Metropolitan University Prague, o.p.s.

The European Budget

Martin Novk student number: 19833 word count: 3012

28.11.2014Introduction 3

Structure of the EU budget 4

Fundamental principles of the EU budget 6

Why is there a need for a budget? 7

Size of the budget 7

Contribution to the EU budget 8

Expenditures 10

Accountability of the EU budget - the gap 12

What is next? 13

Conclusion 14

Bibliography 15

2Introduction

European budget, relatively small, but immensely important from the EU perspective. In this essay, I would like to focus on the main four main elements of the EU budget, which I consider the most vital in order to understand the true power of the budget.Firstly I would like to talk about the structure of the EU budget and its division. In the second part I will focus on the fundamental principles of the EU budget and why they have been defined. The third part will be about the size of the budget, which also includes contribution and expenditures. Lastly I will provide some arguments regarding the accountability gap of the EUbudget.

I realise this topic itself includes a very complicated set of rules, norms and bureaucracy, which is hard to maintain. That is why I am presenting here, right after the introduction, an overview of the current situation regarding the EU budget proposal for 2015.

Current overview of the situation

Since November, every EU representative is deals with preparation for the EU budget proposal, this year it was once again very complicated, since each of the institution of the EU wanted a slightly different amount of money for the following year. The two institutions were approx. 6 billion euro apart (140 vs. 146 bil. euro).As a result, on November 28 2014 the European Commission proposed the final draft of the EU budget for 2015, which foresees 141.3 billion Euro in expenditures. This budget must be approved by the EU institutions and member state until December 17.Structure of the EU budget

The EU budget as a unit is structured into 6 main folders, which are closely bound together. These folders are: Administration, Sustainable growth, National resources + Market related expenditures, Natural resources and rural development, Citizenship (security, justice etc.) and expenditures to improve EU position on a global level.If we look at the budget from the financial perspective, it represents just 1% of the Unions wealth. It serves as one of the most important tools in achieving the goals of EU integration.1People sometimes struggle to understand, that the EU budget is not here to pay the administration of the EU, that take up just about 5 % of the budget and this number is falling every year. This money serves for EU subsidies and more the EU needs to improve the life of its people. Every singlecitizen in the EU benefits from these advantages of the EU, such as education programmes, security, environment protection and the common market.Since 2013, the EU budget is focusing on the strategic points presented in the Europe 2020 strategy2, such as economic growth and the fight with unemployment3. Special emphasis is given to improving the work efficiency in the whole EU.In order to understand the expenditures and contributions better, I believe it is necessary to describe the main folders of the budget in more detail.

Sustainable growth

In terms of economic power, the EU, as one of the main actors needs to be an high level economy; that is the main reason, for such a huge investments in the areas of economic competitiveness (economic growth and employment). Roughly around 16 billion Euro is invested annually, excluding the cohesion funds to support SMB4 companies, which are receiving more than40 billion Euro every year.

1 EU Budget 2013: Investing in Growth and Jobs : Pocket Notebook. Luxembourg: PublicationsOffice, 2013. 1.

2 Europe 2020 is the EU's growth strategy for the coming decade.In a changing world, we want the EU to 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, productivity and social cohesion.

3 EU Budget 2013: Investing in Growth and Jobs : Pocket Notebook. Luxembourg: PublicationsOffice, 2013. 2.

4 Smart and Medium business - usually companies up to 200 employeesPreservation and management of natural resourcesIn order to preserve rural economy, tourism and environment, it is necessary to maintain the agriculture contribution on a high level and to keep the sustainable use of lands and forests. In 2013 more than 60 bil. Euro was invested. Huge emphasis is given to the environment and especially to the regulation of emissions5.

Strengthening of the EU in areas such as freedom, security and justice

Its main focus is the promotion of security and freedom, such as: solidarity and management of migration flows, liberty safeguarding and lastly, the principle of innocence presumption. This is deeply connected with a more liberal approach to education and the promotion of international co- operation on non-governmental level.

EU as a global player

In order to stay in the position EU must behave as a global actor, as a unified entity. In 2013 more then 10 billion Euro was invested to promote and support peacekeeping operations as well as the support of the developing countries, especially in Africa6. It is also necessary to mention the progress in terms of Free trade areas in many countries all around the world.

AdministrationEU administration expenditures are estimated around 8,4 billion Euro per year, that is roughly around 5% of the EU budget. In 2010, the EU adopted a plan, which is gradually reducing the staff level and boosting work efficiency.

5 EU Budget 2013: Investing in Growth and Jobs : Pocket Notebook. Luxembourg: PublicationsOffice, 2013. 4.

6 EU Budget 2013: Investing in Growth and Jobs : Pocket Notebook. Luxembourg: PublicationsOffice, 2013. 6.Fundamental principles of the EU budget

In 1992, when the EU was officially established, the EU budget was introduced in its first version. The financial framework was created years before in 1980s, but we had to wait more than13 years to have the true form of the budget with strong and sustainable principles. There was a need for the expenditures to enable the attainment of objective efficiency7.3 fundamental principles of the EU budget

1. SubsidiarityThe most important principle of the EU budget policy is the subsidiarity, this principle limits the powers of the EU as an entity. It allows it to act only in cases, when it is better for the community. If the member state governments have a better position and can contribute more to the community, the EU is not allowed to act at all. It is important to remember, that Common Agricultural policies are surprisingly excluded from this principle8.

2. Additionality

EU financial intervention cannot be a substitute for national or regional funding programs. This especially applies to the cohesion policy. Historically, there were numerous misuse of this financial intervention, but now this serves as a prevention of the 1st line.9

3. ProportionalityWhen we take a look at international law in the EU countries, we can see that the EU cannot really act for its countries. That is thanks to the proportionality principle, because the EU can act only to the extent to achieve its objectives.10

7 Ferrer, Jorge. The EU Budget: The UK Rebate and the CAP Phasing Them Both Out? Brussels: Centre for European Policy Studies, 2007. 3-4.

8 Ferrer, Jorge. The EU Budget: The UK Rebate and the CAP Phasing Them Both Out? Brussels: Centre for European Policy Studies, 2007. 4.

9 Ferrer, Jorge. The EU Budget: The UK Rebate and the CAP Phasing Them Both Out? Brussels: Centre for European Policy Studies, 2007. 4.

10 Ferrer, Jorge. The EU Budget: The UK Rebate and the CAP Phasing Them Both Out? Brussels: Centre for European Policy Studies, 2007. 3.Why is there a need for a budget?

The EU budget is being called self-financed, but that is not exactly true, even the people who say that the EU budget is financed by their own resource are mistaken. The truth is, that the EU budget is of course financed by the member states, who are indirectly contributing to it.The most vital rule is that all the total revenue must equal total expenditures; by this simple calculation, we can see and measure the EU management. The true reason for having a budget like this is that we can actually finance international projects more easily. The EU wants to work as one entity in the future, so there is a need for real international co-operation not only on the field of business, but also education, science, culture, agriculture, and transportation. These are the main factors, that may later influence the economic growth and employment rate, which is the top priority of the current EU strategy.

Size of the budget

Every year, the precise size of the budget is being discussed in the EU Commission, the Council of the EU and the Parliament. There is a rule that the budget must be in-between 1-1,3% of the Unions wealth. When we take that from the theoretic perspective into practise, we can say that every citizen in the Czech republic contributes to the budget by giving the EU 130 Euro and in return receives 330EURO11. When creating the EU budget, there are 3 main steps which are required to complete the process.The first step is the adoption of multi annual framework from the European Parliament, which reflects the financial framework policies decided once every 5 years12. This also allows to establishment of a budgetary ceiling in order to ensure a long-term expenditures plan with some small parts of the budget dedicated for risk coverage.Then the process goes to all the institutions in order to receive their comments and revisions. When the revisions are done, it is consolidated by the commission into the final state13. When thefinal version is presented, it triggers off a normal ratification process. Transparency is required on

11 Wallace, Helen. The Budget." In Policy-making in the European Union, 209-214. 5th ed. Oxford: Oxford University Press, 2005.

12 Wallace, Helen. The Budget." In Policy-making in the European Union, 210. 5th ed. Oxford: Oxford University Press, 2005.

13 Wallace, Helen. The Budget." In Policy-making in the European Union, 211. 5th ed. Oxford: Oxford University Press, 2005.all levels so the whole process is monitored and observed by independent experts, and of course, the member state representatives.

Contribution to the EU budget

We have already mentioned in the previous chapter, that the EU has its own resource, how to finance its expenditures. There are 3 main types of resource, that are being collected by the EUfrom the member states. Most of these are in-direct resources.14

1. Traditional resources15

Consists mainly of custom duties with non-EU states, because as we all know, there are almost no custom duties between the EU member states.

2. VAT16

The Value added tax is a complex percentage rate that is applied to each and every member states VAT revenue. In 2013 it was roughly 12,4% of the EU revenue.

3. GNI (Gross national income)17The largest source of revenue for the EU, in 2013 roughly around 77% and growing. It is a complex percentage rate that is always applied the to the GNI of each member state. The more the income, the more revenue for the EU. Also the revenue flowing into the EU budget reflects the economic prosperity of the states.

14 Wallace, Helen. The Budget." In Policy-making in the European Union, 206. 5th ed. Oxford: Oxford University Press, 2005.

15 "European Union Budget at Glance." - European Bureau of Library Information and Documentation Associations (EBLIDA), 6-8. January 1, 2010. Accessed November 21, 2014. http:// www.eblida.org/news/eu-budget-at-a-glance.html.

16 "European Union Budget at Glance." - European Bureau of Library Information and Documentation Associations (EBLIDA), 6. January 1, 2010. Accessed November 21, 2014. http:// www.eblida.org/news/eu-budget-at-a-glance.html.

17 "European Union Budget at Glance." - European Bureau of Library Information andDocumentation Associations (EBLIDA), 6. January 1, 2010. Accessed November 21, 2014. http://www.eblida.org/news/eu-budget-at-a-glance.html.8

(Source: "EU Budget Flows." Views of the World. January 1, 2012. Accessed December 17, 2014. http://www.viewsoftheworld.net/wp- content/uploads/2012/11/EU2012_BudgetMoneyFlows.jpg.)

As we can see from the chart, the contributions to and from the EU budget are definitely not equal. The rule is that the most powerful states help the less prosperous states, but this liberal rule is starting to become a problem, because these states have gotten used to the fact, that they simply receive much more, than they have to contribute18.It is also important to mention, that states like the UK, Germany, Netherlands etc. have recently received some benefits, because of their great contributions to the EU budget. The best example possible is the UK rebate, negotiated in the 1980s by Margaret Thatcher. This allows the UK to get back around 20% of their contribution to the EU budget. The reason why the rebate was allowed is because in 1980s,most of the EU money was spent on Common agriculture policies

18 "European Union Budget at Glance." - European Bureau of Library Information andDocumentation Associations (EBLIDA), 7. January 1, 2010. Accessed November 21, 2014. http://www.eblida.org/news/eu-budget-at-a-glance.html.9(CAP) and these policies were not needed in the UK, because their agricultural market is much more smaller than French and German.

Expenditures

As we have mentioned earlier, the total size of the EU budget is roughly 1% of GNI, in other words, the wealth of the union states. The money then serves as a tool to improve the everyday life of the citizens of the EU, for example: Erasmus student exchange programme, custom free area, EU subsidies etc19.One of the most important functions of the budget is also the support of small and medium business. This is mostly because the EU wants the SMB companies to access markets more easily. The vital principle of this finance support is that fair market environment is guaranteed. This is also closely bound to the free movement of workers, which is provides the internal and external markets with more specialized workers and gives people more opportunities to choose their job.The real action projects funded by the EU budget are reflecting the current strategy Europe

202020. The budget of the European union is the main factor when it comes to the financing of project and policy domains. This means only a matter, where the member states agreed to act on Union level.The most important outcome of the budget is that it constantly promotes the co-operation between the member states and also lowers the costs of policy implementation, because it is always much cheaper to implement it on the Union level than to wait for each member state to do it on their own. The subsidiarity principle in process is making sure, that the EU will not act, unless themember states are incapable of implementation on their own21.

19 Cipriani, Gabriele, and Belgium Brussels. The EU Budget: Responsibility without Accountability?Brussels: Centre for European Policy Studies, 2010. 5.

20 Cipriani, Gabriele, and Belgium Brussels. The EU Budget: Responsibility without Accountability?Brussels: Centre for European Policy Studies, 2010. 5.

21 "European Union Budget at Glance." - European Bureau of Library Information andDocumentation Associations (EBLIDA), 2. January 1, 2010. Accessed November 21, 2014. http://www.eblida.org/news/eu-budget-at-a-glance.html.10

(Source: "European Union Budget at Glance." - European Bureau of Library Information and Documentation Associations (EBLIDA). January 1, 2010. Accessed November 21, 2014. http://www.eblida.org/news/eu-budget-at-a- glance.html. )

On this chart we can see the distribution of resources within the EU budget. It is obvious, that most of the money is spent on competitive and cohesion policies, which are designed to boost working efficiency and support the growth of employment and economic power. That means that between 2007-2013 more than 86% of the EU budget was spent on cohesion policies, CAP22 and other forms of rural and environmental support.When we compare that to approx. 13% of the budget, which deals with security, administration and more, it is not that disproportionate as it might seen, because cohesion policiesinclude EU subsidies, which every member state is legitimate to draw.

22 wiki

12SpainFranceGermany PolandItalyOthersIn the chart on the left (in billions

13of Euros), we can see which

member states receives the most

out of the EU budget. The highest

13amount of money goes to states which are in a bad economic12 condition or, to the main

82 contributors, to boost their12 economy even more and ensure a10stable economic situation for the upcoming years. One state is not included in this chart and that is the

Source: "EU Budget 2010." Accessed December 19,2014. http://ec.europa.eu/budget/library/biblio/publications/2010/synth_chiffree/syntchif_2010_cs.pdf

UK. Because of the Rebate provided by the EU to the UK.

Accountability of the EU budget - the gapThe accountability or responsibility is probably the biggest problem, when it comes to the EU budget, because in the whole world, people are refusing to learn, that with money comes responsibility. The so-called accountability gap exists, because the EU institutions are not willing to accept the true meaning of the word responsibility. There are 3 main reasons why23.

1. Non-transparent revenue arrangement24Citizens of the European Union are certainly not aware of the fact, that they are paying annually approximately 200 Euro to the EU budget.

23 Cipriani, Gabriele, and Belgium Brussels. The EU Budget: Responsibility without Accountability?Brussels: Centre for European Policy Studies, 2010. 28.

24 Cipriani, Gabriele, and Belgium Brussels. The EU Budget: Responsibility without Accountability?Brussels: Centre for European Policy Studies, 2010. iii.2. EU lacks a set a specific achievements25

For the Eu institutions it is easier to expect lower results, but then the accountability for then is a bigger problem, because nobody wants to take over.3. Accountability on EU level26

The majority of the functions is carried out on the state level, which means that the implementation depends on the national governments. The problem is, that national governments are not directly accountable to the EU and its Commission! That means the Commission has no authority over the national governments and still it is held responsible for the budget implementation.In my opinion, this problem is not being solved properly: we need to distribute the authority over more institutions and divide it into groups. Also the European Parliament should gain some responsibility, since it is the only body that undertakes direct vote, which means it has the highest authority.

What is next?

I believe the next step is a bigger fragmentation of the budget and higher accountability for it. There is a strong need to distribute the responsibilities all across the EU institutions and force them to be accountable for their decisions.I personally believe, that more money should be invested into education, because todays

trend of just have the paper is terrifying in a long-term perspective. There is a chance, that because of this reason, the EU economy will be affected in the future, because the eastern countries with much better educated citizens will overrun us.We also need to make sure that the efficiency of the work will continue to rise. 10 years ago, especially people from the Czech Republic were used to the fact that they worked four hours instead of the regular eight work hours. This is rapidly changing, because companies and their customers will no longer pay for such an attitude towards work. The tertiary sector (services) has experienceda huge boom in the past 25 years, but now, even services are starting to become a commodity, which means, it is all about price right now. We as the EU need to make sure, that we will supportinnovative companies and SMB to ensure future economical competition.

25 Cipriani, Gabriele, and Belgium Brussels. The EU Budget: Responsibility without Accountability?Brussels: Centre for European Policy Studies, 2010. iii.

26 Cipriani, Gabriele, and Belgium Brussels. The EU Budget: Responsibility without Accountability?Brussels: Centre for European Policy Studies, 2010. 28.

13Conclusion

In this essay, I examined the true meaning of the EU budget in terms of union policies, but also from the perspective of the member states. I believe it is necessary to mention that there are good and bad things about the budget, since nothing in our world is perfect. I personally think, that the structure of the budget is stable and logical, which is proved by the long-term stability of the EU. When it comes to contribution and expenditures I believe it is still quite balanced, although I still think that more money should be invested to support innovative and environmental projects.The real problem is the accountability, because there is almost none. European commission is responsible for the implementation of the budget, but there are no real consequences in case it does not meet the expectations. I am suggesting a much wider distribution of accountability to the rest of the EU institutions, especially to the parliament, which is the most democratic body and should really make sure that the money they give the EU is well spend.Although even the EU knows about these issues, the solution is very difficult, for the the bureaucratic apparatus of the EU. The only hope for us is to stay informed about the EU actions and be ready to oppose them.Even though it might seem like an attack against the EU, I actually stand behind most of their actions, because I believe in the idea of one Europe: a union of states, that is strong, prosperous and that protects its citizens.Bibliography

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Ferrer, Jorge. The EU Budget: The UK Rebate and the CAP Phasing Them Both Out? Brussels: Centre for European Policy Studies, 2007. 1-120.

EU Budget 2013: Investing in Growth and Jobs : Pocket Notebook. Luxembourg: PublicationsOffice, 2013. 1-120.

"European Union Budget at Glance." - European Bureau of Library Information and Documentation Associations (EBLIDA). January 1, 2010. Accessed November 21, 2014. http://www.eblida.org/ news/eu-budget-at-a-glance.html.

"EU Budget Chart 2010." January 26, 2012. Accessed November 21, 2014. http://www.theguardian.com/news/datablog/2012/jan/26/eu-budget-european-union-spending.

Wallace, Helen. The Budget." In Policy-making in the European Union, 208-228. 5th ed. Oxford: Oxford University Press, 2005.

Iozzo, Alfonso, and Stefano Micossi. A New Budget for the European Union? Brussels: Centre forEuropean Policy Studies, 2008.

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"EU Budget Flows." Views of the World. January 1, 2012. Accessed December 17, 2014. http://www.viewsoftheworld.net/wp-content/uploads/2012/11/EU2012_BudgetMoneyFlows.jpg.