Feb. 12 (Bloomberg) -- The seven-year budget plan announced by the European Union’s governments last week came as a diplomatic win for U.K. Prime Minister David Cameron, for which he has been showered with praise at home. As that surprise wears off, the deal serves mainly as a depressing reminder of the EU’s skewed priorities.
EU leaders agreed to cap spending commitments at 960 billion euros ($1.3 trillion) from 2014 to 2020. That’s a cut from the previous seven-year budget, to 1 percent of the EU’s economic output from 1.12 percent -- the first reduction in the bloc’s history. It is also peanuts. Europe’s national governments typically spend 40 to 50 times more as a share of their respective economies.
Reducing the fiscal impact further is the EU’s lack of budget deficits or surpluses: Revenue always matches spending.
Governments worked on the deal for 18 months and needed a 25-hour closing session to wrap things up. The European Parliament now has to approve the budget and is sounding mutinous. Don’t let the theatrics mislead you, though: The macroeconomic implications are virtually zero.
Much more was at stake in diplomatic and symbolic terms. Cameron recently stirred complaints in Europe by calling for structural changes to the EU that would protect the U.K. from unwanted political integration, and allow it to renege on existing EU rules that it doesn’t like. He threatened the U.K.’s withdrawal from the union if he doesn’t get what he needs. Critics at home and abroad said this stance would cost the U.K. influence, and that Cameron had made himself irrelevant in EU policy making.
Not so -- or at least, not so long as Germany’s austerity chancellor, Angela Merkel, happens to want the same outcome as Cameron. The U.K. formed a successful alliance with Germany and other northern European countries in arguing that the EU’s budget shouldn’t grow when national budgets were being cut. The agreed figure was more than Cameron or Merkel had called for, but was still a reduction of more than 3 percent in inflation-adjusted terms, and significantly less than the 5 percent increase that the European Commission first proposed. Cameron also preserved the hallowed rebate of British contributions to EU revenue, a concession negotiated by Margaret Thatcher in 1984.
In this case, obstinacy didn’t weaken the U.K.’s hand. The evident displeasure of the French government only sweetened Cameron’s win. Yet viewed dispassionately, rather than through the lens of these traditional quarrels, the new EU budget gives little cause for celebration.
The agreement continues to reduce spending on Europe’s notoriously wasteful Common Agricultural Policy -- an elaborate system of controls and payments -- but not by enough. Farm subsidies and rural-development spending will continue to take up more of the EU’s budget than any other area for the coming years, with 39 percent of the total. French President Francois Hollande even managed last week to add some money for rural development, the price of his agreement.
At the same time, the European Commission’s proposed increases to funding for some of the growth-oriented, transnational areas where the EU should do more -- such as building cross-border energy and transport links, and boosting research and development -- were reduced. Spending to help develop the EU’s poorest regions, which Europe also ought to support with increased outlays, was cut in absolute terms. The budget for administration, on the other hand, was enlarged.
Real budget reform would have attacked farm subsidies more forcefully and used the savings, and then some, to accelerate EU-wide economic integration by building new infrastructure. Europe’s current economic travails are worsened by the huge disparities between the bloc’s most successful countries and those that are less well-off. Narrowing those gaps requires, among other things, additional investment to link Europe’s nations together.
Successive rounds of budgeting have so far failed to get the EU’s fiscal priorities right. There may soon be another chance, when the European Parliament votes on the new plan later this year. Regrettably, the main political factions in parliament appear to be focused on the overall size of the budget. They see the proposed cut in spending as a precedent-setting attack on ambitions for the EU -- the same reason that euro-skeptic rebels in Cameron’s Conservative Party are so pleased with the deal.
Our advice to members of the EU Parliament is this: Worry less about reversing the overall cut and instead shift resources to where they can stimulate trade, growth and high-value job creation.
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