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Formulation of a European Union Budget

Gautam Sen is a retired IDAS officer who has served in senior positions at the Centre and in a north-east State Government.
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  • July 24, 2017

    Both Chancellor Angela Merkel of Germany and President Emanuel Macron of France have recently expressed views in favour of the European Union (EU) having a unified budget and eventually an EU finance minister as well. However, the details of the structure and contents of such a budgeting system are still to be worked out. Further, even the in-principle approval of the European Commission and the EU parliament to such a proposal is still way off. Of the two leaders, Macron has been the more enthusiastic. Merkel has been a bit guarded given political compulsions in the form of the forthcoming German national elections in September 2017. The underlying idea seems to be that the EU, comprising of 28 member states, and particularly its 19 members within the Eurozone, must be stabilised and the economic dysfunctions of the Union eliminated. But none of the proponents of this idea has elucidated the actual dysfunctions that could be overcome through the new budgetary institution.

    It may be relevant to consider what “formulating” an EU budget entails and its implications internally for the EU and the EUZ as well as externally vis-à-vis non-EU countries. If the intention is to conceptualise a macro budget wherein the financial needs of the EU will be aggregated and the expenditure and investment proposals apropos this aggregate figure worked out based on projections from member states, then the new system will be inconsequential. If the budgeting process simply involves adding up the figures pertaining to the resource needs of each EU member and aggregating the concomitant country-wise expenditure appropriations, the impact will be marginal. In fact, such a budget will only erode the national autonomy of member states and probably involve delays in the budgeting process. Further, it is unlikely to enable supra-national intervention in terms of using the budgetary mechanism for overcoming local or regional zones of slow growth, or facilitating equitable distribution of resources and factors of production, and developing local pockets of under-growth. Finally, such a budgeting process is also unlikely to help the EU achieve the desired outcome of achieving a uniform or near-uniform price level, inflation rate, unemployment threshold (presently varying between five and 25 per cent), debt position, etc.

    If EU-wide uniformity in these economic indicators is the main objective, a more fundamental integration in the budget formulation process will be required. These are, however, lofty targets for the EU in its present state. The wide dissimilarities in the growth pattern across EU countries, diversity in resources, levels of industrial productivity, etc. warrant greater circumspection and caution in moving towards a common EU budgetary institution at this stage or even in the near future especially with a major development like Brexit looming.

    While both Macron and Merkel share a vision of greater integration and stronger cooperation within the EU, Merkel has opined against mutualisation of individual state debts. The divergence of opinion within the EU has been stark vis-à-vis the debt relief or bailout package for Greece. Germany under Merkel has been particularly conservative and critical of a large-scale bailout without a substantial re-structuring of Greece’s economy. Germany has pointed out that the consequence of the three bailout packages from the troika of the European Commission, European Central Bank and International Monetary Fund totalling Euro 366 billion to Greece since its insolvency position arose in 2010 has been a GDP growth rate of a mere 0.7 per cent. Under a unified EU budgetary system, supporting Greece would have been the direct responsibility of an EU finance minister and thus a liability of the EU as a whole. It is doubtful if all EU members including the economically strongest power, i.e., Germany, would have been agreeable to allowing a decision on such a bailout package to be taken on its merits by an EU finance minister through an EU budgetary process duly vetted by the EU parliament. An EU budget can be successful only if the resource raising and allocation process is based on economic principles and not driven by politics and the relative strength of the member states.

    Another contentious issue would be the fiscal transfers that need to be carried out under an EU budget to the constituent countries related in accordance with their economic needs and beyond the resources mobilised within national boundaries. The EU has not reached a stage when receipts generated through tax and non-tax revenues or borrowings of a member state can be pooled under a common budget and deployed according to needs without correlating it with the revenues and borrowings of various members. For a successful EU budgetary system, the framework of national resources and expenditure, which presently operates through national budgets, will have to be abandoned. It is doubtful if EU member countries are psychologically and administratively ready to take financial integration to such a level and integrate their decision-making processes as above.

    An EU budget should logically lead to the formulation of a common policy on taxes and duties and their rates, as well as their seamless execution. This, incidentally, may already be achievable under the treaties governing the functioning of the EU even without a common budget, provided there is political will to do so among members. Therefore, a common budget of the EU should not be viewed as a substantive institutional change. However, under a common budgetary system, it will be of the essence to ensure that the revenues to be raised and their rates are decided by harmonising and giving due weightage to the economic needs of member countries and their unique requirements. This implies, for example, that import duties may have to be dovetailed to the consumer needs or the manufacturing requirements of member countries. That would mean empowering the EU finance minister to take such decisions.

    The moot point is whether member countries are conceptually clear on the economic dysfunctions of the EU which they wish to overcome, the degree of unification of economies that they desire for surmounting these dysfunctions, and the extent of national sovereignty they are prepared to sacrifice when it comes to allocation of resources for economic growth for the EU as a whole. At this juncture, no realistic time-frame can be set in this regard.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.