Rethinking EU Budget Talks: A Game of 27-Dimensional Chess

Budget negotiations within the European Union (EU) resemble a complex game of 27-dimensional chess, where each member state plays simultaneously against one another. As the EU gears up for its next budgetary contest, set to commence next year, the stakes are higher than ever. The geopolitical landscape has shifted dramatically, influenced by the ongoing war in Ukraine, a challenging relationship with China, and the urgent need to address climate change. These factors have prompted calls for what Mario Draghi, former president of the European Central Bank and Italian prime minister, has termed “radical change.” However, the bloc’s largest contributors, notably Germany and the Netherlands, are likely to resist increasing their financial commitments, necessitating cuts in other areas to fund new initiatives in climate action and defense.

The Financial Landscape: Where Will the Money Come From?

The EU’s budget is primarily supported by two significant funding sources: agricultural subsidies and regional redistribution funds. Over the last seven-year budget cycle, agricultural subsidies received approximately €380 billion ($410 billion), accounting for a third of the EU’s regular budget. Meanwhile, regional development funds were allocated around €390 billion. Both funding streams are considered foundational to the European project, designed to support rural economies and promote regional development.

Agricultural subsidies aim to compensate farmers for the EU’s open trade policies, which could otherwise lead to higher prices for consumers. Similarly, regional development funds are intended to enhance the EU’s single market by supporting regions with successful clusters of firms. As Jacques Delors, a former president of the European Commission, articulated, the goal is to create “a Europe built on competition that stimulates, cooperation that strengthens, and solidarity that unites.”

Time for a Rethink: The True Beneficiaries of EU Subsidies

Despite their noble intentions, it may be time to reassess these funding mechanisms. At first glance, altering policies that benefit farmers and economically disadvantaged regions may seem harsh. However, a closer examination reveals that the true beneficiaries of EU subsidies are often less deserving than intended.

Agricultural Subsidies: A Windfall for Landowners

Economists have long recognized that agricultural subsidies disproportionately benefit landowners rather than farmers or agricultural laborers. Historical analyses, such as those conducted regarding the protectionist Corn Laws in the 19th century, indicate that such policies primarily enrich landed proprietors. When subsidies increase agricultural profitability, farmers often bid up the price of land, ultimately benefiting landowners.

Recent research by Edoardo Baldoni and Pavel Ciaian from the European Commission’s Joint Research Centre quantifies this phenomenon, revealing that over 20% of European agricultural subsidies end up in the pockets of landowners. This figure could be even higher in more competitive land markets. In regions with fewer large farms, small landowners struggle to find tenants, leading to lower rental rates. Additionally, collusion among farmers to keep land prices low further exacerbates the issue. As the EU shifts towards green energy initiatives, landowners may see their fortunes rise even further, as seen in Germany’s past subsidies for biogas, which significantly increased land rental prices.

Regional Development Funds: Inequality in Disguise

The rationale behind regional development funds is straightforward: funneling cash to poorer areas of the EU should stimulate economic growth and reduce inequality. However, recent studies challenge this assumption. Research conducted by Valentin Lang, Nils Redeker, and Daniel Bischof indicates that the EU’s regional definitions are too broad and diverse to effectively guide funding. Their analysis of household survey data from 1989 to 2017 reveals that inequality within regions is far more pronounced than disparities between them.

Moreover, the findings suggest that EU regional policies often benefit wealthier households in poorer regions more than their less fortunate counterparts. By comparing regions that barely met eligibility criteria with those that narrowly missed out, the researchers found that while funding does promote regional growth, it fails to uplift the poorest households. Instead, wealthier households see their incomes grow at a faster rate, as EU funds tend to support larger, more skilled job sectors, exacerbating within-region inequality.

The Challenge Ahead: Resistance to Change

Any attempt to reform agricultural or regional funding will likely encounter fierce resistance, including protests from farmers and other stakeholders. Both funding schemes have numerous beneficiaries and are seen as integral to the EU’s identity. However, the changing global landscape necessitates a bold reevaluation of these policies.

As the EU faces unprecedented challenges, it must adapt to meet the demands of a new era. The time has come for a transformative approach to budget negotiations, one that prioritizes effective allocation of resources and addresses the pressing issues of climate change and defense.

In conclusion, as the EU prepares for its next budgetary battle, it must navigate the complexities of its financial landscape with a keen eye on equity and effectiveness. The stakes are high, and the need for change has never been more urgent. The EU’s future depends on its ability to rethink its funding mechanisms and ensure that its resources are directed toward those who truly need them.

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