Navigating EU budget reforms: challenges, controversies, and future directions

Navigating EU budget reforms: challenges, controversies, and future directions

Tuesday, 18 June 2024

Funcas Europe

In a recent episode of Funcas’ Future is Blue podcast, we hosted Professor Iain Begg from the London School of Economics and Political Science and Raymond Torres, Director of Funcas Europe, to discuss the European Union (EU) budget and the pressing need for its reform. We covered the historical context, current challenges, and potential future directions for the EU budget.

The podcast episode can be accessed here.

Historical Context and Structure

The EU budget is structured within a Multiannual Financial Framework (MFF), a seven-year plan that sets ceilings for various expenditure categories. This framework has been in place since 1988, providing a long-term perspective on EU spending. The main expenditure categories include cohesion policy, which supports regional development, and the Common Agricultural Policy (CAP), which provides direct payments to farmers.

The EU budget, comparatively small at about 1% of the EU's gross national income, is required to balance each year, unlike national budgets which can run deficits. This constraint, coupled with the fixed expenditure ceilings, contributes to the budget's inflexibility, making it challenging to respond to new circumstances swiftly.

Challenges and Inflexibilities

One significant challenge highlighted by Professor Begg is the difficulty in negotiating changes within the MFF, as seen in the recent midterm review, which resulted in minimal adjustments despite the pressing need for more significant reforms. The creation of the Next Generation EU (NGEU) funds in response to the COVID-19 pandemic marked a pivotal shift, introducing substantial borrowing at the EU level for the first time. This fund, conceived to support economic recovery and invest in green and digital infrastructure, was set up outside the 'conventional' MFF framework and has a different governance framework, precisely because of the inflexibility of the MFF.

Raymond Torres pointed out that while the EU budget has shown some capacity to adapt in crises, such as the pandemic and the subsequent energy crisis, these adjustments are often ad hoc and lack strategic foresight. The need for a more structured approach to EU spending is evident, especially in light of new geopolitical and technological challenges..

Potential Reforms and Future Directions

The discussion also touched on the potential enlargement of the EU, with countries like Ukraine and Moldova expressing interest in joining. This expansion would further strain the existing budget, necessitating reforms to accommodate new member states and their development needs.

One of the contentious points is the CAP, which has historically consumed a large portion of the EU budget. Both of our guests acknowledged the political difficulty of cutting agricultural subsidies due to the strong lobby of farmers and the implications for the single market. However, they suggested that a possible solution could involve a co-financing mechanism where member states contribute alongside the EU, similar to the cohesion policy.

Professor Begg elaborated on the complexities involved in budget negotiations, describing the process as a "trilemma" where member states must balance the overall size of the budget, the allocation of funds to existing priorities, and the need to address new challenges. He emphasized that finding a consensus is difficult because each member state has different priorities and financial capacities.

EU Fiscal Rules and Integration

The new EU fiscal rules, which emphasize national responsibility and expenditure trajectories, were discussed in relation to the budget reform. These rules require heavily indebted countries to take more significant steps towards debt sustainability, focusing on the trajectory of expenditure rather than budget balances alone. This represents a shift in the EU's approach to fiscal discipline, aiming for a more sustainable long-term financial strategy.

Torres argued for the necessity of increasing the EU's own resources, potentially through new revenue sources like green taxes or a share of corporate taxes. Admittedly, this approach faces resistance from member states wary of higher contributions and the complexities of implementing such measures. However, he also highlighted the potential benefits, including greater transparency and a more democratic process for determining EU spending priorities.

Professor Begg noted the challenges of integrating new own resources into the EU budget, explaining that national contributions currently make up the bulk of these resources. He emphasized that deciding on new own resources does not necessarily mean additional EU revenue because the Gross National Income (GNI) resource operates to ensure that revenue equals expenditure. Consequently, if new revenue sources were introduced, all member states would reduce their national contributions accordingly, leading to no net increase in the budget. This highlights the importance of a comprehensive approach to budget reform that addresses both revenue generation and expenditure, as the EU budget is fundamentally driven by expenditure decisions.

The Role of EU Fiscal Capacity

Both guests discussed the need for an EU fiscal capacity to address issues that transcend national borders, such as energy security and defense. This would involve creating a centralized budgetary mechanism capable of financing large-scale projects with significant economies of scale and that individual member states might struggle to support independently. In this regard, Torres warned that the current reliance on state aid exceptions, which allow countries to provide subsidies to local industries, undermines the integrity of the single market and creates disparities between member states.

Professor Begg proposed the idea of an EU fiscal framework that would include borrowing, expenditure, and revenue mechanisms while addressing governance and legitimation issues. This framework would provide a more coordinated approach to fiscal policy at the EU level, ensuring that resources are allocated efficiently and transparently. He emphasized the need for political will to implement such reforms, noting that resistance from member states is a significant barrier to progress.


Innovative solutions are needed for the EU's budgetary challenges. Professor Begg's proposal for an EU fiscal framework offers a potential path forward, combining fiscal discipline with the flexibility to address new challenges. Torres emphasized the importance of avoiding a status quo, which entails a risk of fragmentation. Clear choices are needed among the different alternatives to tackle the global challenges that the EU is facing.

Carlos Carnicero Urabayen


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