Reform of the own-resources system and net positions in the EU budget : working paper.
Date: 2002-06-03
Institutions: Directorate-General for Parliamentary Research Services
Subjects: Community budget, financing of the EU budget, fiscal policy, monetary policy, own resources

Directorate-General for Research

Division for Budgetary Affairs, Civil Liberties and Internal Affairs,
Rules of Procedure, Petitions and Comparative Law

Working document

REFORM  OF  THE  OWN-RESOURCES  SYSTEM
AND  NET POSITIONS IN THE EU BUDGET

BUDGET SERIES-100
EN

DA    DE    EL    EN    ES    FR    IT    NL    PT    FI    SV

This publication is available in German, English, French and Spanish.
A summary may be obtained in any of the other official languages.

AUTHOR: Professor Klaus Gretschmann
Rheinisch-Westfälische Technische Hochschule, Aachen

Academic assistants: Stefan Flüchter, Dipl.-Kfm.
Heike Spaderna, Dipl.-Kff.

Desk officer: Thomas Böhne
Directorate B - SH 6/66

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Tel. (00352) 4300-22470
Fax  (00352) 4300-27718
E-mail : tboehne@europarl.eu.int

PUBLISHER: European Parliament
Directorate-General for Research - Directorate B
Division for Budgetary Affairs, Civil Liberties and Internal 
Affairs, Rules of Procedure, Petitions and Comparative Law
L-2929 Luxembourg

The views expressed in this document are not necessarily those 
of the European Parliament.

Use and translation for non-commercial purposes are authorised, 
provided that the source is acknowledged and the publisher
is informed beforehand.

Manuscript completed in October 1998.

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Directorate-General for Research

Division for Budgetary Affairs, Civil Liberties and Internal Affairs,
Rules of Procedure, Petitions and Comparative Law

Working document

REFORM  OF  THE  OWN-RESOURCES  SYSTEM
AND  NET POSITIONS IN THE EU BUDGET

BUDGET SERIES-100
10-1998
EN

DA    DE    EL    EN    ES    FR    IT    NL    PT    FI    SV

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List of abbreviations
List of tables
List of diagrams

0.

1.

2.

The basic problem today

INTRODUCTORY REMARKS
0.1
0.2 Criteria for a rational and efficient EU system of revenue raising and funding
0.3

Structure and aim of the present study

INVENTORY OF UNRESOLVED QUESTIONS, PROBLEMS AND SUGGESTED SOLUTIONS IN
TERMS OF FINANCIAL THEORY AND EUROPEAN INTEGRATION POLICY
1.1

Starting point for a future European system of financial planning: Agenda
2000

1.2 Consensus on reform or divergence of interests: the burdens debate
1.3

The  significance,  limitations  and  efficiency  of  the  existing  own-resources
pillars 

CRITICAL APPRAISAL OF THE COMPUTATION OF NET POSITIONS
2.1
2.2

Systematic reservation I: statistical categorisation problems
Systematic reservation II: the limited validity of net balances in terms of the
utility of EU membership
2.3 Net balances and beyond

3.

CALCULATION OF NET POSITIONS WITH SPECIAL REGARD TO TRADE-DRIVEN FISCAL

EFFECTS

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4.

ANALYSIS AND COMPARATIVE EVALUATION OF THE MAIN REFORM AND ADJUSTMENT

IDEAS ON THE EXPENDITURE SIDE

4.1 Development of EU expenditure
4.2 Description and evaluation of potential savings
4.3

Excursus: Arguments for a longer-term radicalisation of reform strategies in
the domain of the Structural Funds

5.

6.

ANALYSIS OF THE MODEL ESTABLISHED BY THE FINANCE MINISTERS OF THE GERMAN
FEDERAL STATES AND OF THE CAPPING MODEL ESTABLISHED BY THE GERMAN FEDERAL
MINISTRY OF FINANCE
5.1
5.2 Analysis and evaluation

Presentation of the models

The status quo

ANALYSIS OF PROPOSALS FOR REFORMS ON THE REVENUE SIDE
6.1
6.2 Aims, methods and limitations
6.3 New ground I: the acceptance factor
6.4 Development of the Member States’ tax ratios as a basis for discussion of

the scope for political consensus

6.5 Qualitative and quantitative assessment of proposals for reforms in the

domain of the Union’s own resources

6.6 New ground II: a European Tobin tax?

7.

RESULTS, CONCLUSIONS, RECOMMENDATIONS

Appendix
Bibliography
About the authors

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ABBREVIATIONS

CAP

Common agricultural policy

CEEC

Central and Eastern European countries

EAGGF

European Agricultural Guidance and Guarantee Fund

EC

ECB

European Communities

European Central Bank

ESCB

European system of central banks

EU

GDP

GNP

PPP

TOR

VAT

European Union

Gross domestic product

Gross national product

Purchasing-power parity

Traditional own resources

Value-added tax

WTO

World Trade Organization

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TABLES

Table 1:

Agenda 2000: new financial framework for the period 2000-2006

Table 2:

Cost estimates for enlarging the EU to include Central and Eastern
European countries

Table 3:

Per capita GDP at market prices, adjusted to take account of the unofficial
economy

Table 4:

Percentage of Member States’ contribution to the own-resources pillars and
correlation with per capita GDP (prosperity indicator)

Table 5: Member States’ net positions from 1992 to 1997 (in m.ecus)

Table 6:

Volume and structure of total receipts for the 1997 financial year

Table 7:

Breakdown of EU receipts by Member State for 1997

Table 8:

Volume and structure of total expenditure for the 1997 financial year
compared with 1996

Table 9:

Exports from new Member States before and after accession to the EU

Table 10:

Intra-EU exports as a percentage of global exports before and after
accession to the EU

Table 11: Ratio of total exports after EU accession to notional total exports in the

event of non-accession

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Table 12:

Increase or decrease in exports and tax revenues as a result of EU
membership

Table 13:

"Corrected" net positions

Table 14: Own-resources ceiling and actual development

Table 15: Expenditure development in the EU budget

Table 16:

Impact of partial (75%) grants under the CAP (year 2006 in m.euros and in
percentages of GNP at current prices)

Table 17:

Impact on net balances of the model established by the finance ministers of
the German federal states (in m.ecus) 

Table 18:

Impact on net balances of the German Federal Ministry of Finance capping
model (in m.ecus)

Table 19: Taxation preferences

Table 20: Taxation as a percentage of GDP in the EU

Table 21: Taxation structures and taxation as a percentage of GDP in the Member

States

Table 22: Comparison of corporation-tax burdens in the 15 EU Member States

Table 23: Redistribution of newly created money

Table 24: Comparison of the burdens of tobacco, wines and spirits duty in the 15 EU

Member States

Table 25: Comparison of interest and capital-gains tax burdens in the 15 EU Member

States

Table 26: Ranking of Member States in terms of the basis of VAT assessment as a

percentage of GDP

Table 27: Comparison of CO /energy tax burdens on the 15 EU Member States

2

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Table 28: Ranking of EU Member States in terms of income and property taxes as a

percentage of GDP

Table 29: Comparison of the burden of taxes on communications and transport in the

15 EU Member States

Table 30: Ranking of potential sources of Union revenue: results of four studies

Table 31: Annualised foreign interest rates necessary under the Tobin tax to be
equivalent to 4% interest earnings in the home currency 

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DIAGRAMS

Fig. 1:

Fig. 2:

Fig. 3:

Fig. 4:

Fig. 5:

Expenditure structure of the EU budget for 1998 (in bn ecus)

Structure and development of the Union’s own resources (in bn ecus)

Taxation as a percentage of GDP in the EU, 1980-1996

Comparison of tax revenue and GDP, 1996

Tax structure in the Member States of the EU, 1996

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0.

Introductory remarks

0.1

The basic problems today

The discussion about the finances of the European Community and the European Union has been
a running topic since the dawning of European integration. First of all, adequate resources are
needed to perform genuinely European tasks; secondly, it is a fundamental principle of modern
democracy that Parliaments have the power to approve or reject the budget; thirdly, conflicts of
national  interests  can  be  solved  by  means  of  financial  ’deals’,  i.e.  compensatory  payments;
fourthly, compensation often has to be paid to those who stand to lose from integration and,
fifthly,  additional  resources  are  needed  whenever  European  integration  is  intensified  and
whenever the Union is enlarged.

Against this background it is hardly surprising that a complex web of liabilities, of expenditure,
revenue and redistribution items, has developed, often as unintended side effects of planned
European and international decisions taken in pursuit of a financial constitution. Deals, rather
than ideals, have characterised the emergent financial structures of the EU. The result has been
a mixture of groundwork and patchwork.

1

This situation has certainly never been entirely satisfactory - whatever the European Commission
might say  - and as we approach the new millennium, reforms have become imperative. We need
a financial constitution for the EU, with a reformed system of funding from the Union’s own
resources and a reformed expenditure structure, for the 21st century. The challenges are legion:
enlargement to the east, a common foreign and security policy, internal security,  economic and
monetary union,  global competitiveness, the need for convergence and cohesion, areas in which
the European economy needs to be brought under control and many other challenges make
increased expenditure indispensable. Accordingly, more resources will be required from the
Member  States.  If  consensus  cannot  be  achieved  and  if  economic  growth  coupled  with
restrictions on the supply side does not produce adequate expenditure and funding margins,
efficiency savings will have to be made by restructuring both the expenditure and the receipts
side of the budget.

2

At the same time, in view of the diminishing popularity of European unification in many Member
States, it is important to discuss the volume of the EU budget and the distribution of the cost of
funding it, not least in terms of what the European public are prepared to accept. The potential
impact of the frustration that arises from excessive net liabilities or from inadequate net benefits
has to be minimised; efforts must be made to create the best possible redistribution structures on
a non-national basis.

1

 In its 1998 report on the financing of the European Union (see bibliography), the European Commission regards the
existing system of Member States’ contributions as satisfactory. There is no immediate need, it says, to revise the system.
The defects examined in the report did not of themselves warrant any change in the decision on the resources contributed
by the Member States.

2
 See the 1992 EC Commission report, Stable Money: Sound Finances.

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To borrow a phrase from E. Blochs, this will be the simple solution that is difficult to achieve,
a fact that is underlined by the intertwining of national and EU finances at a time when finance
is in short supply and when spending cuts and fiscal straitjackets are the order of the day. In other
words, any additional transfer of resources to the EU will leave gaps in national budgets. This
is tantamount to an erosion of national fiscal sovereignty and would stir up the simmering issue
of the fiscal equivalence of tasks and funding at and between different fiscal levels. This issue
has never been resolved. 

0.2 Criteria for a rational and efficient EU system of revenue raising and funding

The fundamental question of the financial constitution that would be appropriate for an entity
such as the EU is difficult, if not downright impossible, to answer, for the approach to the fiscal
aspect of European integration fluctuates between the supranational and the intergovernmental;
this vacillation is occasionally described as a productive ambivalence, because it leaves a margin
for interpretation, thereby precluding conflicts about the ’right’ choice of model. So there is no
clear answer to questions such as that of the tasks which the EU should perform in order to
complement or replace the efforts of the Member States or whether the EU should have its own
fiscal jurisdiction and tax-raising powers.

As a result, instead of developing and discussing rational systems, the usual practice is to pursue
a consequentialist line of argument, identifying the effects of changes to the existing system and
judging them by their acceptability in the eyes of the various vested interests.

Be that as it may, a few questions should be asked with all due brevity at this point, by way of
an alternative agenda, so to speak, about some of the systemic problems inherent in the present
financial constitution of the EU. To that end, in items (a) and (b) below, we present some criteria
for a rational revenue system.

a.

1.

2.

3.

4.

Some key problems of EU funding

The allocation of tasks is not clear-cut, responsibilities overlap and the allocation system
has developed spontaneously. The subsidiarity principle is something of an empty phrase.

The allocation of financial resources is not task-related but rather tends to be determined
by the shortage of resources and by general distrust, with the European Parliament being
denied the right to decide autonomously on the approval or rejection of the budget. No
credit mechanisms are available, the fees and contributions budget is limited, and the
contribution  of  tax-based  resources  by  the  Member  States  is  based  on  a  single-track
structure (VAT only).
The correspondence principle is violated, because there is no link between responsibility
for raising revenue and responsibility for deciding how it should be spent. Voters and
taxpayers have no means of controlling expenditure. One result of this is a tendency to err
on the side of excessive expenditure.

An imbalance has developed in terms of the beneficiaries of EU expenditure; a north-south
resource transfer tends to predominate, which is perceived to be unfair.

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5.

Public acceptance of the EU system of budgetary resources and finance is diminishing
sharply.

In the light of these inadequacies, Henke (1997) formulated the following criteria for a rational
EU national-resources system 

(b)

Rational criteria for a revenue system

1.

a.
b.
c.
d.

2.

a.
b.

3.

a.
b.
c.

4.

Economic criteria

C consideration of national capacities (proportionality)
C availability for interregional redistribution (progressivity)
C availability for the promotion of stability
C avoidance of distortions of competition (external cross-border effects)

Legal criteria

C an ’own-resources’ system to comply with Article 201 of the EC Treaty
C should the federal principle of mutual guarantees also apply in the EU?

Integration criteria

C greater (revenue-raising) autonomy for the EU
C greater solidarity within the Community
C quest for consensus in matters that are not politically controversial

Technical criteria

C sufficient and sustainable earning capacity (volume of the relevant receipts)
C equitable taxation (simple levying)
C little need for harmonisation,
C minimal impairment of national fiscal flexibility
C noticeability/perceptibility
C transparency and simplicity (political obviousness)

These criteria only provide a rough template, which can be used to assess existing financial
structures as well as reform ideas.

0.3

Structure and aim of the present study

After  compiling  an  inventory,  from  the  points  of  view  of  financial  theory  and  European
integration policy, of unanswered questions, unresolved problems and untried solutions, based
primarily on the European Commission initiative Agenda 2000 and the burdens debate as the
foundation stones for future reform efforts (section 1), we then turn to our first substantive
priority, a critical appraisal of the way in which the net positions of the EU Member States are

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calculated. In this we distinguish between statistical categorisation problems on the one hand,
paying particular attention to the Rotterdam-Antwerp effect, and fundamental problems regarding
the reliability of net balances as a measure of the utility of EU membership (section 2).

One of the early highlights of the study is the first-ever calculation of the net position for each
of  the  EU  Member  States  in  which  special  account  is  taken  of  the  fiscal  effects  of  EU
membership over and above direct payments to and from Brussels, namely the benefits derived
from foreign trade (section 3). In this innovative approach, we develop an integration factor, on
the basis of which we compute the additional volume of exports ascribable to EU membership;
we  then  multiply  the  result  by  the  average  tax  rate  in  the  country  in  question  to  obtain  the
additional tax revenue. In the final step, this integration-induced change in the national tax yield
is incorporated into two alternative net-position computations.

In the fourth section we carry out an analysis and a comparative evaluation of the main reform
and adjustment ideas relating to the expenditure side. As well as describing and assessing the
potential scope for savings these ideas offer, we also take time out to examine the arguments for
a more radical approach to reform of the Structural Funds in the longer term. 

The next part of the study, section 5, is devoted to a comprehensive analysis and evaluation of
the capping model devised by the German Ministry of Finance and the model created by the
finance ministers of the German federal states. The strengths and weaknesses of both models are
analysed in detail.

A second highlight is the analysis in section 6 of the proposed reform of the receipts side, in
which particular attention is focused on the distribution of burdens. A brief examination of the
status  quo  and  the  theoretical  and  empirical  background  -  aims,  methods,  constraints,  the
acceptance factor and the development of taxation and similar charges as a percentage of GDP
-takes us to the heart of this section, in which we present our own quantitative and qualitative
evaluation on the proposed reforms of the arrangements governing the EU’s own resources. We
examine the following potential means of generating these resources: 

(a) income tax (surcharge),
(b) taxation of interest at source,
(c) corporation tax, 
(d) VAT (percentages), 
(e) excise duty on tobacco, wines and spirits, 
(f) central-bank profits, 
(g) environmental taxes, 
(h) taxation of communication and transport services.

Our analysis is based on the work of Begg (1997) but goes further, laying particular emphasis on
aspects and arguments that were not addressed, or received insufficient coverage, in the Begg
study. What especially distinguishes our work from previous studies is its explicit assessment of
the effects of the various proposals on the distribution of burdens among the Member States.
What makes this especially desirable is the fact that a political and economic discussion of the
pros and cons of individual proposals is scarcely possible without a comparative analysis of the

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Member States’ burdens and ultimately of their net gains and losses. To complete this section,
we discuss the advantages and disadvantages of introducing a European ’Tobin tax’ in the context
of current political and economic developments.

The last section of our study sums up our main findings and draws the necessary conclusions
from them as well as making some cautious recommendations.

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1.

Inventory of unresolved questions, problems and suggested solutions
from the points of view of financial theory and European integration
policy

The current discussion regarding the future financing of the EU is largely determined by two
closely interrelated factors. The first is the establishment of the amount of funding that the Union
will require in the coming years in order to meet its responsibilities. At the present time, the
necessary volume of funds would seem to be chiefly determined by the potential cost of the
planned enlargement to the east. The enlargement of the EU by up to eleven Central and Eastern
European countries is primarily influenced by the amount of resources that can be activated in
the new Member States by means of the budgetary policies of the EU.

The second factor at the heart of the discussion is the distribution issue, i.e. the distribution of
financial burdens among the Member States. The net contributors are calling for financial relief,
which meets with outright opposition from the net recipients. The latter fear that the planned
eastward enlargement alone will reduce their net incomes and therefore vehemently oppose any
further redistributions. It will be very difficult to achieve a consensus on the basis of these
divergent interests (Walter, 1996).

The end of 1999 sees the expiry of the present agreements on the receipts and expenditure of the
European  Union.  That  is  reason  enough  to  initiate  extremely  thorough  preparations  for  the
creation of the financial framework for the period 2000-2006, with due consideration to the
matter of the future volume of financial resources and the distribution issue. The thinking of the
European Commission on the future funding of the EU was recently set out in the framework of
Agenda 2000 (European Commission, 1997). The decision on the financial framework, however,
will not be taken by the European Council until it has consulted the European Parliament and is
dependent on unanimous adoption by the Member States. There are other factors involved in this
discussion process:

a.

b.

c.

d.

the report presented by the European Court of Auditors in June 1998,

the Commission report of October 1998 appraising the own-resources system,

the report of the European Parliament Committee on Budgets on the own-resources system
(Haug, 1998),

numerous studies, arguments and suggestions presented by the Member States with a view
to improving their respective net positions.

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1.1

Starting point for a future European system of financial planning: Agenda 2000

In accordance with the financial forecasts (’financial perspectives’) for the periods 1988 to 1992
and 1993 to 1999, the European Commission presented its proposals on medium-term financial
planning for the period from 2000 to 2006 in Agenda 2000 with a view to covering the cost of
eastward enlargement, reform of the CAP and reorganisation of the Structural Funds.

In Agenda 2000, the European Commission recommends the preservation of the ’own-resources
ceiling’ laid down in the current financial perspective, in other words the restriction of receipts
to a maximum of 1.27 per cent of the total gross national product of the EU Member States,
which automatically sets the same limit on EU expenditure.  The Commission believes that this
volume of financial resources will be enough to fund not only its present activities but also the
planned eastern enlargement. The financial framework presented by the European Commission
for the period from 2000 to 2006 is based on the following premises:

2

a.

b.

c.

d.

e.

f.

accuracy of the economic forecasts presented in May 1997,

accuracy of the implicitly assumed average GDP deflator of 2% per annum after 1998,

continuation of relatively small increases in the Union budget, ensuring that the own-resources ceiling is
not attained and that an expansion margin remains,

growth rates of 2.5% of GNP for the 15 Member States and 4% for the Central and Eastern European
applicant countries; this is essential if the necessary addition of 10 billion euros is to be achieved,

accession of five Central and Eastern European countries (CEEC) and Cyprus in the year 2002, and

substantive reform of agricultural and cohesion policies, which may limit the increase in the cost of pursuing
these policies on the accession of the CEEC.

2

 The prohibition of credit facilities laid down in the EC Treaty remains in force.

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Table 1:

Agenda 2000: new financial framework for the period 2000-2006

Agricultural guideline

Structural operations

- Structural Funds (EU-15)

- Cohesion Fund (EU-15)

- New Member States

- Pre-accession aid

Internal policies

External action

Administrative expenditure

Reserves

Appropriations for commitments

Appropriations for payments

GNP

Appropriations for payments 
(% of GNP)

1999

2000

2001

2002

2003

2004

2005

2006

in bn. euros/ecus at 1997 prices

43.3

36.1

31.4

2.9

0.0

0.0

6.1

6.6

4.5

1.2

97.8

92.5

7 400

1.25

44.1

35.2

31.3

2.9

0.0

1.0

6.1

6.6

4.5

1.0

97.5

94.1

7 589

1.24

45.0

36.0

21.1

2.9

0.0

1.0

6.4

6.8

4.6

1.0

99.8

96.6

7 790

1.24

46.1

38.8

31.3

2.9

3.6

1.0

7.3

7.0

5.1

0.8

105.1

101.1

8 287

1.22

47.0

39.8

30.3

2.9

5.6

1.0

7.5

7.1

5.2

0.5

107.1

103.9

8 516

1.22

48.0

40.7

29.2

2.9

7.6

1.0

7.7

7.3

5.3

0.5

109.5

106.5

8 730

1.22

49.0

41.7

28.2

2.9

9.6

1.0

7.9

7.5

5.4

0.5

50.0

42.8

27.3

2.9

11.6

1.0

8.1

7.6

5.5

0.5

112.0

114.5

108.9

111.4

8 926

9 131

1.22

1.22

Own-resources ceiling (% of GNP)

1.27

1.27

1.27

1.27

1.27

1.27

1.27

1.27

Source: European Commission, 1997, p. 104.

Table 1 shows that the entire expenditure block in terms of appropriations for commitments will
increase  by  17%  to  114.5  bn  euros  between  1999  and  2006.  By  contrast,  the  Commission
anticipates a considerably more rapid rise in appropriations for payments, forecasting a 20.5%
increase to 111.4 bn euros. 

As far as the development of the individual expenditure categories is concerned, the Commission
is known to be pursuing the following aims:

a.

Agricultural expenditure: On the basis of the agreed agricultural guideline of 1988, the
rate of increase in the agricultural expenditure of the EU must not exceed the European
GNP  growth  rate.  Accordingly,  the  table  shows  an  increase  of  some  15.5%  in  the
agricultural guideline between 1999 and 2006, which is equivalent to about 66% of the
projected  GNP  growth.  After  2003,  the  Commission  expects  to  have  some  a  safety
margin  below  the  agricultural  guideline  as  a  result  of  a  divergence  between  the
expenditure  ceiling  shown  in  the  table  and  the  actual  development  of  agricultural
spending (European Commission, 1997). The agricultural expenditure of the applicant
CEEC  is  divided  into  pre-accession  aid  of  0.5  to  0.6  bn  ecus/euros  per  annum,
supplementary  expenditure  on  market  organisation  (1.1  to  1.4  bn  ecus/euros)  and
modernisation aid (0.6 to 2.5 bn ecus/euros) to replace the pre-accession aid, which is to
be scaled down in the course of time and will benefit only a small number of States.
There is no provision for compensatory payments to the applicant countries.

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b.

c.

d.

e.

Structural policy: The financial perspective limits expenditure on structural policy to
0.46% of aggregate GNP, which represents a continuation of the current arrangement.
This means that between 2000 and 2006 an increase of 18.6% of the 1999 rate is planned.
In other words, for the period until 2006 a cumulative amount of 275 bn euros will be
available; this figure includes 210 bn euros for structural policies and 20 bn euros for
cohesion  policies.  This  projection  is  equivalent  to  a  13%  reduction  in  the  resources
earmarked for the Structural Funds compared with the allocation for 1999. The remaining
amount  of  45  bn  euros  is  available  for  pre-accession  aid  to  the  CEEC  that  will  be
acceding to the EU.

Internal policies: The development of expenditure on internal policies is subject to two
different motivating factors. On the one hand, there is the aim of concentrating resources,
and  on  the  other  hand  there  is  the  need  to  give  priority  to  programmes  designed  to
promote  economic  growth,  employment  and  technological  development  (European
Commission, 1997). For these reasons, the allocation for internal policies is set to rise by
29.5% by the year 2006.

External actions: The Commission plans to increase expenditure under this heading by
one billion euros to 7.6 bn euros, which represents a rise of about 15.2%.

Administrative expenditure: The Commission anticipates an increase of about 22% in the
cost of administration as a result of factors such as the employment of staff from Central
and  Eastern  European  countries  and  the  need  to  engage  the  services  of  additional
interpreters and translators (European Commission, 1997).

It may be assumed that the Commission’s plan to limit the Union’s own resources to 1.27% of
aggregate GNP will prove very difficult to implement and that its feasibility will depend entirely
on whether the proposed agricultural and structural policy reforms can be sold to the Member
States.

A  direct  comparison  of  Agenda  2000  with  various  other  analyses  of  the  cost  of  eastward
enlargement reveals that most studies proceed on the assumption that eastward enlargement will
cost more than the Commission has estimated and that the planned financial framework is not
entirely tenable (Axt, 1997; Friedmann, 1996; Gretschmann, Heitzer-Suša and Buchegger, 1998),
as the following table shows:

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Table 2:

Cost estimates for enlarging the EU to include Central and Eastern European countries 

Agricultural
policy 
in bn euros

Structural
policy 
in bn euros

Countries covered

Source

Remarks

45

4 Višegrad States(1)

Guhl/Marty, 1996

(annual) based on the year 2000

4 Višegrad States,
Slovenia

Weise, 1996

33.0-34.2

14.9-21.3

 10 associated States(2)

European Commission,
1995

4 Višegrad States,
Bulgaria, Romania

4 Višegrad States,
Bulgaria, Romania

Centre for Economic
Policy Research (CEPR),
1992

Stehn, 1994

4 Višegrad States

Baldwin et al., 1997

(annual) period 2000-2010, status quo
scenario (net accession costs equivalent to
30-37% of EU budget)

(annual) period 2000-2010, 'compromise'
reform scenario (net accession costs
equivalent to 10-14% of EU budget)

Status quo scenario, based on estimated
agricultural expenditure of 42 bn euros
(2010) for the 15 EU Member States

Based on 1989 prices, per capita income
growing to twice the 1989 figure

CEPR approach, including growth and
structural change
Payments to the EU budget reduced by
4 bn euros (equivalent to 'net costs' of
19 bn euros, i.e. 19% of the planned budget
for 1999 without enlargement) 

4 Višegrad States

Anderson/Tyers, 1995

cited in Baldwin et al., 1997, p. 155.

Tyers, 1994

Brenton/Gros, 1993

Mahé, 1995

Tangermann/Josling, 1994

Slater/Atkinson, 1995

Tangermann, 1996

10 associated States

Brenton/Gros, 1993

Slater/Atkinson, 1995

4 Višegrad States

Begg, 1992

cited in Axt, 1997, p. 16.

10 associated States

Courchene et al., 1993

Eser/Hallet, 1993

Grabbe/Hughes

11.6

11.3

10

13

7.2

14.5

26.0

42.2

6.6

6.7-7.9

1.0-1.2

9 (2000)

11.7 (2005)

12.2 (2010)

3.7

7.4

5.6

10

37

34

4-31

6-16

9-14

5-15

13-15

32-55

9-23

Table based on Busch and Berthold, 1998.
(1)

 Višegrad States: Czech Republic, Hungary, Poland, Slovakia. 
 The associated States are the Višegrad States plus Bulgaria, Estonia, Latvia, Lithuania, Romania and Slovenia.

(2)

It  emerges  clearly  that  the  European  Commission’s  projections  are  based  on  rather  shaky
premises and therefore entail financial risks. Should it prove impossible to enact the reforms,
additional  costs  of  at  least  60  bn  euros  are  likely  for  both  agriculture  and  structural  policy
(Baldwin et al, 1997; Laffan, 1997).

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1.2

Consensus on reform or divergence of interests: the burdens debate

How consensus on the financial challenges of further integration can be achieved among the
Member States, with all their varying interests, remains a moot point (Berschens, 1997).

The fact is that there are wide divergences between the aspirations of the various EU Member
States in terms of the future development of the Union budget. The main broad distinction is
between the so-called net contributors, in other words the Member States which pay more into
the budget than they receive from it, and the net recipients, the countries receiving more than they
contribute. The distribution of burdens is felt to be unfair by the net contributors, especially the
main  contributors  such  as  Germany,  the  Netherlands,  Sweden  and  Austria.  The  European
Commission does not deny the existence of budgetary imbalances. In its latest report on the
funding of the Community (European Commission, 1998), it recognises the need for corrective
action. Germany, the Netherlands, Sweden and Austria have long been complaining that their
burdens are disproportionately high when compared with their relative levels of prosperity. In
the case of the Federal Republic of Germany, this became especially glaring in the wake of
reunification, which caused a considerable drop in the country’s relative prosperity level within
the EU. 

Although Brussels seems to be yielding some ground to Germany and other net contributors, the
Commission remains wary of large demands. It emphasises that mere calculation of net balances
cannot take full account of the impact of EU expenditure and receipts any more than it can take
account  of  the  political  advantages  and  disadvantages  of  EU  membership.  The  EU  Treaty,
moreover, requires Member States to contribute in a spirit of solidarity to the harmonisation of
living standards in the Community. This explicitly emphasises that redistribution is a Community
responsibility. The German claims for relief are also put into perspective by the Commission
estimates which show that Germany’s share of the net transfer of funds within the EU is set to
diminish in the medium term from two-thirds to 40%.

Brussels has nevertheless come round to a moderate position. This position was mapped out by
the  Members  of  the  European  Parliament  and  also  finds  favour  with  the  new  German
Government. It involves having the Member States finance a quarter of the cost of the direct
grants that currently account for 60% of all expenditure from the EU agricultural budget. There
would be no change as far as the farmers are concerned, as payments would continue to be made
on the basis of Community decisions. The beneficiaries would be prosperous States such as
Germany, which have a relatively small farming sector and consequently receive a minimal
amount in subsidies from the EU budget.

But the net recipients are the ones who fear financial losses in the event of redistribution. They
argue that net balances mean very little for several reasons, particularly because of the difficulties
involved in assessing the utility of a net surplus and in categorising certain statistical data (see
section 2 below). 

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Many proposals for reform of both the receipts and the expenditure side of the EU budget have
been triggered by criticism of the projected growth rates on which the European Commission’s
financial perspective is based, these rates being widely regarded as far too optimistic, given the
global economic crisis (Russia, Asia and Latin America). An increasing number of voices have
also  been  raised,  especially  among  the  net  recipients,  against  the  plan  to  freeze  the  1999
expenditure ceiling of 1.27% of aggregate GNP for a further seven years. There have been many
calls for scope to put initial new arrangements in place before or shortly after the accession of
the first wave of Central and Eastern European countries.

Germany  is  one  of  the  major  net  contributors  which  welcome  the  principle  of  freezing  the
financial framework at the level it is due to attain in 1999. However, it has also been fiercely
critical of the policy of persevering with the present system governing the acquisition by the EU
of its own resources. The implementation of the financial framework proposed in Agenda 2000
would  only  improve  the  net  positions  of  Germany  and  other  net  contributors  by  a  fairly
insignificant amount (Brok, 1994).

The various reform proposals that are currently under discussion cover a very broad spectrum.
The highly complex proposals for the receipts side range from (1) a general restructuring of the
EU budget to (2) the addition of more ’own resources’ and (3) the creation of the Union’s own
new source of receipts. The principal aim of the purely expenditure-based reform efforts is to cut
spending  drastically  and  hence  to  reduce  the  number  of  policy  areas  for  which  the  EU  is
responsible (Henke, 1997).

The models that are being discussed, especially in Germany, include the capping model proposed
by the Federal Ministry of Finance and the suggestion put forward by the ministers of finance of
the German Länder. In terms of their underlying theory, both of these models are designed to
improve the net position of the countries where the distribution of burdens is deemed unfair,
which makes them consequentialist by nature. The degree of relief, however, varies between the
model. While the regional finance ministers’ model has an advantage over the Federal Ministry
of Finance model in that it does not impose an arbitrary capping limit, the latter model has two
different means of influencing the operation of the system in the revenue-retention threshold and
the compensatory percentage (working party of EU desk officers from the Finance Ministries of
the German Länder, 1997). To what extent either model can prove politically acceptable, given
that both of them impose greater burdens on other Member States, remains doubtful and will be
examined in detail at a later point in this paper (see section 5).

One of the main items discussed in the debate on the financial burdens of Member States is the
possibility  of  introducing  additional  sources  of  income.  The  options  discussed  include  a
percentage of the income tax, value-added tax or excise duty on tobacco, wines and spirits, etc.,
collected throughout the EU. However, the differences in basic tax structures in the various
Member States and the credit and debit effects assessed by us in subsection 6.5 below will make
political consensus difficult to achieve in this area too.

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The possibility of empowering the Union to raise its own tax revenue is also under discussion
in connection with the drafting of a new EU budget. The options being examined here include
variants of a European tax deducted at source, a corporation tax and an environmental and energy
tax, as well as a sole right of access to the money created by the European central banks. The
advantages and disadvantages of the various varieties of complementary and additional taxes and
their potential political acceptability will also be examined comprehensively in section 6 below.
In addition, we propose the examination of the idea of a ’Tobin tax’ for Europe (see subsection
6.6 below).

Apart from a number of exceptions, the primarily expenditure-related reform proposals are far
more closely based on the ideas of the European Commission as contained in Agenda 2000 and
focus on reform of the CAP on the one hand and reform of the Structural Funds on the other.
This stands to reason, since about three-quarters of all EU budgetary expenditure falls under
these two headings. 

At this stage, it may be said that the criteria for a future mechanism of whatever type are that it
must ensure that the EU is adequately financed and that it must guarantee a fair distribution of
burdens among the Member States, because fair distribution is one of the main keys to public
acceptance of the Union in all Member States. Fairer distribution of the burden of funding the
EU is essential in Europe’s own best interests. If the financial framework cannot be established
on  the  basis  of  the  aforementioned  criteria,  Europe  will  suffer.  Inadequate  resources  will
jeopardise major projects such as eastward enlargement. On the other hand, an overexpensive EU
would be rejected by its people. 

1.3

The significance, limitations and efficiency of the existing own-resources pillars

As  far  as  the  development  of  the  various  pillars  on  which  the  EU  has  hitherto  based  the
acquisition of its own resources, the traditional type of resources has become less significant,
falling from 29% in 1988 to about 16% of the Union’s own resources in 1998, while resources
from value-added tax have plummeted even more drastically from almost 70% in 1990 to an
estimated 37% for 1999. GNP-based EU resources, on the other hand, have risen from less than
3% in 1990 to almost 47% in 1998.

The decline of the traditional Community resources, however, has been the result of a welcome
development  in  the  domain  of  economic  and  commercial  policy,  namely  an  emphatic
liberalisation of international trade, a lowering of the EU import thresholds and a reduction in
the average external tariffs. In other words, since the EU has pursued a successful liberalisation
policy, the bases of assessment and the rates levied, and hence the revenue from customs duties
and import levies, have fallen.3

3

 Total tax revenue is determined by the equation t x B = T, where t is the rate of taxation, B is the basis of
assessment and T is the total tax revenue. Logically, if t and B are both reduced, T must also decrease.

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The reduction in the proportion of resources from value-added tax is also politically desirable.
Undesirable redistribution effects have long been ascribed to this source of Union revenue. The
following propositions are advanced or unquestioningly accepted:

a.

b.

value-added tax is an excise duty, and

the equation C = f(Y), i.e. consumption is a function of income, applies to countries and industries, and
that consumption increases at a slower rate than income (the theory of the diminishing average propensity
to consume).

Accordingly,  those  countries  with  lower  average  propensities  to  save  and  higher  average
propensities  to  consume  are  unduly  burdened.  Moreover,  it  seems  to  be  a  general  rule  that
economically less developed States tend not to resort to the taxation of income and business
profits, since such countries often have high levels of tax evasion as well as problems with tax
collection, and rely on value-added tax, which is more difficult to circumvent and is therefore
’self-policing’. Both of these effects, it is alleged, make these sources of revenue highly regressive
in their impact.

This objection is also frequently put forward as a ’killer argument’ against the additional VAT
component,  which  is  the  preferred  option  of  the  Committee  on  Budgets  of  the  European
Parliament. It must be said, however, that closer analysis shows the regressiveness argument to
be unconvincing:

a.

b.

c.

If we compare national income (GDP) with national average propensity to save in the
Member States (see Table 3 below), no clear correlation emerges. Wealthy countries such
as Sweden or Denmark have low average propensities to save, while the saving habit is
more  firmly  rooted  in  poorer  countries  like  Greece  and  Portugal.  The  correlation
coefficient between per capita GDP and the national average propensity to save is -0.274
and is thus insignificant. If we look at the United States, we see that the richest country
in the world  has  one  of the lowest average  propensities  to save. In other  words, the
propensity of a nation to consume is evidently dependent on a host of other factors and
not, or not only, on its level of prosperity.

The  correlation  between  national  VAT  and  income-tax  assessment  bases  and  the
development status of national economies is also tenuous. Although the VAT basis is
broader de facto in the poorer EU Member States than in the wealthier ones, that is a
result of domestic fiscal-policy decisions rather than economic necessity. Moreover, there
is an observable general tendency in Europe to move away from taxing the creation of
income (direct taxes) to taxing the use of income for consumption (indirect taxes) with
the aim of encouraging savings and hence the formation of capital.

To conceive of VAT as an excise duty is to see only one aspect of this net multistage tax,
namely the imposition dimension. In procedural terms, however, value-added tax is a levy
on business transactions (turnover) and on the creation of assets. To that extent, if a

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nation’s  entire  creation  of  economic  assets  were  subject  to  taxation,  VAT  would  be
identical with the  GNP pillar (the  sum of the  value of goods  produced  and services
provided by a national economy).

These  points  demonstrate  that  the  regressiveness  theory  has  not  gone  unchallenged.  The
incidence pattern is not accurately measurable, nor is there a clear empirical link between pro
capita  income  and  the  average  propensity  to  consume  of  any  country  (Folkers,  1994;
Teutemanns, 1992).

Lastly, the huge increase in the GNP-based proportion of the Union’s own resources is also the
result of a deliberate political strategy:

GDP (measured in ecus in the EU) is normally used as a prosperity indicator to measure the
performance of national economies and as a convergence indicator too. There are general calls
for GDP to be measured in purchasing-power parity (PPP) rates per head of population rather
than at current prices, since the elimination of differences between price levels (differing rates
of inflation) between individual Member States makes it possible to achieve better comparability
between national prosperity levels. Unless such a correction were made, equal nominal amounts
paid over by various Member States would correspond to different amounts of relinquished
purchasing power. This would infringe the fairness rule. This position is advanced, for example,
in the papers produced by the working party of EU desk officers from the Finance Ministries of
the German Länder and by the German Federal Ministry of Finance. 

Other studies, however, use per capita GNP at market prices (European Commission, 1998;
Busch, 1998).

The  differing  treatment  is  no  coincidence.  Depending  on  whether  the  ’right’  indicators  are
selected, the result in terms of the contributory capacity of an individual country, i.e. its level of
financial  prosperity,  will  vary.  Nominal  exchange  rates,  which  are  determined  by  external
economic transactions and financial flows, generally exaggerate the differences in prosperity
levels between the EU members. But conversely, the GDP purchasing-power parity indicator
creates distortion. For example, when it comes to drawing a comparison between countries such
as Portugal and Sweden, the bundles of goods and services that are required for the construction
of a price deflator are quite dissimilar.

And so the PPP-based comparison usually underestimates the differences between countries’
levels of solvency and their ability to contribute to the EU budget (Watler, 1996). It therefore
comes as no surprise to learn that the German calculations are based on GDP/PPP, while those
from other sources, such as the net-recipient countries, are based on market prices.

No consideration has yet been given in the discussion of this issue to the fact that, in an economic
and monetary union, these differences will become blurred and will eventually disappear once
two developments have taken place: (a) exchange rates between EU currencies will be abolished

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when the single currency is introduced, and (b) the Member States’ inflation rates, which are
already converging very closely, will be replaced by a single rate of inflation. This will put an end
to exchange-rate effects and differences in purchasing power. All Member States will contribute
to the Union’s own resources in euros and on the basis of a set of standard European prices.

When the GDP pillar is used, greater significance will attach to problems relating to the statistical
methods used to assess the value added in each country. In particular, the amounts of undeclared
income from the so-called unofficial economy varies enormously from one Member State to
another  and  may  result  in  considerable  distortions,  with  particular  countries’  economic
performance  being  systematically  understated.  Although  the  European  Statistical  Office
(Eurostat) now operates with correction mechanisms, these are not yet sophisticated enough to
adjust GDP data accurately. If we assume that the Berger/Schneider estimates provide a fair
reflection of the size of unofficial economies in the EU Member States in 1994, the following
corrections would be appropriate:

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Table 3:

Per capita GDP at market prices, adjusted to take account of the unofficial economy

Country

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

United Kingdom

Per capita GDP at market
prices

Size of unofficial economy in
1994

Corrected
per capita GDP

18 136

16 878

23 843

22 175

18 183

18 134

7 405

15 556

16 424

27 740

17 255

6 178

11 255

21 587

15 039

6.8%

21.4%

17.6%

4.8%

14.8%

13.1%

22.5%

15.3%

25.8%

3.0%

13.6%

19.3%

22.8%

18.3%

12.4%

19 369

20 490

28 039

23 239

20 874

20 510

9 071

17 936

20 661

28 572

19 602

7 370

13 821

25 537

16 904

Source: Our own calculations, based on Berger and Schneider, 1998.

Against this background, it seems obvious that the GDP pillar is not exactly a perfect indicator
of performance, solvency or contributory capacity either. At the same time, it seems to be the
prosperity indicator that meets with least political resistance. This is often apparent in connection
with the high correlation between the Member States’ official per capita GDP figures and their
contributions to the ’own-resources’ pillars (Table 4).

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Table 4:

Percentage of Member States’ contribution to the own-resources pillars and correlation with
per capita GDP (prosperity indicator)

Percentage of EU GNP

Percentage funding of
EU budget

Traditional EU
resources

Contributions based on
VAT and GNP

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

United Kingdom

Correlation coefficient

2.6

3.1

1.9

1.4

17.2

26

1.5

1

14.2

0

4.5

1.2

7

3

16.1

2.8

3.9

2

1.4

17.5

28.2

1.6

1

11.5

0

6.4

1.4

7

3

11.9

0.979

1.8

7.4

2

1

10.9

24.2

1.2

2

7.9

0

12

1.1

5

3

21.5

0.894

3

3.1

2

1.33

19

29.1

1.7

1

12.4

0

5.1

1.3

8

3

9.3

0.966

Source: European Commission (1998) and our own calculations.

This comparison of national percentage contributions to the Union’s own resources and national
GNP figures shows, as might be expected, a very high degree of correlation in percentage terms
between national contributions to total EU GNP and national contributions to the EU budget, in
other words both solvency and economic performance are taken into account. This correlation
is significantly closer in the GNP and VAT pillars than in the case of the traditional Community
resources. 

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2.

Critical appraisal of the computation of net positions

The  following  table  will  serve  as  a  point  of  reference  for  the  next  stage  in  our  analysis.  It
summarises the development of the net positions of the various EU Member States during the
period from 1992 to 1997.

Table 5:

Member States’ net positions from 1992 to 1997 (in m.ecus)

Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
United Kingdom

1992

1224.2
295.4

-1319.3
-9561.6
3588.2
2119.8
-231.7
626.2
-818.6
2124.4
2708.1

1993

1333.1
356.9

-1026.9
-11659.7
4094.7
2402.5
-1142.8
737.0
-1263.9
2457.7
3022.4

1994

1139.6
236.6

-2465.3
-13465.7
3873.9
1767.9
-2366.0
607.6
-1762.9
1844.9
3171.6

-2256.1

-2959.3

-1074.0

Source: European Commission, 1998.

1995
-860.5
1718.2
345.1
-133.9
-1540.1
-13198.3
3528.5
1913.7
-672.7
694.1
-1921.2
2441.1
7253.2
-897.7
-4639.1

1996
-213.5
1415.8
247.8
88.0
-137.6
-10528.3
4081.0
2316.1
-1152.5
787.8
-2331.8
2849.7
6114.3
-656.6
-2106.1

1997
-723.6
1079.5

68.6
56.1
-781.1
-10943.5
4371.8
2676.7
-61.3
725.4
-2276.2
2721.8
5936.0
-1129.5
-1798.8

The above table shows that the France, Germany, Italy, the Netherlands and the United Kingdom
were net contributors throughout the reference period from 1992 until 1997. Austria and Sweden,
which acceded to EU membership as part of the 1995 enlargement, are also net contributors.
While the other net contributors carry less of a burden in absolute terms as well as in per capita
terms, Germany and, to an increasing extent, the Netherlands bear the main brunt of funding the
EU budget. In 1997, Germany alone accounted for 62% of all net contributions. Among the net
recipients,  Greece,  Ireland,  Portugal  and  Spain  stand  out  as  the  main  beneficiaries  in  both
absolute and per capita terms.

The  computation  of  net  positions  proceeds  on  the  assumption  that  it  is  possible  to  make  a
numerically  precise  evaluation  of  the  extent  to  which  EU  membership  is  an  advantage  or
disadvantage for individual countries on the basis of payments made to and received from the
EU.  There  are,  however,  considerable  objections  to  this  sort  of  instrumentalism  in  the
computation of net payments. For one thing, the calculation of payments made between the
Member States and the EU runs into statistical categorisation problems which cannot be ignored.
For that reason, it is impossible to work out exactly the true net positions of the individual EU
Member States. Moreover, judging the benefit a country derives from EU membership by its net
position as a contributor or recipient is simplistic. The advantages attaching to EU membership
go far beyond its immediate monetary impact, while to link EU receipts and expenditure with the
aim of establishing the various net positions of the Member States is to follow the principle of

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equivalence. This, however, would be inconsistent with the aims of cohesion and redistribution
associated with the EU budget. In the following subsections we shall deal in more detail with
some reservations about the indicative value of net balances.

2.1

Systematic reservation I: statistical categorisation problems

The computation of net credits and debits presupposes the possibility of categorising precisely
the payments that individual countries make to and receive from the EU budget. On account of
the  structure  of  the  expenditure  and  receipts  sides  of  the  budget,  however,  the  requisite
breakdown of payments is not always possible.

Table  6  summarises  the  volume  and  structure  of  total  receipts  for  the  1997  financial  year,
comparing them with the 1996 figures.

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Table 6:

Volume and structure of total receipts for the 1997 financial year

Absolute amounts (in m.ecus)

Percentage of total expenditure

Type of receipts

Agricultural duties;
sugar and isoglucose
levies

Customs duties

VAT own resources

GNP-based own
resources

Other revenue

Total

1997

2015.5

12203.2

34471.1

33063.8

612.0

82365.6

1996

1966.6

12865.1

35481.5

21878.9

9751.3

81943.4

1997

2.4

14.8

41.9

40.1

0.8

100.0

1996

2.4

15.7

43.3

26.7

11.9

100.0

Source: European Parliament, 1997, and our own calculations. 
Note: The figures given above for agricultural duties and customs duties are 10% less than the total, this being the percentage of the amount
levied which is retained by the Member States to cover collection costs. The sharp increase in the GNP-based Community resources is partly
due to the fact that surpluses amounting to 9.2 bn ecus from the previous year were allocated to the 1996 budget. These are shown in the table
under ’other revenue’. No such surplus was available for the 1997 budget, however, which meant that there was a sharp fall in other revenue
and that the Member States therefore had to provide more GNP-based resources in 1997 to make up the shortfall.

In the EU budget, the amounts of each of the various types of revenue as well as the correction
mechanism for the United Kingdom are broken down precisely into countries of origin. The
following table shows the aggregate payments made by each of the Member States to the EU in
the  four  general  revenue  categories.  The  amounts  of  the  British  rebate,  which  are  entered
separately in the budget, are taken into account here the VAT and GNP-based own-resources
figures.

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Table 7:

Breakdown of EU receipts by Member State for 1997

Agricultural
duties;
sugar and
isoglucose levies

Customs duties

VAT 
own resources

GNP-based
 own resources

Total funding

Percentage of
total 
EU funding

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

48.7

129.2

48.7

29.1

389.3

454.2

26.1

14.8

203.7

0.2

151.4

45.5

171.0

58.1

256.5

930.0

217.4

193.5

1288.8

2981.5

125.1

228.3

1131.8

16.9

1498.5

110.2

474.3

329.4

1050.0

1038.9

662.9

516.3

6912.7

10982.2

574.3

274.3

4156.2

90.5

1759.3

513.8

2653.4

931.0

874.1

1048.1

670.2

483.2

5932.8

9065.7

484.8

223.9

4678.8

71.3

1539.8

419.5

2332.6

907.5

United Kingdom

245.5

2421.0

2355.3

4331.5

2229.2

3146.2

1599.2

1222.1

14523.6

23483.6

1210.3

741.3

10170.6

179.0

4948.9

1089.0

5631.3

2226.0

9353.3

EU

2015.5

12203.2

34471.1

33063.8

81753.6

Source: European Parliament, 1997, and our own calculations.

2.7

3.8

2.0

1.5

17.8

28.7

1.5

0.9

12.5

0.2

6.1

1.3

6.9

2.7

11.4

100

So although on the receipts side the distribution of burdens among the Member States can be
illustrated accurately enough, statistical categorisation problems arise in connection with the
actual burden arising from the transfer of agricultural levies and customs duties to the EU. These
problems are known collectively as the Rotterdam-Antwerp effect.

The Rotterdam-Antwerp effect: On the receipts side of the EU budget, distortions are caused by
the collection of the agricultural and customs duties which are levied at the external borders of
the EU, irrespective of the country of destination. They are debited as a charge on the country at
whose border the goods enter the EU.

Countries which, on account of their geographical situation and their customary trading role, tend
to operate as handling centres for goods from non-EU countries, thereby collect a greater amount
of customs duties than other countries. They transfer these duties to the EU, which then treats
these transfers as payments to the Community budget when assessing the Member States’ net
positions, even if the goods in question have been forwarded to other EU countries and the

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economic cost of the duty is met in the country where the end users live (May, 1985). This
syndrome is termed the ’first-round gateway effect’. If, for instance, an agricultural product is
imported  into  Germany  through  the  port  of  Hamburg,  German  levies  result,  and  these  are
transferred to the EU budget, but if the product is imported to Germany through the port of
Rotterdam, this accordingly results in a Dutch payment into the EU budget. If the product is
purchased direct within the EU, no funds are transferred to the EU budget. But in all three cases
the consumer in the country of final destination will ultimately have to pay an amount in excess
of the world market price for the product. Regional revenue and regional burdens therefore
diverge in many cases.

Then there is the ’second-round gateway effect’ to consider: this relates to intra-Community re-
exporting goods originating in non-EU countries which are merely processed in the handling
country. In this case too, the duties collected are set off against the handling country’s payments
to  the  EU,  even  though  these  duties  are  ultimately  paid  by  the  end  user  in  the  country  of
destination.

Since the major ports of Rotterdam and Antwerp are particularly important handling centres for
imports into the EU, the term ’Rotterdam-Antwerp effect’ has established itself (Peffekoven,
1994). A study by the European Centre for Strategic Analysis (1997) found that these gateway
effects accounted for 31% of all customs duties collected in Belgium and 27% of those collected
in the Netherlands.

The agricultural duties and customs duties figures in particular for Belgium and the Netherlands
are therefore likely to be overestimated in the computation of net balances and do not reflect the
actual burdens on those countries. While Belgium contributes about 3.8% of the total resources
in the EU budget, the agricultural duties, sugar and isoglucose levies and customs duties provided
by Belgium amount to some 7.5% of the EU total. The Netherlands’ contribution in terms of
these duties and levies, at 11.6%, is almost twice as high as its overall contribution to the EU
budget (6,1% - see Table 7 above). A similar situation applies, albeit to a lesser extent, in the
cases of Portugal, the United Kingdom and Ireland. If a deduction were made to allow for the
Rotterdam-Antwerp  effect,  Belgium,  France  and  the  United  Kingdom  would  emerge  as  net
recipients.  Germany’s  net  contribution  would  be  further  increased  (Welter,  1997).  Account
should, however, be taken of the standard 10% allowance for collection costs which the Member
States retain from the customs duties and agricultural levies they collect.

But then there is also the ’inverse gateway effect’. This effect derives from the fact that refunds
on agricultural exports are often paid at the port of shipment (e.g. the Netherlands or Belgium);
these refunds are not retained by nationals of the countries of shipment but are passed on to the
countries of the producers. This phenomenon results in the recording of net gains which do not
really exist. However, it is doubtful whether the gateway effects and the inverse gateway effect
cancel each other out, since the sum of export refunds is falling faster than the product of the
volume of imports and the average EU rate of customs duty.

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If we are to  believe the German Council of Experts for  the Assessment of Macroeconomic
Trends,  the  'Five  Wise  Men'  (Sachverständigenrat,  1994/95),  the  Rotterdam-Antwerp  effect
makes it difficult to assign about 25% of the receipts with which the EU budget is funded.

However, the fact that the significance of the traditional Community resources, to which the
Rotterdam-Antwerp effect relates, will continue to diminish and the fact these are the only funds
that can truly be called the Union's own resources give rise to two consequences:

1.

2.

The  methodological  implication:  When  net  balances  are  compared,  traditional
Community  resources  should  be  completely  disregarded,  since  they  are  diminishing
'transitory items' which do not represent a burden on the Member States. This would also
render the Rotterdam-Antwerp effect irrelevant.

The  substantive  implication:  Since  the  significance  of  these  genuine  Community
resources is waning, they should be supplemented by new genuine Union resources,
possibly in the form of a common EU tax, so that the status quo is at least preserved.
This will prevent a shift in the fiscal power structure.4

As in the case of the EU receipts, its planned expenditure is broken down in the budget by
institutions,  expenditure  categories  and  budget  chapters.  The  volume  and  structure  of  EU
expenditure can therefore be quite precisely determined. The following table summarises the
volume and structure of total expenditure for the 1997 financial year compared with the previous
year.

4

  Such a Community tax, however, is rejected in the paper produced by the EU desk officers of the Finance
Ministries of the German Länder (1997) as well as by Caesar (1996) and Walter (1996), for example. The main
reservations expressed in these documents are constitutional in character.

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Table 8:  Volume and structure of total expenditure for the 1997 financial year, compared
with                 1996

Expenditure categories

EAGGF, guarantee section

Structural Funds and
Cohesion Fund

Research and development

External actions

Education and culture

Administrative expenditure

Other expenditure

Total

Amounts (in m.ecus)

Percentage of total expenditure

1997

41233.0

26632.9

3996.5

4687.5

736.1

4283.6

796.0

1996

41328.0

26008.6

3952.5

4652.1

823.4

4183.6

995.2

1997

50.1

32.3

4.9

5.7

0.9

5.2

0.9

1996

50.5

31.7

4.8

5.7

1.0

5.1

1.2

82365.6

81943.4

100.0

100.0

Source: Commission of the European Communities, 1997, and our own calculations.

However, there are also problems on the expenditure side of the EU budget when it comes to
assigning items of expenditure to individual Member States, for although the amounts are broken
down by the purpose for which they are used, they are not broken down by Member State as the
receipts are.

a.

b.

c.

Agricultural expenditure: Market-support expenditure in the agricultural domain has a
major influence on the Member States’ net positions. These are credited, on the basis of
the place where the intervention agency has its registered office, as a payment to the
country in which the produce in question leaves the territory of the EU. Intervention
agencies, however, also buy farm produce from other countries. The payment, then, is not
necessarily credited to the country where the assisted farmer is based (Peffekoven, 1994).

Reflux of Structural Fund resources: Businesses in net-contributor countries benefit from
payments  made  from  the  Structural  Funds  to  net-recipient  countries  in  the  form  of
contracts.  This  means  that  some  of  the  resources  flow  back  into  the  net-contributor
countries. In response to this argument, however, it may be said that such a reflux of
resources from the Structural Funds is offset by identifiable supplies and services selected
by  the  customer  on  the  basis  of  competitive  tendering  (see  the  example  on  Athens
airport). On the other hand, the resources from the Structural Funds may be said to have
been diverted from other potential uses, very possibly in the net-contributor countries.
Research and development: There is a limit to the precision with which research and
development expenditure can be assigned to particular Member States.

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d.

e.

f.

Payments to non-EU countries: It should also be borne in mind that not all activities
within the Member States do not account for all EU expenditure; some of it flows into
non-EU  countries,  for  example  in  the  form  of  development  aid  (Seidel,  1992).  The
economic and/or political advantages of such expenditure can scarcely be converted into
monetary terms and distributed among the Member States of the EU.

Assignment of administrative expenditure: Administrative expenditure, comprising staff
costs and material costs, accounted for more than 5% of the Community budget in 1997.
This is another area of EU expenditure which can have quite a significant distorting effect
on net positions, since the extent to which this expenditure should be included in the
calculation  of  net  balances  is  a  bone  of  contention.  One  option  is  to  ascribe  the
expenditure entirely to the country in which it arises. This would result in almost the
entire  administrative  expenditure  of  the  EU  being  treated  as  payments  from  the  EU
budget to Belgium and Luxembourg, since the Community institutions are based almost
exclusively in these two countries. There is something to be said for this approach, since
the location of administrative headquarters with their staff brings considerable benefits
to  a  country  or  a  particular  region.  On  the  one  hand,  the  need  to  purchase  office
equipment and materials and the high number of employees creates a certain level of
demand, thereby making the local area more attractive as a business location. On the
other hand, the location of administrative offices helps to absorb some of the country’s
excess  labour.  This  approach  naturally  raises  problems  too,  since  administrative
expenditure, unlike many other EU payments, corresponds to the supply of goods and the
provision of services and cannot therefore be regarded as a pure inflow. Furthermore, the
impact of the expenditure in terms of employment is not limited to the country in which
the administrative offices are located but also benefits the other Member States, since the
employees come from many countries of the Union. Part of these employees’ incomes
will also stimulate demand in their countries of origin (Ott, 1987). Depending on the
computation method used, the country-by-country distribution of EU spending includes
administrative expenditure in full (Federal Ministry of Finance), in part (the European
Commission assigns 50% of EU administrative expenditure to Belgium and Luxembourg)
or not at all (European Court of Auditors).

Omission  of  certain  expenditure  categories:  Several  areas  of  political  activity  with
financial implications (e.g. the ECSC operating budget, the European Development Fund,
the European Investment Bank and other Union borrowing and lending activities), are not
included in the EU budget. These omitted categories of expenditure have grown rapidly
in volume and importance over the past few years. If only for purely budgetary reasons,
financial activities outside the EU budget should be included in the computation. In order
to  assess  their  precise  net  position,  all  Member  States  should  take  account  of  these
extrabudgetary financial transactions and deduct them from the net balance. 

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2.2

Systematic reservation II: the limited validity of net balances in terms of the utility
of EU membership

Besides the statistical categorisation problems referred to above, the question also arises whether
the computation of net balances are fundamentally capable of satisfying the need for adequate
documentation of the advantages and disadvantages of EU membership. The advocates of the
computation approach take the view that the balance of financial transfers is a suitable measure
of the way in which burdens are distributed within the Community, while its opponents argue that
to contemplate a mere statement of account, which only includes payments made directly to and
from the EU budget, is to ignore the indirect economic and political impact that EU membership
can have on a country (Caesar, 1996(b)). Moreover, they fear that the future development of
European  integration  may  be  jeopardised  if  equivalence  is  allowed  to  become  a  political
obsession.  Peffekoven  (1998)  therefore  proposes  that  an  end  be  put  once  and  for  all  to  the
discussion of net positions.

On the whole, the use of net balances to assess the utility of EU membership must certainly be
subjected to critical examination. It all too easily creates the impression of misplaced precision
when anyone attempts to define utility in statistical terms. Although every first-year student of
economics learns that utility can at best be measured relatively (increasing/diminishing), it cannot
be measured absolutely (on a calibrated scale). There is no denying, of course, that net balances
can be useful as proxies, since they indicate general trends and reveal imbalances. We shall now
enumerate  some  examples  of  the  arguments  used  in  defence  of  the  proposition  that  mere
examination of net balances tells us too little.

(1)

Advantages of the single European market

Concentration on the net positions of contributors and recipients ignores the prosperity-enhancing
effects of the single European market for the net-contributor States:

a

b.

Easier cross-border trade: By liberalising trade in goods, services and capital and by
developing uniform standards and legislation, the European single-market programmes
have vastly improved the conditions for cross-border trade between EU Member States.
The main beneficiaries of such a development are the export-orientated industries of the
(economically stronger) net-contributor countries.

Increased sales opportunities: The redistribution of resources through the EU budget to
the economically less-developed regions of Europe results in an increase in those regions’
purchasing power. Moreover, the European integration process has helped to stabilise the
foundations of individual Member States’ economies. Exporters in the net-contributor
countries can benefit from this in terms of finding new markets for their products.

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c.

d.

Increased employment: An increase in the turnover of exporters as a consequence of
easier cross-border trade and increased sales opportunities within the EU may enhance
prosperity by creating new employment and safeguarding existing jobs.

Increased  tax  revenue:  Both  the  increase  in  trade  volume  and  turnover  and  the
employment growth that may accompany such an increase can be expected to boost direct
and indirect tax revenue in the net-contributor countries. This revenue can then be used
to improve the quality of life in those countries. The first-ever attempt to quantify this
effect will be saved for section 3.

(2)

Opportunity cost of non-membership of the EU

a.

b.

c.

Agriculture and structural policy: When we discuss net positions as the basis of a cost-
benefit analysis, we should remember that, in the - albeit hypothetical - event of non-
membership  of  the  EU,  opportunity  costs  would  arise  which  would  burden  national
budgets. For example, high levels of subsidisation would be virtually unavoidable, even
in the context of purely national agricultural policies. Similarly, the structural measures
implemented by national governments would have to be intensified.

Political aspects - I: Another point relates to the political implications of the existence
of the European Union. The developing European integration process, which could be
endangered  by  a  prolonged  discussion  about  net  contributors  and  by  excessive  self-
seeking on the part of individual States, is helping to safeguard peace, which is one aspect
of the planned eastward enlargement, and to strengthen democracy where it is still in its
infancy, for example in Eastern Europe.

Political  aspects  -  II:  As  the  integration  process  continues,  Europe  is  also  likely  to
become a more influential player in international politics. While individual EU Member
States have relatively little to put on the bargaining table in negotiations with the United
States,  for  example,  the  EU  as  a  whole  is  able  to  negotiate  as  an  equal  partner
(Gretschmann, 1997(a)). The challenges faced by the EU at the turn of the millennium
-the  achievement  of  economic  and  monetary  union  and  eastward  enlargement  -  can
ultimately be taken as an opportunity to overcome resistance and indifference to essential
reforms within the Member States (Gretschmann, 1997(b)). These efforts must focus on
both the public sector (e.g. greater flexibility, consolidation of public budgets) and the
necessary structural adjustments in the private sector. The EU must therefore act as a
catalyst in the implementation of essential reforms in the Member States.

2.3

Net balances and beyond

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The foregoing reflections have shown that, on account of statistical categorisation problems as
well as the limitations of a purely budgetary perspective, the computation of net positions fails
to take proper account of the utility and benefits attaching to EU membership. Although these
difficulties are virtually insurmountable because of the problems in measuring utility and finding
utility indicators, in the next section we intend to undertake a rather bold attempt to translate the
commercial  benefits  deriving  from  membership  into  budgetary  effects  and  to  render  them
quantifiable. Thanks to the political stability the EU has created and the advantages of economic
integration,  culminating  in  the  completion  of  the  single  market,  the  Member  States  of  the
European Union have undoubtedly experienced a considerable increase in the volume of intra-
Community trade. This has also enhanced national prosperity - particularly in the net-contributor
countries.

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3.

Calculation of net positions with special regard to trade-driven fiscal
effects

In  the  previous  section  we  discussed  the  limited  value  of  assessing  EU  membership  by
considering the balance of the payments made between a Member State and the EU. In the
following computation of the Member States’ net positions we shall therefore look beyond these
payments to highlight the fiscal effects of EU membership that derive from increases in external
trade. 

As we mentioned above, the literature and political discussions on this subject often focus on
non-fiscal advantages of EU membership. Time and again, emphasis is placed on the fact that
potential commercial benefits of integration cannot be incorporated into an examination of the
fiscal position.

Particularly in the case of Germany, it is argued with insufficient precision that special benefits
on the export side do nothing to alter the basic equation (working party of EU desk officers from
the Finance Ministries of the German Länder). Although the creation of the single market has
simplified many important aspects of trade within the European Union, and although Germany
is the major participant in the internal market in absolute terms, if we consider the proportion of
all Germany’s foreign trade or of its GDP at market prices for which intra-Community trade
accounts, it emerges that other Member States are far more dependent than Germany on the
internal market. To take account of this phenomenon, we shall try in the present study - and this
is the first such attempt - to translate the utility of EU membership in terms of foreign trade for
each Member State into a measurable budgetary impact. To do this, we have taken the total value
added by these transactions and multiplied it by the taxation quotient (total national tax revenue
as a percentage of total national GDP).

The approach we have chosen in order to measure the fiscal impact of EU membership is based
on the following line of argument (see section 2 above): it is assumed that a State’s accession to
the European Union will lead to a considerable increase in its trade with the other Member States.
EU membership may therefore be expected to bring not only an increase in import and export
activity but also to an increase in the importance of trade with the other EU Member States in
relation to trade with non-European countries. This additional export volume should increase the
national tax yield of a new member country by additional direct and indirect tax receipts from
value added from external trade. To determine the actual net position of an EU Member State,
then, these fiscal effects of EU membership must be added to the balance of payments to and
from the EU.

To calculate the fiscal effects, the external trade elasticity with reference to EU membership must
first therefore be calculated for the individual countries. It is then a feasible proposition to make
a comparison between the situation a number of years prior to EU accession to the Community
and the post-accession situation. For the six EU founder members - Belgium, Germany, France,
Italy, Luxembourg and the Netherlands -  this approach is not entirely straightforward, however,

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q

p

y

established. Our analysis of those states therefore takes as its reference year 1968, when the
Customs Union was completed. This was an obvious choice in so far as establishment of the
Customs Union generated major trade-facilitating effects. We further make a distinction between
the  first  EU  enlargement  involving  the  United  Kingdom,  Ireland  and  Denmark  (1973),  the
accession of Greece (1981), the second, southwards enlargement involving Spain and Portugal
(1996) and the accession of the former EFTA states Austria, Sweden and Finland in 1995. The
examination is based on external trade figures three years before and seven years after accession
to the EU. To ensure that the results are sufficiently immune from special distorting factors, a
ten-year review period appears appropriate. Only for the analysis of the founder members and
the most recently acceding EFTA states has the review period been cut to six years (1965-1971)
and five years (1992-1997) respectively. Although, for the EFTA states, it is not possible to
examine the effects seven years following accession, because accession to the EU did not take
place until 1995, it is helpful to shorten the review period for examining the impact on the
founder members in order to prevent the calculations from being distorted by the effects of the
first EU enlargement in 1973. 

The approach can be summarised as follows: (1) Firstly, the volume of intra-Community exports
and total exports for the acceding states before and after EU accession must be determined and,
on the basis of a comparison of the percentage of total exports accounted for by intra-EU exports,
their relative significance must be illustrated. (2) In step two, we estimate the notional level of
total exports by the acceding states if they had not acceded to the EU. (3) By dividing actual
exports by our calculation of the notional exports which would have occurred if they had not
acceded, an ’integration factor’ can be calculated which indicates whether EU accession has
helped to increase total external trade for the acceding states in question. (4) The next step
consists in calculating - on the basis of the integration factor - the additional exports (or decrease
in  exports)  as  a  result  of  EU  membership.  (5)  By  multiplying  this  export  difference  by  the
respective average tax rate in the acceding countries, their additional or reduced tax yield is
approximated. (6) The final step consists in incorporating this integration-dependent change in
the acceding states’ tax yields into two alternatives for calculating net contributor positions.

(1)

Intra-EU exports and total exports before and after EU accession

The following table shows actual exports by the individual acceding countries to the other EU
states three years before and seven years after accession to the EU, expressed in ECU and at the
prices  obtaining  in  the  respective  year  of  accession.  The  development  of  intra-Community
exports is compared with the changes in the acceding states’ total global external trade during the
same  period,  again  expressed  in  ECU  and  at  the  prices  obtaining  in  the  respective  year  of
accession.

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Exports to EU1

Before EU
2

accession

1965

Germany

France

Italy

The Netherlands

Belgium/
Luxembourg

United Kingdom 

Ireland

Denmark

Greece

Spain

Portugal

Austria

Sweden

Finland

6587

4426

3002

3983

4228

1970

4443

143

982

1978

1689

1983

12092

3363

1992

26325

21245

10628

After EU
accession

1971

10945

9116

5412

6617

6723

1980

14403

2433

3350

1988

2493

1993

23951

6171

1997

32982

36652

19398

Before EU
accession

1965

After EU 
accession

1971

18689

10806

7464

7151

6836

1970

20425

1240

4332

1978

3324

1983

27535

6323

1992

39833

38056

19961

27308

18437

12116

10394

9805

1980

33710

3249

6630

1988

3847

1993

38419

8193

1997

53068

66037

36552

1

 ECU m at accession year prices.
2
 1968 (Commencement of the Customs Union) has been taken as the reference year for founder members.
   Source: own calculations on the basis of basic Community statistics from Eurostat.

Method of calculation: ECU values have been converted at the respective exchange rates into national currencies and adjusted to reflect
the corresponding year of accession by means of the price deflators for national gross domestic product at market prices.

For all acceding states, a marked expansion of external trade during the review period can clearly
be seen. During that period there was a considerable increase both in intra-Community exports
by  acceding  states  and  in  their  global  external  trade.  To  some  extent,  however,  there  are
variations in growth between the individual states: while, as regards intra-EU trade, Denmark and
Ireland  experienced  a  huge  increase  in  exports  following  their  EU  accession  (+  240%  and
+1600% respectively), there was only a moderate increase in Greece’s exports to the other EU
Member States (+48%). In the case of Ireland, however, we must point to the special situation
in that the United Kingdom acceded to the EU at the same time: since a large proportion of
Ireland’s external trade is with the United Kingdom, the huge increase in Ireland’s exports to the
other EU states can be accounted for to a considerable extent by the fact that trade with the
United Kingdom, too, was henceforth classified as intra-EU trade.

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g

g

y

g

accession of Spain and Portugal, they also being important trading partners for each other. The
expansion of EU-wide exports from these states can therefore only be attributed in part to the
trade-facilitating effect of  EU membership. With regard to the development of total exports, the
greatest increases were recorded by Sweden (+74%), Finland (+83%) and - once more - Ireland
(+162%). Again it is Greece whose export growth lags behind the other states which acceded to
the EU.

An appropriate way of illustrating changes in relative significance of intra-European exports in
relation to global exports is to compare the percentage of acceding states’ total exports accounted
for by intra-EU exports, before and after accession to the EU, as is set out in the table below.

Table 10: Share of global exports accounted for by intra-EU exports before and after EU accession 

Percentage share of total exports accounted for by exports
to the EU

Before EU accession 1  

after EU -accession

Germany

France

Italy

Netherlands

Belgium / Luxembourg

United Kingdom 

Ireland

Denmark

Greece

Spain

Portugal

Austria

Sweden

1965

35.2

41

40.2

55.7

61.9

1970

21.8

11.6

22.7

1978

50.8

1983

43.9

53.2

1992

66.1

55.8

1971

40.1

49.4

44.7

63.7

68.6

1980

42.7

74.9

50.5

1988

64.8

1993

62.3

75.3

1997

62.2

55.5

1

53.2

Finland

53.1
 1968(commencement  of the Customs Union) has been taken as the reference year for founder members.
   Source: Own calculations on the basis of basic Community statistics from Eurostat.
For all acceding States during the review period, with the exception of the most recently acceding
EFTA countries, a significant increase in the relative significance of intra-Community exports
in relation to global exports can clearly be seen. In particular for the first states to accede - the
United Kingdom, Ireland and Denmark - the share of total exports accounted for by EU exports
increased considerably: while Denmark’s and the United Kingdom’s percentage share roughly
doubled, the percentage for Ireland increased sixfold, though here too we must point to special
effects in connection with the simultaneous accession by Ireland and the United Kingdom. (These

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g

g

in significance of intra-Community exports, however, Germany and Italy have lagged behind the
other acceding states. For Germany and Italy, the increase in the share of total exports accounted
for by intra-Community exports has only risen from 35.2% to 40.1% and from 40.2% to 44.7%
respectively.

(2)  Volume of total exports if accession had not taken place

The next step consists in comparing the actual development in total exports with the estimated
notional total external trade volume of the acceding states if they had not acceded to the EU. The
notional volume of exports if there had been no accession to the EU is calculated here as follows:

Ex

notional(t+7)

= (Ex

-Ex

tot(t+7)

EU(t+7)

/(1-Ex

/Ex

EU(t-3)

)
tot(t-3)

where:

t

= year of accession

Exnotional(t+7)

Extot(t-3)
Extot(t+7)

ExEU(t-3)

ExEU(t+7)

= notional exports without EU accession
= total exports three years before EU accession

= total exports seven years after EU accession

= exports to EU states three years before EU accession

= Exports to EU states seven years after EU accession.

Firstly, then, exports to non-EU states are calculated by subtracting intra-EU exports from total
exports. The share of the country’s total exports accounted for by exports to non-EU states before
EU accession is then determined. The calculation for total exports which a country would have
generated seven years after accession if it had not acceded to the Community is based on the
assumption that, in such a case, there would not have been a shift in significance between intra-
Community and extra-Community trade. The percentage of total exports accounted for by exports
to non-EU states is therefore assumed to be constant. The final step, then, is to determine the
notional total exports of the acceding country concerned - if it had not acceded seven years
previously - by dividing non-European exports (in year t+7) by the assumed constant share of
exports  to  non-EU  states.  The  objection  to  this  premise  is  that  the  regional  shift  in  export
structure is bound not to be ascribable solely to EU accession. Since our premise here is that EU
accession has a dominant effect, however, we regard the assumption made as tenable.

The following table compares total exports, as calculated by means of the above formula, with
actual total exports by the acceding states seven years after EU accession.

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Total exports

Notional total exports

1
After EU accession

1
Without EU accession

Integration factor

Germany

France

Italy

Netherlands

Belgium /
Luxembourg

United Kingdom 

Ireland

Denmark

Greece

Spain

Portugal

Austria

Sweden

Finland

1965

27308

18437

12116

10394

9805

1980

33710

3249

6630

1988

3847

1993

38419

8193

1997

53068

66037

36552

1971

25252

15798

11211

8526

8089

1980

24689

924

4244

1988

2751

1993

25790

4321

1997

59250

66482

36654

1.08

1.17

1. 08

1.22

1.21

1.37

3.52

1.56

1.4

1.49

1.90

0.9

0.99

1

1

ECU m at accession year prices. 1968 (Commencement of Customs Union) has been taken as the reference
year for founder members.

Source: Own calculations on the basis of basic Community statistics from Eurostat.

(3) The ’integration factor’

In the fourth column of the above table, in addition, we have set out the quotients derived from
total exports after EU accession and notional total exports without EU accession. This value,
which we term ’integration factor’, indicates whether membership of the EU has led to an increase
(>  1)  or  a  decrease  (<  1)  in  the  level  of  total  exports  of  a  state.  As  the  table  makes  clear,
membership of the EU has led to a considerable expansion in total exports, in some respects, for
all states apart from the most recently acceding former EFTA states Austria, Sweden and Finland.
The  corresponding  value  for  Portugal  and  Ireland  is  particularly  high,  at  1.90  and  3.52
respectively, though, with regard to these states we must again point to the methodological
problems,  already  outlined,  concerning  the  simultaneous  accession  of  an  important  trading
partner to the Community, which, because exports to those states were then classified as intra-EU
trade, exaggerates the export-promoting effects of EU membership. While the integration factor

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g
Sweden are in fact less than 1 (0.9 and 0.99 respectively). Astonishingly, the shape of both states’
total  external  trade  accounted  for  by  intra-Community  trade  during  the  review  period  has
declined.

g

g

(4) Additional  exports  or,  as  the  case  may  be,  a  decline  in  exports  attributable  to  EU

membership

By means of the ’integration factor’ values, the proportion of current export volume attributable
to EU membership can be calculated with the following formula:

Additional exports = total exports - total exports/integration factor

From current total exports of the Member States in question, then, we subtract the quotient
derived from current total exports and the integration factor. The higher the integration factor,
the higher the additional exports resulting from EU membership. This calculation is based on the
assumption  that  the  ’integration  factor’  calculated  for  the  post-accession  period  is  time-
independent, i.e. it can be applied to present-day exports. The following table represents the
additional export volumes calculated for the acceding states under consideration:

Table 12:

Increase or decrease in exports and tax revenues as a result of EU membership

Integration
factor

Additional
exports
(1996)1

Tax ratio ( %)

Change in tax yield
(1996)1

Germany

France

Italy

The Netherlands

Belgium / Luxembourg

United Kingdom

Ireland

Denmark

Greece

Spain

Portugal

Austria

Sweden

Finland

1.08

1.17

1.08

1.22

1.21

1.37

_

3.52

1.56

1.40

1.49

1.90

0.90

0.99

1

30607

34915

14718

28914

24109

55058

27248

14536

22592

27895

82513

-5095

-676

0

23.3

26.0

28.7

27.1

31.6

29.6

29.7

50.4

22.1

22.4

24.7

29.7

39.9

34.6

7131

9078

4224

7836

7618

16297

8093

7326

4992

6248

20383

-1513

-270

0

Note:  ECU m at 1996 prices;  1994 figures;  1995 figures.

1

2

3

All states apart from the former EFTA states clearly have additional exports as a result of EU
membership. Because of their low integration factor, the most recently acceding States have
recorded either no additional exports (as in the case of Finland) or a decline in exports.

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y

f

p

After quantifying the additional exports, the additional tax yield resulting from EU membership
can be estimated by multiplying this by the average tax rates in the individual acceding states (see
third column in the above table). Because average values are taken into consideration, this can
admittedly  be no more than an approximation.

(6) The ’corrected’ net positions

The last step consists in netting-off the external trade influence yield we have calculated against
existing Member State payment streams in relation to the EU budget. This produces the final net
integration gain. The following table shows the Member States’ net positions from 1996 on the
basis of net contributor calculations by the European Commission (1998) and by Busch (1998).

Table 13:

’Corrected’ net positions

1996 net position
(European
Commission)

1996 net position
(Busch)

Change in tax yield
(1996)

1

1996 ’corrected’ net
position
 (EU Commission)

1996 ’corrected’ net
position
(Busch)

Germany

France

Italy

The Netherlands

Belgium/Luxembourg 

United Kingdom

Ireland

Denmark

Greece

Spain

Portugal

Austria

Sweden

Finland

-10528

-10895

-138

-1153

-2332

2204

-2106

2316

248

4081

6114

2850

-214

-657

88

-460

-1402

-2447

-825

-2276

2260

193

3933

5972

2774

-272

-753

27

Source: Busch, 1998, own calculations.

7131

9078

4224

7836

7618

16297

8093

7326

499

6248

2038

-1513

-270

0

-3397

8940

3071

5504

9822

14191

10409

7574

4580

12362

4888

-1727

-927

88

-3764

8618

2822

5389

6793

14021

10353

7519

4432

12220

4812

-1785

-1023

27

On  the  basis  of  the  approach  we  have  presented,  there  is  an  improvement  in  net  positions,
markedly so in some cases, for all the states which have acceded, with the exception of the most
recently  acceding  former  EFTA  states,  as  a  result  of  incorporating  into  the  net  position
calculation the fiscal effects over and above direct EU payment streams. In absolute terms, the
United  Kingdom  records    the  largest  improvements:  it  moves  from  being  the  largest  net
contributor to become the largest net recipient amongst the States examined. In per capita terms,
the main winners are Ireland and Denmark. 

The above table makes it clear that, in terms of general trends, there is agreement between the
results based on Busch’s net contributor calculation (1998) and the European Commission’s net
calculation (1998). According to the EU Commission’s calculations, however, there is a slight
increase in net recipient positions and somewhat less of a burden for the net contributor states.

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of  spending directly attributable to individual Member States. Only in the case of Belgium and
Luxembourg are there considerable deviations between the two net contributor calculations,
which are principally  accounted for by the EU administrative spending in those states - spending
which primarily benefits those Member States, but was not included by Busch in his calculation
(1998).

However, the results of the study must be qualified in a number of respects:

(a) Although the negative results for Austria and Sweden do indicate that they have fared less
well, by comparison with the other EU states, they paint a gloomier picture than is actually
the case. For instance, reference must be made to Austria’s and Sweden’s huge export boom
in trade with non-EU States in the 1990s (see Table 9). Although both states significantly
increased their intra-EU exports, too, they have been unable to keep pace with trends in total
exports. For that reason, the share of Austria’s and Sweden’s global trade accounted for by
EU trade declined in the period under review. The huge growth in non-Community exports
thus outstripped the two states’ volume of intra-EU exports during the review period, which
also rose in absolute terms. As the correction factor we have used for the net contributor
positions is ultimately based on movement in the relevant significance of intra-EU exports
in relation to global exports, negative correction amounts are shown. If a further ten-year
examination is carried out (1992-2002), as with the other EU enlargement processes, the
situation could be reversed in just a few years’ time, in favour of intra-Community trade, as
a result of the introduction of EMU, in which Austria at least will have participated from the
outset.

(b) Our assumptions are certainly open to examination: our reasoning is based, for instance, on
the assumption that accession to the EU exerts considerable influence on the regional shift
in acceding states’ export structure (trade creation and trade diversion). Other factors are not
taken into account in this study. In addition, reference must be made to the problems which
have  been  outlined  that  occur  if  a  state  and  its  most  important  trading  partner  accede
simultaneously  to  the  Community  (e.g.  Ireland).  Furthermore,  the  assumption  that  the
integration  factor  is  applicable  to  present-day  exports  is  assuredly  not  entirely
straightforward. After all, additional or lower tax receipts can only be approximated if use
is made of average tax rates.

To  sum  up,  our  analysis  has  shown  that,  in  terms  of  general  trends,  current  net  contributor
calculations show net burdens which are too high and net receipts which are too low because the
additional fiscal effects of the EU are ignored.         

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y

p
adjustment ideas on the expenditure side

4.1 Development of EU expenditure

The budget for 1998 provides for total payments amounting to 83.5 bn ecus. As mentioned in
section 1 above, most of the expenditure in the EU budget is still concentrated on two areas,
namely on the common agricultural policy and on structural policy, as the following diagram
illustrates (Hutter and Zendron, 1997; Levermann, 1995).

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Source: Based on Federal Ministry of Finance, 1997, pp. 14-15.

If we consider EU budgets for the period from 1988 to 1996, it emerges that EU expenditure 
rose over that period by 86%, which represents an average annual growth rate of 8.1% per
expenditure category. This puts the growth of the EU budget above the rate of expansion of the
aggregate nominal national product of the 15 EU Member States, which is estimated at about
5.4%. It should, however, be noted that, except in 1993, each of the budgets remained below the
permissible expenditure ceiling.

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1988

1989

1990

1991

1992

1993

1994

1995

1996

Own-resources ceiling  as a % of GNP

(a)

1.15

Accounting ceiling  in bn ecus

(b)

Actual payments in bn ecus

% change in relation to previous year

46.8

41.3

16.9

1.17

51.8

41.1

-0.4

1.18

56.1

43.3

5.3

1.19

61.8

53.8

24.2

1.20

65.2

58.6

8.9

1.20

65.8

64.2

9.6

1.20

68.8

60.3

-6.1

1.21

77.3

66.9

11.0

1.22

81.9

76.8

14.8

(a) Own-resources ceiling as a percentage of GNP as per financial perspective

(b) Accounting ceiling: obtained by taking the percentage of the own-resources ceiling and the GNP figure for the Community of 12 and the
Community of 15

Source: European Commission, 1997, p. 103.

The relatively rapid growth of the EU budget suggest that consideration should be given not only
to reforms on the receipts side but also to specific reforms in particular policy areas on the
expenditure side.

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1988

1990

1993

1996

1988-1996

1988-1996

in m.ecus

Average
annual % rate
of change

% rate of
change from
1988 to 1996

Agricultural guarantees

26 389.6

24 979.5

34 423.3

39 080.9

Structural measures
and fisheries

Social measures

Energy, Euratom,
environment and
internal market
Research and
technological
development 

Cooperation with non-
EU countries

Administration

Refunds, reserves and
guarantees

7 101.8

10 368.1

20 337.6

24 614.5

202.5

233.5

963.0

334.3

309.3

531.3

560.6

694.6

723.0

1 429.4

2 273.2

2 939.0

1 041.3

1 225.1

2 785.2

3 804.8

1 899.9

3 447.4

2 298.1

2 381.0

3 296.4

3 962.5

0.0

936.4

5.0

16.8

16.7

15.2

15.0

17.4

9.6

-15.0

48.1

246.6

243.0

209.6

205.2

265.4

108.6

-72.8

Total expenditure

41 278.9

43 324.8

64 207.6

76 755.7

8.1

85.9

Source: Busch and Berthold, 1998, p. 23, and our own calculations.

4.2

Description and evaluation of potential savings

The  fact  the  European  Commission  opted  in  Agenda  2000  to  retain  the  current  methods  of
financing the Union has opened the floodgates to a vast assortment of reform proposals, not least
because of the forthcoming eastward enlargement by up to eleven new Member States but also
because  of  the  net  contributors’  belief  that  the  current  distribution  of  burdens  is  unfair.
Elementary reform models have been presented - by Germany, for example - with the principal
aim of spreading the Member States’ burden more evenly.

The so-called capping model devised by the German Federal Ministry of Finance, for example,
seeks  to  limit  Member  States’  net  contributions  to  a  specified  percentage  of  GNP.  Any
contributions made over and above that figure would be partially refunded, the percentage to be
refunded being the object of a political decision. The purpose of this capping method would be
to ensure that the Member States pursued a prudent spending policy at the EU level. The model
is essentially a correction mechanism in the sense of a generalisation of the British rebate, to
which we shall return in more detail in the course of this section.

Another reform proposal has been mooted by the Finance Ministers of the German Länder. The
difference between their approach and that of the Federal Ministry is that the regional ministers
have targeted their correction mechanism on gross contributions. Payments to the EU should be
in direct proportion to the Member States’ GDP, while payments made by the EU should be in
inverse proportion to GDP, measured in purchasing-power parities in both cases. This would
mean that the Member States’ payments would no longer be linked to their nominal incomes,
which may be further distorted by exchange-rate movements, but to their real incomes. The
application of this model would result in considerable changes in net positions. Section 5 below
contains further remarks on the capping model and the regional Finance Ministers’ model. 

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budget, which the Member States would finance in accordance with their share of total Union
GNP. This supplementary redistribution of burdens is designed to link the distribution of burdens
more closely to the relative strength of national economies.

The proposed models, which we have only outlined briefly here, are all consequentialist rather
than  rational  in  their  approach,  in  that  the  supplementary  redistribution  they  propose  takes
particular account of the position of net contributors. Another common characteristic is that all
three proposals fail to eliminate the real causes of the uneven distribution of burdens.

Among the Member States there is a quite formidable range of the most diverse ideas for reform
of the expenditure side of the EU budget. A cross-section of the major trains of thought in the
current debate is given in the paragraphs below on a policy-by-policy basis:

a.

Reform  of  agricultural  policy:  There  is  a  widespread  lively  debate  about  whether
European  agricultural  policy  should  not  perhaps  be  based  on  the  principles  of
subsidiarity, market economics and deregulation. With minimum prices being guaranteed
for many agricultural products and an appropriate income for farmers, there has hitherto
been a tendency to overlook the fact that national economic resources are being misused
to eliminate the free determination of price levels on the basis of supply and demand. As
a result, output now exceeds demand for a wide variety of agricultural products, and
surplus production is not unusual in this domain. When the EU buys this surplus produce,
stores it and supports its exportation abroad and its marketing in the Community, all of
these things cost a great deal of money, which is further increased by a fairly substantial
bureaucratic input.

There are also frequent complaints about the fact that a great deal of EU expenditure
never actually reaches its target group, the farmers, but disappears into the coffers of
exporters and processors of farm produce, for example. Furthermore, since the rate of
subsidy  increases  with  production  levels,  large  efficient  farms  with  no  need  of
subsidisation frequently receive unwarranted support.

Far-reaching  reforms  based  on  the  principles  of  subsidiarity,  market  economics  and
deregulation are therefore considered indispensable by most of the participants in this
discussion. They believe that the purpose of such reforms must be to have all aspects of
agricultural production governed by the principles of the market economy in the medium-
to-long term. The preservation of external safeguards is considered necessary for the time
being to prevent an abrupt fall in prices to world market levels. The advocates of these
reform efforts aim to bring EU prices back to a level at which an equilibrium could be
achieved between supply and demand within the protected European market. In the long
run, however, the goal would be gradual adjustment to the requirements of a liberalised
international-trade policy, accompanied by direct income-support grants for farmers with
low incomes.

Some of the other reform ideas are based on the cofinancing of agricultural expenditure
by the Member States as a means of ensuring a fairer distribution of budgetary liabilities.
Under such a system, 25% of the cost of direct EU grants to farmers would be met by the
farmers’ own Member States - one of the principles of cofinancing that is already part and
parcel of European structural policy (European Commission, 1998). The proponents of
cofinancing see additional advantages in improved budgetary discipline, pressure for
agricultural policy reform and the most extensive safeguard to protect the position of the

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p
consensus but could be adopted by a qualified majority. 

p p

q

The basic idea behind this reform proposal is interesting: on the one hand, agricultural
support would be modelled along similar lines to structural support, with the emphasis
on complementarity  and cofinancing; on the  other  hand, it  can be  used  to  achieve a
restructuring of the finance burden for the benefit of the net contributors, in other words
it is a ’two birds with one stone’ model.

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of GNP at current prices)

Changes in the budgetary balance (prior to
payment of UK compensation)

Changes in the budgetary balance (after payment
of UK compensation) 

m.euros

GNP percentage

m.euros

GNP percentage

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

United Kingdom

Six new Member States

Total

Source: European Commission, 1998

43.8

110.7

-100.6

22.8

-648.5

678.2

-451.7

-195.8

134.5

11.6

168.8

23.9

-528.2

62.3

429.6

286.4

0

0.02

0.03

-0.05

0.01

-0.04

0.03

-0.30

-0.23

0.01

0.05

0.03

-0.02

-0.07

0.02

0.03

0.07

53.2

121.9

-93.2

28.1

-585.2

733.5

-446.3

-192.8

186.6

12.4

185.7

-19.2

-503.4

72.6

164.1

300.0

0

0.02

0.04

-0.04

0.02

-0.03

0.03

-0.29

-0.22

0.01

0.05

0.04

-0.01

-0.07

0.02

0.01

0.08

* Payment of 75% of direct aid under the CAP is equivalent to a reduction in the size of the EU agricultural budget by about 9.145 million euros
or 17% of the entire CAP payments for the year 2000.

This, however, would only save Germany about 1.4 billion deutschmarks - far less than
the  figure  of  some  eight  billion  marks  that  was  called  for  by  the  outgoing  Federal
Minister  of  Finance,  Theo  Waigel.  The  European  Commission  and  the  European
Parliament, for their part, stress the procedural advantage. The cofinancing model, they
say, would be adopted if the Council approved it by a qualified majority, and it could
therefore be quickly implemented. A change to the EU contributions system, however,
would have to be adopted by consensus and ratified by every Member State. This also
applies to the rebate first granted to the United Kingdom in 1984. What is, however,
questionable, is whether this proposal can reduce the potential for conflict between the
Member States. The cofinancing model, which Brussels is now indirectly advocating,
produces too little relief to satisfy the German or Dutch demands. On the other hand, it
means that France and Denmark, as well as Spain and Greece, would have to pay more
to  Brussels.  For  that  reason,  both  France  and  Spain  have  already  signalled  massive
reservations. 

b.

Reform of structural policy: As in the case of agricultural policy, the validity of the
subsidiarity principle is under discussion as a yardstick for the practical organisation of
structural aid (Peffekoven, 1994). One possible variant could be support in the form of
block grants to those Member States where the problems are greatest, with the level of
support to a country reflecting the seriousness of its regional problems. The financial

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g

p

p

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g

problems could also be taken into consideration (Karl Bräuer Institute, 1992). This would
also accord with the principle of subsidiarity. The recipient countries would then be
required to use the resources for the benefit of the stricken regions and/or to pass them
on to these regions. According to the advocates of this approach, the proposed system
would  serve  to  ensure  that  those  closest  to  the  problems  could  choose  the  most
appropriate solutions, without the need for the present expensive and time-consuming
detailed  bureaucratic  coordination  process  between  the  Member  States  and  the
Community. These framework rules, however, would have to be supplemented by  the
creation of accompanying inspectorates.

Internal  policies,  especially  the  promotion  of  research  and  development: Extremely
urgent appeals are being made for strict limitation of research and development support
to the pre-competitive domain. The more market-related realm of business initiatives
should  be  left  to  the  private  sector.  EU  support  would  also  be  restricted  to  areas  of
primary macroeconomic importance.

If the promotion of research and technology is to be effectively channelled, the various
players  deem  it  important  that  the  European  Commission  be  required  to  produce  a
periodic  comprehensive  statement  and  detailed  explanation  of  the  objectives  and
measures involved in its support effort. But the scope for savings seems to us to be very
limited in a variety of areas. Moreover, cuts in this particular domain would not sit well
with the aim of strengthening the competitiveness of Europe.

Reducing administrative expenditure: Two of the aims that are being canvassed in the
realm of administrative reform are staff reductions and rationalisation measures within
the administrative apparatus. To this end, consideration might be given, for instance, to
a  pragmatic  approach,  to  focusing  on  the  language  service,  reducing  the  number  of
members of the Commission and paring down the number of directorates-general. An
obligation for the Commission to outline and explain its staffing policy would also be
likely to increase the pressure for savings. Here too, however, the fiscal effect is limited.

Greater budgetary discipline and more efficient financial control: If expenditure is to be
cut, there is a need on the one hand for stricter rules to enforce budgetary discipline and,
on the other hand, for more efficient financial control, underpinned by greater respect for
the principle of prudent housekeeping, by Parliament, the Court of Auditors and the
general  public.  Especially  in  view  of  the  recurring  fraud  scandals,  from  tourism  to
humanitarian aid, there is a definite need for action here. Another goal should be to
provide the clearest and most comprehensive information possible about the finances of
the European Union. There is talk, for example, of posting all financial activities of the
EU in this domain, i.e. the European Development Fund, EU borrowing and lending
activities and the ECSC operating budget would be included in the general budget. This
is also regarded in many circles as an essential prerequisite of the effective control of all
EU finances. (P. Altmaier et al, 1996).

Elimination of unwarranted special treatment of individual Member States: Another
potential saving on the expenditure side would be the complete renunciation by each
Member State of any special status within the Community, such as the situation that
currently applies with the British rebate.

c.

d.

d.

.

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had  a  relatively  small  agricultural  sector  compared  with  other  Member  States  and
imported large quantities of agricultural produce from countries outside the EU, which
meant that the UK had to pay very high amounts of customs duties and agricultural levies
to the Community budget. Since the low level of British agricultural production meant
that only a limited amount of resources flowed back into the UK under the common
agricultural  policy,  and  since  Britain  made  a  relatively  high  contribution  to  the
Community’s own resources through VAT, the result was a considerable imbalance to the
detriment  of  the  United  Kingdom.  Just  how  unfavourable  this  situation  was  may  be
illustrated by the following numerical example: from 1981 to 1984, British net payments
to the Community ranged from 1.38 billion to 1.95 billion ecus at a time when Britain’s
per capita GDP lay below the Community average (Working party of EU desk officers,
1997).

In the years from 1980 to 1983, Britain began to receive ad hoc compensatory payments.
On the basis of a general compensatory arrangement concluded in 1984, a correction
mechanism  was  developed  which  operated  on  the  receipts  side.  The  VAT-based
contribution  served  as  the  starting  point.  Britain’s  percentage  contribution  to  the
Community’s own VAT resources was reduced by the British share of the reckonable
percentage  reflux  from  the  EU  budget.  The  total  reckonable  expenditure  was  then
multiplied by the difference between these two percentages to produce an absolute figure,
the notional net British balance. This net balance serves as the basis for British refunds,
the VAT contribution payable by the UK being reduced accordingly. (Peffekoven, 1994).
The British rebate is financed at the expense of the other Member States, although it
should be mentioned that the German contribution was cut by one-third, and, as with the
British  rebate,  the  additional  load  was  spread  among  the  other  Member  States
(Handelsblatt, 1998).

The reform of the own-resources system, however, has made it necessary to restructure
the British rebate, the declared aim being to stabilise the amount of the British rebate. The
computation of the rebate has been altered on the basis of comparability between the old
British rebate and the financial relief available under the new system. In the new system,
the British rebate will still be financed by adjusting the other Member States’ proportional
contributions of VAT resources. The amount of the correction, however, is no longer
based on the Member States’ shares of total assessable VAT but on the aggregate GNP
of the Community. 

Nevertheless, the time has come to argue vigorously for the elimination of the rebate:

•

•

•

Although such a rebate is open to all Member States in principle, it has remained
a  lex  Britannica.  This  special  arrangement  no  longer  fits  into  the  political
landscape of Europe.

Several States have budgetary imbalances today. These must be eliminated by
means  of  a  uniform  system,  something  which  the  British  rebate  in  all  its
complexity cannot provide. 

The share of the EU budget devoted to agriculture has dwindled from about 70%
to the present level of around 50%. This at least weakens the foundations of the
British rebate.

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the first step in this process can be an adjustment to take account of the reduction
in the percentage of the budget allocated to agriculture. Since the agricultural
share  of  the  budget  has  fallen  by  around  30%,  our  proposal  would  be  a
corresponding initial 30% cut in the amount of the rebate. The change in VAT
would have to be administered accordingly.

Opinions on the desired savings in each of the policy areas are obviously determined by the
Member States' own cost-benefit analyses. With regard to the British rebate, however, there is
a wide degree of consensus among the Member States that the conditions which resulted in the
granting of the rebate no longer obtain and that London could therefore contribute its full share
to the Community budget once more.

4.3

Excursus: Arguments for a longer-term radicalisation of reform strategies in the
domain of the Structural Funds5

In its efforts in the domain of structural policy, the EU has hitherto relied entirely on a vertical
model,  in  which  interregional  redistribution  has  increasingly  been  carried  out  through  the
Brussels  budget.  This  is  also  clearly  reflected  in  the  priorities  set  by  the  Community  in  its
financial planning for the period from 1993 to 1999. Structural policy is undoubtedly the main
growth area. A 40% increase in real terms in the amount earmarked for structural operations has
been accompanied on the receipts side by a shift towards Member States' GNP figures as a basis
for their contributions to the Union's own resources. The main brunt of this development has
been borne by those countries which had previously paid disproportionately small contributions
in relation to their share of total GNP. Because an increasing amount of expenditure is being
channelled towards poorer regions and Member States, while the Union's own resources are
being systematically linked to national income, the EU budget is generally creating more closely
income-dependent  interregional  redistribution  effects.  This  encourages  vertically  organised
regional and structural policies. As a result, the EU is the dominant factor in regional policy in
the beneficiary countries.

The  regional  and  structural  policy  of  the  EU,  with  its  aim  of  ironing  out  regional  income
disparities, is permanently confronted with the danger that, instead of achieving this aim, it will
in fact create a 'transfer-seeking mentality' and 'transfer-dependency'. Transfers of resources
relieve the acute need to eliminate regional weaknesses and to undertake essential adjustments.
They actually help to finance and cement imbalances. They allow the beneficiary regions to enjoy
higher levels of consumption and pay than regional GNP and productivity alone would warrant.
Moreover, funding by means of public transfers tends to perpetuate and sometimes even increase
the dependence of the supported regions. In economic terms, this is reflected in a permanent
current-account deficit, which corresponds on the receipts side to the value of the transfers.

The Structural Funds do not provide for any suitable procedures whereby effective action could
be taken in the event of unexpected economic problems which adversely affect particular regions
or industries or which lead to a general decline in economic activity during a recession. Sectoral
crises, which may result in a serious decline in economic activity and employment within specific
regions, are not covered under EU policy by compensatory payments with which demand can be
stabilised and jobs preserved. Once regions have been hit by such a crisis, it is very difficult for

5

 See for example K. Gretchmann, E. Heitzer-Suša and R. Buchegger, 1998.

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therefore wipe out any benefits that may have derived from long-term support under the structural
programmes of the European Union. Consequently, the EU structural measures must be adapted
to the economic policy of the relevant Member State as well as with the economic measures
being implemented in the other Member States. 

p

The aim of redistribution pursued by the EU through its regional and structural policies could be
more efficiently achieved if wealthy regions of the Community allocated a certain amount of
financial resources to assist poorer regions and made them freely available, i.e. with no strings
attached. The existing Structural Funds are no substitute for a horizontal financial settlement
between Member States. So consideration can certainly be given to the possibility of the EU
withdrawing  from  the  active  pursuit  of  regional  and  structural  policies  (and  from  awarding
special-purpose grants) and of replacing the present active, vertical, policy-related approach to
the ultimate goal of horizontal redistribution with a no-strings-attached horizontal redistribution
system, with the Community confining itself to a monitoring role (passive regional policy) with
the sole aim of ensuring that State aid does not distort competition. A transfer system would thus
be established between regions and/or Member States, and the supranational tier of government
would no longer be involved as a redistributing authority. Desirable interregional redistribution
effects  would  be  achieved  by  direct  transfers  from  the  contributor  to  the  recipient  regions
(through the Member States). Competence in matters of regional policy would henceforth be
vested in the lower constituent parts of the federation. 

This withdrawal from the active pursuit of regional and structural policies and the establishment
of a horizontal redistribution mechanism would also curb policy overlaps and the associated trend
towards  unitarism,  which  are  inconsistent  with  the  demand  for  clear-cut  definition  of  the
responsibilities of the various tiers in terms of functions and policies. This reform would put an
end to the unsystematic allocation of duties and would render untenable the inefficient system
of seven objectives and three central funds that are so inextricably tangled up. A horizontal
redistribution system could initiate an efficient process of competition among the Member States
to establish their credentials as attractive business locations and as good places in which to live
and work, which would be a first step towards a dynamic system of competing regions and a
reorientation of EU legislation. A horizontal redistribution system with no strings attached (albeit
limited  in  time  and  quantity)  could  be  seen  as  evidence  of  the  equal  rights  of  all  member
countries, as a substitute for those many and various activities of the EU in the realm of structural
policy which are not economically justifiable and which have therefore resulted in numerous
misallocations and inconsistencies and a great deal of wastage. 

A horizontal redistribution of resources is compatible with the principle of subsidiarity. By
comparison, the decisive influence of the EU in the domain of regional policy which goes hand
in hand with the present structural-policy model would only be compatible with subsidiarity if
there were cogent reasons why the Member States and regions should not be responsible for their
own regional policies. In order to answer this question, it is useful to make a distinction between
distributive and allocative transfers. It is obvious that an underdeveloped region caught up in a
downward spiral will scarcely be able to pursue a potentially successful growth policy, for wan
of financial resources. If it is solely a matter of improving the basic financial position of such a
region so that it can go on to pursue its own development policy, that purpose can be fully
achieved by means of transfers within a horizontal structural-policy model without any need for
a central body with overall responsibility for regional policy. The basic policy aim, namely the
promotion of underdeveloped regions, is therefore likely to be achieved in a decentralised system
if horizontal transfers enable the region in question to halt the spiral of regional depression. The
objection that such redistribution of finances would inevitably be frustrated by a lack of solidarity

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applied to either redistribution system, the vertical system operating through the EU budget as
well as the horizontal system.  On the other hand, the principle of compensation - the idea that
the losers in the integration process should be indemnified, so that integration can continue for
the good of all - implies that even the net-contributor regions will be sure to back a certain degree
of redistribution. The consent of the net-contributor regions is like a test to find out whether the
compensation argument has been overstretched.

6

j

Decentralised powers are especially useful in cases where regional preferences and circumstances
differ. This sort of divergence exists to a far greater extent in the EU, with its numerous different
linguistic and cultural areas, than within federalist States and broadens with every enlargement.
This heterogeneity seems particularly relevant to the sphere of regional policy. The specific aims
of regional policy will take a variety of shapes in practice, depending on regional preferences.
Besides regionally divergent aims, however, the main problem associated with an EU regional
policy  lies  in  finding  appropriate  starting  points  from  which  the  specific  deficits  of
underdeveloped regions can be addressed. Regional deficits can differ widely in character. They
often take consist in a shortage of vital infrastructural facilities or insufficient availability of
innovative technology and human resources. On the other hand, there may be structural reasons,
such as insufficient regional competition. It is hardly likely that there is a uniform diagnosis
which can be applied to every problem region in Europe. There are many different parameters
that might have to be adjusted in order to improve the competitiveness of a region, and at the
outset there is no way of knowing which measures will prove most suitable. It is hard to imagine
that the supranational authorities, which are furthest removed from the regional problems, could
be more successful than national or regional bodies in pinpointing specific weaknesses within
a region.

Decentralised powers, along with a horizontal redistribution system, would eliminate the cost of
coordination between Brussels and the regions. Horizontal transfers would tend to create a level
playing field for the regions of Europe. In contrast to the present situation, development strategy
would be the undivided responsibility of the decentralised authority. Such an arrangement may
not only be expected to be more successful in identifying and tackling the precise causes of
specific regional problems; in the search for solutions, regional innovation and competition will
also come to the fore. Without a large-scale European coordination effort, an individual region
would be able to test new elements of a growth strategy. Should it succeed, other regions would
quickly follow its example. Should it fail, the adverse effects would be confined to the pioneering
region, which would not be the case if a new version of EU regional policy were introduced. A
flexible process of trial and error would be possible and could help to enhance the dynamism and
efficiency of regional policy in Europe. Undivided jurisdiction for regional policy, coupled with
the horizontal structural model, will accordingly create far better conditions for the disciplined
and efficient use of incoming finances. Responsibility for the success or failure of efforts in the
domain of regional policy would lie exclusively and unmistakably with the lower federal tier of
government, which would make it easier for the electorate and the donor region to check on the
performance of the task in hand.

6
 Unless regional redistribution through the EU budget were concealed from the electorate in the net-contributor
regions because of a lack of transparency, which would make it easier to push through politically. However, the
cloak-and-dagger pursuit of a redistribution process that is not supported by the vast majority of Europeans can
scarcely be a legitimate aim of EU regional and structural policy.

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institutional distinction can be made between the distribution function (compensatory transfer
of resources to assist poor regions) and the allocation function (provision of European public
assets by the EU). At the present time, these two functions are starting to merge at the European
level, which is liable to result in misallocations. EU policies are extended for the sake of their
redistribution effects but without any particular allocative justification. The Cohesion Fund, for
instance, has been administered for the primary purpose of assisting countries with low national
incomes, yet on the other hand the resources from the Fund have been used in those countries to
finance trans-European networks, in other words for a European infrastructure. To an analysis
of the European cost and benefit of such an infrastructure is added the sympathetic consideration
of its distributive effects, and the likely result is an inefficient and probably excessive allocation
of these public assets. If the distributive and the allocative functions were separated, it would be
easier to avoid such an excess burden for any given interregional distributive aim. 

The implementation of a horizontal redistribution system to replace the regional and structural
policies would mark the end of the present integration strategy, in which further integration is
purchased  by  ’sideways  payments’,  as  well  as  requiring  consensus  on  a  new  approach  to
integration and a new federalist ideal for the European level. Neither of these things are evidently
on  the  European  political  agenda  (yet).  The  pressure  created  by  the  various  problems  will
undoubtedly  increase,  and  we  therefore  believe  that  we  cannot  rule  out  lengthier  and  more
fundamental consideration of the way in which we can cope with whatever the future holds: to
be more precise, we believe that such consideration is indispensable.

In the following section we shall analyse concrete expenditure-side reform models, namely the
capping model devised by the German Ministry of Finance and the model devised by the finance
ministers of the German federal states.

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German federal states and the capping model established by the
German Federal Ministry of Finance

5.1

Presentation of the models

(I)

The model devised by the finance ministers of the federal states

In the view of the finance ministers of the German federal states, Germany’s position on both the
expenditure and the receipts side of the EU budget is less favourable than the country’s level of
prosperity warrants. This is the assumption on which the finance ministers of the Länder base
their proposal for reform of the EU finances (Working party of the EU desk officers from the
Länder finance ministries, 1997):

1.

2.

The present resources of the EU from VAT and from GNP-based contributions would be
replaced  by  a  new  third  source  of  Union  revenue  with  a  prosperity-linked  basis  of
assessment. Gross domestic product in purchasing-power parities (PPPs) would serve as
the assessment criterion.

A correction element would be introduced on the expenditure side. Its function would be
to adjust the total sum of return flows on the basis of prosperity-matching. In the view of
the Länder finance ministers, return flows to a country are prosperity-matched if, in
conformity with the cohesion principle, they are inversely proportional to that country’s
economic  prosperity  (GDP  at  PPP).  The  more  prosperous  States  would  accordingly
receive less per capita in return flows than the less prosperous.

Point 1 of the proposal: The Länder finance ministers’ proposal sees gross domestic product
measured in purchasing-power parities as a suitable indicator of the economic prosperity of a
country and hence as the basis for the determination of contributions to the EU (Working party,
1997). In order to eliminate the so-called Rotterdam-Antwerp effect (see section 2 above), this
basis  should  not  be  applied  to  the  traditional  Community  resources  (customs  duties  and
agricultural levies). This means that the transfer of such duties and levies would not be regarded
as contributions by the collecting States and would be disregarded when the Member States’
contributions are fixed. The use of purchasing-power parity, unlike calculations based on nominal
exchange rates, would take account of differences in price levels between individual Member
States. The effect of this conversion would be that two Member States with an identical per
capita income (in euros) but with divergent domestic price levels would be assessed as having
different percentage shares of the aggregate GDP of all Member States and would therefore be
subject to different per capita rates of payment under the adopted measurement criterion. If such
a conversion were not effected, while both of these States would pay the same nominal amount
in euros per head of population, the payment of equal contributions would leave them with
different levels of residual purchasing power per capita, which, in the opinion of the finance
ministers, created an unfair situation on both the credit and debit sides. If such a yardstick were
used, a Member State’s burden would be ’prosperity-matched’, in other words it would correspond
to that State’s economic capacity, because it would be paying a percentage of total contributions
that corresponded to its percentage share of the aggregate GDP at PPP of all Member States
(Working party, 1997).

Point 2 of the proposal: The economic capacity of the Member States should also be used as
the basis for distributing return flows on the expenditure side of the EU budget (Working Party,
1997). This can be done, according to the finance ministers of the Länder, by distributing return

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in purchasing-power parities. The result of this would be that a Member State whose per capita
GDP (in purchasing-power parities) was twice the Community average would have to pay twice
the average contribution, while the payments it received from the EU would only come to half
the Community average. Conversely, a Member State with only half the average per capita GDP
at PPP would only pay half the average contribution and would receive twice the average in
return flows. The finance ministers believed that this distribution basis should be applied to all
return flows. The idea that the use of the prosperity criterion could be restricted to structural
operations on the grounds that they alone were intended to promote the convergence of living
standards within the EU was rejected by the ministers. They believed that payments from the
guarantee section of the EAGGF (European Agricultural Guidance and Guarantee Fund), which
currently account for about half of all return flows, should not be exempted from the application
of the prosperity criterion, because they also enhance the economic strength of the beneficiary
States.

The strategy of the Länder finance ministers envisages that the return flows (based on an estimate
of  the  probable  GDP  in  purchasing-power  parities  and  of  the  probable  prosperity-matched
contributions payable by the Member States) would initially be determined in the framework of
the budgetary procedure in accordance with requirements for the various policy areas. At the end
of the financial year, on the basis of the actual payments made and received by the Member
States,  a  computation  would  be  carried  out  to  ascertain  the  amounts  by  which  these  actual
payments diverge from the prosperity-matched figures. The differences would then be allocated
to the following year’s budget as adjusting figures (Working party, 1997).

For the year 1995 the authors of the paper, taking account of all payments made to and received
from the EU, established that the Federal Republic of Germany had paid a net amount of 8.8 bn
ecus more than the prosperity-matched figure calculated in accordance with the model outlined
above. A total of 4.8 bn ecus of this amount was overpaid to the receipts side, the remaining sum
of about 4 bn ecus being underpaid from the expenditure side of the Union budget (Working
party, 1997). 

If the prosperity-matched distribution based on the finance ministers’ model is compared with the
existing distribution structure of the European Union, it emerges that, besides Germany, the
United Kingdom, Sweden, Austria, the Netherlands and Finland are all being unduly burdened.
The other Member States, on the other hand, are benefiting, according to the finance ministers’
model, from the current budgetary structure. The biggest winner is Spain, with a ’surplus’ of
4.2 bn ecus for 1995 (Working party, 1997). The proposal for a reorganisation of the Union’s
finances would ease the burden of those Member States which, if the prosperity yardstick is
applied, seem to be receiving a raw deal; the other Member States would have to carry that
burden.

On the basis of figures published by the European Court of Auditors for 1996, the following table
compares the net payments under the present system with the figures that emerge if we apply the
model devised by the finance ministers of the German Länder:

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Payments

Return flows

Difference

1996

1996

Difference
according to the
Länder finance
ministers

Difference compared
with actual net
position*

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

United Kingdom

-1872.6

-2743.0

-1359.9

-961.3

-12410.9

-20766.9

-1107.1

-710.2

-8935.2

-163.2

-4435.7

-906.1

-4538.9

-1957.4

-8227.1

1600.4

1996.8

1553.3

988.4

11951.1

9872.0

5039.8

2970.5

7532.9

83.9

1988.9

3680.4

10511.1

1204.9

5951.1

-272.2

-746.2

193.4

27.1

-469.8

-10894.9

3932.7

2260.3

-1402.3

-79.3

-2446.8

2774.3

5972.2

-752.5

-2276.0

-363

-1182

-373

-4

-1427

-4247

1545

-116

-94

-76

-1683

1242

3583

-224

-750

+90.8

+435.8

+566.4

+31.1

+957.2

-6647.9

+2387.7

+2376.3

-1308.3

-3.3

-763.8

+1532.3

+2389.2

-528.5

-1526.0

Source: Busch, 1998, p. 36, and our own calculations.  * - = relief + = burden

Note: Since the calculation does not take account of expenditure that cannot be clearly attributed to individual Member States - administrative
expenditure, for example - the sum of the assessed net balances does not equal zero.

When  the  prosperity  yardstick  devised  by  the  finance  ministers  of  the  Länder  is  applied,
Germany emerges as having paid almost 3.4 bn ecus too much and having received about 3.2 bn
too little. Under this model, Germany would receive by far the greatest amount of relief. The
heaviest burdens would fall on Ireland, Greece, Portugal and Spain, which are the leading net
recipients. It should be noted, however, that the model used in the table above, unlike the one
proposed by the finance ministers of the Länder, eliminates administrative expenditure from the
equation.  

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The Federal Ministry of Finance has devised its own strategy for adjusting the way in which the
burden of financing the EU is distributed. At the heart of the proposal is a correction mechanism
that is designed to protect the net-contributor States from overburdening. The mechanism is not
intended to be limited to individual countries but is specifically designed to apply to all Member
States (Stark, 1996).

The model envisages the following approach: the first step would be to calculate the difference
between a country’s net burden and a politically defined retention threshold (expressed as a
percentage of gross national product). The amount of this threshold has yet to be determined but
should lie between 0.3% and 0.4% of GDP. The second step would then be to refund the excess
over  and  above  the  threshold  -  not  the  full  excess,  but  only  a  certain  percentage,  which  is
assumed to lie in the 50-66% bracket. This is designed to ensure that the individual Member
States go on endeavouring to promote budgetary restraint in the EU. The capping model may be
expressed in the following formula (Busch, 1998):

Adjustment = (net contribution - retention threshold) x percentage rate of refund

The  Federal Ministry of Finance capping model provides for the assessed adjustment to be
financed by the remaining Member States on the basis of their respective shares of aggregate
Community GNP. The result of this is that net-contributor countries which are granted relief on
one side of the balance sheet under this model will themselves have to contribute on the other
side to the relief of the other net contributors that have exceeded the retention threshold. On the
basis  of  the  Federal  Ministry  of  Defence  computation  of  net  contributions  for  1996  and  a
retention threshold of 0.3% of GNP as well as a refund rate of 66%, the main effects of this
model would be its provision of relief to the Netherlands and Germany (see Table 18).

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(in m. ecus)

Divergence from actual net position, 1996 
(BMF model)

Divergence from actual net position, 1996 
(Länder finance ministers’ model)

After UK compensation, 0.3% variant*

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

United Kingdom

+130

+95

+38

+78

+564

-2956

+84

+20

+457

-4

-742

+1

+284

+82

+1970

+90.8

+435.8

+566.4

+31.1

+957.2

-6647.9

+2387.7

+2376.3

-1308.3

-3.3

-763.8

+1532.3

+2389.2

-528.5

-1526.0

Source: Busch, 1998, p. 38, and our own calculations.   * - = relief; + = burden

If the BMF model were applied, France, Italy and the United Kingdom would have had to bear
the main brunt of adjustments to the financing of the EU. In the case of the United Kingdom, it
should be noted that, although the correction mechanism in the EU model would also benefit the
UK, the improvement of its position as a net contributor would be less than that provided by the
rebate  it  currently  receives  on  its  contributions.  Unlike  the  present  mechanism,  the  model
described here would increase Britain’s net contribution. In general terms, the comparison with
the net positional changes under the model proposed by the Länder finance ministers shows that
the relief provided to the net contributors and the additional burden on the net recipients would
be considerably more limited under the Federal Ministry of Finance model. 

5.2 

Analysis and Evaluation

a.

Both approaches are based on a general balancing mechanism which goes beyond the
current United Kingdom rebate. Although the latter is also open in principle to other
Member States, to date it has only been applied in favour of the United Kingdom. (The
additional amount apportioned to Germany for funding the British rebate has, however,
been cut back by one-third and allocated accordingly to the remaining member
countries.) The demand for the abolition of the unilateral correction mechanism must
therefore be expressly welcomed for reasons of equal treatment of the net contributor
States.

b.

At the heart of the Federal Ministry of Finance model is the introduction of a retention
threshold which would have to be fixed politically. Once this was exceeded payments

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c.

d.

e.

p p

y

p p

the German Länder rejects the setting of such a threshold, preferring to tie the
distribution of the receipts and expenditure to a measure of prosperity (per capita GDP
in purchasing-power parities). The demand of the Federal Ministry of Finance for an
explicit limit on net contributions or a general correction mechanism similar to the
rebate on the British contribution is largely unconvincing for the following reasons: on
the one hand, there is no scientific basis for setting a fixed ceiling; on the other hand, it
makes no sense to postulate a more or less balanced EU net position as an objective as
long as the expenditure of the Community is concentrated above all on two policy areas
(agricultural and structural policy) in which variable allocation to the member countries
is politically artificial. That is why the idea of the specific limiting of national net
positions can be interpreted as an expression of  pure equivalence thinking (Caesar,
1997). 

The approach of the finance ministers of the Länder to make the allocation of the return
payments from the EU budget inversely proportional to the relative prosperity of the EU
States must be questioned critically: such a procedure appears defensible for the area of
structural political expenditure, since the aim of the latter, as specifically emphasised in
the EC Treaty, is to strengthen economic and social cohesion between the regions and
States of the Community. Agricultural expenditure, however, must be seen in the proper
perspective, as it does not primarily serve the purpose of strengthening cohesion within
the European Union but of supporting incomes in the agricultural sector. Although such
promotion is always associated with interregional redistribution, these distribution
effects must be regarded merely as a side effect and not as an primary goal of EU
agricultural policy. The goal of solidarity and redistribution between the States and
regions of the European Union should not be pursued via the ‘roundabout route’ of
agricultural policy (Busch, 1998).

One argument against the use of purchasing-power parity as proposed in the Länder
finance ministers’ model is the limited reliability of their calculation. Although the
reliability of purchasing-power parity is considerably greater in industrialised countries
than in developing countries (Strack et al., 1997), we should not overlook the difficulty
of putting together a basket of commodities which is applicable to all the countries of
the EU (Walter, 1996).

However, more fundamental doubts may be raised about the use of purchasing-power
parity. It can be argued, for example, that the current EU revenue system guarantees that
each country waives the same percentage of the purchasing power of its gross national
product – in exactly the same way as the same percentage in purchasing power is paid
over to the tax authorities in the German value-added tax system (Deffaa, 1997). What
is implicitly intended by the use of the purchasing-power approach, therefore, is a
change in the distribution of the burden. Underlying this intention is the fact that the
purchasing-power parity (PPP) exchange rate frequently differs from the nominal
exchange rate which is created on the foreign exchange markets. Thus, for example, in
1996 the average exchange rate of the deutschmark against the ecu was DM 1.91.
However, when purchasing-power parity is used as a comparative yardstick, an
exchange ratio of 2.173 DM to the ECU resulted. Therefore, on the basis of the nominal
exchange rate compared with the PPP exchange rate, the DM was overvalued against
the ECU by almost 14%. On the other hand, the position was reversed between the
ECU and the Greek drachma: whereas the nominal ECU exchange rate was 305.5
drachmas, the PPP exchange rate was 235.1 drachmas. In relation to the ECU,

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f.

g.

h.

y
purchasing power parities as an indicator of prosperity, the German finance ministers
are therefore attempting to correct the German contribution charges (VAT and GNP-
based resources) which, in the view of the ministers, are too high because of the latent
overvaluation of the deutschmark.

y

g

The model devised by the finance ministers of the Länder has the greatest effect with
regard to the reduction in the German net balance. Had the model been applied in 1996,
the German net balance would have been reduced to barely 40% of its actual value. The
use of the Federal Ministry of Finance capping model would have reduced Germany’s
net balance 73% of its actual value. Both models provide for the cost of this
considerable reduction in the German net contribution to be borne by the other EU
Member States. Given the requirement for a unanimous resolution of the European
Council, it is very difficult to see how the two models could be carried through
politically. The odds against their implementation are surely very high.

The basic problem of both approaches is their one-sided attitude towards the net
balance. Chapter 2 has clearly shown the limited value of examining net balances. On
the one hand, an exact allocation of the payment flows to the individual states both on
the receipts and on the expenditure side of the EU budget is only possible to a limited
degree. On the other hand, it is not enough to focus solely on net positions when
assessing the benefits of EU membership: both the political advantages of EU
membership and the prosperity-enhancing effects of being part of the European internal
market remain unconsidered when attention is focused purely on payments in and out of
the EU budget.

In view of the challenges with which the EU is faced in terms of the implementation of
economic and currency union and enlargement at the beginning of the next millennium,
application of both the capping model and the model of the finance ministers of the
Länder would prove inflexible. Without reform of the policies which have led to the
existing distribution of receipts and expenditure, an across-the-board restriction of the
burden on the net-contributor States would make it more difficult to sustain the EU’s
fields of operation. It would unduly restrict the continued pursuit of the Union's
structural and agricultural goals.

6. Analysis of proposals for reforms on the revenue side

6.1 The status quo

Since 1970 the funding system of the EU has been an own-resources system in which, on the
current legal basis (Council Regulation of 31 October 1994 ), the following types of receipts
are included (Bladen-Hovell et al, 1994; Böker, 1994; European Parliament, 1997):

7

1.

Agricultural levies, customs duties and sugar levies: Agricultural levies and customs
duties are regarded as traditional own resources. These resources are levied on imports
from other States outside the borders of the EU. The Union has the authority to set and

7
 The Member States previously made their contributions on the basis of a formula laid down in Article 203 of the
EEC Treaty.

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In addition, within the framework of the common agricultural policy, the EU also sets
the levies used for external protection on the import of agricultural products.
Furthermore, the duties to be paid by manufacturers in the context of the common
market organisation for sugar are included among traditional own resources. Since the
fiscal reform of 1988 the Member States have continued to pay 90% of their traditional
own resources. Ten per cent is retained as a standard collection allowance by the
Member States.

p

VAT own resources: In accordance with the Council Decision of 31 October 1994, the
EU is entitled, through the own-resources system, to receipts resulting from the
application of a standard charge for all Member States on the standard VAT own-
resources ceiling of each member country determined in accordance with Community
regulations. Value-added tax receipts do not therefore consist of a proportion of VAT
revenue, i.e. the Member States cannot influence the level of national payments to the
EU budget via the level of national VAT rates.

GNP-based own resources: Under the own-resources decision of 31 October 1994, the
GNP-based own resources are used to cover the requirement for resources not funded
by the other sources of revenue, and are therefore a contingency reserve. A fiscal charge
in terms of a percentage of GNP for each Member State is laid down in the budget
procedure.

2.

3.

Figure 2:

Structure and development of the Union’s own resources (in bn ecus)

= GNP own resources

= VAT own resources

= traditional own resources

Source: M.C. Lödl, 1997.

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A steady, proportionate fall in traditional own resources has been observable. While in 1988
these still exceeded 29%, over the course of time customs duties, agricultural levies and sugar
levies - strongly influenced by the worldwide trade liberalisation measures introduced by GATT
and the WTO – fell to around 17% in 1997. It is clear that the proportion of VAT own resources
is  also  tending  to  fall,  very  largely  as  a  result  to  political  decisions.  Whereas  in  1988
approximately 60% of total EU receipts were still drawn from this source, by 1997 the proportion
had declined to around 42%. On the other hand, GNP receipts have gained sharply in importance.
The growth in receipts in the EU is – for primarily political reasons – being sustained essentially
by GNP-based own resources (Diekmann, 1998).

If the decrease in traditional receipts took place to a certain extent automatically, notably in the
face of the above-mentioned efforts at liberalisation, the reduction in the VAT share was initiated
principally by two elementary measures: on the one hand, the VAT assessment limit was capped
at 55% of GNP. By 1999 it is due to be brought down gradually to 50%; on the other hand, a
step-by-step reduction in the standard rate to 1% in 1999 was prescribed.

 6.2 Aims, methods and limitations

In  view  of  the  extensive  tasks  and  major  challenges  confronting  the  EU  as  the  millennium
approaches – enlargement to the East, creation of an economic and monetary union, common
foreign and security policy and reinforcement of internal political co-operation, strengthening of
global competitiveness and the new position in the world economy, etc. – a continuation of the
status quo in relation to the level of expenditure (capping) and the funding mechanism (own-
resources  pillar),  as  the  Commission  suggests  in  its  report  of  7  Oct.  1998,  appears  to  be
unworkable.

It is therefore necessary not only to think about alternatives but also to think ahead.

At the same time, on the receipts side of the EU budget essential reforms are on the agenda. As
far as new sources of EU revenue are concerned, these are discussed in detail in the Commission
report (European Commission, 1998) and in Begg et al. 1997. In both studies – with varying
criteria and with a different ranking of the recommendations – the following potential sources
of EU revenue are examined: (a) income tax (surcharge), (b) taxation at source on investment
income, (c) corporation tax, (d) VAT (shares), (e) tobacco and alcohol taxes, (f) central bank
profits, (g) environmental taxes, (h) taxation of communications and transport services.

While Begg in his examination establishes a very broad basis of assessment from a micro- and
macroeconomic,  fiscal  and  finance  policy,  psychological/financial  and  revenue-specific
perspective, the European Commission bases its analysis of the proposals on the criteria of
horizontal equality of the Member States, public transparency (incidentally, this can be strictly
contrary for acceptance), relation to Community policies, existence of a harmonised assessment
basis and the productivity or efficiency of the respective taxes.

The analysis we have carried out below examines the same proposals but stresses in particular
those aspects and arguments (highlighted) which are either not addressed at all or are addressed
inadequately in the above reports. Moreover, both in Begg et al. and in the Commission report,
there is an absence of any appraisal of the effects of the individual proposals on the relative
distribution of the burden among the Member States.

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p

y

p

y

p

economic  discussion  of  the  pro  and  contra  arguments  is  practically  impossible  without  an
analysis  of  differences  in  the  burden  and  ultimately  of  gains  or  losses  in  the  net  position.
Unfortunately, within the chronological and physical framework of the existing paper a detailed
calculation of the net positions following the introduction of various new own resources is not
possible. What it has been possible to achieve, however, is an analysis of the relative shifts in the
burden. For this, original records and raw data have been edited which could often only be
investigated  with  great  difficulty.  This  may  influence  the  precision  and  validity  of  the
calculations in detail, but the direction and order of magnitude of the results remains unaffected.
We have also fallen back partly on approximate dimensions (proxies) and indicators which
remain to be specified in the course of further research.

Against this background we have carried out the following comparative analysis:

1. What are the characteristic features and history of the proposals?

2. Who are the taxpayers in each case?

3. What is the underlying principle?

4. Which type of modelling is being proposed?

5. What advantages, and

6.

what disadvantages does the proposal have?

7. What is the position regarding the achievable fiscal revenue?

8. What degree of acceptance can be expected?

9.

How does the relative burden look for individual Member States?

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g

p

As far as question 8 is concerned, we shall turn to the results of a dissertation, as yet unpublished,
by Armin Rolfink, a graduate in business studies, on the funding of government in the light of
public preferences (Aachen, 1998). In his dissertation, Mr Rolfink examines popular preferences
and the level of public acceptance of various types of taxation as sources of government finance
(see following table).  He  finds  that  income tax and the solidarity tax levied in Germany to
finance the rehabilitation of East Germany are very unpopular (high preferred rate of adjustment),
that VAT is accepted, although any increase in the VAT rate is considered undesirable, but that
there is some limited scope for increases in corporation tax and the taxation of motor vehicles
and considerable scope for increased tobacco duty and environmental taxes.

Table 19:

Taxation preferences

 Type of tax

 Income tax 

 Value-added tax

 Solidarity surcharge

 Excise duty on mineral oil

 Corporation tax

 Business tax

 Excise duty on tobacco

 Road tax

 Property rates

 Insurance tax

 Ecotaxes

Source: Armin Rolfink, 1998, p. 233.

Preference for increased or
decreased reliance
on each form of taxation

Preferred 
adjustment 
(in %)

Average
resistance factor

- 

+/-

-

+

+/-

+/-

+

+/-

+/-

+/-

+

- 10.1

- 0.1

- 11.8

+ 1.2

+ 1.9

+ 1.9

+ 12.9

+ 0.3-

- 3.5

- 3.8

+ 5.3

3.931

3.003

4.003

2.881

2.848

2.842

1.931

2.968

3.320

3.355

2.521

Applied to our testing of potential new sources of Union revenue, this indicates that models
based on income tax and surcharges are likely to prove unpopular. Increases in VAT would not
exactly be a popular choice either, although the level of resistance to them is lower. Excise duties
on tobacco products (and on wines and spirits) and environmental taxes (’ecotaxes’) do not pose
any problems and could be useful alternatives to the present financing system; this also applies,
albeit  to  a  lesser  extent,  to  the  corporation-tax  option.  The  use  of  seigniorage,  the
communications tax and taxes deducted at source on interest and dividends were not included
in the survey. While we are inclined to believe that a tax on central-bank profits (seigniorage)
would  be  quite  readily  accepted  because  of  its  imperceptible  immediate  effect  on  people’s
pockets, and while we believe that a tax at source on interest would enjoy little popularity, being
essentially a tax on income from interest, which might well be equated with income tax, we
cannot pronounce on a communications tax, since such a tax does not yet exist. 

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p

for political consensus 

p

Before analysing the various proposals, we shall begin by presenting the tax-to-GDP ratios of the
various EU Member States. In 1996 the tax-to-GDP ratio in the Union rose by 0.2% to 27.2%
of aggregate GDP. This puts it just below the previous peak of 27.3%, recorded in 1989, as the
following diagram illustrates:

Figure 3:

Tax as a percentage of Union GDP, 1980-1996 (Source: Eurostat, 1997)

The peak level of 1989 marked the climax of an almost constant long-term rise in the tax ratio
through two full percentage points. At the start of the nineties the tax-to-GDP ratio hovered
within a 0.5% margin. The annual tax-to-GDP ratios in the Union over the period from 1980
to 1996 were as follows:

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Year

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996

Tax-to-GDP ratio in the Union 
(in %)

Burden of taxes and charges
(% of GDP)

25.5
26.0
26.2
26.5
26.8
26.8
26.7
27.0
27.0
27.3
27.0
27.0
27.1
27.0
26.8
27.0
27.2

38.7
39.2
39.8
40.3
40.5
40.6
40.5
41.0
40.8
40.9
40.7
41.1
41.6
41.9
41.6
42.0
42.4

Source: Eurostat, 1997, p. 2.

Since the national burdens of taxes and charges are weighted in accordance with the national
share of total Union GDP, the largest Member States account for a correspondingly larger
part of the Community total. Accordingly, the various changes in the smaller Member States
have a very limited effect on the Union average. The weighting assigned to the various
Member States on the basis of relative size may be represented as follows:

Figure 4:

Comparison of tax revenue and GDP, 1996

Tax revenue

GDP

Source: Eurostat, 1997, p. 1.

It emerges from the above illustration that the large Member States Germany, France, the United
Kingdom and Italy together account for about three-quarters of all tax revenue as well as of total
Union GDP.

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p

p

provided in the following table:

Table 21:

Tax structure and tax ratios in the Member States (in % of GDP)

Taxes on income and
property

Production taxes and
import levies

Value-added tax

Total taxation

1985

1994

1995

1996

1985

1994

1995

1996

1985

1994

1995

1996

1985

1994

1995

1996

Austria

13.0

11.7

12.5

13.6

Belgium

19.6

17.8

18.3

18.2

Denmark

28.6

31.7

31.4

31.6

7.4

4.2

8.2

7.8

5.2

7.9

Finland

17.2

17.7

17.8

19.7

14.4

14.6

France

9.1

9.4

9.5

10.0

Germany

12.6

11.1

11.3

10.4

Greece

5.4

6.8

Ireland

14.3

15.5

14.0

14.6

Italy

Lux.

NL

13.1

15.1

14.9

15.3

18.3

15.4

15.2

14.7

12.7

14.0

13.1

13.5

6.9

5.8

14.2

9.6

4.2

9.9

4.2

Portugal

Spain

7.7

8.5

8.6

9.4

10.5

13.2

11.5

11.4

11.5

Sweden

21.0

21.2

21.6

22.5

UK

EUR

15.5

13.7

14.6

14.6

13.1

12.8

13.0

13.1

7.5

5.0

7.9

6.3

7.4

5.9

7.4

6.6

7.3

5.4

8.1

6.2

7.6

5.8

7.3

6.8

7.4

6.0

7.9

7.7

6.6

10.8

10.5

10.3

5.6

7.0

5.1

6.8

7.2

6.7

5.6

7.1

4.9

7.3

7.6

6.5

5.8

4.8

8.6

7.5

6.6

9.5

9.5

9.7

7.1

9.3

6.8

9.2

0.0

8.1

5.9

0.0

7.3

4.8

5.0

6.8

0.0

0.0

7.0

5.3

5.7

8.2

6.5

9.5

0.0

6.7

6.4

6.2

6.6

5.1

5.2

6.2

6.2

5.1

8.1

6.6

6.3

7.5

6.4

9.4

7.6

6.8

6.1

6.5

5.2

5.4

6.1

7.2

5.1

7.1

6.5

6.3

8.0

6.5

9.7

8.4

7.2

6.1

6.5

5.1

5.9

6.5

5.2

8.1

6.6

6.4

29.8

28.0

28.3

29.7

32.0

31.1

31.2

31.6

47.2

50.1

49.7

50.4

31.7

32.5

32.1

34.6

25.2

24.9

25.2

26.0

25.3

24.5

24.3

23.3

20.6

22.1

32.6

31.2

29.3

29.7

22.8

27.7

27.8

28.7

34.5

32.5

32.2

31.7

25.0

27.2

26.2

27.1

21.1

23.1

24.7

18.2

22.7

22.4

22.4

37.5

36.2

36.8

39.9

31.7

28.4

29.7

29.6

26.8

26.8

27.0

27.2

Source: Eurostat, 1997, and our own calculations.    - = data not available.

A look at the tax-to-GDP ratio reveals the following picture: Denmark has the highest tax
ratio, at 50.4%, followed by the other Nordic countries as well as Belgium, Ireland, Italy,
Luxembourg, Austria and the United Kingdom, all of which exceed the EU average of 27.2%. 

The following diagram illustrates the composition of the tax structure in average Member
States:  

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Source: Eurostat, 1997, p. 6.

6.5

Qualitative and quantitative assessment of proposals for reforms in the domain of
the Union’s own resources

Against this background, the following pages contain analyses of the various proposals in tabular
form; each of the analyses is followed immediately by a statistical table showing the calculated
burden of the tax in question in each of the Member States:

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European corporat on tax

Models

Principle

Taxpayers

Acceptance

Advantages

Characteristics

C The precursors of this proposal are the Spinelli report, the 1978 Green Paper on financing the
Community and the Colom i Naval report of 1990.
C Attempts to harmonise company taxation: Neumark Committee (1963), Van den Tempel report
(1977), Commission proposals (1975, 1990), Ruding report (1992)
C Taxation of large companies (multinational and supranational)
C Companies legally liable for corporation tax
C Alternative 1: EU-wide corporation tax levied and collected nationally. Precondition: uniform
definition of taxable income and application of harmonised tax regulations
C Alternative 2: Uniform corporation tax to be levied and collected at EU level
C good
C Sufficiently large volume of revenue
C Avoidance of arbitrary allocation of tax revenue
C Minimisation of scope for companies to avoid taxation
C Simpler administration of company taxes possible (with regard to manipulation of transfer prices
and inadequate capital resources)
C The tax would be levied on those who gain most from the single market
C Large companies create few jobs
C Absence of a harmonised basis of assessment and different underlying systems - system with
split-level tax rates, separate levying or offsetting procedure
C Administrative problems for those countries which have integrated the taxation of business
profits into the system of personal taxation.
C Highly susceptible to cyclical fluctuations
C Little transparency and therefore a lack of consideration of the responsibility principle
C International tax competition would decrease in the EU because of uniform taxation
rates, but competition with other economic areas would stiffen
C Not all businesses would be affected, only companies in the corporation category
C A general business tax would be neutral in its effect
C Distributive effects are somewhat blurred
C Rates and systems / basis of assessment are not harmonised
Calculation of burden C Comparison of corporation-tax burdens: see following table

Disadvantages

Positional changes

Yield

C Four of the present net contributors (Germany, Austria, France and Italy) would
obtain  relief  because  of  their  relatively  small  corporation  tax-to-GDP  ratios;  the
Netherlands, though also a net contributor, would have a heavier burden to bear than
the others. As far as the largest net recipients are concerned, the introduction of an
EU corporation tax would not alter their net positions very significantly.
C If a uniform corporation tax were levied by the EU, it might be expected to yield about 6% of
the GNP of all Member States. Slightly less than one-sixth of this amount would suffice to meet
the financial needs of the EU, so the funds would be split between the EU and the Member States.

Table 22:Comparison of corporation-tax burdens in the 15 Member States

Corporation tax
(as a % of national GDP)

Ranking*

Germany

France

Italy

Austria

Spain

Portugal

Denmark

0.96

1.6

1.72

1.8

2.01

2.07

2.34

1

2

3

4

5

6

7

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Sweden

Belgium

United Kingdom

Ireland

Netherlands

Luxembourg

Finland

Greece

2.67

3.18

3.21

3.26

4.16

4.23

18.51

no data available

Source: Our own calculations; see appendix for basic statistics.
* Note: First place in the table is assigned to the Member State with the smallest burden.

8

9

10

11

12

13

14

-

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Characteristics

Principle

Taxpayers

Models

Acceptance

Advantages

Disadvantages

Calculation of burden

Positional changes

Yield

y

y

C Seigniorage is an important source of revenue for the Member States 
C Different methods are used to ascertain the amount of this revenue: (1) taking the country’s
money supply as a basis (notes and coins in circulation and cash holdings of the commercial
banks); (2) calculating the difference between market interest rates flowing into the central bank
from accounts receivable and the interest on liabilities put into circulation
C When the euro is introduced as the European single currency the Member States will lose their
revenue from seigniorage.
C Partial transfer of profits
C Institutions rather than individuals (ECB/finance ministries of Member States)
C Simple to administer; the ESCB would merely have to pass on the profits
C high
C In a unified monetary area there is no useful key for the distribution of seigniorage revenue
among the Member States
C If seigniorage is used for any other purpose, e.g. distribution among the Member States, a similar
phenomenon could occur to the ’Rotterdam-Antwerp effect’ that is observable in the domain of
customs revenue
C No levying and collection costs
C Little perceptible effect on people’s lives
C Fiscal result of European economic and monetary union
C No new taxes
C No additional burden that would be perceptible at the first stage (possible revenue shortfall
that will have to be made up in Member States)
C Resources related to EU policy (EMU)
C Some States will lose part of their seigniorage revenue in EMU, so a new arrangement is
necessary in any case
C Relatively low revenue => could only be used to top up existing Union resources
C It is conceivable that revenue could become degressive if the introduction of EMU leads to an
increase in non-cash payments and public cash holdings diminish
C Unclear distributive effects
C Political problems could arise because not all Member States are taking part in EMU
C Lack of transparency for the taxpayer; responsibility principle disappears
C Not all Member States are taking part in EMU
C Potential for political problems, since the Member States rely on return flows to their budgets
on the basis of a distribution key
C See following table
C Present net contributors Germany, the Netherlands, Austria, Italy and Sweden would
be more heavily burdened, because their shares in the initial capital of the ECB are
disproportionately smaller than their shares of the monetary basis of the EU. France and
the United Kingdom would be the main winners.
C  Relatively  small  yield  compared  with  EU  requirements  =>  only  suitable  as
supplementary source of revenue
C Estimates suggest about 0.4% of Union GDP, with regressive development if inflation can be
effectively curbed by EMU.

Table 23:

Redistribution of newly created money

Percentage of
GDP

Percentage of total
EU monetary basis

Column 1 ÷
Column 2

Percentage of initial
capital of the ECB

United
Kingdom

France

Portugal

14.63

17.37

1.02

6.86

8.96

1.26

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0.47

0.52

1.24

- 80 -

14.75

16.73

1.95

Cumulative 
balance in
bn euros

Ranking

12.1

11.91

1.02

1

2

3

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Belg um

Luxembourg

Ireland

Finland

Greece

Denmark

Sweden

Netherlands

Austria

Italy

Spain

2.88

0.19

0.94

1.91

1.28

2.10

3.21

4.45

2.41

15.64

7.36

2.45

0.03

0.77

1.48

2.48

2.2

3.25

5.13

3.33

17.53

11.36

0.85

0.16

0.82

0.77

1.94

1.05

1.01

1.15

1.38

1.12

1.54

Germany
Source: K. Gretschmann, 1997, and our own calculations.
* Note: First place in the table is assigned to the Member State with the smallest burden.

24.61

32.91

1.34

2.88

0.15

0.84

1.40

2.01

1.68

2.67

4.3

2.38

15.03

8.79

24.48

0.67

0.19

0.11

-0.12

-0.72

-0.8

-0.89

-1.28

-1.46

-3.83

-3.95

-12.92

4

5

6

7

8

9

10

11

12

13

14

15

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Characteristics

Principle

Taxpayers

Models

Acceptance

Advantages

Disadvantages

Exc se dut es on tobacco, w nes and sp r ts

C Harmonisation of excise duties on tobacco, wines and spirits was part of the original single-
market programme but made slow progress as a result of resistance from the Member States.
However, in the 1997 report on the single market, it was once more accepted as a minimum
taxation target.

C Taxation of specific (undesirable) consumption

C Consumers of tobacco products, wines and spirits

C A share of the Member States’ revenue from these duties to be paid to the EU. Precondition:
further progress towards an agreement on a harmonised basis of assessment for the entire EU

C high

C Low introduction costs, since these excise duties are already levied by the Member States.
C Guaranteed adequate and stable revenue
C Educational function, since the tax curbs the consumption of demeritorious products with high
social costs
C Linkage with health education

C No price elasticity - stable yield

C Doubtful accordance with the principle of fair taxation
C Tax rates would have to be adjusted periodically to take account of the rate of price increase or
of changes in spending patterns
C There tends to be a negative correlation between the consumption of these products and per
capita income, which makes them regressive taxes.
C Differing preferences could lead to strong resistance from individual Member States
C Narrow tax base, so high rates are required

Calculation of burden

C (Tobacco, wines and spirits duty) / ratio of national GDP to Union GDP; see following table

C Varying national taxation levels in the Member States

Positional changes

Yield

C The net contributors Italy, Austria and the Netherlands would benefit from this type
of EU funding; States like Finland, the UK and Ireland would be disproportionately
burdened

C If 0.15 euro were levied on every packet of cigarettes, the yield would be equivalent to 0.3% of
total Community GDP
C If the revenue from all tobacco duties were to flow into the coffers of the EU, the yield would
be equivalent to 0.6% of total Union GNP.

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Tobacco duty as a % of
GDP 

Wines and spirits duty as a % of
GDP

Total % of GDP

Ranking*

Belgium

Italy

Austria

Netherlands

Spain

France

Germany

Portugal

Sweden

Denmark

Luxembourg

Finland

United Kingdom

Ireland

Greece

0.51

0.07

0.53

0.47

0.55

0.74

0.58

0.77

0.42

0.73

1.51

0.56

1.09

1.21

0

0.6

0.15

0.23

0.19

0.04

0.22

0.16

0.68

0.44

0.18

1.23

0.82

1.25

0.51

0.67

0.68

0.70

0.74

0.78

0.80

0.93

1.10

1.17

1.69

1.79

1.91

2.46

no data available

no data available

no data available

Source: Our own calculations; see appendix for basic statistics.
* Note: First place in the table is assigned to the Member State with the smallest burden.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

-

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European interest and capital-gains tax (deducted at source)

Characteristics

Principle

Taxpayers

Models

Acceptance

Advantages

Disadvantages

C Levied on income from dividends and interest
C European Commission proposal, 1989: Community tax to be levied at source on income from
interest  payments  and  investments.  Thwarted  by  the  resistance  of  the  United  Kingdom  and
Luxembourg.
C Taxation of a specific type of income
C Recipients of unearned income
C Tax rate: 15% on interest from bonds and from bank and savings deposits, where the debtor is
a resident of a Member State
C Exception: Eurobonds
C Tends to be fairly low
C Reduces the existing distortions in the flow of portfolio investments in Europe, which is caused
by the current differentials in the taxation of unearned income
C Accords with the principle of fair distribution of burdens
C Standardises European capital transactions
C Minimises the risk of speculative capital movements and tax avoidance

C Able to attract consensus at EU level (Commission proposal of 20 May 1998 - 20%
minimum rate)
C Progressive redistribution effect (owners of capital are generally in higher income
brackets)
C Can be linked to further liberalisation of the rules governing capital
C Would handicap European financial centres in the acquisition of foreign capital for portfolio
investments => incentive for EU citizens to incest their money elsewhere.
C  Unwanted  effects  on  the  supply  of  financial  resources  in  the  EU  and  hence  on  long-term
economic growth, i.e. higher taxation of interest => higher cost of capital => lower investment
levels
C These taxes would not suffice to meet the financial requirements of the EU unless high rates
were imposed
C Since investments and savings fluctuate considerably, they do not constitute a stable source of
revenue.

C Denmark, Luxembourg and the Netherlands do not have such taxes.

Calculation of burden

C Capital is extremely mobile - avoidance reactions will erode the yield
C Comparison of national savings rates / GDP; see following table

Positional changes

Yield

C  The  present net contributors Germany and Austria would have to bear an unduly heavy
burden if a European tax on interest and capital gains were introduced, because the average
propensity to save is relatively high in both countries. However, other net contributors - the UK
and, more especially, Sweden - would have their burdens eased somewhat by this type of tax.
C A fairly low yield in relation to the needs of the EU => would only be suitable as a
supplementary source of income

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Table 25:

Comparison of interest and capital-gains tax burdens in the 15 EU Member States

APS**

Ranking*

Sweden

Denmark

Finland

Ireland

United Kingdom

Italy

Belgium

France

Netherlands

Spain

Greece

Germany

Austria

Luxembourg

14.3

14.8

14.9

14.9

15.1

17.1

17.8

19.1

19.7

19.8

20.9

22.2

24.1

24.4

1

2

3

3

5

6

7

8

9

10

11

12

13

14

Portugal
Source: Eurostat and our own calculations.
* Note: First place in the table is assigned to the Member State with the smallest burden.
** For want of statistical data, we have used the investment ratio as an approximation to the average propensity to save (APS).

25.8

15

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Characteristics

Principle

Taxpayers

Models

Acceptance

Advantages

Disadvantages

Calculation of burden

Positional changes

Yield

Percentage of value added tax

C VAT is the core of the present EU own-resources system
C Aim: replacement of the third and fourth sources of revenue by an EU-wide VAT
C The basis of this proposal is the Langes report, tabled by the Committee on Budgets of the
European Parliament in 1994. It provides for the VAT levied on consumers in the Member States
to  be  split  into  an  EU  component  (for  which  the  Commission  and  Parliament  would  be
responsible), comprising a 1.5% VAT rate on consumer goods and 3% on all other goods and
services, and a national component (for which the national parliaments would be responsible).
C Taxation of the use of income
C Technical collection method: levied on economic transactions
C Consumers and service users
C Basic features as proposed in the Langes report
C  Accompanied  by  various  optional  correction  mechanisms  to  ensure  a  fair  distribution  of
burdens:
(1) Mechanism for graduating VAT or adapting it to GNP (European Commission, 1978, which
draws on the 1977 McDougall report)
(2) Proposal for 100% adjustment to eliminate distortions (Denton, 1983)

(3) Correction on the basis of GNP or size of population
C neutral, but scarcely any scope for increases
C Elasticity of yield
C Basis of assessment is largely harmonised throughout the EU
C No additional administrative costs => can be directly levied on the basis of tax returns C High
degree of public acceptance within the EU, since VAT is already a familiar tax 
C Taxing consumption and encouraging savings = capital formation
C Clear link to the single market
C old tax = good tax
C Regressive effects of taxation
C Dependence on a number of influencing factors: on the ratio of private consumption to GDP,
on the ratio of public to private consumption and, in the case of industrial goods, on the net
balance of trade
C Fundamental problems inherent in the compound system may militate against the splitting of
VAT revenue
C Regressive distribution effects
C Rates and bases of assessment are not fully harmonised
C Negative multiplier effect D\ Y Y\
C Cyclical variability
C VAT assessment basis / GDP; see following table
C Our comparison reveals that the major net contributors to the EU would again be the main
losers if the VAT-based contribution were increased. The desired change in their net position
would not materialise; on the contrary, the existing structures would be more  firmly cemented.
C Relatively high yield

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Italy

Greece

Belgium

France

Sweden

Spain

Ireland

Netherlands

United Kingdom

Finland

Denmark

Luxembourg

Austria

Germany

Portugal

Ranking of Member States in terms of the basis of VAT
assessment as a percentage of GDP

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Source: Our own calculations; see appendix for basic statistics.
* Note: First place in the table is assigned to the Member State with the smallest burden.

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Characteristics

Principle

Taxpayers

Models

Acceptance

Advantages

Disadvantages

Calculation of burden

Positional changes

Yield

CO /energy tax

2

C The idea of an energy tax was first mooted in the Commission Green Paper of 1978 on financing
the Community
C There is a very wide range of options, from extensive taxation of energy use and demonstrable
forms  of  environmental  pollution  to  the  far  more  selective  taxation  of  particular  pollutant
emissions
C Taxation of the consumption of environmental resources
C Users of scarce environmental assets (energy sources)

2

C Emitters of pollutants
C  Commission  proposal  on  the  introduction  of  a  CO   tax:  US  $3  to  be  raised  on  the  energy
produced by one barrel of crude oil, rising to $10 in the year 2000 
Equal consideration to be given to energy content and CO  intensity 
C high
C Avoidance of external effects on neighbouring areas (restriction of ’freeriding’)
C  Exertion  of  influence  on  the  environmental  behaviour  of  the  population  =>  reduction  of
excessive use of pollutant energy sources
C Internalisation of external effects
C Creation of environmentally acceptable behaviour

2

C Capable of attracting political consensus
C Possible incompatibility with the objectives pursued by the Member States
C Regional distribution of eco-tax revenue would be highly random
C High introduction costs resulting from the need to provide measuring installations
C Probable degressive revenue pattern, i.e. tax yield will decrease in the course of time.
C European energy costs will increase in relation to those elsewhere (effect on competitiveness
C New tax

2

C  Conflict  between  fiscal  and  environmental  aims  may  lead  to  a  reduction  in  the  basis  of
assessment8
C CO  tax amounting to US $10 per barrel of crude oil would raise about 1.1% of GNP
C (CO  emissions + energy consumption / ratio of national GDP to Union GDP: see following
2
table)
C Sweden, France, Austria, Italy and, to a lesser extent, Finland would be better placed because
of  their  CO   levels,  which  are  lower  than  the  average  for  the  15  EU  Member  States.
Luxembourg and Portugal would be hardest hit by this tax, as their CO  emissions are by far
the highest of all the Member States.
C The erosion of the basis of assessment would lead to diminishing revenues unless the rate of
taxation were increased. A CO  tax would therefore be of limited value as a source of revenue.

2

2

2

8
 If the ecotax is effective, taxpayers will reduce their consumption of environmental resources, as is intended, but
that will reduce the basis of assessment, which is fiscally disadvantageous. Given that t (tax rate) x B (basis of
assessment) = T (tax yield), if B and T are reduced, t must increase. This would mean massive rises in the rate of
taxation.

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Table 27:Comparison of CO /energy tax burdens on the 15 EU Member States

2

CO  burden indicator

2

Ranking

Sweden

France

Austria

Italy

Denmark

Finland

Spain

Ireland

Germany

United Kingdom

Netherlands

Belgium

Portugal

Luxembourg

Greece

16.82

20.03

23.65

25.90

28.57

29.32

32.34

34.04

34.50

36.36

38.43

38.54

47.06

47.37

60.94

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Source: Our own calculations; see appendix for basic statistics.
* Note: First place in the table is assigned to the Member State with the smallest burden.

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Income-tax surcharge

Characteristics

C Most common method of raising revenue

Principle

Taxpayers

Models

Acceptance

Advantages

Disadvantages

C Economic capacity expressed in ’comprehensive income’

C Natural persons

C Partnerships, businesses and self-employed persons
C In principle, two different approaches are conceivable:
(1) Surcharge on the income tax levied by the various Member States, or

(2) Yearly payments to the EU by every Member State in accordance with its own percentage of
total Union GDP.

C poor

C Provides adequate revenue
C High elasticity of yield
C Member States’ contributions linked to economic capacity
C Transparency; EU component would be identifiable

C Considerable obstacles as a result of widely diverging national objectives (e.g. in relation to
redistribution)
C Lack of a harmonised basis of assessment could result in an uneven distribution of burdens
among the Member States
C Loss of national sovereignty
C Restriction of the fiscal autonomy enshrined in the Stability Pact

C High resistance to and evasion of tax
C Tax avoidance (cross-border)
C Tax rates and basis of assessment differ between Member States
C Coordination with national income tax difficult

C Overlapping interpersonal and interregional incidence

Calculation of burden

C Comparison of income tax with ratio of taxation to GDP; see following table

Positional changes

C On the basis of the aforementioned ranking, the surcharge would have different
effects on different Member States. Whereas the burden of a supplementary tax on
income and property would be relatively light for the net contributors France and
Germany,  Finland  and  Sweden  would  be  very  heavily  burdened;  the  other  net
contributors - Austria, Italy and the UK - would be somewhere in the middle.

Yield

C Relatively high yield

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Income and property taxes as a
percentage of GDP

Ranking

Greece

France

Germany

Portugal

Spain

Netherlands

Austria

United Kingdom

Ireland

Luxembourg

Italy

Belgium

Finland

Sweden

Denmark

6.8

10.0

10.4

10.5

11.5

13.5

13.6

14.6

14.6

14.7

15.3

18.2

19.7

22.5

31.6

1

2

3

4

5

6

7

8

8

10

11

12

13

14

15

Source: Our own calculations; see appendix for basic statistics.
* Note: First place in the table is assigned to the Member State with the smallest burden.

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Characteristics

Principle

Taxpayers

Models

Acceptance

Advantages

Disadvantages

Calculation of burden

Positional changes

New forms of communications and transport tax

C One of the effects of the creation of the single market has been an increase in the volume of
transport and communications in the EU.
C The legal framework governing the domain of transport and communications is being established
to an increasing extent at the European level.

C Securing a new and sustainable source of taxable added value

C Users of transport and communications services

C The objects of an EU-wide communications tax could be air transport and telecommunications,
for example.
C  3  possible  communication  taxes:  (1)  Taxation  of  telephone  connections  (including  mobile
phones), (2) Tax on air transport, (3) Tax on use of computers/Internet

Unknown, but we suspect it will be rather low

C High elasticity of yield; could cover the entire financial requirement if properly structured 
C Positive correlation with economic capacity and low initial costs for new Member States from
Central and Eastern Europe.
C Low assessment and collection costs.
C Very low risk of tax evasion and fraud
C High degree of transparency
C Relation to EU policy: cross-border mobility of goods, currency and persons
C Cross-border and mobility-orientated benefit (European single market)
C Unclear distribution of tax revenue
C Receipts will be difficult to attribute to individual Member States
C Contrary to the principle of free movement within the internal market
C Inconsistent with the long-term EU goal of strengthening European competitiveness for the 21st
century
C Tax on communication and transport is undesirable from an allocative point of view, because
it restricts both of these activities
C Unclear whether value or quantity is being taxed here
C High introduction costs

C Average annual taxation of about 40 euros per telephone connection would yield 10 bn euros
(at 1997 prices)
C Estimates of the yield from airport departure taxes run at about 10 bn euros (at 1997 prices)
C Number of telephone connections / ratio of national GDP to Union GDP
C Number of flights / ratio of national GDP to Union GDP: see following table

C Air transport: With regard to the burdening of Member States in the event of a
transport tax being introduced, an examination of the air-transport situation does not
produce a uniform picture. While the net contributors UK and Italy would obtain
some relief, the Netherlands - also a net contributor - would be one of the losers.
Similarly, among the net recipients there are winners (e.g. Ireland) and losers (e.g.
Greece).
C Communication: No clear pattern is identifiable in this domain either between net
recipients and net contributors. The burdens are distributed heterogeneously.

Yield

C Suitable only as a supplementary source of revenue 

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Member States

Air-traffic indicator

Ranking

United Kingdom

Italy

Finland

Ireland

Austria

Sweden

Denmark

Spain

France

Belgium/Luxembourg

Germany

Portugal

Netherlands

-65.55

-49.23

-15.71

0.00

0.00

0.00

0.00

14.13

26.60

34.20

68.26

73.53

760.90

Greece
Source: Our own calculations; see appendix for basic statistics.
* Note: First place in the table is assigned to the Member State with the smallest burden.

792.19

1

2

3

4

5

6

7

8

9

10

11

12

13

14

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Communication indicator

Ranking

Luxembourg

Ireland

Sweden

Denmark

Finland

France

Austria

Italy

Belgium

Greece

Netherlands

United Kingdom

Germany

Portugal

531.58

1127.66

1264.80

1319.05

1324.61

1341.39

1549.79

1556.91

1572.92

1601.56

1662.92

1715.65

1820.40

1823.53

Spain
Source: Our own calculations; see appendix for basic data.
* Note: First place in the table is assigned to the Member State with the smallest burden.

2133.15

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

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p p

q

(1) The structure of tax revenue varies from one Member State to another. Which Member
States will be primarily affected by which of the aforementioned tax changes? Can a
fundamental distinction be made between northern and southern countries or between net
contributors and net recipients, or will the effects be felt equally, irrespective of tax
structures? Can they attract political consensus? 

(2) Should a separated or linked system be chosen for a future EU funding system? As far as
the financial autonomy of the EU is concerned, a separated system (i.e. independent and
exclusive sources of revenue) is preferable. For reasons of practicality and acceptance, a
linked system would be preferable, since it is a recursive approach to reform which depends
on existing structures. The changeover would thus create fewer shock waves.

The following table provides a general comparison between our evaluation of the individual
proposals for reform of the own-resources system and previous evaluations:

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Table 30:Ranking of potential sources of Union revenue: results of four studies

European
Economy

Begg et al.

Keerl

Gretschmann 
et al.
(quantitative)

Gretschmann 
et al.
(qualitative)

CO /energy tax

2

Revised VAT

Excise duties on tobacco,
wines, 
and
mineral oil

spirits 

Corporation tax

Tax  on  transport  and
t e l e c o m m u n i c a t i o n s
services 

Income tax

Tax on interest, levied at
source

ECB  profits  from  note
issues

1

3

4

2/3

-*

5

4

2

6

1

3

4

2

5

7

8

2

1

4

3/4

-*

5

2

3

2

8

4**

1

5

6

7

3

6

5

3**

1

8

7

4

2

Compiled on the basis of the European Commission own-resources report (1998) and our own calculations.
*- = Data not available.
** Ranking is based exclusively on examination of tobacco, wine and spirit consumption.

The quantitative assessment (second-last column) focuses chiefly on the redistribution effects
of the various forms of revenue in terms of the relief they might bring to net-contributor
States. Our analyses put corporation tax in first place, followed by a CO /energy tax and the
allocation of ECB profits to the EU budget. Our final qualitative general assessment (last
column) goes beyond the quantitative aspects to consider factors such as acceptance, yield
and general advantages and disadvantages (see previous tabulated analysis). This alters the
ranking slightly: while corporation tax and the transfer of ECB profits are still favourably
assessed, the CO /energy tax can only be given a limited vote of confidence after all the pros
and cons have been weighed up. By contrast, the specific excise duties come out better than
in the purely quantitative ranking.

2

2

The option of introducing a European corporation tax ranks considerably higher in our study
than in the other studies included in the table, whereas we cannot unreservedly recommend
the introduction of a European value-added tax, unlike the other studies.

6.6

New ground II: a European Tobin tax?

The proposal in 1978 by James Tobin, that doyen of Keynesian economics, to subject short-
term capital movements in particular speculative capital regaining its topicality despite being
a comparatively old proposal. Given (a) the pronounced global financial market crisis since
mid-1998, (b) the collapse of a major hedge fund (LTCN) and the jolt received by at least one
other major hedge fund (Tiger Fund), (c) a change of outlook by leading economists, such as
Paul Krugman or Joseph Stiglitz, and institutions, such as the IMF and World Bank, and (d) a
new social democratic basic consensus in the EU Member States on bringing ultra-liberalised
capital markets under control, the so-called Tobin tax is experiencing a renaissance. While
earlier assessments, for instance in 1995 and by the OECD and by the IMF, tended to be

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p
proposal in the light of the recent crisis.

j

g

g

What is at stake here, and what might the Tobin tax yield if it were an EU own resource?

Given a trading volume of some US$ 1.3 trillion per day on the international financial
markets and a global trading volume of some US$ 4 trillion per year, turnover on the
financial markets in only three days is equivalent to total annual global trade. This implies
dangerous volatility concerning short-term capital movements in particular (portfolio
investments). That such capital outflows can have a fatal impact on entire economies can be
seen from the Mexico crisis, the Asia crisis and the dangers currently lurking in Brazil, which
impose either dramatic devaluations or, on the other hand, untenably high interest rates. At
present it is becoming increasingly clear that hedge funds in particular, with their incredible
leverage effects, import huge risks for the world economy into the system.

Against this backdrop, the Tobin tax on international transactions seeks to put a spanner in
the works of international financial markets, but not fundamentally to reverse capital market
liberalisation. The intention is to make foreign exchange transactions more expensive: a
premium would be payable on the nominal value of transactions, i.e. a tax rate of between
0.5% and 1%. In particular the time frames are important, however: long-term capital
investment would be largely spared; short-term investment would be hit particularly hard.
This would:

1.

2.

3.

4.

increase the importance of long-term underlying data for players’ investment
decisions,

permit greater monetary and fiscal autonomy,

considerably scale-down speculative capital movements, and

permit a significant yield to be generated by a genuinely international tax (estimates
range from approx. US$ 150 bn to 500 bn).

The notion of containing financial market speculation by raising transaction costs originated
with Keynes. Tobin put this thinking into more specific terms by proposing a uniform
international rate of tax on all foreign exchange turnover which would be dependent on
volume (assessment basis). The tax would be payable on all exchange operations. This would
hit short-term capital movements per se significantly harder than long-term movements. This
is impressively substantiated by Table 31.

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interest earnings in the home currency

Period

1 day

3 days

1 week

1 month

1 year

5 years

Source: IMF, 1995, p. 3

0.5% tax rate

551.3

90.7

35.6

11

6.6

4.6

This makes the special burden on short-term capital movements apparent. Non-monetary
financial movements and physical asset investments are not affected.

Instead of financing global development programmes, as has been proposed on various
occasions, e.g. at the UN Social Development Summit in Copenhagen in 1995, the yield from
a ’hemispheric Tobin tax’ levied in the EU, for instance with the assistance of the European
Central Bank (ECB) could at least partly finance the EU budget.

Assuming, by way of an initial rough estimate, the two benchmark figures of ECU 120 bn and
ECU 350 bn (if derivates are included) as the global yield from the Tobin tax, and allowing
for the fact that the EU accounts for some 21.5% of total world GNP but for a far higher
proportion of world financial and capital resources (some 33%), the annual yield would be
between about ECU 30 bn and ECU 80 bn. 

In addition to high fiscal yield, there would be a comparatively high degree of popularity as  a
crisis management instrument, a progressive distributive effect, a high level of transparency
for the public, a role in reflecting a unique European interest - stabilisation of the financial
markets - and a uniform assessment base for all EU Member States. The main drawbacks are
regarded as technical ones (OECD, 1995; IMF, 1995).

Admittedly, this study cannot conduct a detailed analysis of such a new own resources pillar.
That should be the task of a more far-reaching study, however, as the model overall can be
regarded as eminently promising.

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,

,

1. Against the backdrop of (a) the challenges facing the EU’s financial rules and regulations
in the transition to the 21st century and (b) the continuing debate on burden sharing, this
study analyses the imperative action to be taken and models for reform in connection with
the EU’s finances.

2. An initial perusal of proposals and discussions reveals (a) that Agenda 2000 is burdened
by considerable uncertainties regarding its premises and, accordingly, harbours financing
risks, (b) that the Commission report of 7 October 1998 has given a new twist to the
burden-sharing debate in that the existence of persistent budgetary imbalances has
definitely been acknowledged, (c) that preference is being given to expenditure-side
reforms, without a convincing case being made for this, over changes on the revenue side,
and (d) that the dominant approach is reactive rather than rationalistic.

3. Our examination of own-resources bears out the fact that traditional own resources
(TORs) are in continuing, inherent decline. This is the result of increasing EU
liberalisation of imports - lower tariff rates - and as such must be welcomed. However,
this development is having two major effects: (a) in terms of methodology, TORs should
be completely disregarded in analyses of net balances, since they are a declining self-
balancing item and do not burden the Member States, and (b) in substantive terms, the
constant decline of the only genuine own resources must be compensated by the
introduction of a new genuine source of own resources, at least to preserve the status
quo. It is therefore entirely sensible to call for a Euro-tax.

4.

 In our view, the much-invoked regressive nature of VAT own resources is not tenable.
On the one hand, marginal propensity to consume declining in relation to national income
cannot be established. The calculated correlation for all EU Member States is -0.274 and
is not significant. The accusation of regression against the proposal from the Committee
on Budgets of the European Parliament, and its preference for a VAT model, is therefore
unfounded.

5. There are also problems with regard to incorporating GDP as an affluence indicator or a
criterion for national contributive capacity. In future - in the light of the single currency
and one downwardly converging inflation rate for Euroland - the issue of assessing
purchasing-power parities and/or determining exchange rates will no longer be of any
particular significance. What is much more important, in our view, is the correction of
GDP/per capita figures for unreported value added from the informal economy, ranging
from 3% in Luxembourg to 26% in Italy, which are insufficiently allowed for by Eurostat.

6. The study also examines productive capacity and constraints in terms of considerations of
net position, focusing on the Rotterdam Antwerp Gateway Effect. We have established
that, although this effect markedly exaggerates the Netherlands’ net contributor position
and underestimates Belgium’s net inflow position, at the same time it (a) tends to be offset
by an inverse Gateway Effect (agricultural compensatory payments) and (b) will become
less important in quantitative terms, because of the decline of TORs. Nonetheless, the
Gateway Effect must be viewed as an indication that, on the revenue side of the EU
budget, between 15 and 25% of resources are not attributable. We therefore propose that
both the Rotterdam Antwerp Effect and the TORs overall be completely removed from
net calculations.

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g

g

p

generally regarded as not being quantifiable in budgetary terms. However, it can be
assumed that benefits in terms of external trade, direct investment relief, freedom of
establishment, internal market etc. (a) vary between the EU Member States and (b)
produce budgetary effects. The latter also holds true for the opportunity cost of non-
membership of the EU. In this instance, additional national budget funding is needed for
agriculture, regional policy or structural assistance. Our conclusion is that, in the light of
such problems, calculations of net positions must be interpreted with caution: on the one
hand, false precision is misleading; on the other, however, generalisations may be lent
support and budgetary imbalances detected.

8. Nonetheless, the first attempt ever is being made in this study to translate value added

from EU-dependent external trade gains, multiplied by average national overall tax ratios,
into budgetary effects. On the basis of specific assumptions, we have been able to show
that EU trade gains produce differing volumes of additional national tax revenues,
ranging from ECU 1.5 bn for Sweden to ECU 7.3 bn for Denmark, ECU 7.8 bn for the
Netherlands, ECU 9 bn for France and as much as ECU 16 bn for the United Kingdom.
This, of course, puts a different complexion on the question of justifying the contribution
rebate. Germany makes a gain of ECU 7.1 bn and considerably modifies its net
contributor position to ECU - 3.3 bn. To sum up, because the fiscal effects of increased
intra-EU trade are ignored, current net position calculations show net burdens which are
too high and net inflows which are too low.

9. With regard to the proposals for reform on the expenditure side, the study examines and
reports above all on proposals for reorganisation in the areas of agriculture and the
Structural Funds. Although it can be shown that the CAP co-financing model proposed by
the Commission and Parliament both is in keeping with the system and reduces the
burden on net contributors, it is our view (a) that the approach is more reactive than
systematic and (b) that this variant for a solution is potentially the source of considerable
conflict in that winners and losers find themselves in a zero-sum game. Political
opposition is therefore inevitable and can probably be overcome only by making new
’side-payments’ in other areas.

10. In our judgment, savings and the beginnings of reforms in other areas such as, for
example, R&D, administrative expenditure, financial control etc. will not yield a
sufficient volume of financial resources. The only useful element we see is the
dismantling of the British special rebate, with a phasing-out model operating in parallel
with the scaling-down of the EU budget share accounted for by agriculture. 

11. We would furthermore argue that the reform of the Structural Funds must be analysed

from a fiscal point of view and in terms of financial rules and regulations. In the interests
of making for more radical lines of reasoning, we propose that the burden of acting as a
concealed financial compensation mechanism be removed from the Structural Funds and
that a separate system of compensatory transfer payments be established.

12. The study carries out a detailed examination with reference to two specific German

proposals for reform: the Land finance ministers’ model and the capping model of the
Federal Ministry for Finance. In our assessment, neither model appears to be entirely
suitable for meeting the challenges of the EU finance system and coping with the problem
of burden sharing. Both go for ex-post compensation mechanisms which are not
transparent and politically controllable. These proposals also suffer from their exclusively

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pp
contribution.

j

g

13. Lastly, this study attempts to carry out an in-depth comparative analysis of the reform-
side proposals which have been made. We submit our own quantitative and qualitative
assessment of the proposals for own-resources reform. The following potential sources of
own resources are examined: (a) income tax (surcharge), (b) taxation of interest earnings
at source, (c) corporation tax, (d) VAT (pro rata), (e) taxes on tobacco and alcohol, (f)
central bank profits, (g) eco-taxes and (h) taxing of communications and transport
services.

14. We have included European citizens’ preferences for the various own-resources proposals
in the analysis. While the income tax (surcharge) option is comparatively unpopular, and
cooperation and eco-taxes are very much accepted, there is very little latitude as far as
VAT is concerned.

15. We also analyse the differing effects, in terms of burdens, of the various own-resources
proposals on the EU Member States. While (a) the corporation tax models ease the
burden on the current net contributors (Germany, France and Italy) but present the
Netherlands with additional burdens, (b) Germany, the Netherlands, Austria, Sweden and
Italy would be additionally burdened by ’seigniorage’ financing. France and the United
Kingdom were winners. (c) Denmark’s proposals concerning tax on alcohol and tobacco
would ease the burden on Italy, Austria and the Netherlands, but would involve new
burdens for France, the United Kingdom and Ireland. (d) Germany and Austria in
particular would be hit hard by a tax on interest at source, but the burden on the United
Kingdom and Sweden would be eased. (e) The VAT component would produce an even
greater burden for the current net contributors, while (f) a CO  tax would ease the burden
for Sweden, Austria, France and Italy. (g) An income tax surcharge would have positive
effects for Germany but would impose greater demands on France and Sweden. The
effects of (h) a communications and transport tax are comparatively vague.

2

16. In the light of this outcome, we have drawn up a list of own-resources alternatives, in

order of merit, the three best in purely quantitative terms (net burden) being corporation
taxes, CO  taxes and ’seigniorage’, while in a general analysis including qualitative
criteria, some of which we have developed ourselves, corporation taxes and ’seigniorage’
maintain their position but CO  tax markedly loses ground.

2

2

17. Last but not least, the study discusses the appropriateness of a Tobin tax (anti-speculation
tax) as a source of own resources for the EU. Although it was not possible, as part of this
work, to make a large-scale quantitative estimate of the likely effects, the qualitative
benefits would appear to warrant a more precise examination. We therefore recommend
that this own-resources alternative be looked at more closely.

18. From this we derive a number of recommendations:

(a)

(b)

In our view, further research would be useful in the area of the Tobin tax, own-
resources acceptance (citizens’ preferences in the individual Member State) and the
changes in net positions, which can be quantified to an even greater extent,
resulting from the own-resources proposals;
There should be a further, detailed examination of the VAT proposal from the
Committee on Budgets of the European Parliament; it does not seem optimal to us;

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p p

g

g

(d)

examined in greater depth;
It is essential that declining genuine own resources (TORs) be offset, which
justifies the further quest for a Euro-tax;

(e) With regard to that quest, we would give utmost priority to putting corporation tax

(f)

on a European footing and to the ECB’s central bank profits;
In the medium and long term, the Committee on Budgets and Parliament should
develop a reasoned system for horizontal and vertical compensatory transfer
payments without hypothecation.

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APPENDIX

Selected tax revenue by Member State (1996 in m.ecus)

VAT

Tobacco duty

Excise duty on
wines and spirits

Excise duty on
mineral oil

Corporation tax

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

United Kingdom

14 217.1

13 614.02

13 734.0

7 920.15

88 733.25

112 749.0

5 139.68

3 518.43

48 691.65

809.32

20 067.95

4 797.5

22 176.69

14 865.3

54 025.75

916.3

1 071.95

977.0

543.22

9 028.03

10 839.26

0.0

653.11

664.64

209.35

1 462.80

602.73

2 341.11

832

9 142.24

Source: Eurostat, 1996, and our own calculations.

266.5

0.0

599.0

1 202.44

432.93

4 158.07

0.0

678.42

2 694.6

3 184.59

1 968.0

2 222.48

22 877.09

35 744.21

0.0

978.38

5 739.27

23 444.58

25.35

602.88

125.36

825.06

1 356.1

6 841.29

447.90

5 935.33

2 083.98

-

2 792.5

19 433.6

3 126.7

6 620.49

3151.0

18 080.11

19 467.58

17 716.3

0.0

1 757.93

16 438.82

585.29

12 875.45

1 606.91

8 592.21

5 253.1

27 032.18

Selected tax revenue by Member State (1996, as a percentage of each country’s GDP)

VAT

Tobacco duty

Excise duty on 
wines and spirits

Excise duty on

mineral oil

Corporation tax

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

8.18

6.53

10.19

8.11

7.29

6.08

6.38

6.53

5.09

5.85

6.49

6.16

0.53

0.51

0.73

0.56

0.74

0.58

0.0

1.21

0.07

1.51

0.47

0.77

0.15

0.0

0.44

1.23

0.04

0.22

0.0

1.25

0.6

0.18

0.23

0.16

1.55

1.53

1.46

2.27

1.88

1.93

0.0

1.81

2.45

3.24

1.92

2.68

1.80

3.18

2.34

18.51

1.6

0.96

0.0

3.26

1.72

4.23

4.16

2.07

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Spa n

Sweden

United Kingdom

5.18

7.54

6.42

0.55

0.42

1.09

0.19

0.68

0.82

1.42

2.31

2.01

2.67

3.21

Source: Eurostat, 1996, and our own calculations.

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Air-transport
services*

Passenger traffic*

Cargo traffic*

Other air-transport services*

Austria

Belgium / Luxembourg

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Netherlands

Portugal

Spain

Sweden

United Kingdom

53

-15

231

840

507

-385

1693

37

52

-479

31

7

-404

194

336

-367

1198

110

-70

260

43

-24

166

667

108

191

389

-88

69

-12

Source: Eurostat, Basic Statistics of the European Union, 1995.

* Data basis: 1994

-22

2

469

-21

63

-209

106

16

53

-728

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Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

United Kingdom

Sweden
Source: Eurostat, Basic Statistics of the European Union, 1995.

* Data basis: 1994

No of main telephone lines in 1000s

3466

4264

3003

2742

29905

35421

4497

1096

23709

207

7395

3014

13792

26084

5922

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WORKING PARTY OF EU DESK OFFICERS FROM THE FINANCE MINISTRIES OF THE

GERMAN 

LÄNDER 

(ARBEITSGRUPPE 

DER 

EU-REFERENTEN 

DER

LÄNDERFINANZRESSORTS),  Finanzbeziehungen  der  Bundesrepublik  Deutschland  zur

Europäischen  Union.  Working  Party  report  to  the  Conference  of  Finance  Ministers  of  the

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ABOUT THE AUTHORS

Klaus  Gretschmann  has  been  a  professor  of  Economics  and  Finance  at  the  Rhenish-

Westphalian Technical University (Rheinisch-Westfälische Technische Hochschule) in Aachen,

Germany, since 1993. He also acts as an adviser on international politics. He also served for

several years as head of directorate and chief economist at the European Institute of Public

Administration,  an  international  organisation  under  the  auspices  of  the  EU  and  based  in

Maastricht in the Netherlands.

Address: RWTH Aachen

Lehr- und Forschungsgebiet

Allg. VWL und Finanzwissenschaft (FB 8)

Templergraben 55, D-52056 Aachen

Tel: 0049-(0)241-80-6156; Fax: 0049-(0)241/8888-337

E-mail: kgr@fiwi.rwth-aachen.de

Stefan Flüchter is an academic assistant in the Department of Economics and Finance at the

Rhenish-Westphalian Technical University in Aachen. 

Address: RWTH Aachen

Lehr- und Forschungsgebiet

Allg. VWL und Finanzwissenschaft (FB 8)

Templergraben 55, D-52056 Aachen

Tel.: 0049-(0)241-80-6154; Fax: 0049-(0)241-8888-337

E-mail: finanzwissenschaft@rwth-aachen.de

Heike Spaderna is an academic assistant in the Department of Economics and Finance at the

Rhenish-Westphalian Technical University in Aachen.

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Lehr- und Forschungsgebiet

Allg. VWL und Finanzwissenschaft (FB 8)

Templergraben 55, D-52056 Aachen

Tel: 0049-(0)241-80-6156; Fax: 0049-(0)241-8888-337

E-mail: finanzwissenschaft@rwth-aachen.de

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