The EU's budget: Time to go back to basics

The EU's summit in November descended into a nasty row between EU leaders about the Union's finances. The dilemma member-states face is how to finance enlargement the accession of ten, poorer countries without taking funds away from current EU members or pushing spending above the existing budget ceiling of 1.27 per cent of EU GDP. Heads of government will most probably agree on a messy compromise which involves the gradual redirection of spending towards the new member countries. But if the member-states want to make more efficient use of the EU budget they should consider a much more radical overhaul of the budget.

The EU budget has two fundamental flaws. First, the EU's S100 billion annual budget does not reflect the true costs of EU policies. National administrations bear the costs of implementing and enforcing EU law. Businesses have to pay extra costs because of EU policies. And then European farmers have to spend large amounts of time ploughing through the rules of the common agriculture policy (CAP) time that could be spent more productively elsewhere. The CAP also pushes up EU food prices and thus cuts into the budgets of families from Helsinki to Naples.

Second, the EU budget is not spent well. The basic principle behind the budget is redistribution: the transfer of funds from wealthier European countries to the less well-off member-states. How much Œsolidarity' there should be between EU member-states is a question for politicians. However, the way in which the EU distributes money is peculiar. Rather than simply transferring money from rich countries to poorer ones, the EU channels it through the CAP and the structural and cohesion funds. These policies, however, have or should have objectives other than redistribution.

The structural funds distribute money according to a rather crude regional income threshold. This is roughly in line with the principle of redistribution. But it does not necessarily help regional development. A more effective regional policy would have to be tailored to local needs. It should be left to national and local governments, rather than the EU.

Similarly, the cohesion funds are supposed to both improve the EU's infrastructure and help the poorer member-states at the same time. A large share of the funds is invested in trans-European transport networks. But in terms of creating an efficient transport network, it would be better to spend the funds in regions with high traffic volumes rather than on Europe's periphery. Meanwhile, the CAP has become so complex that it is now difficult to establish its true objectives. Some of the richest member-states, such as Denmark and France, do well out of the CAP. And large, wealthy farms generally benefit more than small, poor ones. The costs, meanwhile, are borne by taxpayers, consumers and farmers in the third world.

The EU needs to decide what it wants to achieve through its common budget. It should stop the rather random transfers between member-states. It should focus spending on financing European public goods, such as the internal market, environmental protection, a common foreign policy or EU-wide internal security. Most importantly, it should sever the link between the redistribution and specific policy objectives such as agriculture and transport. Thus the EU should phase out the CAP and the regional funds and replace them with a 'compensatory fund'.

The member-states would pay money directly into the fund. The fund would then make direct transfers to national governments. The EU institutions would have no role in administering the payments. The donor countries alone should define the criteria on which payments are based, such as the recipient country's level of public debt or investment.

Unlike the CAP and the regional funds, this new budget mechanism would be highly transparent. Any waste would show up quickly. Monitoring costs and inefficiencies would fall drastically. Thousands of European civil servants in Brussels and elsewhere would be available for other tasks. The biggest advantage, however, would be that member-states' access to benefits, such as the internal market or security, would no longer be tied up with haggling about money.