COMMISSION STAFF WORKING DOCUMENT TECHNICAL ANNEXES   Accompanying document to the   COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE NATIONAL PARLIAMENTS  The EU Budget Review
Date: 2010-10-19
Institutions: European Commission
Subjects: Community budget, European Parliament, report, revision of financial perspectives

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EUROPEAN COMMISSION 

Brussels, 19.10.2010 
SEC(2010) 7000 final 

COMMISSION STAFF WORKING DOCUMENT 

TECHNICAL ANNEXES 

Accompanying document to the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE NATIONAL 
PARLIAMENTS 

The EU Budget Review 

{COM(2010) 700 final} 

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   EN 

 
 
  
 
 
 
 
 
TABLE OF CONTENTS 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

11. 

Origins of the budget review........................................................................................ 3 

Main results of the public consultation on the budget review ..................................... 4 

Analysis of the evolution of the EU budget ................................................................. 6 

Flexibility in the multi-annual financial Framework 2007-2013............................... 10 

The links between the EU budget and economic reform ........................................... 12 

Intra-EU Trade in Goods and Services ...................................................................... 14 

The impact of cohesion policy on the EU economy .................................................. 18 

The role of financial instruments ............................................................................... 21 

Results of ex-post evaluations.................................................................................... 24 

Improving sound financial management.................................................................... 28 

Analysis of potential alternative own resources to finance the EU budget................ 31 

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1. 

ORIGINS OF THE BUDGET REVIEW 

The  December  2005  European  Council  and  the  Inter-Institutional  Agreement  between  the 
European  Parliament,  the  Council  and  the  Commission  on  budgetary  discipline  and  sound 
financial  management  of  May  2006  mandated  the  Commission  "to  undertake  a  full,  wide 
ranging  review  covering  all  aspects  of  EU  spending,  including  the  Common  Agricultural 
Policy, and of resources, including the United Kingdom rebate, and to report in 2008/ 2009"1.  

The  Commission's  general  approach  to  the  reform  was  set  out  in  its  consultation  paper  of 
September 20072. A series of external studies have been commissioned and academic experts 
have provided a sound analytical basis for assessing EU finances, notably in the framework of 
an academic conference organised by the Commission in April 2009 and followed by a series 
of  workshops3.  A  broad  consultation  with  interested  parties  at  local,  regional  and  national 
levels, backed up by a number of hearings, seminars, workshops and information events, has 
stimulated  a  Europe-wide  debate  on  EU  political  priorities  and  the  role  of  EU  finances  to 
promote these priorities.  

The European Parliament made significant contributions to the preparatory work leading up to 
the  establishment  of  the  review.  It  engaged  in  a  dialogue  with  national  parliaments  on  the 
reform of the own resources system. 

The Commission received close to 300 contributions in the public consultation4, reflecting a 
broad range of opinions and approaches. They included contributions from all Member States 
as  well  as  from  national  parliaments,  regional  and  local  authorities,  social  partners,  non-
governmental organisations, universities and academic experts, private sector interest groups 
and  individual  citizens.  Contributions  were  also  received  from  the  European  Court  of 
Auditors, the Committee of the Regions, the European Economic and Social Committee, the 
European Parliament's Committee on Budgetary Control and some individual Members of the 
European Parliament. A major conference organised in November 2008 allowed contributors 
and other stakeholders to express their views and provided a further opportunity for dialogue 
with the European Parliament5.  

1 
2 
3 

4 

5 

OJ C 139, 14.6.2006, p. 15 (Declaration No 3). 
SEC(2007) 1188, 12.9.2007. 
The conference's proceedings and papers are available on: 
http://ec.europa.eu/dgs/policy_advisers/public_finance_conference_en.htm.  
The contributions have been published: http://ec.europa.eu/budget/reform/issues/read_en.htm. A short, 
in  SEC(2008)  2739  of  3.11.2008 
non-exhaustive  summary  of  contributions  can  be  found 
(http://ec.europa.eu/budget/reform/library/issue_paper/summary_consulation_doc_final_en.pdf).  
Resolution on the Mid-term Review of the 2007-2013 Financial Framework, A6-0110/2009  

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2. 

MAIN RESULTS OF THE PUBLIC CONSULTATION ON THE BUDGET REVIEW 

The key conclusions of the public consultation can be summarised as follows:  

–  Only a minority of respondents were fully satisfied with the current budget structure. Many 
contributors saw the budget as being determined by political trade-offs rather than a well 
grounded allocation decision to advance European objectives; 

–  The majority of contributions stated that the guiding principle should be "European added 
value". EU spending should offer clear and visible benefits for the Union and its citizens 
that could not be attained by spending at national/regional/local levels; 

–  Maintaining and improving Europe's global competitiveness and the fight against climate 
change  were  seen  as  being  among  the  most  demanding  future  challenges  that  should  be 
reflected in the EU budget;  

–  Other  frequently  mentioned  challenges  were:  greater  global  responsibility  to  deal  with 
increasing external pressures, ensuring energy supply, promoting Europe's transformation 
into  a  knowledge  and  service  economy,  adapting  to  demographic  trends,  managing 
migration, reducing inequalities and disparities, and addressing security threats;  

–  There was widespread support for reorienting spending priorities, with many contributions 
advocating, in particular, reductions in spending on agriculture and increased spending on 
research, energy, technological development and innovation; 

–  There  was  strong  support  for  strengthening  the  Union's  profile  in  the  areas  of  migration 
and security. A significant number of contributions highlighted the increasing dependence 
of  the  well-being  of  Europeans  on  developments  outside  the  EU's  borders.  Special 
emphasis was therefore placed on the particular importance of external policies, including 
the  external  dimension  of  energy  security,  climate  change  and  migration,  with 
enlargement,  the  European  neighbourhood  policy,  development  action  and  the  common 
foreign and security policy frequently being mentioned in that context; 

–  The Common Agricultural Policy (CAP) was the policy area most frequently commented 
on in the consultation, with a relatively broad consensus about the need for further reforms 
to align the policy with current priorities. To many, agriculture remains a strategic sector, 
but most respondents advocated modernising the CAP, making European agriculture more 
competitive at the global level, more responsive in terms of climate change and food safety 
and quality requirements and better targeted on the objectives it is supposed to achieve; 

–  Cohesion policy received strong support, with, however, opinions considerably diverging 
on how it should be reformed. The reduction of regional disparities remains a key concern 
in the enlarged Union. A clear majority of contributions argued in favour of concentrating 
funds more strongly on less developed Member States and regions; 

–  The inflexibility within financial frameworks and the perceived inability to adapt quickly 
to changing priorities were seen as problems. The idea of continuing to work with multi-
annual  financial  frameworks  received  general  support.  However,  only  a  minority  of 
contributors stated that the existing framework provides an adequate balance between the 
need for stability and the need for flexibility. A considerable number of respondents argued 
that sufficient margins should be foreseen to increase effectiveness and efficiency; 

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–  A  considerable  number  of  contributors  criticised  the  net-balance  approach,  which  places 

the emphasis on net cash flows to and from Member States; 

–  The  most  frequently  mentioned  guiding  principles  for  the  own  resources  system  were 
fairness, effectiveness, simplicity, transparency, equity, sufficiency of means, sustainability 
and stability; 

–  Two  own  resources  received  considerable  support:  moving  towards  a  system  exclusively 
based  on  Traditional  Own  Resources  (TOR)  and  the  resource  based  on  Gross  National 
Income (GNI); 

–  A large number of respondents indicated that eliminating the resource based on a statistical 
value  added  tax  (VAT)  could  contribute  to  a  more  transparent  and  simple  financing 
system, without greatly affecting its current functioning; 

–  Many respondents supported the idea of financing a larger part of the EU budget from new 
own  resources.  Resources  related  to  the  environment  and,  in  particular,  climate  change 
were among the most prominent candidates. More specifically, contributors referred to the 
allocation of all or  part of  the  revenues  from  emission allowance  trading; CO2 or carbon 
taxation; energy, petrol, fuel or kerosene taxation; flight duties, maritime transport taxation 
and vehicles taxation. 

–  There  was  very  heavy  opposition  from  all  categories  of  contributors  to  any  kind  of 
corrections,  exceptions  or  compensations.  The  clear  majority  view  was  that  abolishing 
existing exceptions and correction mechanisms is an indispensable step in making the EU 
budget more equitable and transparent;  

–  The responses to the consultation also conveyed a clear message in favour of simplification 
and proportionality. Administrative burdens and control requirements are often considered 
excessive in the light of the modesty of resources involved for certain actions; 

–  Most  respondents  agreed  that  budget  delivery  should  become  more  result-  and 
performance-oriented,  with  increased  coordination  to  achieve  synergies  and  ensure 
coherence; 

–  Some contributors took the view that a better balance should be found between the cost of 
controls  and  the  efficiency  and  benefit  of  such  controls.  Since  aiming  at  zero  risk  is 
extremely  expensive  and  not  realistic,  a  clear  understanding  about  the  "tolerable  risk  of 
error" could help to improve the economy of the system.  

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3. 

ANALYSIS OF THE EVOLUTION OF THE EU BUDGET 

3.1. 

Evolution of expenditure ceilings 

The  total  amount  of  own  resources  allocated  to  the  EU  budget  to  cover  annual  payment 
appropriations  is  ultimately  constrained  by  the  ceilings  laid  down  in  the  own  resources 
decision (ORD)6, which is adopted by the Council by unanimity and after ratification by all 
Member States. 

First  introduced  in  1988  at  1.15%  of  EU  GNP,  the  own  resources  ceiling  was  gradually 
increased, first to 1.20% in 1992 and afterwards to 1.27 % in 1999. Since then, the ceiling has 
remained stable and has been only subject to technical adaptations that have maintained the 
absolute  amount  of  the  ceiling  unchanged7.  The  own  resources  ceiling  is  fixed  currently  at 
1.23% of EU GNI. The ceiling for commitment appropriations developed accordingly and is 
now established at 1.29% of EU GNI. 

The expenditure level of the EU budget is further restricted by the ceilings laid down in the 
Multiannual  financial  framework  (MFF),  also  first  introduced  in  1988.  Until  the  entry  into 
force of the Lisbon Treaty, the MFF was an integral part of an inter-institutional agreement 
between the European Parliament, the Council and the Commission. EU spending was limited 
to levels which have in general remained well below the ceilings laid down in the ORD. The 
Lisbon Treaty has enshrined the MFF in EU primary law and introduced the requirement to 
lay it down in a Council regulation, to be adopted by unanimity after obtaining the consent of 
the European Parliament. 

During the period 1993-1999, the payment ceiling in the MFF was on average equivalent to 
1.18% of EU GNP. For the period 2000-2006, increasing pressure to limit the size of the EU 
budget resulted in an average payment ceiling of 1.06% of EU GNI. The political pressure to 
constrain the growth of the EU budget was even higher when the current financial framework 
for  2007-2013  was  negotiated,  resulting  in  an  agreement  to  restrict  the  average  payment 
ceiling  to  1.00 %  of  EU  GNI.  However,  due  to  the  impact  of  the  economic  crisis  in  recent 
years and the consequent drop in the absolute level of EU GNI, the average payment ceiling 
for 2007-2013 corresponds currently to 1.07% GNI. 

The  actual  annual  budget  execution in  payments  has  remained  significantly  below  the  MFF 
ceiling, thus leaving quite significant margins available. The average execution was 1.06% of 
EU  GNI  in  the  period  1993-1999  (with  a  significant  decreasing  trend)  and  0.94%  in  2000-
2006  (stable  over  the  period),  leaving  in  both  cases  an  average  margin  of  0.12%  below  the 
MFF payment ceilings.  

The  evolution  of  the  own  resources  ceiling,  the  MFF  payment  ceiling  and  the  budget 
execution is illustrated below: 

6 
7 

Council Decision No 436 of 7 June 2007 on the system of Communities' own resources 
In 2001, the own resources ceiling established as 1.27 % of EU GNP was recalculated to 1.24% of EU 
GNI. The GNI aggregate replaced the GNP but the ceiling was adapted in order to maintain unchanged 
the amount of financial resources put at the disposal of the Union. The same procedure was applied in 
2010, when it was decided to apply financial intermediary services (FISIM) for GNI for own resources 
purposes 

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% of EU GNI
1,25%

1,20%

1,15%

1,10%

1,05%

1,00%

0,95%

0,90%

0,85%

from 1.20% to 1.27% of GNP

'93-'99 average 1.18%

1.27% of GNP ≡ 1.24% of GNI excl. FISIM

1.23% of GNI incl. FISIM

'93-'99 average
1.06%

'00-'06 average 1.06%

'00-'06 average
0.94%

'07-'13 average 1.07%

Own Resources ceiling

 Payment agreed in the
 Financial Framework

Payments actually
executed/appropriations

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

3.2. 

Expenditure of the EU budget 

The profile of EU spending has changed considerably over time. Historically, the vast bulk of 
the EU budget has been concentrated in a relatively small number of policy areas. But both 
within  and  beyond  these  areas,  the  focus  of  spending,  the  policy  objectives  pursued  and 
consequently the structure of the budget have evolved: 

–  CAP  expenditure  represented  64%  of  the  budget  in  1988,  including  3%  for  the  EAGGF 
Guidance section and the Fisheries fund that were structural funds at that time. By 2013, 
the  share  of  CAP  spending  will  have  decreased  to  40  %%,  following  a  decrease  of  first 
pillar expenditure in real terms in the current financing period.  

–  The amounts earmarked for structural actions corresponded to around 17% of the budget in 
1988  (14%  if  the  EAGGF  Guidance  section  and  Fisheries  fund  are  excluded),  and  will 
represent  36%  of  the  EU  budget  in  2013,  with  at  least  two-thirds  earmarked  for 
competitiveness,  growth  and  jobs.  The  significant  increase  in  cohesion  spending  was 
linked to the enlargement of the EU since 2004. 

–  Funding  for  other  policies  (mainly  related  to  competitiveness  and  external  actions)  was 
originally  very  limited.  In  the  first  financial  framework,  only  7%  of  the  budget  was 
reserved  for  these  areas.  But  the  new  emphasis  on  economic  development  and 
competitiveness will see the share of the budget for such policies rise to 18% in 2013, of 
which 10% for competitiveness and 6% for external actions. 

–  The spending policies for the period 2007-2013 put a new emphasis on the goals of growth 

and employment and on new policy directions such as freedom, security and justice. 

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Expenditures structure (1988-2013)

EAGGF Guidance & 
Fisheries

1988
2013

l
a
t
o
t

f
o
%

70%

60%

50%

40%

30%

20%

10%

0%

Common Agricultural
Policy

Cohesion Policy

Other policies

3.3. 

Financing of the EU budget 

Evolution of the own resources 

The system of own resources for the general budget was introduced in 1971 progressively to 
replace  financial  contributions  from  Member  States.  Own  resources  originally  consisted  of 
traditional own resources (customs and agricultural duties and sugar levies) and a VAT based 
resource.  A  new  own  resource  based  on  Member  States’  GNP  was  introduced  in  1988  as  a 
‘balancing  item’,  automatically  providing  the  additional  financing  necessary  to  balance  the 
Community budget. 

The  traditional  own  resources  have  stagnated  over  time  due  to  the  effects  of  trade 
liberalisation. As a result, their share in the financing has gone down. The share of VAT based 
resources  decreased  significantly  as  the  maximum  rate  applicable  to  the  uniform  VAT  base 
was reduced progressively from 1.4 to 1 % over the period 1995–99, and further to 0.75 % in 
2002 and 0.50 % in 2004. Since 2007, the rate of call has been fixed at 0.3%. The balancing 
GNI  based  resource,  which  was  originally  envisaged  as  a  marginal  item,  has  in  parallel 
developed into the most important source of financing (currently representing about 75% of 
the total). 

The shift in the composition of the different types of own resources between 1988 and 2013 is 
illustrated below: 

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Revenues structure (1988-2013)

1988

2013

l

a
t
o
t

f
o
%

80
70
60
50
40
30
20
10
0

Traditional
own
resources

VAT-based
own resource

GNI-based
own resource

Evolution of the correction mechanisms 

The issue of budgetary imbalances first emerged with the accession of the United Kingdom to 
the Communities in 1973 and became progressively the leitmotiv of all financial framework 
negotiations,  often  overshadowing  the  discussions  on  the  content  of  the  EU  policies.  Even 
though the roots of the problem are generally considered to be on the expenditure side of the 
budget, correcting measures have been applied mainly8 on the revenue side. 

The  UK  correction  was  agreed  by  the  1984  Fontainebleau  European  Council  and  has 
remained  in  place  since  then.  Although  the  mechanism  has  been  modified  with  every 
successive Own Resources Decision, its basic principle has remained unchanged, namely to 
reimburse to the UK 66% of the difference between what the UK pays to and what the UK 
receives as allocated expenditures from the EU budget. 

From the very beginning of the UK correction, Germany received a 1/3 reduction of its share 
in the financing of the UK correction. This "rebate on the rebate" was widened to three other 
Member  States  (Austria,  Sweden  and  the  Netherlands)  in  2000  and  the  reduction  in  their 
financing share increased to 75%.  

The increase in collection costs of Traditional Own Resources from 10% to 25%, which has 
been in force since 2000, is also generally considered to represent a correction mechanism. 

Two  new  corrections  were  introduced  in  the  2007  Own  Resources  Decision  for  the  period 
2007-2013 only. Germany, Austria, Sweden and the Netherlands benefit from a reduced rate 
of call on the VAT based resource9. Moreover, the Netherlands and Sweden were granted a 
gross  reduction  in  their  GNI  resource  payments  (EUR  605  million  for  the  Netherlands  and 
EUR 150 million (in 2004 prices) for Sweden), to be financed by all Member States. 

8 

9 

Also  the  expenditure  side  of  the  EU  budget  contains  more  and  more  "compensating"  payments  to 
Member States (especially from the cohesion and structural funds and rural development fund). 
The  rate  of  call  is  fixed  at  0.225%  for  Austria,  0.15%  for  Germany  and  0.1%  for  Sweden  and  the 
Netherlands.  

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4. 

FLEXIBILITY IN THE MULTI-ANNUAL FINANCIAL FRAMEWORK 2007-2013 

4.1. 

Sources of flexibility 2007-2010 

Since  their  introduction  in  1988,  the  EU's  multiannual  financial  frameworks  have  ensured 
strict budgetary discipline and medium-term predictability of EU expenditure. However, this 
predictability came at the price of limited flexibility.  

The most important sources of flexibility within the MFF are currently: 

–  The revision of the MFF, by qualified majority in Council if restricted to 0.03% of the EU 

GNI; 

–  The unallocated margins under the various headings; 

–  Redeployment of funds within the headings concerned; 

–  The 4 instruments outside the MFF, in particular the Flexibility Instrument. 

Over  the  first  4  years  of  the  current  MFF  these  sources  of  flexibility  have  been  extensively 
used  (and  almost  fully  exhausted)  to  permit  the  EU  budget  to  cope  with  unexpected 
circumstances. An additional EUR 8.4 billion was required for Galileo, the Food Facility and 
the European Economic Recovery Plan. The financing for these budgetary needs, which were 
provided through a mix of all the existing sources of flexibility (see table below), was in the 
end  only  possible  because  of  the  high  margins  available  in  Heading  2,  which  provided  in 
excess of EUR 6 billion. These exceptionally high margins are however unlikely to persist in 
future.  

FINANCING OF EERP + GALILEO + HIGH FOOD PRICES FACILITY

Commitment appropriations (EUR million)

TOTAL

Revision of heading 1A (fully compensated)

Financed from the unallocated margin within H1A

Financed through redeployment and reprioritisation under H1A

Financed from the unallocated margin under heading H2

Financed through redeployment within H4

Use of flexibility instrument

Use of emergency aid reserve

Grand total

Compensation mechanism

Compensation heading 1B
Compensation heading 2
Compensation heading 3A
Compensation heading 5

5.376

-5.376

-7
-5.064
-5
-300

84

600

1.020

240

740

340

8.400

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In  recent  months  an  additional  financing  need  of  EUR  1.4  billion  has  been  expressed  for 
ITER. 

4.2. 

Sources of flexibility 2010-2013 

For the second half of the MFF, these sources of flexibility (in particular the margins) have to 
a large extent dried up, which poses legitimate questions about flexibility for the period 2011-
2013. 

The possibility to revise the MFF has been restricted by the fact that Council only accepted 
the principle of a revision to the extent that it does not increase the overall amount of the MFF 
over  the  period.  Since  any  increase  in  a  ceiling  therefore  has  to  be  compensated  by  a 
corresponding decrease of another ceiling, this limits the scope for revisions in 2011-2013 to 
the emergence of unallocated margins under the various headings. This severely restricts the 
flexibility allowed for by the IIA. 

As  illustrated  in  the  table  below,  margins  for  the  remainder  of  the  current  MFF  have  been 
reduced to the bare minimum. For the period 2011-2013, the only margin of any significance 
is the 2011 margin under heading 2. 

Margins currently remaining under the multiannual financial framework ceilings 
2010-2013 (in EUR million) 

Heading 1A 

Heading 1B 

Heading 2 

Heading 3A 

Heading 3B 

Heading 4 

Heading 5 

2010

0

1.4

456.2

18.5

0

0

43.5

2011

50.1

16.9

851.8

70.7

15.2

70.3

160.6

2012 

34 

1.4 

126.2 

26.5 

18.1 

132.3 

122.7 

2013

47

0.4

131.4

52.9

22.8

134.6

151.3

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5. 

THE LINKS BETWEEN THE EU BUDGET AND ECONOMIC REFORM 

The European Union has learned many lessons from the recent financial and economic crisis. 
In  a  highly  integrated  Union,  and  even  more  so  in  a  monetary  union,  economies  and  their 
respective  successes  and  weaknesses  are  linked.  Although  the  EU  has  a  number  of 
instruments for the co-ordination of economic policy, the crisis has shown that they have not 
been used to the full and that there are gaps in the current governance system. There is broad 
political  agreement  that  this  has  to  change  and  that  the  EU  needs  to  be  equipped  with  a 
broader  and  more  effective  set  of  policy  instruments  to  ensure  its  future  prosperity  and 
standards of living.  

The  EU  has  taken  comprehensive  and  consistent  measures  to  overcome  the  crisis  and  draw 
lessons for the future. The launch of the European Economic Recovery Programme in 2008 
helped  cushion  the  shock  of  the  downturn  on  our  economies.  Coordinated  support  was 
provided  to  EU  Member  States  that  needed  it  as  well  as  to  safeguard  the  stability  of  the 
Economic  and  Monetary  Union.  A  set  of  measures  to  strengthen  the  supervision  and 
regulation of the financial system is under negotiation, in the EU and beyond. Now that the 
framework of the Europe 2020 Strategy is in place, a series of initiatives will follow, designed 
to unlock the EU's potential to boost growth and create jobs. It is logical to assume that the 
EU budget should be mobilised in support of the objectives that have been agreed between the 
EU institutions under the Europe 2020 strategy, and that the programmes and instruments to 
be proposed under the next multiannual financial framework should be designed to facilitate 
the delivery of the Europe 2020 strategy in all Member States. 

At  the  same  time,  it  is  recognised  that  an  essential  part  of  the  Europe  2020  strategy  is  the 
introduction  of  reforms  with  a  medium-  to  long-term  horizon  that  focus  on  promoting  the 
sustainability  of  public  finances  and  enhancing  potential  growth10,  particularly  following  a 
period  during  which  the  economic  downturn  has  had  a  clear  impact  on  revenues  raised  by 
Member  States11.  The  extent  of  the  benefits  of  such  reforms  depends  on  their  depth  and 
breadth and sustained political commitment on the  part of  the  European institutions and the 
governments of the Member States. 

The  European  Commission  has  put  forward  a  number  of  suggestions  aiming  at  enhancing 
European- wide economic policy coordination for stability, growth and jobs12: 

–  Develop  the  proposals  for  greater  economic  policy  co-ordination  and  surveillance  by  (i) 
addressing  imbalances  through  stronger  macroeconomic  surveillance,  including  alert  and 
sanction  mechanisms;  (ii)  strengthening  national  fiscal  frameworks  by  specifying 
minimum requirements for domestic fiscal frameworks, and notably moving from annual 
to  multi-annual  budgetary  planning;  (iii)  strengthening  the  Stability  and  Growth  Pact,  in 
particular by focusing on the issue of debt dynamic as well as deficits; 

10 

11 

12 

European  Commission, DG  Economic  and Financial Affairs,  Economic  Papers  424, September  2010, 
Quantifying the potential macroeconomic effects of the Europe 2020 strategy: stylised scenarios. 
European Commission, DG Taxation and Customs Union / Eurostat, Taxation trends in the European 
Union,  2010;  European  Commission,  Directorate  General  for  Economic  and  Financial  Affairs,  Public 
Finances in EMU 2010, European Economy 4/2010. 
COM(2010) 367. 

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12 

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–  Set  out  effective  enforcement  mechanisms  to  ensure  that  Member  States  will  act  in 
compliance  with  the  EU  framework  to  which  they  have  agreed.  Where  developments  in 
Member State economies pose a risk to the overall development of the Union, a series of 
preventive and corrective measures are proposed, including a range of sanctions that could 
be applied where breaches occur;  

–  Establish a European semester for policy co-ordination and explain the process and timing 
that will provide a European input to national policy decisions, leading to more effective 
ex-ante  policy  co-ordination.  This  also  applies  to  the  structural  reforms  and  the  growth 
enhancing elements of the Europe 2020 strategy.  

With regard to the strengthening of the stability and growth pact, the European Commission 
recently proposed a comprehensive package of reforms13 through an increased focus on public 
debt and fiscal sustainability, the extension of surveillance to macroeconomic imbalances, and 
more effective enforcement through the use of sanctions and incentives. The intention is that 
the  "European  semester"  will  integrate  all  revised  and  new  surveillance  processes  into  a 
comprehensive and effective economic policy framework. The monitoring of public finances 
will  be  based  on  the  new  concept  of  prudent  fiscal  policy-making  that  should  ensure 
convergence,  while  debt  developments  will  be  followed  more  closely  and  put  on  an  equal 
footing  with  deficit  developments  as  regards  decisions  linked  to  the  excessive  deficit 
procedure. 

Changes in both the preventive and corrective part of the SGP are backed up by a new set of 
gradual financial sanctions for euro-area Member States. The changes are devised so that they 
should facilitate the eventual move to a system of enforcement linked to the EU budget. The 
newly proposed Excessive Imbalance Procedure (EIP) will comprise a regular assessment of 
the risks of imbalances based on a scoreboard composed of economic indicators.  

13 

COM(2010) 522; COM(2010) 523; COM(2010) 524; COM(2010) 525; COM(2010) 526; COM(2010) 
527. 

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6. 

INTRA-EU TRADE IN GOODS AND SERVICES 

Markets are integrated when “economic frontiers” between them are eliminated. An economic 
frontier  is  any  demarcation  over  which  goods,  services,  capital,  technology,  labour  and 
communication  flows  are  low  or  absent.  The  removal  of  barriers  to  intra-EU  products, 
services and factor flows inter alia, increases intra-EU trade and facilitates firm entry in the 
various national markets. 

6.1. 

Intra-EU trade in goods 

% share of imports on GDP

INTRA-EU IMPORT PENETRATION, 2000 and 2007: 
Manufactured Imports as a % of GDP 

52

49

48

45

43

41

37

37

35

60

50

40

30

20

10

0

30

28

27

27

25

23

21

21

19

19

17

17

17

16

14

13

11

11

10

Czech Republic
Slovakia
Estonia
Belgium

Hungary

Slovenia

Bulgaria

Lithuania

Latvia

Malta

Luxembourg 
Austria
Romania

Poland
Netherlands

Portugal

Cyprus
Denmark

Sweden

Finland

Germany 
EU27:

Ireland

France

Spain

Italy

United Kingdom
Greece

2000:

2007:

This chart shows the openness of EU countries to imports coming from other Member States 
in 2000 as compared to 2007. The degree of a country's openness is heavily determined by its 
size. Smaller countries such as Belgium are usually more open than big countries like France, 
as they are more dependent on the outside world for getting what they need (imports) and for 
selling  their  domestically  produced  goods  and  services  (exports).  Therefore,  to  assess  the 
degree  of  trade  integration  inside  the  Internal  Market,  the  focus  should  not  only  be  on  the 
degree of openness in any given year, but also on changes over time. A significant increase 
indicates that a country is becoming more open and integrated inside the Internal Market and 
therefore it is “trade creating”.  

Among the most integrated countries in terms of imports are many of the new Member States, 
whose  intra-EU  imports  account  for  40  to  50%  of  their  GDP  (whereas  the  average  EU-27 
ratio is around 17% of GDP). Most of these countries were already highly integrated in 2000, 
well before their official accession date, due to the intense increase in trade flows driven by 
the  "Europe  agreements"  during  the  nineties.  Therefore,  no  major  increases  in  trade  were 
commonly expected after accession.  

However,  in  many  new  Member  States,  integration  has  not  lost  momentum  after  accession, 
although  significant  cross-country  differences  can  be  observed:  while  Poland,  Lithuania  or 

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14 

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Latvia have seen further increases in imports during the current decade, countries like Estonia 
or Hungary stayed at their (high) 2000 levels. Overall, enlargement can be seen as the major 
driver for further integration within the Internal Market. 

Among the "older" Member States, only some small countries exhibit high import penetration 
rates: Belgium (whose imports from other EU countries account for more than 49% of GDP), 
followed  by  Austria,  Luxembourg,  the  Netherlands  and  Portugal.  As  expected,  the  big 
economies are the least open ones, with shares of intra-EU imports of GDP ranking between 
9.9 % in the United Kingdom and 16.6 % in Germany. While many of these larger economies 
had shown growing degrees of openness during the nineties (in particular France and Spain), 
only Germany maintained that momentum during the current decade. 

By  contrast,  the  Nordic  countries  and  Austria,  which  joined  the  EU  in  1995,  are  still 
increasing  their  imports  from  other  EU  countries.  Nevertheless,  the  highly  dynamic  trade 
performance of Belgium or Germany shows that the Internal Market still offers the potential 
also for more trade integration for long-time members – both with regard to small and already 
highly integrated economies (Belgium) and for big economies such as Germany. 

6.2. 

Intra-EU trade in Services 

Intra-EU trade in services, 2004 and 2007
(Imports as a percentage of GDP)

% of GDP

25,0

20,0

19,3

17,1

15,0

10,0

5,0

0,0

12,6

11,3 11,1

9,5

8,7

7,8 7,7 7,4 7,2

6,5 6,2

5,7 5,7 5,7 5,4

4,6 4,5 4,5 4,5 4,3

3,8 3,6 3,6

2,6

5,7

5,1

4,9

mt ie cy be ee dk bg nl at hu sk se lv cz fi lt si de es ro pt pl uk it gr fr

2004

2007

eu27

EU12

EU15

This  chart  indicates,  for  each  EU  country,  how  open  it  is  to  the  imports  coming  from  other 
Member States. As usual, size is an important determinant of openness: All the big countries – 
old  and  new  (Poland)  alike  –  are  clearly  below  the  EU  average.  But  not  only  big  countries 
exhibit  a  low  ratio:  also  Greece,  Romania  and  Portugal  are  among  the  countries  with 
apparently more closed markets for services. 

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15 

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The  countries  that  are  most  open  to  other  EU  service  providers  are  a  combination  of  older 
Member  States  (Ireland,  Denmark,  Benelux14,  Austria)  and  newer  ones,  such  as  Malta, 
Cyprus,  Estonia  and  Bulgaria.  In  fact,  most  of  NMC  exhibit  relatively  high  openness:  on 
average, EU-12 import share on GDP accounts for 5.7 of GDP against 4.9 for EU-15. 

6.3. 

The effects of cross-border public procurement within the internal market 

Cross-border procurement can take place in different ways.  

Direct cross-border procurement occurs when firms operating from their home market bid and 
win contracts for invitations to tender launched in another Member State.  

Indirect  cross-border  activities  arise  when  firms  bid  for  contracts  through  subsidiaries  (i.e. 
when their foreign affiliates bid for tenders launched by authorities of a country different from 
the  home  country  where  the  firm  has  its  headquarters  or  where  the  parent  company  is 
located).  Indirect  cross-border  procurement  can  also  occur  when  a  domestic  firm  imports 
goods in order to supply them to a contracting authority or entity. Finally, foreign bidders can 
submit offers in consortia with local firms. 

14 

Luxembourg is a special case regarding services trade: due to its small size and the huge relevance of its 
financial  sector,  its  share  of services  flows  in  GDP  is  very  high.  Its  inflows  from  other  EU  countries 
accounted for 46% of GDP in 2004, and 53.3% in 2007.  

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Direct cross-border procurement 

Until  now,  procurement  indicators  to  measure  cross-border  activity  have  indicated  limited 
direct  cross-border  procurement  activity  (between  1.2-1.5%  of  the  number  of  awards, 
information  collected  using  data  from  the  Tenders  Electronic  Daily  database  (TED, 
http://ted.europa.eu/)).  However,  in  some  Member  States  direct  cross-border  procurement 
accounts for more than 10%. 

AT 
BE 
BG 
CY 
CZ 
DE 
DK 
EE 
ES 
FI 
FR 
GR 
HU 
IE 
IT 
LT 
LU 
LV 
MT 
NL 
PL 
PT 
RO 
SE 
SI 
SK 
UK 

2009
2008
5,61% 4,84%
4,29% 4,26%
1,36% 1,95%
8,68% 7,31%
1,07% 2,39%
1,44% 1,54%
4,37% 3,18%
7,10% 7,20%
0,55% 0,86%
1,27% 1,75%
0,59% 0,72%
1,87% 1,70%
1,06% 1,91%
13,22% 17,66%
0,82% 1,35%
2,26% 2,35%
12,24% 15,07%
1,34% 3,31%
18,18% 14,17%
2,73% 2,78%
0,77% 0,95%
1,73% 4,41%
1,94% 2,27%
2,27% 2,22%
1,18% 1,73%
4,21% 4,11%
1,18% 1,55%
1,21% 1,49%

Source: European Commission 

EU funds in direct cross-border procurement 

The  proportion  of  contracts  involving  EU  funds  was  higher  in  direct  cross-border 
procurement than in all contracts: 

–  In  2009,  11%  of  direct  cross-border  procurement  involved  projects  financed  from  EU 

funds, compared to 5% of all awards.  

–  For the EU-12 countries, the proportion of cross-border contracts involving EU funds was 

even higher (20% in 2009). 

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7. 

THE IMPACT OF COHESION POLICY ON THE EU ECONOMY 

The  impact  of  EU  budget  interventions  on  the  economies  of  different  Member  States 
countries is not a scientifically well-documented subject. The documentation is limited. 

The European Parliament15 has made a study, using the HERMIN model to assess (simulate) 
the impact on net contributor states of the investments undertaken in the net recipient states 
through Cohesion Policy in the period 2000 – 2006. The table below shows the share of the 
total exports of the net contributor Member States going to the net recipient Member States of 
Cohesion Policy in the period 2000-2006.  

Figure 1 - Share of the total exports of the net donor states going 
to the net recipient states

20%

18%

16%

14%

12%

10%

8%

6%

4%

2%

0%

GERMANY

FRANCE

ITALY

UNITED KINGDOM

AUSTRIA

BELGIUM

SWEDEN

DENMARK

FINLAND

NETHERLANDS

LUXEMBOURG

Source: Eurostat, COMEXT database 

The net recipient Member States can in general be classified as small open economies, often 
with a narrow industrial basis, where many capital products or other goods that are vital for 
the  implementation  of  structural  interventions  are  not  produced  domestically.  The  main 
contributor  Member  States,  on  the  other  hand,  tend  to  be  large,  diverse  and  advanced 
economies, producing many kinds of capital, goods and services that are required by recipient 
states as they go trough a process of fast development and growth. A consequence for a small 
open economy, when it implements Cohesion Policy programmes, is that the induced process 
of development triggers higher levels of imports of a wide range of goods and services from 
their main and more advanced trading partners.  

The  Commission  also  made  a  study  on  the  impact  of  cohesion  policy  on  the  EU  economy. 
The QUEST III endogenous R&D model of DG ECFIN has been used to assess the effect of 
raising  taxes  to  pay  for  cohesion  policy  as  well  as  of  the  effect  of  the  expenditure  that  it 
finances. The modelling results indicate that, overall, the funding provided by cohesion policy 
for the 2000-2006 period had a positive effect on GDP growth in the EU even if account is 

15 

European  Parliament,  Directorate  General  for  Internal  Policies,  Policy  Department  B:  Structural  and 
Cohesion Policies, Regional Development, The Economic Return of Cohesion Expenditure for Member 
States, 2009. 

EN 

18 

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taken  of  the  depressing  effect  in  countries  which  were  net  contributors  to  the  funding  of 
cohesion policy. 

GDP  in  the  EU25  as  a  whole  is  estimated  to  have  been  0.7%  higher  in  2009  because  of 
cohesion  policy  over  the  2000/2006  period.  Therefore,  the  positive  effect  on  countries  that 
were net recipients of financial aid from the Structural Funds outweighed the adverse effects 
on the countries mainly responsible for raising the finance for the Funds (Table 1).  

Moreover, the net beneficial effect on GDP tends to increase over time as the lagged effects 
on  raising  productive  potential  in  recipient  countries  come  through.  By  2015,  GDP  in  the 
EU25 is estimated to be 2.4% higher as a consequence of the support provided for the 2000-
2006  period  and  in  2020  4%  higher.  The  implication  is,  therefore,  that,  according  to  the 
QUEST  model,  the  cohesion  policy  conducted  over  the  2000-2006  programming  period  is 
likely  to  add  0.2%  a  year  to  the  EU25  average  GDP  growth  between  2000  and  2020  (i.e. 
effectively increasing the average growth rate of around 2% a year by 10%). 

Overall,  cohesion  policy  over  the  programming  period  2000-2006  is  estimated  to  have 
contributed economic growth and strengthened the capacity for growth in the EU as a whole. 

Concerning the 2007-2013 programming period, the most recent model-based analysis16 has 
examined the potential impact of cohesion policy spending. The analysis points out those ex-
ante model-based assessments cannot provide evidence on the positive output effects of fiscal 
transfers, but can shed light on the potential channels through which policies could have an 
impact.  The  long  term  growth  effects  depend  on  the  precise  nature  of  the  projects  that  are 
supported. Other factors must also be taken into account, notably the increasing difficulty of 
Member  States  to  provide  co-funding  as  a  result  of  the  economic  crisis,  and  long  delays  in 
spending due to implementation lags. The analysis found that significant effects from policies 
should only be expected some years after implementation. 

Sources: 

1) Varga,  Janos and in't Veld, Jan (2009): A  model-based analysis of the impact of cohesion policy 
expenditure 2000-2006: Simulations with the QUEST III endogenous R&D model. 

http://ec.europa.eu/economy_finance/publications/publication_summary16014_en.htm  

2) European Commission (2010): Ex-post evaluation of the ERDF 2000-2006, Synthesis Report 

http://ec.europa.eu/regional_policy/sources/docgener/evaluation/pdf/synthesis_eval2000_2006.pdf 

3) Varga, Janos and in't Veld, Jan (2010): The Potential Impact of EU Cohesion Policy Spending in 
the 2007-2013 Programming Period: A Model-Based Analysis 

http://ec.europa.eu/economy_finance/publications/economic_paper/2010/ecp422_en.htm 

4) European Commission: Ex-post evaluation of the ESF 2000-2006 

http://ec.europa.eu/social/main.jsp?catId=701&langId=en&internal_pagesId=616&moreDocuments=y
es&tableName=INTERNAL_PAGES 

16 

Varga,  J.  &  in't  Veld,  J.,  The  Potential  Impact  of  EU  Cohesion  Policy  Spending  in  the  2007-13 
Programming  Period:  a  Model-Based  Analysis,  European  Commission,  Directorate  General  for 
Economic and Financial Affairs, European Economy, Economic Papers 442, September 2010. 

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Table 1: 
2000-2006 

Cumulative  net  effect  of  cohesion  policy  on  GDP  according  to  QUEST, 

GDP in end year as a % of GDP in absence of cohesion policy 

2000-09 

2000-15 

2000-20 

DE 

IE 

EL 

ES 

IT 

PT 

CZ 

EE 

CY 

LV 

LT 

HU 

MT 

PL 

SI 

SK 

EU4 (Cohesion EU15 MS) 

EU15 net donor countries 

EU15 

EU10 

EU25 

0,6 

2,0 

13,0 

9,5 

1,1 

15,7 

1,4 

3,5 

0,1 

11,7 

7,7 

3,1 

0,7 

5,0 

0,8 

2,3 

9,8 

-2,2 

0,5 

3,7 

0,7 

2,1 

5,2 

28,6 

20,0 

2,8 

33,7 

3,9 

8,3 

0,7 

27,9 

18,7 

8,0 

2,7 

14,7 

2,3 

6,0 

21,1 

-4,0 

1,9 

10,2 

2,4 

3,6 

8,1 

42,9 

29,8 

3,9 

49,7 

6,0 

12,0 

1,2 

41,1 

28,8 

12,5 

4,4 

23,1 

3,4 

9,3 

31,5 

-5,3 

3,3 

15,9 

4,0 

Note: Aggregations are weighted averages of country estimates, using the GDP of countries 
expressed  in  EUR  as  weights.  GDP  in  2009  has  been  used  to  weight  the  estimates  for  the 
subsequent years. 

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8. 

THE ROLE OF FINANCIAL INSTRUMENTS 

8.1. 

Typology of EU financial instruments 

8.1.1. 

Introduction 

In  the  context  of  the  new  Financial  Framework  2007-2013,  the  European  Parliament,  the 
Council and the Commission agreed that the introduction of co-financing mechanisms would 
be necessary to reinforce the leverage effect of the EU budget. In particular, it was agreed that 
the introduction  of co-financing  mechanisms is necessary to reinforce the leverage effect of 
the  limited  EU  funds.  These  mechanisms  were  the  financial  instruments  under  the 
Competitiveness  and  Innovation  Framework  Programme  (in  particular  SME  Guarantee 
Facility and equity instrument called GIF), the Risk Sharing Finance facility (RSFF) and the 
Loan Guarantee Instrument for TEN-Transport (LGTT). 

Since  the  inception  of  these  three  instruments,  a  number  of  additional  innovative  financing 
mechanisms have been introduced by the Commission. 

Innovative  financial  instruments  can  be  designed  in  the  form  of  loan  schemes,  guarantee 
schemes,  risk-bearing  instruments  or  equity  and  quasi-equity  instruments.  They  can 
complement grant funding but cannot replace it. In other words, economically viable projects 
may need grant funding in order to become financially viable and thus 'bankable'. Therefore, 
the  Commission  has  also  developed  a  range  of  grant/loan  blending  instruments  for  specific 
policy  objectives  which  are  included  in  the  category  of  financial  instruments.  Finally,  trust 
funds  are  commonly  used  mechanisms  in  the  developing  countries,  bringing  together  the 
resources of a number of donors into a structure which in turn may provide risk capital, loans, 
grants and/or technical assistance together with the IFIs. 

Apart from loan facilities, the Commission has usually no direct contractual relationship with 
the final beneficiaries of such products, but delivers them through intermediaries. Thus, these 
international  financial 
programmes  are  managed  with 
intermediaries  (IFIs)  and  various  types  of  market  participants,  and  follow  to  a  large  extent 
market practices. These programmes are usually also demand driven mechanisms and as such 
there are no legally binding obligations for a balanced portfolio by country. 

involvement  of 

the  active 

Some examples of currently available instruments are presented below. They do not constitute 
a comprehensive list. 

8.1.2.  Loan schemes and blending mechanisms 

Unlike  grants,  loans  must  be  repaid  by  the  beneficiary  to  the  Commission  or  to  the 
intermediary. Loans are funded by the Commission on the capital markets and the proceeds 
are  on-lent  to  the  beneficiaries  on  a  back-to-back  basis.  Consequently,  the  loans  are  priced 
according  to  the  market  pricing  including  a  small  margin  to  recover  costs  incurred  by  the 
Commission  in  the  context  of  the  transaction.  Examples  include  Euratom  loan  facilities  to 
support the financing of investment projects for electricity production in the nuclear sector. 

A  rather  new  type  of  debt  instrument  are  fund  structures  pulling  together  resources  of  the 
EU  budget  and  other  public/private  institutions  in  order  to  provide  a  range  of  financial 
products  to  beneficiaries.  The  EU  contribution  is  often  structured  as  a  first  loss  piece, 
leveraged by IFI contributions in the sub-ordinated shares, which together attract other private 

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21 

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and public investors to invest in the fund in the senior shares thus achieving a higher leverage 
for  this  action.  These  funds  often  have  a  revolving  character  due  to  the  revenue  generating 
financial products the funds are offering to the beneficiaries. Examples include the European 
Fund  for  South-East  Europe  (finance  to  micro-enterprises)  and  the  European  Progress 
Microfinance Facility (guarantees, risk-sharing, equity and debt to microfinance institutions in 
EU-27). Typically, they are managed by independent professional management teams who are 
experts in the targeted sectors, countries and financial products offered. 

A special type of combined grant/loan schemes are programmes in which loans granted by a 
financial  intermediary  are  combined  with  technical  assistance  grants,  investment  grants  or 
interest  rate  subsidies  provided  by  the  Commission.  These  have  been  used  for  example  for 
capacity  building  purposes,  i.e.  banks  have  received  technical  assistance  in  order  to  set  up 
internal guidelines, policies and processes including training of the staff. In turn, these banks 
have  committed  themselves  to  expand  the  lending  volumes  in  specific  sectors,  for  example 
energy efficiency, municipal or SMEs lending. 

Finally, there are also technical assistance schemes supporting the development of bankable 
projects  but  for  which  no  direct  obligation  of  IFI  co-financing  exists.  Examples  include 
JASPERS (which supports managing authorities in EU-12 to develop larger scale projects for 
funding from the Cohesion Fund or the ERDF) and ELENA (technical assistance to support 
energy efficiency and renewable energy investments). 

8.1.3.  Guarantee schemes 

Guarantees are provided to banks and guarantee institutions providing debt financing to SMEs 
and other beneficiaries in order to minimise risk exposure of those institutions. 

In  the  context  of  the  EU's  expenditure  programmes,  extensive  experience  has  been  gained 
with portfolio guarantees. Such guarantees are typically given to intermediaries that provide 
lending to a large number of final beneficiaries who have difficulties to access finance (e.g. 
SMEs, vulnerable people, infrastructure, etc.). The portfolio approach is suited for covering a 
large  number  of  loans,  thus  providing  for  diversification  in  terms  of  risk,  geographical 
coverage  and  industry  sectors.  In  order  to  ensure  that  the  EU's  exposure  is  known  upfront, 
portfolio  guarantees  are  typically  capped,  i.e.  the  maximum  amount  payable  to  an 
intermediary is limited to a pre-determined amount. Usually, this cap covers the expected loss 
of  the  portfolio  potentially  including  a  small  margin.  Consequently,  the  EU  budget  will 
normally  be  fully  disbursed  and  used  by  the  financial  institution  to  cover  the  losses  of  its 
portfolio.  

Portfolio  guarantees  do  not  benefit  from  extra  leverage  by  IFIs  as  these  do  not  provide  any 
funding.  In  the  EU,  for  example  under  SME  Guarantee  Facility,  the  leverage  is  achieved 
through  the  additional  debt  volumes  the  banks  and  guarantee  institutions  are  requested  to 
provide to SMEs. 

The EU Guarantee Fund for External Action covers loans granted by the EIB to projects in 
third  countries.  It  is  a  key  instrument  enabling  the  EIB  to  be  involved  in  a  wider  range  of 
countries and borrowers, both by allowing the EIB to intervene in higher risk countries and 
operations  and  by  making  financial  conditions  more  attractive  to  borrowers.  The  EU 
guarantee is  restricted  to  65  %  of  the  aggregate amount of  credits disbursed and guarantees 
provided, less amounts reimbursed, plus all related sums.  

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8.1.4.  Risk sharing instruments 

The objective of the risk sharing is not to minimise the overall risk exposure of a programme 
but to optimise exposure, i.e. to take prudent risks in order to increase the leverage capacity of 
EU funds as much as possible. When a financial intermediary grants a loan or a guarantee to a 
beneficiary,  the  Commission  shares  the  risk  of  a  potential  loan/guarantee  loss  with  the 
intermediary, such as the EIB.  

Based on experience and historic data on defaults of companies and projects, a bank assigns 
each loan/guarantee into a risk category. Depending on the level of the risk category, the bank 
has to set aside capital to cover the estimated risks. The risk of a default can be split into an 
expected loss, an unexpected loss and a residual loss which can be shared between the parties.  

RSFF  (the  Risk  Sharing  Finance  Facility)  and  LGTT  (Loan  Guarantee  Facility  for  TEN-
Transport) are examples of risk sharing instruments. For each loan and guarantee granted, the 
Commission  pays  to  the  EIB  a  portion  of  the  risk  assigned  based  on  a  financial  model 
developed  jointly  by  the  Commission  and  the  EIB,  the  remaining  portion  is  covered  by  the 
EIB. These two instruments are not provided for free to the beneficiary but the advantage is 
that pricing covers only the costs of the institutions without any profit margin. An additional 
advantage  for  the  beneficiary  is  the  better  pricing  of  the  loan  due  to  the  EIB's  and  the 
Commission's AAA-rating.  

These instruments have a revolving character due to the price obtained from the beneficiary to 
cover the risks which can be used for new projects and the high probability of non-use of the 
unexpected loss and residual risk. 

8.1.5.  Equity instruments 

The Commission mainly invests through a financial intermediary in venture capital and risk 
capital funds, which then invest in final beneficiaries, for example innovative SMEs with high 
growth potential or in energy or transport infrastructure projects. These final beneficiaries are 
selected  in  an  independent  way,  but  in  line  with  the  investment  policy  of  the  fund,  by  the 
fund's management company during an investment period of several years, following the start 
of the fund. Examples of such instruments include Marguerite (direct equity investment in a 
risk capital fund aimed at investments in TEN-E, TEN-T and renewable energy infrastructure 
in  EU-27)  and  the  Global  Energy  Efficiency  and  Renewable  Energy  Fund  (GEEREF)  for 
equity investments in SMEs in third countries. 

The EU's investment attracts private funding: the EU has always a minority stake of the fund's 
capital,  and  invests  alongside  with  other  investors  in  the  fund.  The  majority  of  the  fund's 
capital needs to be held by market-oriented investors, i.e., private or public investors seeking 
the  same  level  of  return  as  a  private  investor  would  have  requested  under  the  same 
circumstances. 

8.1.6. 

Structural Funds financial instruments 

Financial  instruments  under  Structural  Funds  (shared  management)  offer  a  large  variety  of 
financial products: loans, guarantees and equity investments. The JEREMIE (Joint European 
Resources  for  Micro  to  medium  Enterprises)  and  JESSICA  (Joint  European  Support  for 
to 
Sustainable  Investment 
invest/contribute  part  of  their  structural  funds  allocations  into  financial  intermediaries  and 
urban development funds, so that the EU contribution can be leveraged.  

initiatives  enable  managing  authorities 

in  City  Areas) 

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9. 

RESULTS OF EX-POST EVALUATIONS  

The Commission attaches high priority to evaluations of current policies and programmes and 
impact assessments of future initiatives, in order to ensure as far as possible the most efficient 
and effective use of EU instruments. The Commission carried out more than 1400 evaluations 
and impact assessments in the years 2002-2009. Moreover, the "Forward Evaluation Plan for 
2009 and beyond" from the Commission contains 704 evaluations that are either ongoing or 
planned by the services. Most of the evaluations cover the current Financial Framework for 
2007-2013, while a few of them go even beyond.  

As regards the previous Financial Framework 2000-2006, the Commission contracted in 2008 
a  comprehensive  meta-study  on  lessons  learnt  from  existing  evaluations  as  an  input  to  the 
review of EU spending17. With a view to the Budget Review, it analysed 257 evaluations of 
the  previous  programming  period.  The  lessons  learnt  remain  relevant  for  the  preparation  of 
the next generation of programmes.  

9.1. 

Assessment per policy area  

The  study  provides  separate  assessments  for  seventeen  policies  clustered  into  a  five  broad 
policy  areas  (competitiveness,  cohesion,  natural  resources,  citizenship,  and  global 
partnership).  

The paragraphs below summarise these assessments for the policies that account for the most 
resources in budgetary terms. Overall, they cover 94% of the EU budget. The seven criteria 
used  were  relevance  (the  extent  to  which  the  objectives  are  (still)  in  line  with  the  needs, 
problems  and  challenges  which  justified  the  launching  of  the  intervention),  coherence  (the 
extent  to  which  the  intervention  complements  other  interventions  pursuing  the  same  goals, 
while  avoiding  duplication  and  seeking  synergies),  added  value  (the  extent  to  which  the 
desired results/impacts are better achieved through a European intervention than what would 
have  resulted  from  similar  interventions  at  the  level  of  Member  States),  effectiveness  (the 
extent to which the desired results/impacts are achieved), sustainability (the extent to which 
the achieved results/impacts are likely to continue in the long-term ), efficiency (the extent to 
which  the  desired  effects  are  achieved  at  a  reasonable  cost)  and  the  value  of  unintended 
impacts (the extent to which unintended impacts are positive or negative with respect to the 
needs, problems and challenges of the society).  

The  effectiveness  of  the  markets  support  and  direct  aid  in agriculture policy is assessed as 
satisfactory  but  significant  shortcomings  or  failures  are  also  mentioned  in  terms  of  market 
imbalances or increased production costs. Where efficiency is assessed, there are some very 
negative messages, especially with regard to over-compensation in a number of instances. 

European interventions targeted at rural development are assessed as having generated major 
benefits  in  terms  of  improving  product  quality  and  marketing  channels,  and  opening  new 
perspectives for local governance in rural areas. Large-scale impacts are, however, limited by 
the fact that the policy does not reach a critical mass in the supported territories. For example, 
the impact on farm efficiency and young farmers was not substantial. 

17 

Euréval/Rambøll  Management,  Meta-study  on  lessons  from  existing  evaluations  as  an  input  to  the 
review of EU spending, 2008.  

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Regional  development  programmes  are  assessed  as  relevant,  although  a  number  of 
evaluators  mentioned  concrete  development  needs  that  would  deserve  stronger  emphasis, 
especially  in  connection  with  sustainable  development  and,  to  a  lesser  extent,  the  “Lisbon 
objectives”.  Macro-economic  studies  predicted  an  impact  of  1%  to  3%  in  GDP  after  seven 
years  of  support,  which  suggests  that  the  rapid  convergence  of  some  Member  States  is 
attributable  to  causes  other  than  the  cohesion  policy,  such  as  the  benefits  of  the  internal 
market and/or effective national economic policies. 

The Cohesion Fund is assessed as relevant and effective. There is a clear and considerably 
faster  improvement  of  infrastructure  in  the  beneficiary  Member  States,  owing  to  European 
assistance. Further impacts on business investments, economic activities, and employment are 
predicted to be positive. 

The employment measures supported by the European Social Fund are assessed as relevant 
with limited exceptions, such as insufficient emphasis on social inclusion and gender pay gap 
in Objective 2 regions. Effectiveness is also assessed positively in terms of contribution to the 
development  of  skills  and  qualifications,  but  also  in  terms  of  system-wide  effects  such  as 
reform of labour market policies. 

Research  and  technological  development  policy  is  considered  to  add  European  value  by 
strengthening  the  research  system  as  a  whole  through  a  structural  effect,  although  its 
expenditure is less than five percent of the total public RTD expenditure in the EU area. The 
policy  has  addressed  a  number  of  deficiencies  in  the  European  research  landscape  and 
significantly contributed to bridging the gap between research and innovation.  

Finally,  cooperation  with  third  countries  is  subject  to  mixed  assessments.  All  donors, 
including the Commission and the Member States, have committed themselves to better co-
ordinating their activities with recipient countries and between themselves, but the assessment 
of  coherence  remained  mixed  during  the  period  under  study.  Apart  from  specific  successes 
and failures, a common pattern is repeatedly highlighted, i.e. the effectiveness of projects and 
programmes heavily depends on the progress of policy reforms at sector level. 

9.2. 

Assessment per evaluation criterion 

Most European policies are said to be relevant in that they respond to stakeholders’ needs and 
address key challenges. When there are reservations, the evaluators report on policy responses 
which  are  not  proportionate  to  the  problem,  which  build  upon  inappropriate  impact 
assumptions,  which  do  not  match  the  expectations  of  the  targeted  groups,  or  which  lack  a 
proper long-term strategy. 

Trans-national networks and partnerships are repeatedly assessed as adding European value 
in  that  they  contribute  to  mutual  learning,  benchmarking,  creative  thinking  and  raising  new 
ideas. Other ways of adding value are to address challenges that are cross-border by nature, to 
seek effects that arise beyond Member States’ boundaries or to tackle problems that are not 
politically appealing and therefore not addressed by Member States. The two last approaches 
may  be  seen  as  either  opposing  or  complementing  each  other:  (1)  achieving  economies  of 
scale  through  European  harmonisation  and  standardisation,  and  (2)  promoting  diversity  in  a 
context of European levelling. 

With  regard  to  coherence,  the  study  differentiated  between  issues  of  coordination  and 
complementarity. In the area of cohesion policy, the need to organise co-financing is said to 
have initiated new partnerships and coordination arrangements at regional level and to have 

EN 

25 

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removed  the  duplication  of  activity  for  applicants.  However,  the  three  Structural  Funds 
(ERDF, ESF and EEAGF) have operated according to different principles and with different 
financial requirements, so coordination efforts are not effective enough for enabling synergy 
between  the  funds.  With  regard  to  complementarity,  in  several  instances,  conflict  between 
objectives are addressed by creating specific measures, e.g. support to exporting enterprises in 
developing  countries  as  a  way  to  reconcile  the  objectives  of  the  trade  and  development  aid 
policies;  agri-environmental  measures  as  a  way  to  reconcile  the  CAP  and  environmental 
objectives.  

Effectiveness  tends  to  be  less  positively  assessed  where  the  evaluated  intervention  bring 
direct  short-term  benefits  to  a  large  number  of  people  or  organisations.  In  contrast,  the 
effectiveness of system changes or structural changes are often assessed more positively. 

Assessments  of  efficiency  are  not  that  frequent  but  rather  negative.  Frequently-raised 
problems are (1) insufficient targeting and allocation of a grant, subsidy, or payment to those 
who do not really need it, and (2) complex procedures entailing waste of human resources and 
discouraging those in need of the support from applying for it. 

9.3.  Main lessons learned 

–  European interventions do not need a heavy critical mass if they are to reach their target 
indirectly  through  inducing  changes  in  systems  and  structures.  On  the  contrary, 
interventions  are  much  more  costly,  and  rarely  reach  the  necessary  critical  mass  if  they 
attempt  to  reach  large  Europe  wide  targets  in  a  direct  manner.  In  practice,  the  problem 
raised  by  the  lack  of  critical  mass  is  to  be  solved  through  a  less  extreme  solution,  i.e. 
designing an adequate policy-mix involving both direct and indirect approaches. 

–  Instead  of  being  used  for  its  own  merits  (i.e.  satisfying  the  end  user’s  needs),  the  direct 
approach  should  be  primarily  understood  as  an  incentive  for  inducing  policy  reforms  or 
governance  improvements.  Expenditures  should  therefore  be  proportionate  to  the  desired 
“incentivising”  effects,  and  no  longer  to  the  needs  of  the  targeted  groups.  This  lesson 
originates  from  a  crosscutting  view  on  evaluation  conclusions  across  almost  all  policy 
areas.  To  a  certain  extent,  it  could  also  be  applied  in  the  areas  where  the  current 
interventions  reach  large  targets  in  a  direct  manner,  i.e.  cohesion  for  growth  and 
agriculture. 

–  Accurate  targeting  of  beneficiaries  is  a  major  factor  of  success.  It  helps  reaching  the 
most  in-need  people  or  organisations  and  therefore  optimizing  the  achievement  of  the 
intended results. Conversely, it minimizes deadweight. The lesson was learned in the areas 
of  research,  innovation,  energy,  agriculture,  and  rural  development,  more  often  in  a 
negative  way,  i.e.  from  failure  to  target  the  beneficiaries  in  an  accurate  enough  way.  It 
could therefore be transferred to any policy area where implementation bodies can be given 
an increased autonomy in the targeting of beneficiaries. This could be the case in the future 
for cohesion, rural development, cooperation, enlargement, etc. 

Convergent messages are delivered about the complexity of procedures. Dealing with a new 
level of government, transparent selection processes, and strict audit rules may be perceived 
as complex during a transitional time period. This is sometimes expressed in terms of ‘entry 
cost’ that creates a number of barriers to new entrants.  

–  Through  decentralising  management  and  increasing  the  autonomy  of  implementing 
bodies, it is possible to achieve flexibility, to reduce complexity, and ultimately to ensure 

EN 

26 

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local  relevance  and  increased  efficiency.  The  complexity  of  procedures  is  highlighted  in 
evaluation reports across almost all policy areas. Explanations and remedies are however 
proposed in just a few reports related to SME schemes and the European Social Fund. The 
lesson  should  therefore  have  a  large  potential  for  being  used  in  many  policy  areas.  An 
associated  risk  is  however  that  the  intended  results  and  impacts  be  forgotten  if  the 
implementing  bodies  are  granted  considerable  autonomy.  The  lesson  is  therefore 
transferable if, and only if, a result-oriented management can be put in place. 

–  Major  attempts  have  recently  been  made  at  developing  performance  incentives  in  the 
spirit  of  result-oriented  management.  The  incentives  have  taken  the  form  of  additional 
budgetary funds allocated to the best performing interventions. The first attempt has taken 
place in the area of cohesion for growth and employment, but the performance incentives 
have  not  been  integrated  in  a  consistent  system  of  result-based  management  and  the 
implementing bodies have not been granted significantly larger autonomy. Complexity has 
not  seriously  declined  and  the  assessment  of  the  experience  has  been  suboptimal.  The 
second attempt has been launched in the area of cooperation, and is assessed as likely to 
succeed  in  one  of  the  reviewed  reports,  but  not  yet  on  an  evidence  basis.  There  is  a 
prospect  for  learning  from  this  second  experience  in  other  policy  areas,  as  soon  as  more 
lessons are learnt. 

–  Finally, there is a scope for better leveraging private and public funds. Leverage is said 
to  “multiply”  the  budgetary  expenditure  in  the  sense  that  targeted  people  or  entities  are 
allocated a small part of the funds they need, with a view to encouraging them to provide 
complementary resources, either from their own funds, from public-private partnerships, or 
from other public or private funding institutions. The multiplier may be even larger if use 
is  made  of  financial  engineering  where  budgetary  funds  are  converted  into  loans,  seed 
capital, loan guarantee, etc. Co-financing is another way of multiplying European funds by 
attracting matching funds from public institutions at the level of regions, Member States, 
partner  governments,  or  international  institutions.  In  the  view  of  impressive  multipliers 
figures quoted in a few evaluation reports, the EU should be called to promote leverage by 
any available means in all policy areas.  

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10. 

IMPROVING SOUND FINANCIAL MANAGEMENT 

The Commission has already taken several actions to improve Sound Financial Management, 
the most important being the following. 

10.1. 

Simplifying the Implementation of the Research Framework Programmes18 

Stakeholder consultations indicate that access to the programmes and preparation of proposals 
are  considered  too  difficult,  in  particular  for  newcomers,  that  the  administrative  burden  for 
project  administration  and  accounting  is  perceived  as  too  high  and  that  time-to-grant  and 
time-to-pay are viewed as being too long. The Commission has therefore outlined measures 
and  options  for  simplifying  EU  research  funding,  for  assuring  that  EU  research  funding 
promotes  the  highest  quality  research  and  for  finding  a  better  balance  between  trust  and 
control and between risk taking and risk avoidance.  

For  maximum  impact,  research  and  innovation  programmes  at  European  level  should  be 
highly  attractive  and  accessible  to  the  best  researchers  worldwide,  to  Europe's  industry  and 
entrepreneurs, to universities and other research and innovation actors. The Commission has 
presented a number of simplification efforts in the following areas: 

–  Improvements  and  simplifications  that  the  Commission  will  implement  under  the  current 
legal and regulatory framework, which should contribute to a further reduction of average 
time-to-grant and time-to-pay (e.g. improved IT-tools, user support, uniform application of 
rules, optimising the structure and timing of calls for proposals etc.); 

–  Changes to the rules of the current cost-based model (e.g. general acceptance of accounting 
practices  of  participants  including  average  personnel  costs,  a  unique  set  of  rules  for  all 
participants covering all intervention measures and a reduction of the number of different 
reimbursement rates and methods for calculating indirect costs etc.); 

10.2. 

Strengthening the Commission's supervisory role under shared management of 
structural actions19 

In  2008,  following  the  European  Court  of  Auditors  ("Court")  Annual  Report  of  2006,  the 
Commission adopted an action plan with 37 actions (further measures and programmes were 
added  during  2008  and  2009)  to  strengthen  its  supervision  of  Member  States  in  relation  to 
shared  management  of  structural  actions  ("Action  Plan").  The  objective  of  the  Action  Plan 
was  to  reinforce  actions  by  the  Commission  to  address  the  high  level  of  errors  in 
reimbursements for structural actions and weaknesses in the Member States management and 
control systems ("systems").  

The  Commission  has  given  an  assessment  of  the  results  and  the  first  impact  on  the 
implementation of the Action Plan, as well as on the implementation of additional actions by 
the Commission under the Joint Audit Strategy for Structural Actions ("Audit Strategy").  

The 37 actions in the Action Plan were grouped under 10 headings.  

18 
19 

COM(2010) 187. 
COM(2010) 52. 

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The Commission concluded the following: 

–  The Commission has produced results for all the actions and has laid the foundations for 
continued  improvements.  It,  therefore,  considers  the  Action  Plan  completed  and  the 
objectives achieved.  

–  The Commission will seek to reap the full benefits of the legislative provisions for the new 
programming period 2007-2013, including the simplification of cost options;  it  will keep 
up the momentum generated by the Action Plan and pursue rigorous supervisory actions in 
the context of its Audit Strategy and report on the situation in the Annual Activity Reports.  

10.3.  Reviewing the Financial Regulation 

The  Commission  has  recently  submitted  proposals  for  the  triennial  review  of  the  Financial 
Regulation20 aiming at more efficient delivery mechanisms and a thorough simplification of 
rules  and  procedures.  A  review  of  the  financial  rules  is  required  at  least  every  three  years. 
This is the second such exercise: the first review took place in 2006-2007.  

The new rules provide for the simplification of some unnecessarily cumbersome procedures, 
improve  accountability  and  financial  control  and  increase  the  transparency  of  EU  spending. 
These  are  crucial  elements  in  the  development of  a  modern,  efficient  financial  management 
system  and  to  shaping  the  management  of  EU funds  well  into  the  next  decade.  The  revised 
rules need to be agreed by the time the new EU-funded programmes come into play when the 
current multi-annual financial framework closes in 2013.  

The  Commission  also  carried  out  a  public  consultation  from  19/10/2009  to  18/12/2009  in 
order to benefit from contributors' experience as project managers and beneficiaries of public 
funding. In the consultation, the Commission was specifically seeking for stakeholders views 
on how to make the rules for grants and contracts more effective for everyone.  

Drawing on the Commission’s own experience, the consultation paper highlighted key areas 
that concern fund beneficiaries. The first looked at improving the process of public calls for 
proposals  in  the  award  of  grants.  Experience  here  has  shown  that  procedures  are  often  too 
long and cumbersome. The paper also raised a series of questions such as: should the rules on 
co-financing  requirements  for  the  recipients  of  EU  grants  be  more  flexible?  Would  the 
introduction of performance-based grants (i.e. based on results rather than on reimbursement 
of  costs)  make  life  easier  for  everyone?  Or  what  about  loosening  up  the  current  non-profit 
rule, where EU grants at the moment cannot generate any top-up revenue for beneficiaries? 

The second focus in the consultation was on how to simplify the Commission's own handling 
of financial files. The current rules are designed to minimise the risk of error and fraud, yet 
practical  experience  shows  that  they  can  often  create  additional  red  tape.  This  is  why  the 
Commission  will  be  examining  ways  to  adapt  the  rules  to  ensure  effective  project 
management, as well as maintaining a high level of protection for taxpayers' interests.  

The  consultation  encouraged  interested  parties  to  send  235  contributions,  reflecting  a  broad 
range  of  opinions  and  perspectives.  The  contributions  received  largely  agreed  with  the 
following points:  

20 

Regulation (EC) No1605/2002 of 25 June 2002. 

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–  internal Guidelines and best practice/tools should be improved;  

–  use of lump sums and flat rates;  

–  shift towards a performance-based system;  

–  the application procedure for grants should be improved;  

–  the real-cost regime should be maintained but it should be clarified and streamlined;  

–  thresholds for low value grants should be raised;  

–  rules  on  the  recovery  of  interests  generated  by  pre-financing  generate  excessive 

administrative burden and misunderstandings with operators and partners.  

The Commission adopted its proposal for the revision of the Financial Regulation on 28 May 
201021.  At  the  same  time,  it  has  endorsed  a  Staff  Working  Document  on  the  Implementing 
Rules of the Financial Regulation so that European Parliament and Council can examine both 
texts, which are complementary, simultaneously. 

10.4.  European External Action Service (EEAS) 

The Commission has also proposed an ad-hoc revision of the Financial Regulation in order to 
facilitate  the  establishment  of  the  EEAS22.  This  is  a  separate  exercise  from  the  triennial 
review  of  the  Financial  Regulation  at  the  end  of  the  first  semester  of  2010.  In  budgetary 
terms,  the  EEAS  will  be  treated  as  an  institution  in  the  sense  of  Article  1  of  the  Financial 
Regulation so that it will have budgetary autonomy, i.e. its own section in the EU budget. It 
will  implement  its  own  administrative  expenditure  (like  all  other  institutions)  and  will 
therefore  receive  discharge  from  the  European  Parliament  for  it.  The  European  Parliament 
will therefore exercise its full budgetary and control powers towards the EEAS. 

21 
22 

COM(2010) 160. 
COM(2010) 85. 

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11. 

ANALYSIS  OF  POTENTIAL  ALTERNATIVE  OWN  RESOURCES  TO  FINANCE  THE  EU 
BUDGET 

11.1. 

Introduction 

This technical annex presents a summary of a number of potential alternative own resources 
pointing at key issues related to these alternatives, and putting forward indicative quantitative 
estimates. More refined analyses and concrete proposals will be developed in 2011. 

Six options have drawn particular attention in the budget review consultation. These include 
the three options put forward by the Commission in 2004, namely a resource based on VAT, 
energy  and  corporate  income.  In  addition,  three  options  that  gained  prominence  in  recent 
years have been added, namely resources related to the auctioning of greenhouse gas-emission 
allowances, to aviation and to financial sector taxation.  

This list of options should be seen as purely indicative, to enable an illustration of some of the 
issues which need to be considered. These and other potential options will need further study 
in the coming months in view of concrete proposals. 

11.2. 

Financial sector taxation 

Outline of the option 

The  Commission  recently  adopted  a  Communication  on  taxation  of  the  financial  sector23, 
which addresses both a financial transactions tax (FTT) and a financial activities tax.  

The FTT is designed to tax the value of single transactions. For a wide coverage, it should be 
applied  to  a  broad  range  of  financial  instruments  (i.e.  equities,  bonds,  currencies  and 
derivatives),  even  if  some  current  proposals  envisage  limiting  the  scope  to  a  subset  (e.g. 
currency transaction levy).  

Another potential instrument to improve taxation of the financial sector and reduce potential 
negative externalities is the Financial Activities Tax (FAT) as proposed by the IMF. It can tax 
total profit and wages (addition-method FAT) or can specifically target economic rents and/or 
risk. In contrast to  an FTT, whereby each  financial  market  participant  is  taxed  according to 
her transactions, the FAT taxes corporations. 

Qualitative assessment 

A FTT would be levied on activities that are notoriously difficult to tax at national level and 
usually  benefit  from  favourable  tax  treatment.  To  be  viable  and  mitigate  competitive 
distortions, such a tax needs to be levied at the international level and it requires a harmonised 
approach.  In  the  light  of  the  analysis  undertaken  to  date,  FTT  appears  less  suitable  for 
unilateral introduction at EU level since the risks of relocation are high and would undermine 
the  ability  to  generate  revenues.  In  the  current  international  context,  there  are  substantial 
obstacles  to  a  global  agreement  on  a  broad-based  FTT  and  while  a  narrow-based  financial 
transaction tax could be considered at the EU level only, there are uncertainties about how to 
ensure a fair and workable solution without global consensus. 

23 

COM(2010) 549. 

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Existing studies suggest that applying a very low rate on a large tax basis would allow raising 
significant amounts of tax revenues. The FTT would respect well the ability-to-pay principle 
as  it  would  primarily  affect  high-income  taxpayers  active  on  the  financial  market  and 
shareholders of financial institutions. The ultimate impact very much depends on the scope of 
the financial instruments that would be taxed and would require careful design.  

Introducing  a  FTT  would  not  be  easy,  however.  The  operating  costs  related  to  this  system 
could  be  initially  high  if  the  FTT  covered  all  the  main  type  of  transactions,  because  of  the 
different  characteristics  of  the  financial  market  segments  involved.  Control  and  incentive 
systems would need to be installed in order to avoid massive tax avoidance and migrations of 
markets. This could include financial incentives to the agent(s) collecting the tax on behalf of 
the Union. The legality of any FTT could also be challenged with regard to the EU treaties 
and  WTO  GATS  provisions.  Revenue  flows  could  vary  significantly  in  the  short  run, 
depending on the activity of the financial markets. There could also be a perceived national 
imbalance as, due to network externalities, financial asset transactions are highly concentrated 
in certain markets.  

The geographical distribution of revenues from a FAT would by and large reflect the actual 
distribution of the financial sector in the EU. However, the revenue is not as concentrated as 
in  the  case  of  a  broad-based  FTT.  The  reason  is  that  the  base  is  not  trading  activity,  which 
takes  place  mainly  in  a  few  financial  centres,  but  rather  remuneration  and  profit,  which  is 
more evenly spread. In this sense the FAT would be better suited to raising revenue for budget 
consolidation purposes. 

As  regards  economic  burden,  the  effects  also  depend  on  the  concrete  design  of  the  tax.  In 
practice  there  is  no  available  empirical  evidence  on  the  real  incidence  of  a  FAT.  If  the  tax 
were  to  be  shifted  to  the  customer,  and  given  that  there  is  no  deduction  for  business 
consumers, the tax burden could also partly fall on users of financial services. 

Quantitative assessment 

The  range  of  revenue  estimates  in  the  academic  literature  is  extremely  broad.  In  the  staff 
working  paper  on  innovative  financing  published  in  April  2010,  the  Commission  services 
estimated that a FTT levied on spot transactions on exchanges with a rate of 0.1% could bring 
revenues of around EUR 20 billion per year for Europe (EU + Norway and Switzerland). A 
narrower  Currency  Transaction  Levy  of  0.005%  on  global  Euro  transactions  could  yield  an 
amount of US$ 13 billion annually (equivalent euro).  

For the 22 developed economies considered in the IMF report to the G-20, a 5% rate of the 
addition-method FAT would create revenue corresponding to the average of 0.28% of GDP. 
Using  the  country-level  estimates  for  the  share  in  GDP  to  calculate  absolute  figures,  this 
would  translate  into  total  revenue  for  the  22  countries  of  roughly  EUR  75  billion  for  the 
addition-method  FAT.  For  the  EU-27,  the  addition-method  FAT  could  raise  up  to  EUR  25 
billion. 

11.3.  Auctioning of greenhouse gas emission allowances 

Outline of the option 

The  EU  Emission  Trading  Scheme  (ETS)  has  been  in  operation  since  2005.  From  2013  to 
2020 (and beyond), there will be an annually declining EU-wide emissions cap. During this 
period,  an  increasing  share  of  emission  allowances  will  be  auctioned.  The  proceeds  from 

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allowances  auctioning  could  be  transferred  to  the  EU  budget.  Part  of  the  revenue  collected 
would have to be removed from EU revenues and transferred to Member States to maintain 
the redistribution agreed in the legislation.  

The revenue could be partially 'earmarked' for climate and energy priorities as envisaged in 
the relevant legislation. 

Qualitative analysis 

The  EU  ETS  is  part  of  the  acquis.  The  system  runs  on  a  harmonised  EU  basis  and  the 
auctioning revenue would be closely linked to a core EU policy. 

Revenue from auctioning is not a tax revenue, though it does represent a source of income for 
public authorities. As a charge closely related to pollution by economic operators, it is in line 
with the polluter-pays principle (article 191 of the Lisbon Treaty). This resource may not need 
to  transit  via  Member  States  treasuries.  The  total  administration  cost  of  a  centralised 
auctioning  system  would  be  lower  and  the  recently  agreed  regulation  governing  auctions 
provides for a common platform.  

It  could  be  argued  that  the  revenue  flow  related  to  emissions  auctioning  will  decrease  over 
time as emissions diminish. This argument appears unconvincing as the scope of the EU ETS 
is likely to expand over time and the price of carbon should increase as the emissions cap is 
reduced in line with a trajectory to a low-carbon economy in 2050. The revenue is dependent 
on the evolution of the carbon price, which has been variable in phase 1 (2005 to 2007) but is 
less so in the current phase 2. Varying revenue would be offset by the fact that the residual 
GNI-based  resource  would  still  be  in  place  and  could  in  any  case  compensate  for  any  such 
possible volatility in this as in other resources. 

Auctioning  revenue  will  arise  disproportionally  in  more  energy-intensive  Member  States. 
However, assuming that part of the revenue from auctioning would be geared at climate and 
energy priorities (political earmarking of 50% of the revenue), it could be expected that heavy 
emitters  per  unit  of  output  would  also  benefit  from  a  higher  share  of  expenditures.  On  the 
other  hand,  some  Member  States  already  earmark  some  auctioning  revenues  to  support 
climate and energy policies at the national level.  

Quantitative analysis 

The  revenue  for  the  EU  budget  resulting  from  auctioning  could  amount  to  some  EUR  20 
billion24 in 2020 after the transfer of 12% of the revenues to some Member States in line with 
the  European  Council  agreement  of  December  2008.  Revenues  for  earlier  years  would 
probably be lower due to the reduced share of auctioning and likely lower price of emission 
allowances as the EU economy recovers from the crisis. 

24 

Estimate  assuming  a  price  per  emission  allowance  of  EUR  20.3  and  an  auctioning  of  65%  of  total 
allowances. This estimate does not include the revenue from auctioning in the aviation sector and other 
potential sectors included in the scope of the EU ETS as of 2013. 

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11.4.  Aviation charge 

Outline of the option 

An  aviation  duty  could  apply  to  freight  and  passenger  flights  entering,  operating  and/or 
leaving  the  so-called  European  Flight  Information  Region.  This  would  not  be  a  duty  on 
passengers or a duty related to kerosene consumption, but a charge per flight. The amount of 
the  duty  could  depend  on  the  aircraft  technical  characteristic  and  other  variables.  The  duty 
would be such that the more efficient planes would pay less, ceteris paribus.  

Qualitative analysis 

Aviation  is  an  example  of  how  Community  law  helps  to  achieve  safe,  orderly  and  efficient 
business operations throughout Europe. Liberalisation of air transport in the EU has allowed 
considerable  efficiency  gains,  the  emergence  of  new,  low-cost  companies,  and  considerable 
price reductions for passengers over the years.  

An  aviation  duty  would  serve  various  EU  policy  objectives.  It  would  provide  incentives  to 
reduce  air  pollution,  including  greenhouse  gas  emissions  not  covered  by  the  EU  Emission 
Trading  Scheme,  such  as  nitrogen  oxides  (NOx),  noise  and  airport  congestion.  It  would 
contribute  to  the  functioning  of  the  internal  market  and  reduce  current  distortions  of 
competition  vis-à-vis  other  modes  of  transportation  (e.g.  the  current  absence  of  VAT  on  air 
tickets or fuel tax on kerosene for international flights gives an undue advantage to aviation 
compared  to  other  modes  of  transportation).  An  aviation  duty  may  also  be  justified  by  the 
large free allocation of emission allowances (85%) foreseen in the Emission Trading Scheme.  

Regarding  the  implementation  of  the  aviation  duty,  start-up  and  operating  costs  could  be 
small,  since  the  data  bases  required  and  the  technical  facilities  necessary  for  a  precise  and 
timely  computing  of  the  aviation  duty  due  are  already  in  place  and  in  use.  The  charging 
system could be based on existing solutions already proved to be successfully operational and 
accepted  over  the  years.  However,  this  would  require  active  participation  of  Eurocontrol  in 
the  duty  collection  and  the  agreement  of  all  parties  concerned.  This  may  lead  to  lengthy 
political  and  legal  proceedings.  Lastly,  aviation  duties  would  not  need  to  transit  via  the 
Member States budgets.  

Quantitative analysis 

Based on a standard duty of EUR 1.0 per kilometre for a reference plane, the total estimated 
income would have been EUR 12.8 billion for the year 2006. The corresponding aviation duty 
per  average  flight  (freight  and  passenger  flights)  would  have  been  EUR  1,331.  This  would 
correspond, for passenger flights, to a few Euros per passenger. The amount collected for the 
aviation  duty  could  be  expected  to  be  increasing  significantly  in  the  post-2013  period 
considering the growing trend of aviation activity.  

11.5.  EU VAT 

Outline of the option 

A combined VAT rate could consist of the national and the EU rate. The Member States could 
determine  the  national  rates  as  today.  An  EU  rate  could  be  defined  separately  in  the 
framework  of  the  own  resource  Decision  and/or  its  implementation  rules.  The  EU  VAT 
payments  could  be  clearly  denoted  on  each  individual  invoice,  next  to  the  national  VAT 

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payment25.  Different  rates  could  be  applied  to  different  categories  of  goods  and  services  in 
line  with  the  existing  differences  in  the  Member  States.  This  resource  would  thus  be 
completely  different  from  the  existing  VAT-based  own  resource  which  is  in  practice  a 
contribution  from  the  Member  States  based  on  statistical  calculations.  The  Member  States 
would collect the EU VAT and transfer the proceeds to the EU budget. 

Qualitative analysis 

VAT is an important and stable source of revenue. Moreover, tax receipts grow in line with 
increased spending on goods and services without any change in the VAT rate(s).  

As a new own resource, it would be very visible to the citizen, which is why it has sometimes 
been advocated as a potential own resource. The low VAT rate (1-2%) necessary to finance 
the  EU  budget  could  put  in  perspective  the  size  of  the  EU  budget.  However,  the  very  high 
visibility of the EU VAT could also be seen as a problem if the population perceived EU VAT 
as an additional tax burden rather than replacing a national contribution paid for from other 
taxes.  

The technical preparation for the implementation of an EU VAT could be relatively limited 
and it would probably not take more than a few years to put the system in place. However, 
harmonising  further  the  structure  of  rates  (notably  zero-rated  goods)  and  remaining 
differences of VAT bases could prove challenging. In absence of this, the system could also 
function, but not all EU taxpayers would be faced  with  the  same  EU  VAT  for  a  number  of 
goods. Furthermore, the omission of existing zero-rated goods might be seen as unjustifiable 
relief from the proposed new EU VAT for certain Member States an issue that would need to 
be examined as part of a balanced overall proposal.  

Quantitative analysis 

Applying a 1% EU VAT to both reduced and standard rates, combined with the elimination of 
the current ('traditional') VAT-based own resource, and exempting zero-rated goods from the 
EU  rate  would  yield  revenues  corresponding  to  close  to  half  of  total  EU  financing.  More 
precisely,  in  its  2004  report  on  EU  financing,  the  Commission  estimated  that  revenues  of  a 
1% EU VAT would amount to EUR 41.0 billion (estimate for 2001).  

11.6.  EU energy levy 

Outline of the option 

Existing  taxes  on  energy  consumption  (in  particular  on  motor  fuels)  could  fully  or  partially 
(up to the level of the EU minimum tax rates) serve as own resources for the EU budget or 
could  be  replaced  by  an  EU  levy  on  energy/CO2  emissions.  Member  States  could  apply 
national duties ('surcharges') on top of the EU duties. Member States would collect the energy 
levy and transfer the proceeds to the EU budget. 

Qualitative analysis 

The  main  advantage  of  this  option  would  be  practical  feasibility  and  easy  implementation 
(existing  tax  with  a  large  degree  of  harmonisation)  combined  with  the  fact  that  such  a  tax 

25 

Although not all transactions, particularly retail B2C, would generate an invoice. 

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would  be  clearly  linked  to  various  Community  policies  and  would  support  them  (internal 
market, energy, transport and environmental policies).  

However,  these  efficiency  gains  would  only  be  possible  if  the  total  rates  resulting  from  the 
EU  rate  combined  with  Member  States  surcharges  were  more  harmonized  than  the  current 
rates  or  if  a  reform  of  the  existing  framework  for  energy  taxation  could  be  facilitated  by 
linking it to a reform of own resources.  

Quantitative analysis 

In  its  2004  report  on  EU  financing,  the  Commission  showed  that  with  a  levy  of  330 
euros/1000  litres  of  motor  fuel  (the  minimum  rate),  an  energy  tax  could  yield  EUR  109.8 
billion  (estimate  for  2002).  Introducing  a  rate  corresponding  to  half  the  minimum  rate 
currently  defined  in  the  energy  taxation  directive,  the  EU  energy  levy  on  petrol  and  gasoil 
only would bring revenues close to half of the total EU financing requirements.  

11.7.  EU Corporate Income Tax 

Outline of the option 

An EU Corporate Income Tax (EUCIT) would first require a common corporate tax base. A 
relatively  small,  uniform  EU  corporate  tax  rate  could  then  be  applied  to  the  common 
corporate base of corporations. Member States could continue to apply a national rate to this 
new base, or the EUCIT could be a percentage of each national company tax.  

Qualitative analysis 

If  a  common  basis  replaced  current  national  rules  and  bases,  this  could  lead  to  substantial 
efficiency gains (fewer tax distortions in investment decisions) and help to reduce compliance 
costs  for  companies  operating  cross-border  in  the  internal  market.  In  addition,  it  could 
contribute to a "clearer" distribution of tax bases for multinationals across Member States.  

Challenges  to  implement  a  EUCIT  are  considerable.  The  work  on  a  possible  EU  tax  base, 
which was first suggested in 1962, is notoriously difficult, given the competences of Member 
States in taxation, as it relates to essential differences in Member States tax systems. Even the 
completion of an optional Common Consolidated Corporate Tax Base (CCCTB), which has 
not been conceived as a basis for a new own resource, has proved controversial.  

Quantitative analysis 

Corporate income tax represents on average between 2% and 3% of GDP in the EU so that in 
the  scenario  of  a  new  compulsory  base  for  all  companies  with  all  or  part  of  the  revenues 
accruing  to  the  EU,  there  would  be  enough  revenues  to  finance  the  EU  budget  even  with  a 
relatively low EU rate. However, the amount raised would fluctuate with the taxable profits of 
the EU private sector and would be difficult to predict. In the absence of any clear proposals 
on how such a proposal would ultimately be implemented, precise revenue estimates appear 
premature. 

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