A Position Paper on the Future of EU Finances

Download the full position paper On the Future of EU Finances

Executive summary

The EU budget has been a result of political negotiations and trade-offs between member states rather than a well-grounded financing scheme of generally agreed pan-European goals. The politicized use of EU funds distorts the motivation of market participants, harms free competition, impairs an effective allocation of limited resources, incentivizes corruption, contributes to higher inflation in recipient countries and brings benefits primarily to particular interest groups rather than to all EU citizens. The process of forming the EU budget faces a phenomenon known in economics as “the Prisoner’s Dilemma” where each member state would be better-off financing common goals. Failing to cooperate on mutual goals and seeking to maximize their own benefits, member states end up in a situation where funds are used inefficiently. The EU budget’s “Prisoner’s Dilemma” may be solved by a mutual agreement that funds should be allocated only for projects that bring mutual pan-European benefit. Any other use of funds should be prohibited as it returns much lower payoffs to the people of the EU. For EU budget reform, there must be a zero baseline in the beginning, with no preconceptions regarding the principles, size, revenue sources, policies and measures of the budget.

The present EU budget revenue system is too complex and the use of multiple revenue streams is inefficient and unjustified. The VAT and GNI-based revenue streams overlap, causing double taxation of the value added component. The EU budget’s revenue sources must be reformed and built on the following maxims: national contributions to ensure democracy; proportionality to encourage fairness and neutrality; simplicity and transparency to create accountability; and a low administrative burden to increase the effectiveness of payments. The only scenario of the Reflection Paper on the Future of EU Finances which reflects the abovementioned maxims is “Radical redesign: Simplification of current system: abolish all rebates, reform or abolish value added tax-based own resource”.

The employment of these maxims dictates the following changes on the revenue side:

  1. to eliminate the VAT-based revenue stream;
  2. to rely on member states’ contributions based on equal proportions of GNI;
  3. to diminish the financial role of the traditional “own” resources, leaving them as a temporary regulatory tool and to move towards deeper liberalisation of trade;
  4. to abstain from creating new sources of revenue;
  5. to eliminate “corrections of payments” or rebates.

Policies that are funded from the EU budget are too demanding, too ambitious and therefore unrealistic. Policies are incoherent and contradictory; some of them erode European competitiveness, so the aims of every policy and their consistency need profound re-examination.

The way out of this “Prisoner’s Dilemma” lays in the agreement to finance only pan-European projects. Given that the single market and economic freedoms bring real and tangible benefits to all EU citizens and to all member states, and that this was the major aspiration for founding the EU, the EU budget should be strictly in line with the goal of implementing and strengthening the common market. And vice versa, no funding is justified if it hampers the free movement of capital, technology, goods, services and people. The current situation of the budget is a result of a gradual departure away from the original values of the Common Market behind the EU’s foundation.

EU budget spending must go in line with the following maxims: EU funds for EU goals; goals, not interests of particular groups, ensure efficiency; financing may bring desired results, yet redistribution is a result in itself. The application of these principles implies an essential reform (and perhaps the abolition of some) of the current policies.

Cohesion can only be achieved by the removal of regulatory barriers to flexibility and free movement of factors of production within the common market, as well as the improvement of the physical conditions to free movement; thus, EU funds should focus on infrastructure that links member states together.

Competitiveness policy should create market conditions conducive to free competition. Any public “competition” projects or publicly subsidized private (profit-seeking) projects are not acceptable. Competitiveness Policy includes some programs, such as the implementation of pan-European transport projects that improve market conditions; therefore these programs should be included in the future finances.

There is hardly any social and economic justification for the Common Agricultural Policy and rural development programs. The investment into creating a “good” CAP (which makes up 37% of 2014-2020 budget) is a waste of time and other limited resources because it is in all aspects unjustifiable: the member states have different problems, however the common policy applies the same mechanisms of subsidies to all states; the system itself is rigid and cannot respond to changing global conditions; it does not bring mutual benefits, yet leads to mutual problems and costs. Therefore all efforts should focus on the creation of a sound exit mechanism from this destructive use of public resources.

On the EU budget expenditure side there is a crucial need for the following actions:

  1. to create a sound exit mechanism from CAP and rural development policies and annually reduce contributions to the EU budget by the amount previously allocated to these policies;
  2. to redesign the Cohesion Policy, focusing it on removal of barriers to flexibility of the markets and free movement of factors of production inside the EU market and improvement of infrastructure linking member states;
  3. to abstain from financing highly uncertain goals, such as climate change control and mitigation, Galileo, etc.;
  4. to rely on the private financing of innovation, research and development and not to increase present EU budget funding for these purposes;
  5. to supplement the Union’s external actions with the promotion of free market reforms in non-EU countries;
  6. to avoid the financing of profit-seeking private companies regardless of their region, economic activity or project;
  7. to avoid unrealistic and potentially harmful large scale investment programs such as the Juncker’s Investment Plan.

To conclude, only a fundamental budget reform, not a reform of the budget’s structure, may change Europe. Accordingly, the EU budget must be reduced if an agreement on common needs or attainable goals is not reached.