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Scenarios
for the Financial Redistribution across Member States in the
European Union in 2007-2013 |
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by Sándor Richter
wiiw Research Reports, No. 317, April 2005 |
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| A strikingly
unique and particularly important feature of EU integration
is the redistribution of resources across member states. This
has grown from a nearly negligible level in the early stages
of the European integration to its present modest volume (approximately
1% of the Union's GNI). Redistribution of resources across member
states has been gaining in significance as new relatively poor
member states join the enlargement process. After the 2004 enlargement,
differences in the member states' level of economic development
increased significantly. Measured in terms of average per capita
GNI in PPS, twelve member states are now above the EU-25 average.
Thirteen member states' development levels range between the
EU-25 average and less than half of that. With the accession
of Bulgaria and Rumania in 2007 the lower end will be 34-35%
of the then EU-27. |
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| Redistribution
across member states in the EU is designed in multi-annual financial
frameworks. The full weight of enlargement-related challenges
will appear in the financial perspectives for 2007-2013. Scenarios
made by independent research groups prior to the February 2004
publication of the European Commission's proposal for the financial
perspectives 2007-2013 reckoned with a range of options, including
radical reforms focused on agricultural and cohesion expenditures.
With the publication of the Commission's proposal the focus
of discussions shifted to the size of the EU budget. |
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| The Commission
proposes an EU budget which amounts to 1.26% of the EU GNI in
commitment appropriations (that corresponds to 1.14% in payments
appropriations). The six major net payer member states insist
on a smaller EU budget: it should not exceed 1% of the EU GNI
in commitment terms (about 0.9% in payments). The debate on
the next financial perspective takes place against the backdrop
of commitment appropriations. In that context, the Commission's
proposal for the total envisaged expenditures for seven years
equals to EUR 1025 billion, while the major net payers require
20.5% less expenditures, EUR 815 billion for the same period.
In the Commission's proposal, expenditures were to grow annually
by 4%; in 2013 they would be 31.3% higher than in 2006. In the
six major net payers' version the annual growth in expenditures
would only be 0.6% and the compound growth rate for 2013/2006
would amount to 4.4% only. The EU-27 GNI is estimated to grow
by 17.3% over the seven-year period concerned: an annual growth
rate of 2.3% (all data at constant prices). |
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| In this
paper three moderate and two radical reform scenarios for the
redistribution across member states in 2007-2013 are introduced.
The scenarios reflect the ongoing discussions on the size of
the future EU budget, possible net financial positions of the
member states, efficiency of EU transfers and finally directions
of earlier reform proposals. |
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| The first
scenario is identical to the European Commission's proposal.
It represents a partial departure from the spending structure
of the current (2000-2006) financial perspective. The newly
created expenditure sub-heading Competitiveness is a resolute
step towards an upgrading of programmes with 'European value-added'
and establishes, with other, smaller classes of expenditures,
a third major pillar of spending beside Agriculture and Cohesion.
Another important new element is the introduction of a general
correction mechanism to address the problem of excessive negative
net financial positions. |
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| The second
scenario stands for the proposal of the major net payer countries
and reckons with a 1% of EU GNI (commitments) budget. Here,
just as in all further scenarios, direct payments for farmers
and market intervention and administrative costs are exempted
from reductions, as CAP-related spending is compulsory while
administration costs are regarded as too rigid to be reduced.
The burden of reduction (close to one third on average) is therefore
borne, to an equal extent, by all other expenditures. |
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| The third
scenario is, what concerns the size of the EU budget, a compromise
'at halfway' between the Commission's and the six major net
payer member states' proposals. The expenditure structure is
similar to that in the first and second scenarios. |
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| The fourth
and fifth scenarios represent radical reforms. Both are based
on the assumption that the major net payer countries will succeed
in reducing the EU budget to 1% of the EU GNI (commitments).
It is further assumed that a smaller budget must set priorities,
the practice of 'something for everyone' cannot be continued
any longer. With picking up only one of the two leading motives
for the redistribution across member states in the EU, providing
'EU-wide value-added' or enhancing cohesion (catching-up of
less developed regions and member states), respectively, these
scenarios operate with a radically re drawn expenditure structure.
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| The fourth
scenario, labelled 'More competitiveness', leaves expenditures
for providing 'EU-wide value-added' unchanged as they figure
in the Commission's original proposal. The requisite cuts to
come down to a '1% budget' are made in the expenditures earmarked
in the Commission's proposal for cohesion. In the fifth scenario,
labelled 'More cohesion', the cohesion-related expenditures
of the Commission's proposal are left unchanged and the expenditures
for providing 'EU-wide value-added' are reduced. |
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| In the
scenario 'More competitiveness', while the programmes supporting
the provision of EU-wide value-added can be implemented to full
extent, projects enhancing catching-up will have to be reduced
to hardly more than one third of that proposed by the Commission.
The cuts in cohesion-related programmes will amount to EUR 27
billion in 2007 and EUR 42 billion in 2013. In 2013 expenditures
on cohesion will amount to less than half the respective amount
in 2006, the year preceding the accession of Bulgaria and Romania. |
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| In the
scenario 'More cohesion', emphasis is placed on redistribution
favouring the less developed member states and regions. Unchanged
expenditures (including, as in all scenarios, CAP-related and
administration items), make up nearly 80% of the total envisaged
for 2007 in the Commission's original proposal. This means that
the remaining 20% will have to bear the brunt of the cutbacks
in total expenditures so as to comply with the 1% GNI ceiling.
The breakdown of expenditures by policy area clearly shows that
in the first year of the new financial perspective, the policy
areas affected by cuts are practically annihilated. After 2007,
the situation slowly changes as the relative weight of direct
payments to farmers and transfers for cohesion decreases and
that for provision of 'EU wide value-added' increases. The rate
of reduction in expenditures for the latter group, compared
to the Commission's proposal, drops from 92% in 2008 to 68%
by 2013. |
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| With per
capita GNI well below the EU average, the most important issue
for the new member states is how much additional funding will
be available to them for catching up via cohesion transfers.
The Commission's intention is that cohesion-related transfers
are distributed approximately in the proportion 50:50 between
new and old member states, respectively. |
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| In the
first and fifth scenarios (Commission's proposal, 'More cohesion')
where funds for cohesion correspond to those proposed by the
Commission, the eight less developed new members are able to
draw cohesion transfers annually up to 4% of their GDP, Malta
and the Czech Republic up to 3%, Cyprus and Slovenia up to 2%
of their GDP. In the second scenario (1% budget, unchanged expenditure
structure), even if the relatively more developed new members
Cyprus, Slovenia, Malta and the Czech Republic received transfers
equalling to only 2% of their GDP, and all other new members
3%, old EU members should fall back upon about one quarter (at
the beginning of the period) to less than 10% of the total cohesion
transfers (end of the period), instead of about 50% as earmarked
in the Commission's proposal. The really bad news for new members,
however, would be the realization of the fourth scenario 'More
competitiveness', which would leave cohesion transfers for the
four more developed new members amounting only to 1% of their
GDP and only 2% of the GDP for all other, less developed, new
members. Even in this fairly meagre edition of cohesion policy
for new members, the share of old members would only amount
to about one third of the total instead of one half as proposed
by the Commission. |
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| The radical
reform scenarios would lead to significant shifts in the net
positions of the member states, but an exact assessment of the
changes by individual member states is as yet impossible. This
leads to the conclusion that the general correction mechanism
proposed by the Commission or even a different mechanism with
an outcome of diminished variation in net financial positions
by member state is an important prerequisite for any major reform
of the redistribution across member states in the EU. The mere
fact that no excessive deficits may emerge as a consequence
of relatively unpredictable effects should encourage the most
developed EU member states to adopt a more open attitude towards
changes of all kinds concerning the EU budget. |
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| The paper
discusses the main features of the position of five member states
(Slovenia, Hungary, Poland, Austria and Germany) concerning
selected issues of the next financial perspectives. In the search
for a compromise on the size of the next EU budget, Germany's
position is of paramount importance. The Stability and Growth
Pact prescribes the observance of a maximum 3% budget deficit/GDP
ratio in any member state. Featuring as the main financial pillar
of the EU budget, Germany has been struggling with its own excessive
deficit for years, while its net financial contribution to the
EU budget amounted to more than 0.5% of its GNP in 1997-2000
and 0.38% of its GNP/GNI in 2001-2003. The recently proposed
relaxation of the Stability and Growth Pact rules may offer
remedy to the troubled relationship of the EU and German budgets.
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| Although
the discussion on the 2007-2013 financial perspective may be
concluded as early as June 2005, the possibility of the negotiations
not reaching a decisive stage until the first half of 2006 cannot
be excluded. This means that the first evaluation of the new
members' record in the absorption of EU transfers may play an
important role in the final stage of negotiations on the future
budget. If the experience is overwhelmingly positive or at least
acceptable in most of the new member states, no additional element
will enter the discussion. However, should it transpire that
all or most of the new members have encountered serious difficulties
in drawing down available resources from the EU budget and are
thus far behind their own projections for absorption, the discussion
on the new financial perspective might take a decisive turn
for the worse, from the new member states' point of view. Those
calling for a smaller budget and/or less spending on cohesion
would receive important arguments for the discussion. |
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| The main
conclusion of the paper is that in case the six major net payer
member states succeed in getting the EU budget cut to 1% of
the EU GNI, the consequences will be considerable, unless expenditures
for cohesion are declared exempt from the cuts. It would be
practically impossible to strike a compromise without seriously
frustrating one of the two groups (old and new members). As
the approval of a budget calls for unanimity, this may well
lead to a serious crisis in the Union over the next two years.
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Keywords:
European integration, EU, redistribution across member states,
scenarios, cohesion, competitiveness, budgetary reforms, EU
financial perspective, EU budget, own resources and expenditures,
net financial position
JEL classification: F15, F36, F47, H29, H49, H77, H87, R11 |
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