British Presidency: the sad final act edit

Dec. 24, 2005

The long battle over the EU budget ended last week with an agreement that leaves everything unchanged. It was a rare display of hypocrisy. The horsetrading involved just peanuts for some of the major actors involved in the deal. Governments running yearly budgets of the order of 700 billion euros or more were fighting over a few million Euros. The final result is a six-year, 2007-13, financial package largely concentrated on transfers to agriculture (42 per cent of the budget) benefiting roughly 3 per cent of the EU population. Another 35 per cent of EU spending is allotted to structural funds whose effectiveness is highly controversial.

-->No room was made for the provision of European public goods, such as cross-country infrastructural projects, research and defense, i.e., the type of policies which can be most effectively carried out at the supranational level. A rational allocation of tasks would attribute to the EU spending capacity on policies and projects having relevant spillovers across jurisdictions, and whose provision can achieve significant economies of scale. An EU budget involving such positive sum games could increase together with the enlargement of the Union and its economic integration. But the bulk of EU economic policies will still be, at least up to 2013, a set of zero-sum games involving opaque transfers across jurisdictions. A few Heads of Governments currently understand the current structure of the EU budget. In spite of her first appearance at an EU Summit, Angela Merkel was one of these few and indeed she played a crucial role in the final agreement. Most Governments seem to be interested just in maximizing gross (rather than net) transfers from the EU under the pressure of national lobbies, ministries and local authorities wishing to keep their spending capacity unaltered. Net fiscal positions vis-à-vis Brussels are marginal and not well-defined (there at least a dozen of different ways to estimate the net fiscal positions vis-à-vis Brussels ; Governments can always find one that you like or dislike). This leaves in place a number of mutually offsetting transfers and makes net contributions to the EU budget unrelated to income per capita levels in the Member countries.

Thus, the message that this agreement delivers to the EU citizens is as follows. «Europe is still the same: a bureaucracy running a chaotic set of policies, either ineffective or benefiting a minority of its citizens». And the message given to national policy-makers is no less harmful (for us): «Don't worry, be happy; you can still use Europe as an easy scapegoat when you need to conceal your mistakes».

Overall, it was a sad final act of the British Presidency. Blair raised in June a lot of positive expectations. As the only leader of a major EU country with popular support, he was expected to be a true reformer. But no progress was made on the service directive, which is the most effective way to restore the confidence around the European project. A well-designed service liberalization has the potential to increase markets by 30 to 40 per cent. It would significantly boost European growth. This is a necessary condition to get out of the standstill. The French referendum has left Europe stuck in the middle of the river. It was aimed at providing support to political integration, postponing after the referendum economic integration. It has ultimately blocked political integration while preventing any further economic integration. The Austrian Presidency has already made clear that it will not deal with the service directive. Sometimes the energy to get out of a vicious circle come out at times of «extraordinary politics». Perhaps a better outcome of the Brussels summit last week would have a «no deal» on the budget. It would have forced EU leaders to think more about Europe rather than finding another way to bury their head under the sand.