Conflict and Change in EU Budgetary Politics

Johannes Lindner

• Publisher: Routledge
• Year: 2006
• Print ISBN:
  9780415356794
• Edition: 1
• eBook ISBN:
  9781134249725
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

Why did the European Union experience a stark variation in the levels of conflict between the late 1970s, when budgetary disputes dominated European politics, and the 1990s, when political actors were able to settle upon budgetary agreements without major conflicts?

This book responds to this key question with a two-step argument: Its first part shows that decision-making rules can be regarded as a key determinant of the level of conflict in EU budgetary politics. It details far-reaching reform in 1988 reduced conflict, because it introduced an institutional setting for multiannual budget planning that corrected the deficiencies of the original budget treaty. Having identified institutional change as the trigger for the reduction of conflict, the second part of this study focuses on the 1988 reform. It shows how a number of 'reproduction mechanisms' prevented major institutional change in the 1970s and early 1980s. When these 'reproduction mechanisms' lost force, a reform became possible and a new institutional setting emerged in 1988.

These findings deliver a sharp insight into the interplay between rules and conflict in the still evolving political system of the EU. Moreover, by identifying precise conditions for the occurrence of institutional change, and by linking political performance of institutions to their stability this is a significant contribution to institutionalist research in social science.

This book is an excellent resource for students and scholars of the European Union, Political Science, International Relations, Public Policy and Public Finance.

1 Introduction

An institutionalist perspective on conflict and change in EU budgetary politics

Conflicts over ‘who gets what and why?’ and ‘who pays?’ have been at the heart of political developments for centuries and the trigger for fundamental institutional changes. The American Revolution was fought over the right to determine the level of taxation and over the ability to allocate the collected funds (‘no taxation without representation’). In Europe, modern parliamentary democracy emerged from the continuous struggle between King and Parliament over the power to raise taxes and to determine the size and composition of the budget. Medieval kingdoms developed into potent nation states as they gradually centralised fiscal authority. Budgets provide the arena for conflicts over political priorities and the struggle for the power to govern the country.

In the European integration process, conflict over the budget in the 1970s and 1980s produced some of the most intense clashes among member states and between European parliamentarians and national ministers, seriously challenging the operation of European institutions. New member states, such as Great Britain, fought vigorously against the established distributive order and branded it as ‘demonstrably unjust’ (Margaret Thatcher 1979). Moreover, the European Parliament used its (new) budgetary powers to challenge the dominant position of national governments in European decision-making. Year after year, Parliament and Council failed to agree on budgets and fought over the power to determine European expenditure. Summit after summit, the European Council argued about British demands for a rebate and over the future of the Community’s finances, culminating in a near collapse of the Community by the mid-1980s.

By the late 1980s, however, budgetary conflict seemed an issue of the past, and subsequent discussions over the Community budgetary have proceeded in a structured and orderly manner. Although distributive disputes still occur, they no longer challenge the ability of the Union to adopt annual budgets and to rely on a broad consensus over the distributive order of the European Union. This sudden disappearance of high levels of conflict in EU budgetary politics is unique for a political system with so many different and competing interests. It poses an interesting empirical puzzle that is still unresolved.

This book explains why the European Union (EU)¹ experienced such a stark variation in the level of conflict between the late 1970s, when budgetary disputes dominated European politics, and the 1990s, at which point actors were able to settle budgetary agreements peacefully. I argue that high levels of conflict in the 1970s and 1980s resulted primarily from the problematic institutional design of the 1970 budget treaty, which gave the Community its ‘own-resources’ and a largely supranational budgetary decision-making procedure. The key shortcomings of the new treaty provisions pertained to the exclusion of distributive and institutional interests of new member states and of the European Parliament (EP), and the scope of interpretation that allowed these actors to challenge dominant interpretations of the treaty provisions. Addressing these problems, a far-reaching reform in 1988 significantly reduced levels of conflict. It supplemented the treaty provisions with an institutional framework for multi-annual budget plans and clear rules for the budgetary procedure. The two pillars of this reform, the financial perspective and the interinstitutional agreement, were successfully renewed twice – in 1992/93 and 1999. Having identified institutional change as the trigger for reducing conflict, I will put particular emphasis on the 1988 reform. The bargaining power of the six member states that enacted the 1970 treaty, the institutional interdependence between subfields of budgetary politics, and the high switching costs (relative to the opportunity costs) prevented major institutional change in the 1970s and early 1980s. When these ‘reproduction mechanisms’ lost force, a reform became possible and a new institutional setting emerged in 1988.

This book therefore reveals a fascinating story of conflict and change. Budgetary conflict is primarily fought over distributive outcomes. It takes place within rules that structure the decision-making process. One of the key functions of rules is to manage and contain conflict. In failing to do so, they can themselves become an important source of conflict. For example, negotiations over how to distribute public finances get intertwined with debates over whose right it is to take these decisions and what kind of voting rule should apply. In this case, rules are not accepted as given, but heavily contested. Conflict within rules turns into conflict over rules and can eventually lead to institutional change. The mechanism of how distributive conflict may trigger institutional change depends to some extent on the functionality of the existing rules. Moreover, institutional change may often occur in culmination points, such as the 1988 reform. However, as this book shows, an explanation of institutional change that assumes that change occurs when rules fail to contain conflict and that focuses exclusively on key culmination points is too narrow. The book contends that in order to explain the occurrence of institutional change a thorough analysis of the preceding period of institutional stability is important. Such an analysis is likely to reveal that institutions are often ‘sticky’ and the timing and shape of institutional developments are not merely determined by the degree to which the existing institutional framework ensures an ordered decision-making process.

In this introduction, I will first sketch the empirical setting in which my story of conflict and change is told. In the following three sections, I will introduce the particular focus, the analytical tools and the data sources of the book. Finally, the outline of the book is presented.

The setting

EU budgetary politics

EU budgetary politics is a small but horizontal policy field that is interlinked with other policy fields. It is placed in a complex and evolving political system. I will briefly introduce the main features of EU budgetary politics and explain why – in my view – it is an interesting empirical field for research.

Given that welfare state policies still remain national competencies, the EU budget is not the key layer of budgetary activities in the European Union. Although it has increased significantly over the last 40 years, the budget accounts for only around 1 per cent of the EU’s gross national income (GNI)² (see Figure 1.1; also Appendix No. 1: The EU budget in figures). Four-fifths of the budget is spent on two specific policy areas with a strong redistributive bent, namely agricultural and regional policies. On the revenue side, the EU budget was given its ‘own-resources’ in the 1970 budget treaty. These sources of revenue encompassed customs duties, agricultural levies and a uniform percentage rate of the VAT assessment base. The institutional overhaul of the budgetary procedure in 1988 brought the introduction of an additional ‘fourth resource’ which is calculated on the basis of member states’ GNI in market prices and accounts in the meantime for two-thirds of the EU’s revenue. The EU is obliged to keep the expenditure within the limits of the existing revenue as the treaty prohibits the adoption of a budget with a deficit. The 1970 budget treaty introduced the treaty provisions for the annual budgetary procedure which, in principle, are still in place.³ They were updated only once: the 1975 budget treaty introduced a number of minor revisions. Figure 1.2 illustrates the different steps of the budgetary procedure. It distinguishes between compulsory and non-compulsory expenditure: compulsory expenditure covers all spending that follows directly from treaty obligations (mainly agricultural spending), while non-compulsory expenditure encompasses the rest (in particular regional policy spending). Decision-making for both types of expenditure proceeds simultaneously but follows two different procedures. The Council can overrule parliamentary modifications for compulsory expenditure, but has to accept parliamentary amendments to non-compulsory expenditure. Yet, non-compulsory expenditure has to stay within a maximum rate of increase, which limits the extent to which Parliament can exceed the previous year’s amount of non-compulsory expenditure.⁴ The Commission calculates the maximum rate at the beginning of the year on the basis of indicators given in the treaty, i.e. the evolution of the EU’s GNI, the average variation in the budgets of the member states, and the evolution of the inflation in the EU. The two arms of the budgetary authority, namely the Council and the Parliament, can alter the maximum rate of increase with a joint decision.

The treaty sets clear deadlines for the different stages of the budgetary procedure, limiting them to the time from 1 September to 31 December. In practice, however, a ‘pragmatic’ timetable has been applied by the three institutions since 1977:

• The Commission submits its preliminary draft budget (PDB) by no later than 15 June.
• The Council establishes the draft budget in its first reading before 31 July.
• The EP holds its first reading in October.
• The Council conducts its second reading during the third week in November.
• The EP finally adopts the budget at its second reading in December.

Figure 1.1 Overview of the development of expenditure at current prices in millions of Euros. Source: European Commission (2003): Financial Report 2002.

When the Council and the EP fail to adopt an annual budget, the Commission enacts the system of provisional twelfths at the beginning of the financial year: EU spending is then limited per month to the one-twelfth of the previous year’s budget.

Since 1988, annual budgetary decision-making has been supplanted by an institutional framework for multi-annual budget planning. The two pillars of the framework are the financial perspective and an interinstitutional agreement. The financial perspective is a multi-annual budget plan for originally five and now seven years which lays down the maximum amounts of both total annual expenditure and annual expenditure on specific policy headings. It also ensures a balance

Figure 1.2 Overview of the annual budgetary procedure.

between the annual expenditure amounts and the overall revenue ceiling. The financial perspective is negotiated within the Council and adopted by Heads of State or Government. An institutional agreement between the Council, the EP and the Commission subsequently translates the financial perspective into a binding structure for annual budgets. In the negotiations over the interinstitutional agreement, the Commission and in particular the EP have the opportunity to demand concessions for accepting the financial perspective as adopted by the Heads of State or Government. These concessions take either the form of budgetary revisions of the financial perspective or they are institutional adjustments to the practice of annual budgetary decision-making. As a result, the financial perspective and the institutional agreement, which were renewed in 1992/3 and 1999, have radically altered the annual procedure without changing the rules of the treaty. In fact, they do not even have the status of enforceable law (Monar 1994). Except for the decisions on the revenue ceilings, their binding character stems chiefly from the political willingness of actors to adhere to the jointly agreed institutional and distributive framework.

Against the background of this brief sketch of the EU budgetary politics, the question arises: why is a focus on budgetary politics relevant to the study of the EU? In essence, I would argue there are four reasons.

First, the EU budget is – although limited in size – of high political importance. Key for the political importance of the EU budget is the fact that the EU spends most of its budget on the Common Agricultural Policy (CAP) and, since the late 1980s, also on Structural Funds. Hence, the budget is highly concentrated on two groups of recipients: farmers and less developed regions. Budgetary decisions, therefore, have a decisive impact on these two groups. In the case of farmers, the recipients are well organised and fiercely defend their distributive interests. They have political power far beyond their numerical strength and the potential to dominate the European agenda.

Moreover, the relationship between national contributions to the EU budget and gains from it plays an important role within the national discourse over the costs and benefits of EU membership. This is particularly true for countries, the so-called net-contributors, which contribute more than they gain (Appendix No. 3 on net-contributions). The visibility of budgetary figures gives the net-contributions a high symbolic value that goes far beyond their actual financial importance. Finally, the EU budget facilitates the progress of integration in other policy areas. Member states achieve unanimous decisions on new integration projects by financially compensating potential losers in the integration process. Without the possibility of side payments through the budget, a consensus on a deepening of European integration would be difficult to achieve, as the treaty revisions of the Single European Act and Maastricht amply demonstrated. Member states that fear the possible costs of further integration would be able to block any progress.⁵

Third, negotiations over the EU budget are linked to the question of what kind of Europe is evolving from European integration. Is it a political system that is oriented mainly towards providing a regulatory framework for a single market with the budget simply as the source for side-payments to facilitate integration; or is it a political community that regards equity and solidarity also as tasks and objectives of the European level?

Yet, beyond the direct political relevance of EU budget budgetary decision-making provides – as a fourth reason – a particularly telling case to examine a key characteristic of European integration: the necessity to balance national sovereignty with supranational authority and the tensions resulting from it. The 1970 budget treaty introduced a decision-making procedure that combined intergovernmental and supranational elements in a unique manner. On the revenue side, decision-making is exclusively intergovernmental. Council decisions, unanimously adopted and ratified by national parliaments, determine the general structure and the upper limit of the revenue. Yet, the exact amount of revenue follows from the level of the annual budget, which is determined by the supranational procedure for the expenditure side. Moreover, the so-called ‘own-resources’ underline their nominally supranational character.

This combination of intergovernmental and supranational elements in the 1970 budget treaty resulted from the needs and demands of the integration process. Money is a political issue t...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures and Tables
• Acknowledgements
• Abbreviations
• 1 Introduction
• Part I Variation in the level of conflict in EU budgetary politics
• Part II1 Institutional change in EU budgetary politics
• 12 Conclusions
• Appendix No. 1
• Appendix No. 2
• Appendix No. 3
• Notes
• Bibliography