The EU Can Do a Lot More With Its Money

For all the talk of the costs that “Brexit” will impose on Britain, the U.K.’s withdrawal from the European Union will not be painless for the rest of the bloc either. One immediate problem will be how to fill the gap in the EU budget resulting from Britain’s departure.

The U.K. is a net contributor to the EU budget. Even taking into account the money London gets back from Brussels in the form of research grants or farm support, for example, the EU will fall around 10 billion euros ($12.3 billion) short each year.

This challenge offers the EU-27 an opportunity to rethink the way the budget is allocated. A document published jointly last week by the finance ministers of Italy and Germany offers one useful blueprint. They argue that the EU should spend more on European “public goods” — areas of spending identified as in the interests of the whole union.

In their most clear-cut form, these spending items share two characteristics: They are what economists call non-rival and non-excludable. To put it simply, one country’s or person’s consumption doesn’t affect another’s. Furthermore, it is impossible to exclude countries that have not paid for them from using them.

Spending to foster European defense and to patrol the EU’s external borders are two straightforward examples. More efficient checks in the Mediterranean Sea could help the whole of the EU manage the inflow of refugees. Asking one member state to fund this effort alone is unfair, since the benefits will inevitably trickle down on all European partners. While there is already some EU funding for these tasks already (for example, via the European Border and Coast Guard Agency), it is patently insufficient, leaving countries such as Italy to shoulder a disproportionate share of the total costs.

The two finance ministers do not call openly for reducing other areas of spending, but that is the logical consequence of their push. The obvious target is the Common Agricultural Policy. The CAP is not only protectionist; it is also not clear why European taxpayers should be paying for a measure that helps producers from individual member states. France, the CAP’s biggest beneficiary, has been the main obstacle to any change. But French President Emmanuel Macron has said recently he is open to rethinking the CAP. That would in itself be a major improvement in how the EU spends its money — even apart from the opportunities it opens up for improved budget allocation.

Brexit has also provided an impetus to revisit the EU’s “cohesion funds” — money designated to help the bloc’s poorest areas converge towards the richest. Unlike agricultural subsidies, there is a public-good dimension to this spending: Narrowing economic differences within the EU can strengthen the bloc’s cohesiveness and reduce public discontent.

However, too often cohesion funds have been wasted on feel-good projects — such as food festivals — or misspent, rather than serving as an effective way to raise a region’s long-term growth rate. The two ministers would like the commission to make these disbursements dependent on a range of indicators, including the effectiveness of the use of previous funds and the efficiency of administrative procedures.

Recipient countries should also be compliant with other EU objectives, including showing solidarity in managing migration inflows. Some in Germany have gone even further, arguing that “cohesion funds” should be linked to respect of the rule of law and democracy. These ideas have already proven controversial with Eastern European governments, but they make a lot of sense: If you benefit from transfers from other members of a club, it is only fair that you play by the rules.

While “public goods” sounds like something most Europeans can agree on in theory, in practice making budget decisions will require trade-offs, even if the EU manages to plug the Brexit-made hole or even increase the overall budget. But Brexit has forced the debate. And for now, the recommendations coming from Italy and Germany make a good starting point.
Source: Bloomberg