Econ_May_05

The Economist

May 5th 2018

Europe 53

PAIN’S recession ended in 2013, but in Extremadura, a scenic,

sparsely populated region in the country’s south-west, you

would be forgiven for not noticing. Last year unemployment

stood at 26.3%, among the highest rates for any region in the

. At

the People’s University, a municipal college in Cáceres, the re-

gion’s second town, a dozenyoungsters studying tourismdeclare

the local situation hopeless; most are resigned to seeking jobs

elsewhere once they get their diplomas. A nearby fast-food joint

offers a lunchtime “Menu Anticrisis” (roast chicken, baguette,

packet ofcrisps and a soft drink). Extremadura’swoes render it, in

the bloodless jargon of the European Union, Spain’s only “less

developed region”.

Youmight think this is a tag politicianswould be keen to shed.

But losing itwouldbe a “disappointment”, saysRosaBalas, the re-

gional government’s head of external action. Why? Because that

classification helped put Extremadura in line for

subsidies

worth €3bn ($3.6bn) between 2014 and 2020. Such “cohesion”

funding, stumped up by other governments, has revolutionised

infrastructure across the poorer parts of the

. (It also helps pay

for those tourism classes in Cáceres.) In some eastern European

countries it makes up the vast bulkofpublic-investment budgets.

The

’s budget has often been a byword for mindless subsi-

dy and unnecessary centralisation. To examine its make-up is to

delve into the grand bargains of European negotiations past. The

Common Agricultural Policy’s subsidies were granted to France

in exchange for opening its markets toWest German goods; Mar-

garet Thatcher, swinging her handbag against the

CAP

, secured a

juicy rebate for Britain, which in turn spawned “rebates on the re-

bate” forother rich countries. All this led towaste, rigidityandun-

bearable complexity. But powerful lobbies and stubborn govern-

mentsmake reformdifficult.

As countries growricher and the

confronts new issues, like

migration and global warming, the shape of its budget is at last

changing. On May 2nd the European Commission proposed a

€1.28trn budget for the seven years from 2021 to 2027. That fired

the starting-gun on painful negotiations between governments

that could last two years or more. Günther Oettinger, the budget

commissioner, acknowledges that his proposal is not revolution-

ary. It contains the usual bungs and barnacles—including €700m

to fund jolly rail holidays for youngsters, even ifthey can afford to

pay. And cross-border infrastructure and energy schemes, which

ought to be central to an

budget, still look like afterthoughts. If

you were building the budget from scratch, you would not de-

vote 60% of spending to farming and cash transfers.

Yet there are tentative signs that the budget is growing up. The

commission urges big increases (albeit from a low base) to re-

search and education, and a small fund to protect investment in

the euro zone during downturns. Muchmore is earmarked for ar-

eas that demand European co-operation, like migration and de-

fence. Such schemes will be funded in part by modest cuts to co-

hesion funding and the

CAP

. To the delight of countries like

Germany, aid to poorer countries will be linked to economic-re-

form efforts. Even the cherished rebates are on the chopping

block, although they will have to be prised from the cold, dead

hands of countries like the Netherlands.

During the last septennial negotiations, in 2012-13, a backdrop

ofausteritydrove the first ever real-terms cut to the

’s budget. A

different cluster of problems will shape the next round of talks.

Brexit will mean a shortfall of around €10bn-12bn a year. The ref-

ugee crisis demands spending on border protection, integration

programmes and development aid, especially in Africa—and a

more nimble budget capable of responding to emergencies. Most

controversially, the commission wants the right to suspend pay-

ments to countries with compromised judiciaries. This is one an-

swer to the rise of soft authoritarianism in Hungary and Poland,

but it will make for bruising talks. “The atmosphere ismore emo-

tional this time,” says one veteran of

budget negotiations.

What does this mean for Extremadura? Cuts to the

CAP

and

cohesion will hurt, but the region has other uses for European

money. At an agricultural-research facility near the Portuguese

border, scientists use

funds for clever schemes that exploit lo-

cal crops, such as a biodegradable lacquer for tin cans created

fromtomato skins. SantiagoOrtega, the centre’s Europeanproject

manager, says

programmes have opened the door to collabo-

rative opportunities with partners across Europe. One took him

to Anfield stadium in Liverpool, where, he says with delight, he

got to pose for a photowith the Champion’s League trophy.

I’malright Günther, keep your hands offmy stack

Mr Oettinger spoke warmly of the

’s “added value” this week.

Not everyone agrees that Brussels manages subsidies more effi-

ciently than national capitals, but its budget is tiny. The commis-

sion’s proposal amounts to 1.11% of

gross national income,

around a fiftieth ofmost average governments’ spending. But this

will be forgotten in the fierce debate to come. Governments

quickly lined up to take potshots at the commission’s proposal.

Most will take the Micawberian approach: the greater their re-

ceipts and the smaller their contributions, the happier they will

be. And althoughBritain’s departure thins the ranks ofthe budget

hawks, those that remain, including the Austrians, Dutch and

Nordics, will fight that much harder to rein in spending.

And that is the rub. Every government must consent to the

budget, a rule that creates incentives for deals that may sand

away the proposal’s harder edges. Past experience proves the

budget’s inertia; change creates losers, and losers mobilise to re-

sist. The European Parliament, a reliable champion for more

spending in good times and bad, must also have its say. So drag-

ging the

’s budget into the 21st century will not be easy. But

there are quiet signs that change is afoot.

Seven-year itch

The EU’s budget is being dragged, kicking and screaming, into the 21st century

Charlemagne

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