EU budget spending needs serious re-thinking, OECD second-in-chief warns

Before talking about new sources of income for the EU budget – known as ‘own resources’ – the EU should assess the efficiency of its current spending, Fabrizia Lapecorella, the deputy secretary-general of the Organisation for Economic Cooperation and Development, said this week.

EU ‘own resources’ have come increasingly into focus as the bloc looks into new priorities that need to be funded – such as propping up its defence industry – while its budget overall remains at around 1% of the combined 27 countries GDP.

“New revenue sources are needed, but also a revision or a reallocation – in an efficient way – of the EU spending,” Lapecorella told at an event organised by EU policy think tank Bruegel on Wednesday (5 June).

“The view of the OECD is that the own resource question is central, but indeed a combination of initiatives would be required,” she said.

When discussing potential reallocation, Lapecorella talked about “two expenditure items” in particular – cohesion policy and agricultural spending, both of which account for more or less a third of total EU spending (see Chart of the Week).

“Both of [them] would require serious thinking,” she said.

The OECD official warned that so far, the EU cohesion programme has not been as effective in reducing regional divides as hoped. “Something is not working there,” she said – arguing cohesion spending should be “better targeted at the lagging regions to address more effectively the regional divide”.

This is indeed a touchy subject for the bloc, as at present all EU regions, even economically efficient ones, receive a portion of cohesion-related funds under the “European Regional Development Fund” and the “European Social Fund”, while the much smaller “Cohesion Fund” is reserved for poorer regions.

However, the beneficiaries of cohesion money – organised in the EU’s ‘Committee of the Regions’  – have repeatedly warned against shifting to an approach that would see rich regions lose their funding, arguing that this would cost acceptance of the EU as a whole.

“All European regions should remain eligible for funding in the future,” the Committee said in a manifesto on the future of cohesion policy it adopted unanimously last year.

Meanwhile, outgoing Cohesion Commissioner Elisa Ferreira warned in Berlin earlier this week that new spending priorities, such as defence, should not cut into the EU cohesion spending.

“I think all of us in Europe have to be intelligent enough to accommodate new priorities, not at the cost of something absolutely essential,” said the Portuguese socialist – who stands little chance to be renominated by the new conservative prime minister Luís Montenegro.

As for agriculture, Lapecorella warned the problem “is even worse.”

“What is actually striking is that there is a large part [27%] of support to the agricultural sector that is still linked to production,” she said, adding that this should be “phased out”.

“Support for investment would be consistent with the growth-oriented funding of the EU budget, but supporting production is honestly something that, at this point in time, could be readdressed.”

Criticism from the OECD on the EU’s agricultural policy is nothing new, however, as the international organisation has often warned against its potential shortcomings.

The European Commission and the Parliament themselves have also repeatedly made efforts to introduce more nuanced and targeted measures within the framework to make disbursement more proportionate to local needs – also through redistributive strategies. However, such proposals have regularly been blocked at member state level.

And this time around too, changes suggested by Lapecorella would seem politically unrealistic, given that the European People’s Party – which has branded itself as a champion of farmers’ causes – is set to win the most seats in the EU elections this weekend, and that the EU’s Common Agricultural Policy (CAP) has strong backing among EU leaders.

One of the EU’s particularities is that its long-term budget is set out every seven years, while the EU parliament is elected for five years, with no alignment between the two.

The next Multiannual Financial Framework (MFF) only starts in 2028, giving EU institutions some time before they have to address the thorny questions of where to cut and where to add spending.

But with the post-pandemic Recovery and Resilience Facility (RRF) ending in 2026, EU priorities such as the green and digital transition risk facing an abrupt “cliff effect” in public support.

And the largely unresolved question of how to boost the bloc’s defence-related industrial capacity adds to this, which means the issue of how to reshuffle the bloc’s spending could come to the fore sooner rather than later.

Realistically, the newly elected EU parliament will have little say in these negotiations. These will hinge on broader, dire political questions that continue looming on the horizon – namely, the future role of fiscal consolidation versus public spending – and where EU leaders think cuts would be most or least painful.

Chart of the Week

The EU budget can be neatly put into three categories.

There’s the Cohesion policy, which consists of several funds supporting EU regions. There’s the Common Agricultural Policy, which supports farmers. And then there’s everything else, including flagship projects such as the research programme “Horizon Europe”.

Each of them broadly accounts for a third of EU spending, and each of them has powerful lobbies fighting for their survival.

Economic Policy Roundup

In a widely anticipated move, the European Central Bank cut rates for the first time in five years on Thursday (6 June). What will – and should – happen after that, however, is a matter of contention. Markets currently expect fewer than 60 basis points to be cut in 2024 – equating to two 25 basis point cuts plus a non-negligible possibility of a third. “I must say I’m torn between either two additional rate cuts – September and December is still our base case – but I think there is a clear risk that it’s going to be less than that,” said Carsten Brzeski, global head of macro research at ING. Analysts also disagreed about whether the ECB should adjust its policy framework moving forward, with some expressing concern that the bank’s desire to drive down inflation to 2% could end up inflicting unnecessary damage on the European economy. Read more.

Europe’s economic problems primarily stem from insufficient private and public investment rather than excessively burdensome regulations, the lead candidate for the European Commission presidency for the Party of European Socialists (PES), Nicolas Schmit, told Euractiv in an interview. Although Schmit, who currently serves as the European Commissioner for jobs and social rights, agreed Europe does need to “de-bureaucratise”, he stressed that it is nevertheless unrealistic to think that cutting regulations alone will boost the bloc’s faltering economy. “[There are] those who tell us Europe is weak because we have over-regulation. If it were so easy, well, we could skip 30% of our regulations and the economy [would be] booming. This is really crazy,” he said. “I absolutely agree that there’s too much bureaucracy. [But] investment is the key.” Read more.

EU defence spending should not cut into cohesion funds, Commissioner warns. New EU priorities, such as defence, should not come at the cost of helping poorer EU regions, European Commissioner for Cohesion Elisa Ferreira told Euractiv in Berlin on Monday (3 June). Read more.

German businesses warn against ‘Dexit’ amid fears of far-right gains. Germany’s exit from the European Union, also known as “Dexit”, would cost the country’s economy €200 billion a year, business lobby INSM warned on Wednesday (5 June), as Germany’s far-right AfD party, currently second in the polls ahead of this weekend’s EU elections, maintains strong anti-EU rhetoric. Read more.

Leading French and Italian business organisations urge incoming EU policymakers on Tuesday (4 June) to make “crucial decisions” to boost the bloc’s faltering competitiveness by cutting regulations and ramping up investment. In a joint declaration issued just two days before the start of the European elections, the Mouvement des Entreprises de France (MEDEF) and Confindustria—France’s and Italy’s largest business associations—argued that “overregulation” and an insufficiently integrated single market are severely hampering the bloc’s economic growth. “The European Parliament, to be elected on 9 June, along with the new European institutions, will have to make crucial decisions for the European Union,” the statement reads. “Overregulation greatly weakens our companies,” the document reads. “Europe needs to […] bridge the gap between appropriate high-level policy decisions and implementation.” Read more. 

Eurozone finance ministers back G7 push on Russian frozen assets, but legal questions remain. Eurozone finance ministers gave their political backing on Wednesday (5 May) to a G7 plan to provide loans to Ukraine by using windfall profits generated from Russian assets, which they are ready to discuss after a G7 leaders’ summit later in June. Read more.

[Edited by Anna Brunetti/Zoran Radosavljevic]

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