A French finance ministry has told that both France and Germany have agreed on and will lay out plans for a new budget for the eurozone ahead of a trip by Emmanuel Macron to Berlin on Sunday. The annual European Union budget is a large sum in absolute terms, but only about 1 per cent of the…
A French finance ministry official has shared that both France and Germany have agreed on and will lay out plans for a new budget for the eurozone ahead of a trip by Emmanuel Macron to Berlin on Sunday.
Background
The annual European Union budget is a large sum in absolute terms, but only about 1 per cent of the wealth generated by EU economies every year. The budget is used in areas where it makes sense to pool resources for the good of Europe such as improving transport, energy and communications links between EU countries; protecting the environment; making the European economy more competitive and helping European scientists and researchers join forces across borders.
The budget is also used for meeting administrative expenses like those of the parliament, the executive branch, and the judiciary distinct from those of the member states. They administer the application of treaties, laws and agreements between the member states and their expenditure on common policies throughout the Union. According to the European Commission, 6 per cent of spending is on administration, compared with 94 per cent on policies.
The annual budget is decided democratically, where the European Commission first proposes the budget. This is followed by the national governments (acting through the EU Council), and the elected European Parliament who have to then approve the proposal. The EU obtains its resources from 4 primary sources namely, through its own sources comprising of customs duties, sugar levies; VAT- and GNI based resources.
Analysis
France and Germany have agreed on the broad outlines of a proposed eurozone budget which they will present to EU finance ministers in Brussels on Monday, a French finance ministry source said.
French Finance Minister Bruno Le Maire and Germany’s minister, Olaf Scholz, will “jointly present a proposition on Monday… about the layout for a budget for the eurozone,” the ministry source told AFP.
According to the proposal, the budget would be part of the EU budget structure and governed by the 19-euro members. “The eurozone budget would foster convergence and incentivise reform implementation in particular by co-financing growth-enhancing public expenditures such as investments, research and development, innovation and human capital,” the proposal says.
The French have also proposed that countries could pay into a pool of money from which they could take out bridge loans during recessions to keep up investment spending. The European Commission, on the other hand, has proposed that it would draw on funds from the EU budget. It would be worth 30 billion euros ($34 billion). The German Finance Ministry has also proposed to set up a reinsurance fund for member countries’ unemployment insurance.
Both France and Germany had agreed in June in the ‘Meseberg’ declaration to engage in a joint Eurozone-only budget to ensure closer eurozone integration. The declaration also included an agreement to get on with putting in place a financial backstop for the currency bloc’s Banking Union. “There’s agreement with the Germans to say we need a budget for investment and competitiveness spending,” one Finance Ministry source said.
The French president, Emmanuel Macron had been seeking for this far-reaching vision for the future of EU integration since his speech at Sorbonne university last September. Many analysts believe that the very fact that the German leader has accepted the idea of a common pool of money dedicated to the monetary union, is a strong symbolic breakthrough.
Counterpoint
Though the proposal has been published, the joint paper does not specify the size of the budget. It says it will be financed by contributions from eurozone member states.
Despite having specific resources for the single currency, Mr Macron’s drive to push forward integration has been resisted by hawkish creditor countries. Some of these countries include the Netherlands and Finland who are pushing for more national responsibility for economic management.
Assessment
Our assessment is that the proposed budget will help eurozone countries in economic downturns and make them more resilient to crises. However, we believe that due to the present ambiguity of the size of the budget it would face specific resistance. We also understand that the current Brexit situation will have a direct bearing on the eurozone and will impact any futuristic planning. We also believe that many eurozone members will realise that financing of the budget will have to be done more by fiscal transfers.
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