Executive Summary
This is the Executive Summary of the Position Paper that is prepared by the Coalition for a Free Europe
[1] as a response to the Communication from the Commission “REFORMING THE BUDGET, CHANGING EUROPE” 112.9.2007 SEC (2007) 1188.
The EU budget is a historical result of political negotiations and trade-offs between member states rather than a well grounded financing of generally agreed pan-European goals. The politicized use of EU funds distorts motivation of market participants, harms free competition, discourages effective allocation of limited resources, creates background for corruption, contributes to higher inflation in recipient countries, raises prices on agricultural goods and primarily brings benefits to interest groups rather than citizens. The EU budget formation faces a Prisoner’s dilemma where each member state would be better off financing common goals. Failing to cooperate and seeking to maximize own benefits, member states end up being trapped in a situation where funds are being used inefficiently. EU budget’s Prisoner’s dilemma may be solved by a mutual agreement to allocate funds for projects that bring mutual pan-European benefit. Any other use of funds should be prohibited as it forces us back to the outcome with the lowest payoffs. The baseline for the EU budget reform must be zero preconceptions regarding the principles, size, revenue sources, policies and measures of the budget.
Present EU budget revenue system is too complex and the application of several revenue streams is poorly justified. VAT and GNI-based revenue streams overlap, causing double taxation of the value added. The EU budget revenue sources must be reformed and built on the following maxims: national contributions ensure democracy; proportionality leads to fairness and neutrality; simplicity and transparency (visibility) increases accountability; low administrative burden leads to effectiveness of payments.
The employment of these principles dictates the following changes on the revenue side:
1) to eliminate VAT-based revenue stream;
2) to rely on member states contributions based on equal proportions on GNI;
3) to diminish the financial role of traditional “own” resources, leaving them as temporary regulatory tool and to move towards deeper liberalization of trade;
4) to abstain from new sources of revenue, such as an “EU” tax. The introduction of such taxes should be banned;
5) to eliminate corrections of payments or rebates.
Policies that are funded from the EU budget are too challenging, too optimistic, too ambitious and thus unrealistic to perform. Policies are incoherent and contradictory, some of them erode competiveness of the markets, so the aims of every policy and their consistency need profound reexamination.
The exit out of the Prisoner’s dilemma lays in the agreement to finance only supranational projects. Given that the single market and economic freedoms bring real and tangible benefit to all EU citizens and all member states, the EU budget should go strictly in line with the goal of implementing and strengthening the common market. And vice versa, no funding is justified if it hampers free movement of capital, technology, goods, services and people.
EU budget spending must be built on the following maxims: EU funds - for EU goals (subsidiarity); goals, not interests, ensure efficiency; financing may bring results, yet redistribution is a result in itself. The application of these principles implies an essential reform (and perhaps abolishment of some) of the current policies.
Cohesion can only be achieved by 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 linking member states.
Competitiveness Policy should create market conditions favorable to free competition. Any engagements in public “competition” projects or publicly subsidized private (profit-seeking) projects are not acceptable. Present Competitiveness Policy includes some programs, such as implementation of big transport and energy projects that improve market conditions; therefore these programs should be included in the prospects of the new budget.
There is hardly any social and economic justification for the Common Agricultural Policy and rural development programs. The investment into creating a “good” CAP is a waste of time and other limited resources, so all efforts should focus on the creation of a sound exit mechanism, abandoning 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 the 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 new questionable goals, such as climate change control and mitigation;
4) to rely on 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 market reforms in non-EU countries;
6) to avoid financing profit-seeking private companies regardless of their region, economic activity or project.
To conclude, only the fundamental reform of the budget, not a reform of the budget’s structure, may change Europe. The size of the EU budget must be decreased if an agreement on common needs or attainable goals is not reached.
[1] Coalition for a Free Europe unites fifteen leading European free market oriented think tanks. It was launched in the middle of 2006. The goal of the Coalition is to offer the EU and local governmental institutions solutions based on individual freedom, responsibility and limited government in the areas of Tax competition, EU budget reform and EU accountability and energy policy. The Coalition members have a long history of cooperation among themselves in different fields of economic policy. Recently the Coalition members raised initiatives on the “Services” directive, Common Consolidated Corporate Tax Base and Excise policy. In 2008 the Coalition will concentrate on Tax competition and EU budget reform issues.
