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For a few euros more: Benevolent objectives have only a supporting role in determining EU budget

The EU budget is supposed to reflect benevolent principles, but some suspect that baser motives may guide member states bargaining over the allocation. This column summarises evidence demonstrating that power politics play a large role in building the EU budget, while benevolence is rather lacking.

Despite the relatively small size of the EU budget, member states take a very passionate stance towards it, especially in the Council of the EU, the main decision-maker in budget matters. The explanation lies in the redistributive nature of the EU budget: some 80 percent of the budget is devoted to redistributive purposes. That does not fit too well in the essentially inter-governmental decision-making of the EU.

According to the high-minded principles of budget allocation, the bulk of the expenditure is devoted to agriculture and low-income regions.1 Rural low-income countries try to catch benefits following the principles, and higher-than-average-income not-so-rural countries oppose them. As neither net recipient nor net contributor countries constitute a sufficient majority in the Council, fierce bargaining among member states is likely to determine the resulting allocation of receipts. The match between the allocation principles and the actual outcomes remains unclear.

The European Commission is in the midst of a fundamental review of the EU budget, including the Common Agricultural Policy, to be presented at the end of this year. If we do not take the high-minded principles for granted, the public choice school of thought might shed some light on the determinants of budget allocation. Public choice, as Nobel Laureate James Buchanan states in his artful phrase, is politics without romance.2 It assumes that policymakers pursue private interests and are just as egoistic as homo economicus. Public choice is simply an application of economics to political science. A straightforward lesson from the public choice school for the EU budget is that member states’ influence in budgetary decision-making determines the distribution of EU spending.

Building the budget

Indeed, recent research indicates that the distribution of voting power in the Council of the European Union largely (though not completely) explains past EU budget allocations.3 More specifically, this public choice or power politics approach argues that EU budget allocations among member states are attributable to the distribution of voting power in the Council, which is the key decision-maker on the EU budget. This argument is further strengthened by the fact that the major part of the EU expenditure is devoted to specific policies with a strong redistributive bent, i.e., the Common Agricultural Policy and structural operations. This gives Council members strong incentives to affect their receipts from the budget, while the true needs deriving from low-income regions and poor agricultural conditions play only a minor role.

Despite the strong explanatory power of egoistic motives, the power politics literature has thus far been unable to explicitly capture the exact role of benevolent motives in the allocation of budget expenditure. One natural approach is to presume that the European Parliament, where national interests do not matter,4 represents benevolent aspects in budgetary decision-making. As the European Parliament is not very likely to be the key promoter of the Common Agricultural Policy, it is natural to think that MEPs express their benevolent objectives by considering the income differences between member states and regions.

The EU’s budget expenditure has been divided – in EU jargon – into compulsory and non-compulsory expenditure. In the case of the former, the underlying principle and the amount are legally determined by the treaties, secondary legislation, conventions, international treaties or private contracts, whereas, in the case of the latter, the budgetary authority is free to choose the amount that fits. The European Parliament only has the final say in determining the amount of non-compulsory expenditure and only a minor say on compulsory expenditure. Roughly speaking, spending on agriculture belongs to compulsory and structural spending to non-compulsory spending. The bulk of the rest of the expenditure is compulsory, i.e. administration, external relations, etc.

Budgetary benevolence?

There are several approaches to assess how and at which magnitude benevolent aspects are smuggled into the EU’s budget allocation. Given that the European Parliament pursues benevolent policies and that it is, in practice, restricted to non-compulsory expenditure, one could try to evaluate Parliament’s relative influence in budgetary decision-making and using that as a proxy for the weight of benevolent aspects.

In a recent study I co-authored with Heikki Kauppi from University of Turku, we adopted another approach.5 We split the annual budget receipts in 1976-2003 into compulsory and non-compulsory components. Then we ran two separate regressions, one for compulsory and one for non-compulsory spending. In both cases, we regressed member states’ corresponding shares of receipts against political power, as measured by the Shapley-Shubik index of power, and relative income per capita. The former represents the power politics view whereas the latter stands for benevolent aspects. We also added a Franco-German dummy in both regressions to capture the impact of collaboration between the countries.

Our investigation let us draw three conclusions. First, political power is highly significant in explaining member states’ receipts in both types of spending. Second, relative income per capita has explanatory power in non-compulsory expenditure but not in compulsory expenditure. In the latter, we even got a positive sign indicating that higher-relative-income economies received more. In other words, benevolent objectives have impact when the European Parliament has influence and compulsory spending has a slight bias towards the richest countries via the Common Agriculture Policy. Third, Franco-German cooperation benefits these countries, especially in agriculture, whereas the effect is negative for structural spending. The latter can be explained by expanding cohesion that was a prerequisite for combining the Internal Market and Iberian entry.

Adding up the two components demonstrates that there is one-to-one correspondence between political power and budget receipts, as expected by the public choice view. That is, however, mitigated by benevolent objectives via relative incomes per capita but the effect is indeed tiny. With our regression equations, a simple back-of-the-envelope calculation suggests that the impact of benevolence is seven percent of the total budget. In terms of 2008 budget figures, that is €9 billion of €129 billion total. Indeed, for a few euros more.

1 See http://europa.eu.int/comm/budget.
2 Buchanan, J. (1979): Politics without Romance: a Sketch of Positive Public Choice Theory and its Normative Implications, IHS Journal, Zeitschrift des Instituts für Hohere Studien, 3.
3 Kauppi, H. & Widgrén, M. (2004): What Determines EU Decision-making? Needs, Power or Both?, Economic Policy 39, 221-266 and Kauppi, H. & Widgrén, M. (2007): Voting Rules and Budget Allocation in an Enlarged EU, European Journal of Political Economy 23, 693–706.
4 Noury, A. & Roland, G. (2002): More Power to the European Parliament?, Economic Policy 35, 279-320.
5 Kauppi, H. & Widgrén, M. (2008): Do Benevolent Aspects Have Room in Explaining EU Budget Receipts? CEPR Discussion Paper 6778.


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