ECONOMY

Battle over EU budget begins

Brussels – The European Union budget proposal covering the period from 2007 to 2013 that the European Commission unveiled last Tuesday includes many changes that could result in Greece receiving a lot less money than it currently does. The extremely tough negotiations about the budget that are certain to follow will likely decrease these funds, which Greece counts on to keep its economic growth going, even further. The fundamentals of the budget are as follows. Its total size for the period under question is almost 1 trillion euros, averaging 1.14 percent of the total gross domestic product (GDP) of the 25 EU member countries or soon-to-be members. At present, the annual budget is about 100 billion euros or about 1 percent of the GDP of the current 15 member states. The annual budget will range from 133.5 billion euros in 2007 to 158.5 billion in 2013; in the latter case, net payments will be 143.1 billion. In GDP terms, the progression will not be linear: thus the 2007 budget’s size will be equal to 1.15 percent of the GDP; in 2008, 1.23 percent; in 2009, 1.12 percent; in 2010, 1.08 percent; in 2011, 1.11 percent; in 2012, 1.14 percent; and in 2013, 1.15 percent. Slight rise in funding The two largest budget items, as expected, will continue to be those concerning the Common Agricultural Policy (CAP) and the Cohesion Fund, which includes the funds to be made available through the Fourth Community Support Framework (CSFIV) program. For the Cohesion Fund, the Commission proposal calls for an increase from 39.6 billion euros in 2006, the last year of the current period, to 43.5 billion in 2007 and 50.96 billion in 2013, with net transfers somewhat less than these figures. Factoring in inflation, we see that this is not much of an increase. However, the need for cohesion funds will dramatically increase on May 1, with the accession of 10 new members, almost all of them poorer than the current 15. The need to continue the transfer of funds to the current recipients, such as Greece, Spain, the former East Germany, Portugal and even parts of Ireland, will still exist. The crucial issues, then, are what the final size of its budget will be and how the money will be distributed. Concerning the latter, we should note that the Commission proposal does not specify how the money will be divided. Such a decision is not expected soon because it depends on a series of factors that have not been finalized yet. In any case, the Commission’s proposal on this issue is not expected before summer, and the final apportionment will not take place before the governments reach their own decisions. As a result, predicting what portion of the funds Greece or any other country will receive is «highly risky,» according to Brussels-based officials. A first step toward clearing up the issue will be taken next week, when the Commission will decide on which areas will be excluded from «Target 1» of the Cohesion Fund. Target 1 areas are the poorest within the EU and aid to such areas is the major source of EU funds for Greece. Currently, all 13 of Greece’s regions are included in Target 1. But, with Greece’s rising income relative to the EU average, four of these regions – Attica, Central Greece, Central Macedonia, and Southern Aegean – could be excluded from receiving Target 1 funds. The contributors’ revolt As we already mentioned, the budget’s fundamental provisions are open to revision. This is because the countries that will be called upon to contribute most of the funds, that is Germany, France, the UK, the Netherlands, Sweden and Austria, have already expressed their opinion that even this 1.14 percent of GDP as the budget’s average size that the Commission proposes is excessive. In a joint letter – which sounds more like an ultimatum – they demand that the budget size not exceed 1 percent of the EU’s GDP, although the 1.24 percent level was agreed several years ago by all member states. If the budget were to be limited to the 1 percent level, this would mean an enormous loss of funds. The major argument of the big contributors is that, due to the economic stagnation in recent years and the demands made by the Stability and Growth Pact, combined with the increasing displeasure of their voters, they are obliged to show restraint in their spending for the EU. Of course, they overlook the fact that the vast majority of funds they allocate return to them in the form of investments and imports, or procurements, from the beneficiaries, but that’s another story. Germany, especially, uses the above argument continuously, explaining that, even if it wanted to, it could not be as generous as in the past because its finances will not allow it. It even goes as far as to accuse the Commission of imposing strict policies designed to reduce its deficit, in a climate of economic difficulty and painful restructuring. In so arguing, Germany conveniently forgets that it was through its pressure that the Stability and Growth Pact, and its provisions, were instituted. In any case, the Schroeder government will find it difficult to explain to voters that it will spend significant sums to help restructure the economies of other countries. France, the other major Stability and Growth Pact violator, having ensured that its main interest (the continuation of fat farmers’ subsidies through the CAP) will continue, takes Germany’s side, demanding cuts in funding from which, in any case, it expects little. As for the UK, it is mainly interested in preserving the annual partial reimbursements of its contributions to the budget, agreed upon in 1984, and which have acquired a totemic significance, as a kind of «victory over Europe.» The British are not, in any case, known for their generosity to other EU members and are among the most open in asking for a decisive reallocation of EU aid in favor of the new members. The other angry contributors – Austria, the Netherlands and Sweden – have simpler reasons for their position. They find the obligations that their relative prosperity entails burdensome, especially at a time of slow growth, and expect to be relieved of part of their burden. New vs old beneficiaries On the other hand, the new entrants into the EU await the funding as manna from heaven, or, to be more prosaic, as one of the largest operations of income redistribution ever. One could say that these funds constitute the main attraction to countries that are otherwise, and to varying degrees, skeptical about the EU as a political project. At the same time, the current beneficiaries claim a significant slice of the budget, arguing that a significant reduction in funding would have adverse consequences. Striking a balance between new and old members will be especially important, especially regarding Cohesion funding. At the time, the balance is heavily in favor of the new members. The Commission has expressed reservations, insisting on the need to provide significant funds to Greece, Spain and Portugal; however, it is not the Commission that will have the decisive say in the debate, but the European Council. Aggravating things further for current beneficiaries is the fact that many members see the emerging conflict over the budget as an opportunity to «slay the monster of Brussels.» Budget negotiations will be further complicated by the concurrent haggling over the new European Constitution. Germany, for example, has already made it clear that accommodating behavior from countries such as Spain on the issue of the constitution, and the relative strength of each country’s vote, is a prerequisite for its own consent on budgetary matters. The early indications are that both Spain and Poland – the two recalcitrants in the debate on the Constitution – are beginning to understand the implications of their conduct very well and are prepared to move away from their steadfastly negative position they took at the Intergovernmental Conference last Fall. It is far from certain that the ensuing horse trading will produce any positive results from Greece, which, in the past, has benefited from Spain’s tough diplomatic tactics on behalf of the Mediterranean countries. The presence of the Eastern Europeans complicates the game. Whatever the outcome of the negotiations, one thing is certain: Far stricter conditions will be attached to the use of the funds in order to prevent any kind of misspending. Beneficiaries will be obliged to apply draconian auditing systems to ensure the correct and transparent use of the fund. To Greece, this constitutes both a danger and an opportunity: a danger of losing funds and an opportunity to improve the effectiveness of the state administration.