occasional paper series · 2005. 4. 1. · units the latter (scharpf 1988). we believe, however,...

OCCAS IONAL PAPER SER IESNO. 27 / APR I L 2005

THE EU BUDGET

HOW MUCH SCOPE FOR INSTITUTIONAL REFORM?

by Henrik Enderlein,Johannes Lindner,Oscar Calvo-Gonzalez and Raymond Ritter

In 2005 all ECB publications will feature

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€50 banknote.

OCCAS IONAL PAPER S ER I E SNO. 27 / APR I L 2005

THE EU BUDGET

HOW MUCH SCOPE FOR INSTITUTIONAL

REFORM? 1

by Henrik Enderlein 2,Johannes Lindner 3,

Oscar Calvo-Gonzalez 3

and Raymond Ritter 3

This paper can be downloaded from the ECB’s website (http://www.ecb.int).

1 The opinions expressed in this paper are those of the authors and do not necessarily reflect those of the European CentralBank. We thank Pierre van der Haegen, Pierre Petit, Theodor Martens, Hedwig Ongena, Demosthenes Ioannou, WouterCoussens, Anne Montagnon, Helge Berger, Magarita Katsimi, Gérard Roland, an anonymous referee and the participants

of two CESifo-Delphi Conferences, “Designing the New EU”, in Munich and Delphi and of the 14th InternationalConference of Europeanists in Chicago for helpful comments.2 Freie Universität Berlin, JFKI, Lansstr. 7-9, 14195 Berlin.

3 DG-International and European Relations, European Central Bank, Postfach 16 03 19, 60066 Frankfurt am Main

© European Central Bank, 2005

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The views expressed in this paper donot necessarily reflect those of theEuropean Central Bank.

ISSN 1607-1484 (print)ISSN 1725-6534 (online)

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Occasional Paper No. 27April 2005

C O N T E N T SABSTRACT 4

1 INTRODUCTION 5

2 SOME THEORETICAL CONSIDERATIONS 9

The EU’s institutional frameworkbetween supranational andintergovernmental decision modes 7

Budgetary procedures – a balancebetween efficiency and legitimacy 8

The EU budgetary procedure andthe constraint of limited politicalintegration 9

3 REFORMING THE EU BUDGETARYPROCEDURE: AN ASSESSMENT 10

Proposals for reform at the generallevel 12

Proposals for reform at the level ofmulti-annual planning 15

Proposals for reform at the level ofthe annual procedure 19

4 THE STATE OF PLAY FOLLOWING THEINTERGOVERNMENTAL CONFERENCE 23

5 CONCLUSION 25

REFERENCES 27

4ECBOccasional Paper No. 27April 2005

ABSTRACT

This paper reviews current discussions onreforming the European Union (EU) budgetaryprocedure and assesses the main reformproposals that have been suggested thus far. Itargues that prospects for reforms are presentlyhampered by the complex interplay betweensupranational and intergovernmental decisionmodes and the requirement of any budgetaryprocedure to strike a balance betweenefficiency and legitimacy. The paper reviews

the main criticisms of the present budgetaryprocedure and the related reform proposals,which are assessed on the basis of relevanttheoretical literature as well as briefcomparisons with the federal budget of theUnited States. The paper argues that the currentEU budgetary procedure maximises efficiencyand legitimacy, given the present state ofpolitical integration in the EU. Significantmodifications to the budgetary procedurewould depart from that equilibrium.

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1 INTRODUCTION

1 INTRODUCTION

Calls for reform of the procedures governingthe finances of the EU have enjoyed someprominence in recent discussions on the futureinstitutional framework of the EU. Both inacademic and policy-making circles, it hasbecome commonplace to refer to the “problem”deriving from the present EU budgetaryframework at both the multi-annual and annuallevels. The Chairman of the EuropeanConvention, President Giscard d’Estaing,commented on the present budgetary procedureby claiming that “there is indeed a real problemin that area” (Plenary Session of theConvention on 12 September 2002). Therepresentative of the United Kingdom in theConvention, Peter Hain, was equally bold onthis issue and called upon his colleagues to“simplify where we can”. The Sapir Reportprepared at the request of CommissionPresident Prodi calls upon Member States to“refocus the EU budget” (Sapir 2003); whilethe special report of the European Parliamenton the budgetary procedure stressed the “needfor reforming, updating and simplifying”(European Parliament 2003).

These demands for an institutional overhaul ofthe EU budgetary procedure contrast with theresults achieved in the recent round ofdiscussions on changes to the EU legalframework, in particular in the context of theEuropean Convention and theIntergovernmental Conference (IGC). Whilethe Constitutional Treaty for Europe (whichwas adopted by the IGC on 17-18 June 2004 butstill needs to be ratified by the Member States)introduces a few minor changes to the

budgetary procedure, many fundamental issueshave either not been raised or have rapidlydisappeared from the agenda.

The goal of this paper is threefold. It intends

– to provide an assessment of the EUbudgetary procedure based on theoreticalconsiderations and brief comparisons withthe budgetary procedure of the UnitedStates;

– to present an overview of the various reformproposals presently or recently underdiscussion, assessing their potentialimplications for the balance betweenefficiency and legitimacy in the EUbudgetary procedure; and

– to suggest an explanation of the nature ofthe reform discussions on the EU budgetaryprocedure and their (limited) impact on theoutcome of the recent constitutionalnegotiations within the EU.

Although due to its limited size the EU budgetdoes not bear major economic and fiscalimportance for the EU economies, a closeanalysis of the rules and procedure that governbudgetary decision-making at the EU level isnevertheless of considerable interest for theEuropean Central Bank (ECB). First, inidentifying the factors that determine the shapeand the design of the budgetary procedure thispaper provides indications of why the EUbudget has remained limited in size comparedto the national budgets. The small size of theEU budget and the requirement that it mustalways be in balance or in surplus have clear

“Now that the European Council has decided to give us the mandate to simplifythe system, to make it more functional and visibly democratic, are we supposed to hold

onto all the procedures which history has laid down in succession,or are there some which can we do away with?”

Giuliano Amato, Vice-President of the European Convention,on budgetary decision-making in the EU (12 September 2002)


implications for the conduct of macroeconomicpolicy in the euro area: it makes thecoordination of decentralised fiscal policies allthe more crucial. The dominance of nationalbudgets reflects the current state of theintegration process, but it is not necessarily asteady state. Understanding why the EU budgetremains small in comparison to nationalbudgets, how it has developed over time and thedebate about its future development istherefore of great interest to those who, like theECB, are involved in policy formulation with aeuro area-wide perspective. Second,modifications to the EU budgetary procedureare a particularly intriguing example ofinstitutional reform in the EU. The reformdiscussions concerning the EU budgetaryprocedure reveal that individual policy areasare embedded in the overall state of politicalintegration and that this embeddedness cansignificantly constrain the scope ofinstitutional reform. The assessment of thereform discussions and their outcome thereforecontributes to a better understanding of theimpediments to launching area-specificreforms.

The paper is structured as follows. Section 2outlines the main theoretical considerations.Section 3 presents the main criticisms of thecurrent EU budgetary procedure and reformproposals and assesses them on the basis ofcomparisons with the budgetary process in theUnited States and with reference to the relevanttheoretical literature. Section 4 reviews theactual changes contained in the EuropeanConstitution and Section 5 concludes.

2 SOME THEORETICAL CONSIDERATIONS

The assessment of the EU budgetary procedurehas to be placed into two sets of widertheoretical analyses. On one hand, focusing onthe particular political and institutional contextof the EU, which is based on the pooling ofnational sovereignties in a supranationalframework, seems warranted in order tounderstand the implications of that particular

context for the budgetary procedure. On theother hand, an overview of the theoreticalliterature is necessary for identifying themain features that should be provided by anybudgetary procedure.

Three main concepts are used to assess thecurrent EU budgetary procedure: efficiency,legitimacy and political integration. These willbe considered in more detail later in thissection, but it is worth mentioning them brieflyat this point. We consider that any budgetaryprocedure has to strike a balance between theconsiderations of efficiency and legitimacyunder the constraint of political integration.The efficiency of a budgetary procedure can bedescribed as the timely and flexible allocationof resources in order to ensure the appropriateprovision of the main public goods required.The legitimacy of a budgetary procedurederives from the degree of democratic controlby citizens so that resources are allocatedaccording to the will of the people and that anykind of “rent-seeking” is minimised. It followsthat from a purely institutional perspectivethere is a conflict between the basicrequirements of efficiency and legitimacy,with large units enhancing the former and smallunits the latter (Scharpf 1988). We believe,however, that beyond that simple institutionalrelationship, the compatibility of efficiencyand legitimacy is largely conditioned by apolitical dimension related to the willingnessof citizens to accept the redistributiveimplications of a common budgetary authority.The legitimacy of a large budgetary unit (e.g. ina large nation state) increases in line with thecitizens’ sense of belonging to that unit, andthus their willingness to be part of a pooledsystem of income redistribution also grows.We use the term “political integration” to referto this willingness. 1

1 This def inition of political integration obviously relates to thetwo large bodies of literature on f iscal federalism (see Oates1999 for an overview) and on the appropriate size of nations(see Alesina and Spolaore 1997).

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2 SOMETHEORET ICAL

CONS IDERAT IONS

2 However, it is also argued that eff icient decision-makingprocedures yielding effective policy outcomes can also createa high degree of legitimacy (see the distinction between inputand output legitimacy in Scharpf 1999).

THE EU’S INSTITUTIONAL FRAMEWORKBETWEEN SUPRANATIONAL ANDINTERGOVERNMENTAL DECISION MODES

The origins of the EU’s present institutionalset-up can be assessed in terms of a principal-agent analogy. This starting point benefits fromthe use of constitutional choice literature (e.g.Buchanan/Tullock 1962) which givesnormative and positive accounts of the originsof constitutional orders and their legitimacyand efficiency. The focal point of theconstitutional choice literature is the poolingof individual citizens’ sovereignty and thedelegating of functions and powers to electedrepresentatives. Citizens, as principals, allowelected representatives, as their agents, to be incharge of public institutions and to takepolitical decisions.

While the principal-agent analogy allows theconstitutional choice literature to explain therationale behind the existence of states, theanalogy can also be used to analyse institutionbuilding at the international level and, in thespecific European context, at the supranationallevel (Pollack 2003). Here, states are regardedas the principals. Under certain circumstances,cooperation among states is beneficial andstates may decide to pool their politicalsovereignty in selected areas. A key example ofsuch an institution based on a certain degree ofpooling of sovereignty among states is theUnited Nations (UN). Other examples includethe UN specialist bodies such as theInternational Monetary Fund and the WorldTrade Organisation.

In the context of pooled sovereignties at thesupranational level, there are, however, twotypes of decision-making procedure:

– Intergovernmental cooperation. Statesagree to take decisions in the relevantpolicy area by unanimity, thus preserving aconsiderable degree of “ultimate”sovereignty stemming from the power ofeach individual member state to vetodecisions. These decisions are legitimised

by the direct link between citizens and theirnational governments and the fact that thesegovernments cannot be outvoted. At thesame time, the unanimity rule rendersnegotiations difficult, as decision-makingis clearly hampered by national vetoes.

– Supranational governance. States mightrealise that it is beneficial to take somedecisions by majority and to delegate, asprincipals, certain functions to an(independent) agent helping them toovercome collective action problems. Thismove towards majority voting anddelegation is motivated by an interest inincreasing the efficiency of internationaldecision-making. The states sacrificetheir veto power and assign political tasks,such as overseeing implementation andmediating between states, to a supranationalagent. However, supranational governancemay, in the view of citizens, be regarded asless legitimate, because nationalgovernments can be outvoted andsupranational agents exercise powerwithout a direct mandate from the citizens.2

In order to counteract this lack of directlegitimisation, supranational actors may bedirectly elected by the citizens, thuscircumventing national governments as thesole source of legitimacy. However, thisincrease in legitimacy may again come atthe cost of efficiency. The involvement ofan additional directly elected agent mayincrease the complexity of decision-making.

Applying these theoretical considerations tothe EU, we can see a political system that hasreached an advanced but still limited state ofintegration. Important areas of nationalsovereignty, such as competition and tradepolicy and the four freedoms that underpin thesingle market, are pooled at the EU level and acertain degree of political identification and


acceptance has been achieved. However, thenation state still provides an importantreference point for political identity andnational institutions continue to determine theday-to-day life of citizens in a vast number ofareas.

With regard to the institutional set-up, the EUlevel is governed by a combination ofsupranational and intergovernmental forms ofdecision-making. In the intergovernmentalsphere, Heads of State or Government set thebroad policy guidelines in the EuropeanCouncil by consensus. Moreover, they adoptTreaty changes, which are subsequentlyratified according to national domesticprocedures. In the Council of Ministers,representatives of national governments makedetailed policy decisions on the basis oflegislative initiatives from the supranationalCommission. Voting rules vary depending onthe policy field. Where unanimous voting stillapplies, the Council acts as anintergovernmental body, while in the case ofqualified majority voting ministers switch tosupranational mode. The directly electedEuropean Parliament provides a link betweenthe supranational decision-making process andthe citizens. Its involvement as a strong veto-player is largely connected to qualifiedmajority voting in the Council, where, in termsof legitimacy, it compensates for the loss ofMember States’ veto power. Moreover, itfulfils control functions vis-à-vis theCommission and thus contributes to anappropriate level of accountability. Thepresent institutional set-up of the EU thuscombines elements of intergovernmentalcooperation and supranational governance andstrikes a balance between legitimacy andefficiency.

This overall balance lays the foundation for thespecific rules and procedures in the differentpolicy fields of the EU. The involvement of theCommission, the European Parliament and theCouncil is a common feature of most policydomains. It caters for similar legitimacy andefficiency concerns regardless of the particular

characteristics of the specific policy field. Thisdoes not mean that there is no variation in thedegree to which political authority is delegatedto supranational agents in the differentdomains. Indeed, in certain policy fields, suchas competition policy, the Commissionexercises significant decision-making powers,while in others, such as the Common Foreignand Security Policy, decisions are taken byunanimity in the Council. However, policyfields evolve as part of the overall institutionalframework. Moreover, they reflect the generalscope of pooled sovereignty and the degree ofpolitical integration and acceptance.

Therefore, calls to reform the decision-makingprocedure in a particular policy field should notbe assessed independently of the general stateof integration. On the contrary, their contentsshould be put under scrutiny with a view to the“meta-level” that the state of integrationconstitutes. This meta-level not onlyoverarches but also determines decision-making in the different policy fields of the EU.Therefore the complexity or allegedinefficiency of a decision-making procedurecannot be exclusively attributed to theinstitutional provisions governing the specificpolicy field but need to be linked to thecharacteristics of the meta-level. Moreover,the degree of embeddedness in the meta-levelconstrains the scope of institutional reform in apolicy field. In other words, while far-reachingreform proposals could increase the efficiencyand legitimacy of the procedure, they wouldindeed require a higher degree of politicalintegration than is currently the case.

BUDGETARY PROCEDURES – A BALANCEBETWEEN EFFICIENCY AND LEGITIMACY

Shifting the analysis from the generalreflections on the institutional set-up of the EUto the procedural features of the budgetaryfield, it becomes clear that the complexinterplay between the concerns of legitimacyand efficiency is even further accentuated inthat particular area. Decisions on the

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2 SOMETHEORET ICAL

CONS IDERAT IONSutilisation of public finances need to besubjected to tight control by citizens so thatresources are allocated according to the will ofthe people and any kind of rent-seeking isminimised. At the same time, such decisionsneed to ensure an efficient resource allocationand ought to guarantee the provision of themain public goods required.

There is a solid body of academic literaturelinking these fundamental requirements of abudgetary procedure to the underlyinginstitutional framework.

In relation to the effectiveness and efficiencyof the budgetary procedure, influentialliterature has emerged from a number of cross-country analyses comparing different types ofinstitutional framework. Mainly developed byvon Hagen (1992), von Hagen and Harden(1994), and Hallerberg and von Hagen (1999),this literature establishes theoreticallygrounded and empirically detectable linksbetween institutional components of thebudgetary procedure and its success inachieving specific policy goals (in thisliterature mainly fiscal discipline). Thestarting point for these analyses is theassumption that an optimal allocation of publicresources is unlikely to be achieved within acomplex interplay of numerous actors pursuingdifferent interests. They show that a strongpolitical authority at the top of the process (e.g.a strong finance minister), a parliament withlimited amending powers, and a strictimplementation process ensure a lower overallsize of the budget and more restricted use ofdebt as a way of financing public expenditure.What stems from this literature is the claim thatbudgetary procedures need to be capable ofyielding swift and effective decisions on fiscalmeasures, even if such measures seemunpopular in the short run.

The delegation of powers to a strong politicalauthority for efficiency reasons, however,needs to be embedded in an effectivedemocratic control mechanism, ensuring thatvoters’ legitimacy concerns are met. As a

number of stylised analyses in politicaleconomy convincingly demonstrate, for voterutility to be maximised in a system of delegatedauthority, an effective separation of powersneeds to be enacted (Persson, Roland andTabellini 1997; Persson and Tabellini 2003).The analyses are based on the key distinctionbetween presidential and parliamentaryconstitutional regimes, arguing that directaccountability is more effective in presidentialthan in parliamentary democracies. Persson,Roland and Tabellini (1997, 2000) give tworeasons for this. First, the chain of delegation isshorter under the presidential system, since theexecutive is directly accountable to the voters.In a parliamentary system, where the executiveis directly accountable not to the voters but tothe legislature, the scope for collusion at thevoters’ expense is greater. Second, the degreeof separation of powers tends to be larger andthe system of checks and balances tends tofunction more effectively in presidentialsystems. Persson, Roland, and Tabellinigenerally argue that checks and balances in apresidential system improve accountabilityand strengthen the incentives for goodbehaviour among politicians, since voters canexploit diverging interests among the bodiesinvolved in decision-making to prevent abuseof power or to reduce information asymmetriesbetween themselves and the policymakers (seealso Persson and Tabellini 2003).

THE EU BUDGETARY PROCEDURE ANDTHE CONSTRAINT OF LIMITED POLITICALINTEGRATION

Looking at the EU budgetary procedure fromthe twin perspectives of “efficiency” and“legitimacy”, it becomes clear that theinstitutional complexities arising from thearticulation of supranational andintergovernmental decision modes are evengreater in the budgetary sphere. While it isstraightforward to argue that an appropriatebudgetary procedure for the EU would seek tostrike a balance between citizens’ legitimacyconcerns and procedural efficiency concerns, it


Figure 1 The ef f ic iency- legit imacy trade-of f

Efficiency

Legitimacy

A *

B’*

B’’*

B *

Political integration

has to be taken into account that such balancehas to be determined under the constraint ofstill limited political integration. Indeed, as alarge number of studies and surveys indicate(see overview in Marx and Hooghe 2003), thedelegation of sovereignty from Europeancitizens to the EU is to a large extent stillgrounded in a strong national identity ratherthan a European identity. The mechanism ofdemocratic control by European citizens ofdecision-making bodies of the EU still seemslargely perceived as requiring the interventionof national governments rather than beingexercised directly through the EuropeanParliament.

In this context, options for reforms of thebudgetary procedure need to be consideredwithin the scope granted by the present degreeof political integration. The EU budgetbasically reflects the range of those areas inwhich sovereignty is pooled at the EU level.Such pooling is often legitimised on the basisof efficiency. However, taking into account thevarying degree of European citizens’ politicalidentification with supranational decision-making at the EU level and also the verytangible financial component of budgetarydecisions, possible legitimacy concerns needto be carefully addressed. The involvement ofMember States’ representatives serves to

redress such concerns, as budgetary decisionsare usually regarded as an issue close tonational sovereignty. However, suchintergovernmental elements may come at theexpense of efficiency.

This paper thus argues that the exogenouslygiven state of political integration is key tounderstanding the current debate – and itsoutcome – on the reform of the EU budgetaryprocedure. Proponents of far-reaching reformsseem to underestimate, first, the scope forchange allowed by the general state ofintegration and, second, the high degree towhich the current procedure is already in tunewith the present degree of integration.

To illustrate this assessment, Figure 1 (whichshould be viewed as a metaphorical depictionrather than a formula-based curve) indicatespossible solutions to the identified trade-offbetween legitimacy and efficiency. Thesesolutions are limited by a “Pareto frontier”determined by the state of integration – i.e.outward/inward shifts of the frontier can onlybe triggered by increases/decreases in politicalintegration.

Proponents of reform seem to assume that thebudgetary procedure is currently situated at thesuboptimal point A. This paper, by contrast,argues that point B is probably an accuratedescription of the current procedure. While theproponents of reform take the view that reformswould significantly and simultaneouslyincrease efficiency and legitimacy, this paperargues that improvements could only bemarginal and would have to concentrate onenhancing either efficiency (leading to B’) orlegitimacy (leading to B”).

3 REFORMING THE EU BUDGETARYPROCEDURE: AN ASSESSMENT

This section assesses the main proposals forreform of the EU budgetary procedure andargues that simultaneous increases inlegitimacy and efficiency are highly unlikely

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3 REFORMING THEEU BUDGETARY

PROCEDURE:AN ASSESSMENT

The Convention’sdiscussion circle

European on the budgetary Sapir EuropeanReform proposals Parliament1) procedure2) Group3) Convention4)

Content of the budgeta) Re-focussing the expenditure side of the EU budget – – Yes –b) Modifying the revenue base of the EU budget Yes – Yes –

Financial Perspectivea) Adopting the Financial Perspective and/or the revenue Yes Yes (preferably Yes Yes for the

side by qualified majority among Member States with a “super FP, but no formajority”) later revenue

b) Institutionalising the Financial Perspective Yes Yes – Yesc) Adopting the Financial Perspective in the Council – No – Yes 6)

of Ministers instead of the European Councild) Taking the veto power from the European Parliament No No – Noe) Shortening the time frame of the Financial Perspective Yes No (at least – No (at least

and synchronising it with the European Parliament elections five years) five years)f) Increasing the flexibility of the expenditure headings Yes No (but with Yes No

provisions forflexibility reserve)

Annual budgetary procedurea) Eliminating the distinction between compulsory Yes Yes – Yes

and non-compulsory expenditureb) Giving either the Council or the European Parliament Yes (EP 5)) Yes (EP 5)) – Yes (EP 5))

the last word

Table 1 Overview of reform proposals

1) European Parliament (2003): Report on the reform of the budgetary procedure: possible options in view of the revision of thetreaties, 20 February, A5-0046/2003.2) European Convention (2003a): Final report of the discussion circle on the budgetary procedure, 14 April, CONV 679/03.3) André Sapir et al. (2003): An Agenda for a Growing Europe. Making the EU Economic System Deliver, July.4) European Convention (2003b): Draft Treaty establishing a Constitution for Europe, 18 July, CONV 820/1/03 REV 1, CONV 847/03, CONV 848/03.5) Within certain limitations.6) But possibly allowing for the Council of Ministers to meet at the level of the Heads of State or Government.

3 The description of the US budgetary process is based on theseminal treatment of the matter by Schick (2000), as well asOff ice of Management and the Budget (2003) andCongressional Budget Off ice (2003). For the EU budgetaryprocedure, Laffan (1997), Nava (2000), European Commission(2002) and Lindner (2005) serve as the main references.

without major advances in politicalintegration.

In the current political discussions an array ofdifferent reform proposals have been presentedby various actors. The European Parliament setout its ideas in a report that was initiated by theCommittee on Budgets (European Parliament2003). The European Convention focusedextensively on the budgetary procedure in aspecial discussion circle (EuropeanConvention 2003a) during the preparatoryphase leading to the issue of its draft Treatyestablishing a Constitution in June 2003(European Constitution 2003b). Finally, anindependent, high-level study group, whichwas established at the initiative of thePresident of the Commission, also covered thebudgetary procedure in its report on the

economic governance of the EU (Sapir et al.2003). Table 1 gives an overview of thesedifferent proposals.

These reform proposals can be assessed in thecontext of a comparison of the EU budgetaryprocedure with the decision-making process ofthe US federal budget.3 Obviously, comparingthe United States and the EU is limited in itslegitimacy. The United States is already afully-fledged federal system where“intergovernmental” cooperation has madeway for “supranational” governance and states


EU budget US federal budget

Total expenditure Total expenditureamount EUR 99.7 billion amount USD 2,158 billionas a percentage of GNI 1.0% as a percentage of GDP 19.8%

Selected expenditure Selected expenditureas a percentage of total as a percentage of total

expenditure in 2003 expenditure in 2003Agricultural policy and rural 45% Social security 22%developmentStructural and Cohesion Funds 34% Health (including Medicare) 22%Internal policies 7% National defence 19%External actions 5% Income security (e.g., unemployment benefits) 15%Pre-accession aid 3% Education 4%

Table 2 The content of the EU and US budgets in 2003

Sources: European Union Financial Report 2003 and Off ice of Management and Budget.

have pooled much of their sovereignty, as isalso reflected in the actual contents of thefederal budget (see Table 2). In the UnitedStates, political decision-making takes place ina context of dominant federal actors. Theexecutive power enshrined in the Presidencylargely depends on agreements with the Houseof Representatives, representing the interestsof electoral districts, and the Senate,representing those of individual states.Imposing an analogy with the EU, the role ofthe European Commission can be comparedwith that of the US President, the role of theEuropean Parliament with that of the House ofRepresentatives and the role of the Council ofMinisters with that of the Senate. From thisanalogy one clear difference between thebroader political systems of the United Statesand the EU becomes immediately apparent: thedegree of representation of the citizens. In theUnited States, Senators are directly elected bytheir constituents, rather than beingrepresentatives of state governments.Similarly, although the President of the UnitedStates and the European Commission could becharacterised as the executive powerrespectively in the two systems, there is a cleardifference in terms of how they are appointed.In other words, there is a direct link betweenthe electorate and all three players in the USbudgetary process, which is further enhancedby a national identity that attaches US citizensto the federal level. In terms of the criteria

outlined above, this difference matters most inchecks and balances but also plays a role whenit comes to effectiveness of decision-makingand to transparency. This brief and broad-brushcomparison between EU and US procedures isnonetheless a worthwhile exercise as itillustrates areas for possible reform of the EUprocedure, while also showing that even thefully integrated political system of the UnitedStates still functions on the basis of a budgetaryprocedure based on a complex interplaybetween legitimacy and efficiency concernswithin a multi-level polity.

PROPOSALS FOR REFORM AT THEGENERAL LEVEL

One main criticism voiced with regard to thegeneral level of the EU budget relates to theexpenditure structure of the EU budget andimplicitly also raises the issue of the size of theEU budget.

In this context, it should be noted that at presentthe size of the EU budget is almost negligible ineconomic terms (around 1% of EU GNI),4

whereas the US budget amounts to roughly onethird of US GDP, of which the federal levelaccounts for approximately twice as much as

4 At present the size of the EU budget is formally capped at1.24% of combined national GNIs.

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expenditure by the states. The large differencein size between the EU and US budgets reflectsthe very different compositions of therespective expenditures and sources ofrevenue. While in the United States the federalbudget contributes to the financing of state andlocal government through annual federal grantsamounting to around 3.5% of GDP, therelationship in the EU is the opposite.Moreover, large parts of the US budget areconcentrated on welfare, military spending,education and servicing federal debt. Incontrast, in the EU spending on welfare,defence and education is done at the nationallevel. The EU budget focuses mainly on a smallnumber of policies with a strong redistributivebent, namely agricultural and regional policies,which alone account for more than 80% ofexpenditure in the EU budget. Whileagricultural spending provides Europeanfarmers with subsidies, regional spendingredistributes funds to less wealthy regions.Although often presented as such (e.g.Leonardi 1999), these policies may only to alimited extend be regarded as public goodsbenefiting the Union as a whole. Together witha revenue side that de facto is based largely onnational contributions, these policies result in asystem in which Member States are underpressure to demand “juste retour” for thepayments into the budget.

The present EU budget is expenditure-ledwithin a limit set in an “InterinstitutionalAgreement” with a multi-annual horizon (seebelow). Resources are raised to match what isneeded to carry out the EU policies. Thiscreates very different incentives for theEuropean Parliament and the Council as thetwo arms of the budgetary authority. ForMember States there is an incentive to reduceexpenditure to achieve a reduction in theirdirect contributions, while for the EuropeanParliament there is an incentive to proposeexpenditure programmes, since the matchingfinancing will be furnished automatically bythe Member States up to the overall ceiling.

Members of the European Parliament (MEPs)thus enjoy a unique position – they gain creditfor expenditure agreed by the EuropeanParliament, but are not associated with therelated costs. This is not the case for USpoliticians, who also set the tax levelsnecessary to finance expenditure. In practice,however, differences in the incentives forMember States and MEPs have been reduced,on one hand, by a growing acceptance amongMEPs of an austerity approach towardsbudgetary decisions and, on the other hand, bythe interests of individual Member States inexpenditure in areas in which they gain morefrom the budget than they contribute.

While one of the main rationales for theexistence of a public budget is the financing ofthe provision of public goods which wouldotherwise be under-provided, the fact thatcurrent expenditure at the EU level is for themost part redistributive in nature shows thatequity rather than efficiency criteria play adominant role in guiding the expenditure sideof the EU budget. Although it does not questionthe existence of a redistributive element in thebudget, the Sapir report favours a “change inthe current mix of equity and efficiencyconsiderations” when deciding uponexpenditure financed by the EU budget as wellas an increase in the provision of public goods,which do not prompt a calculation of justeretour among contributors. The Sapir reportsuggests that the EU budget should promotegrowth through expenditure on R&D,education and training, and infrastructure.Other proposals have included internal andexternal security, foreign policy, research,immigration, and single market-related issues(see e.g. Tabellini 2002).

The key problem related to changes on theexpenditure side is obviously one of allocatingmore legitimacy for decision-making at theEuropean level. It has to be borne in mind thatthe present structure of EU expenditure reflectsthe current institutional set-up of the EU and


5 As Padoa-Schioppa (2002: 200) puts it: “There can be nodoubt that it would be a good thing, for the Union, to have moreroom for manoeuvre in the area of budgetary policy. But it isalso my belief that this can only come as a natural consequenceof political union. No country has ever adopted a large budgetjust in an effort to obtain more instruments for economicpolicy. Historically, the size of the budgets grew because thefunctions attributed to the Union grew.”

6 In a sense, the situation with regard to the EU budgetresembles more closely the one that characterised the USfederal budget during the nineteenth century. In fact, up until1921 the budgetary process in the United States can becharacterised as one of legislative dominance (Schick, 2000),in which the Congress effectively constrained the executivenot only over total expenditure but also over individual itemsof expenditure (see description of the EU budgetary procedurebelow). The size of the US federal budget was very limited andstable at around 2% of GDP up until the Civil War in the 1860s,and mainly devoted to f inancing public works projects,defence and the operations of government agencies. Inaddition, in the absence of a federal income tax, the US budgetlacked true own resources to commit itself to making majorinvestments in transportation and f inance. The major sourceof US federal revenues throughout the nineteenth centuryremained the tariff, which accounted for around 80 to 90% offederal revenues (Wallis 2000). Moreover, and despite thelack of a formal constraint on budgetary outcomes, the normof balanced budgets was broadly maintained. It was not untilthe 1930s that the US federal budget gained the prominencethat it currently enjoys in the allocation of f iscal activitybetween the different levels of government.

the political consensus on the policy tasksassigned to the EU and national levelsrespectively.5

Any changes to be made on the expenditureside of the EU budget would thus necessitate anagreement among policymakers on themodification of the present assignment ofpolicy tasks at the EU level. Reforms of thespending programmes depend on thewillingness of citizens to allocate additionaltasks to the EU and thus may only be realised asa consequence of changes in the degree ofpolitical integration (see also Strauss-Kahn etal. 2004).

A related field of criticism with regard to thepresent general features of the EU budget is itsrevenue base. At present, the EU is fundedpredominantly by direct transfers from theMembers States, although the current system iscalled a system of “own resources”. Directtransfers obviously facilitate the computationof net positions and do little to curb MemberStates’ pursuit of juste retour.

The system of own resources has become lessand less autonomous since its creation in the1970s when it was intended to give resources tothe Community that would “belong” to it andwould not depend on decisions by nationalgovernments. This, together with the grantingof the “power of the purse” to the EuropeanParliament in the 1970s, was a development ofa federal nature, aimed at enhancing thesupranational element of the Community.However, as Community expenditureincreased, the traditional own resources,namely customs duties, agricultural levies andVAT contributions, proved insufficient and afourth resource – in form of a set percentage ofnational GNP – was established as part of theDelors-I package in 1988 which alsointroduced the multi-annual FinancialPerspective (see below). This fourth resource,which now accounts for approximately two-thirds of total EU budget revenues, can beregarded as similar to the pre-1970 period inwhich the Community was financed by

contributions from the Member States (Beggand Grimwade 1998). In line with the notion ofan expenditure-led budget and in considerationof the sovereignty concerns of Member States,changes in the revenue structure of the EU haveto be taken by unanimity following a procedurethat is completely separate from the annualbudgetary procedure.

In the United States around one-half of currentrevenues are raised by personal income tax, athird by social insurance receipts and a further10% by corporate income tax. Almost all ofthese sources of income are referred to in theUS federal budget as general funds. Decisionsover the level and structure of taxes are oftendirectly linked with expenditure decisions. TheUS budget is allowed to run deficits, but, in linewith the current state of integration, the Treatyclearly forecloses this option in the EU andobliges the budgetary authority to adoptbalanced budgets.6

In the light of the decreasingly autonomouscharacter of the EU’s “own resources”, a

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7 While the Financial Perspective sets an upper limit on theannual EU budget, there is some limited leeway for revisionsin response to unforeseen circumstances. However, anyrevision has to remain within the margin for unforeseenexpenditure as specif ied in the Financial Perspective.Moreover, revisions amounting to more than 0.03% ofCommunity GNI require the agreement of both the EuropeanParliament and the Council, whereby the Council has to actunanimously (in the case of revisions below 0.03% ofCommunity GNI, the Council can act by qualif ied majority).

number of proposals have been made. Forexample, the Sapir report proposes theintroduction of a new revenue source with aclear EU dimension, such as a tax with a verymobile tax base within the EU. This could becapital income taxes or stock exchanges taxes.While such a tax would arguably convey astrong and positive symbolic message andenhance the transparency of citizens’contributions to the EU, it is doubtful that sucha proposal would be acceptable given thepresent state of political integration. On onehand, Member States seem very reluctant tomove the current set-up on the revenue side in amore supranational direction which wouldultimately give the EU resources that cannot beredirected to Member States when they exceedthe level of expenditure. On the other hand, thecreation of an “EU tax” would certainly requirea well-functioning system of checks andbalances at the EU level. As Persson, Rolandand Tabellini (1997) and Persson and Tabellini(2003) argue, rents from power and incompleteinformation at the expense of voters areaccentuated in a common pool situation inwhich the bodies participating in the budgetaryprocedure are “residual claimants” over thebudget (i.e. they can keep the benefits ofspending within the majority, putting part ofthe costs on the excluded minority). Put in thecontext of the EU institutional set-up, thisargument is certainly far too simple. There areno clear lines of divide between majorities andminorities in the EU context. Alliances tend tovary greatly between different groups of actorsin both the European Parliament and theCouncil. The fundamental demand of “notaxation without representation” is still likelyto be voiced as an argument against an EU tax.This argument would be technically wrong,since representation could be ensured by theEuropean Parliament, but in the perception ofmost EU citizens the time does not seem ripefor introducing an EU tax.

Overall, looking at general aspects of thebudgets in the United States and the EU, it isevident that the role of the EU budget iscommensurate with the much lower degree of

political integration in the EU: the size of thebudget is small, its content is not geared towardsthe provision of basic public goods but has a verylimited focus and it is redistributive. Thiscombination of a budget which is funded bydirect transfers from Member States and which isspent largely on regional or agriculturalprogrammes, which are easily tracked toregional or national recipients, rather than onEuropean-wide public goods creates a situationparticularly prone to bargaining.

PROPOSALS FOR REFORM AT THE LEVEL OFMULTI-ANNUAL PLANNING

The Financial Perspective is the EU’s multi-annual budgetary framework (7 years) whichlays down the maximum amounts of both totalannual expenditure and annual expenditure inspecific policy areas.7

The Financial Perspective was a welcomedevelopment when it was first introduced in1988 (Lindner 2003). In the late 1970s andearly 1980s EU budgetary negotiations wascharacterised by confrontations between theEuropean Parliament and the Council whicheventually led to the rejection of entire draftbudgets by the European Parliament (Läufer1990). The early 1980s also saw complaintsfrom the United Kingdom and a lack ofsufficient resources. The latter was promptedmainly by the increase in Common AgriculturePolicy (CAP) spending and aggravated whenthe UK rebate was agreed. In this context, theFinancial Perspective was intended tosignificantly restrict the scope for politicalchoice during the annual budgetary procedure.By linking revenue and expenditure sides, it


8 Renegotiations in the European Council take place inconjunction with other political issues. Hence, bargainingamong Member States combines budgetary issues with non-budgetary issues. In this context, it has been argued that theEU budget fulf ils an important “compensation function”. Itcompensates those Member States that might incur costs fromthe integration process and thus, facilitates a consensus forfurther integration among Member States (Folkers 1997).

9 Although the Commission and the European Parliament have,as signatories of the International Agreement, a veto powerover the ceilings of the Financial Perspective, they rarelyexercise it. Usually, the European Parliament grants itsconsent to the ceilings in exchange for informal extensions ofits budgetary powers.

ensured that expenditure-led budgets would nolonger exceed existing resources (Shackleton1990).

The Financial Perspective combinesintergovernmental and supranational elements.After a proposal by the Commission, it isdiscussed in the European Council, where itrequires unanimous agreement among MemberStates. The involvement of Heads of State orGovernment ensures that differences andstalemates between EU ministers areovercome. The Financial Perspective is finallyadopted as an “Interinstitutional Agreement”between the European Parliament, the Counciland the Commission. In contrast to indicativefinancial programming, the ceilings of theFinancial Perspective are binding on the threeparties. While the revenue ceilings are codifiedin legal acts adopted unanimously by MemberStates in the Council, the expenditure ceilingsgain their binding character from the politicalwillingness of actors to adhere to the“Interinstitutional Agreement”, which by itselfdoes not have the status of an enforceable legalact (Monar 1994). The semi-voluntarycharacter of the Financial Perspective obligesactors to cooperate, as the multi-annualframework would otherwise break down.

Planning stability and a reduction in conflictcomes at a price: the Financial Perspectiveclearly limits the flexibility of budgetary actorsand introduces a strong status-quo bias. Annualexpenditure ceilings for regional spending, forexample, have the status of spending targetsand thus commit annual budgetary decisionsover a period of seven years. Moreover, whenthe Financial Perspective is renegotiated in theEuropean Council, national governments usetheir veto power in order to maximisebudgetary gains. Although the FinancialPerspective is not automatically renewed at theend of the seven year period, the use of vetopower and the resulting bargaining dynamicslead to a largely incremental revision of theceilings, thus respecting the key spendinginterests of Member States, such as the rebatefor the United Kingdom, regional spending for

the countries benefiting from the CohesionFund, and unaltered CAP spending.8 In such asetting, major changes and far-reachingreforms are very unlikely to occur (Begg 1999)unless there is significant progress in politicalintegration.9

In the United States there is no true multi-annual planning, as there are no binding multi-annual constraints. The President’s budget,which is transmitted to Congress eachFebruary, pertains exclusively to the followingfiscal year, while the horizon envisaged in thecongressional budget resolution has nostatutory implications. The only multi-annualbudgetary implications stem from themandatory spending implied by past actsproviding for entitlements such as socialsecurity, but then again, the President andCongress can change the law in order to changethe spending on entitlements and othermandatory programmes in any given year.

Overall, in the EU a binding multi-annualbudget plan adopted by Heads of State orGovernment plays a key role in reducing theconflict between budgetary actors and ensuringplanning stability. This comes at a price: theflexibility of the annual procedure is seriouslycurtailed and major shifts between the mainspending blocs are de facto almost impossible.The intergovernmental level, at whichlegitimacy concerns clearly dominate overefficiency concerns, thus uses multi-annualplanning to strictly limit the scope forsupranational decision-taking in the annualprocedure. Although lengthening thebudgetary cycle is discussed, decision-making

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10 Legitimacy concerns could to some extent be diminished byinvolving the European Parliament in the decision-makingprocedure on the revenue side.

in the United States proceeds almostexclusively within the remit of the annualprocedure.

A number of proposals have been made toreform the Financial Perspective.

One set of proposals for reform relates to thesuggestion of the European Parliament, theConvention’s discussion circle on thebudgetary procedure and the Sapir report thatthe Financial Perspective be adopted byqualified majority voting among MemberStates.

Such reform would address the key bottleneck ofthe veto power by Member States. It wouldprobably reduce the tendency for thenegotiations on a new Financial Perspective by-and-large to confirm the existing spendingstructure. It may also help to curtail theinclusion in the Financial Perspective ofamounts earmarked for specific spendingprojects in individual Member States without adirect link to existing expenditure programmes,as has arguably been the case with theexpenditure for “particular situations” detailingspecific amounts of structural funds for certainregions (Begg 1999). Combined with theintroduction of qualified majority voting on therevenue side, this may enable Member States torevisit the rules that govern own resources.

While these arguments may look veryappealing from the perspective of increasingthe efficiency of the EU budgetary procedure, itis rather doubtful, given the present state ofpolitical integration, that such reform wouldindeed yield the desired increases in efficiency.Moreover, it probably lacks the necessary basisin terms of transfers of legitimacy.

It is indeed not certain that an abolition of theunanimity requirements would eradicate the“pork-barrel” character of the FinancialPerspective. Experience from areas in whichqualified majority voting has been adoptedshow that bargaining still figures prominently

in the discussions, as Member States generallytry not to outvote each other.

Even more importantly, as the decisionsregarding the Financial Perspective and therevenue side are ultimately redistributive innature (Member States will probably always tryto work out whether they are net contributors ornet recipients), it could be difficult tolegitimise the contributions to the EU budget ofMember States that are outvoted in the decisionon the Financial Perspective (imagine, forexample, a decision taken by majority thatsignificantly increases the budget contributionof one of the large net contributors).10 Theunanimity requirement in the area of theFinancial Perspective and in particular onthe revenue side serves, at the moment, asan important element in addressing thesovereignty concerns of Member States.

Although, at first glance, the introduction ofqualified majority voting seems conducive tofurther reducing conflict by limiting the vetopower of Member States, it might actually havethe opposite effect. Currently, Member Statesare assured that their distributive interests willbe taken into account in the negotiations for therenewal of the Financial Perspective. Potentialconflict is channelled into these negotiations.If this were no longer the case, outvotedMember States may altogether question theadvantage of having a Financial Perspectiveand may carry their discontent into the annualprocedure. As long as the binding nature of theFinancial Perspective is dependent on thepolitical will and acceptance of all actorsinvolved, the introduction of qualified majorityvoting might seriously threaten the functioningof the Financial Perspective.

A second set of proposals for reform relates toincluding the Financial Perspective in theTreaty and making its ceiling legally binding,


as proposed by the European Parliament andthe Convention’s discussion circle. Budgetaryactors would be obliged to adopt a multi-annualbudget plan and to adhere to its ceilingsduring the annual budgetary procedure. Suchan institutionalisation of the FinancialPerspective would give recognition to thespecial relevance of the Financial Perspectivefor budgetary decision-making and would thusclose the gap between the Treaty provisionsand current practices.

At the same time, depriving the FinancialPerspective of its voluntary nature couldundermine its conflict-reducing nature. Atpresent, negotiations take place in the shadow ofthe qualified majority voting prescribed by theTreaty for the annual procedure. The FinancialPerspective is not renewed automatically and itsexistence hinges on the ability of Member Statesand subsequently of the Commission and theEuropean Parliament to agree on a new multi-annual budget plan (although theInterinstitutional Agreement stipulates that theceilings of the old Financial Perspectivecontinue to apply until a new one is adopted, theCouncil and the European Parliament can vetosuch automatic continuation). If the FinancialPerspective were to be institutionalised and sucha veto did not exist, the tendency for negotiationsover a new Financial Perspective to confirm theexisting spending structure might increasefurther. Budgetary actors could simply preventchange by relying on the automatic prolongationof the status quo. Also, the threat to exit theFinancial Perspective (and the InterinstitutionalAgreement) or to veto its renewal has so farserved as a healthy warning to all actorsinvolved, thereby forcing them to cooperate.

A third set of proposals on the FinancialPerspective relates to its adoption in theCouncil of Ministers instead of the EuropeanCouncil. This proposal is included in the EUConstitution, with the possibility, however,that the Council of Ministers could meet at thelevel of Heads of State or Government. Theadoption by the Budget Council would indeedbring the multi-annual budget plan more in line

with the annual budgetary procedure and wouldplace it on the same level as other EU policyareas.

Having said this, the involvement of theEuropean Council ensures that differencesbetween the spending ministers aretranscended. The Budget Council may not bepowerful enough to free itself from the grip ofthe spending Councils (the influential role ofthe Agriculture Council is often cited in thisrespect). Moreover, Heads of State orGovernment in the European Council are ableto broker an agreement on the FinancialPerspective by linking financial negotiationswith non-budgetary issues, as has so far beenthe case every time the Financial Perspectivehas been renewed.

A fourth set of proposals on the FinancialPerspective relates to synchronising the time-frame with the term of office of the EuropeanParliament, as has been proposed by theEuropean Parliament. This would shorten thetime frame from seven to five years and thus(slightly) reduce the high degree of pre-commitment that the current seven-year cycleentails. Moreover, synchronising the FinancialPerspective with the European Parliamentelections would politicise the multi-annualbudget plan. MEPs could put their budgetaryideas before the electorate and thus gainstrength vis-à-vis the Council. European voterswould become more aware of the EU budgetand may exercise pressure for a more effectiveuse of EU funds. There are thus clear argumentsin terms of legitimacy and checks and balancesin favour of this proposal.

That said, a shorter time frame would be likelyto increase the number of budgetarynegotiations, thus reducing the degree ofefficiency of the procedure. Indeed, apoliticisation would only be feasible if theEuropean Parliament were fully involved in thenegotiations on the Financial Perspective. Aslong as the ceilings of the FinancialPerspective are set by Member States in theEuropean Council and the European Parliament

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is presented with a take-it-or-leave-it choice atthe end of the negotiations, voters will not seethe relevance of European elections for thesetting-up of the Financial Perspective.

The last proposal on the Financial Perspectiverelates to increasing the flexibility of theexpenditure headings, as proposed by theEuropean Parliament and the Sapir report. Theceilings imposed on specific expenditureheadings under the current FinancialPerspective may indeed be regarded asquestionable. By setting rigid limits onexpenditure for specific purposes for a ratherlong period of time, a potentially useful degreeof flexibility is lost. It appears that thepreference for detailed bargaining at the multi-annual or annual level may be driven by thevoting mechanism through which the multi-annual framework and annual budgets areapproved. In the current situation theunanimity requirement renders agreement onthe Financial Perspective particularly difficultand the costs in terms of lost flexibility may notoutweigh the benefits in terms of predictabilityand stability over a relatively long period oftime. However, if voting requirements forapproval of the Financial Perspective and theannual budgets were to be relaxed, the benefitsof greater flexibility than is currently the casecould perhaps be reaped without running therisk of a protracted stalemate.

However, loosening the headings andfacilitating regular revisions may turn theFinancial Perspective into a mere “financialplanning” exercise, largely re-shifting thedecision-making on budgetary matters back tothe annual budgetary procedure and therebyreducing the efficiency of the procedure. Inconsequence, the high levels of conflict thatdominated the 1970s and 1980s may creep backinto budgetary decision-making, therebyseriously threatening the timely adoption ofannual budgets. Moreover, with its flexibilityand emergency reserves the FinancialPerspective already provides buffers to allowfor unexpected developments.

Theoretical approaches support this point. Asmentioned above, voter utility increases in atwo-stage system based on separate allocationsof responsibilities for the size of the budget andits composition (Persson, Roland and Tabellini1997). Increasing the flexibility of theFinancial Perspective (which is de facto set bythe European Council) may run the risk ofcreating a “common pool” bargainingenvironment, leading to increased rent-seekingactivity by office-holders and a decrease inutility for voters.

PROPOSALS FOR REFORM AT THE LEVEL OF THEANNUAL PROCEDURE

The annual budgetary procedure for the EUbudget, set out in detail in Article 272 of theTreaty, appears to conform to the division oflabour between an executive branch thatproposes the budget and a legislative branchthat adopts it (see Figure 2). The Commissionprepares a “preliminary draft budget” (PDB),which is amended by the Council; this versionof the budget, which at this stage of theprocedure is called the “draft budget” (DB), isforwarded to the European Parliament forproposals for amendments or modifications.Following two readings by each of the twoinstitutions, the European Parliament adoptsthe final budget. However, the role of theCommission is much more limited than thisdivision of labour suggests. Although theCommission is present at all stages of thebudgetary process, its main function is overonce the preliminary draft budget is submitted.

The Treaty bestows each of the two arms of theEU budgetary authority, i.e. the EuropeanParliament and the Council, with specificpowers which largely rest on a distinctionbetween compulsory expenditure (that resultsdirectly from Treaty application or fromacts adopted on the basis of the Treaty) andnon-compulsory expenditure. Compulsoryexpenditure accounts for around 45% of the EUbudget and is mainly used for the CAP. While


11 The Treaty provides for a maximum rate of increase as a limiton non-compulsory expenditure. Under the InterinstitutionalAgreement, the ceilings of the Financial Perspective replacethe maximum rate of increase.

the European Parliament can – within the limitsset by the Financial Perspective11 – overrule theCouncil’s amendments on non-compulsoryexpenditure, it has to accept the Council’sprerogative in the domain of compulsoryexpenditure. Moreover, the EuropeanParliament has the exclusive power to reject theoverall budget.

For years, the distinction between compulsoryand non-compulsory expenditure has been abone of contention between the EuropeanParliament and the Council (Lindner andRittberger 2003). It was introduced in 1970 inorder to limit the budgetary powers of theEuropean Parliament and to ensure theexclusive control of Member States in theCouncil over legislative decisions withfinancial implications. With that distinction,the Council was able to continue its practice of

introducing legally binding entitlements. Asthe definition of compulsory expenditure in theTreaty left scope for interpretation, theEuropean Parliament and Council foughtintense battles over the classification of certainexpenditure lines.

Since the introduction of the FinancialPerspective and the extension of the EuropeanParliament’s legislative powers, the distinctionhas gradually lost relevance. Close cooperationand a series of formal and informal meetingsduring the course of the annual procedure givethe two arms of the budgetary authority theopportunity to confer over both types ofexpenditure. Often a compromise is found at

Figure 2 The current budgetary procedure (Art ic le 272 of the Treaty)

Source: Enderlein/Lindner (2005).

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12 Most notably the 1921 Budget and Accounting Act, by whichthe President gained a formal role in the federal budget priorto Congress action, and the 1964 Congressional Budget andImpounding Control Act, which provided for Congress toadopt an annual budget resolution setting revenues andspending and also established the Congressional BudgetOff ice.

the conciliation meeting shortly before thesecond reading in the Council, which is thenendorsed by both institutions in theirrespective readings.

As mentioned above, in the United States thePresident, as the executive, plays a muchstronger role, and the main dividing line in thebudgetary process runs between the Presidentand the two chambers of Congress – the Senateand the House of Representatives.Unsurprisingly, the current annual budgetaryprocess of the US federal budget has beenshaped by a number of swings in the relativestrengths of the Presidency and the Congresswhich have resulted in a rather complexbudgetary procedure.12 The first step in the USfederal budgetary cycle involves thesubmission by the President of the budget forthe following fiscal year. Once the President’sbudget has reached the legislature, Congresspasses its own “budget resolution”, whichprovides a framework within which thedifferent congressional committees will workand includes targets for total spending andrevenues.

Once Congress has passed its budgetresolution, it turns its attention to passing thelegal instruments which will, subject to thesignature of the President (who retains thepower of veto), allow the disbursement offunds. The procedure for such approvaldepends on the type of expenditure in question.

Formally, the US federal budget contains twotypes of spending categories – discretionaryand mandatory – which have some resemblanceto the distinction between compulsory and non-compulsory expenditure in the EU budgetaryprocedure. Discretionary spending for thefollowing fiscal year is decided on an annualbasis by the President and Congress.Discretionary spending, which currentlyaccounts for around a third of all federaloutlays, covers items such as agency budgets,defence programmes, education, foreign aid,etc.

Mandatory spending, which accounts for two-thirds of all spending, is authorised bypermanent laws. It includes entitlements, suchas social security, through which individualsreceive benefits because they are eligible onthe basis of certain criteria. It also includesinterest on the national debt, which theGovernment pays to individuals andinstitutions that hold Treasury bonds and othergovernment securities. The President andCongress can change the law in order to changethe spending on entitlements and othermandatory programmes – but they do not haveto. For discretionary programmes, Congressand the President must act each year to providespending authority. For mandatoryprogrammes, they may act in order to changethe spending that current laws require.

On an annual basis, Congress prepares thirteenbills to appropriate funds for discretionaryexpenditure and, if it so chooses, modifies orenacts new authorising bills governingmandatory spending and revenues. In eachcase, for any authorisation or appropriation tobe enacted, ratification by the President isrequired. If the President vetoes a bill, it will bereturned to Congress where a two-thirds voteby a quorum of members in each chamber isnecessary to override the veto of the executivebranch.

Conflict between the President and Congresscan be pervasive from the moment thePresident’s budget reaches the Congress inFebruary up until the beginning of the fiscal yearin October. The very nature and the high profileof the budget resolution makes it prone toconflict between the President and Congress.Congress can pass any resolution but ultimatelymust gain the President’s approval to enact itsproposals. As a result, since 1974 the process


and timing of the congressional budgetresolution has been widely different dependingon the year. The veto power enjoyed by thePresident is over entire bills. In other words, thePresident cannot pick and choose from amongthe provisions of a particular act. Congress canalso combine several appropriation bills withother legislation into one single omnibusmeasure, thus forcing the President to sign it orveto it as a whole. This tactic can put significantpressure on the President, particularly if, as it issometimes the case, spending bills are presentedafter the new fiscal year has already started and apresidential veto would risk shutting down theGovernment. Partial shut-downs of federalgovernment have in fact occurred in the not toodistant past (e.g. 1981, 1984, 1986, 1990 and1995).

Conflicts between the executive and legislativebranches are aggravated by pork-barrelspending, in particular earmarking, containedin bills forwarded by Congress to the President.By incorporating earmarks into the 13 annualspending bills that it passes each year,Congress specifies in law how a certain amountof money be spent, rather than giving theexecutive branch discretion. In so doing,provided the President signs the respective bill,Congress manages to keep a tight grip on animportant element of government expenditure.

Overall, both annual budgetary proceduresdisplay a high degree of complexity whichstems from the involvement of a wide range ofinstitutions and actors representing differentconstituencies. In tune with the politicalsystem of the United States, the US budgetaryprocedure seeks to strike a balance between thepowers of the directly elected President, whoheads the executive branch, and the role ofCongress, the legislative branch, whichrepresents the interests of voters in the districtsand states. In the EU the largely supranationalannual budgetary procedure involves delegatesof national governments in the Council anddirectly elected MEPs. The Commission, as arepresentative of the executive branch, is abureaucratic actor that plays a limited role in

the final stages of the procedure. The ceilingsof the Financial Perspective provide a largelyintergovernmental framework around theannual procedure that limits the conflictbetween the different actors.

A number of proposals for reform have beenmade with regard to the annual budgetaryprocedure in the EU.

One set of proposals relates to eliminating thedistinction between compulsory and non-compulsory expenditure (proposals made bythe European Parliament and the Convention’sdiscussion circle). Such reform would addressone of the complexities of the annual budgetaryprocedure and would acknowledge not onlythat there is no real difference in naturebetween the two types of expenditure, but alsothat in practice the European Parliament andthe Council have developed a system of closecooperation which has significantly reducedthe relevance of the distinction. Moreover, therationale that originally lay behind thedistinction, namely to accommodate theasymmetry in the distribution of budgetary andlegislative powers between the Council and theEuropean Parliament, has largely ceased toapply, as the European Parliament has becomean important co-legislator.

However, it should be kept in mind thatabolishing the distinction is closely linked tothe question of whether one of the two arms ofthe budgetary authority should dominate theannual procedure. At the moment, thedistinction serves as an instrument for dividingthe power to adopt the annual budget equallybetween the European Parliament and theCouncil. Should non-compulsory expenditurebecome the single, all-encompassingexpenditure classification, the EuropeanParliament would be able to reject theCouncil’s amendments and would thus gain thelast word on the annual budget.

A second set of proposals for reform relates togiving either the Council or the EuropeanParliament the last word on the annual budget

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4 THE STATEOF PLAY

FOLLOWING THEINTERGOVERNMENTAL

CONFERENCE

13 As MEPs campaign on European platforms and are directlyelected to decide on European issues, it may be argued thattheir democratic legitimacy is stronger than that of nationalgovernments, which are chosen (in most Member States) bynational parliamentarians who are elected largely on the basisof national issues.

14 This section is based on Laffan/Lindner (2005).

(proposals made by the European Parliament,the Convention’s discussion circle and theConstitution – all three proposals favour givingthe last word to the European Parliament).

The current system with two arms of thebudgetary authority having two readings of theannual budget could indeed be streamlined byreducing the number of readings to one andgiving one of the two branches of the budgetaryauthority the last word on the annual budget.Such a reform would help increase theefficiency of the annual budgetary procedure,in particular as the Council’s first readingsseem to serve mainly presentational purposes.Moreover, the reform might also increase thecoherence of annual budgets, as one arm of thebudgetary authority would assumeresponsibility for the budgets as a whole andwould be freed from finding detailedcompromises with the other institution. Forreasons of democracy,13 the EuropeanParliament would seem to be more suited thanthe Council to take over this position, inparticular as the European Parliament alreadyhas the right to reject the overall budget.

However, it is important to bear in mind that,taking into account legitimacy concerns, thecurrent balance between the Council and theEuropean Parliament helps to ensure theacceptance of annual budgets among MEPs, aswell as among Member States, whosecontributions form the EU budget. Therefore,proposals to grant the European Parliament (orthe Council) the last word over the annualbudget may need to be embedded in a structureof close cooperation, building on the existingchannels between the European Parliament andthe Council. In particular, the conciliationcommittee should play a prominent role,thereby ensuring that the position of theCouncil (or the European Parliament) is dulytaken into account.

The theoretical literature on efficiency andlegitimacy provides no clear answers to thequestion of the final decision-taking authorityin the annual budgetary procedure. The specific

set-up of the EU institutions makes it difficultto attribute the traditional roles of “executive”and “legislature” to the various playersinvolved in the annual budgetary procedure. Itis clear, however, that a joint decision mode,bringing together two or more actors in thebudgetary procedure, would face the “commonpool problem”. In this context, a two-stageapproach with either the European Parliamentor the Council taking the final decision on theannual budgetary procedure would appeartheoretically more desirable. This point alsoderives from the efficiency literature, whichclearly favours a streamlined process with aclear allocation of power resources.

4 THE STATE OF PLAY FOLLOWING THEINTERGOVERNMENTAL CONFERENCE14

Against the background of these differentproposals and on the basis of the draftConstitution of the Convention, representativesat the IGC negotiated on the possibleinstitutional reforms in the budgetary field. TheEuropean Constitution, which was finallyadopted by Heads of State or Government inJune 2004 and formally signed in Rome on29 October 2004, introduces a budgetaryprocedure that remains de facto close to thecurrent budgetary decision-making process –even though de jure the two procedures mayappear very different. In fact, the maininnovations that the “new” budgetary procedureentails are taken from the rules and proceduresthat are currently laid down in theInterinstitutional Agreement. Thus, it simplyinstitutionalises existing informal arrangementsand does not enact institutional change.

For the annual procedure, three innovations areintroduced (see Figure 3): (i) the abolition of the


Figure 3 The amended annual budgetary procedure in the Constitutional Treaty(Art ic le I I I -404)

Source: Enderlein/Lindner (2005).

Submission of DB

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5 CONCLUSION

distinction between compulsory and non-compulsory expenditure, (ii) the introduction ofa Conciliation Committee into the Constitution,and (iii) the granting of the right of rejection tothe Council. All three correspond closely tocurrent practice. In the first case, over time thedistinction between the compulsory and non-compulsory expenditure has lost its relevance.The Interinstitutional Agreement already givesthe European Parliament some say overcompulsory expenditure through the ad hocconciliation procedure. Second, the equivalentto a Conciliation Committee is already in place.Most of the time, the annual budget is de factoadopted in a conciliation meeting between theCouncil and the European Parliament shortlybefore the second reading in Council. Third,given that negotiations at the conciliationmeeting cover all areas of the budget, theexclusive budgetary powers over the non-compulsory expenditure for the EuropeanParliament and over the compulsory expenditurefor the Council have de facto amounted to a rightof rejection for both arms of the budgetaryauthority. Both the Council and the EuropeanParliament use their budgetary powers asbargaining chips to strike deals over the differentparts of the budget. Under the new procedure, theCouncil will be able to prevent an agreement inthe Conciliation Committee and thus trigger anew budget proposal by the Commission. Thegranting of the right of rejection to the Councilsimply maintains the current balance.

With regard to the Financial Perspective, thenew provisions largely institutionalise thecurrent procedures for the multi-annual budgetplan. From the outset, it was clear that theinstitutionalisation of the FinancialPerspective would probably be a minimumresult of the constitutional negotiations. Giventhe objectives of the constitutional process (i.e.to update and streamline the Treaty), thecontrast between the Treaty provisions andcurrent practice was simply too pronounced inthis area of budgetary decision-making for thedrafters of the Constitution to ignore it.However, any attempts to go beyondinstitutionalising the current Interinstitutional

Agreement were strongly opposed. Althoughthe Convention settled on the introduction ofqualified majority voting for the FinancialPerspective after 2013, the Heads of State orGovernment adopted a provision that allowsfor the introduction of qualified majorityvoting only on the basis of a unanimousdecision by the European Council. Similarly,the Constitution’s provisions concerning therevenue side do not alter the unanimityrequirement for own-resources decisions.

Overall, the IGC settled on reforming thecurrent budgetary procedure only to the extentthat proven rules and procedures from outsidethe Treaty are brought into the Constitution.Taking into account the close link between theoverall state of integration in the EU andprocedural issues related to budgetary matters,it is not surprising that constitutionalnegotiators were risk-averse with regard tochanges to the budgetary procedures that wouldhave entailed significant consequences for thegeneral set-up of the EU.

5 CONCLUSION

This paper has discussed the questionwhy, despite widespread calls for reforms ofthe EU budgetary procedure, the EuropeanConvention and, even more importantly, theIntergovernmental Conference seem to havegenerated only minor institutional adjustmentsin the area of the EU budgetary procedure.

The analysis of the EU budgetary procedureand various reform proposals reveals that thecurrent institutional design corresponds by-and-large to an equilibrium between all theactors involved. Altering that equilibriumwould require a shift in the level of integration.The “embeddedness” of the budgetary field inthe overall state of European integration thusconstrains the scope of reform. Given thatneither the European Convention nor the IGCfocused on questions related to the generalstate of political integration, it is not surprisingthat the calls for far-reaching reforms of the EU


budgetary procedure did not result in thedesired institutional change.

While it is beyond the scope of this paper toconsider the pros and cons of changes in thestate of political integration, a number ofelements are crucial in demarcating the roomfor manoeuvre for the EU budgetary procedure.Such key elements, which we call dimensionsof political integration, are (i) the assignmentof tasks to the different levels of government,(ii) the balance of power between the variousEU actors and the corresponding votingmodalities, and (iii) the degree to whichcitizens identify themselves with the EU andwith the politicians who are supposed torepresent them at that level.

These conclusions should not be read as apanglossian view of current EU budgetaryprocedures but rather as a cautionary tale aboutthe limited impact that may be expected from asimplification of budgetary procedures thatleaves unaltered the broader EU institutionaland political set-up. To fundamentally changecurrent EU budgetary outcomes would requirethe modification of the current set of broaderconstraints in which any EU budgetaryprocedure is necessarily embedded.

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EUROPEAN CENTRAL BANKOCCASIONAL PAPER SERIES

1 “The impact of the euro on money and bond markets” by J. Santillán, M. Bayle andC. Thygesen, July 2000.

2 “The effective exchange rates of the euro” by L. Buldorini, S. Makrydakis and C. Thimann,February 2002.

3 “Estimating the trend of M3 income velocity underlying the reference value for monetarygrowth” by C. Brand, D. Gerdesmeier and B. Roffia, May 2002.

4 “Labour force developments in the euro area since the 1980s” by V. Genre andR. Gómez-Salvador, July 2002.

5 “The evolution of clearing and central counterparty services for exchange-tradedderivatives in the United States and Europe: a comparison” by D. Russo,T. L. Hart and A. Schönenberger, September 2002.

6 “Banking integration in the euro area” by I. Cabral, F. Dierick and J. Vesala,December 2002.

7 “Economic relations with regions neighbouring the euro area in the ‘Euro Time Zone’” byF. Mazzaferro, A. Mehl, M. Sturm, C. Thimann and A. Winkler, December 2002.

8 “An introduction to the ECB’s survey of professional forecasters” by J. A. Garcia,September 2003.

9 “Fiscal adjustment in 1991-2002: stylised facts and policy implications” by M. G. Briotti,February 2004.

10 “The acceding countries’ strategies towards ERM II and the adoption of the euro:an analytical review” by a staff team led by P. Backé and C. Thimann and includingO. Arratibel, O. Calvo-Gonzalez, A. Mehl and C. Nerlich, February 2004.

11 “Official dollarisation/euroisation: motives, features and policy implications of currentcases” by A. Winkler, F. Mazzaferro, C. Nerlich and C. Thimann, February 2004.

12 “Understanding the impact of the external dimension on the euro area: trade, capital flows andother international macroeconomic linkages“ by R. Anderton, F. di Mauro and F. Moneta,March 2004.

13 “Fair value accounting and financial stability” by a staff team led by A. Enria and includingL. Cappiello, F. Dierick, S. Grittini, A. Maddaloni, P. Molitor, F. Pires and P. Poloni,April 2004.

14 “Measuring Financial Integration in the Euro Area” by L. Baele, A. Ferrando, P. Hördahl,E. Krylova, C. Monnet, April 2004.

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15 “Quality adjustment of European price statistics and the role for hedonics” by H. Ahnert andG. Kenny, May 2004.

16 “Market dynamics associated with credit ratings: a literature review” by F. Gonzalez, F. Haas,R. Johannes, M. Persson, L. Toledo, R. Violi, M. Wieland and C. Zins, June 2004.

17 “Corporate ‘Excesses’ and financial market dynamics” by A. Maddaloni and D. Pain, July 2004.

18 “The international role of the euro: evidence from bonds issued by non-euro area residents” byA. Geis, A. Mehl and S. Wredenborg, July 2004.

19 “Sectoral specialisation in the EU a macroeconomic perspective” by MPC task force of theESCB, July 2004.

20 “The supervision of mixed financial services groups in Europe” by F. Dierick, August 2004.

21 “Governance of securities clearing and settlement systems” by D. Russo, T. Hart,M. C. Malaguti and C. Papathanassiou, October 2004.

22 “Assessing potential output growth in the euro area: a growth accounting perspective”by A. Musso and T. Westermann, January 2005.

23 “The bank lending survey for the euro area” by J. Berg, A. van Rixtel, A. Ferrando,G. de Bondt and S. Scopel, February 2005.

24 “Wage diversity in the euro area: an overview of labour cost differentials acrossindustries” by V. Genre, D. Momferatou and G. Mourre, February 2005.

25 “Government debt management in the euro area: recent theoretical developments and changesin practices” by G. Wolswijk and J. de Haan, March 2005.

26 “The analysis of banking sector health using macro-prudential indicators” by L. Mörttinen,P. Poloni, P. Sandars and J. Vesala, March 2005.

27 “The EU budget – how much scope for institutional reform?” by H. Enderlein, J. Lindner,O. Calvo-Gonzalez and R. Ritter, March 2005.

occasional paper series · 2005. 4. 1. · units the latter (scharpf 1988). we believe, however,...

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