The budget of the European Union II.

1. The budget of the European Union II. Introduction to the European Union Written by Endre Domonkos 1 st Semester, Academic Year 2010/2011

2. I. The European Union’s financial perspective for the period 2007-2013 I. • The Commission presented its proposal for the 2007-2013 financial perspective for an EU of 27 on 10 February 2004, in the form of a Commission Communication named „Building our Common Future: Policy Challenges and Budgetary Means for an Enlarged EU, 2007-2013.” • Unlike in the case of previous financial perspectives, the Commission chose a structure that was better suited to spelling out the European Union’s key objectives and political priorities. • The EU’s financial perspective for the period 2007-2013 contains 5 headings. • Heading 1- Sustainable growth is divided into two separate: Competitiveness (1a) and Cohesion (1b). 1a. Competitiveness for growth and employment, encompassing expenditure on research and innovation, education and training, the security and environmental sustainability of EU networks, the internal market and accompanying policies, as well as employment and social policy. 1b. Cohesion for growth and employment, covering economic and social cohesion policy, in practical terms the expenditure of Structural and Cohesion Funds. • This subheading is designed to enhance convergence by the least developed Member States and regions, to complement the EU strategy for sustainable development outside the less prosperous regions through competitiveness and employment programmes, and to support European inter-regional cooperation. • Subheading 1b also includes the so-called phasing-out aid to regions which will loose eligibility for cohesion funding, either because of their successful catch-up or because they are statistically affected by enlargement and no longer below the per capita GDP eligibility limit in an enlarged Union.

3. I. The European Union’s financial perspective for the period 2007-2013 II. • Heading 2- Preservation and management of natural resources includes the common agricultural and fisheries policies, rural development and environmental measures. The proposal of the Commission for the Common Agricultural Policy reflected the agreement reached at the Brussels European Council in October 2002 (which allowed for a maximum annual nominal increase of 1% between 2007 and 2013) and the 2003 CAP reforms. • Heading 3 – Union citizenship, area of freedom, security and justice reflects the growing importance attached to these fields, such as border management, asylum policy, institution building, access to public goods, food safety, public health, consumer protection, culture, audiovisual policy, youth, information and dialogue with the citizens. • Heading 4 – The European Union as a global partner covers all external action, including pre-accession instruments, neighborhood policy, civilian crisis prevention and management, development policy aid for poverty reduction in developing countries, and the European Development (EDF). This heading also includes the current reserves for emergency aid and loan guarantees. • Heading 5 – Administration covers expenditure for institutions other than the Commission, including pensions and the European Schools. Commission administrative expenditure is included directly under the relevant operational headings. • In its proposal, the Commission pointed out that expenditure for the period 2007-2013 was partly decided: in October 2002, agreement was reached in the Council on market and direct payments within the CAP until 2013; due to the lower per capita GDP levels of the ten new Member States, expenditure on cohesion policy keeps growing; the decision has been made to grant membership to another two less prosperous countries with big agricultural sectors; several policy areas (such as internal market, transport, justice and home affairs) require more and more funding due to the Treaties and certain secondary legal acts.

4. I. The European Union’s financial perspective for the period 2007-2013 III. • The European Commission expressed its view that the level of financing proposed by the six net contributors (1% of GNI) would make it impossible for the Union to meet the Council’s commitment for farm spending, would undermine the gradual introduction of cohesion policy in the new Member States and could jeopardise the fulfillment of the new political priorities, including future enlargements. • In a 1% scenario, the EU would also be forced to curb its external aid programmes, cut rural development spending, backtrack on some of its international commitments and drastically reduce cohesion funding to Member States. • Therefore the Commission’s proposal represented 1.14% of EU GNI on average for the whole period 2007-2013 for covering the common expenditure of a Union of 27 members. • In addition to retaining the existing principle of budgetary discipline, the Commission proposal would have also capped own resources at 1.24% of GNI, i.e. the ceiling applied from 2000 to 2006. • According to the Commission’s proposal, commitment appropriations in 2007 should have totalled EUR 133.6 billion (at 2004 prices), which would grow to 158.5 billion by 2013. For the seven years of 2007-2013, the Commission would have liked to ensure EUR 1,025 billion for the Union. • The changes proposed by the Commission in the allocations to budgetary headings reflected the changing political priorities of the Union. • The most significant change was made in the Commission proposal is in Subheading 1a ‘Competitiveness for growth and employment’: an almost threefold increase from EUR 8.791 to EUR 25.825 billion in 2013.

5. I. The European Union’s financial perspective for the period 2007-2013 IV. • With this increase, the Commission wished to put more emphasis on the economic policy objective enshrined in the Lisbon strategy: strengthening competitiveness, and so promoting sustainable growth and improving employment. • The proposal called for a major leap in Subheading 1b ‘Cohesion’ from 2006 to 2007 when equal treatment of old Member States and those that joined in 2004 would have had to be applied and funding to new ones would have had to jump sharply. • Overall cohesion spending was to grow by about 25% from EUR 38.791 billion to 47.57 billion in just one year (2006 to 2007), but then not change significantly, ending up only to 50.96 billion by 2013. • The Commission proposed maintaining the proportion of cohesion spending within the overall EU-budget, but extending Structural and Cohesion Funds to the new Member States on equal terms. As a result, although in 2006 the 10 new Member States received only 22.5% of these Funds, for the 12 new Member States the Commission proposed 44.7% in 2007 and 53.3% in 2013. • As a key feature of Heading 2 ‘Preservation and sustainable management of natural resources’, the Commission proposed the ceiling of market support and direct payments to farmers agreed by the Heads of State or Government in October 2002. • With spending capped at a nominal maximum of 1% CAP expenditure would not increase in the new financial period, while rural development would become more important (27% of the total expenditure in this heading, with market support and direct payments accounting 70%, fisheries 2% and environmental spending 1%). The weight of this heading would reduce from 46.4% in 2006 to 36.5% in 2013.

6. I. The European Union’s financial perspective for the period 2007-2013 V. • The Commission proposed significant increases in Heading 3 ‘Citizenship, freedom, security and justice’ (from EUR 1.381 billion in 2006 to 3.62 billion in 2013). • The Commission also proposed a relatively considerable increase in Heading 4 related to external actions (40% over six years) and Heading 5 related to administrative expenditures (30%). • On the whole, the Commission draft aimed to reduce the proportion of farm spending considerably, while putting much more emphasis on the new political priorities of competitiveness, Union citizenship, freedom, security and justice. • The Commission proposal in practice would have left the rate of cohesion expenditure unchanged, but would have allocated a growing share of these funds to Member States that joined in 2004 and 2007. • Division among the Member States. The six net contributors (Austria, France, Germany, the Netherlands, Sweden and the UK) attacked the proposal and refused to accept spending set at above 1% of GNI. The net contributors mainly attempted to cut back cohesion spending in the old Member States (regions in the south of Europe) and reallocate those savings to the new Member States, but since this solution was the most unfavourable for the current beneficiary countries, the Southern Member States, they fought hard against the suggested 1% ceiling. • Fierce debate about the British rebate among the Member states (abolition of rebate). • The Luxemburg Presidency proposed considerable cuts in the Commission’s original proposal, capping commitment appropriations at only 1.06% of GNI.

7. I. The European Union’s financial perspective for the period 2007-2013 VI. • The biggest cuts in Presidency package would have slashed Subheading 1a (competitiveness) from EUR 132 billion proposed by the Commission to just 72 billion over the seven-year period. In subheading 1b (cohesion) the Presidency proposed to reduce the original Commission proposal from EUR 344 billion to 306 billion. • The Presidency, with a view to the October 2002 agreement on agricultural spending, suggested only minor cuts (from 301 billion to 295 billion) in Heading 2 (agricultural market support and direct payments to farmers), but would have reduced both Headings 3 and 4 significantly (from 21 to 11 billion, and from 96 to 44 billion, respectively). • The debate focused not so much on cohesion funding, but much more on the position of net payers and the extent to which they should contribute to the Community budget. • Finally, the United Kingdom refused to accept any reduction or freezing of its rebate, until spending on the Common Agricultural Policy was reduced, the CAP reformed and the Community budget overhauled. But France and some other Member States refused the whole reform of CAP. • In early December 2005, the British Presidency put forward a new proposal with further cuts to the Luxembourg package, with commitment appropriations at only 1.03% of GNI. • Finally, at the European Council meeting of 15-16 December 2005, the Heads of State of Government agreed on a compromise halfway between the Luxembourg and the British proposals, capping commitment appropriations at 1.045% of GNI. • According to the agreement at the 2005 December summit, the CAP financial package adopted in 2002 would remain in effect until 2013, and so would the British rebate, but the EU would start discussing the reform of both the revenue and expenditure sides of the budget, especially the financing of the CAP, the system of own resources and the UK rebate.

8. I. The European Union’s financial perspective for the period 2007-2013 VII. • Rural development funding enjoyed a major boost; over the seven year-period, it will amount to 24% of CAP market support measures and direct payments. • Final figures under Heading 3 ‘Citizenship and the area of freedom, security and justice’ are hardly more than a half of what the Commission proposed, but the EU will still spend 78% more in this area than it did in 2006. • Although Heading 4 ‘the Union as a global partner’ was also cut to 50% of the Commission proposal, there will still be a small 8% hike from 2006 to 2013. • Another novelty of the 2007-2013 financial Perspective is the decision of the Member States (approved by the Inter-Institutional Agreement) to set up a European Globalisation Adjustment Fund, with a view to providing complementary assistance for the restructuring efforts aimed at counterbalancing the negative impacts of globalisation and of world trade flows endangering European jobs. • The annual budget of the Fund is EUR 500 million, financed mainly from unused expenditure of the previous budgetary year. • The financial perspective also created a European Union Solidarity Fund with an annual budget of EUR 1 billion, which provides financial assistance to Member States and candidate countries in the event of natural disasters or terrorist attacks. • Another novelty is the Emergency Aid Reserve, which enables the Union to respond rapidly to crisis situations in third countries and provide assistance for humanitarian aid, crisis management and civil protection up to a maximum of EUR 221 million a year.

9. I. The European Union’s financial perspective for the period 2007-2013 VIII. • The review clause served as a compromise solution to the most controversial budgetary issues (UK rebate, CAP reform) postponed to a later date. • The review of clause stipulates that both the revenue and expenditure side of the budget has to be reviewed. • The Commission is instructed to carry out this comprehensive budgetary review during the course of 2008 and 2009, paying attention to the British rebate and the CAP. • Based on the Commission’s report, the European Council may then take decisions on areas covered by the review, the results of which will be taken into consideration when preparing the next financial perspective. • The Financial Perspective includes some key auxiliary rules for improving the budgetary positions of net contributors. • The VAT collection rate was capped at 0,3% (which meant a reduction), with special provisions for the four largest net contributors. • For the years between 2007 and 2013, the maximum VAT collection rate for Austria is 0.225%, for Germany 0.15%, and for Sweden and the Netherlands 0.1%. On top of that, in these 7 years, the Netherlands and Sweden ca withhold EUR 605 million and 150 million respectively (of their GNI-based contributions.

10. I. The European Union’s financial perspective for the period 2007-2013 IX. • The UK rebate was maintained in the form agreed by the 1999 Berlin European Council, except for the Member States that joined in 2004 and 2007, which can reduce their financial obligations vis-à-vis the United Kingdom (except the CAP direct payments) by 0% in 2007-2008, by 20% in 2009, by 70% in 2010 and by 100% in 2011-2013. • The correction of the UK rebate over the seven period cannot exceed EUR 10.5 billion, roughly 20% of the total rebate. • The biggest single structural change in the 2007-2013 Financial Perspective is the increased proportion of non-agricultural and non-cohesion internal policies (Headings 1a and 3). • Another important structural change is the increase in rural development spending and the falling ratio of agricultural market support and direct payments within the budget. • Problems: the British rebate and the reform of Common Agricultural Policy. • The next financial perspective for the period between 2014 and 2020 will be discussed during the Hungarian Presidency. • Fierce debates on the following areas: the supports of the Structural Funds and Cohesion Fund + restructuring of the budget (reduce the sharing of CAP and increase the expenditure for R&D, innovation and competitiveness)

11. II. The new budgetary procedure in the Treaty of Lisbon I. • The Treaty of Lisbon institutionalised the now standard practice of multi-annual financial planning and incorporated it into the primary sources of EU law under the name of multi-annual financial framework. • Accordingly, the Union’s annual budget is drawn up on the basis of the multi-annual financial framework. • Following the practice of financial perspectives, the multi-annual financial framework determines the annual ceilings on commitment appropriations by headings. • The Council and the Parliament adopt multi-annual financial frameworks jointly and the Treaty of Lisbon includes a special bridging clause, which allows the European Council acting by unanimity to authorise the Council to switch to qualified majority voting when adopting a multi-annual financial framework. • The new budgetary procedure is introduced as a special modified version of the ordinary legislative procedure. • The new procedure has strict deadlines and consists of a single reading and a conciliation phase. • The compulsory and non-compulsory expenditure was abolished by the Treaty of Lisbon. • This solution reinforces Parliament’s role, which enables it to deal with all expenditure items in the same way and Parliament no longer has the final say in non-compulsory expenditure. • The Treaty of Lisbon allows for only one case when Parliament has the final say: if the Council rejects the budget after an agreement has been reached in the conciliation committee (which is most unlikely to happen in practice).

12. II. The new budgetary procedure in the Treaty of Lisbon II. • According to the provisions of the Treaty of Lisbon, the Union’s annual budget is established through the following procedure: • Each institution, before 1 July, draws up estimates of its expenditure for the following financial year. The Commission consolidates these estimates in a draft budget containing an estimate of revenue and an estimate of expenditure. • The Commission submits a proposal containing the draft budget to the European Parliament and to the Council not later than 1 September of the year preceding that in which the budget is to be implemented. The Commission is capable to amend the draft budget during the procedure until such time as the Conciliation Committee is convened. • The Council adopts is position on the draft budget and forwards it to the European Parliament not later than 1 October of the year preceding that in which the budget is to be implemented. • If within forty-two days such communication, the European Parliament: a.) approves the position of the Council, the budget will be adopted; b.) has not taken a decision, the budget will be deemed to have been adopted; c.) adopts amendments by a majority of its component members, the amended draft will be forwarded to the Council and to the Commission. In the last case the President of the European Parliament, in agreement with the President of the Council immediately convenes a meeting of the Conciliation Committee. • The Conciliation Committee, composed of the members of the Council or their representatives and an equal number of members representing the European Parliament, has the task of reaching agreement on a joint text within twenty-one days of its being convened. The Commission takes part in the Conciliation Committee’s proceedings and takes all necessary initiatives in order to reconcile the positions of the European Parliament and the Council.

13. II. The new budgetary procedure in the Treaty of Lisbon III. • If, within the twenty days, the Conciliation Committee does not agree on a joint text, a new draft budget will have to be submitted by the Commission. • If within the twenty-one days the Conciliation Committee agrees on a joint text, the European Parliament and the Council will each have a period of fourteen days from the date of that agreement in which to approve the joint text. • If, within the period of fourteen days: (a) the European Parliament and the Council both approve the joint text or fail to take a decision, or if one of these institutions approves the joint text while the other one fails to take a decision, the budget will be deemed to be definitively adopted in accordance with the joint text, or (b) the Parliament, and the Council both reject the joint text, or if one of these institutions rejects the joint text while the other one fails to take a decision, a new draft budget will have to be submitted by the Commission, or (c) the Parliament, acting by a majority of its component members, rejects the joint text while the Council approves it, a new draft budget will be submitted by the Commission, or (d) the Parliament approves the joint text whilst the Council rejects it, the Parliament will be able, within fourteen days from the date of the rejection by the Council and acting by a majority of its component members and three fifths of the votes cast, to decide to confirm all or some of the amendments referred to in paragraph 4(c). • Where a European Parliament amendment is not confirmed, the position agreed in the Conciliation Committee on the budget heading which is the subject of the amendment will be retained. The budget will be deemed to be definitively adopted on this basis. 8. When the procedure provided is completed, the President of the European Parliament will declare that the budget is definitively adopted.

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