ZEW Reform Proposal for the EU Financing System - Two Percentage Points of Value-Added Tax for Brussels and More Power to the Parliament

The EU financing system has to become more transparent. The contributions of EU Member States to the EU budget should therefore be indicated in the national value-added taxes (VAT). On average, the contributions of all EU Member States would equal exactly two percentage points of VAT. Moreover, the European Parliament should have greater influence on the expenditure pattern of the EU budget. These are the key aspects of a new proposal of the Centre for European Economic Research (ZEW) for a future EU financing system. ZEW President Clemens Fuest will be presenting the reform proposal at an event of the European Economic and Social Committee in Brussels today.

The reform proposal starts from two weak points at the centre of the current financing system. Fuest summarises the issues at stake: "Europe is spending money on the wrong things, and what's more, EU citizens feel there is a lack of cost transparency."

For example, the European Union is still devoting some 40 per cent of its budget to agriculture, although the sector's economic importance has grown rather small. Moreover, more than one third of resources are used for regional policy projects, many of which are located in prosperous countries that actually do not need EU support. The EU budget is thus largely used for policy areas that are in fact of prime importance for national and local policy-makers. According to the authors of the study, this expenditure pattern is inconsistent with the idea of an effective division of tasks. The EU budget should not finance local policy projects but truly European tasks like foreign policy, defence, or development cooperation.

The second key issue for EU citizens, alongside the ill-designed expenditure structure, is deficient cost transparency. The EU budget is largely financed through Member State contributions, which are determined according to each country's gross national income (GNI-based own resources). While European tax-payers are financing the EU budget indirectly through their taxes, they have no idea about the real share for Europe in their own tax payments.

There have been calls in Brussels for explicit EU taxes to improve cost transparency. ZEW recommends a different approach: In the ZEW proposal, the current system of GNI-based own resources would persist. However, each EU Member State should indicate the contribution to the European budget within the national VAT. European citizens would then be able to see their contribution to the EU budget on their receipt at every purchase. For Germany, the costs for the financing of the EU would currently amount to 2.1 percentage points of VAT, i.e. almost exactly the EU-wide average of 2.0 percentage points.

The second key element of the ZEW reform proposal is to give the European Parliament greater influence on the structure of the EU budget. At present, it is essentially the national governments who finalise the expenditure structure within the seven-year budget planning of the Council. The annual budgetary process, where the Council and the Parliament are partners with equal weight, is in fact only a negotiation of details. This procedure is weakening the position of the European Parliament. Greater influence of the EU Parliament in the decision-making process is highly desirable, because the focus of the MEPs is much less on agricultural and regional policy - unlike the heads of the national governments, who are primarily interested in projects with strong visibility at home. A simple modification could substantially enhance the Parliament's power: The multi-annual financial framework should only determine the overall size of the EU budget, but not the actual expenditure structure. The decision how to spend the money would thus be made in the annual budgeting process. This would strengthen the Parliament's influence significantly.

For further information please contact

Prof. Clemens Fuest, Phone +49(0)621/1235-100, E-mail fuest@zew.de

Prof. Dr. Friedrich Heinemann, Phone +49(0)621/1235-149, E-mail heinemann@zew.de

Martin Ungerer, Phone +49(0)621/1235-303, E-mail ungerer@zew.de