2007-2013: The budget's odyssey

Published on October 17, 2005

Story by

eduardo s. garcés

Translation by:

Rebecca Caulfield

This June, the leaders of the EU member states held a summit in Brussels with the objective of reaching an agreement on the 2007-2013 EU budget, or ‘financial perspectives’ in EU jargon. The meeting was a resounding failure and negotiations are due to begin again later this year under the British presidency of the EU. The probability of reaching an agreement is minimal and, as a result, the president of the European parliament, Josep Borrell, has proposed deciding on just the 2007 budget.

What's it all about?

The 2007-2013 ‘financial perspectives’ is the forecasted EU budget for a period of seven years in which the maximum expenditure limit for each budgetary category is decided. The main beneficiary of EU funding is the Common Agricultural Policy (CAP) which is assigned approximately 45% of the budget. Another 35% is allocated for cohesion policy, in other words, helping poorer member states. The budget for the next seven years will be between €800 billion and €1 trillion, quite a modest figure considering that it represents only 1.14% of the EU's Gross National Income (GNI) and that public spending of the EU member states is between 45% and 50% of the GNI.

Where does this money come from?

The EU lacks the means to finance itself and is dependent on money from member states, whose contributions depend on the size of their economy and their demographic weighting. The 2004 budget - the first since the EU enlarged to include 10 new member states - was €92 billion (11% more than in 2003). The countries that got back less than they put into the budget were Holland (which ‘lost’ 0.44% of its GDP), Sweden (0.33%) and Germany, which was the biggest contributor in absolute terms. The UK and France lost just 0.16% and 0.19% respectively.

The greatest beneficiaries of the 2004 budget were Greece (which gained the equivalent of 3.5% of its GNI), Portugal (3.35%), Lithuania (2.81%), Estonia (2.5%) and Latvia (2.46%). However, the country receiving the largest amount of money in absolute terms was Spain, which gained 2.07% of its GDP.

Why can't they agree?

There are several bones of contention over the budget, which are making any agreement difficult. On average, the new EU member countries which joined last May have a GNI which is approximately 50% less than that of the old members. Whereas when Greece, Portugal and Spain entered the EU, their GNI was equivalent to 65% of the EU average. Put simply, there are now more people and less money to share between them.

Germany, Holland, France, Sweden, Austria and the UK (the six main net contributors to the EU) want the budget to be reduced from 1.14% to 1% of the EU's GNI, i.e. they want to pay less money than they did previously, even though the EU has some major economic shortfalls to address. The European Commission believes that this percentage is insufficient and wants to increase the budget to 1.25%: a difference of €200 billion between the current budget and that suggested by the Commission.

Since 1984, the UK has enjoyed a rebate in its contributions, described by French President Chirac as “The British Cheque”, which amounted to €5.4 billion last year alone. Thanks to this rebate, the UK ends up being the country that contributes the least compared to its GDP but, despite this, the British have said that they would not be willing to make concessions while CAP funding is not reduced. In the other corner, France, as the main beneficiary of CAP funding, wants the 2002 agreement which fixed CAP subsidies until 2013 to be respected. In other words, France does not want to see the CAP suffer any large reductions in the budget.

Spain could go from being the highest net recipient of EU funds to becoming a net contributor before the end of the 2007-2013 period. The introduction of the ten new member states has seen Spanish income increase by 10% compared to the EU average, which is the reason given as to why Spain should miss out on some €40 billion in funding, compared to the 2000-2006 period.

Potential for compromise

The solution lies with Germany (and the other countries opposing an increase in the GDP percentage that should go towards the EU budget) accepting the Commission's proposal to increase the budget to 1.25% of the EU's GDP. In the enlarged EU, which needs more funding than before, it would be paradoxical for the budget to be decreased, rather than increased. The UK should accept that its rebate is no longer valid and France should accept that large CAP cuts are inevitable. Finally, Spain should negotiate the amount of funding it would be willing to lose. Perhaps going from being the main recipient of EU subsidiaries to being a net contributor would be excessive, but there are a range of options between these two extremes. This would be the ideal solution in which everyone ‘loses’ their particular battle, but the EU wins.

Story by

eduardo s. garcés

Translated from Perspectivas financieras 2007-2013: el futuro incierto