, to strengthen transnational research net-works and to support programmes for life-long learning.

To sum up, member states’ positions under non-crisis conditions as expressed during the budget review process shows two remark-able results. First, the statements reveal a principal willingness of the member states to thoroughly review the current status of European funding for growth policies within the existing framework structure, but also with respect to the generation of additional financial means as well as in view of the concentration of funds across relatively few strategic fields. Second, although most of the member states’ statements remained relatively vague on specific topics of policy changes, it is still striking that the lines of argument have hardly been structured along their respective innovation performance and research capabilities. Against this background it can be concluded that member states’ governments widely agreed on the basic ration-ale for European funding on growth policies, at least as long as it would support not only world-leading scientific excellence but also the catching-up of less-developed European science and innovation systems.

In a second step we look at national crisis policies and the reactions of the member states’ governments of Germany, Poland, Sweden, the Netherlands and Spain to current EU Commission proposals. We aim at evaluating if and to what extent national governments


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have changed their strategies and interactions at the European level. We assume that the member states’ reaction to the crisis should generally differ according to their capabilities and performance in research and innovation. We therefore refer to a categorisation of innovation performance established by the European Innovation Scoreboard 2008 (European Commission 2009a) that divides all EU Member states into ‘innovation leaders’ (Sweden, Finland, Germany, Denmark and the UK), ‘innovation followers’ (Austria, Ireland, Luxembourg, Belgium, France and the Netherlands), ‘moderate inno-vators’ (Cyprus, Estonia, Slovenia, Czech Republic, Spain, Portugal, Greece and Italy) and ‘catching-up countries’ (Malta, Hungary, Slovakia, Poland, Lithuania, Romania, Latvia and Bulgaria).

With respect to the member states’ economic stimulus packages for 2009 our assumption is not generally confirmed. In terms of the respective national GDP the size of the German stimulus pack-ages has been 1.4 per cent while the Swedish ones amounted to 0.4 per cent of the country’s GDP. Spain reached a GDP equivalent of 1.1 per cent, the Netherlands and Poland, 0.5 per cent each (European Parliament 2009b). Some member states, such as Germany, have implemented further stimulus packages during 2009 and thus invested even higher amounts of public money for the recovery of their domestic economies. The crucial point here is that the mem-ber states provided quite different national contributions to the EU Recovery Plan which called upon member states to make allowances of at least 1.2 per cent of the EU’s GDP. Considerable differences also exist in terms of national austerity measures. While the Swedish gov-ernment plans to increase public expenditures in the coming years, the German government agreed on a budget cut of about €80 bil-lion until 2014 (an equivalent of 0.4 per cent for 2011). In Spain the budget cut will amount to 2.9 per cent of the GDP in 2011 while the Dutch liberal party, which won the national election in June 2010, has announced that it will reduce the country’s budget by about €45 billion (or 1.7 per cent of the annual GDP) until 2014. The Polish government refrained from direct budget cuts, but rather aimed at increasing public revenues through a 1 per cent increase to VAT and through further privatisations.

In terms of national R&D spending for 2009 we observe that the innovative performance of the five countries had no immedi-ate impact on their policies. The governments of all the countries


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planned to increase public R&D investments. For 2010, however, the situation had changed significantly. The Spanish government announced a 4 per cent reduction of the country’s R&D budget in December 2009. In Sweden, investments in R&D remained largely the same. The share of the total budget is 3.6 per cent, only 0.1 per cent lower than in 2009. This is due to increased overall public expenditures. The German federal R&D budget for 2010 included a 6.5 per cent increase for R&D. However, this figure alone is not a sufficient indicator for the country’s development since the German Länder provide the largest part of public R&D investments. In Poland the government aimed at a reduction of the budget for higher edu-cation and research of about 6 to 7 per cent of which the research budget will have to take the considerably larger share.

Hardly any difference can be seen in view of the use of public R&D financing measures. Eight of a total of eighteen member states have directed parts of their funds towards ‘high-short term effectiveness’ (European Commission 2010g: 2) in order to support firms during the crisis. That strategic re-orientation holds for all five countries. Nevertheless, in terms of overall public support during the crisis the countries differ in terms of the strategic use of policy instruments. In Germany and the Netherlands (that is an innovation leader and an innovation follower), measures were primarily aimed at an inno-vation-led recovery in many different sectors. The contrary is true for Poland, Sweden and Spain (that is an innovation leader a moder-ate innovator, and a catching-up country) where public instruments were mainly used for a more general economic support. This is an important aspect as mainly Germany and Sweden were particularly hit by an economic downturn in export-oriented manufacturing industries such as the automotive industry, machinery and equip-ment as well as chemicals. The same does not hold for Spain and the Netherlands (European Commission 2010g: 4–7).

All in all, there are at least some indications that due to the eco-nomic and financial crises the European member states are in danger to drift further apart. The European Commission’s Spring Economic Forecast clearly shows that the gap is widening mainly with respect to GDP growth and unemployment rates. On the basis of our evalua-tion of current trends in R&D investments and public spending there is relatively little hope that this development can be reversed in the near future. Based on these findings we will now come back to the


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political consequences of the crisis and will turn to the question of how the EU will deal with the dilemma that has emerged from the duality of normal and crisis politics.

4.4 Policy entrepreneurship and strategic choices

The economic downturn hit the EU in a moment in which it was already apparent that the Lisbon agenda had not significantly improved its competitive position in the world. The debt crisis within the Eurozone made very clear that the problem of the high degree of economic heterogeneity among the member states along with the relatively low degree of policy coordination between them could hardly be solved by normal politics. While the EU lacks the finan-cial resources to stabilise the member states’ economies, the national governments (at least within the Eurozone) reluctantly accepted the transformation of the EU into a ‘community of fate’ characterised by common (financial) responsibility of all member states for the eco-nomic stability of the whole EU. As a consequence, this development already has and will further on significantly alter the institutional balance within the EU.

There are good reasons to argue that the future EU will be much more member states-driven than it is today. This process will, how-ever, not lead to a ‘simple’ re-nationalisation of European policies. On the contrary, the member states’ governments will have to inten-sify the search for European policy solutions, but they will not nec-essarily accept a leading role of the European Commission. As the European Council seems to develop into the focal arena of EU poli-tics, the Commission is obviously in danger to forfeit its entrepre-neurial capabilities. The Lisbon Treaty amendments already pointed into this direction. An even stronger indication can be found in the most recent report of the ‘Project Europe 2030’ reflection group of the European Council (2010: 17):

Giving leadership for economic coordination to the European Council, while fully respecting the role of the Commission and working closely with the EP, the Commission itself and other rel-evant economic institutions; reinforcing and extending the coor-dination responsibilities of the Eurogroup in relation to both the internal and external management of the monetary Union.


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Against this background, it is hardly surprising that the European Commission’s proposal for the next MFF reveals that the high reform dynamics that still existed during the budget review process have come to a standstill. The delayed publication of the budget review communi-cation and especially its unambitious content have clearly shown that the original intention of the budget review – that is setting policy and financial priorities for the EU without immediate pressure to decide – has not been achieved. The budget review became a victim of crisis at least in two ways: firstly, because the process could not be completed in the foreseen framework, and secondly, because the member states shifted significantly their preferences as a result of the crises.

The future budget will therefore not be negotiated under the logic of the EU reform, but rather mirror the rationality of member states’ fiscal consolidation requirements. The fact that the share of expendi-tures for research and innovation will stagnate at around 8 per cent of the total EU budget is also an indication that the Commission was not able to enforce re-allocations towards growth policies even within its own organisation.

As a consequence the traditional negotiating positions and estab-lished patterns of interpretation of the member states’ governments will dominate the upcoming negotiations. The open letter of the five largest net-contributors of December 2010 showed that the divergent interests of net-contributors and net-recipients will again play a decisive role.

In terms of policy entrepreneurship and strategic choices we can therefore conclude that the European Commission has certainly lost influence in areas in which legislative action is not an option and in which informal agenda-setting processes dominate. In parallel, the European Council obviously gained importance, but it lacks so far the institutional capacity to agree on European targets by major-ity voting. As a consequence, member states’ governments will find it easier either to obstruct the agreement on targets or to drop out from commonly agreed goals. An open question which we have not discussed here is, of course, how the EP will react to the shift in the institutional balance within the EU.


In this chapter we have argued that the European economic and financial crisis has established a new dualism between ‘normal


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politics’ and ‘crisis politics’ which has immediate consequences for the institutional balance within the EU and the entrepreneurial capabilities especially of the European Commission. From a theo-retical point of view, we assumed that the Commission will find it much harder to define the political agenda in areas in which it cannot propose legislative action. Since crisis politics are much more characterised by informal processes of agenda-setting the Commission lost much of its entrepreneurial power to the European Council. The institutional role of the European Council had already been strengthened by the Treaty of Lisbon and it will most likely further be valorised if the impact of the economic crisis will not decrease in the near future.

Our analysis suggests that at least some member states initiated national measures that deviate from agreed guidelines and targets at the European level. We also found evidence for budget cuts and stimulus packages, which mainly follow the logics of national con-cernment. It comes therefore not as a surprise that the coherence in terms of economic performance among EU member states has further decreased during the crisis. As for the budget review we conclude that the national positions submitted under the conditions of ‘normal politics’ are still valid at least in terms of their main strategic orienta-tions. There are, however, also clear signs that some of the proposals will not survive the phase of crisis politics. In view of EU growth policies, this certainly seems to be the case for the idea to increase the overall budget for research and innovation. The reaffirmation of the Barcelona 3-per cent-target in the Europe 2020 strategy requires that most of the member states will have to invest much more money into their domestic research and innovation systems even under the conditions of their budget austerity policies. A potential increase in the overall EU budget for research, innovation and other growth-relevant investments will also collide with the establishment of the European Stability Mechanism as of 2013, which will have an initial capital stock of €780 billion and being certainly the most profound implication of the crisis. Last but not least, the friction between net-contributors and net-receivers is even likely to be reinforced in times of crisis and austerity. Moreover, the group of net recipients will be hardly united as it is composed of states that are part of the Eurogroup and others that are due to their non-participation in the euro less dependent on the solidarity of the net contributors within


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the Eurogroup. This constellation makes higher national contribu-tions to support European growth policies hardly probable.

Notes

1. The views expressed in this chapter are those of the authors and are not necessarily those of the European Commission.

2. To note that 66 per cent of the cohesion policy funding are earmarked for investment in operations consistent with the Lisbon Strategy and the Europe 2020 Strategy (see Council Conclusions on the Strategic Report of 2010 by the Commission on the implementation of the Cohesion Policy Programmes, 3023rd Foreign Affairs Council, 14 June 2010).

3. In this point we agree with Rubio’s (2008: 7) argument stressing that ‘in order to assess the likely outcome of this revision, it is important to start by having a look at the choices taken by the Commission when preparing for the review’.

4. See European Council conclusions of 17 June 2010.5. For a more detailed discussion, see Chapter 3 by Giacomo Benedetto.6. To note that many of these proposed activities have already been men-

tioned in the so-called Key Issues Paper ‘Responding Proactively to the Economic Downturn’ from the Competitiveness Council to the 2009 Spring European Council (Council of the EU 2009b).

7. The Council agreed that the Commission will launch a pilot partner-ship on ‘Active and Healthy Ageing’ to test the concept and assess how it can best be implemented (Competitiveness Council, Conclusions on Innovation Union for Europe, 26 November 2010).

8. Currently, just less than 9 per cent of the EU’s budget goes to research (see Agence Europe, 5 July 2010).


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EU spending is dominated by redistribution – mostly based on agri-cultural and structural programmes (see Figure 5.1 for an overview). Detailed analyses show that many redistributive programmes lead to perverted redistributive effects favouring regions with large and rich agricultural producers (see e.g. Shucksmith et al 2005). Only lit-tle is spent on EU-wide public goods.2 Based on the theory of fiscal federalism (see Oates 1999), we define EU public goods here as those policies which should – because of large international spillovers, large economies of scale and comparatively homogeneous prefer-ences of the European population – be pursued at the EU level.3 Common market policies are one example. Based on the afore-mentioned fiscal federalism, Alesina et al (2005) identify further potential for providing such public goods especially in the areas of environmental policy, international relations, justice and migra-tion. Tabellini (2002: 17 ff.) argues for a focus on defence, foreign policy and aspects of internal security, border patrols and immi-gration policy. Many economists thus believe that redistribution is excessive and inefficient while the provision of EU-wide public goods is insufficient. But how could the provision of EU-wide public goods be improved in the current context – which is dominated by the implementation of the Lisbon Treaty and the ongoing financial crisis? Does the Lisbon Treaty facilitate budget reforms in favour of a more important role for public good spending? And did the

5The Lisbon Treaty, the Financial Crisis and Exit from Budget GridlockCharles B. Blankart and Gerrit B. Koester1

79


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80 Charles B. Blankart and Gerrit B. Koester

financial crisis open a window of opportunity that can and has been used for a reform of the budget?

In this chapter we propose a public choice perspective on the EU budget. We argue that the EU budget has been characterised by gridlock resulting from two different blocking coalitions: one on the revenue side and one on the expenditure side. These coali-tions have strong incentives to block fundamental reform of the EU budget, which would reduce redistributive spending. We will argue that the coalitions have remained in power even after the Lisbon Treaty and are likely to block substantial reform in the future. But the Lisbon Treaty can nonetheless have an important impact on the EU budget and public good provision as the newly created pro-cedure of enhanced cooperation facilitates the establishment of an additional budget exclusively for public goods. With respect to the financial crisis, we argue that two aspects are important. First, the EU contribution to the fiscal stimulus programmes has led to a reallocation of resources from agriculture to spending, especially on infrastructure (which has more of a public good character). However, this has been very limited in extent. Far more important is the second aspect: the possibilities of the EU to issue debt and give out loans – via the Balance of Payments (BoP) assistance and the European Financial Stability Mechanism (EFSM) – have been increased strongly during the financial crisis. As this debt is guar-anteed via the margin between the own resources and the payment

Figure 5.1 Development of the EU budget by policy area

Data source: European Commission.

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Administrativeand others

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Lisbon Treaty, the Financial Crisis 81

appropriations, the credit programmes add a new dimension to the negotiations on the financial perspective, the own resources deci-sion and the annual EU budget. Furthermore, the credit lines have the potential to directly affect EU spending in the future – if the recipients of the credits fail to comply with their repayment obliga-tions and the EU has to step in.

The chapter proceeds as follows.4 Section 5.1 argues that the EU budget was dominated before the Lisbon Treaty by two blocking coa-litions – one on the revenue side and one on the expenditure side – and that these coalitions will persist after the Lisbon Treaty. Section 5.2 proposes how the Lisbon Treaty can nonetheless facilitate more spending for public good provision: via the mechanism of enhanced cooperation. Section 5.3 discusses the EU’s reaction to the financial crisis and its implications for the EU budget..

5.1 Budget deadlock and the Lisbon Treaty

Within the past few decades – at least since the inter-institutional agreement of 1988, which implemented seven-year multiannual budgets within the MFF (see Laffan and Lindner, 2010) – the EU budget has shown three characteristic features.5 First, the size of the budget has been relatively stable – fluctuating around 1 per cent of GNI of the EU. Second, the budget has been spent mostly on redis-tributive programmes – especially via agriculture and the structural funds. Third, the net payment positions of the member states have been surprisingly stable.6 In our view these characteristics reflect budget gridlock resulting from four factors. First, after the focus shifted to spending for agriculture and structural funds, the budget became a redistributive game.7 In this redistributive game – second – self-inter-ested governments tried to maximise their net payment positions. This meant that net-payers tried to reduce their net payment posi-tions while the net receiver states tried to expand their receivables. Based on the historical development of the budget, third, the net payer and the net receiver states – which largely coincide with the relatively rich and the relatively poor states – were the natural coali-tions with diverging interests with respect to the budget. But this alone does not explain the stability of net payment positions and of the extent of the budget. Here a fourth point is decisive: the annual budget, as well as the MFF, is dominated by different decision rules


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on the revenue and expenditure sides. As budget players know that both decision criteria have to be met, the two budgets are interre-lated. The former criterion foreshadows the latter and the latter feeds back to the former.

As expenditure decisions have been taken by qualified major-ity since the Treaty of Amsterdam, a large coalition is needed to change the status quo, whereas only a small blocking coalition is necessary to preserve the status quo. The revenue decisions as well as the decisions on the MFF still need unanimous agreement. Based on these decision rules, two coalitions developed, which are causing the budget gridlock: net payer states are able to avoid expenditure increases in favour of net receiver states due to their blocking minor-ity and can also veto any decision that would lead to increased rev-enues. On the expenditure side, net receivers have an incentive to block a reallocation of the budget towards public goods, as such a reallocation is likely to lead to losses for the net receiving countries.8 The result is a deadlock of the spending allocation within the budget and the MFF.

How have votes been distributed between these two coalitions before the weighting of votes under the Lisbon Treaty comes into force in 2014? Table 5.1 shows the votes of the groups of net receivers and net payers under the rules of the Treaty of Nice in the European Council, which we see as the dominant and deci-sive actor in EU budget politics. One important argument for this

Table 5.1 Votes of net receiver states and net payer states in the Council under the rules of the Treaty of Nice 2004–13 (EU27)

Group of member states

Number of votes

Total votes

Blocking minority

Qualified majority

Net receiver states 166 345 91 255

Net payer states 179 345 91 255

Source: Own calculations based on EU budget data provided by the European Commission. Net payment positions based on operating budgetary balances. Our calculations are based on data on payments and funds received from the European Commission until 2009. Other studies such as Heinemann (2005: 18) derive similar values for the votes of the two coalitions. According to Heinemann (2005), net receivers hold 178 votes in the period 2007–13, while net payers account for 167 votes.


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dominance is that the Council has to agree unanimously on own resources decisions while the EP is only consulted, although gives its consent to their implementing measures.9 The latter is true for the MFF, in which important decisions on the different expendi-ture headings are included. Within the annual budget procedure the parliament had the last word before Lisbon, but only on non-compulsory expenditure (especially structural fund money and administrative expenditures) based on the Treaty of Nice (Article 272 (6) TEC).10 However, as the members of the EP may be expected to likewise vote especially in their national interest and that the votes of net receiver and net payer states in the EP do differ not so much from the vote distribution in the Council, it is unlikely that the EP could overcome the budget deadlock by raising a strong majority for shifts away from redistributive spending benefiting net receiver states.11

Since the EU enlargements in 2004 and 2007, Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxemburg, the Netherlands, Sweden and the UK have been net payer states (12), while the other 15 states have been net receiver states.12 Both of these groups hold a blocking minority, but neither net receivers nor net payers have enough votes for the qualified majority needed to initiate an expenditure change. So the net receiver states can block policies reducing transfers to them and can maintain the size of the agricultural and structural funds they benefit from. On the other hand, net payers can use their blocking minority to avoid a further increase of their net payment position and can block any attempts to increase the own resources. All in all, the allocation of the budget is therefore expected to be very stable.

The Lisbon Treaty came into effect in 2009 and includes two important changes. First, new decision rules in the Council were implemented and second, the roles of the Council and the EP in the budget process were changed. With respect to the decision rules in the Council, the Lisbon Treaty provides for new rules starting in 2014 (2017 in exceptional cases), requiring a double majority of 55 per cent of the member states (i.e. 15 States for approval) which have to repre-sent at least 65 per cent of the total EU population.13 Furthermore at least four member states are necessary to form a blocking minority. Otherwise a qualified majority will be deemed to have been reached even if the population criterion is not met.


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Can we expect these changes to facilitate a reform of the EU budget via the Council in the future? Table 5.2 shows the distri-bution of votes in the Council between net receiver and net payer states under the new rules of the Lisbon Treaty based on the 2009 and the planned 2010 budget allocation. We see that, based on the new rules, the existing coalitions of net receiver states as well as of the net payer states will both be able to maintain their blocking minority. So the coalition of net payers can block an extension of expenditures in favour of the net receivers and, as a last resort, an increase of EU’s total amount of own resources at their costs due to the unanimity requirement of Article 269 TEC.

With respect to the EP, the situation is more complex. Based on the Lisbon Treaty, the Council and the EP need to agree on a joint draft in the conciliation committee. Then the Parliament, on the basis of Article 314 (7c) of the Lisbon Treaty TFEU, can enforce its amend-ments to the second reading of the budget proposal (Article 314 (4c)) by a majority of its component members and three-fifths of the votes cast – but only if the joint draft negotiated in the conciliation com-mittee by the Council is rejected. We consider it very unlikely that the Council will agree with the EP on a joint draft and then vote this draft down and therefore believe the EP has even less influence than under the Treaty of Nice. Therefore, we expect the Council, which is dominated by net receiver states, to maintain its dominant position in the budgetary process. Based on the persistently strong coalitions, little or no change can be expected in the revenue or expenditure structure from Lisbon and its reforms of the decision rules and the budget process. Consequently we see little chance of an increase in the provision of union-wide public goods.

Table 5.2 Votes of net receiver states and net payer states in the Council under the Lisbon Treaty (EU27)

Group of member states

Number of votes

Total votes

Blocking minority

65% of the population

Net receiver states 15 27 4 34% < 65%

Net payer states 12 27 4 66% > 65%

Source: Own calculations on EU budget data of the European Commission. Net payment positions based on operating budgetary balances as in 2009 and 2010.


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5.2 A way out of the budget deadlock based on the Lisbon Treaty

5.2.1 General conditions for a way out of the deadlock

How could the diagnosed budget deadlock be broken and an increased provision of public goods with benefits for all citizens in the EU be realised? In our view the following five conditions are important for an implementable reform proposal:

A special budget for public goods:1. we have seen that the means for additional public goods cannot be raised according to the current budgetary rules. There is no majority for changing the current allocation which benefits the net receivers; in anticipation of this, net payers will refuse to contribute. Therefore, it is necessary to create a special budget, ‘the public good budget’, encompassing all or a subgroup of member states.14 But the old budget, ‘the general budget’, may not be given up, in order to avoid losers.Necessity of consent: 2. the new budget procedure has to be designed such that no party risks are being exploited. Therefore, the addi-tional budget requires the consent of all participating member state governments. To avoid locking member states into the status quo, an individual right of termination (at the end of pre-assigned periods) needs to be included (symmetric unanimity)Right of initiative:3. to make sure that all beneficial public goods projects – and not just those favoured by the European Commission – have a chance of implementation, every member state government should have the right to propose new projects within the public good budget.Congruency4. between beneficiaries, decision makers and contribu-tors (institutional congruency as proposed by Wicksell 1896): the member states agreeing on a separate provision of public goods should not only benefit from these goods but bear their costs as well. This congruency rules out the possibility of involuntary exploitation.Contributions5. : since willingness to pay for public goods depends on a number of factors such as the characteristics of the good, individual preferences, income, prices etc., the rules of financing should be flexible. They should take the form of individual contri-butions rather than general rate-based payments.


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Based on the unanimity requirement, a budget procedure based on these five conditions guarantees that nobody is made worse off com-pared to the actual gridlock with little or no public good provision. Strategic behaviour, which is typical under the unanimity rule, is mitigated as member states have to commit to the public good budget for a pre-assigned period in the short term (which creates stability), but can drop out in the long run (see condition 2). Additionally, the principle of ‘one country, one vote’ holds. Hence there is no need for weighting votes. Furthermore, the public good budget does not necessarily need to be a unitary budget. It may consist of several sub-budgets which are approved sequentially, as in the early years of the EU.15 The process thus reveals for each separate budget whether the benefits exceed the costs.

Our proposal relates to other contributions in the literature. Heinemann et al (2008; 2010) for example argue in favour of a sep-aration of the budget as well: they plan to separate expenditures which do not have clear or politically sensitive redistributive effects and expenditures which have critical redistributive effects (espe-cially CAP and structural fund spending). The two budgets shall be financed by different means and a general correction mechanism shall replace individually determined rebates (e.g. the UK rebate). The main difference and the uniqueness of our approach is that we do not attempt to split expenditures of the current budget, but to introduce a completely new budget. This solves the fundamental problem of the incentives to veto any changes of the current budget allocation (see the discussion in the introduction of this volume).

5.2.2 Implementing a new public goods budget within the institutions of the EU

How could our newly proposed public good budget be implemented within the institutions of the EU? In our view, the existing option of an ‘enhanced cooperation’ can be an important starting point.

Enhanced cooperation – as a mechanism for intensified cooper-ation of a group of eight or more member states within the consti-tutional framework of the EU and its procedures – was originally introduced in Article 11 TEU (Treaty on European Union) of the Treaty of Amsterdam of 1997 and Article 20 TEU (Lisbon). The strict regulations for authorisation of the mechanism imposed constraints on launching enhanced cooperation and the Commission and the


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Council had many opportunities to veto such cooperation at each stage of the process. Hence, it is not astonishing that enhanced cooperation did not really become popular and has as such never been applied.16 In the Treaty of Nice of 2002, the member states relaxed the rules of enhanced cooperation somewhat. Further liber-alisation was achieved by the Lisbon Treaty (Article 20 TEU Lisbon and Article 326–334 TFEU Lisbon). In particular the authorisation criteria are to be downgraded in the ‘passerelle system’, enabling the Council to authorise enhanced cooperation by a mere quali-fied majority (as defined in Article 48 (7) TEU and Article 333 TFEU Lisbon).17

Based on the reforms in the Lisbon Treaty, any group of nine18 or more member states, in principle – given the support of a qualified majority in the Council – should be able to implement an additional public good budget within a process of enhanced cooperation.19 Based on the ‘passerelle system’, they could agree on our proposed symmet-ric unanimity rule for decisions on this budget. As is provided for by the Lisbon Treaty (Article 332 TFEU Lisbon), the costs for such a budget would be borne by the participating member states (as required by our criterion of institutional congruency)20 and, in our view, a sys-tem of contributions could be introduced for this budget.21

While it generally seems possible to implement an additional pub-lic good budget within a process of enhanced cooperation, there are several remaining obstacles under the treaties which would need to be reformed in order to facilitate the set-up of an additional budget in the form proposed above. First, the establishment of enhanced cooperation is intended only as a ‘last resort’ for a minimum of nine member states if the objectives cannot be attained within the regu-lar EU-wide legislative procedures (Article 20 TEU Lisbon). In our view this excessively constrains the ability of member states to agree on additional public good projects. Therefore the ‘last resort’ status and the fixed minimum requirement for participating member states should be abolished. To avoid discrimination, the Commission should instead have to prove that a proposal encompassing a larger number or all member states is feasible. If the Commission fails to do so, enhanced cooperation among any subgroup of member states should be permitted. Second, the Commission’s exclusive right of initiative within a process of enhanced cooperation should be abolished as it violates our demand of a right of initiative for every participating


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member state. And, lastly, the EP currently needs to ratify all deci-sions under enhanced cooperation by a majority of its members on issues that would normally fall under the codecision procedure.22 This should be the case for most public good projects. However, we find that the participation of the EP in unanimous decision making of a group of member state governments is an unnecessary compli-cation and a further blockade option for member states not partici-pating in special public good projects. We find that such restrictions make enhanced cooperation projects unnecessarily unattractive, inducing member states to dismiss them or to opt for agreements outside the EU. We therefore propose omitting the EP under the add-itional public budget procedure within enhanced cooperation.

5.3 The financial crisis and the European Union budget

Crises often make fundamental reforms possible (see e.g. Drazen and Easterly 2001). Has the financial crisis played an important role for the budget; in particular has it brought a shift from redis-tribution to more public goods now and in future budget nego-tiations or has it reinforced its redistributive character and further limited the room for public good provision? The most important consequences of the crisis for the EU budget have been, first, the attempt of the EU to contribute to the national fiscal stimulus pro-grammes set-up in 2008 and 2009 via the EU budget and, second, the crucial role of the EU budget for the establishment of the BoP assistance programme and the EFSM. All these consequences and their ramifications will be discussed in the following. We will argue that the EU has committed substantial resources especially to loan programs with redistributive character. If losses occur from these programmes, they are likely to limit the room especially for public good provision further.

5.3.1 The EU contribution to the European Economic Recovery Plan

In autumn 2008 the European Commission tried to coordin-ate the national fiscal stimulus programmes and initiated its own contribution within the European Economic Recovery Plan.23 The Commission, Parliament and Council agreed on 2 April on the


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contribution of the EU of €5 billion within the years 2009–13.24 This money is intended to finance €3.98 billion worth of additional EU spending on energy projects – especially for the improvement of electricity and natural gas networks, permanent storage possibil-ities for CO2 and offshore wind energy projects. Furthermore, the extension of the broadband network in rural areas is scheduled to receive €0.4 billion and special agricultural projects, €600m. The €5 billion is to be financed not by additional means but by reallocation of unused EU funds from the agricultural budget to the structural funds. Therefore no additional payment appropriations were neces-sary.25 However, the reallocation of funds might, in effect, reduce repayments of unused financial means from the EU to its member states according to their contribution quotas.

The shifting of resources from the agricultural budget to projects which are financed by the structural funds and have more of a pub-lic good character (like enhancing networks) might be seen as an argument that the financial crisis was a window of opportunity for the EU to shift expenditures and increase its public good provision. This could also be seen as an argument for the financial crisis as a way to – at least partly – overcome the budget deadlock. While we would generally agree that improving infrastructure might be more beneficial than some agricultural spending, we argue that the role of the EU stimulus programme should not be overemphasised. First, the EU fiscal stimulus programme equalled only less than 1 per cent of the cumulative EU budgets from 2009 to 2013. Therefore it is only miniscule and does not indicate any substantial change. Second, the shifting was facilitated by availability of excess funds from the agri-cultural budget. This adjourned the unanimity requirement on the financing side as no additional funds needed to be raised – a situa-tion which is likely to be exceptional for the EU budget. So we argue that the effects of the stimulus programme on the EU budget are only very limited and, furthermore, do not indicate any change in the diagnosed budget deadlock.

5.3.2 Financial support for EU member states via EU loan programmes

Alongside direct spending, the EU has strongly expanded the pos-sibilities for financial support available to its member states via two instruments: the BoP assistance and the EFSM – both in response to


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the financial and economic crisis. We will argue in the following that these may have a very important influence on the EU budget in the future.

Under BoP assistance,26 the EU gives loans to non-euro-area EU member states experiencing balance of payment problems. This programme has its origin in the Delors Plan of 1993. In the past, BoP loans were given out by the EU to Italy (credit of €8 billion in 1993) and – based on the BoP programme – within the process of EU enlargement in 2004 to Kosovo, Moldova and Georgia. The loans are usually given in close cooperation with the IMF and are conditional on an economic adjustment programme developed jointly with the IMF. However, the EU – unlike the IMF – does not receive a preferred creditor status. The maximum volume of this credit facility equalled €12 billion in December 2008, but was then further expanded to €25 billion and even further to €50 billion in May 2009.27 These loans are financed on the capital markets via bonds issued by the European Commission and the credit conditions of the EU are passed on to the recipients of the loan.

Currently loans under this programme have been given to three countries which experienced strong balance-of-payment problems related to the financial crisis: Hungary received €6.5 billion from October 2008 to November 2010, €3.1 billion were lent to Latvia from January 2009 until January 2012 and Romania received €5 bil-lion from May 2009 to May 2012.

The European Commission has financed these loans by issuing 17 bonds on the capital markets since December 2008. These bonds bear an average interest payment of 3.5 per cent – reflecting the AAA rating of the European Commission.28 These AAA conditions are passed on to receiving countries such as Hungary, which received the credit at a time it was downgraded by Standard & Poor’s from BBB+ to only BBB (with negative outlook) in November 2008. This makes the programme very attractive for the receiving countries and underlines the interest rate subsidy given by the Commission via this programme.

Within the balance-of-payment assistance programme, it remains unclear how the EU guarantees the bonds issued. But as the EU only disposes of its own resources (Article 312 TFEU),29 the only possibil-ity is that the EU guarantees the bonds through unspent revenues under its own resources rules.


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Alongside the BoP programme, the euro crisis led to the establish-ment of the EFSM by the European Council during 8–9 May 2010. The EFSM was created to facilitate EU lending to eurozone members in need. The total volume of the EFSM was communicated in the press as €60 billion. However, in the decision for establishing the EFSM no concrete volume was specified. Article 2.2 of the Council Decision of 9–10 May 2010 reads: ‘The outstanding amount of loans or credit lines to be granted to member states under this Regulation shall be limited to the margin available under the own resources ceil-ing for payment appropriations.’ 30

Table 5.3 shows the own resources ceiling and the payment appro-priations for the current financial perspective. We see that the mar-gin available under the own resources ceiling and the payment appropriations equals €13.2 billion in 2010, €17.2 billion in 2011, €16.7 billion in 2012 and €21.4 billion in 2013. Different interpreta-tions seem possible.

Based on the wording of Article 2.2 (see above) one would expect that these annual margins are the limit for the amount of loans

Table 5.3 Level of EU own resources and payment appropriations, 2007–13 (in current prices)

2010 2011 2012 2013Total

2010–2013

Own resources (% of GNI)

1.23 1.23 1.23 1.23 1.23

Payment appropriations (% of GNI)

1.12 1.09 1.08 1.05 1.09

Payment appropriations (€ billion)

134.3 134.3 141.3 143.3 553.2

Margin between own resources and payment appropriations (% of GNI)

0.11 0.14 0.15 0.18 0.15

Margin between own resources and payment appropriations (€ billion)

13.2 17.2 19.6 24.5 74.5

Source: European Commission (2010a; 2011f).


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outstanding and this would make economic sense as well, as the EU would always – even if all the recipients were to default completely on their outstanding loans – be able to pay back all loans given in any year. This is conditional, of course, on all the loans given out under the BoP programme (see above) being paid back on time and in full. However, there is a large gap to the communicated €60 bil-lion, and the allocation of €22.5 billion to Ireland and of €26bn to Portugal within the EFSM programme in late 2010 speak against this narrow interpretation as well.

Therefore, the European Commission favours a different inter-pretation, which it established, for example, in a communication to the Council and the Economic and Financial Committee in late November 2010. ‘To be absolutely certain that the Commission will be able to call additional own resources (OR) from member states in case of a default on a guaranteed payment, the combined total of (i) the MFF ceiling for payment appropriations (or the payment appropriations authorised in the annual budget if already known) and (ii) the total amount of guaranteed reimbursements due (princi-pal + interest) must not exceed 1.23 per cent of EU GNI in any given budget year.’31 This means that the Commission has to make sure that principal and interest payment of all outstanding loans guar-anteed by the EU – and these include explicitly the EFSM as well as the BoP assistance – do not exceed the margin available under the own resources ceiling and the payment appropriations in any year. The Commission says that it has calculated the total volume of loans that can be guaranteed by this margin to equal €110 billion. As €50 billion are assigned to the BoP facility, €60 billion remain for the EFSM – which explains the communicated volume.32

Generally this interpretation of the regulation is – from an eco-nomic point of view – appealing, as the EU would (despite its lack of a tax authority and the fact that it has to finance its budget wholly out of own resources (Art 310 and 311 TFEU)) always be able to step in – if a recipient country defaults on its payments. How would this work in detail? Were one country to default on the interest or prin-cipal of an EU loan, the Commission ‘would first raise the neces-sary amount to service the debt by drawing on its cash balances33 and, if these are not sufficient, draw additional cash resources from member states. In a second step, the Commission would propose to budget the cash advance.’34 To be able to budget the cash advance,


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a new budget position was created, ‘hosting the coverage provided by the EU budget for possible financial assistance operations carried out under the EFSM.’35 This new budget line specifies the following. ‘The Commission will ensure that the legal obligations towards the bondholders are fulfilled in a timely manner and would propose, if necessary, to make available on the budget line the appropriations needed.’36

The European Commission will finance loans under the EFSM – similar to the BoP assistance – by issuing bonds on the capital markets and plans to pass on its favourable rating conditions to the receiving member states – giving a high interest rate subsidy.37 Furthermore, the EU does not receive preferred creditor status.

5.3.3 Implications of the loan programmes for the European Union budget

The strong expansion of the volume of loans the EU can give out to member states in need via the BoP and the EFSM has important implications for the EU budget. In the following we discuss the four implications which are – from our perspective – most important.

Generally the EU should be only able to dispose of means, which 1. are already allocated to the EU within the MFF, which lasts till 2013. But the cumulative margin between the own resources and the payment appropriations until 2013 equals only €68.5 billion (much less than the maximum amount of loans of €110 billion) and the loans given out are likely to have a longer duration than 2013. As a consequence, the maximum credit allocations within the BoP and EFSM facilities already do determine the required margin between own resources and payment appropriation for large parts of the next financial perspective. If we assume, for example, an average interest rate of 3.5 per cent and a margin of €17 billion per year to guarantee interest and principal payments, the minimum repayment period for loans of €110 billion would equal 8–9 years – this means that giving out these loans prede-termines a minimum threshold for the margin between own resources and payment appropriations nearly to the end of the next MFF (2020), although the framework is not yet negotiated. That the assignment of resources far beyond 2013 has partially already taken place is also underlined by the bonds, which have


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already been issued by the European Commission under the BoP programme. For example the EU issued a bond with a maturity of 30 years in January 2012.The EU gives out loans to support countries which are in dire 2. straits and have trouble borrowing on the capital market. This indicates that the capital market sees as high the risk of a default. These risks are largely uncompensated by appropriate interest sur-charges within the loan programmes (as the credit conditions of the EU shall be passed on to the receiving countries – see note 42). At least partial default of such credits is not unlikely. In this case the EU would have to step in. This shows that the EU credit pro-grammes add a completely new risk to the EU budget. Now, one could argue that this risk is only theoretical since the EU could always draw on the own resources to cover additional expendi-tures. But this argument does not seem to be wholly valid. First, the margin between payment appropriations and own resources had previously functioned as a safety margin for EU spending as well. This safety margin could be lost if the EU needs to step in for defaulting creditors. Second, the calculations rest on the assump-tion that all countries can and will commit their share in the own resources fully to the EU. But those countries which default on their debt are unlikely to be willing or able to contribute their share of the own resources, which further reduces the margin between receipts under own resources and payment appropria-tions. It does not seem impossible that losses from the loan pro-grammes could even make a cut in EU spending necessary. These cuts are likely to reduce especially spending for public goods, as the receiver states are likely to veto any proposals to cut the redis-tributive spending they profit from.The loan programmes – which are guaranteed by the EU own 3. resources – add an additional redistributive dimension to the EU budget. Net receivers are especially likely to receive the loans and the interest subsidy, which is facilitated especially by the contri-butions of the large net payers.Finally, guaranteeing the loan programmes through the margin 4. between own resources and payment appropriations could add an additional dimension to the negotiations on the budget, the own resources and the MFF. The higher this margin, the higher the vol-ume of principal and interest payments which can be guaranteed,


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and consequently the higher the volume of loans that can be given out. Member states which are interested in a large EFSM and BoP programme have an additional incentive to lobby for an increase in the own resources ceiling or for an increase in the mar-gin between own resources and payment appropriations. On the other hand, large net payer states (which because of their size are unlikely to be able to ever profit from the loan programmes) may fear a further increase of the loan programmes, which they would have to guarantee without any compensation.


In this chapter we argued that the EU budget has been in a deadlock resulting from two different blocking coalitions on the revenue and expenditure sides and the Lisbon Treaty perpetuates this. On the revenue side the net payers block any increase of the financial means while on the expenditure side the net receivers block any change that would leave them worse off than in the status quo. These findings lead to a pessimistic evaluation of normative approaches to reform the EU budget. So far we are not aware of a normative proposal which could seriously be expected to break the existing deadlock on the revenue or expenditure sides.

From our perspective, the Lisbon Treaty does little to change this constellation. Both coalitions are likely to remain stable and the deadlock of the EU budget will continue. However, the possibility of enhanced cooperation established in the Lisbon treaty might offer a way out – in the sense that a process of enhanced cooperation would allow the creation of an additional public good budget under the strict unanimity rule. This proposal could overcome the incentives to veto any changes in the redistributive status quo and at the same time prevent further redistribution. This would be an institutional improvement which would potentially increase efficiency by addi-tional public good provision.

In our view the financial crisis had far-reaching consequences for the EU budget. These consequences are not so much the result of the EU contribution to the stimulus packages of European govern-ments (European Economic Recovery Plan) by reassigning spending from agriculture to the structural funds – especially to finance infra-structure investments. Although these infrastructure investments


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are likely to have more of a public good character than agricul-tural spending, this reassignment, unfortunately, cannot be seen as important step away from the budget deadlock or as proof of the ability of the EU to use a crisis as a window of opportunity for an important reform. The extent of the programme is far too small to have had any substantial impact (less than 1 per cent of the 2009–13 budget). Furthermore, the situation has been special inasmuch as the additional spending was financed by a reallocation of means, which would otherwise have been redistributed to the financing member states. This was how the unanimity requirement on the revenue side was adjourned.

Far more important are – in our view – the consequences and implications of the credit facilities of the EU created and expanded during the course of the crisis. Here, the ability of the EU to give out loans and issue debt has been very strongly increased and now equals nearly one year’s budget. This has four primary implications. First, the expansion of the maximum value of the loan programmes already predetermines a lower threshold for the margin between own resources and payment appropriations in the next MFF. Second, the EU assumes sovereign risk and gives up the safety margin between payment appropriations and own resources ceiling. In the future this could even make cuts in EU spending necessary – if recipients of EU loans default on their debt and the EU has to step in. Third, the expansion of the loan programmes adds an additional channel of redistribution to the EU finances – which tends to favour the net receiver countries at the cost of large net payer countries. Finally, the loan programmes add the margin between own resources and pay-ment appropriations as a new dimension to the negotiations of the budget, the own resources and the MFF. In fact, BoP and EFSM loans may indicate a first step towards a European fiscal union with author-ity for taxing, spending and debt issuance. Against this background, the EU’s response to the financial crisis has not improved EU budget politics but is likely to further complicate future negotiations.

Taken together the financial crisis and the system of loans by the EU pose a particular danger to the EU budget in the case of debt default, of which the first victim would be the – already marginalised – public goods. This makes our proposal of a supplementary budget for pub-lic goods via enhanced cooperation to protect a key area of spending that is outside traditional redistribution even more important.


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Notes

1. The views expressed in this chapter are those of the authors and are not necessarily those of the Deutsche Bundesbank.

2. Expenditure on research, external activities and administration (in relation to total expenditure) could, in a first rough approximation, be regarded as contributions to EU-wide public goods, while member state-specific expenditure could be defined as non-EU-wide. Spending for administra-tion would serve here as a proxy for public goods (e.g. common market policies) which are provided by the administration. If we follow this def-inition, roughly 15 per cent of the budget is spent on EU-wide public goods. For the data see European Commission (2010a: 72).

3. Alternative approaches to the definition of public goods at the EU level are discussed, for example, in Zuleeg and Hagemann (2008).

4. Several arguments of this chapter – but not the implications of the finan-cial crisis – are laid out in more detail in Blankart and Koester (2009).

5. For details of the historical development see Blankart and Koester (2009), Ackrill and Kay (2006) and Lindner (2006).

6. For data on net payment positions see e.g. European Commission (2010a), EU Budget 2009, p. 85 ff. and previous editions.

7. We discuss the historical development of the budget and the reason why it became a redistributive game in detail in Blankart and Koester (2009). See as well the discussion in Ackrill and Kay (2006).

8. This holds as long as the efficiency gains for public good provision are not so high for the net receiver states that they would have an incen-tive to give up returns from redistributive programmes for public good spending.

9. For a discussion of the role of the EP in the budget process under the Nice and Lisbon treaties see Chapter 3 by Giacomo Benedetto in this volume.

10. The Council’s modifications to the Parliament’s amendments to non-compulsory expenditures could be modified or rejected by the Parliament by a combined majority of its component members and three-fifths of the votes cast. Such a decision would mean final adoption of the budget and the Parliament having the last word. The Parliament is also able to turn down the entire budget by a majority of its total votes, providing this also amounts to three-fifths of the votes cast. In that case, the proce-dure would have to be resumed from scratch on the basis of a new draft budget.

11. The domination of national interests and the ‘juste retour’ approach in the budget negotiations in the EU institutions is supported by the analy-sis of Mrak and Rant (2010) and by Richter (2008).

12. For data on net payment positions see e.g. European Commission (2010a), EU Budget 2009, p. 85 ff. and previous editions.

13. Under the transitory rules of the Lisbon Treaty (Article 3 § 3), at the demand of any member of the Council, a population criterion of 62 per cent


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can be applied already from 2009 on. However, this has no impact on the majority coalitions discussed here.

14. We doubt that new rules can be adopted without an integration of the status quo. This is where our proposal differs from other institutional approaches such as that of Buchanan and Lee (1994).

15. It has to be remembered that the EU never had a fully integrated budget. The budget of the European Coal and Steel Community (during its exist-ence) as well as the budget on loans and credits has always been sepa-rated from the general budget (see Strasser 1991: 46–9). Furthermore the existence of separately financed ‘public good budgets’ in other interna-tional organisations (as, for example, in the OECD – Organisation for Economic Co-operation and Development) prove the feasibility of such an approach (see e.g. Heinemann et al. 2007: 76 ff).

16. For a discussion of the Schengen acquis and its relationship to the proc-esses of enhanced cooperation, for instance, see CEPS, EGMONT and EPC (2007: 97 ff).

17. Except for enhanced cooperation projects in the area of the CFPS.18. The minimum number of participants for enhanced cooperation was

increased in the Lisbon Treaty from eight to nine.19. It should be noted that the anti-discrimination rules (Article 327 and

328) ensure that the enhanced cooperation remains open to late-comers. See also e.g. the discussion in Bordignon and Brusco 2006.

20. Except for administrative costs, which are borne by the EU budget. Before the Nice Treaty, all costs of programmes of enhanced cooperation were allocated to the EU budget.

21. The concrete form of cost-sharing is not specified in the treaty; see Article 331 TEC Lisbon.

22. For a discussion of the role of the EP see especially CEPS, EGMONT and EPC (2007: 5 ff and 97 ff).

23. For a communication on the European Economic Recovery Plan see COM (2008) 800 final of 26 November 2008.

24. See the discussion in the monthly report of the German Federal Ministry of Finance, April 2009.

25. See for the adjustments of the Multiannual Financial Framework COM (2009) 662 final.

26. See Council Regulation (EC) No 332/2002 of 18 February 2002 establish-ing a facility providing medium-term financial assistance for member states’ balances of payments and Article 143 TFEU.

27. Council Regulation (EC) No. 431/2009 of 18 May 2009.28. See http://ec.europa.eu/economy_finance/financial_operations/market

/borrowing/index_en.htm29. ‘[O]ther revenues’ mentioned in Article 311 TFEU point to what might be

meant in the long run. The EU may try to establish an EU tax or tax shar-ing with national authorities. Such revenues would fall in the category of ‘other revenues’ and therefore not be governed by the strict budget rules.


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http://ec.europa.eu/economy_finance/financial_operations/market/borrowing/index_en.htm

http://ec.europa.eu/economy_finance/financial_operations/market/borrowing/index_en.htm


30. See Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism (OJ 118, 12 May 2010).

31. Communication from the Commission to the Council and the Economic and Financial Committee, COM (2010) 713 final, Brussels, 30 November 2010.

32. ‘At the time of the adoption of the Regulation, it was estimated that, with careful management of the repayment schedules, a volume of up to €60 billion for the EFSM could be accommodated below the own resources ceiling in addition to the volume of €35 billion which remains avail-able under the BoP facility. A further €15 billion under the BoP regula-tion has already been allocated as external financial assistance to Latvia, Hungary and Romania.’ (Communication from the Commission to the Council and the Economic and Financial Committee, COM (2010) 713 final, Brussels, 30 November 2010. p. 4)

33. On the basis of Article 12 of Council Regulation No 1150/2000/EC, Euratom of 22 May 2000 Implementing Decision 2007/436/EC, Euratom of the system of Communities own resources.

34. Communication from the Commission to the Council and the Economic and Financial Committee, COM (2010) 713 final, Brussels, 30.11.2010. p.4.

35. Amending Budget No. 5 for the year 2010 covering the creation of the budget structure for the EFSM was adopted by the Budgetary Authority on 22 September 2010. The Commission Draft Amending Letter No. 2/2010, which also incorporates those changes into the 2011 draft budget, has been submitted to the Budgetary Authority on 11 October 2010. A simi-lar structure already exists for the BoP facility for non euro-area Member states.

36. A new budget line (802) has also been created on the revenue side to account for any potential reimbursements after an initial default or for any other revenue arising in connection with the guarantee provided by the EU.

37. Details on interest conditions can be found at: http://europa.eu/rapid/pressReleasesAction.do?reference =MEMO /11/602&format =HTML&aged=0&language=EN&guiLanguage=en


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http://europa.eu/rapid/pressReleasesAction.do?reference =MEMO /11/602&format =HTML&aged=0&language=EN&guiLanguage=en

http://europa.eu/rapid/pressReleasesAction.do?reference =MEMO /11/602&format =HTML&aged=0&language=EN&guiLanguage=en



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Part II

Public Spending and Budget Reform


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Agriculture has always occupied a central place in arguments about the EU budget. In historical perspective, spending on agriculture (and more recently rural development) takes up a large proportion of the total budget although the trend has been downwards. Partly this reflects the early emergence of the CAP as a central pillar of the EU, which mirrored the fundamental position of farming in the national economies and social cohesion of many member states. From the late 1970s, over-production and the environmental critique of indus-trial farming put agricultural spending under considerable political pressure. This was exacerbated by successive enlargements to the EU, notably in 2004, where the increased pressures on the budget were managed by constructing a less generous support system for the new entrants (Greer 2005: 113, 144). At the same time, institutional and rule changes in the wake of enlargement, notably the extension of the codecision mechanism to the CAP in the Lisbon Treaty, have increased both the number of policy actors and of potential veto points.

Budgetary considerations have been a key factor in setting the reform agenda since the early 1980s, and negotiations about the MFF for 2014–20 have taken place in tandem with a debate about the future shape of the CAP. The financial crisis after 2008 has exerted an important influence here. In its reform proposals for example, the European Commission (2010j: 3) emphasised competitiveness, innovation and climate change ‘within the constraints of limited

6Reform of the European Union Budget: Implications for the Common Agricultural PolicyAlan Greer

103


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104 Alan Greer

budgetary resources and taking into account the severe impact of the economic crisis on agriculture’. Politically, this reinforced the drive for austerity at the national level, making any increase in the EU budget even more controversial than usual. As the EU budget review exercise noted, global economic crisis ‘put public spending at the heart of the political debate in European countries. Throughout the European Union, difficult choices are being made. Public spend-ing priorities are being challenged in a way not seen for decades’ (European Commission 2010d: 2). More broadly, there is a question about whether this will lead to priority setting within the overall budgetary envelope that will squeeze the resources available for agri-culture. It also draws attention to how resources can be most effec-tively used. As the EU budget review exercise noted, ‘the issue is not first and foremost about spending more or less, but about finding ways to spend more intelligently’ (European Commission 2010d: 2, emphasis in original).

This chapter addresses several questions about the agricultural budget within its wider political context, summarised as ‘how much’, ‘on what’ and ‘why?’ These are interlinked because attitudes about whether agriculture should be supported from public funds (increas-ingly centred on the notion of public goods) impacts directly on debates about how much money should be spent, and on what. First, the chapter sketches patterns of agricultural expenditure as a propor-tion of the EU budget, then provides a snapshot of the distribution of resources in the contemporary CAP (‘how much’ and ‘on what?’). Second, it addresses the question of what the CAP is for (‘why’), and third, it considers its future shape within the framework of discus-sions about the MFF after 2013.

6.1 How much? On what?

A usual starting point for the discussion of agriculture in the EU is to emphasise the big slice of the budget that it has always consumed. The dominance of the CAP reflects its historical position as the most important ‘common’ policy, one moreover in which EU spending effectively replaces that at national levels. In her account of the CAP, Rosemary Fennell noted the ‘extraordinary imbalance in the distri-bution of appropriations’ in the EU and the ‘dominant position of agriculture’, calculating that in the late 1970s around 75 per cent


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Reform of the European Union Budget 105

of total spending went to agriculture (1979: 81). The Commission itself has indicated that CAP payments doubled to 70 per cent of the budget between 1965 and 1985, then fell to 60 per cent in the first year of the 1988–92 MFF and to just over 50 per cent by the late 1990s, reflecting both CAP reforms and the expansion of the EU into other sectors such as cohesion, regional and social policy (European Commission 2007a: 3; 2007b: 5–6).

In the 2010 EU budget of €141.5 billion, the largest share by finan-cial framework heading (45.4 per cent, €64.3 billion) was devoted to sustainable growth, competitiveness and economic recovery in the wake of the financial crisis.1 Around 42 per cent of the total went to the CAP, most under the heading ‘preservation and management of natural resources’ (€59.5 billion in 2010). While it is envisaged that that the proportion of CAP spending will fall to around 40 per cent by 2013, the amount remains substantial and agriculture is still the single most important sector in the general budget. Not surprisingly then, the distribution of these substantial resources for agriculture and rural development has always been a matter of contention. Around three quarters of the 2010 budget (31 per cent of total EU spending) went to market-related expenditure and direct payments, the rest to rural development and the environment (see Table 6.1). Spending on ‘direct aids’ is distributed through two main policy instruments: the Single Payment Scheme (SPS) introduced as a result of the 2003 Mid-Term Review, and the Single Area Payment Scheme (SAPS) used by ten of the twelve countries that joined the EU in 2003 (the excep-tions being Cyprus and Malta). ‘Decoupled’ direct payments take up nearly 60 per cent of the total budget; payments still ‘coupled’ to pro-duction such as the suckler cow premium took up only 15 per cent of spending on direct aids and 5 per cent of total budget commit-ments. Traditional market support and intervention measures are still important in some sectors, justified by the Commission in terms of providing a safety net against market instability. For example a sub-stantial fall in milk prices in early 2009 led to the re-introduction of export subsidies for some dairy products and renewed intervention buying of butter and skimmed milk powder.

For most of its existence the CAP was financed through the European Agricultural Guidance and Guarantee Fund (EAGGF) mech-anism in which export refunds and market stabilisation measures were allocated from the ‘guarantee’ section and structural funding


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106 Alan Greer

such as farm consolidation from the ‘guidance’ section. Almost all resources went to the former, and the latter took up less than 5 per cent of CAP expenditure in 1979 (Fennell 1979: 82–7). Reflecting the emergence of rural development as a core theme, a two ‘pillar’ structure was adopted after the Agenda 2000 reforms. Following the implementation of a single legal funding instrument in 2005, direct payments and market stabilisation (pillar I) are financed through the European Agricultural Guarantee Fund and rural development and environmental measures (pillar II) using the European Agricultural Fund for Rural Development. Reforms since the 1990s have aimed to divert funding from pillar I to pillar II, but this has been politically controversial, advocated by CAP reformers such as the UK and often opposed by those such as France who favour retention of the ‘trad-itional’ CAP. The Chirac-Schröder deal in October 2002 for example stabilised the CAP budget at ‘existing levels’ until 2013 and protected pillar I expenditure (Greer 2005: 149–51; Swinbank and Daugbjerg 2006). Horse-trading on the MFF in 2005 also scaled back proposed

Table 6.1 Agriculture and rural development budget, 2010 (€ millions)

Title/Chapter Heading

Appropriations 2010

Commitments Payments

05 01 Administrative expenditure 133.4 133.4

05 02 Interventions in agricultural markets

4,099.8 4,100.5

05 03 Direct aidsSPSSAPS

39,273.028,480.0

4,497.0

39,273.0

05 04 Rural development 14,358.1 13,397.5

05 05 Pre-accession measures 169.8 131.5

05 06 International aspects 6.3 6.3

05 07 Audit of agricultural expenditure

–300.5 –300.5

05 08 Policy strategy & coordination 40.6 36.3

Title 05 – Total 57,780.4 56,777.0

Source: Eur-Lex 2010 General Budget.


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substantial increases in rural development spending, which was allo-cated €69.75 billion for 2007–13 compared to almost €89 billion pro-posed initially by the Commission.

Nonetheless, around a quarter of the CAP budget now goes on rural development and the environment. The 2010 budget allocation of €14.4 billion represented 24 per cent of spending within the natu-ral resources heading, and 11 per cent of the EU budget (European Commission 2010h: 9, 12). Total spending by European Agricultural Fund for Rural Development for 2007–13 is estimated at €225.7 bil-lion, nearly two thirds from the EU contribution and national co-financing, but 30 per cent from levered-in private expenditure. This funds around a hundred rural development programmes in the 27 member states. Although detailed rules set minimum levels of spend-ing, and at least a quarter of funding must go to environmental sustainability, there is substantial variation between countries and regions. Belgium for example gives priority to improving competitive-ness, the Netherlands to wider rural development. Agro-environment payments are the most important measures (22 per cent of funding) and also account for over half of total rural development spending in the UK (European Commission 2008d; 2008g).

Recognising the pressures on the CAP budget, the main way to strengthen rural development is through co-financed modulation (a mechanism for the transfer of funds from pillar I). Introduced as a voluntary option for member states under Agenda 2000, then made compulsory in the 2008 ‘Health Check’ of the CAP, modulation contributed 14 per cent of rural development funding in the 2010 budget. It first applied to all direct payments over €5000 (starting at 3 per cent in 2005, rising to 5 per cent from 2007, with post-2003 entrants exempted until 2013). The ‘Health Check’ doubled the rate to 10 per cent by 2012, with 14 per cent on payments above €300,000 a year. This represented a compromise following bargaining between states and was a notable fall-back from the original proposal of the Commission (European Commission 2008e).

The distribution of the CAP budget in terms of the relative benefits it provides to member states, to different agricultural activities and to different types of producers and processors, has always been a matter of some debate (see for example De la Fuente and Doménech 2001; Rieger 2005; 2000). Support for farmers is skewed to direct pay-ments and has favoured sectors such as dairy, beef and arable crops.


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108 Alan Greer

Distributional impact is rhetorically captured in the aphorism that ‘eighty per cent of the money goes to twenty per cent of the farmers’, largely those who have larger enterprises and more political influ-ence. Indeed Rieger notes that in the early 2000s around half of all direct payments went to just 5 per cent of beneficiaries (2005: 174). Moreover because most countries use ‘historic’ payments (based on receipts in 2000–2) for the calculation of the single farm payment, the distribution of resources among farmers has to some extent been frozen. There are also notable variations across member states. In money terms, the largest countries unsurprisingly dominate because they have more farmers. France is the biggest recipient of funds (€10 billion in 2008), followed by Spain (€7.1 billion) and Germany (€6.6 billion), but when expressed in GNI the main beneficiaries are Greece, Bulgaria and Ireland. Funding also favours the ‘old’ EU of 15 member states (or EU15), leading the 2003 entrants to demand greater fairness in the distribution of resources.

Distribution effects also relate to EU budget contributions by mem-ber states and by extension to the CAP, which, despite the original intention, has never been self-financing. This is most evident in the debates about the UK ‘correction’ (popularly referred to as the ‘rebate’), first granted in the late 1980s to help compensate for relatively low receipts from the CAP. It remains a contentious issue, bedevilling negotiations in 2005 over the 2007–13 MFF and emerging again dur-ing discussions about the budget after 2013. In September 2010, for example EU budget commissioner, Janusz Lewandowski, commented that the ‘correction’ could not be supported in future because EU farm spending would go down; in June 2011 the French government reiterated its view that France ‘has always been against rebates’ and that any extension to the financial ‘corrections’ received by the UK and Denmark ‘would be unimaginable’. The UK, on the other hand, stuck to its long-established position that the correction ‘remains fully justified’, not least ‘because of expenditure distortions from pol-icies such as the CAP’ (Euractiv.com, 30 June 2011; euobserver.com, 7 September 2010). Yet while the UK is the most trenchant critic of the CAP, it benefits from it by nearly €4 billion per year and there is no groundswell of popular opinion in favour of its abolition. Indeed in a 2009 survey about the CAP, only 13 per cent of UK respondents were totally opposed to payments to help stabilise farmers’ incomes, and 17 per cent agreed that the EU budget allocation to agriculture


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was ‘too high’ – responses not out of line with those in many other countries (European Commission 2010i: 79, 82).

As well as the level of spending, the decision-making processes and the instruments through which that funding is distributed and audited are also important (see Grant 2010 for a discussion of CAP policy instruments). Fraud has been a perennial problem, with atten-tion also paid to financial control, monitoring and accountability. As noted by the Commission’s Agriculture and Rural Development Directorate-General (DG AGRI), because the CAP still consumes over 40 per cent of the budget, it is essential ‘that management and check-ing systems are in place which give reasonable assurance that the sums are spent properly and that any irregular payments are detected and recovered’ (European Commission 2007b: 3).

6.2 Why? What is the Common Agricultural Policy for?

The level and distribution of the CAP budget reflects basic values about the importance of agriculture and rural development in con-temporary societies. Debates about how much money should be devoted to it, and about what it should be spent on, are related to normative values about what the essential purposes of agricultural policies should be. Defenders of the CAP, for example, tend to empha-sise the social benefits from maintaining rural areas; critics point more to its weaknesses as an economic policy and its trade-distorting aspects. Disagreements about whether a common policy is necessary at all often centre on the issue of renationalisation – the repatriation to member states of most agricultural policy, including its funding. The Commission’s 2008 budget consultation exercise noted that one advantage of greater co-financing of the CAP is that it forces member states to pay more attention to the efficient use of public money, and an analysis commissioned to inform the review questioned whether EU-level income support was justified (ECORYS 2008: 172).

Powerful forces at both EU and national levels oppose renational-isation, however, including agricultural interests and member states, especially ‘gainers’ from the CAP such as France and Ireland (see Greer 2005: 210–13; Rieger 2005: 174–5). There remains strong sup-port for a common policy at the supranational level without which – as the Commission emphasises – member states would ‘proceed with


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110 Alan Greer

national policies with variable scope and with different degrees of public intervention’. Moreover wide discretion for countries ‘bears the risk of reorienting agricultural support back towards poten-tially market and trade distorting support mechanisms’ (European Commission 2009c: 5). Conversely, supranational policy promotes coherence through a common set of objectives, principles and rules, stimulates the mutual learning essential for effective policy imple-mentation, and is vital for fairness by ensuring level playing fields across member states. Challenges such as climate change and ani-mal health also can be tackled effectively only through European-level solutions (European Commission 2009c: 5; 2010j: 7–8). There are important budgetary aspects to this. Indeed for the Commission the ‘EU value added’ of a ‘truly common policy’ lies in the fact that it ‘makes the most efficient use of limited budgetary resources in maintaining a sustainable agriculture throughout the EU, addressing important cross-border issues such as climate change and reinfor-cing solidarity among member states, while also allowing flexibility in implementation to cater for local needs’ (European Commission 2011e: 3).

Even if the need for a common policy is accepted, this still leaves much room for debate about its objectives. In formal terms, while there has been reorientation of the focus and mechanisms of the CAP over the years, its five core objectives remain those set out in Articles 38 to 47 of the Treaty of Rome (1957). These relate to a tech-nology-based increase in agricultural productivity that underpins the central aim to ‘ensure a fair standard of living for the agricul-tural community, in particular by increasing the individual earnings of persons engaged in agriculture’, the stabilisation of markets, the availability of supplies and to ‘reasonable’ consumer prices (for useful summary discussions see Grant 1997: 64–5; Roederer-Rynning 2010: 183–5). However, as Roederer-Rynning (2010: 184) comments, ‘ambi-guity characterised treaty provisions on the substantive objectives of the CAP’. Indeed there has been much debate about the nature of the objectives and the consistency between them, for example the extent to which ‘reasonable’ prices to the consumer is consistent with ensuring a fair standard of living for farmers. Importantly also the Lisbon Treaty left the basic policy objectives for the CAP unaltered (essentially they are restated in Articles 38–44 of the Consolidated ver-sion of the Treaty on the Functioning of the EU, TFEU).


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The addition since the 1987 Single European Act of some general cross-cutting treaty provisions have had direct relevance for agricul-ture, notably relating to the environment, animal welfare and con-sumer protection. This focuses attention on how the objectives of contemporary agricultural policies are increasingly ‘multifunctional’. Essentially this means that they should contribute to the attainment of diverse aims ranging from the protection of farm incomes to more recent concerns with the sustainability of the environment and rural areas. As part of its consultation exercise on the post-2013 CAP, for example, DG AGRI issued a discussion paper entitled ‘Why Do We Need a Common Agricultural Policy?’ In its own response to the question, DG AGRI restated that European agriculture is expected to fulfil a variety of functions and identified five core objectives: food security, competitiveness in a global market, sustainable land management, maintaining viable and attractive rural areas, and responding to climate change (added as a main new challenge for the CAP in the 2008 ‘Health Check’). Crucially however, the ‘first and foremost role of European agriculture is to supply food’ (European Commission 2009c: 1).

The discussion paper highlighted the fundamental justification for agricultural policy, namely that market mechanisms alone ‘can-not provide for the manifold roles and services to be provided by European agriculture’. Public support is thought necessary to cush-ion farmers against increasingly volatile markets, to ensure the pro-vision of public goods and to facilitate changes in practices needed to ensure that farming meets societal demands (European Commission 2009c: 1). That agricultural policy can and should deliver desirable public goods has become increasingly popular and the rhetoric has permeated recent debates about the CAP. A Commission-funded study identified ten public goods fostered by agriculture including landscapes, biodiversity, water quality and reducing greenhouse gas emissions. It supported the idea that these should be delivered through public funding but also noted substantial variations in the capacity to achieve them between regions and at the level of individ-ual farms (Cooper et al 2009).

A central problem is that there is disagreement about what should be defined as public goods in the agricultural sphere, ranging from stable incomes and reasonable food prices to environmental bene-fits. Nonetheless, most discussion of public goods relates not to food


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112 Alan Greer

production itself but to its desirable by-products, mainly in the area of environmental sustainability. In its communication on the future of the CAP, DG AGRI claims that agriculture and forestry ‘play a key role in producing public goods’ such as landscapes, farmland biodiversity, climate stability and greater resilience to natural dis-asters such as flooding, drought and fire (European Commission 2010j: 5). Moreover targeting support to ‘remunerating the collective services’ that farmers provide to society would not only increase the effectiveness and efficiency of support but also further legitimise the CAP (European Commission 2010j: 3). A central aim of a reformed CAP would be to ‘secure the enhanced provision of environmen-tal public goods as many of the public benefits generated through agriculture are not remunerated through the normal functioning of markets’ (European Commission 2010j: 7, original emphasis). Unsurprisingly therefore, the perspective tends to be favoured by those who argue that resource distribution within the CAP should be much more focused on environmental and rural development rather than direct payments to farmers. The UK government for example argues that the CAP ‘must better reward farmers for the provision of public goods’, particularly environmental benefits (Agra Europe, No. 2415, 4 June 2010).

6.3 The Lisbon Treaty, CAP reform and the budget post-2013

The ‘how much’, ‘on what’ and ‘why’ questions about the agricul-tural budget are directly connected to arguments about the future shape of the CAP, and also draw attention to its decision-making processes. The architecture of the traditional CAP gives key roles to member states (through the Council of Ministers), DG AGRI and the agricultural lobby, especially the representatives of larger and wealthier farmers. In most perspectives the Council of Agriculture Ministers is viewed as dominant, sitting at the centre of a complex system of inter-governmental bargaining and compromise (see Grant 1997; Rieger 2000; 2005). Historically the agricultural policy proc-ess also has been highly insulated against non-agricultural concerns and the EP has had a marginal role. Although some observers such as Roederer-Rynning (2003) attribute greater influence to the EP, its weakness has been grounded in two structural features. First, it


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had limited capacity to influence the distribution of the agriculture budget because most spending, including Pillar 1 direct payments, has been designated ‘compulsory expenditure’ on which the Council has final say. Second, the CAP was subject to the consultation pro-cedure in which the EP had largely a consultative role (for a general discussion see Pollack 2010: 30–1; Wallace 2010: 82–4).

6.3.1 The Lisbon Treaty and the EU budget, post-2013

While the Lisbon Treaty left the objectives of the CAP largely unal-tered, it introduced potentially important changes to its decision rules and processes, notably by enhancing the formal role of the EP on both law making and the budget (see Greer and Hind 2011; Roederer-Rynning and Schimmelfennig 2011). A new single budget procedure replaces the previous division between compulsory and non-compulsory expenditure, and the ‘ordinary legislative proce-dure’ is extended to agriculture (Article 43 TFEU), which in practice makes the CAP subject to ‘codecision’. Formally this procedure gives the EP and the Council equal powers to legislate on the CAP – both will need to agree the MFF headings including expenditure on agri-culture for example – and allows the EP ‘to veto any proposal that falls under its auspices’ (Peterson and Bomberg 1999: 25). Revised ‘comitology’ rules introduced in March 2011 may also give the EP more say over implementation of the CAP (see Council of the EU 2011). Overall, as noted by Paolo De Castro, the chair of the EP’s Agriculture and Rural Development Committee (COMAGRI), the extension of codecision to the CAP means that the ‘powers and responsibilities of our committee are more important than ever’.2

The impact of the changes introduced by the Lisbon Treaty on the future shape of the CAP will not become clear for several years, not least because they will make the decision-making process more drawn-out (Greer and Hind 2011). For one commentator, codecision will apply on ‘the “bigger” political issues’ while consultation ‘will continue to govern the more “technical” farm issues’ (Roederer-Rynning 2010: 199). Another has suggested that the introduction of an additional veto point could complicate the task of securing agree-ment on the CAP after 2013, leading in practice to ‘co-indecision’ (O’Keeffe 2010). On the other hand the institutional architecture of the CAP tends to produce incremental change along a well-defined path, and although the process may take longer, future outcomes


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114 Alan Greer

may not be very different. Moreover the EP tends to choose essen-tially traditional CAP defenders as chair of COMAGRI (De Castro being an ex-minister for agriculture in Italy), and many of its mem-bers also have links to agriculture and the land. Unsurprisingly then, there is general consensus in COMAGRI about the ‘strengths’ of the CAP and the need to maintain a strong EU-level policy. Indeed the split in COMAGRI over the future CAP budget was between those who advocated an increase to meet new challenges and those sup-porting its maintenance at existing levels. The report drawn up for EP by its rapporteur, UK Liberal Democrat George Lyon, called for CAP spending ‘to be at least maintained post-2013’, although a sub-sequent amendment referred more vaguely to ‘a budget commensu-rate to the objectives pursued’ (European Parliament 2010a: 10; Agra Europe, No. 2415, 4 June 2010).

Proposed reforms of the CAP after 2013 will provide a major test for the new inter-institutional arrangements and decision-making architecture post-Lisbon. Just as the 2008 ‘Health Check’ was trig-gered by the agreement on the 2007–13 MFF that there should be a wide ranging review of all aspects of EU spending, policy change after 2013 again is inextricably connected to wider budget concerns. The broad context was set by the draft 2014–20 MFF unveiled by the Commission in June 2011, which advocated a total increase of €49 billion (4.8 per cent) to €1025 billion, funded partly through new EU-level taxes in a bid to reduce national contributions from 1.12 to 1.05 per cent of GNI (European Commission 2011e).

During the debate on the MFF, some think tanks argued for a fun-damental re-structuring of priorities. The Brussels-based Centre for European Policy Studies, for example, proposed reducing the CAP share of the budget (coupled with national co-financing) and a switch in funding from agricultural policy to better targeted spend-ing on issues such as energy and climate change (Núñez Ferrer 2009). According to ex-Budget Commissioner Dalia Grybauskaïtė, the 2008–9 budget consultation – in which agriculture had been ‘one of the hottest topics’ – had also identified ‘widespread support for considerably reorienting spending priorities’, with many contribu-tions advocating switching spending from agriculture to areas such as climate change, research/development and energy where there is ‘genuine’ added value at the EU level (European Commission 2008f, section 2.3).


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Despite such voices, the draft 2014–20 MFF proposed that ‘a sig-nificant part of the EU budget should continue to be dedicated to agriculture, which is a common policy of strategic importance’, and that the share of funding taken by the CAP be effectively maintained at 2013 level (European Commission 2011e: 7). Of the €371.72 bil-lion earmarked for the CAP (2011 prices), three quarters will go to Pillar 1 direct payments and market measures (€281.8 billion com-pared to €289 billion in the 2010 budget) and the rest for Pillar 2 rural development, a decrease from €96 billion to €89.9 billion. A further €15.2 billion will be allocated under other headings, for example for research and innovation and food support. Total resources available for agriculture will nonetheless fall gradually and, given the increased budget envisaged by the Commission, the share of the total taken by the CAP is predicted to fall to around 36 per cent.

6.3.2 CAP reform

Preliminary discussions on the CAP after 2013 were initiated by DG AGRI in April 2010 in the context of the preparation of the new MFF, followed by a reform communication in late 2010 and detailed legis-lative proposals in October 2011. In its 2010 paper, DG AGRI identi-fied the main challenges facing agriculture, addressed the question of why more reform was necessary, stipulated three core objectives of a future CAP (food security and viable production, environ-mental sustainability and climate action, and ‘balanced territorial development’) and set out its thinking on broad options and policy instruments. Based on the belief that consultations showed the vast majority of respondents favoured the retention of a ‘strong com-mon policy’ structured around its two pillars, DG AGRI proposed measures to enhance the primary market orientation of agriculture, focused on ‘smart’, ‘sustainable’ and ‘more inclusive’ growth for rural Europe – the three strands of ‘Europe 2020’ collectively referred to as ‘green growth’.

The central aim was to take the opportunity provided by the new MFF to ‘refocus the CAP on its core and new activities’ (European Commission 2011e: 15). In the future CAP, resources will be better targeted and there will be ‘a greener and more equitably distrib-uted first pillar’ with a second pillar ‘more focussed on competi-tiveness and innovation, climate change and the environment’ (European Commission 2011e: 16). The goal therefore is to promote a


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‘new partnership between Europe and its farmers’ through creating a CAP that will ‘strengthen the competitiveness, sustainability and permanence of agriculture throughout the EU in order to secure for European citizens a healthy and high-quality source of food, pre-serve the environment and develop rural areas’ (Europa 2011).

Specifically the Commission’s thinking was expressed in the form of three broad policy options, fleshed out as more detailed scenarios that struck different balances between the two pillars and the rela-tive weight attached to the three objectives. Option 1, or the ‘adjust-ment scenario’ envisaged ‘further gradual changes’ that build upon the ‘well-functioning aspects of the policy’ but there were ‘serious doubts’ about whether this could ‘adequately address the impor-tant climate and environmental challenges of the future’. At the other extreme the ‘refocusing scenario’ (option 3) presaged ‘more far reaching reform ... with a strong focus on environmental and cli-mate change objectives, while moving away gradually from income support and most market measures’. Not only does this foresee ‘a substantial overall decrease of the budget it also would accelerate structural adjustment’ and ‘come at a significant social and environ-mental cost’ (see European Commission 2010j: 12; 2011d: 38; 2011e: 5–6).

The preferred approach for DG AGRI was encapsulated in the ‘inte-gration scenario’ (option 2) that would ‘capture the opportunity for reform, and make major overhauls of the policy in order to ensure that it becomes more sustainable, and that the balance between different policy objectives, farmers and member states is better met’ (European Commission 2010j: 12, original emphasis). This approach was the ‘most balanced in progressively aligning the CAP with the EU’s strategic objectives’. Indeed it ‘breaks new ground with enhanced targeting and greening of direct payments ... . If the right balance is struck, this scenario would best address the long term sustainability of agriculture and rural areas’ (European Commission 2011e: 6).

In policy specifics, this approach has three main elements that are intended to alter the distribution of spending within the CAP: convergence, capping and greening. The aim of ‘convergence’ is to narrow variations between farmers and across countries in the levels of direct payments, particularly between old and ‘new’ Europe, to ensure both ‘a more equal distribution of direct support’ and ‘fairer treatment of farmers performing the same activities’ (European


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Commission 2011e: 16). This is to be achieved through the gradual introduction of a unified ‘basic payment scheme’ that will replace the existing plethora of systems by 2019. National envelopes for direct payments will be adjusted so that countries receiving less than 90 per cent of the EU average payment will see one-third of the gap closed. For the long-term MFF after 2020, the Commission hinted at a preference for ‘complete convergence’ in the distribution of direct support across the EU.

‘Capping’ refers to the introduction of limits on the payments received by larger holdings, with resources transferred to rural devel-opment (often referred to as degressivity). A progressive reduction of support for large beneficiaries is proposed, starting at 20 per cent each year for entitlements between €150,000 and €200,000, gradually increasing in three stages to a 100 per cent reduction for payments over €300,000. Further ‘greening’ of the CAP is proposed through making 30 per cent of direct support conditional on verifiable and legally defined ‘environmentally supportive practices’ with farmers ‘receiving payments to deliver public goods to their fellow citizens’ (European Commission 2011e: 16). These practices as specified in the legislative proposals are crop diversification, maintenance of perma-nent pasture and the preservation of ecological reserves and land-scapes (maintaining an ‘ecological focus area’ of at least 7 per cent of farmland, excluding permanent grassland). In addition countries will be able to transfer up to 5 per cent of direct payments between pillars to reinforce rural development, although those whose level of direct payments is below 90 per cent of the EU average will be able to ‘reverse’ transfer to pillar I.

Given the lessons of past reform episodes, these proposals are unlikely to be implemented without further important changes. In the first instance they embody assumptions about the MFF that may turn out to be overly optimistic. Several national governments, largely net contributors such as the UK, the Netherlands, France and Germany, criticised the ‘bloated’ and ‘above inflation’ budget increase as ‘significantly in excess of what is needed’ for a stabilisation of the budget and which did not chime with the austerity measures being introduced in many countries. For them the priority was to ‘spend better, not spend more’ (Euroactiv.com, 12 September 2011).

The CAP reform proposals also are subject to inter-institutional negotiation and their final shape after 2013 will reflect further


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118 Alan Greer

bargaining between institutions and stakeholders. There is support from key institutions for the direction of travel. Agriculture Council ministers have broadly backed the Commission’s ideas for example, noting in March 2011 that the CAP had to remain a strong common policy with financial resources commensurate with its objectives (Euractiv.com, 18 March 2011). The EP’s Lyon report also reflected key ideas in the emerging proposals, including a focus on competi-tiveness, greater emphasis on the provision of public goods, full decoupling with a fairer model for direct income support and a max-imum limit on the size of subsidies (European Parliament 2010a). On the other hand there will be intense bargaining around the specifics. Capping subsidies, for example, has been fiercely resisted in previ-ous reform episodes by countries such as the UK and France who have efficient and large scale enterprises, and is likely to again be an area of dispute. The main farming stakeholders in the UK – the National Farmers’ Union and the Country Landowners’ Association – described the reform proposals as ‘a missed opportunity’ to improve efficiency and competitiveness, specifically rejecting ‘capping’ that would ‘discriminate against the UK’ (NFU and CLA 2011).

Fundamental disagreements between member states remain extremely important. As Agra Europe noted in a report on an informal meeting of agriculture ministers in Spain in June 2010, ‘calls for an end to Pillar One largesse were echoed by more liberal-leaning member states ... while traditional defenders of the CAP budget made clear their continued support for a strong CAP despite the new budgetary austerity sweeping across Europe’ (No. 2415, 4 June 2010). Pro-reform countries such as the UK, Sweden and the Netherlands favour budgetary restraint, if not substantial cuts in the short term, with a reorientation of support in favour of rural development and the provision of public goods. Traditional CAP defenders such as France, Ireland and Greece support maintenance of the budget, favour direct payments tied to past levels of pro-duction and remain sceptical about ‘greening’. In early 2011, for example, President Sarkozy made it clear that France would aim to ‘maintain the CAP’s budget to the last euro’ and stated that ‘we do not have to excuse ourselves for defending Community preference and the CAP budget’ (adding that farmers are ‘producers of agricul-tural goods, not maintenance workers’) (Euractiv.com, 19 January 2011; Le Monde, 12 May 2011).


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A crucial element in the political process has again been the Franco–German axis. In July 2009 a joint group on future CAP reform was set up and a paper published in September 2010 set out agreed core principles for ‘a strong CAP beyond 2013’, which advo-cated continuation along the lines set out in the 2008 Health Check. It rejected renationalisation through co-financing, supported reten-tion of the two-pillar structure and of decoupled direct payments and opposed substantial redistributive measures to narrow the gap in payments across countries (convergence), ruling out an EU-wide flat rate. While it did not put a figure on the size of the budget, it did state that ‘there must be resources for action commensurate with our ambitions’ (Bundesministerium et al 2010: 2). On the other hand Secretary of State Caroline Spelman told the meeting in Spain that the UK ‘could not support any farm council moves to protect the CAP budget’, noting that the crisis in public finances across Europe made promoting competitiveness and tackling climate change the main priorities. Specifically pillar I payments should be cut to fund increased expenditure on rural development and the environment – ‘green growth’ within a ‘strong Pillar Two framework’ (Agra Europe, No. 2415, 4 June 2010; Euractiv.com, 2 June 2010). Unsurprisingly then, for the UK the Commission’s legislative proposals did not go far enough to reduce the budget and improve competitiveness, or to deal with the twin challenges of international food security and pro-tecting the environment. While ‘some of the Commission’s rhetoric is right, overall we’re disappointed and the proposals as they stand could actually take us backwards ... the UK will be working hard with the Commission, European Parliament, and other member states to achieve the best deal for farmers, taxpayers and the environment’ (DEFRA 2011).


This chapter has focused on the budget for agriculture and rural development in the context of debates about reform of the CAP and the new MFF after 2013, framed by the impact of economic crisis. It has asked crucial questions about the size of the CAP budget, how resources are distributed, the nature and purposes of agricultural policy and about the future shape of the CAP. First, expenditure on the CAP still takes up over 40 per cent of the total EU budget and


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120 Alan Greer

while this proportion has fallen over the past 30 years, change has been gradual – and will continue to be so. Second, there are import-ant distributional patterns within CAP spending, most of which goes on direct payments and market support (pillar I) with rural develop-ment and the environment (pillar II) receiving only around a quarter of the budget, despite efforts substantially to increase the share. The UK budgetary ‘correction’ continues to inform debates and there also is a continuing ‘enlargement effect’ that is manifest in distributional inequalities that are politically controversial. In the debates on CAP reform for example, a key concern for countries such as Poland and the Czech Republic has been the need to secure a more equitable dis-tribution of spending, reflected in the Commission’s identification of ‘convergence’ as a core reform theme.

Third, there are important debates about what the CAP is for and why it is needed. There remains strong support for a common EU-level policy based on financial solidarity, and vocal opposition to renationalisation. For key policy actors such as the Commission this provides ‘value-added’, not least because an EU-level policy ‘provides for a more efficient use of budgetary resources than the coexistence of national policies’ (European Commission 2010j: 8). Within this con-text, policy has multifunctional objectives including food security, farm incomes, tackling climate change and promoting the prosperity of rural areas generally. An important theme is the notion of public goods. While usually narrowly interpreted to cover the environmen-tal benefits of agricultural production, there seems to be an attempt to exploit the concept to justify the CAP in its entirety. Indeed to a certain extent supporters of current agricultural policy have tried to defend the continued existence of the CAP in something like its cur-rent form by exploiting a concept often used to criticise it.

Fourth, CAP reform proposals have been influenced by the draft MFF for 2014–20, which envisages the maintenance of spending at the 2013 level. Despite calls from some quarters for a thorough overhaul of the CAP in the context of a radical rethinking about overall budget priorities, all the signs point to ‘business as usual’. Although subject to negotiation, the draft MFF does not presage any major reduction in agricultural spending, and with little support for renationalisation it is clear that a substantial CAP will remain after 2013. Reformed along the lines of the Commission’s ‘integra-tion’ approach, this will retain much of the core elements of the


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CAP beloved of its defenders, but move further towards redirecting spending to the provision of public goods, especially relating to the environment and climate change.

Essentially the decision rules and institutional structures around the CAP, including the balance of forces between member states, still ensure that change will be incremental. While the changes intro-duced by the Lisbon Treaty give the EP a greater formal role in the decision-making process, this is more likely to buttress the status quo than to facilitate radical change. Indeed when welcoming some of the ideas put forward in the Franco–German paper on the CAP, UK minister Caroline Spelman insisted that France and Germany could not dictate the outcome in the way they had done with previous reforms. For Spelman, the negotiating framework is ‘very different now with the Lisbon Treaty and codecision making with the European Parliament. It’s much harder, even if you’re two big states out of the 27, you can’t dictate terms’ (Euractiv.com, 22 September 2010). This may be true but it is hard to see how the power-plays around the wider budget review and CAP reform are going to facilitate a radical alteration of priorities, at least in the medium term. The majority of member states seem to have backed ‘a strong and well-budgeted CAP post-2013’, leaving reformers such as the UK and Sweden relatively isolated (Agra Europe, No. 2415, 4 June 2010). Indeed when around 20 countries defended the CAP at an Agriculture Council meeting in March 2011, French agriculture minister, Bruno Le Maire, greeted this as not just a ‘strong political signal of support by governments for the CAP’ but for ‘strengthening it in the years to come’ (Euractiv.com, 2 June 2010, 18 March 2011).

Notes

1. Figures used here are commitment appropriations, which are legal pledges, rather than payment appropriations which are actual monetary transfers.

2. See the EP’s Agriculture and Rural Development Committee website, accessed 19 December 2011: http://www.europarl.europa.eu/committees/en/AGRI/home.html.


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http://www.europarl.europa.eu/committees/en/AGRI/home.html.

http://www.europarl.europa.eu/committees/en/AGRI/home.html.

The EU’s budget is small. In 2007, it amounted to €126.5 billion. This was equivalent to 1.08 per cent of EU GNI – or 15 per cent less than the British government spent on the National Health Service alone. Despite its small size, the EU budget remains the source of bitter argu-ments among the member states. Many argue that its structure looks increasingly out of date with the challenges facing the EU, such as climate change. Some 45 per cent of the EU budget is still consumed by spending on agriculture and rural development. Another reason why the EU budget excites strong passions is the scale of disparities in member states’ net contributions. Unsurprisingly, net contributors have tended to agitate for change, while countries which are large beneficiaries of disbursements under the CAP or cohesion policy have tried to resist reform. This chapter focuses on the achievement and relevance of cohesion policy. It questions whether we need a cohe-sion policy and if so which changes cohesion policy should undergo in order to be up to date with the new challenging of an enlarged Europe in a global economy. The chapter argues that irrespective of a higher or lower allocation of budget to cohesion policy, the policy can still be effective if priorities and funding system among member states and regions are revised.

This chapter will look at the effects of budgetary review on struc-tural funds1 as the financial instruments to implement cohesion policy in the context of the 2007–13 agreement an in light of the 2014–20 budget.

The aim of cohesion policy is to promote solidarity. It allocates more than a third of the EU budget to the reduction of the gaps

7Challenges for the Future of the Structural FundsSimona Milio

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Challenges for the Future of the Structural Funds 123

in development among the regions and disparities among the citi-zens in terms of well-being. ‘The Union seeks to use the policy to help lagging regions to catch up, restructure declining industrial regions, diversify the economies of rural areas with declining agri-culture. The policy aims to make regions more attractive, innovative and competitive places to live and work. It focuses on growth and jobs for all regions and cities of the European Union and promotes a harmonious, balanced and sustainable environment for the EU. In a word, it seeks to strengthen the economic, social and territo-rial “cohesion” of the Union’ (European Commission 2004a: 2). The Regional Policy aims to strengthen the economic, social and territo-rial cohesion of the EU by reducing socio-economic disparities in development between regions.

Cohesion policy, which is based on a multiannual programming period, has already completed three cycles – 1989–93, 1994–99, 2000–06 – and it has entered the fourth planning period, 2007–13. These have been very challenging years, in which cohesion policy has also become the instruments for delivering the Lisbon and Gothenburg Agenda.2

Despite the financial effort, the existing economic literature on cohesion policy dwells on the question of whether cohesion policy is an instrument of distributive politics, side-payments to poorer mem-ber states or a development tool – that is promoting economic con-vergence between regions or not. Controversial arguments suggest a very limited and at times negligible economic impact and little pro-gression in terms of overcoming regional inequalities (Keating 1995; Rodriguez-Pose 1998). On the other side, recent reports on economic and social cohesion (European Commission 2004b) within the EU of 15 member states (EU15) and various studies (Bradley et al 2004; Labour Associados 2003) have observed an appreciable reduction of the disparities among regions and even more among member states. They have also shown that this development has to a great extent been supported by the action of the financial instruments of cohe-sion policy, namely structural and cohesion funds (see also Leonardi 1995; 2005).

It has to be said that some progress has been made over the past 20 years, as suggested by economic development in the largest bene-ficiaries of cohesion policy – that is Spain, Portugal, Greece and Ireland. These four member states have significantly reduced the


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124 Simona Milio

gap with the rest of the EU. However, many authors are sceptical of the direct relationship between structural funds and GDP growth (Betutel 2002; Basile et al 2001).

Nonetheless the enlargement of the EU to the ten new member states has accentuated the disparities and gaps between the regions (European Commission 2005c). At the same time, Bulgaria and Romania, which joined the EU in 2007, as well as the new candidate countries, Croatia, Turkey and Macedonia, have a lower level of wealth than the least prosperous of the new member states (Eurostat 2005).

Therefore the new challenge for cohesion policy is to support both the newly joined countries and the future candidate in their process of catching up. In this respect, cohesion policy will have to address three priorities: growing social and regional disparities, the emergence of new territorial inequalities, the continuing problem of social exclusion (European Commission 2005d: 4).

Along with new demands, the enlargement has brought in extra governments and therefore has created a greater threat of veto to agreement, especially on the budget.

The latest policy documents that have animated the debate ‘the future of Cohesion Policy 2020’,3 suggest that there are 4 general challenges for regions: 1) globalisation will increase competition putting additional pressure on local firms and, indirectly, on wages, especially for low-skilled labour. Many regions throughout the EU will therefore have to restructure their economy and promote con-tinuous innovation; 2) demographic trends project that the EU will see a process of shrinking in working age population, ageing soci-ety and population decline, which will lead to a low growth due to the shrinking labour force; 3) climate change will strain economic, social and environmental systems by constraining development of economic sectors which rely on ecosystem services and natural resources; 4) energy use and supply will see an increase in prices and consumption forcing the regions to more efficient and sustainable environmental approach.

These four challenges are exacerbated by the ongoing financial cri-sis and consequent economic recession. The strategy put in place by the EU to face these challenges has been labelled Europe 2020 with the aim of making the EU become a smart, sustainable and inclusive economy. These three mutually reinforcing priorities should help the EU and the member states deliver high levels of employment,


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productivity and social cohesion. Concretely, the EU has set five ambitious objectives – on employment, innovation, education, social inclusion and climate/energy – to be reached by 2020. These objec-tives clearly show a shift of the EU budget to the needs of providing public goods rather than redistribution of funding.

In this context, characterised by enlargement, financial crisis, increased demand, increased veto power and the need for public goods rather than redistribution, this chapter addresses some ques-tions which are at the heart of the debate on cohesion policy:

What has cohesion policy achieved so far, economically, socially 1. and institutionally?If we intend to keep it, which changes are necessary to face future 2. challenges?

Section 7.1 describes the size of the budget and the growing rele-vance of cohesion policy over the past 20 years, with a specific focus on the latest negotiation dated December 2011. Section 7.2 analy-ses the dynamics in the allocation of regional funds and the results achieved during the past three planning periods. Section 7.3 looks at the actual planning period, the new objectives of cohesion policy and its relevance in light of the challenges that emerge in an enlarged Europe (for example social inclusion, increased regional disparities in the new member states). Section 7.4 focuses on the MFF negotia-tions and their implication for structural funds. It makes some rec-ommendations on the themes of better concentration, additionality, co-financing and social objectives.

7.1 Cohesion and the size of the budget

7.1.1 A brief excursus

The profile of EU spending has changed considerably over time: his-torically, the vast bulk of the EU budget has been concentrated in a relatively small number of policy areas. But both within and beyond these areas, the focus of spending and the policy objectives pursued have evolved (Figure 7.1).

At the beginning of the integration process, each of the three European Communities had specific budgets. The first budget of the EU was very small and covered exclusively administrative


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126 Simona Milio

expenditure. The 2007 general budget was mainly an operating budget, authorising payment appropriations at a level of €115.5 bil-lion for sustainable growth, the preservation of natural resources, citizenship, freedom security and justice and the EU’s external action.

In 1965, payments for the CAP absorbed 35.7 per cent of the budget and rose to 70.8 per cent in 1985. In the first year of the 1988–92 financial perspective, CAP expenditure still represented 60.7 per cent of the budget. By 2013, the share of traditional CAP spending (excluding rural development) will have almost halved (32 per cent), following a decrease in real terms in the financing period 2007–13.

Only 6 per cent of the European budget was spent on cohesion policy in 1965, a share which increased only slightly until the 1980s (10.8 per cent in 1985). The Single European Act put a new empha-sis on economic and social cohesion and was accompanied by a sig-nificant increase of cohesion spending. The amounts earmarked for structural actions had already risen to 17.2 per cent by 1988, and will represent 35.7 per cent of the EU budget in 2013, with at least two-thirds earmarked for competitiveness, growth and jobs.

Funding for other policies (mainly related to competitiveness, external actions and rural development) was originally very lim-ited. In the first financial framework only 7.3 per cent of the budget was reserved for these areas. But the new emphasis on economic

Figure 7.1 Evolution of Expenditure in Cohesion Policy and Common Agricultural Policy

Source: European Commission, SEC (2007).

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Commonagricultural policy

Cohesion policy Other policies

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development and competitiveness will see the share of such poli-cies rise to 26 per cent in 2013, of which 10.2 per cent for competi-tiveness, 6.3 per cent for external actions and 7.3 per cent for rural development.

7.1.2 The wrangle around the 2007–13 financial agreement

The negotiations around this financial framework were really hard and animated by four main issues: 1) the overall budget ceiling for the 2007–13 financial cycle – that is the gap between the six big net payers and the Commission’s proposal – backed by the net recipients; 2) the amount and speed of modernisation funds for the eight east-ern European newcomers and financial adjustments for other states; 3) the UK rebate (representing €3–4 billion per year) which was nego-tiated in 1984 when Britain was in economic decline; 4) the weight of farm subsidies.

The minimalists wanted commitments to future spending capped at 1 per cent of EU GNI, which implies actual payments of 0.94 per cent at most. The Commission’s original proposal to spend 1.14 per cent was for actual payments, which meant that the Commission wanted the budget to reach as much as 1.24 per cent of EU GNI in committed funds. In terms of money, the gap between the Commission and the minimalists was worth some €215 million per year, or roughly €1.5 billion over the seven-year period.

After 17 hours of negotiations at the European Council on 15–16 December 2005, the UK managed to get a political agreement from all member states on the package for the period 2007–13.

The compromise agreement contains the following elements: 1) the overall spending committed was capped at 1.045 per cent of GDP,4 which was expected to be €862 billion; 2) the UK gave up €10.5 billion of its rebate; 3) the Netherlands received a €1 billion reduction; 4) Poland became the largest beneficiary of EU cohe-sion spending, €59.7 billion; 5) The European Commission was asked to hold a full and wide-ranging review of all EU spending, including the CAP and the British rebate, and to draw up a report in 2008–09. There was no extra money for Bulgaria and Romania once they joined in 2007, so the budget had to be stretched to cover 27 states rather than 25. Table 7.1 shows the present financial frame-work (2007–13) which comprises six headings broken down in some cases into subheadings:


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128 Simona Milio

7.1.3 The Financial Framework, 2014–20

The main aim of the MFF proposed by the Commission is to deliver the EU 2020 strategy and its objectives.

The former budget Heading 1 on Sustainable Growth and former Heading 2 on Conservation and Management of Natural Resources have been renamed ‘Smart and Inclusive Growth’ and ‘Sustainable Growth: Natural Resources’ echoing the three pillars of the Europe 2020 strategy (see Table 7.2).

To all intents and purposes, this superficial change does not affect the actual content of the budget headings. However, the philosophy behind the budget is now explicitly joined up. This means that one policy area can be funded through various policies belonging under different budget headings. This is the case of agriculture, which mobi-lises a major part of the budget allocated under Heading 2 Sustainable

Table 7.1 Overview of the Financial Perspective, 2007–13 in 2004 prices, € billions

Commitments appropriations Total 2007–13 %

1. Sustainable growth 379,739 44.0

1a. Competitiveness for growth and employment

72,120 8.8

1b. Cohesion for growth and employment 307,619 35.6

2. Preservation and management of natural resources

371,244 42.7

of which market related expenditure and direct payments

293,105 34.0

3. Citizenship, freedom, security and justice 10,270 1.3

3a. Freedom, security and Justice 6,630 0.8

3b. Citizenship 3,640 0.5

4. EU as a global player 50,010 5.7

5. Administration 50,300 5.8

6. Compensations 0,800 0.1

Total appropriations for commitments 862,363

Commitments ceiling as a % of GNI 1.048

Source: Council of the EU (2005).


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Growth through the CAP, but also obtains funding earmarked for R&D (Heading 1 Smart and Inclusive Growth), food safety (Heading 3 Security and Citizenship) and the management of farming crises (special reserve for managing crises in the agricultural sector and the European globalisation adjustment fund, which are outside the MFF).

The joined-up philosophy mentioned above makes it tricky to com-pare the Financial Perspective of 2007–13 with the MFF of 2014–20 in detail. However, the main budget volumes are still basically compara-ble. On the whole, the CAP and cohesion policy remain the EU’s two biggest budget items (respectively 36.3 per cent and 32.8 per cent of the 2014–20 MFF), but their budgets have been somewhat reduced (–16.4 per cent) to the benefit of Research, Development and Innovation (+35 per cent) and External Aid (+25 per cent) in particular.

7.2 Cohesion Policy, 1988–2006

7.2.1 Dynamics in the allocation of regional funds 1988–2006

Prior to 1989, EU cohesion policy was relatively unstructured and financially much smaller. Cohesion policy ‘proper’ began with the

Table 7.2 Overview of the new Multiannual Financial Framework (Commission proposal), 2014–20, in 2011 prices, € millions

Commitments appropriations Total 2014–2020 %

1. Smart and inclusiveness growth 490,908 47.89

of which: economic, social and territorial cohesion

336,020 32.78

2. Sustainable growth: natural resources 382,927 37.36

of which market related expenditure and direct payments

281,825 27.50

3. Security and citizenship 18,535 1.818

4. Global Europe 50,010 4.88

5. Administration 62,629 6.11

Total appropriations for commitments 1.025,000

Commitments ceiling as a % of GNI 1.05

Source: European Commission (2011c).


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130 Simona Milio

introduction of the EU’s multiannual spending guidelines or finan-cial perspectives, as they were called until the Lisbon Treaty. These were the so-called Delors I package for the period 1989–93, the Delors II package for the period 1994–9 and the Agenda 2000 package for the period 2000–6.

European Councils in 1988, 1992, 1999 and 2005 confirmed the importance of cohesion policy by allocating increasing shares of the European budget to it (Table 7.3).

Before the enlargement the big receiver of structural fund has been Spain followed by Italy, Germany Greece and Portugal as shown in Table 7.4.

7.2.2 Achievement of cohesion policy

Economic growth?

Despite this financial effort, the literature duels on the question of whether cohesion policy is an instrument of distributive politics,5 side-payments6 to poorer member states or a development tool – that is promoting economic convergence between regions or not. Controversial arguments suggest a very limited and at times negligi-ble economic impact and little progression in terms of overcoming regional inequalities among regions7 (Keating 1995; Rodriguez-Pose 1998).

It has to be said that some progress has been made over the past 20 years, as suggested by the economic development in the largest beneficiaries of cohesion policy – that is Spain, Portugal, Greece and Ireland. These four member states have significantly reduced the gap

Table 7.3 Structural Fund Contri-butions 1989–93, 1994–99, 2000–06, 2007–13 in current prices

Period Allocation (€ billion)

1989–93 65

1994–99 159

2000–06 213

2007–13 347

2014–20 336


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with the rest of the EU.8 Yet, many authors remain sceptical of the direct relationship between structural funds and GDP growth (Basile et al 2001; Betutel 2002; Sapir et al 2004).

Social cohesion?

Ensuring social cohesion means guaranteeing access to the same rights for all, respect for dignity of others, the right for all individuals to have the opportunity for personal development and participation in the democratic process. It therefore includes respect for minor-ity rights and for the principle of non-discrimination. Translated into the main areas of CP interventions, this means focusing on the

Table 7.4 European Union allocation, 1989–2006 in € Millions

1989–1993 1994–1999 2000–2006

Member statesTotal in

€ M %Total in

€ M %Total in

€ M %

Belgium 864 1.20 2096 1.30 2038 9.60

Denmark 430 0.60 844 0.50 825 0.30

Germany 6431 9.00 21731 13.40 29764 14.04

Greece 9161 12.80 17736 10.90 24883 11.74

Spain 15086 21.20 42400 26.20 56205 26.53

France 6942 4.70 14939 9.20 15666 7.39

Ireland 4901 4.90 7403 4.60 3974 1.87

Italy 11872 16.70 21651 13.30 29656 13.99

Luxembourg 77 0.10 103 91 0.04

Netherlands 814 1.10 2616 1.60 3286 1.55

Austria 1831 0.86

Portugal 9461 13.20 17629 10.90 22760 10.74

Finland 2090 0.98

Sweden 2186 1.03

United Kingdom 5329 7.50 12981 8.00 16596 7.83

Total 71368 100.00 162129 100.00 211851 100.00

Source: European Commission annual reports, 1989–2006.


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132 Simona Milio

following priorities: lifelong learning; work force adaptability and information society; labour market policy to promote employment; social inclusion; gender equality. The latest independent ex-post ESF evaluation report suggest mixed results on each of the five areas (gender and inclusion being the most problematic).

It is fully recognised that, within cohesion policy, there is a gap or imbalance between the social and economic objectives. The Funds are still not inclusive enough and focus more on economic issues rather than social. Indeed, the vast majority of money is allocated to the ERDF whose main focus is sustainable economic development through investment in R&D, innovation and entrepreneurship, energy and transport (Table 7.5).

Institutional development?

The argument on the effect of structural funds on institutional development and administrative capacity building are quite recent. They have developed with the enlargement process, given that pro-grammes of capacity building were created in order to support new member states in familiarising with structural funds rules and regu-lations. Based on previous research I carried out (Milio 2007; 2008) it emerges that cohesion policy has definitely contributed to: 1) the development of administrative capacity for implementing complex programmes – based on planning multiannual resources; prioritis-ing investment; monitoring and evaluating the results in order to improve resources implementation over time; 2) the establishment of a method of governing development policy common to all EU

Table 7.5 Division of funds allocation, 1989–2006

PeriodTotal

allocation ERDF ESF EAGGFOthers/

FIFG

1989–1993* 71368 34312 (49%)

20784 (29%)

11799 (16.5%)

4474(6.3%)

1994–1999* 162129 71488(44%)

41975(26%)

22059(14%)

27150(17%)

2000–2006** 212061 123220(58%)

65417(31%)

20502(9.6%)

2921(1.4%)

Sources: * European Commission (1997); ** European Commission (2007c).


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member states. Before cohesion policy was created, many regions did not have any understanding of long-term planning and monitoring and evaluation procedures were deficient.

Clearly, the attempt to coordinate the various funding instru-ments was not easily achieved, and it required a long period of experimentation and socialisation of administrative personnel on the benefits of coordination before the goal could be achieved. Monitoring of structural funds investment and evaluation of impact proved to be and still are the most challenging aspect. But overall this new system of governance has proved to be effective not only under the structural funding framework but also under any development policy raising the profile of regional government performance.

The brief analysis above suggests that (1) economic goals have been partially reached; (2) social goals have been not addressed enough; (3) institutional development has been the most successful achieve-ment among the three set goals.

Based on these results it emerges that cohesion policy has had mixed results in achieving the objective of economic, social and institutional development. In an enlarged Europe the role of the policy will be even more necessary and the challenges posed on the budget negotiation will determine the policy financial allocation to pursue its objective.

In this context the next section will try to answer two main ques-tions: 1) do we need cohesion policy to promote economic and social development? If yes, 2) what features need to be modified in order for cohesion policy to be more effective and target the challenges created by the enlargement?

7.3 Cohesion Policy, 2007–13: challenges and shortcomings

7.3.1 Financial allocation and objectives

In the financial perspective, or long-term budget, agreed in December 2005, cohesion policy is financed under Subheadings 1b ‘Cohesion for Growth and Employment’ of Heading 1 for sustainable growth. Heading 1 consists of two subcategories: ‘Competitiveness for Growth and Employment, and Cohesion for Growth and Employment’.


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134 Simona Milio

The two subcategories are connected and aim to increase the EU’s competitiveness, boost the European economy and create better jobs.

Various programmes pertaining to research, innovation, educa-tion, the internal market and the EU networks are financed under the first subcategory. The EU has set the objective to create a knowl-edge-based society and become the most competitive and dynamic knowledge-based economy in the world (according to the Lisbon Strategy). The triangle of knowledge, education/research and inno-vation, is a principal tool in achieving this goal.

This subcategory covers actions promoting the competitiveness of firms within an integrated single market, the creation of the ERA, the improvement of the standard of education and training, with an emphasis on mobility, and the achievement of the social policy agenda, combining legislation, the open method of coordination and social dialogue.

Financial assistance under this subcategory concerns R&D, the trans-European transport and energy networks, entrepreneurship, the growth of small and medium enterprises, the innovative poten-tial of the EU, education and training investment in information technology for public services, and cost effective energy purchasing and consumption.

The main programmes within this subcategory are: (1) Seventh Framework Programme for research, technological development and demonstration activities (FP7); (2) the Competitiveness and Innovation Programme; and (3) the Lifelong Learning Programme.

The second subcategory – 1.b Cohesion for Growth and Employ-ment – finances the regional policy and is comprised of the two struc-tural funds, the ERDF and the ESF, as well as the Cohesion Fund.

The European Commission in its proposal dated July 2004 sug-gested an allocation of €336 billion to achieve the ambitious plan of reduction of the ‘wealth gap’ by financing programmes aimed at boosting competitiveness and growth. The struggle over the finan-cial agreement reached in 2005 has sought a reduction of €28 billion from the initial proposal.

Until 2000, cohesion policy has concentrated on investment in infrastructure and small and medium enterprises. In March 2000, the Lisbon Strategy was adopted by the European Council in Lisbon, and brought about a paradigm shift in cohesion policy. It now focuses on reducing economic inequality by boosting growth,


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employment and innovation towards the highest concentration ever of resources on the poorest member states and regions. Indeed, the European Council agreed in December 2005 on the budget for the period 2007–13 and allocated €308 billion (constant prices 2004) on structural and cohesion funds.

The above funds have been divided to cover three main objectives (European Commission 2005b):

81.54 per cent for Convergence;1. 15.95 per cent for Regional Competitiveness and Employment;2. 2.52 per cent for European Territorial Cooperation.3.

The rationale of the Convergence Objective (previously called Objective 1) is to promote growth-enhancing conditions and fac-tors leading to real convergence for the least-developed member states and regions. In the EU of 27 member states (EU27), this objec-tive concerns – within 18 member states – 85 regions with a total population of 154 million, and per capita GDP at less than 75 per cent of the EU average (Table 7.6), and – on a phasing-out basis – another 16 regions9 with a total of 16 million inhabitants and a GDP only slightly above the threshold, due to the statistical effect of the larger EU. The amount available under the Convergence Objective is €251 billion, representing 81.7 per cent of the total. It is split as fol-lows: €178 billion for the convergence regions, while €12.5 billion are reserved for the ‘phasing-out’ regions and €61.4 billion for the Cohesion Fund.

Outside the convergence regions, the Regional Competitiveness and Employment Objective (previously called Objectives 2 and 3) aims at strengthening competitiveness and attractiveness, as well as employment, through a two-fold approach. First, development programmes will help regions to anticipate and promote economic change through innovation and the promotion of the knowledge society, entrepreneurship, the protection of the environment and the improvement of their accessibility. Second, more and better jobs will be supported by adapting the workforce and by investing in human resources. In the EU27, a total of 168 regions are eligible, representing 314 million inhabitants. Within these, 13 regions10 which are home to a total of 19 million inhabitants represent so-called phasing-in areas and are subject to special financial allocations due to their


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136 Simona Milio

former status as Objective 1 regions. The amount of €48.8 billion – of which €10.4 billion is for the ‘phasing-in’ regions – represents just below 15 per cent of the total allocation. Regions in 19 member states are concerned with this objective.

Table 7.6 List of regions with GDP per capita below 75 per cent of EU average

New member states

Bulgaria the whole territory (6 regions)

Estonia the whole territory

Czech Republic Střední Čechy, Jihozápad, Severozápad, Severovýchod, Jihovýchod, Střední Morava, Moravskoslezsko (7)

Hungary Közép-Dunántúl, Nyugat-Dunántúl, Dél-Dunántúl, Észak-Magyarország, Észak-Alföld, Dél-Alföld (6)

Latvia the whole territory

Lithuania the whole territory

Malta the whole island

Poland the whole territory (16 regions)

Romania the whole territory (8 regions)

Slovenia the whole territory

Slovakia Západné Slovensko, Stredné Slovensko, Východné Slovensko (3)

Total 46 regions + 5 unitary states

Old member states

Germany Brandenburg-Nordost, Mecklenburg-Vorpommern, Chemnitz, Dresden, Dessau, Magdeburg, Thüringen (7)

Greece Anatoliki Makedonia, Thraki, Thessalia, Ipeiros, Ionia Nisia, Dytiki Ellada, Peloponnisos, Voreio Aigaio, Kriti (9)

Spain Andalucía, Castilla-La Mancha, Extremadura, Galicia (4)

France Guadeloupe, Guyane, Martinique, Réunion (4)

Italy Calabria, Campania, Puglia, Sicilia (4)

Portugal Norte, Centro, Alentejo, Região Autónoma dos Açores (4)

United Kingdom Cornwall and Isles of Scilly, West Wales and the Valleys (2)

Total 34 regions


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The European Territorial Cooperation objective has an allocation of €7.5 billion (2.5 per cent of the total) which will be invested in strengthening cross-border cooperation through joint local and regional initiatives, transnational cooperation aiming at integrated territorial development, and interregional cooperation and exchange of experience. The population living in cross-border areas amounts to 181.7 million (37.5 per cent of the total EU population), whereas all EU regions and citizens are covered by one of the existing 13 tran-snational cooperation areas.

Based on the three objectives and economic criteria such as GDP per capita, GNI, unemployment and infrastructural problems, the financial division finally agreed sees as main beneficiary countries: Poland, Spain, Italy, Czech Republic, Germany, Hungary, Portugal, Greece, Romania and France (Table 7.7). This means that among the ten most financed countries, six still belong to the old member states. This does not reflect the fact that out of the 85 regions cov-ered by the convergence objective, 60 per cent – that is a total of 46 regions and five unitary states – are in the new member states, leaving just 34 regions in the old member states. Indeed, the old member states receive almost 49 per cent of the total allocation of structural funds – that is almost €150 billion.

7.3.2 What is wrong with cohesion policy?

Budget allocation among member states

As seen in Tables 7.3, 7.4 and 7.5, the main beneficiaries of struc-tural funds pre-enlargement were Spain, Portugal and Greece, with Ireland still receiving sizeable, albeit declining, amounts. All the richer members, including Luxembourg, also got at least some money from the structural funds for their poorer regions. Many feel that in the enlarged EU the structural funds should be targeted at the poorest countries. Yet the Commission’s proposal suggested that the ‘old’ members would still receive roughly half of the structural fund allocation from 2007 to 2013. The Luxembourg presidency sug-gested shifting more money towards the new members, but it would still have left as much as 40 per cent of all structural funds spending in the old member states. At the end the final agreement secured to the old member states 49 per cent of the total cohesion budget. Many have criticised this approach arguing that only Portugal and Greece


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Table 7.7 Cohesion Policy, 2007–13: indicative financial allocations (€ Millions, constant price-2004)

Member State

Convergenze Objective

Competitiveness Objective

Territorial Cooperation Total Percentage

Cohesion Fund Convergenze

Phasing out Phasing in

Regional Competitiveness

Belgium 579 1268 173 2019 0.66

Czech Republic 7830 15149 373 346 23697 7.69

Denmark 453 92 545 0.18

Germany 10553 3770 8370 756 23450 7.61

Estonia 1019 1992 47 3058 0.99

Greece 3289 8379 5779 584 186 18217 5.91

Spain 3250 18727 1434 4495 3133 497 31536 10.24

France 2838 9123 775 12736 4.13

Ireland 420 261 134 815 0.26

Italy 18867 388 879 4761 752 25647 8.33

Cyprus 193 363 24 581 0.19

Latvia 1363 2647 80 4090 1.33

Lithuania 2034 3965 97 6097 1.93

Luxembourg 45 13 58 0.002

Hungary 7589 12654 1865 343 22451 7.29


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Malta 252 495 14 761 0.25

The Netherlands 1477 220 1696 0.55

Austria 159 914 228 1301 0.42

Poland 19562 39486 650 59698 19.38

Portugal 2722 15240 254 407 436 88 19147 6.22

Slovenia 1239 2407 93 3739 1.21

Slovakia 3433 6230 399 202 10264 3.33

Finland 491 935 107 1532 0.5

Sweden 1446 236 1682 0.55

UK 2436 158 883 5349 642 9468 3.07

Bulgaria 2015 3873 159 6047 7.96

Romania 5769 11143 404 17317 5.62

Not assigned 392 392 0.13

TOTAL 61558 177083 12521 10385 38742 7750 308041 100


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140 Simona Milio

are now below average in terms of GDP per capita. On the other side, supporters of the Commission’s structural fund proposals made three points in favour of continuing to grant money to the richer member states.

The first is that most countries have at least some regions with GDP per capita below 75 per cent of the EU average11 (the eligibility threshold for most structural fund money). Begg (2008) argues that there is no reason why help for poorer regions in rich countries needs to come from the EU, rather than from national exchequers. Besides, richer member states receive almost all the funding under the regional competitiveness and employment objective (which amount at 16 per cent of the available funds for the period 2007–13). This is because the regions eligible under this objective are those with an income per capita of more than 75 per cent of EU average (mainly regions in the richer member states). The 15 ‘old’ member states will receive about 90 per cent of the budget pre-allocated for the competitiveness and employment objective and only a few billion euro are allocated to the Czech Republic, Latvia, Slovakia, Hungary and Cyprus (Table 7.8). Gelauff et al (2005) support even more strongly Begg’s argument that richer member states have the financial capacity to deal with invest-ment in the three themes addressed by this objective – that is innov-ation and the knowledge economy, environment and risk prevention and accessibility to transport and communication services.

The second argument is that the EU can only engender positive feelings if all members gain at least something back from the struc-tural fund budget. Yet people in the EU are aware that they ulti-mately pay for the EU budget through their taxes and what they receive is sometimes less than what they contribute (the juste retour argument).

The third argument is that the new members, with their ineffi-cient bureaucracies, cannot ‘absorb’ much larger sums from the EU. That is why the EU has decided to cap overall structural fund spending in the new member states at 4 per cent of their respec-tive GDPs. Worries about ‘absorption capacity’ in the East should therefore be an argument for cutting the total size of the structural funds to match what can usefully be spent, not for diverting the extra cash back to the richer countries, where absorption capacity is also an issue at stake. Indeed Table 7.8 shows that over the past three planning periods some old member states have had difficulties in


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absorbing their overall allocation. By the end of the 2000–6 finan-cial period, Greece and Italy had absorbed the lowest percentage of funding, respectively 53 per cent and 60 per cent.

Funds alignment

An argument which has been recently addressed by practitioners, and previously discussed in subsection 7.1.2, relates also to the imbalance between economic and social goals. Also in the actual planning period of 2007–13, 60 per cent of the resources allocated for cohesion policy were financing projects under ERDF, whereas just 24 per cent will assist actions under the ESF. With the enlargement this cannot be ignored any more. Indeed, if it is true that numerous examples of economic disproportion can be readily identified,12 it is also true that the last EU enlargement also resulted in increased inequalities at the social level. In particular, problems related to

Table 7.8 Percentage of Structural Fund Expenditure* – EU Objective 1

a. Period 1989–1993 b. Period 1994–1999 c. Period 2000–2006**

% % %

Ireland 95 Portugal 89 Ireland 82

Portugal 91 Ireland 87 Sweden 79

Spain 87 Spain 82 Germany 77

Greece 84 Denmark 81 Spain 75

France 84 Austria 77 Portugal 75

UK 83 Greece 73 Austria 74

Italy 73 Belgium 72 Finland 72

France 67 Netherlands 72

Netherlands 67 Belgium 66

UK 67 UK 66

Italy 67 France 64

Italy 60

Greece 53

Source: European Commission – Annual report on Structural Funds.* per cent of expenditure is calculated as expenditure/total allocation.** The expenditure is calculated until December 2006.


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142 Simona Milio

growing internal and cultural diversity have become more apparent. While minority issues exist in Western Europe (for instance in the Basque Country or Corsica), the entry of 12 new countries in the EU, nearly all rather internally and ethnically diverse, has reinforced the need for European norms of minority protection.

Also, the discrepancies between these two funds are clearly recog-nised in the lack of alignment between the interventions. Indeed, cohesion policy was built on two key strands of intervention, one based on people and the other investing in more competitive busi-ness. The former would generally be supported by the ESF and the latter by the ERDF. In fact, while the ESF provides the skills for employment, the ERDF ensures that the corresponding job oppor-tunities exists – that is if the ERDF had funded higher education buildings and research capacity, the ESF should be invested in post-graduate research. Evidence has shown that ERDF and ESF are still lacking this effective alignment.

7.4 Recommendations for the Multiannual Financial Framework, 2014–20

The proposal for 2014–20 would see an 8 per cent increase in regional spending, bringing it up to €336 billion, but it will remain at 33 per cent of the total budget, broken down into several different fund-ing streams (Table 7.9). Stronger conditionality will apply to those in receipt of funds, with some extra cash available for regions that

Table 7.9 Total proposed commitment ceilings 2014–20 – Cohesion Policy

Total proposed budget 2014–20 of which

€336 billion

Convergence regionsTransition regionsCompetitiveness regionsTerritorial cooperationCohesion fundExtra allocation for outermost and sparsely populated regions

€162.6 billion€39 billion€53.1 billion€11.7 billion€68.7 billion€926 million

Connecting Europe Facility for transport, energy and ICT

€40 billion plus €10 billion ring fenced inside the Cohesion Fund

Source: European Commission (2010d).


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achieve good results. All regions in the EU, irrespective of level of wealth, will receive funding. Although not part of the structural funds per se, the proposal also includes the creation of a new fund ‘Connecting Europe’, worth €40 billion over the period, aimed at promoting transport and energy networks across Europe.

Economic disparities are growing between the states and regions of the EU. There is a need for better concentration, additionality and co-financing. The effort of the European Commission in anchoring the goal of cohesion policy during 2007–13 to the Lisbon Strategy and later to Europe 2020 may be a step in the right direction.

Structural funds are also currently over-loaded with too many objectives, and suffer from poor targeting and project selection as well as unnecessary complexity.

As discussed in the previous sections, this chapter has brought to light two main challenges for cohesion policy: one in terms of fund-ing allocation and the second in terms of funding alignment. The subsections that follow will look at some recommendations on how to face some of the discussed shortcomings.

7.4.1 More concentration

Structural funds should be better concentrated. This recommenda-tion is both radical and viable.

a. Radical approach:

There should be only one objective: convergence.• If convergence concerns an entire (or much of a) member state, • the argument for EU involvement is more persuasive than if it is just a smaller territory (or even worse a smaller territory in a rich member state).Instead of some of the EU’s richest member states recycling funds • between each other, the funds should be targeted at the genuinely poorer regions, where they can make the most difference.

b. Viable approach:

One alternative – which has been favoured by the UK government • in the past – is only for countries with GDP below 90 per cent of the EU average to qualify for the funds, which would mean all member states apart from four would save money net from such a


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144 Simona Milio

reform (since the funds are shared by fewer member states), mean-ing that the wealthier member states would have exactly the same amount of money available to run their own regional policy, in addition to the cash freed up by repatriation of the structural funds. This would mean that:

all new member states would receive more cash in subsidies • than they do at the moment;it would make it much easier to administer and control the • funds since reducing them and focusing their objectives would reduce the number of instances where error and mismanage-ment could occur;it would improve targeting, as the funds would be tailored • around the needs of poorer countries and regions, rather than the catch-all criteria that currently apply.

7.4.2 Additonality

The principle of ‘additionality’ needs to be reinforced:

According to the additionality principle, structural funds in the • region targeted shall not replace public expenditure in order to reach a genuine economic impact but should complement these efforts. This principle was attached to cohesion policy since the very beginning for fear that the Fund’s assistance would lead member states to reduce their own regional development efforts. Nevertheless after the initial period, member states having discre-tionality in the use of the funds ended up deploying the resources to substitute their public finance (Del Bo et al 2011). The underly-ing concept of the additionality principle is that without addi-tionality, cohesion policy would be a redistributive policy rather than a ‘structural’ one.The Sapir report (2004) re-launched this principle emphasising • how additionality ensures that cohesion policy finances invest-ments that otherwise would not have been undertaken, and that co-financing procedures are already in place. Indeed, the ERDF contributes between 50 per cent and 75 per cent of Objective 1 operations, less for other objectives, and national matching funds need to be available for the rest. In 1999, the total of national matching funds in Objective 1 regions amounted to almost €82


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billion, much larger than the €30 billion from EU funds. Both these principles need to be applied more tightly.

7.4.3 Co-financing

A radical reform of co-financing of structural funds should be con-templated. This could include its extension or replacement by a sys-tem of post-programme reward provided by a performance reserve:

The Ecorys report (2008) suggests that eligibility should be tight • and also include substantial co-financing from the member states to prevent lobbying and misuse of resources.For the improvement of regional competitiveness and employ-• ment there is thus not much of a reason for EU budgetary involve-ment. However, EU co-financing of R&D activities can be justified, but these activities need not be financed in a regional policy framework, given that member states have better knowledge of the specifics of their regions than the EU, and have better incen-tives to spend the money more effectively (Ecorys 2008).The Commission’s proposal for a performance reserve – a mecha-• nism which would allow some funding to be set aside and given to those regions that have achieved the best results – is excellent and would establish a link between results on the ground and funding, which is completely absent at the moment. Given the difficulties involved for poorer regions to come up with the co-financing funds, a well functioning performance reserve could replace co-financing altogether.

However, in order to achieve results it is necessary to increase the monitoring of spent funds. If the structural funds are not spent effi-ciently the economic benefit will be lost. Indeed, the problem is not the amounts spent; it is the quality of the projects financed.

7.4.4 The alignment of social and economic investment

This challenge is influenced by four main factors which are listed below and addressed in turn:

The time frame for programmes provides a challenge. The social • goals of cohesion are long-term goals which last longer than the normal four- to five-year terms of political office, yet politicians


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146 Simona Milio

are interested in short-term rewards that can assist with their re-election. To mitigate against this problem, increased monitoring and performance indicators should be introduced in order to make national and local institutions more accountable (Crescenzi, 2009.The budget distribution among member states is tied up with • juste retour (getting back at least what you put in, if not more). Politicians want to go back ‘home’ saying how much money they get from the EU, while solidarity towards other member states does not interest local voters. On this issue, two suggestions have been made. One is to decide on the governance and objectives of cohesion policy before the amount of funds and their allocation have been agreed (Barca 2009). The other is to apply the multilevel governance frame not only during the implementation but also during the cohesion budget negotiations to balance the power factors during the alloca-tion process, for example for regions which are not politically aligned with the centre (Bouvet and Dall’Erba 2010).The alignment between the ESF and ERDF implies cooperation • among different departments. However, national and regional government departments are headed by different political appoint-ees who are not necessarily interested in working together. A step in the right direction may be to create a bipartisan consensus on cohesion spending and goals and a more technocratic approach to management, planning and implementation.In terms of visibility, achieving balance between social and eco-• nomic intervention is not on the political agenda. Giving priority to social intervention does not provide the same visibility as the construction of expensive infrastructure and so does not provide electoral benefits. This could be solved by improving communica-tion about results in social inclusion, allowing publicity for the ESF, and tailoring at local level a combination of investment pri-orities across hard and soft interventions. The economic and euro zone crises have shown how soft intervention is at times more needed and easier to achieve than harder intervention. An expan-sion of social inclusion and training programmes under the ESF would be cheaper than infrastructure under the ERDF, would have greater effect on economic development and would there-fore offer better value for money.


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This chapter has analysed cohesion policy in light of the previous budget allocation mechanisms in order to draw recommendations for the MMF of 2014–20.

The enlargement of the EU and the financial crisis have posed some challenges to budget allocation which can be summarised as follows: (1) Growing demands, since the accession of new mem-ber states and the proposed accession of future members raises social and regional disparities across Europe and increases the dif-ferent demands of each region; (2) Veto power: at the same time, the accession of extra member states has increased the threat of veto on the budget, making it more difficult to reach an agreement that satisfies each country’s needs; (3) Public goods: as a result of increased disparities and financial crisis, the budget and in par-ticular cohesion policy need to focus on providing public goods (for example employment, innovation, education, social inclusion) rather than acting in a redistributive fashion; (4) the allocation mechanism of resources: in line with the shift to public goods sup-ply, the mechanisms for allocating resources to the different lines of the EU budget have to take into account the needs of the least developed regions.

Therefore it is necessary to move away from the idea that all regions can be allocated EU funding.

In conclusion, economic policy and social policy need to be brought into a much closer relationship with one another than has been customary. Overcoming economic inequalities and promot-ing regional convergence towards economic growth makes it easier to achieve social cohesion. Economic development must, however, be seen as a means of achieving the more fundamental goal of human development. Indeed, it has been increasingly recognised that continued economic development depends upon sustained social development. A stronger and cohesive society can rise to the challenges of globalisation and climate change. Regions or member states can face economic crises only if their model of economic development is based on a solid social platform. Therefore a major alignment and integration among these two pillars of development is necessary.


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148 Simona Milio

Notes

1. The four structural funds as the instruments of the EU cohesion policy were created in different periods. Firstly, the ERDF aims to reduce imbal-ances between regions of the EU by financing development projects in the poorer regions. Secondly, the ESF provides financial assistance to prevent and combat unemployment, as well as developing human resources and promoting integration into the labour market. Thirdly, the EAGGF finances the EU’s CAP providing market support and promoting structural adjustments.1 Finally, the Financial Instrument for Fisheries Guidance (FIFG) has grouped together the EU instruments for fisheries in order to support the adaptation and modernisation of the sector’s facili-ties. Along with structural funds, a further instrument was created in 1994 (Council Regulation 1994), the Cohesion Fund, in order to assist those countries whose GDP was below 90 per cent of the EU average – that is Spain, Ireland, Greece and Portugal. More specifically this fund aimed at financing environmental and transport projects, as infrastructure in these two areas remains inadequate. During the period 2007–13 only Portugal, Greece and the new member states qualify for the Cohesion Fund.

2. In March 2000 the Lisbon European Council set out a strategy designed to make Europe ‘the most competitive and dynamic knowledge – based economy in the world by 2010’. At the Gothenburg European Council in 2001, the strategy was widened by adding a new emphasis on pro-tecting the environment and achieving a more sustainable pattern of development.

3. This process has been informed by the following documents: Fourth Report on Economic and Social Cohesion 2007; Fifth Progress Report on Economic and Social Cohesion 2008; Prospective work on 2020 chal-lenges 2008; Debate on territorial cohesion 2008; Barca Report April 2009; Hübner Reflection Paper on the future Cohesion Policy + joint ministerial communiqué, April 2009; 6th Progress Report, June 2009; Ex-post evalu-ations and studies 2009; Samecki policy orientation paper, December 2010; Fifth Cohesion Report, November 2010.

4. Following rejection by the EP in January 2006, this ceiling was revised upwards to 1.048 per cent of GNI.

5. According to the theory of the state one of its main functions is the equal distribution of the wealth across citizens by central government. Since the role of central government has been challenged by the economic integration, the structural funds represent the tool to exercise a distribu-tive function at supranational level. Therefore cohesion policy has been labelled as a distributive policy which provides transfers to the poorer areas of Europe, rather than a pro active development policy based on investments.

6. The scholars from the intergovernamentalist approach (Morasvick 1993; Pollack 1995) depict cohesion policy as a consequence of side-payments related to the bargain for the approval of the Single Market. The idea


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underlining the side-payment framework is that the establishment of cohesion policy was the ‘payment’ provided by the richer member states to the poorer countries to induce them to join the Single Market pro-gramme. This is because the poorer member states were supposed to be potential losers from the adhesion to the economic integration.

7. By looking at the intermediate aggregate of macro-regions one may refine the ‘country convergence’ and ‘region divergence’ findings. The bulk of the structural and cohesion funds flows into six macro-regions (Greece, Spain, Ireland, Portugal, the six eastern German Länder, the Mezzogiorno in Italy). When convergence of these macro-regions is assessed, one finds that their average GDP did converge. However, within the broad macro-region convergence picture there are wide differences across the six areas considered. The Italian Mezzogiorno showed no sign of convergence, while Spain, Portugal and Greece grew only slightly faster than the EU average. Ireland and eastern Germany have driven the convergence of the six macro-regions. The impressive performance of Ireland is such that in only 15 years it has moved from the bottom group of the poorest four EU countries to become one of the top four (in terms of GDP per capita). A provisional conclusion to be drawn from the available macroeconomic evidence is that convergence is observed both at the level of member states and at the level of macro-regions. However, at the level of sub-national regions across the EU, the evidence is mixed: low-GDP regions have displayed a faster growth, but GDP levels of the regions are becoming more widely dispersed across the EU (Sapir 2004: 59–60).

8. Between 1995 and 2005, Greece reduced the gap with the rest of the EU, moving from 74 per cent to reach 88 per cent of the EU’s average GDP per capita. By the same year, Spain had moved from 91 per cent to 102 per cent, and Ireland reached 145 per cent of the EU’s average starting from 102 per cent.

9. Belgium: Province du Hainaut; Germany: Brandenburg-Südwest, Lüneburg, Leipzig, Halle; Greece: Kentriki Makedonia, Dytiki Makedonia, Attiki; Spain: Ciudad Autónoma de Ceuta, Ciudad Autónoma de Melilla, Principado de Asturias, Región de Murcia; Austria: Burgenland; Portugal: Algarve; Italy: Basilicata; United Kingdom: Highlands and Islands

10. Éire-Ireland: Border, Midland and Western; Greece: Sterea Ellada, Notio Aigaio; Spain: Canarias, Castilla y León, Comunidad Valenciana; Italy: Sardegna; Cyprus: tout le territoire; Hungary: Közép-Magyarország; Portugal: Região Autónoma da Madeira; Finland: Itä-Suomi; United Kingdom: Merseyside, South Yorkshire.

11. This is one of the two main consequences of the predominantly regional focus of cohesion policy. The second aspect is that countries with a similar level of national GDP may receive very different shares of EU funds. For example, Sweden and Italy have comparable levels of national GDP per capita, but since the latter suffers from much wider regional inequalities it receives considerably greater support from EU cohesion policy.


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150 Simona Milio

12. At the member state level, Luxembourg is now seven times richer than Romania, in terms of per capita income. At the regional level, more pro-nounced differences are evident with the richest region being Central London (290 per cent of the per capita income of the EU27) and the poorest region being north-east Romania (23 per cent of the EU27’s per capita income).


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The CFSP of the EU has been a long time in the making. Whilst CFSP and more generally, the EU’s role in the world, has become a more pressing concern for the EU during the past decade, there remain considerable hurdles in developing an effective format in order to increase the EU’s influence. The Lisbon Treaty sought to stream-line how the EU’s foreign policy activities are structured through the introduction of new institutions – the EEAS, the President of the European Council, the High Representative for Foreign Affairs and Security Policy (Barber, 2010) and the CFSP start-up fund. Developing the CFSP continues to be dogged by regular stand-offs between dynamics of intergovernmentalism and supranationalism. Financing CFSP involves a hybrid structure of a common budget, intergovernmental agreements to fund operations as they emerge and national capabilities. Rather than empowering decision mak-ing, the Lisbon Treaty has renewed institutional turf wars in Brussels which have often centred on the budget. The global financial crisis, coupled with the euro crisis and reluctance on the part of mem-ber states to commit to Europeanising security and defence policy, has hampered significant steps towards building a more robust EU

8Foreign and Security Policy in Austerity Europe: Budgetary Aspects of the Development of the Common Foreign and Security Policy and Common Security and Defence Policy1

Alister Miskimmon

151


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152 Alister Miskimmon

policy. This chapter argues that institutional wrangling over who shapes EU external affairs, coupled with reticence in member states to fully Europeanise foreign and security policy, present significant challenges which remain to be resolved. Added to this, the com-ing age of austerity presents financial limits on member states and their involvement in building EU capabilities. Defence spending will remain driven by national calculations due to political sensitivities in defence policy, ensuring that European initiatives will be limited, despite their financial logic. These dynamics combined ensure that there is little sense of foreign and security policy as a collective pub-lic good which limits the integrative capacity of CFSP in the short term.

Analysing the development of the CFSP in connection with its budget often focuses on issues of national sovereignty, relations between the EU institutions and differing national foreign strate-gic cultures (Cornish and Edwards, 2001; 2005). The EU has grown into a significant international actor since the end of the Cold War, thanks largely to its status as an economic power. Spending on for-eign policy has, however, remained modest. This is due to an often uneasy relationship in EU foreign policy between the intergovern-mental aspects of CFSP and the growing role of the Commission and the EP. The tensions between intergovernmentalism and suprana-tionalism continue to linger, often crippling efforts to develop new ways to coordinate foreign policy among the 27 EU member states. This chapter outlines the key issues surrounding the financing of CFSP and highlights what difficulties exist, which are relevant in the context to the review of the budget. The financing of CFSP is in many ways ad hoc, particularly in the area of military crisis man-agement. This stems from attempts within the Council to retain political control over defence aspects of CFSP and is in recognition that defence remains resolutely a national competence. There have nonetheless been efforts to cover common costs of the EU’s growing international role through the EU budget, which has resulted in a growing role for the EP in external affairs – an area where the EP has been historically weak.

During the period 2007–13 the EU budget on external affairs has been raised by 29 per cent. Spending on Europe in the world, however, still only accounts for approximately 6 per cent of the EU’s budget. Yet, this is indicative of the EU’s growing concerns, particularly since


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Foreign and Security Policy in Austerity Europe 153

the conflict in Kosovo in 1998/99, to become a more prominent and effective international actor. The EU has a very complex machinery of external affairs spanning a wide range of policies and involving the European Commission, the EP and the Council of the EU (Smith, M. E., 2003). The main formal policy for EU external relations is the CFSP, which emerged from the Treaty of European Union (TEU) in 1993. The CFSP was designed to help develop the EU into a more effective international actor in crisis management. The external role of the EU has been an important component in establishing the EU as an international actor in foreign and economic policy. The EU’s international role has grown incrementally since the TEU and now encompasses security and defence components since the operational-isation of the European Security and Defence Policy (ESDP) in 2003.2 There remains a continued tension between national capabilities within EU member states and the desire to develop more effective EU capabilities in foreign and security policy, which debates over the financing of the CFSP highlight. Questions over the financing and budget procedures of CFSP have also been interesting in terms of the development of the Commission and the Parliament’s role in CFSP. Greater recourse to the EU budget to fund CFSP has ensured that the Commission and the EP have acquired greater role in foreign and security policy, which had been previously largely characterised by intergovernmental cooperation. Attempts to streamline foreign and security policy within the Lisbon Treaty have not meant that inter-institutional tensions have disappeared. CFSP is conditioned by dynamics of path dependency. The desire to establish more effective foreign policy cooperation has ensured that the more foreign policy becomes integrated within the EU, budgetary disputes, institutional wrangling and gridlock emerge.

The EU lacks a significant impetus for closer cooperation in secu-rity and defence policy. The EU does not face an imminent territorial threat and the North Atlantic Treaty Organisation (NATO) remains the dominant forum for defence in Europe. In a recent edited vol-ume by Emil Kirchner and James Sperling, it is very clear that the leading EU states of France, Germany and the UK view multilateral cooperation within the EU as being highly contingent on national interests (2010). The tenor of cooperation is often that of pragma-tism, rather than a sustained effort to Europeanise foreign and secu-rity policy (Giegerich, 2006; Gross, 2009; Irondelle and Besancenot,


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2010). The Treaty of Lisbon’s innovations also have implications for any future development of CFSP in that intergovernmentalism has been reinforced, which could limit any integrative momentum, which the Commission is able to generate in external relations. Now that the High Representative (HR/VP), who is also Vice-President of the European Commission, plays a central coordination function, it is likely that the Council will play a more prominent role in shaping CFSP into the future. Added to this, the new age of austerity which EU states are entering could mean that member states are unlikely to agree to raising the EU budget when there are substantial budgetary cuts taking place domestically (Mölling and Brune, 2011). Another factor which will hamper discussions on the development of CFSP is the fact that it will take several years for the new institutions and structures of EU foreign and security policy to become settled. How the new institutions outlined in the Lisbon treaty will function is still being resolved. Therefore, the Lisbon treaty’s aim to streamline EU foreign and security policy might take some time to work itself out and could ultimately be hampered by the EU’s institutional setup. Added to this defence remains overwhelmingly a national preroga-tive. Efforts to cooperate in the EU on defence face addressing issues of national sovereignty which are resistant to adaptation, despite the logic of cost savings and greater efficiency in European defence being difficult to refute. There is also no driving organised interest outside of the defence industry which can pressure member states to cooperate more closely in security and defence policy. The Libya crisis of 2011 also highlighted how differences in national foreign policies continue to restrict the EU’s ability to act (Menon, 2011).

8.1 The evolution of the European Union as an international actor

The EU’s evolution as a foreign and security policy actor has been a protracted affair. The genesis of the EU’s foreign policy role can be dated back to the creation of European Political Cooperation (EPC), following the Luxembourg/Davignon Report of 27 October 1970. The EU’s growing economic role necessitated a more coordinated for-eign policy position to represent EU economic interests internation-ally. EPC was an ad hoc meeting of EU foreign ministers to discuss foreign policy which did not become formally institutionalised and


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gain treaty status until the Single European Act.3 During the Cold War, NATO was the dominant forum for the discussion of secur-ity and defence policy, which greatly limited the extent to which the EC could develop a distinct political presence in international affairs. The EC was therefore overwhelmingly a global economic actor, rather than developing a political role. EPC remained inter-governmental and voluntary. EPC’s lack of a budget ensured that dynamism within the EPC was reliant on member state activism. EPC was supported by a small secretariat, made up of only 17 people in 1987, the finance for which was split between the EC budget and national administrations. EC Presidencies were expected to make a symbolic payment of 1 ecu4 towards the costs of the running of the Secretariat during their six-month presidency (Pijpers et al 1987: 86). The lack of a budget ensured that the EU institutions had a limited role in EPC and made its activation heavily dependent on the views and wishes of the EC Presidency. With the creation of the CFSP in 1993, the EU did not significantly increase the amount of funding allocated to CFSP. Due to the array of actors involved in CFSP, budget discussions have been dominated by squabbles over who should pay for what. The financing of CFSP has been traditionally modest. In 2002, the CFSP budget was a mere €30 million (Cameron, 2003). Traditionally, the Commission has had significantly more funding for humanitarian aid and civilian aspects of external affairs, than CFSP. As CFSP has developed and the distinction between CFSP and external relations undertaken by the Commission has blurred, ques-tions have been raised about the financing of EU external relations. Discussions on who controls the external affairs budget have become more prominent since the Treaty of Lisbon which will be outlined below.

There are a number of key developments that have challenged EU foreign and security policy in recent years and which raised ques-tion marks over existing budgetary procedures in the area of CFSP. The CFSP went through a ‘baptism by fire’ (Ginsberg, 2001) in the Balkans during the 1990s. The EU’s inability to establish and main-tain peace in the Balkans as the former Yugoslavia collapsed high-lighted in Hill’s term, the underlying ‘capability – expectations gap’ afflicting the emerging CFSP (Hill, 1993). Hill argued that the EU simply did not have the capabilities to meet the expectations of its emerging role in external affairs held by European citizens and the


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EU’s international allies – particularly, the United States of America. Tony Blair’s frustration with the EU’s inability to act provided a major impetus to Franco–British discussions at St-Malo in December 1998, where it was agreed to work towards building autonomous EU military capabilities. NATO’s Operation Allied Force, in 1999, high-lighted the EU’s major capability gaps in the field of crisis manage-ment and sparked an intense discussion on reforming the CFSP and developing an autonomous EU military capability. The Operation Allied Force reinforced how reliant were EU member states on the military and diplomatic muscle of the USA. Another major factor for the development of EU external relations has been the EU’s enlarge-ment. As the EU has grown in geographical size and membership, a more sophisticated policy to deal with the EU’s relations with periph-eral states has become necessary. The southern Mediterranean area and Eastern Europe have become focal points for the EU’s European Neighbourhood Policy since its inception in 2004. Despite efforts to engage in the Mediterranean area through the EU’s Neighbourhood Policy, the EU was unable to respond collectively to the 2011 Libya crisis, resulting in NATO leading the operation to enforce the no-fly-zone under the conditions of United Nations Resolution 1973 (Jones, 2011b). Finally, the EU has emerged as the world’s biggest humanitar-ian aid donor, giving more than 50 per cent of the global funds for humanitarian support. This has been a major pillar of the EU’s grow-ing international influence and has taken up a significant chunk of the EU’s external affairs budget. In 2007 the European Commission’s Humanitarian Aid office, along with the European Development Fund, allocated €741 million across the globe.5

8.2 The impact of the budget review

In a contribution to the public debate on the review of the EU budget, the European Council on Foreign Relations (ECFR) criticised the EU’s low level of spending on external affairs. The ECFR argued that with the EU committed to addressing a wider range of important exter-nal issues – including, development, humanitarian aid, civilian and military engagement, neighbourhood policies, instruments related to the fight against terrorism and climate change – it is insufficient to spend less than 7 per cent of the overall budget on external relations (Fox et al 2008). With such a wide range of commitments and the


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importance of stabilising the wider European region, EU foreign pol-icy continues to be under-resourced. The European Security Strategy 2003 tied together the different components of EU external affairs in an attempt to provide a more comprehensive structure to EU for-eign policy.6 The structures agreed on in the Lisbon Treaty 2009 are designed to bring together these different components in a more affective way, without, however, significantly increasing budgetary provision in external affairs.

There are numerous reasons for this lack of resource which hamper the development of EU external policy. In the age of austerity, devel-oping CFSP may not witness much innovation in the short term. With the main drivers of CFSP – France, Germany and the UK – fac-ing significant economic challenges, there may be little enthusiasm to develop CFSP. In the case of Germany, domestic constitutional limits on German debt – no new debt beyond a permitted level of 0.35 per cent of GDP from 2016 onwards – coupled with a more con-tingent European policy (Harnisch and Schieder, 2006; Bulmer and Paterson, 2010) focusing on strengthening the euro zone, will poten-tially limit Germany’s interests in CFSP – and in particular CSDP. The UK also has significant concerns with the ruling Conservative-Liberal Democrat government focusing on balancing the books at home. This is linked to a perception of British reluctance – and at times scepticism – concerning the development of CSDP after the initial willingness to pursue closer EU cooperation signalled by the 1998 Franco–British St-Malo agreement (Smith, M.A., 2010). Ongoing commitments in Afghanistan and Iraq also provide a rationale for delaying any focus on building CSDP. France faces chal-lenges of its own economically requiring domestic belt-tightening. Sarkozy and Merkel’s disagreements on how best to tackle the euro crisis also signals a faltering of the Franco–German tandem in the EU. France’s recent rapprochement with NATO under Sarkozy signals that NATO, despite prior reports of its imminent demise, remains the pre-eminent defence institution in Europe. France’s re-engagement with NATO also suggests that CFSP is too unwieldy to develop into a significant force in crisis management. We are therefore likely to see CFSP dominated by occasional pragmatic engagement in the com-ing years, rather than by adventurous new attempts to forge a more common security and defence policy. This is the difficult context in which the innovations in CFSP of the Lisbon treaty must adapt to.


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The member state responses in security and defence policy to austerity have not been greater cooperation within the EU. What we have witnessed is primarily bilateral or multiple bilateral coop-erative endeavours among EU member states, rather than efforts to forge a strategy at 27. The two best examples of this are the UK–France defence agreement of November 2010, which commit-ted both parties to pooling and sharing resources, including air-craft carriers and nuclear assets (Gomis, 2011; Jones, 2011a; Taylor, 2010). The second development is the Swedish–German Ghent initiative on ‘pooling and sharing’ from 2010. The aim of ‘pool-ing and sharing’ was to rationalise defence capabilities across the EU and subsequently also NATO in the context of national cuts in defence spending. Rather than building new capabilities, the ‘pool-ing and sharing’ initiative is driven by concerns to retain existing national capabilities or to jettison assets no longer required, as is the case with the Netherland’s decision in 2011 to phase out their tank battalions.

The Lisbon Treaty brings in a number of developments in CFSP, which are designed to increase the effectiveness of the EU in external relations.7 Four new institutions – the EEAS, a CFSP start-up fund, a permanent President of the Council and a High Representative for Foreign Policy and Security – have been established. The first holder of the position of High Representative for Foreign Affairs and Security Policy is Catherine Ashton. Ashton also holds the post of Vice-President of the European Commission (known by the acronym HR/VP), which is intended to facilitate more joined up cooperation on foreign and security policy between the Commission and the Council. Ashton’s role merges the former external affairs commis-sioner’s job, previously held by Benita Ferrero-Waldner with that of the position of the High Representative for CFSP, formerly held by Javier Solana. She is also responsible for chairing foreign minister council meetings. In order for these institutions to be effective, they will need to be properly resourced which will need to be factored into budget negotiations. The creation of the EEAS is designed to enhance the EU’s global diplomacy and to better coordinate the foreign and security policy of the EU across the world. The EEAS falls under the responsibility of the HR/VP. Both of these developments have involved inter-institutional wrangles and discussions over budgetary authority. Particularly in the case of the EEAS, the EP has attempted


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to gain more oversight of the EEAS through discussions over the EEAS budget with Ashton (European Parliament, 2010b).

The foreign policy machinery of the EU has been unwieldy since its inception. The Lisbon Treaty aims to reform how foreign and security policy is made and performed as well as allowing for greater control and direction of the budgetary resources available for external rela-tions. Under the former system, the European Commission had signif-icant funds – annually around €10 billion for external affairs – yet the political decisions shaping the CFSP were taken within the Council, supported by the work of the High Representative and his secretariat. The Lisbon Treaty proposed that the position of the HR/VP be given control over the current budget allocated to the Commission. Ashton’s role of running the EEAS and chairing meetings of foreign ministers is outlined in Article 18 of the Lisbon Treaty. The new provisions on foreign and security policy within the Lisbon Treaty are an example of what Wessels terms, ‘rationalised institutionalism’ – bringing in some aspects of communitarised cooperation, whilst retaining the key role of the Council in setting the political direction and scope of the CFSP (Wessels, 2001). This is particularly the case with the double-hatting of Ashton as Vice-President of the Commission and the High Representative working within the Council.

The EEAS8 has been controversial for a number of reasons. First is the concern that it will be an unnecessary duplication of national capabilities. Second is the issue of accountability in terms of its rela-tions with the Council, the Commission and the Parliament. This has particular relevance for what budgetary arrangements are estab-lished (Crowe, 2008). Under the Treaty of Lisbon arrangements the President of the Council, the Commission President and the EP, through its powers over the budget, will have significant input in the work of the EEAS and the developing CFSP (Lieb and Maurer, 2008). Finally, the budgetary arrangements for the EEAS involved a protracted negotiation and since its operationalisation it is clear that there has been an underestimation of the costs of establishing the service. The EEAS has its own budget heading as Section X of the General Budget of the EU, which is separate from the Commission (section III) and the Council (section I). In budgetary terms, there-fore, it is treated as a separate institution and has a budget of €464 million. The role of the HR/VP is therefore vital in terms of her abil-ity to broker agreements across institutions in order to direct and


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utilise all the external relations resources available to her. The role has been increased in importance under the provisions of the Lisbon Treaty and carries with it much more resource to support external action (Kaczynski and ó Broin, 2009).

The Lisbon Treaty made strides to try to improve the EU’s capacity to act and to raise the profile of the EU in international affairs. No longer is the EU conceived as a regional actor. The EU has aspirations to global engagement, outlined in the European Security Strategy of 2003 and in the lines of the Lisbon treaty. The Consolidated Treaty on European Union (TEU) outlines the principles and wide range of issues which guide the CFSP.

Article 21

1. The Union’s action on the international scene shall be guided by the principles which have inspired its own creation, devel-opment and enlargement, and which it seeks to advance in the wider world: democracy, the rule of law, the universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, the principles of equality and solidarity, and respect for the principles of the United Nations Charter and inter-national law. The Union shall seek to develop relations and build partnerships with third countries, and international, regional or global organisations which share the principles referred to in the first subparagraph. It shall promote multilateral solutions to common problems, in particular in the framework of the United Nations.

The EP voted to agree to the Financial Framework 2007–13, which included a 29 per cent rise in funding for EU external policies of €43.496 million. Article 41 of the Consolidated Version of the TEU outlines how CFSP is financed. All non-military and defence aspects of CFSP are to be drawn from the EU budget. The financing of the CFSP through the EU budget has resulted in the greater involvement of the European Commission and the EP in CFSP affairs (Dietrichs, 2004). Article 41 of the Consolidated TEU (ex-Article 28 TEU) states the following:

1. Administrative expenditure to which the implementation of this Chapter gives rise for the institutions shall be charged to the Union budget.


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2. Operating expenditure to which the implementation of this Chapter gives rise shall also be charged to the Union budget, except for such expenditure arising from operations having military or defence implications and cases where the Council acting unanimously decides otherwise.In cases where expenditure is not charged to the Union budget, it shall be charged to the member states in accordance with the gross national product scale, unless the Council acting unani-mously decides otherwise. As for expenditure arising from operations having military or defence implications, member states whose representatives in the Council have made a formal declaration under Article 31(1), second subparagraph, shall not be obliged to contribute to the financing thereof.

3. The Council shall adopt a decision establishing the specific pro-cedures for guaranteeing rapid access to appropriations in the Union budget for urgent financing of initiatives in the frame-work of the common foreign and security policy, and in partic-ular for preparatory activities for the tasks referred to in Article 42(1) and Article 43. It shall act after consulting the European Parliament.

Preparatory activities for the tasks referred to in Article 42(1) and Article 43 which are not charged to the Union budget shall be financed by a start-up fund made up of member states’ contributions.

The Council shall adopt by a qualified majority, on a proposal from the High Representative of the Union for Foreign Affairs and Security Policy, decisions establishing:

(a) the procedures for setting up and financing the start-up fund, in particular the amounts allocated to the fund;

(b) the procedures for administering the start-up fund;(c) the financial control procedures.

When the task planned in accordance with Article 42(1) and Article 43 cannot be charged to the Union budget, the Council shall authorise the High Representative to use the fund. The High Representative shall report to the Council on the implementation of this remit.


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After a lengthy debate over the financing of the EEAS an agreement was finally made in November 2010 (European Parliament, 2010c). For civilian aspects of CFSP/CSDP the following are covered from the budget:

Salaries of personnel seconded by Member states to an operation will be borne by the sending member state. All other costs related to the operation including per diems, as far as possible, by the CFSP budget. Costs related to possible complementary Community measures, under the Commission’s responsibility, which are sup-porting or complementing the civilian crisis management opera-tion under Title V (CFSP), are eligible for financing through the relevant Community budget line. (Council of the EU, 2003)

Within the Lisbon Treaty, one major development in the financing of CFSP was proposed. The so-called CFSP fund or start-up fund is designed for cases where rapid access to funds in order to under-take civilian CSDP missions is needed. As a weakness of CFSP budget provisions, the Council has pinpointed the lack of robust funding mechanisms to enable the EU to react quickly to international crises. In a statement to make ten years of the ESDP, the Council of the EU stated that ‘We acknowledge that the CFSP budget should be ade-quate to serve our policy and to respond to current and future chal-lenges’ (Council of the EU, 2009c). The High Representative is tasked with the establishment and organisation of this fund in consultation with the EP as outlined in Article 41 of the Consolidated TEU.

The start-up fund is for cases in which the Council is unable to draw on the EU budget to finance an operation. In this way the Council can avoid involving the EP. EP scrutiny over CSDP is there-fore kept at arm’s length, which is one of the major criticisms the EP has over the post-Lisbon CFSP process. It is this range of budg-etary measures that has sparked vigorous debates between Ashton and the EP. Elmar Brok, a German Christian Democrat in the parlia-mentary group of the European People’s Party, has been particularly vocal in calling for more EP influence over the EEAS, threatening to stall negotiations on the budget if a compromise is not reached. The HR/VP therefore has a very difficult task to keep the Commission, Council and Parliament on board in order to successfully launch the EEAS. The EP’s role – through the consent procedure – in the


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appointment of the HR/VP has also increased its influence. Before the establishment of the post of HR/VP the Council currently had €237 million allocated for CFSP, compared with around €8 billion at the disposal of the European Commission for external affairs. How these funds are now allocated and spent under the HR/VP will be one of the most interesting developments in the external relations budget (Gya, 2009).

8.3 Developing the Common Security and Defence Policy

The EU budget does not support defence and military aspects of the EU’s foreign and security policy. The main reason behind this is that the EU does not have any ‘common’ defence capabilities, in terms of a European army. Rather, military capabilities are pooled by the EU member states as part of the European Rapid Reaction Force, which became operational in 2003. The Battle Group concept is, however, designed to be a common and permanent defence capability (Major and Mölling, 2010). These multinational battalion-sized forces of approximately 1,500 soldiers, which rotate every six months, are designed to be rapidly deployable units in crisis management. Since the decision to develop the ESDP was taken in 1999, the EU has sought to coordinate and develop military capabilities through the Headline Goal 2010 process. Under the Berlin Plus agreement of December 2002, the EU may have access to NATO capabilities to undertake a crisis management operation in cases where NATO itself does not wish to participate.

Article 41, paragraph 2 of the TEU outlines that CSDP will be supported jointly by member states on the basis of gross national product. The so-called Athena mechanism was established in 2004 (Council of the EU, 2004), which is the mechanism through which the costs of CSDP missions are administered. A Special Committee made up of representatives of member states contributing to the financing of each mission manages Athena. The make-up of this committee will vary depending on the contributions by member states for a given military operation. Non-EU member states par-ticipating in a CSDP mission can take part in this special commit-tee, but they do not have a vote in this forum. In addition to the special committee the HR/VP appoints an administrator to oversee


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Athena. Among the administrator’s tasks are to act as a coordinator for participating states and other relevant international institutions, to draft a budget for each mission and to administer revenue and common costs outside of periods of active operations. The Secretary of the Council also appoints an accounting officer for a period of two years, who is tasked with keeping an accurate register of the accounts and to oversee payments through the Athena mechanism. During the active phase of an operation, the mission’s operation commander takes over responsibility for the budget (Council of the EU, 2006). The Athena mechanism was modestly reformed under the Polish Presidency in the second half of 2011. Discussions on reform of the Athena mechanism have focused on increasing the amount of common costs in the budget for operational expenditure, which would result in a broader sharing of the costs of operations across the member states, and not primarily on those participating countries in CSDP missions. No substantial changes to Athena are expected. The Athena mechanism has been used for EUFOR Althea, EUFOR Congo and EUFOR Chad/CAR.

In addition to this, the following CSDP operations have been financed under the EU budget:

EU Police Mission in Bosnia Herzegovina (EUPM)• EU Police Mission in the former Yugoslav Republic of Macedonia • (Proxima)EU police advisory team in the former Yugoslav Republic of • Macedonia (EUPAT)EU Police Mission in DR Congo (EUPOL Kinshasa)• EU Integrated Rule of Law Mission for Iraq (EUJUST Lex)• EU Rule of Law Mission in Georgia (EUJUST Themis)• EU security sector reform mission in the Democratic Republic of • the Congo (EUSEC Congo)EU Support to AMIS II (Darfur)• EU Monitoring Mission in Aceh (AMM)• EU Police Mission for the Palestinian Territories (EUPOL COPPS)• EU Border Assistance Mission for the Rafah crossing point (EU • BAM Rafah)

As outlined above, the EP’s input into CSDP has grown as a result of its budgetary powers and also due to its role in consenting to


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international agreements with third parties. As part of discussions over the funding of Operation Proxima in Macedonia (2003–5), the EP earned the right to be better informed of the financial implica-tions of CSDP missions. Better budgetary support for CSDP missions will, however, not result in an increase in CSDP missions. As was witnessed in the Libya crisis in 2011, it is political will which is the most important precondition for the EU to intervene. Despite calls in some quarters that Libya has demonstrated the need for closer cooperation in security and defence policy, significant political bar-riers remain, notably in the UK government, to deepening CSDP. As the next section will demonstrate, defence policy remains stub-bornly national in character and organisation, despite the economic incentives for closer cooperation.

8.4 National security and defence policy cooperation

Discussions over budgetary provisions for CFSP continually raise thorny questions relating to member states’ defence budgets and whether military capabilities can be pooled within the EU with-out upsetting the delicate relationship between the EU and NATO. Missiroli argues that the inconsistency and confusion surrounding the budget in the sphere of CSDP has an impact on the external effectiveness and internal cohesion of EU external affairs (Missiroli, 2003; Scannell, 2004). There is a significant disparity in defence spending in member states, which complicates the interoperability of forces in CSDP operations (Giegerich, 2008). The development of CSDP has raised questions regarding Europe’s inadequate capabilities. Defence budgets have remained static as the cost of procurement has steadily risen. The European defence market has been notoriously slow to adapt and rationalise to meet the needs of EU member states heading into the 21st century (Keohane, 2008). The establishment of the European Defence Agency in 2004 is an attempt to encour-age a more strategic development of European capabilities, but this remains a voluntary agreement. In the light of the global credit crunch, it is unlikely that spending on defence will be a top priority in the near future. The primacy of national parliaments and govern-ments in agreeing to the deployment of national forces and the lack of pooled capabilities on the EU level will also ensure that security and defence policy will remain disjointed for some time to come.


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With scarce resources and the continued centrality of NATO for ter-ritorial defence for the majority of EU states, it is unlikely that the financing of CSDP will move much beyond the relative ‘ad-hockery’ of the Athena funding mechanism in any budgetary review proc-ess, despite attempts to increase the proportion of common costs for operations. The provision of a start-up fund for military aspects of CSDP would have limited impact in the strained financial climate and as long as the member states continue to view defence aspects of CSDP as an exclusive national competence characterised by intergov-ernmental decision making.

Member states within the EU are faced with the significant task of developing national and collective strategies to meet the chal-lenges of the 21st century. James Sperling outlines these as strategies of assurance (post-conflict interventions), prevention (pre-conflict interventions), protection (internal security) and ‘compellence’ (mil-itary intervention) (2010). The role of armed forces has become less clear and defined in the post-Cold war era. Militaries are expensive to run and maintain. On top of this, European states have found it increasingly difficult to keep pace with the USA’s defence spending and maintaining the capabilities they need for multinational crisis management operations within the EU and NATO (Alexander and Garden, 2001). With the lack of territorial threat to the EU the major spending on national defence has come under scrutiny, generally leading to downward pressure (Council of the EU, 2006). France, Germany and the UK have all gone through major strategic defence reviews as a result of the global financial downturn and the squeeze on public spending (Giegerich, 2010). Greater cooperation has been viewed as a means to overcome national budgetary pressures, as most clearly seen in the British–French agreement on security and defence cooperation of November 2010.9 The difficulty with stream-lining defence spending is the challenge of avoiding reform based on purely budgetary limitations rather than on strategic policy deci-sions. Defence reform also takes place in the sure knowledge that predicting the future is difficult and events will almost certainly frustrate the best-laid plans (Gray, 2010). On top of this, defence planning comes up against significant organisation and ideational constraints which make the reviewing of defence and security policy particularly thorny, often resulting in sub-optimal outcomes and patchy reform (Cornish and Dorman, 2008; 2009). Defence spending


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is inherently linked to issues of sovereignty and national concep-tions of how a state perceives the use of military force. For Germany, defence reform has brought the question of conscription increas-ingly into focus and highlighted the pressures caused by CSDP and NATO operational deployments on German troops. France and the UK have faced the challenge of remaining capable military actors whilst having constrained resources to devote to defence. France’s continued ‘exceptionalism’ (Irondelle and Besancenot, 2010) and the UK’s privileging of defence ties with the USA will provide the stra-tegic context for cooperation between the EU’s military powers for years to come, which may continue to frustrate attempts for closer cooperation.

Stumbling blocks to pooling resources and closer cooperation within the CFSP has demonstrated the continued difficulties involved in the Europeanisation of security and defence policy. EU member states are torn between the sticky legacies of national strategic cul-ture and nationally bounded conceptions of defence policy and the necessity of improving the EU’s contribution to international crisis management. Inefficiencies are inherent in European security and are difficult to cut out and are reinforced by overlapping security institutions in Europe. Rather than working towards removing these obstacles Hofmann (2011: 116) posits:

One wonders why member states do not solely have the goal of peace and security in mind when conducting multilateral crisis management operations. Institutional overlap creates operational, political and institutional problems that actors do not necessar-ily want to alleviate but instead have an interest in creating and maintaining.

NATO still remains the pre-eminent defence organisation in Europe, with Afghanistan being the most important project for NATO allies. This will remain the priority with the EU focusing on less military intensive crisis management and the establishment of the External Action service in 2011. Due to the sensitivities surrounding defence policy bilateral cooperation such as the UK–France agreement of November 2010 can be viewed as attempts to maintain capabilities without the complications of organising cooperation within the EU. Nevertheless, the implications of such agreements as the UK–France


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proposals of November 2010 point to a greater purposefulness in forging bilateral cooperation, which will inevitably lead to closer European ties in defence procurement, research and technology and, when feasible, military crisis management operations.


The budget to support the EU as a global player represents only approximately 6 per cent of the EU’s annual budget. Yet, the EU has become increasingly ambitious in foreign and security policy since the end of the Cold War. The development of CFSP, the EU’s emergence as a major humanitarian actor and the development of European Neighbourhood Policy and the CSDP have demonstrated that the EU takes external relations very seriously. Unfortunately, above and beyond the well-documented difficulties of forging a coherent and effective foreign policy stance among 27 member states, the EU has under-invested in foreign and security policy. In order for the EU to further develop its capabilities it will need a sub-stantial injection of funds and a sober analysis of how best to gain the most effectiveness from these resources in the current financial turndown. Demonstrating effective use of these funds and the added value of collective action could prove a means to overcome some of the difficulties inherent in the complex institutional machinery of foreign policy making in the EU.

The Treaty of Lisbon’s creation of the HR/VP, the CFSP start-up fund and the EEAS on paper suggest the EU is attempted to pur-sue more ‘joined-up’ foreign policy. However, how these institutions will function remains to be seen. The HR/VP is an almost impossible coordination task bringing together the Council, the Commission and the Parliament. Squabbles over the nature of the EP’s role exter-nal affairs as a result of the budgetary implications of establishing the EEAS have highlighted that the EU’s institutional structure still complicates the making of foreign and security policy in fundamen-tal ways. A further brake on foreign and security policy cooperation is the austerity measures coming into place in EU member states. With significant cuts forecast in the big three (France, Germany and the UK), there may be little enthusiasm to pursue new projects within CFSP for the foreseeable future. Bilateral and multiple bilateral cooperation will be the order of the day, enhancing links between


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member states, with potential for EU-level cooperation in the future. However, the EU’s international credibility represented by the euro will be the top priority international issue for EU member states. Developing CFSP and the CSDP, which has made only little progress, may not be a priority in the short term.

Discussions surrounding the Lisbon Treaty and its implementa-tion have focused on the structure of the new institutions of foreign policy. The new structures will take some time to settle before we can see what impact the streamlining of foreign policy in the EU will have. Key to the success of the External Action Service will be the agency of Ashton and her colleagues. Member states will define the scope of the possible, particularly within the CSDP and in terms of the resources they are willing to commit to the EU budget. It also remains to be seen whether Commission, Council and member state officials can overcome their differences and work together within the EAS. The EP’s enhanced role in foreign policy as a result of con-cessions relating to negotiations over the EAS budget may also take some time to see their effects. The Lisbon Treaty’s foreign policy arti-cles have at their core a realisation that the EU must attempt to use its foreign policy assets more strategically.

The hybrid funding of security and defence policy within the EU between Brussels and national capitals will continue to influence cooperation among member states. It is this which precludes sub-stantial discussions on defence budgets taking place within the EU, thus limiting how much foreign and security policy spending in the EU can grow. In instances where major cuts in defence spending has been undertaken, EU member states have not deepened their coop-eration, preferring small group cooperation outside the EU frame-work, as was the case with France and the UK in 2010. Discussions on ‘pooling and sharing’ and ‘smart defence’ in the EU and NATO have so far yielded few results. In addition, security and defence policy will remain a low priority for the EU in the face of the euro zone crisis, thus making efforts to profile CFSP as a public good in need of increased funding, more difficult to make.

Notes

1. Thanks to the editors of this volume and to Dr Luis Simón for helpful comments on the draft of this chapter.


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2. Since the Lisbon Treaty, ESDP is referred to as the CSDP.3. For a history of EPC see Nuttall, S. (1992) European Political Cooperation,

Oxford: Clarendon Press.4. The ecu or European Currency Unit was the predecessor of the euro.5. Information on ECHO’s budget and spending can be obtained from

http://ec.europa.eu/echo/funding/budget_en.htm. The EU’s humanitar-ian and development spending is made up of funding in the European Commission budget, the European Development Fund and donations from individual member states. For the period 2008–13 the EDF has allo-cated € 22.682 billion.

6. For the text of the European Security Strategy 2003 and follow-up documents see http://www.consilium.europa.eu/eeas/security-defence/european-security-strategy.aspx?lang=en

7. For an in-depth examination of these developments see Wessels, W. and Bopp, F. (2008) ‘The Institutional Structure of CFSP after the Lisbon Treaty – Constitutional Breakthrough or Challenge Ahead?’, Challenge, Liberty and Security Research Paper No.10, Centre for European Policy Studies, June.

8. Article 27 (3) TFEU.9. UK–France Summit Declaration on Security and Defence Cooperation,

2 November 2010, available at http://www.number10.gov.uk/news/statements-and-articles/2010/11/ ... mit-2010-declaration-on-defence-and-security-cooperation-56519; Financial Times (2010) ‘A new entente for Paris and London’, 2 November; Errera, G. (2010) ‘A pact to end Europe’s Thousand Years’ War’, Financial Times, 2 November.


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http://ec.europa.eu/echo/funding/budget_en.htm

http://www.consilium.europa.eu/eeas/security-defence/european-security-strategy.aspx?lang=en

http://www.number10.gov.uk/news/statements-and-articles/2010/11/ ...

http://www.consilium.europa.eu/eeas/security-defence/european-security-strategy.aspx?lang=en

http://www.number10.gov.uk/news/statements-and-articles/2010/11/ ...

Much political capital has gone into the principle of budget reform in the past and in the present, but this has often floundered not on account of support for continuity but on account of division between the governments of EU member states. At the time of writ-ing, the countries of the EU face the most serious economic crisis since the 1930s and yet the EU’s budget in terms of payments is fixed at no more than 1 per cent of collective national wealth. One solu-tion that seems politically impossible would be for a massive federal-type expansion of the budget in order to provide compensation for economic shocks. Only in part, this may be possible via the semi-formal mechanisms explored by Charles Blankart and Gerrit Koester in Chapter 5 although this could occur only outside the principal architecture of the EU system. Indeed, Ackrill and Kay (2006) pro-vide an interesting account of how reform of the EU budget has occurred not through changing existing policies or procedures but by adding yet another layer of institutions on top of all the old ones. On the other hand, partial solutions confined to that 1 per cent of payments could involve investment in new policies at the expense of pre-existing policies, which has happened in the past.

This chapter concludes the study by exploring the nature of pos-sible reform. In the first section, we provide a summary of the find-ings in each chapter and report on their policy implications for the negotiations on the MFF. In the second section, we analyse the find-ings on the review of the budget that took place in 2008 and 2009. We also compare the substance of the financial perspective negoti-ations for 2000 to 2006 and for 2007 to 2013 with the nature of the

9Conclusion: Budget Policy, Past Experience and the FutureGiacomo Benedetto and Simona Milio

171


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172 Giacomo Benedetto and Simona Milio

Commission’s and EP’s proposals for the MFF of 2014 to 2020. In the final sections, we offer an expectation of outcomes for the future of the EU budget.

9.1 Policy implications for the Multiannual Financial Framework

The first part of the book scrutinised the institutional questions related to budget reform. In Chapter 2, Sara Hagemann suggested a need for radical changes to the EU’s financial priorities. However, these will be difficult to bring about. The EU has 27 governments around the table, each with veto powers and strong preferences over both strategy and outcome from the negotiations. While the governments’ rhetoric currently shows a willingness to meet new and different priorities not currently reflected in the budget, left-over problems from the last negotiation rounds are also becom-ing impossible to ignore. Previous negotiations show that radical changes to the existing framework are almost impossible to achieve, despite the rhetoric from national governments. The author warns that in order for both member states and the EU as a whole to win in the long run, the governments cannot regard the negotiation process as a war of ‘red lines’, leaving all responsibility for achiev-ing a coherent outcome to selected ‘brokers’. The chapter argued three main points. First it is necessary to pay close attention to the checks and balances imposed at national level on governments. EU negotiators may be able to address and meet the governments’ bargaining positions differently if they do not treat each other as unitary actors in the Brussels bargaining game. Second, a number of improvements can be made to the rules that govern the negoti-ations, even within the existing treaty framework. The rules favour a strong status quo bias and hence beg for certain interpretations of the treaty text in order to improve on the next negotiation out-come. Lastly, the national level formulation of country positions and priorities must also be addressed to achieve a more satisfactory and efficient outcome. Hence, timing and sequencing of budget negotiations are crucial. In this context, it would be a mistake to under-estimate the power of the European Commission and of the EP to set agendas by initiating any reform and making proposals to the Council.


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Conclusion 173

In Chapter 3, Giacomo Benedetto looked at the impact of the Lisbon Treaty on budgetary reform. The chapter concluded that ratification of the Lisbon Treaty renders budgetary reform no more likely than before. The Lisbon Treaty even takes away some of the powers of the EP to overrule the Council on amendments to the annual budget. The Commission, Council and EP, however, will benefit from a col-lective efficiency and legitimacy gain. The new procedures are easier to understand and partly compensate the EP and the Commission with new powers in certain fields to match a loss of powers in oth-ers. Notable among these are the EP’s powers to agree budgetary implementation rules with a qualified majority in the Council and the EP’s new agenda-setting power, shared with the Commission, in proposing the MFF subject to the approval of a unanimous Council. Since unanimity remains the Council decision-making procedure for reforming the MFF and own resources, reform is no more likely than before Lisbon. Moreover, any non-agreement on a new MFF will result in the amounts from the final year of the previous agreement being automatically rolled over. This creates a strong bias in favour of the status quo since any single government has the veto power to ensure budgetary continuity. The removal of the EP’s power to overrule the Council in areas of the annual budget and provisional twelfths weakens the EP’s ability to force reform onto the agenda in a direction that it would like. Finally, the member states’ new power to implement the budget jointly with the Commission introduces new veto players not least because member states will become account-able to the EP and Court of Auditors for how they spend EU money. In short, the Lisbon Treaty re-balances some powers but does not facilitate reform of the budget.

Robert Kaiser and Heiko Prange-Gstöhl argued in Chapter 4 that the European economic and financial crisis has established a new dual-ism between ‘normal politics’ and ‘crisis politics’, which has immedi-ate consequences for the institutional balance within the EU and the entrepreneurial capabilities especially of the European Commission. The analysis suggested that the coherence in terms of economic performance among EU member states has further decreased dur-ing the crisis. This is because at least some member states initiated national measures that deviate from agreed guidelines and targets at the European level as well as implementing budget cuts or stimu-lus packages, which mainly follow the logics of national concern.


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As for the budget review, two main points emerged for the research of Kaiser and Prange-Gstöhl. Firstly, that the national positions sub-mitted under the conditions of ‘normal politics’ are still valid at least in terms of their main strategic orientations and also that some of the proposals will not survive the phase of crisis politics; secondly, the friction between net contributors and net receivers is likely to be reinforced in times of crisis and austerity. Moreover, the group of net recipients will be hardly united as it is composed of states that are part of the euro zone and others that due to their non-participation in the euro are less dependent on the solidarity of the net contribu-tors within the euro zone. Based on these findings, the authors con-cluded that this constellation makes higher national contributions to support European growth policies most unlikely.

If Kaiser and Prange-Gstöhl concluded on a pessimistic note regard-ing the chance of investment in economic innovation, in Chapter 5 of Part I, Charles Blankart and Gerrit Koester offered a solution to the problem of financing public goods such as R&D. Blankart and Koester argued that before the Lisbon Treaty and the finan-cial crisis, the EU budget was dominated by redistributive spend-ing, while expenditure on public goods was very limited. Overall, EU budget policy has been characterised by gridlock. They agreed with Hagemann and Benedetto that the Lisbon Treaty is unlikely to change this fundamentally, but suggested that the new mechanism of enhanced cooperation might open a window of opportunity for a new and welfare-enhancing public goods budget. The financial crisis has had – via the EU contribution to the fiscal stimulus programmes of the member states – at first sight only a minor influence on the EU budget and will not change the general distribution of spend-ing. However, parts of the own resources have now been assigned explicitly as guarantees for credit lines for bail-out funds under the EFSM worth nearly one year’s budget. This adds a new dimension to the negotiations on the budget and the MFF and has the potential to affect directly EU spending in the future. Moreover, two different, historically formed coalitions, net contributors and net recipients, have an incentive to block changes to revenue or spending, which leads to budget deadlock. This prohibits a change towards more pub-lic goods provision, which under existing rules could be financed only through a reduction in the CAP and structural funds, which is unacceptable to many states. The solution is a separate, parallel


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Conclusion 175

budget for public goods with separate decision-making rules within a process of enhanced cooperation. Programmes would be financed separately from the EU budget and would be agreed unanimously by the participating member states for a specified time period. The programmes would expire at that point unless renewed by a further unanimous agreement thus reassuring participants that a ‘lock-in’ of the type that applied to the CAP in 1970 could not occur. Blankart and Koester believe this to be more urgent than ever in view of the decisions to under-write the EFSM with funds from the EU’s own resources.

The second part of the book on policy spending started with a chapter on the largest area of budget expenditure, the CAP, by Alan Greer. The chapter considered the development of the CAP in the context of budgetary reform pressures. Together with a growth of EU competence elsewhere, these pressures have led to the relative decline of CAP and rural development spending from 75 per cent of the EU budget in the late 1970s to around 40 per cent at the time of writing. The distributional nature of spending remains important, with three-quarters going directly to farmers in the form of direct subsidies, while just 20 per cent is allocated to rural development. Contemporary changes to the CAP in the light of budgetary and other pressures such as trade liberalisation are examined. In agricul-ture, the budgetary reform exercise in 2008 was closely intertwined with the ‘health check’ of the CAP (2007–8). This made adjustments to the major reforms of 2005 but also placed greater emphasis on the need for policy to reflect better the increasing importance of rural development. Crucially, it also stressed the need for the CAP to contribute to dealing with new challenges and opportunities related to climate change, renewable energy, water management and bio-diversity. Although there will be further contraction in the agricul-ture budget after 2013, it is unclear just how much change will take place, and in what form. EU member state governments continue to disagree fundamentally about the importance of agriculture in economic, social and political terms and some will wish to retain a robust policy framework while others advocate radical restructuring in the direction of a comprehensive policy for rural areas.

After the CAP, the second largest area of budget expenditure is represented by cohesion policy, which may now exceed the budget share of the CAP. In Chapter 7, Simona Milio analysed


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the EU Structural Funds budget, which remains a source of bitter arguments among member states. Net contributors and recipients have taken opposite sides in the reform debate, with each camp able to block QMV if it wishes. The main problem is not merely the disparity in contributions, but the distribution of funds and whether economic and social policy integration occurs. In the negotiation of the next MFF, cohesion policy faces the twin chal-lenges of improving solidarity towards new member states, while modifying its objectives along social lines. Concerning the former, six of the ten most funded states are ‘old’ member states. These states received 49 per cent of total structural funds for the 2007–13 period. However, this does not reflect the fact that 46 out of the 85 poorest regions covered by the convergence objective are located within the new member states. ‘Renationalisation’ of structural funds could improve solidarity enabling a greater allocation of finances to poorer member state regions. Concerning the prioritisa-tion of social objectives, the fundamental aim of cohesion policy to achieve regional convergence and social cohesion is not being met. Sixty per cent of funds finance economic development, infrastruc-ture and innovation under the ERDF. Only 24 per cent assists ESF initiatives tackling social exclusion and vocational training. Based on the increased social inequalities created by the EU enlargements of 2004–7, imbalances in fund allocation can no longer be ignored. From these two challenges emerges a concern for the quality rather than the level of spending. There may be consensus between con-tributors and recipients to shift expenditure towards social aspects, while integrating complementary national and EU funding within the context of ‘renationalisation’.

The third area of spending, investigated by Alister Miskimmon in chapter 8, is CFSP and CSDP. Analysing the development of the CFSP in connection with its budget is a thorny issue and quite apart from the budget, CFSP will evolve due to the Lisbon Treaty. The EU has grown into a significant international actor since the end of the Cold War. Spending on external affairs has, however, remained modest. This is due to an often uneasy relationship in EU foreign policy between the intergovernmental aspects of CFSP and the grow-ing role of the Commission and the EP. The financing of the CSDP is ad hoc, particularly in the area of military crisis management. This stems from attempts within the Council to retain political control


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Conclusion 177

over defence aspects of CSDP and is in recognition that defence remains resolutely a national competence. In the period 2007–13, EU spending on external affairs was raised by 29 per cent. This is indicative of the EU’s growing concerns to be a more prominent and effective international actor. However, there remains a continued tension between national capabilities and the desire to develop more effective EU capability in foreign and security policy. Debates over the financing of the CFSP highlight this tension. Greater recourse to the EU budget to fund CFSP has ensured that the Commission and the EP have acquired enhanced roles in foreign and security policy, previously characterised by intergovernmental cooperation. If the EU wishes to continue to develop its international role and ensure that member states make a fair financial contribution, a more robust mechanism for financing the CFSP/CSDP is required. The challenge will be to achieve this in an age of austerity in which even national defence budgets are being reduced.

As the final sections of this conclusion will explain, the politics of austerity, combined with the rules of the Lisbon Treaty requiring unanimity for budget change, mean that it will be very difficult to decrease – or to increase – overall spending. As in the past, adjust-ments to amounts given to specific policies at the expense of other policies may still be possible although unintended consequences may accompany any change.

9.2 Review and previous experience of budgetary agreements

This section compares the budget review of 2008–9, previous budget packages and proposals for the MFF issued by the EP and European Commission in 2011. It draws on this evidence to ask what type of reform may be possible in the final sections of the conclusion.

In 2006 the conclusion of the negotiations on the budget package for 2007–13 included, on British insistence, a commitment to hold a major review of the budget between 2008 and 2009. The review occurred by use of a public consultation whose conclusions were pub-lished by the European Commission (2010d). The document called for new areas of policy allowing Europe to succeed in the 21st century but in content did not represent a departure from policy pronounce-ments that were already familiar. These included delivery of key


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priorities and the notion of the EU providing added value through a results-driven budget and mutual benefits through solidarity. Given the failure of the Lisbon Strategy and its re-launch as Europe 2020, the Commission called for ‘smart, sustainable and inclusive growth’ with five targets to be met by 2020: an increase in employment levels to 75 per cent; R&D investment at 3 per cent of GDP; a reduction in greenhouse gas emissions by 20 per cent compared to the levels of 1990 and a 20 per cent increase in energy efficiency; a reduction in the number of young people leaving education too early; and rescu-ing 20 million people from poverty (European Commission 2010d: 6–7). These are impressive targets but does past and current experi-ence of the EU budget provide much hope of delivery?

As explained in Chapter 1, the budget deals of the past that secured real policy shifts were rather few, notably those of 1970 and 1988. Following the entry into force of the Single European Act in 1987, an inter-institutional agreement between the Commission, Council and EP was reached in 1988, opening the way for a ‘Delors’ budget to replace the CAP-oriented, intergovernmental ‘de Gaulle’ budget of the past (Laffan and Lindner 2010; Linder 2006). This allowed for the doubling of the ERDF to hasten economic development in poorer regions and to facilitate integration of the European internal market. The budget change of 1988 had major significance and matched the EU’s development in other spheres, notably the internal market. The words in the Commission’s response to the budget review of 2008–9 are positive and could lead to the kind of change seen in 1988 if other factors allowed for it. The global financial and euro zone cri-ses provide a plausible launch pad for major change to the budget although the EU’s national governments appear unlikely to approve such changes unanimously. The rules of the Lisbon Treaty do not make it easier to take bold decisions.

The MacSharry reforms to the CAP in 1992 allowed for a hidden change to the budget imposed by the pressures of world trade. The case of MacSharry is that of an additional institution added to pre-existing ones (Ackrill and Kay 2006). The next opportunity for budget change in the EU arrived in the late 1990s. That year saw the launch of Agenda 2000, the Commission’s new budget strategy for the years 2000 to 2006. Following the completion of the internal market and preparation for monetary union, the next step was to prepare for the imminent enlargement of the EU’s membership towards Central


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Conclusion 179

and Eastern Europe. As Table 9.1 shows, 41 per cent of the expend-iture commitments agreed at Berlin in March 1999 were still to be allocated to the CAP in intervention and direct payments. Rural development constituted a further 4.7 per cent. Moreover, as new member states joined, their entitlement to CAP payments would be temporarily reduced, meaning that the vast bulk of the €267 billion (in the prices of 1999) allocated to CAP for 2000–6 would remain within Western Europe. Structural funds including the Cohesion Fund amounted to around 36 per cent of total expenditure commit-ments, equivalent to €235 billion. The remaining headings included internal policies (security, justice, R&D, environmental protection, transport, consumer rights and everything else done by the EU that excludes redistribution) whose budget share was only 6.8 per cent. The fourth main heading, external action, including CFSP, was set at 5 per cent.

The total ceiling for spending commitments during 2000–6 was agreed at 1.08 per cent of GNI, equivalent to €646.2 billion over seven years. The EU can make contracts up to that upper figure, but the actual level of payments available was slightly lower at 1.07 per cent of GNI or €641.5 billion. The difference between these two fig-ures provided a small margin in case of any over-spends. However, own resources for that period were set at 1.27 per cent of GNI, a full 0.2 per cent above the maximum level of payments.

The next multiannual budget package was agreed initially in December 2005, setting the level of commitments at 1.045 per cent, a real reduction compared to the commitments level of 1.08 per cent of GNI in 1999. However, following the enlargement of 2004, the EU had grown by ten new member states, so the total GNI had increased alongside a fall in GDP per capita since the new member states were poorer. In January 2006, the EP rejected the agreement on the grounds of opposing budget cuts and what it saw as insuffi-cient resources being oriented towards public goods like R&D. The Council agreed to a small rise to 1.048 per cent of GNI in commit-ments (or €846.3 billion in the prices of 2004 over seven years). The division between the EP and the Council was not directly ideo-logical in terms of left–right politics, since both institutions were home to centre–right majorities though in public spending the EP and Commission tend to favour greater resources for the EU. More particularly the EP has supported the Commission in expanding EU


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Table 9.1 Spending across frameworks, 2000–13 and Commission proposal, 2014–20

FP 2000–6€ M in prices

of 1997percentage of spend

FP/MFF 2007–13

€ M in prices of

2004percentage of spend MFF 2014–20

2014–20 € M in prices of

2011percentage of

spend

2a. Structural Funds

195010 30.18 1a. Competitiveness for growth and employment

382139 44.21 1a. Smart and inclusive growth

490908 47.89

2b. Cohesion Fund

18000 2.79 1b. Cohesion for growth and employment

308041 35.64 1b. Of which, economics, social and territorial cohesion

336020 32.78

1b. Rural development

30370 4.70 2a. Preservation and management of natural resources

371344 42.96 2a. Sustainable growth: Natural resources

382927 37.36

1a. CAP 267370 41.38 2b. Of which, market related expenditure and direct payments (CAP)

293105 33.91 2b. Of which, market related expenditure and direct payments (CAP)

281825 27.50

3. Internal policies

43830 6.78 3. Citizenship, freedom, security, justice

10770 1.25 3. Security and citizenship

18535 1.81

4. External Action

32060 4.96 4. EU as a global player

49463 5.72 4. Global Europe 70000 6.83


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5. Administration 33660 5.21 5. Administration 49800 5.76 5. Administration 62629 6.11

6. Reserves 4050 0.63 6. Compensations 800 0.00

7. Pre-Accession Aid

21840 3.38

Total Commitments

646190 864316 1025000

Percentage of GNI

1.08 1.048 1.05

Total Payments

641500 820780 972198

Percentage of GNI

1.07 1.00 1.00

Margin 0.20 0.24 0.23

Own resources ceiling

1.27 1.24 1.23

Sources: Official Journal of the European Communities C 172, 18 June 1999; Official Journal of the European Union C 139, 14 June 2006; European Commission (2011b).


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policy into new areas that offer cost effective added value. In 1988, it was the EP rather than the Council, which became a strong sup-porter of the newly invigorated structural funds.

Reflecting this concern for new policy, the budgetary package for 2007–13 was rebranded with new headings to reflect new priorities (Table 9.1). However, in terms of GNI percentage, the amounts avail-able had fallen compared to 2000–6 at just the moment when there was a demand for greater redistribution due to the enlargements of 2004 and 2007. While commitments fell from 1.08 to 1.048 per cent of GNI, the ceiling for payments was reduced more radically from 1.07 to 1.00 per cent (or €821 billion in the prices of 2004) over seven years. The fall in payments to 1.00 per cent of GNI was all the more dramatic considering that in 2004 the Commission had proposed increasing payments from 1.07 to 1.14 per cent (Rant and Mrak 2010: 349). This allowed for a difference between contractual commitment and actual maximum payments of €44 billion compared to just €4.7 billion between 2000 and 2006. Although this allowed a cush-ion for unforeseen circumstances, it also allowed a ‘win’ for both maximalists and minimalists on the budget. Those who favoured a higher budget, often the EP and the Commission, could claim satis-faction on the basis of commitments, which do indeed commit the EU to spend if programmes are successful. National governments who wish to reduce spending can be more justifiably satisfied since payments can be made only up to the lower ceiling for payments at 1.00 per cent of GNI.1

The agreement of 2006 cut spending and changed the headings and labels for the budget to reflect the priorities of the Lisbon Strategy. In a sense this also concealed the effect of the CAP. A new Heading 1 was entitled ‘Competitiveness for Growth and Employment’ amounting to 44 per cent of commitments. Within this, cohesion was located under Heading 1b, accounting for 36 per cent of spending or €308 billion. This was a freeze in percentage terms of budget share and a cut in real terms considering that structural funds, the Cohesion Fund and pre-accession aid (ex-Heading 7) also amounted to 36 per cent during 2000–6. However, the Commission had originally pro-posed a cut to a 33 per cent share of spending in 2004 (Rant and Mrak 2010: 350). Heading 1a on ‘Competitiveness’ comprised sci-ence, research, innovation, nuclear safety, education, training, youth, sport, energy, transport and information technology, coming to 9 per


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Conclusion 183

cent of commitments in the budget package. This was a real increase compared to the period between 2000 and 2006, when it had been included under ‘Internal Policies’ financed to the level of 6.8 per cent of commitments and which had to include freedom, security and justice. In 2004 the Commission had, however, proposed not a 9 per cent share but a 12 per cent share of spending for Heading 1a on competitiveness (Rant and Mrak 2010: 350). The agreement of 2006 hid CAP and fisheries within a new Heading 2 entitled ‘Preservation and Management of Natural Resources’. CAP and fisheries were effec-tively re-labelled as Heading 2b on ‘Market Related Expenditure and Direct Payments’, which amounted to nearly 34 per cent of commit-ments or €293 billion, a real term cut compared to the 41 per cent allocated between 2000 and 2006. In 2004, the Commission had once again proposed a lower level of relative funding for Heading 2b at 29 per cent of spending commitments (Rant and Mrak 2010: 350). Despite the overall cut in the budget package, small increases were possible in public goods at the expense of the CAP, with an effec-tive freeze for cohesion policy. The new Heading 2a comprised rural development, and environmental and climate change expenditure. With financing at 8 per cent of commitments, this was also a notable increase. Previously, rural development was set at 4.7 per cent, while environment projects were included in Internal Policy. The agree-ment of 2006 also allowed for a small increase on European foreign policy, re-labelled Global Europe, from 5 to 5.7 per cent of commit-ments. This reflected the expectation that the Lisbon Treaty would be ratified thus creating the EEAS and the office of HR/VP.

The effect of the negotiations for the package for 2007–13 was that the Commission proposed an overall increase in spending, with big cuts for the CAP, smaller cuts for cohesion and a big increase for public goods. The end result in 2006 was an overall cut rather than increase, with notable cuts for the CAP though not as radical as those that the Commission proposed, a freeze for cohesion and a moderate increase for public goods.

Amid the publication of the results of the review of the budget (European Commission 2010d), the EP set to work drafting its own priorities for the MFF of 2014–20. A parliamentary committee on the future of the budget was established and in early June 2011, three weeks before the publication of the Commission’s plans for the MFF, the EP adopted a text with its own ‘shopping list’ of demands.


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Its proposals were consistent with long-standing EP positions on expanding the budget and the competence of the EU. The EP is also interpreting Article 312 (on the MFF) of the Lisbon Treaty in such a way as to give it de facto joint proposal power with the Commission on the new MFF. The EP favours initiatives to construct new own resources such as a financial transactions tax in order to escape the situation where member states constantly calculate their net posi-tions and juste retour (European Parliament 2011, recitals P and Q). The EP supported a new growth strategy for Europe 2020 (public goods) and the notion of added value as provided by the EU, for which budgetary increases would be necessary. It also noted the new responsibilities for the EU under the Lisbon Treaty in foreign policy, climate change, energy, tourism and civil protection, public goods of which all would require budgetary increases. Of course in 2006 it had been possible to improve funding to these areas while cutting the overall budget due to larger cuts in the CAP. In an era of austerity and amid a desire by at least 20 governments to protect the CAP, as Alan Greer revealed in Chapter 6, it is not certain that this can be repeated.

Next, the EP proposed a further re-labelling of the budgetary head-ings to denote the key priorities. Heading 1a on competitiveness would be changed from ‘Competitiveness for Growth and Employment’ to ‘Knowledge for Growth’. A new Heading 1c for ‘Management of Natural Resources and Sustainable Development’ would replace the former 2a and 2b, encompassing the CAP, rural development, fish-eries, environment, climate change, energy and transport. A new Heading 1d on ‘Citizenship, Freedom, Security and Justice’ would take over the old Heading 3. The relabelling was designed to place all the traditional policies under Heading 1. ‘Global Europe’ and ‘Administration’ would be allocated respectively to Headings 2 and 3 (European Parliament 2011, para 142). Next, the EP called for more flexibility within and between headings (or policy areas) in the budget so as to utilise under-spent resources. This will conflict with national governments who like to gain refunds from any under-spends. The EP called for binding reviews of the MFF and the ability to raise its spending ceiling. It condemned the 1 per cent of GNI ceiling for payments in the view that it is too low for proper invest-ment in public goods, such as delivering on the pledges of the Lisbon Strategy and Europe 2020 to increase spending on R&D from 1.9 to


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Conclusion 185

3.0 per cent of GDP. If the Council wished to freeze or cut spending, it should, in the EP’s view, have to explain which priorities would be sacrificed. Finally, the EP called for a new Convention of the EP, national parliaments, the European Commission and national gov-ernments to draft a new budgetary agreement.

As Table 9.1 shows, the Commission proposed in June 2011 to freeze spending, setting commitments at 1.05 per cent of GNI, or €1,025 billion (at the prices of 2011) over seven years, and payments at 1.00 per cent. The 5 per cent gap between the two is equivalent to €48.6 billion, which has grown in line with GNI since 2006. The Commission pitched its proposal at the status quo for spending in awareness of the political context. Contributor governments would like to cut the budget, yet the Commission, EP and sympathetic gov-ernments have ambitions for the future. The best way to achieve these for the Commission is to ignore the EP and propose spending continuity rather than increases. Under Article 312 of the Lisbon Treaty, failure to agree a new MFF by the end of 2013 means continu-ity of the previous package at the levels for 2013. It is sufficient for one government to block agreement for this to occur, particularly if it prefers current arrangements to the alternatives. Put another way, a European Commission which wants to achieve agreement will make a proposal as visibly close to the status quo as possible. In 2006, despite a cut to the budget and a larger cut still to the CAP, spending was increased slightly in cohesion and public goods. Despite a budget freeze, reallocation of priorities could be possible for 2014–20.

Although the EP called for a re-organisation of the headings, the policy headings in the Commission’s document are unchanged (Table 9.1). Heading 1a, which includes science, research, innovation, nuclear safety, education, energy and transport increases from 8.6 per cent to 15.1, a major step forward for public goods. Heading 1b, which is cohesion, decreases slightly from around 36 to 33 per cent. Heading 2a, which is sustainable growth apart from CAP and fish-eries, and which includes rural development, environment and the fight against climate change almost freezes at 9.9 per cent compared to 9.1 previously. Again the biggest hit is taken by the CAP and fish-eries (Market Related Expenditure and Direct Payments), which fall from 34 to 27.5 per cent of the budget. In terms of cash, this is a fall from €293 billion in the prices of 2004 to €282 billion in the prices of 2011. Headings 3 (Security and Citizenship), 4 (Global Europe)


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and 5 (Administration) each see a small rise, respectively from 1.3 to 1.8 per cent, from 5.7 to 6.8 and from 5.8 to 6.1. In the case of Global Europe, the increase takes account of the EEAS and the new role of the HR/VP.

The year 1970 saw the establishment of own resources, the entrenching of the CAP and the introduction of budgetary power for the EP. In 1988 an inter-institutional agreement established long-term financial packages and allowed for the doubling of the ERDF. This section has shown that outside of the events of 1970 and 1988, budgetary change is possible even in conditions of unanimity. Although Article 312 provides a strong bias in favour of continuity for the MFF, as seen in the Commission’s proposal to freeze overall spending in commitments and payments, substantial sums can be made available for new policy areas, particularly public goods, at the expense of traditional redistribution, particularly the CAP. At the time of writing, the Commission’s proposal discussed above is only a proposal. Given the proposal and the well-known views of the EP and many governments, the following sections will discuss what type of reform may be possible and its consequences.

9.3 Future reform

This section concludes by speculating on the way forward for the budget after 2013. The Lisbon Treaty and past practice make exit from the status quo difficult to imagine given the ease of veto or veto threat. For example, net contributor member states with strong sec-tors for R&D may nevertheless oppose policy that moves funds from the CAP to public goods if they are influenced by a well-organised domestic agricultural lobby. This volume has revealed that a number of factors may be relevant in helping to secure exit. Sara Hagemann suggests that a broader interpretation of the negotiating rules may allow space to be found for reform. Charles Blankart and Gerrit Koester propose an escape from the current constraints of the budget not through cuts in redistribution but through the creation of a sup-plementary budget to support public goods by means of enhanced cooperation. The wider literature (c.f. De la Fuente and Doménech 2001; Heinemann et al 2010; Osterloh et al 2009; Rant and Mrak 2010; Schild 2008) proposes other exit strategies. While these may seem improbable, not least for under-estimating veto use by any one


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Conclusion 187

member state that is uncertain of the outcomes of change, the effects of the global financial crises since 2008 have been unprecedented. An unpopular solution to the crisis of the euro zone would be fur-ther economic integration, with a budget increase sufficient to inter-vene in the case of asymmetric shocks. The latter is a key criterion of Mundell (1961) for an optimal currency area but is politically unfeas-ible. As the literature, including that written by the authors of this volume, recognises, very little funding for public goods or economic intervention can be harvested from reductions in redistribution due to member state veto power. Only an increased budget, whose rev-enue may be direct or indirect, can deliver that investment.

Given the ability of a single member state to prevent agreement on a new MFF and to ensure the rolling over of spending commit-ments from the final year of the previous agreement, there is a strong bias for continuity. If an increased EU budget sufficient to deal with asymmetric shocks is off the cards, what else could we foresee? As Table 9.1 has shown, investment in public goods under Heading 1a (not including cohesion) amounted to 9 per cent of commitments agreed for the 2007–13 period, a big increase compared to 2000–6. For 2014–20, the Commisson has proposed greater increases at the expense of the CAP and cohesion. Time will tell as to whether the power of the Commission and EP to make proposals and set agen-das has an effect. In 2006, the eventual agreement, though seeing a very significant increase in funds for public goods and cuts for the CAP, did not go as far as the original proposal of the Commission from 2004 (Rank and Mrak 2010: 350). In making that proposal the Commission was implementing policy already decided by the European Council, whose members subsequently found themselves defending traditional redistribution based on CAP and cohesion. The original Commission proposal of 2004 had planned for direct payments in the CAP and fisheries to account for 29 per cent of com-mitments. The eventual agreement of 2006 cut back the size of total budget payments from 1.14 to 1.00 per cent of GNI, while increasing the share for agriculture and fisheries to 34 per cent of commitments. The European Council likewise increased the share for cohesion from 33 to 36 per cent. Meanwhile there was a reduction for competitive-ness (R&D, training, education, innovation, etc.) from 12 to 9 per cent of commitments or in cash from €122 billion to €74 billion. It could be that this scenario will not repeat itself and occurred only


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because an agreement made in 2002 protected the CAP and would leave it untouched until 2013.

In securing reform, external pressure from the economic crises may also have an effect (Rant and Mrak 2010), the institutions may adopt a more flexible attitude in order to find agreement, as Sara Hagemann suggests, and the Commission may well have proposed an MFF that the governments find it hard to resist. The proposal of June 2011 is less outlandish than previous reform plans. It proposes to freeze the GNI percentage share for payments and commitments, it increases the share for competitiveness (Heading 1a) from 9 to 15 per cent of spending and proposes reducing the share for agricultural and fisheries direct payments from 34 to 27.5 per cent and for cohe-sion from 36 to 33 per cent. Even a more modest cut to the share for CAP to around 29 or 30 per cent will allow for a significant increase for competitiveness under Heading 1.

As Simona Milio has suggested, discussion of actual amounts of money can be beside the point. Firstly, a freeze of 1.00 per cent GNI in payments may not be sufficient to deal with the need for pub-lic goods to regenerate the economy, so far more may be needed. Secondly, the way in which funds are distributed (rather than the amounts) can make all the difference in terms of effect and percep-tion. With respect to the CAP and cohesion, Alan Greer and Simona Milio have both suggested that a re-orientation of the programmes in a public goods direction may have greater effect and may make them more palatable politically. For example, if CAP funds can be spent in a way that enhances the quality of the environment and conserva-tion, it will be easier for the CAP’s recipients to maintain funding. In terms of cohesion, Simona Milio’s recommendations are very spe-cific concerning concentration of funds, co-financing, additionality and re-orientation in favour of social rather than infrastructural pri-orities. The role of co-financing and the criteria for release of funds can have positive effects on the capacities and internal discipline of sectors in receipt of those funds. No matter how much money is forthcoming (or not) in the future, we should expect the discourse of public goods to be more prominent with respect to traditional EU redistribution.

Reform on the basis of the European Commission’s modest pro-posal to freeze the level of spending beyond 2013 at 1.00 per cent of GNI but almost to double the public goods provision of Heading


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Conclusion 189

1a for competitiveness to a 15 per cent share may be possible. Some political actors may want something more radical and the euro zone crisis may demand further intervention of public funds for economic regeneration. Other actors may want to block such intervention or protect existing areas of spending like the CAP, which requires a veto from only one member state to be possible. In 2006 there was a net shift in favour of public goods though smaller than the Commission originally proposed. A further net shift may occur but only at the expense of CAP and cohesion policy. Public goods will not receive new money through a larger budget of the type that could absorb asymmetric shocks, which is demanded by the EP. The only way to achieve funds for new budgetary priorities in research and innov-ation, competitiveness, modern transport and infrastructure, train-ing, nuclear safety and combating climate change is either through politically difficult cuts to the CAP and cohesion – or to follow the suggestion of Blankart and Koester for a supplementary or parallel budget for public goods for which only contributors would benefit – or perhaps a combination of the two.

The chances of a veto or a ‘fudged’ agreement that ensures conti-nuity are very high. The only ways around this are flexibility and an appreciation of the difficult positions of other political actors, as suggested by Sara Hagemann, possibly a parallel budget for public goods proposed by Charles Blankart and Gerrit Koester, and internal reform on the part of the recipients of agricultural and structural funds that goes in line with the demands of public goods, including the environment and competitiveness, and in which funds are much better targeted.

9.4 Possible consequences of the reform

Although the negotiations for the MMF of 2014–20 are ongoing at the time of writing, the analysis and reflections presented in this book allow for some supposition on the possible consequences of the reform based on the plausible positions of member states.

Not surprisingly, the net contributors hold a negative position with regard to overall amounts. The British and German govern-ments find the budget too high and unrealistic at a time when national budgets are under particular stress. France, for example, keeps a contradictory position: on the one hand, it opposes the


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proposed spending level, on the other it empathises with the need for retaining the CAP in its current form. Certain net contributors, of which France is the leader, may wish to reduce spending, protect the CAP from which they benefit and, despite having sectors that would benefit from investment in public goods like R&D, resist pub-lic goods investment if it were only financed through reductions in redistribution like the CAP.

Contrary to these restraining positions, the net recipients are in favour of using the budget as an instrument for cohesion and eco-nomic development, as well as a boost to exit the crisis. In the mid-dle of these two opposite positions, there are those member states, as Spain for example, that may be classified as net contributors for the first time after 2013 and therefore have mixed views on the most suit-able reforms. For these countries the trade-off is to choose between a more generous cohesion policy budget, from which they will still benefit, or a smaller budget towards which they will automatically contribute less.

Clearly, the global financial and euro zone crises have influenced budget policy moving from redistribution towards development. This is the case for cohesion policy and CAP. Indeed, cohesion pol-icy is likely to remain the same or undergo only small cuts in over-all amounts of spending. However, the issue raised in Chapter 7 about geographical eligibility seems to lead towards financing less-developed regions in poor member states as a priority. Meanwhile, it remains to be seen how to tackle the issue of poorer regions in wealthier member states. There appears to be consensus for ‘renationalisation’ of cohesion spending in the latter case. There is also agreement on trying to devolve a larger part to the CAP for development purposes rather than subsidies. Notions of public goods, including innovation or investment in environmental con-servation, are popular and tie in with both the Lisbon Agenda of 2000 and its successor, Europe 2020. The agricultural and cohesion policies may stand a better chance of maintaining high budgetary spending by adapting to the discourse on public goods. Rather than changing budgetary amounts, both of these policy areas stand to be re-organised internally. While part of that re-organisation may lean towards public goods priorities, it may accompany principles like co-financing or better concentration and partial ‘renationalisa-tion’ suggested by Simona Milio in Chapter 7.


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Conclusion 191

As revealed in the previous section, past agreements on the budget have often been a compromise between the ideal positions of differ-ent actors. For example, in the case of the perspectives for 2007–13, the Commisson proposed a cut in direct payments for agriculture and fisheries from 41 to 29 per cent. The final amount agreed was 34 per cent. A modest reduction in CAP spending may be a result of a similar compromise for 2014–20. Whatever the outcome, the budget will remain highly symbolic, providing the EU with an identity beyond that of a pure free trade area. Its symbolism and the expectations that it provides make it prone to disappointment. An unintended consequence of a reform based on relatively minor reductions in amounts spent on the CAP and cohesion policy, as well as their internal re-organisation, is that they will disappoint and render the budget unable to meet Europe’s challenges for the future. How might this play out?

First of all, any reduction in redistribution for agriculture or regions could trigger opposition from concentrated interests whose incomes will fall. Public opinion sympathetic to those interests could become more Eurosceptic, particularly in a context of continuing economic crisis. Second, it is not certain that reductions in cohesion spending for poor regions in wealthy member states will be offset by increased national subsidy for those regions. Third, a small increase in the budgets for competitiveness and other areas of public goods, financed through reductions in agricultural and cohesion spending, will not meet the needs of the Europe 2020 programme nor make a significant contribution to regenerating the European economy. As Charles Blankart and Gerrit Koester suggested in Chapter 5, there may be pressure for a parallel or supplementary budget to fill the gaps. Such a budget would be intergovernmental and detached from the EU itself. An unintended consequence then of significant new investment in public goods could be that, given an expansion in Europe-wide spending on innovation, there will be renewed pressure from net contributors for further cuts in the budget of the EU itself. Finally, any budget reform taking effect from 2014 is likely to con-form with the tendency identified by Ackrill and Kay (2006) that old structures remain in place and are further complicated and rendered more opaque and confusing by new structures.

It should be remembered that the European Council must agree unanimously on a new MFF. Given that budget reform is full of


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uncertainty and consequences that may be unintended, and that any one member state may make a credible threat of veto, there will be a strong bias for continuity, since spending continuity is the con-sequence of non-agreement. Our conclusion is that the prospects for significant budget reform are weak and that changes to the EU budget itself are likely to be no more significant than those agreed in 2006.

Note

1. Interviews with officials at DG Budget, European Commission, Brussels and at the Foreign and Commonwealth Office, London, December 2011.


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http://www.parlia-ment.uk/briefing-papers/SN05750.pdf



http://www.number10.gov.uk/newsuk%E2%80%93france-summit-2010-declaration-on-defence-and%20security-







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207

absorption (in)capacity, 3, 12, 15, 41, 140, 160

added value, 19, 29, 31, 71, 114, 177, 182, 184

additionality, 122, 143, 144, 188Administration, 2, 184, 186Agenda 2000, 44, 55, 106, 107,

130, 178agenda-setting, 62, 63–4, 76, 77, 173agriculture, 1, 2, 3, 4, 8, 12–13, 79

103–5, 109–16, 119, 122, 123, 175, 191

council, 112, 118, 121policy see Common Agricultural

Policyanimal welfare, 29, 31, 111arable farming, 107Ashton, Catherine, 158–9, 162, 169Athena, 163–4, 166audit, 43, 54, 55, 109, 173austerity, 3, 4, 16, 17, 40, 56, 59, 66,

73, 77, 104, 117, 118, 152, 154, 157, 158, 168, 174, 177, 184

Austria, 11, 13, 73, 83

Balance of Payments, 80, 88, 89–95Balkans, 155bargaining positions see negotiating

positionsBarroso, Jose Manuel, 4, 69beef farming, 107Belgium, 5, 73, 83, 107biodiversity, 111, 112, 175Blair, Tony, 156blocking minority, 82–4border control, 29, 30Bosnia Herzegovina, 164Brazil, 68British ‘correction’ see UK rebateBritish rebate see UK rebate

broadband infrastructure see broadband network

broadband network, 69, 89Brok, Elmar, 162budget

amendments, 45, 46, 48, 50–2, 55, 56, 84, 173

annual, 2, 6, 7, 16, 17, 35, 40–1, 43–56, 81, 83, 92, 168, 173

implementation, 16, 41, 43–4, 52–6, 66, 68, 173

package see Multiannual Financial Framework

review (consultation, 2008–2009), 24, 28, 29, 31, 59–61, 71, 72, 76, 77, 104, 114, 174, 177–86

Bulgaria, 9, 73, 108, 124, 127

Centre for European Policy Studies, 114

checks and balances, 16, 23, 24, 27, 172

China, 68Chirac, Jacques, 106Citizenship, Freedom, Security and

Justice, 2, 126, 184climate change, 27, 30, 103, 110,

111, 114–16, 119–21, 124, 147, 156, 175, 183–5, 189

codecision procedure, 42–3, 45, 48, 88, 103, 113, 121

co-financing, 107, 109, 114, 119, 125, 143–5, 188, 190

cohesionbudget, 9, 137, 146 183,

185, 187–91Policy, 1, 10, 13 15, 18, 26, 30, 33,

40, 60, 67, 70–2, 81, 89, 95 105, 122–7, 129–35, 137, 140–7, 174–6, 179, 182, 188, 189

Index


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208 Index

cohesion – continuedsocial, 123, 125–6, 131–5, 145,

147, 176Cohesion for Growth and

Employment, 133–4Cohesion Fund, 134–5, 179, 182Cold War, 152, 155, 166, 168, 176Common Agricultural Policy, 2,

5–7, 9–15, 18, 26, 29–31, 35, 40, 51, 56, 60, 61, 69, 71, 79, 80–1, 83, 89, 95, 96, 103–21, 126, 127, 128, 129, 175, 178–9, 182–91

health check 2008, 69, 107, 111, 114, 119, 175

Common Fisheries Policy, 2, 10, 51, 183–5, 187–8, 191

Common Foreign and Security Policy, 4, 18, 151–69, 176–7, 179, 183

Common Security and Defence Policy see European Security and Defence Policy

compensations, 11, 69, 95, 171competitiveness, 10, 29, 60, 71–2,

103, 105, 107, 111, 115–16, 118, 119, 126, 127, 134–5, 140, 145, 182–4, 187–9, 191

Competitiveness for Growth and Employment, 2, 69, 133, 182, 184

conciliation committee, 48, 51, 84Confederation of Swedish

Enterprises, 31Congo, Democratic Republic

of the, 164Connecting Europe, 143consent procedure, 162Conservation and Management of

Natural Resources, 128Constitution, EU, 43consultation procedure, 54, 113consumer rights, 179Convergence Objective, 135,

137, 176‘correction’ see UK rebate

cost effectiveness, 2, 11, 134, 182Council of Ministers (Council of the

EU), 16, 35, 36, 40–56, 60, 66, 69, 83–92, 112–13, 152–3, 161–4, 168, 169, 172–3, 176, 178, 179, 182, 185

Country Landowners’ Association, 118

Court of Auditors, 54, 55, 173criminal law, 54crisis

empty chair, 5, 7euro zone, 3, 11, 15, 146, 157, 169,

178, 187, 189–90financial (economic), 4, 10, 15,

17–19, 37, 59–70, 73–7, 79–81, 88–91, 96, 103–5, 119, 124–5, 147, 171, 173–4, 191

Croatia, 124Cyprus, 29, 73, 105, 140Czech Republic, 73, 120, 137, 140

dairy products, 105, 107Darfur, 164De Castro, Paolo, 113, 114defence spending, 152, 158, 165,

166, 169De Gaulle, Charles, 5, 7, 47Delors budget, 7, 14, 55, 130, 178Denmark, 29, 42, 73, 83, 108direct payments, 2, 9, 105–8,

112–13, 115–19, 179, 183, 185, 187–8, 191

economicefficiency, 31–4, 41growth see growthpolicy, 32, 109, 147, 153

Economic and Financial Committee, 92

Ecorys report, 145ecu, 155education, 67, 74, 125, 134, 142, 147,

178, 182, 185, 187efficiency gains, 31, 41employment see labour market


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Index 209

energynetworks, 134, 143policy, 27, 184–5renewable, 175

enhanced cooperation, 17, 35, 80, 81, 86–8, 95–6, 174–5, 186

enlargement of the European Union, 3, 10, 11, 14, 16, 18, 30, 40, 44, 56, 62, 83, 90, 103, 120, 124–5, 130, 132–3, 137, 141, 147, 156, 160, 176, 178–9, 182

environment, 2, 8, 28, 29, 30, 32, 60, 103, 105–7, 111–12, 115–17, 119 -121, 123, 124, 135, 140, 179, 183, 185, 188–90

policy, 1, 37, 79Estonia, 73EU police missions, 164Eurogroup, 59, 75, 77, 78Europe

foreign policy see Common Foreign and Security Policy

Europe 2020 10, 143, 178, 184, 190, 191,

European Agricultural Guidance and Guarantee Fund, 5, 105,

European Commission, 3–5, 7, 9–10, 12, 14–15, 17, 24–5, 27–8, 34–7, 41–56, 58, 60–78, 85–94, 103–5, 107, 109–24, 127, 134, 137, 140, 143, 145, 152–6, 158–60, 162–3, 168–9, 172, 173, 176–189; Directorate General for Agriculture, 109

European Council, 15, 29, 36, 61, 64–6, 68, 75–7, 82, 91, 127, 134–5, 151, 156 187, 191; Presidency, 155, 164

European Council on Foreign Relations, 156

European Court of Justice, 54European Defence Agency, 165European Development

Fund, 156European Economic Recovery Plan,

68, 69, 88, 95

European External Action Service, 19, 27, 151, 158–9, 162, 167–9, 183, 186

European Financial Stability Mechanism, 80, 88, 89, 91–3, 95, 174–5

European Globalisation Adjustment Fund, 129

European Investment Bank, 68–70European Neighbourhood Policy,

30, 156, 168European Parliament, 2, 5–12,

15–17, 27, 35–8, 40–56, 62, 66, 71, 73, 75–6, 83–4, 88, 112–14, 118, 121, 152–3, 158–62, 164, 168–9, 172–3, 176–9, 182–7, 189

European Political Cooperation, 154–5

European Rapid Reaction Force, 163European Regional Development

Fund, 7, 47, 132, 134, 141–6, 176, 178, 186

European Research Area, 61, 70European Security and Defence

Policy, 18, 151–69, 176–7European Security Strategy, 157, 160European Social Fund, 2, 5, 132,

134, 141, 142, 146, 148European Territorial Cooperation,

135, 137Europe in the World, 152euro zone, 3, 11, 146, 157, 169, 174,

178, 187, 189, 190excessive deficit procedure, 65expenditure, 1 –19, 24–8, 30–8,

40–2, 47–56, 60–3, 73–4, 79–84, 86, 89, 94–6, 103–9, 113–16, 119–20, 125–7, 140, 142, 144, 146, 152, 156, 158, 160–1, 164–6, 169, 174–7, 179, 180, 182–92

ceilings, 1, 11–13, 34, 45, 46, 49, 91, 92, 95, 96, 127, 142, 179, 182, 184

commitments, 45, 105, 106, 127, 128, 142, 179–83, 185–8


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210 Index

expenditure – continuedcompulsory, 48, 51, 66, 113maximum rate of increase,

45–6, 51non-compulsory, 45, 48, 49, 51,

55, 66, 113payments, 4, 12, 14, 15, 45, 50, 89,

91–6, 106, 127, 179–88external aid, 12external policy see Common

Foreign and Security Policy

farmers, 30, 32, 107–8, 110–12, 116–19, 175

Ferrero-Waldner, Benita, 158financial perspectives, 2, 6–7,

10–12, 15, 25, 35, 44, 49, 61, 81, 91, 93, 126, 129, 130, 133, 160, 171, 172–86

transactions tax, 9, 184Finland, 29, 73, 83fiscal federalism, 11, 79

stimulus, 80, 88–9fisheries, 2, 10, 51, 183–5, 187–8, 191food safety (food security), 12, 29,

31, 70, 111, 115, 119, 129foreign policy, 2, 4, 19, 27, 51, 79,

151–4, 157–9, 168–9, 176, 183–4Former Yugoslav Republic of

Macedonia see MacedoniaFP7 see Research Framework

ProgrammeFrance, 73, 83, 106, 108–9, 117–18,

121, 137, 153, 157–8, 166–9, 189–90

fraud, 54, 109Freedom, Security and Justice,

14–15, 128, 183

Gaullists, 5gender equality, 132Georgia, 90, 164Germany, 5, 11, 13, 15, 17, 19, 63,

72–4, 83, 108, 117, 119, 121, 130, 137, 153, 157, 158, 166–8, 189

Global Europe, 2, 183–6Gothenburg Agenda, 123Great Britain see UKGreece, 7, 73, 108, 118, 123, 130,

137, 141green economy, 68growth, 2, 4, 11, 16–17, 29, 33,

59–78, 105, 115, 119, 123–4, 126, 128–31, 133–5, 147, 174–5, 178–9, 182, 184, 185

Grybauskaïtė, Dalia, 114

High Representative see HR/VPHR/VP, 19, 151, 154, 158–9, 161–3,

168, 183, 186Humanitarian Aid Office, 156Hungary, 31, 73, 90, 137, 140

immigration policy, 79incentive channelling reforms, 12India, 68Indonesia, 68industrial policy, 68, 103information and communication

technology, 67, 134, 182infrastructure, 29, 63, 67–9, 80,

89, 95, 134, 146, 148, 176, 189

innovation see technological development

intellectual property, 70Inter-Institutional Agreement of

1988 7, 10, 44, 47, 81, 178, 186

internal market see single marketinternal policies, 179, 183International Monetary Fund, 90Iraq, 157, 164Ireland, 7, 30, 42, 73, 83, 92, 108,

109, 118, 123, 130, 137Italy, 5, 15, 29, 31, 73, 83, 90, 114,

130, 137, 149

Japan, 68jobs see labour marketjuste retour see net balance


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Index 211

knowledge-basedeconomy, 134society, 60, 134

Kok report, 66–7Kosovo, 90, 153

labour market, 29, 60, 67, 74, 123–6, 132–5, 137, 140, 142, 145, 178

landscape, 31, 111–12, 117Latvia, 73, 90, 140Le Maire, Bruno, 121Lewandowski, Janusz, 108Libya, 154, 156, 165Life+, 30lifelong learning, 132, 134Lisbon Agenda (Lisbon Strategy), 10,

14–15, 17, 30, 60, 62, 67–9, 75, 124, 134, 143, 178, 182, 184, 190

Lisbon Treaty see under treatiesLithuania, 73low politics, 32Luxembourg/Davignon Report, 154Luxembourg, 73, 137Lyon Report, European Parliament,

114, 118

Macedonia, 124, 164, 165MacSharry reforms, 178majority

absolute, 48qualified see qualified majoritysimple, 25, 36, 48three-fifths, 45, 49, 51, 84two-thirds, 48, 51

Malta, 73, 105market modernisation, 67, 127 189Martino, Antonio, 31Members of the European

Parliament, 36mid-term review of 2003 60, 105Moldova, 90Multiannual Financial Framework,

2–4, 7, 8, 10–12, 14, 16, 18, 23–5, 28, 34–6, 37, 40, 41, 43, 44–7 51, 52, 54, 56, 60–2, 69,

76, 81–3, 92–4, 96, 103–6, 108, 113–15, 117, 119, 120, 125, 127–9, 142–6, 171–7, 179, 180, 183–92

National Farmers’ Union, 118national parliaments, 5, 16, 25–6,

165, 185negotiating positions, 15, 23–6,

76, 172net

balance, 9, 12–13, 26–7, 37, 62, 140, 146, 184

contributions, 26, 28, 38, 122contributors see net payerspayers, 3–4, 6–13, 15–18, 43, 62,

76–7, 81–5, 94–6, 117, 122, 127, 174, 176, 186, 189–91

receivers see net recipientsrecipients, 3, 9, 17, 62, 76–7, 81–5,

94–6, 127, 174Netherlands, 5, 9, 11, 13, 17, 63,

72–4, 83, 107, 117–18, 127non-discrimination, 131North Atlantic Treaty Organisation,

153, 155–8, 163, 165–7, 169nuclear safety, 182, 185, 189

optimal currency area, 187ordinary legislative procedure, 45,

54–5, 113own resources, 5–7, 9–11, 14, 40–1,

43–4, 46, 51–4, 56, 80–1, 83–4, 90–6, 173–5, 179, 184, 186

traditional, 6, 43

Palestinian Territories, 164passerelle, 45, 87path dependence, 6, 153Poland, 17, 63, 72–4, 120, 127, 137policy entrepreneurship, 60,

62–6, 75–6pollution, 31, 33Portugal, 7, 73, 92, 123, 130, 137pre-accession aid, 182


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212 Index

Preservation and Management of Natural Resources, 69, 105, 183

productivity, 12, 29, 110, 125provisional twelfths, 43, 49, 51, 55,

56, 173public

choice, 80goods, 2–4, 10–17, 19, 24, 29–32,

34, 41, 56, 79–82, 84, 85–9, 94–6, 104, 111–12, 117–21, 125, 147, 152, 169, 174–5, 179, 183–91

procurement, 67, 70spending, 1, 8, 10–14, 26–32, 34,

41, 56, 73–4, 79, 104, 144, 166, 179, 189

public-private-partnerships, 68, 70

qualified majority, 18, 45, 46, 48, 54–5, 82–3, 87, 161, 173, 176

R&D see research and developmentreading, legislative

first, 48, 51second, 84

rebate see UK rebateredistribution, 1, 3, 9, 10–13, 15,

17–18, 33, 42, 51, 79, 88, 95–6, 125, 179, 182, 186–91

red lines, 16, 24, 36–7, 172Regional Competitiveness and

Employment Objective, 135, 140, 145

regional convergence, 147, 176regional development, 12, 18, 42, 144regional policy, 123, 134, 144, 145regions, 1 -2, 7–8, 30, 79, 107, 111,

122–5, 129–30, 133–42, 176–8, 190–1

rejection see vetorenationalisation, 18, 109, 119–20,

176, 190research and development, 2, 4, 10,

12, 17, 63, 67–70, 72–4, 129, 132, 134, 145, 174, 178–9, 184, 186–7, 190

Framework Programme, 60–1, 69–71, 134

reserves, 117, 126, 129, 135, 145revenue, 1, 5–7, 9, 11, 13, 28, 37,

40–6, 62, 73, 80–2, 84, 90, 95–6, 164, 174, 187

Risk Sharing Financing Facility, 69Romania, 73, 90, 124, 127, 137rural development, 70, 103, 105–21,

122, 126–7, 175, 179, 183–4

Sapir report, 144Sarkozy, Nicolas, 118, 157Security and Citizenship, 129, 185side-payments, 8–9, 42, 123, 130,Single Area Payment Scheme, 105Single European Act, 7, 10, 111, 126,

155, 178single market, 7, 11, 30, 67, 134, 178Single Payment Scheme, 105skills see vocational trainingSlovakia, 73, 140Slovenia, 73Smart and Inclusive Growth, 128–9social cohesion, 103, 123–6, 131–2,

145–7, 176social inclusion, 124–5, 132, 146–7social interest groups, 32social policy, 2, 18, 28, 33–7, 105,

125, 131–2, 134, 147, 176Solana, Javier, 158South Africa, 68Spain, 7, 15, 17, 63, 72–4, 108,

118–19, 123, 130, 137, 190Spelman, Caroline, 119, 121spending see expenditurespillover effects, 79Standard & Poor’s, 90statehood policies, 33–4status quo bias, 18, 24, 34, 172St-Malo summit, 156–7structural funds see

Cohesion Policysubsidiarity, 31, 71Sustainable Growth, 105, 126, 128,

133, 185


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Index 213

Sweden, 1, 13, 17, 63, 72–4, 83, 18, 121, 158

tariffs, 5, 6, 9, 43technological development, 2–4, 10,

17, 29, 31, 60–3, 66–77, 115, 134–5, 140, 147, 154, 157, 174, 176, 182, 185, 187, 189–91

timing and sequencing, 38, 46, 172

trans-European networks, 30, 134

transport policy, 2, 30, 132, 134, 140–3, 179, 182–5, 189

treatiesAmsterdam Treaty, 42, 82, 86Lisbon Treaty (Treaty on the

Functioning of the European Union), 1–4, 7–8, 15–19, 34–6, 40–56, 65–6, 75, 77, 79–87, 90, 92, 95, 103, 110, 113, 121, 130, 151, 153–5, 157–60, 162, 168, 169, 173–4, 176–8, 183–6; ratification of, 4, 44, 173

Maastricht Treaty (Treaty on European Union), 65, 86–7, 114, 153, 160, 162–3

Nice Treaty, 82–4, 87Rome Treaty, 110

Treaty Establishing the European Community, 45, 49, 83–4

trilogues, 54Turkey, 124

UK, 3, 6, 11–13, 18, 19, 30, 42, 73, 83, 86, 106–8, 114, 117–22, 127, 143, 153, 156–8, 165–9, 173, 177, 186

‘correction’ see UK rebateUK rebate, 3, 6, 11, 14, 15, 86, 108,

120, 127unanimity, 2, 5, 6, 36, 44, 46, 56,

84–9, 95–6, 173, 177, 186United States of America, 156,

166, 167

value added tax, 5–7, 9, 11, 43–4, 73veto, 4, 6, 12–17, 41–8, 50–6, 86–7,

94–5, 125, 147, 172–3, 186–9, 192

national, 11, 40players, 10–11, 14, 41–56, 173

vocational training, 60, 67–8, 124, 142, 176

water, 30, 111, 175wind energy, 89

Yugoslavia, 155


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