Opinion of the Economic and Social Committee on "Financing the European Union"

(1999/C 138/07)

On 26 January 1999 the Economic and Social Committee, acting under the third paragraph of Rule 23 of its Rules of Procedure, decided to draw up an opinion on "Financing the European Union".

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 3 March 1999. The rapporteur was Mr Vasco Cal.

At its 362nd plenary session (meeting of 24 March 1999), the Economic and Social Committee adopted the following opinion by 105 votes to six, with nine abstentions.

1. Introduction

1.1. The European integration process is not confined to its budgetary aspects and these are not even the main aspects. All participating countries consider that the advantages outweigh the disadvantages, which vary from case to case and over time. Also, the main reasons for enlargement are political and not economic, even though studies show that some countries could benefit more than others.

1.2. The European Union has reached a decisive point in its history. With the completion of the internal market, the creation of the single currency, the strengthening of economic and social cohesion and the accession of central and eastern European countries, the European Union is embarking on a new phase in its development which demands a long-term response.

1.3. The Committee is convinced that the problems of financing the European Union can only be resolved by the application of empirical principles and by putting the common good before considerations of national interest. It calls on all the Member States to adopt a constructive and cooperative approach to this issue, eschewing partisan attitudes and recognizing that the achievement of an equitable and lasting solution is in the best long-term interests of every Member State. The Committee wishes to contribute to this debate by submitting, in section 4 of the opinion, a proposal for the future system of EU financing.

1.4. In its opinion on Agenda 2000(1) adopted at the October 1997 plenary session, the ESC saw the need for a "wide-ranging debate" on the costs and benefits to the various Member States of the system used to finance the Community budget with a view to creating a broad consensus in approving a revision of the financial perspectives.

1.5. The Commission report on the operation of the own resources system, although scheduled for the end of 1999, was published on 7 October 1998. The report allows an analysis of Agenda 2000 and the financial perspectives as a whole, taking account of the questions raised by some Member States about their budgetary imbalances(2).

1.6. Agenda 2000 is one of the key topics for discussion at the European Summit to be held in Berlin on 24 and 25 March, and the ESC feels duty-bound to help the summit to "carry through a politically ambitious exercise commensurate with the building of a more solid, more integrated and more united European Union (...), which has been perceived by many of its citizens as a shared project for the future, and not as an extreme, short-term defence of national interests" (point 4.5 of the above-mentioned opinion).

2. The Commission Report

2.1. As part of the series of inter-linked policy proposals within the framework of Agenda 2000, the European Commission has published a wide ranging review of the operation of the present system of financial resources available to finance the budget of the European Union (COM(1998) 560 final). The review outlines the evolution of the different components in the past decade.

2.2. The object of the review is to better inform the debate about both the adequacy of the present system in making resources available and also the relative merits of the different options for variations, or major changes, in the sourcing of these resources. Since major decisions are under consideration for the main expenditure items in the budget (including the Common Agriculture Policy and the Structural Funds) it is important that the revenue resources should be adequate to meet the commitments.

2.3. The Commission report on the financing of the European Union:

- reviews the merits of the present own resources system, which combines revenue from the Traditional Own Resources, an earmarked levy on VAT revenue and a contribution based on relative GNP totals;

- considers the possibility of new own resources;

- in particular, considers the possibility of a direct payment to the European Union of a VAT related resource;

- reviews the suggestions that the present structure of contributions from some member states puts an unfair burden on them whilst others receive relatively generous treatment (which includes consideration of the mechanism to provide a partial rebate to the United Kingdom).

2.4. As regards Community budget resources, the Commission arrives at the same conclusions as those reached by the ESC in its Opinion on Agenda 2000, namely that "contributions to the Community budget have become more proportionate with national wealth", leading to greater fairness (point 4.4.3 of the opinion). The Commission puts this down to the modifications introduced in 1988 and 1994, in the first and second Delors packages, which led to a greater share of GNP resource within budget contributions as a whole and a relative fall-off in the amount of traditional own resources and VAT (see Graph 1 in the report).

2.5. The Commission restates a qualification which the ESC had made in its earlier opinion and is important in any assessment of the impact of the EU on individual Member States. The ESC opinion pointed out that "the situation as regards benefits is more complex. Expenditure on economic and social cohesion benefits the neediest countries and regions, but expenditure on internal policies is distributed differently and has a regressive impact in cohesion terms. Expenditure on the CAP in particular tends to favour the countries in which this policy has applied longest, and which have a higher aid capitation, although the 1992 reform has reduced this imbalance."

2.6. The Commission acknowledges that, whilst the present own resources system generates a means of financing EU expenditure, the EU does not have genuine "own resources" but depends mainly on transfers from the treasuries of Member States and, therefore, the relationship to citizens of the Union between contributions and benefits is even less transparent than between taxpayers and citizens within a Member State.

2.7. Whilst the Commission draws attention to the lack of genuine financial autonomy for the EU, the report does not develop the debate on whether the Commission, and the Governments of Member States, would wish to see the system of financing the Union made more dependent on revenue collection methods within the competence of the Union and less dependent on transfers from the Member States of funds from their treasuries.

2.8. The debate on the degree of financial autonomy for the Union raises critical issues of principal and operational detail. The discussion stimulated by the Commission on a possible agreement that the Commission, through the institutional procedures of the Community, should have the option to determine a (low) rate of VAT specifically earmarked directly for the Community budget, presumes that the increased degree of financial autonomy and the transparency of the arrangement would be beneficial.

2.9. Despite the technical, conceptual and accounting difficulties in measuring budgetary imbalances detailed in the report, the Commission has attempted to calculate these net balances by various methods (the operating balance method and the method used for UK correction), which, elsewhere in the report, the Commission claims has inhibited transparency in the financial relationships of the Member States and the EU budget.

2.10. As for solving these problems, if a political consensus can be reached, the Commission document sees three possible options which are not mutually exclusive: a more transparent and fairer system of financing, doing away with the correction mechanism in favour of the UK and making general use of the GNP resource; a system of expenditure where the CAP burden would be reduced by partially reimbursing direct aid payments from national budgets and a generalized correction mechanism.

2.11. The report concludes that neither the need for an increase in financial resources, nor the shortcomings of the present system, make it necessary to modify the current Own Resources Decision. This restates the view expressed in Agenda 2000.

2.12. The Commission acknowledges that options to vary the constituents or proportions of the present own resources system are available and could be considered for future implementation but none offers an ideal solution. If the question of budgetary imbalances attracted a sufficient degree of support, decisions on the best and most appropriate options would be needed.

2.13. However, with some anticipation of the impact of the enlargement of the Community, the Commission suggests that the change in the overall demands on the Community budget "would appear to present a change of circumstances so significant as to justify such a major reform".

3. General comments

3.1. As the ESC has already stated in point 4.4.4 of its Agenda 2000 opinion, "the distortions which emerge in calculations of the net balance of contributions to and from the Community budget are not so much a matter of resources (Member States' contributions) as of the relative weight of the various expenditure headings. Agriculture still represents the lion's share (around 50 % of the total) and structural policies account for around a third of the total."

3.2. Both Community revenue and expenditure are determined in the final analysis by the decisions taken by the Council in furtherance of the objectives laid down in the Treaty in fields such as the reform of the CAP, economic and social cohesion and scientific and technological research. The budgetary consequences of these decisions are frequently not apparent straightaway, for they depend on how the decisions are applied in the Member States and Member States' economic structures.

3.3. The compensation mechanism for the United Kingdom was agreed on in 1984 because of the UK's budgetary imbalance. This is due to the UK having a smaller and structurally different agricultural sector, resulting in lower CAP spending, plus the fact that the UK makes a proportionally higher contribution since its share of VAT is relatively higher than its share of total GNP. The rebate mechanism has meant that in recent years the size of the UK budgetary imbalance has fallen from -0,5 % to -0,2 % of GNP. If the same method of calculation is applied to Germany, the Netherlands, Austria and Sweden, it can be seen that they, too, now have a budgetary imbalance of around -0,5 % of GNP. This has prompted their respective governments to request that they, too, should benefit from a rebate mechanism. The truth is that if the UK's rebate mechanism could be phased out, the budgetary imbalances of the main net contributors would be much smaller.

3.4. The simulations presented in Annex 6 regarding the consequences of a generalized correction mechanism based on the current UK model but which makes States contribute to the effects of the mechanism on others but not on themselves show that the United Kingdom would be the most affected in relation to the present situation, where it is the sole beneficiary of the compensation mechanism.

3.5. With regard to the progressivity in budget contributions proposed by Spain, the Commission has also produced simulations for the effects on Member States' contributions. In its analysis the Commission recognizes that the current system of own resources has degressive elements, but considers that the proposal does not make sufficient allowance for the budget's redistributive elements on the expenditure side, especially under the heading of economic and social cohesion.

3.6. The possibility of creating new own resources, so as to give the Union greater financial autonomy vis-à-vis national budgets, has been discussed at length by the Commission. It has presented various options (CO2/energy tax; a modulated VAT tax; excise taxes on tobacco, alcohol and mineral oils; corporate income tax; communications tax; personal income tax; withholding tax on interest income; and ECB seigniorage) and discussed the advantages and disadvantages of each one. The inability to forecast the revenue which would accrue in many of these cases limits their widespread use.

3.7. Another possibility discussed by the Commission was the application of measures provided for in Agenda 2000, in particular the transfer of some of the spending on direct aid under the CAP to national budgets. This measure would lower Community budget payments by about 8 % and might consequently cut Member States' contributions, which would in turn reduce the current budgetary imbalances. Yet another possibility would be to make sure that agricultural spending, which is the largest item of expenditure, takes greater account than at present of the economic weight of each Member State.

3.7.1. Consideration has also been given to the possibility of bringing down farm prices to the level on world markets. This takes no account of the fact that world market prices are also distorted by large-scale support measures in the major producer countries.

3.8. All these options have their limitations and their application poses technical problems. However, the most serious consequence for the future of the European Union is that none of them is capable by itself of solving the current problems or guaranteeing stable and reliable resources within the framework of a fairer, mutually supportive and generally acceptable system which is sustainable in the long term and capable of absorbing the planned accessions.

3.9. The Committee would emphasize that there should be no confusion between the three facets of the current debate: the size of the budget and Community resources, the balance between different Community policies (CAP, structural policies, enlargement etc.) and equity between the Member States.

3.10. In addition, it was important for the Commission to draw up projections for the period 2000-2006 with regard to budgetary balances, for the balances calculated for 1997 and 1999 could be changed significantly in the long term by many of the proposed measures. For example, if the UK's rebate mechanism were to be ended, if the GNP resource were to be used more widely instead of the VAT resource, if part of CAP spending on direct aid were to be transferred to national budgets, or if the monies set aside for the structural funds were to be reduced, the trend in budgetary balances would be much different in 2000-2006 that it has been in the present 1993-1999 period and the greatest differences might be outside those countries which want to benefit from a correction mechanism.

3.11. The ESC would emphasize that the real issue at stake in the budget debate surrounding Agenda 2000 is the burden of enlargement. Given the considerable difference between living standards in the EU and those in the countries of Eastern Europe, it is clear that the cost of enlargement for the EU budget has been seriously underestimated. It is therefore apposite to point out that there is a fundamental contradiction between the objective of enlargement and the insistent demands for EU budget contributions to be cut. The Committee suggests that prior to enlargement, the Council might amend its own resources decision, to improve the apportionment of budgetary expenditure resulting from enlargement.

4. Proposal for the future system of EU financing

4.1. Before the issues of Agenda 2000, the financial perspectives and the system of own resources are settled this year, a clear stance should be taken on financing in the long term. The accessions which are to take place from 2005/2006 provide a historic opportunity for introducing a new system of financing which is fairer and less imbalanced than the present one.

4.2. The principles of the future system must be the subject of an overall political agreement so that the measures to be taken in the short term which must apply until the entry-into-force of the future system do not conflict with the latter and do not make the future debate on the EU's system of financing even more difficult.

4.3. Bearing in the mind the wide range of arguments put forward about the subject of budgetary imbalances, the Committee is in favour of a general regulating mechanism for establishing a framework which takes account of the future system of own resources. Such a mechanism would establish a direct link between national prosperity (expressed in terms of per capita GNP) and the budgetary balances of each Member State. The purpose should be to safeguard the overall level of own resources for enabling the European Union to maintain and extend its role.

4.3.1. The curve which represents the graphical expression of this mechanism could not exceed the limits on budgetary balances.

4.4. The direct relationship between the two variables should not be expressed by a line but by a shaded area around that line so that the correction mechanism comes into play when the net situation in a Member State falls outside the shaded area and deviates considerably from the net situation in the other Member States with the same level of prosperity. The relationship between budget imbalance, measured in relation to per capita GNP and operational budgetary balances requires a formula which allows for year to year variations in budget contributions. Conceptually, the agreed mechanisms should envisage a margin of variation which would be acceptable when averaged over a period longer than one year. The scale of this margin should be sufficient to enable a better balance to be struck between the stability and reliability of the level of revenue and the corrections to be made to budgetary balances when they fall outside the accepted degree of variation. It will thus be possible to avoid generalized corrections every year.

4.5. One technical question which could cause problems in the future is the question of determining spending in each Member State. Many of the budgetary headings do not succeed in providing this information at present. However, as the system would not enter into force immediately, it would be possible to prepare the administrative system accordingly and it would always be possible to consider that certain expenditure such as that resulting from external actions or administrative spending should not be attributed in full.

4.6. An agreement in principle on the future system of financing will also facilitate the approval of various immediate proposals in specific areas, such as the ones considered in the Commission report, insofar as all Member States will be provided with a guarantee that the imbalances and the injustice will not become more pronounced.

4.7. It will also make it possible to make the current system of financing simpler straightaway, e.g. by applying the GNP resource more widely instead of maintaining the complicated calculations about the VAT contribution, or by increasing the deductions made by Member States with regard to traditional own resources, or again by reducing the basis on which the compensation granted to the UK is calculated. These immediate measures would reduce the imbalances in current contributions during the period 2000-2006 and would make the switch to the new system easier.

Brussels, 24 March 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

(1) OJ C 19, 21.1.1998.

(2) Measured in terms of the disparity between contributions to and funding received from the EU budget.