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Rethinking the EU's Finances

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Talks have started on what should be the EU's next long-term budget, known as the Multiannual Financial Framework. The current one will finish next year so it is time to consider what should be done for 2014-2020. It is not only about how much money is needed and what it should be spent on, but also where the funding should come from.

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The European Parliament has always argued that the EU should have its own resources. Today 75% of the EU's budget comes from national contributions based on gross national income. A contribution based on value-added tax accounts for a further 11%, while traditional own resources such as customs duties, agricultural duties and sugar levies come to 13%. The rest of the funding comes from taxes on EU staff salaries and fines imposed on companies in breach of competition law.

As national governments are responsible for providing the lion's share of the EU budget, they sometimes fall into a familiar trap: to know the cost of EU membership but little about its value. There is a temptation to regard EU membership as a simple (and simplistic) calculation: contribution minus any EU funding for the country such as subsidies. During negotiations member states therefore make a play of trying to keep this number as low as possible and to divide EU countries into two categories: "net contributors" and "net beneficiaries". This approach disregards all the other advantages EU membership bestows on its members, such as access to the world's largest internal market and a stronger position in international negotiations. Net contributors are often rich countries whose companies have benefited significantly from being able to operate in a larger market without trade barriers. Even at a strictly monetary level, the calculation can be misleading. Funding for a motorway built in Poland, for example, obviously benefits Poland but, potentially also for instance, a German contractor winning the tender to do the work.

Most MEPs have criticised the current system for years as they see it as too complex, lacking transparency and being completely incomprehensible to European citizens. It makes the contribution to the EU seem an additional burden on national budgets and rather than encouraging solidarity and leveraging public expenditure to greater all-round benefit it causes member states to focus on their own, narrowly defined, interests. This is why many MEPs favour the EU having its own resources.

In fact this was the idea all along. The European Coal and Steel Community, the earliest incarnation of the EU, had its own resources based on a levy raised on each ton of steel produced. The European Economic Community was also to have its own resources following a transitional period of being financed by national contributions under the 1957 Treaty of Rome. In 1970 the European Council reached an agreement on ending national contributions by enabling the European Community to have its own resources through agricultural levies and customs duties, as well as an additional source of income based on VAT

That leaves the question of how a future system of own resources should look like. A resolution adopted by the Parliament in 2007 said the following principles should be considered:
• Full respect for the principle of fiscal sovereignty of the member states
• Fiscal neutrality (the new system should not increase overall public expenditure nor the tax burden for citizens)
• No changes to the order of magnitude of the EU budget
• Progressive phasing in of the new system
• Establishment of a clear political link between a reform of revenue and a reform of expenditure
To ensure the new system would not be more expensive, the resolution suggested that national audit offices and the European Court of Auditors should be asked to check and guarantee compliance with the fiscal neutrality principle.

The European Commission's proposal for the next Multiannual Financial Framework includes own resources in the form of a financial transaction tax and a new VAT system. These suggestions have been broadly welcomed by many MEPs. They think having a system of own resources will establish a direct link between the public and EU finances, make it more transparent and comprehensible to citizens, reduce the EU's dependence on contributions from the member states and be more effective and equitable. It should also help the EU to better meet the goals of the "Europe 2020" strategy for stimulating the economy. But although the majority of MEPs have always backed the call for own resources for these reasons, some MEPs vehemently oppose it. They fear having own resources will lead to the EU becoming more costly and powerful.

On Thursday the Parliament will hold a high-level conference to discuss the Multiannual Financial Framework for 2014-2020 with their counterparts from the national parliaments, ministers and the Commission, including own resources. It will be far from the last meeting on the long-term budget, but that makes sense. This is something that will affect all of us for years to come, so it should be considered carefully.