Friday, February 08, 2013

Europe’s Fiscal cliff? Hardly.

MEPs - or at least some of them - aren't exactly doing themselves any favours at the moment.

European Parliament President Martin Schulz has been waxing lyrical about how devastating a cut in the EU budget would be.
"We want a modern EU budget…As far as we can tell, however, the proposal on the table today would be something very different, namely the most backward-looking financial framework in the history of the EU."

“I won’t sign a deficit budget…Europe, like the U.S. a few weeks ago, is heading for a fiscal cliff.”
Wait. What? Did he just compare a real terms cut in the EU budget to the US Fiscal cliff?

Frankly, this a ridiculous comparison. As Schulz-types themselves are keen to point out, the EU budget amounts to around 1% of EU GNI while the US Federal Budget amounts to around 15% - 20% of US GDP (and has historically been even higher than that).

The fiscal cliff would have amounted to tax rises and spending cuts worth almost $600bn. The current proposal sees EU budget commitments falling by €34bn in real terms (increasing in nominal terms). This is 0.3% of EU 2011 GNI. The US fiscal cliff could potentially have caused US GDP to fall by 4% - 5% in a short space of time; the cut in the EU budget will barely register, especially in comparison to the other problems in the European economy.

The EU budget has important implications for the politics of the EU and can provide some useful funding in certain areas (which it often fails to do by spending so much on the CAP) but will this type of stuff make taxpayers around Europe take Schulz more seriously?


Anonymous said...

This blog misses the point. The EU budget is already carrying more than €200 billion in outstanding commitments. This means commitments (legal obligations) have been engaged but they have not yet been paid. In effect, this means the EU budget is already €200 billion in debt right now from the 2007-13 programming period. By setting payment appropriations excessively low for the period 2014-2020, there is a very real risk that very soon the commitments due in a given year (the legal obligations that must be paid in that year) will exceed the payments that can be made under the MFF ceiling for that year. That is the "cliff" that is being spoken about. In effect, the EU would be unable to pay its legal obligations and would default. Is this not a serious issue? The relationship between commitments and payments in the EU budget is complex, but "serious" commentators could make at least a little effort to understand it rather than sending out overly-simplistic messages.

Open Europe blog team said...

Thanks for the comment.

This is precisely the point we make in numerous posts see:

Obviously commitments need to be paid out at some point (although some of the difference may not materialise due to cancelled projects etc). We have discussed this at length in several briefings and blog posts. This should be incorporated into the payments for the new budget (and within the respective political requirements of keeping the headline figure down) – i.e. it should encourage the EU to spend its money more effectively and selectively since this is clearly what national governments – and in particular those who actually pay the EU bills - want.

Furthermore, even if the gap is “€200bn” (please do send a source over as it is an interesting figure….) that is still only 0.0016% of the 2011 EU GNI. Is this anywhere near on the same level as the US fiscal cliff which could have had an impact on the global economy? We would suggest not. It is an important and a technical issue which the EU should take note of. That said, “serious” politicians should try to communicate the issues to people in the correct manner rather than engaging in oversimplifications and wild inaccurate comparisons.

Rik said...

You mean they are as irresponsible as the US Congres running into commitments while the funding therefor is simply not there.

Anonymous said...

The US federal budget has been running at about 24% of GDP in recent years and has only been this high as a percent of GDP on one occasion post WWII

Rik said...

@Anonymus 8:49
And your point is?
That the EU should also go for a new world record (next to national taxes that are already substantially higher than in the US)?

Igahu said...

Hmm, do you want to check your calculation here?

34bn = 0.0003% of 2011 GNI?
That implies GNI is 11,300,000,000,000,000 or 11.3 million billion euros

IMF stats suggest EU GNI of 12,650 bn.
That would make 34bn about 0.3%...

Anonymous said...

My point was that the 15-20% reference in the post was wrong.

Rik said...

Depends in which timeframe you look at it. Obama is even making Hollande and Bush to shame. More structural it should be in the very high 10s.
Unless Obama can make a real welfarestae out of the US which seems very unlikely. Everybody with a brain in the US already has enough of him. In Europe that is different I know, but that is Europe and they cannot vote.