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Fiscal Equalization and Economic Development Policy in the EU Is the EU a federation, a confederation, or what? Is the EU a federation, a confederation, or what? The EU Commission The EU: Changing directions The signing of the Treaty of Rome (March 1957) The EU: Regional enlargement Pending EU Enlargement The EU and the 1st round of enlargement The EU’s own revenue A finance reform The relative importance of EU revenue instruments (2001) The importance of EU revenue instruments The structural development of revenue instruments Distributional implications Contributions to the budget by Member State Revenue equalization The size of EU Expenditures Compulsory vs. non-compulsory outlays The structure of Community outlays The structure of EU outlays The development of Community expenditures The Common Agricultural Policy (CAP) Structural Funds Breakdown of SFaccording to subfunds Structural Funds: Objectives Breakdown of SF according to objectives Cohesion Fund Structural development of EU outlays External actions (2000) European Development Fund:regional incidence (1999) EU regions: Population density EU regions: GNP per capita EU regions: GNP/capitaThe accession countries Fiscal Equalization and Economic Development Policy in the EUPaul Bernd SpahnGoethe-Universität, FrankfurtInternational ConferenceOctober 28-29, 2002Prince Edward Island, CanadaForum of Federations / Forum des federations www.forumfed.org forum@forumfed.org Is the EU a federation, a confederation, or what?The EU has some characteristics of a federationIt has decentralized autonomous entities It coordinates national policies toward a common goalCoordination is effected within an institutional settingHowever the EU is notconsidered a federation mainly becauseThere is strong skepticism against centralization (subsidiarity principle)Competencies are partially transferred, institutionally divided, and controlled by national parliamentsThe process of integration is asymmetrical („opt out“)Is the EU a federation, a confederation, or what?The EU must be considered to be more than a loose confederation, becauseThere are common or harmonized policies, and common institutions: an EU legislative process, an EU Executive, and an EU JudiciaryThe EU Parliament has only limited powerThe EU Council is the decisive political body where the member states inject their voiceThe EU Commission is an „Executive“ whose democratic legitimacy has often been questioned, but it has been the effective driving force of integrationThe EU CommissionThe EU: Changing directionsThe original objectives were purely political, with “common policies” as the key instrumentSoon, economic objectives came to the forefront, with market liberalization as the key instrumentReciprocity with home-based quality control and consumer protection were the driving forces of creating a “single market”The creation of a “level playing field” required tax harmonization and other instrumentsCompetition policies are now the single most important policy domain of the EU CommissionThe signing of the Treaty of Rome (March 1957)The EU: Regional enlargementFrom six at the outset, the Community now has 15 members:the Paris (1951) and Rome (1957) Treaties were signed by France, Germany, Italy and the Benelux countriesthe United Kingdom, Ireland and Denmark acceded on 1 January 1973Greece became the 10th Member State on 1 January 1981Spain and Portugal acceded on 1 January 1986Austria, Finland and Sweden acceded on 1 January 1995Pending EU EnlargementThe Commission has recently recommended to admit 10 further countries by 2004Lithuania, Latvia, Estonia, Poland, Czech Republic, Slovakia, Hungary, Slovenia, Cyprus, and MaltaTwo more countries may follow by 2007Romania and BulgariaTurkey has applied, but admission to the EU remains controversial. A decision may be taken after the November electionsMain Outsiders: Norway, Switzerland, Albania,and the former Yugoslavia (except Slovenia)The EU’s own revenueAgricultural duties, and sugar andisoglucoselevies:Customs dutiesVAT resourcesThese derive from the application of a uniform rate to each Member State’s VAT base, determined in a uniform manner in accordance with Community rules.Since the June 1988 reform, the uniform rate was found by applying a 1.4 % rate to the VAT base“Fourth resource” (created in 1988)This resource is a percentage of GNPIt is a variable, budget-balancing resourceA finance reformAs agreed at the Edinburgh European Council, a new Decision on the system of own resources was adopted on 31 October 1994. This Decision raised the own resources ceiling to 1,21 % of GNP in 1995 and, in stages, up to 1,27 % of GNP in 1999. reduced the uniform VAT rate gradually from 1,4 % to 1 % in 1999 and restricted the VAT base to be taken into account to 50 % of GNPThe new own resources Decision entered into force with effect from 1 January 1995 after it had been ratified by all the Member States in 1996. The relative importance of EU revenue instruments (2001)Mill. €Percent of totalAgricultural levies1,9142.0Customs duties12,29213.1VAT34,04935.6Fourth resource45,51648.5Miscellaneous7520.893,940100.0The importance of EU revenue instrumentsThe structural development of revenue instrumentsDistributional implicationsThere are distributive implications of the EU’s revenue systemCustoms duties and agricultural levies are neutralThe VAT share is neutral as to tax rate variations, but tends to work against consumer members (net importers) The “fourth resource” follows GNP and therefore works against the producer members (net exporters)The effects cannot be generalized because ofspecial arrangements (United Kingdom, Germany)revenue capsContributions to the budget by Member StateRevenue equalizationThere is no explicit equalization mechanism on the revenue sideOn the contrary: Concessions were made in favor of richer Member States (UK, Germany)More recently, there were also concessions made to the “poorer” members (those qualifying for aid through the Cohesion Fund)The main redistributive effects stem from the expenditure side of the EU budgetThe size of EU ExpendituresCompulsory vs. non-compulsory outlaysThe distinction between compulsory expenditure and non-compulsory expenditure is basically political in that it determines the division of power over the budget between Parliament and the Council Compulsory expenditure is defined to be expenditure „which the budgetary authority is obliged to enter in the budget to enable the Community to meet its obligations, both internally and externally“ All other expenditure is non-compulsoryThe problem of classifying outlays is a source of conflict between the two arms of the budgetary authorityThe structure of Community outlaysGeneral BudgetEuropean Agricultural Fund(EAGGF Guarantee Section)Structural Funds, of which•European Agricultural Fund (EAGGF Guidance Section)•European Regional Development Fund (ERDF)•European Social Fund (ESF)•Cohesion FundResearchExternal actionAdministrationEuropean Development Fund (EDF)European Coal and Steel Community (ECSC)The structure of EU outlaysThe development of Community expendituresThe Common Agricultural Policy (CAP)The CAP has the following objectives:to increase agricultural productivity;to ensure a fair standard of living for the agricultural community;to stabilize markets;to guarantee the availability of supplies;to ensure that supplies reach consumers at reasonable prices.To achieve these objectives, the common agricultural market was based on three principles: a single market, Community preference, and financial solidarityA common Fund (EAF) was created in 1962.In 1964, this Fund was divided into two sections —the Guarantee Section for outlays arising from price policy, and the Guidance Section for Community expenditure resulting from structural policies in agricultureStructural FundsSubsection B2 of the budget covers structural operations, including operations under the Structural Funds (European Regional Development Fund (ERDF), European Social Fund (ESF) and the EAGGF Guidance Section), the Financial Instrument for Fisheries Guidance (FIFG) and, since 1993, the Cohesion Fund. It also includes some internal policies: other agricultural and regional operations, transport and fisheries. Breakdown of SFaccording to subfundsStructural Funds: ObjectivesWith the appropriations for the Structural Funds and the FIFG, the Union supports the following seven objectives:1: promoting the development and structural adjustment of economically lagging regions;2: converting regions affected by industrial decline;3: combating long-term unemployment and facilitating job creation for young people and excluded persons;4: facilitating the adaptation of workers to changes;5a: speeding up the adjustment of agricultural structures;5b: facilitating the development of rural areas;6: development and structural adjustments of regions with an extremely low population density.Breakdown of SF according to objectivesCohesion FundWith the Cohesion Fund appropriations, the Union is making a financial contribution to environmental projects and trans-European transport infrastructure networks in those Member States with a per capita gross national product which is less than 90 % of the Community average, measured on the basis of purchasing power parities (Greece, Spain, Ireland and Portugal). The rate of Community aid amounts to between 80 % and 85 % of public or similar expenditure.Structural development of EU outlaysExternal actions (2000)European Development Fund:regional incidence (1999)EU regions: Population densityEU regions: GNP per capitaEU regions: GNP/capitaThe accession countriesTHE EU IS DEFINITELY HEADING TOWARDS ITS BIGGEST CHALLENGEWILL IT WORK WITHOUT EXPLICIT REGIONAL EQUALIZATION ?Thank you for your attention.