Opinion of the Economic and Social Committee on 'Financing the European Union'
Date: 1999-03-24
Institutions: European Economic and Social Committee
Subjects: EU financing, Member States' contribution, financing method, gross national product, own resources

18.5.1999

EN

Official Journal of the European Communities

C 138/19

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.

The European Union has reached a decisive point in its
1.2.
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.

In its opinion on Agenda 2000 (1) adopted at the
1.4.
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 Com-
mission 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.

(1) OJ C 19, 21.1.1998.

(2) Measured in terms of the disparity between contributions to and

funding received from the EU budget.

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The Commission report on the financing of

2.3.
European Union:

the

— 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;

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.

— 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 Com-
mission 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.’

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

the Community budget, presumes that

the Commission,

that

2.9.
Despite the technical, conceptual and accounting diffi-
culties 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 mech-
anism.

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.

2.6.
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.

2.12.
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.

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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’.

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. General comments

As the ESC has already stated in point 4.4.4 of its
3.1.
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 deter-
mined 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
the UK’s budgetary
was agreed on in 1984 because of
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
it can be seen that they, too, now have a
and Sweden,
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
the UK’s rebate mechanism could be phased out,
budgetary imbalances of the main net contributors would be
much smaller.

The simulations presented in Annex 6 regarding the
3.4.
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 contri-
butions proposed by Spain, the Commission has also produced
simulations for the effects on Member States’ contributions. In

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 poli-
cies, 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

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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
it has been in the present
1993-1999 period and the greatest differences might be
outside those countries which want to benefit from a correc-
tion mechanism.

in 2000-2006 that

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 Com-
mittee suggests that prior to enlargement, the Council might
amend its own resources decision, to improve the apportion-
ment 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 per-
spectives 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.

The principles of the future system must be the subject
4.2.
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.

the subject of budgetary imbalances,

Bearing in the mind the wide range of arguments put
4.3.
forward about
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

Brussels, 24 March 1999.

own resources for enabling the European Union to maintain
and extend its role.

The curve which represents the graphical expression
4.3.1.
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.
imbalance, measured in
The relationship between budget
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 correc-
tions 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.

It will also make it possible to make the current system
4.7.
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 contri-
butions during the period 2000-2006 and would make the
switch to the new system easier.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI