Europe's budget makers must slaughter sacred cows

Nov 23, 2012, 5:51 PM EST
French President Francois Hollande (R) chats with British Prime Minister David Cameron (L) and Dutch Prime Minister Mark Rutte during a meeting at the EU Headquarters, on November 23, 2012 in Brussels, as part of a two-day European Union leaders summit called to agree a hotly-contested trillion-euro budget through 2020.

The giveaway of how far apart the various EU leaders are on the bloc's next budget is that when the U.K.'s prime minister David Cameron and France's president Francois Hollande met at the newly collapsed budget summit in Brussels they didn't bother with the pretence of bilateral negotiations. Budget hawk Cameron and Hollande, who had France's farm subsidies from the EU to defend, knew their differences were unbridgeable. A sociable chat ensued, evidence to support Lithuania president Dalia Grybauskaite's observation that the mood among EU leaders "was surprisingly good because the divergence in opinions was so large there was nothing to argue about.
It is difficult to see how Cameron and Hollande's positions, and those of the 25 other EU leaders, will be resolved into an acceptable deal when they all meet again in the New Year. In money terms, the gap is relatively small, €30 billion on a proposed seven-year budget of €973 billion ($1.2 trillion). But it is the difference between increasing and freezing the existing budget.
The great rift is between the richer countries that are net contributors to the EU's budget and the poorer newer members from the east and debt-encumbered ones in the south, who are net beneficiaries. The six leading net contributors on a per capita basis—Germany, the U.K., the Netherlands, Denmark, Sweden, and Finland—held their ground in opposing the 4.8% increase in the bloc's planned spending between 2014 and 2020 to €973 billion. The euro budget hawks say that these times of austerity in Europe call for budget cuts, not increases, with the ever eurosceptic-tinged U.K. taking the hardest line.
If the EU's budget sounds a lot, by the yardstick of national budgets, it is not. It amounts to 1% of the EU's GDP. That does, though, sit on top of national European budgets that fall into a range of 35%-55% of GDP; the number for the U.S. by way of comparison is 40%.
Subsidies to agriculture via the Common Agricultural Policy account for 37.5% of the budget. Support for infrastructure-building in the EU's poorer areas–cohesion funds in the EU's argot–takes a further 32%. France dug its heels in over agricultural subsidies. Poland and the countries of eastern and southern Europe did the same over cohesion funds. None wanted to vote for their handouts to be cut. European Council President and budgetmeister Herman Van Rompuy fiddled with his percentages during the summit but barely trimmed the total. His revised numbers satisfied no one.
The 17-member euro zone was unable to agree on the next phase of Greece's bailout. It is perhaps not surprising  the 27-member EU can't strike a deal on its budget. Even a pre-summit reduction of the proposed budget to €973 billion from €1.025 trillion took a year.
If EU leaders fail again in the New Year, they would have until the end of 2013 to succeed. No agreement by then would mean rolling over the 2013 budget into 2014 on a month-by-month basis. That would throw doubt on hundreds of billions of euros in public investments, to which real jobs and incomes are attached in a Europe already close enough to recession to commute.
The worst outcome would be that in the horse trading to seal a deal sacred cows get saved and projects more worthwhile for Europe's long-term growth sacrificed. The last draft offered up at the summit by Van Rompuy cut money from cross-border infrastructure and R&D to prop up farm subsidies, not the sort of choices a forward looking Europe should be making, especially when national capital investment budgets are being cut.
One sacred cow of Brussels own, administrative costs, should be sent to the slaughter house before all. Public sector workers are bearing the brunt of national austerity policies across the EU. Administrative costs take just 2% of the EU's budget, despite the general impression of Europe's bureaucrats living high off the hog. Exempting them from the general budget cost cutting, as has happened so far, will win Brussels no friends anywhere.