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NVESTING WHERE IT MATTERS

EU B

UDGET FOR

ONG

-T

ERM

ROWTH

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NVESTING WHERE IT MATTERS

EU B

UDGET FOR

ONG

-T

ERM

ROWTH

CEPS T

ASK

ORCE

EPORT

HAIR

Daniel Tarschys

Professor Emeritus in Political Science and Public

Administration, Stockholm University and Chairman

of the Board of the Bank of Sweden Tercentenary

Foundation

Jorge Núñez Ferrer

Associate Research Fellow, CEPS

APPORTEUR

ENTRE FOR

UROPEAN

OLICY

TUDIES

RUSSELS

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This report is based on discussions in the CEPS Task Force on Aligning the

EU Budget with the Europe 2020 Objectives. The group met six times over a

concentrated period from May to December 2011. The participants

included senior executives from a broad range of stakeholders, such as

business and industry, business associations, academic experts, EU officials

and members of the European Parliament. A full list of members and

invited guests and speakers appears in Appendix 2.

The members of the Task Force engaged in extensive debates over the

course of several meetings and submitted comments on earlier drafts of this

report. Its contents reflect the general tone and direction of the discussion,

but its recommendations do not necessarily represent a full common

position agreed by all members of the Task Force, nor do they necessarily

represent the views of the institutions to which the members belong.

CEPS gratefully acknowledges the financial support received for this

Task Force from the Confederation of Danish Industry (DI) and the Central

Organisation of Industrial Employees in Denmark (CO-i).

ISBN 978-94-6138-159-0

retrieval system or transmitted in any form or by any means – electronic, mechanical,

photocopying, recording or otherwise – without the prior permission of the Centre

for European Policy Studies.

Centre for European Policy Studies

Place du Congrès 1, B-1000 Brussels

Tel: (32.2) 229.39.11 Fax: (32.2) 219.41.51

E-mail:

[email protected]

Website:

http://www.ceps.eu

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ONTENTS

Preface .......................................................................................................................i

Executive Summary ............................................................................................... 1

Introduction............................................................................................................. 5

1. The EU budget should be a long-term investment tool .............................. 8

2. Investing in the future of Europe and the single market ........................... 14

2.1 Investing for excellence in research and innovation ..........................15

2.1.1 Reasons for public and specifically EU support in the area

of RDI ..............................................................................................17

2.1.2 Bringing research from concept to market ................................18

2.1.3 Investing to achieve the climate and energy objectives:

The SET Plan ..................................................................................20

2.2 Investing in innovation as a fundamental priority of the structural

funds ..........................................................................................................22

2.2.1 Funding level and distribution of funds ....................................27

2.2.2 INTERREG – Underfunded and neglected ................................29

2.2.3 Earmarking .....................................................................................29

2.3 Investing through the Connecting Europe Facility.............................30

2.3.1 Funding level and distribution of funds ....................................33

2.3.2 Using project bonds to develop core infrastructure .................34

2.4 Investing in Europe’s human and social capital, and in

employability ...........................................................................................36

3. The European added value of public goods and the efficiency of

expenditures ..................................................................................................... 38

3.1 A focus on European public goods in agriculture and rural

development .............................................................................................38

3.2 Sustainable investment: Environmental and resource efficiency .....40

4. Knowledge-based governance and institutional support ......................... 43

5. Conclusions ...................................................................................................... 47

References .............................................................................................................. 49

Appendix 1. Glossary of Technical Terms ........................................................ 52

Appendix 2. Task Force Members and Invited Guests and Speakers........... 53

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REFACE

ne percent of our common GDP? 1.05%? 0.95%? Once again, the

member states are locked in an unrelenting and sterile battle about the

size of the EU budget.

They are barking up the wrong tree. The amount is not decisive.

When it comes to EU spending, quality matters far more than quantity.

And it is on the quality side that we can make the most significant

improvements.

The weaknesses of the Union have been brutally revealed by the

financial crisis. Within a few months, Europe has lost assets considerably

exceeding the costs for the EU budget over a full seven-year cycle. In spite

of its unquestionable achievements over the last few decades, the ground is

shaking under the entire European project.

The four freedoms and a host of accompanying regulations and

practices have set the scene for unprecedented economic and social

development in Europe. The historical cleavages of the continent are being

overcome through the accession of the new member states and evolving

relations with the new neighbours. Centuries of parochialism are at last

giving way to widening horizons.

The Task Force set out to examine how the next multi-annual

financial framework of the EU could become more growth-oriented. We

found this to be entirely in line with the expressed intentions of the

European Commission, but less so with its actual proposals.

In the course of our inquiries and deliberations, we noted that the

role of the EU budget in stimulating growth is principally indirect. Some

investments in infrastructure, research and innovation promise lasting

returns, but many expenditures have only short-term and transient effects.

Such success indicators as ‘jobs created’ or ‘jobs maintained’ testify to a

myopic vision in several areas of EU policy.

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ii | P

REFACE

For enduring results, we should identify investments with a long-

term impact and a clear European dimension. The strongest generators of

economic expansion are probably found in the regulatory sphere.

Important engines for this development are the internal market, the

monetary union and the growing mobility of skills and knowledge.

In stimulating lasting growth, EU rules matter more than EU

expenditures. But the budget has an important role in promoting the many

processes needed to secure this positive influence. Institutional support is

crucial for future success. A knowledge-based economy needs knowledge-

based governance. The elaboration, implementation and refinement of the

regulatory framework require considerable investment in policy analysis,

policy evaluation and policy learning.

Daniel Tarschys

Chairman of the CEPS Task Force

Professor Emeritus in Political Science and Public Administration

Stockholm University and Chairman of the Board of the

Bank of Sweden Tercentenary Foundation

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XECUTIVE

UMMARY

istorically, large parts of the EU budget have been devoted to

redistributive measures purporting to build and sustain support

for European integration. With the challenges now facing the

European Union, more weight must be given to allocative efficiency and

investments in European common goods. This report describes how the

budget could be adapted to promote long-term growth and identifies the

expenditures that are most conducive to this end. These are in particular

expenditures that develop the single market and support research and

innovation.

The European Commission recently unveiled its proposals for the

next multi-annual financial framework (MFF) for the period 2014 to 2020.

The proposals do not radically change the structure of the EU budget, but

make a serious attempt to improve the quality of strategic planning and the

implementation of the policies, aligning the expenditures with the Europe

2020 objectives. The documents have been released at a delicate moment at

one of the worst points of the financial crisis, which has induced severe

austerity measures across the EU to cut budget deficits.

The Commission’s Communication skilfully balances the need to

address new and pressing EU objectives and the demands for funding

increases with a freeze in expenditures.

The document seems to square the

circle of limiting expenditure to 2013 levels while increasing it, at least

theoretically, to the levels sought by the European Parliament if one

combines the provisions for special budgetary lines now outside the MFF.

European Commission, Communication on a Budget for Europe 2020, COM(2011)

500 final, Part I, Brussels, 29 June 2011(a).

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XECUTIVE

UMMARY

Presentational skills, however, are not what Europe needs from the

EU budget, but rather a real overhaul of how it is managed and what the

expenditures are used for. The EU budget has substantial untapped and

poorly understood potential as a long-term investment tool at the European

level. The proposals do show important steps forward, demonstrating the

Commission’s willingness to press for a budget centred on areas that

matter to long-term economic growth, putting the accents in the right

places in many of its proposals. Yet the proposals fall short of abolishing

existing measures of low European added value.

Nevertheless, the Commission has published proposals that offer

fertile grounds for negotiation. The budget is now under discussion in the

Council and European Parliament. While the Parliament aligns itself

closely with the Commission’s proposals, the discussions in the Council are

still not based on policy considerations, but rather on the budget size and

distribution. Driven by the present economic climate and the desire to

reduce budget deficits at the national level, a number of member states are

focusing on cutting the budget.

The Commission is also proposing a complex set of strategy and

oversight reforms, to rectify what many member states and the Court of

Auditors have complained about over the years. But even in this regard

serious discussions are not yet taking place.

Unfortunately, the politically most expedient cuts are those in the

areas of highest added value and highest growth returns to the EU. These

correspond to areas that in theory are recognised by the net contributors as

being vital to Europe’s future. Thus, member states should not treat the

budget as a mere cost, but as an investment opportunity. It is time that

member states discuss seriously the quality of EU expenditures and take

very careful decisions on any ‘austerity cuts’.

The EU budget is an essential instrument for Europe and it is

important to remember the reasons for such a financial mechanism:

•

The functioning and sustainability of the internal market requires a system

of targeted budgetary transfers

at the EU level owing to the uneven

distribution of benefits across countries and regions of integration.

In the areas of

research and innovation,

crucial for Europe’s future

competitiveness, there are

important economies of scale

that can be

fostered by the budget.

•

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BUDGET FOR LONG

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•

Without the EU budget many objectives of the EU cannot be achieved

and

poorer member states will not be able to comply with all of the

obligations of the

acquis.

The EU budget has a very important role in steering policies and leveraging

funding

from the private and public sectors.

•

Key recommendations

In the negotiations on the multi-annual financial framework, the member

states need to

focus on the long-term impacts, the European added value and the

efficiency and effectiveness of the EU budget.

Expenditures should be geared

towards

investing in long-term growth, the development of the internal market,

European public goods and financing important EU objectives.

There is a strong consensus among the Task Force members that the

EU budget has a key role to play in the development of the internal market and

thus long-term growth in the EU.

The Task Force considers that it is of paramount importance that the

emphasis on

research and innovation is protected and reinforced.

Cuts to the EU

budget cannot be undertaken in areas that will undermine Europe’s

capacity to compete globally and generate growth and jobs. No

compromise can be acceptable in these areas. In practice, this means that:

•

Funding for research and development under the Horizon 2020 programme

should not be reduced.

Funding to support the Strategic Energy Technology Plan, which will

fundamentally change Europe’s way of using energy and therefore Europe’s

economy, should be increased.

The EU’s share of funding in the energy

sector is highly important and significant.

The European Commission’s proposals on the governance of the cohesion

policy should be supported.

The coherence among strategies for different

funds has to be reinforced, including with member states’ own

programmes in view of avoiding duplication. The proposal for smart

specialisation strategies for the structural funds needs to be

implemented, along with that for peer review of the strategies. More

weight should be put on

ex ante

conditionality, monitoring and

outputs, and less on procedures and

ex post

auditing. Procedures to

act upon weak strategies and the lack of outputs, however, need to be

clarified.

•

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XECUTIVE

UMMARY

•

The proposed increase in the use of innovative financial instruments should

be supported and even further expanded.

Regarding

project bonds, the Task

Force considers that this instrument offers clear added value to the EU,

long as certain preconditions are met to ensure that only projects of a

high level of European added value are pursued.

On cross-border infrastructure, one of the crucial instruments to

develop the internal market is the

Connecting Europe Facility.

It is thus

recommended that

the proposed level of funding is maintained.

Notwithstanding the support for this budget line, the Task Force considers

that the way in which funding is allocated has to be reviewed, increasing

the share devoted to energy.

If savings are necessary in the budget, they should be found in areas of low

European added value, not in areas investing in the future innovative capacity of

the EU.

The Task Force agreed that the Common Agricultural Policy has an

important role to play in the EU, but that policies are still suboptimal and

thus the expenditure level unjustified based on the European added value

and public goods criteria.

Judicious savings in this policy can be achieved

without compromising the positive aspects of the policy. Other savings could also

be achieved by reducing expenditures in wealthier regions, when such spending

does not have a clear European dimension in impact.

The Task Force is concerned about the blind budgetary cuts on

‘administration’ of the EU at a time when the governance of the EU needs to be

reinforced.

Savings in this area may well mean higher costs for the EU

economy, not less. The development of agencies and institutions at the

European level to handle the single market, such as air-traffic and rail-

traffic control, food safety, maritime safety and others, already reduce the

cost of disparate regulatory bodies at the national level. Reinforcing the EU

institutions is in many cases a saving, not a cost.

The Task Force did not deliberate on the EU’s own resources, but it

hopes that the discussion on resources does not overshadow the important

discussions on the focus and quality of expenditures.

The EU budget is an important tool to promote long-term sustainable

growth in Europe. It is time it is recognised as such and decisions are taken

in line with ensuring it operates effectively and efficiently towards this

goal.

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NTRODUCTION

n its 29 June 2011 Communication on the next multi-annual financial

framework (“A Budget for Europe”), the European Commission makes

a strong commitment to the objective of knowledge-based growth and

investment in European public goods.

The principles espoused in this

document deserve strong support.

But when it comes to translating these ambitions into concrete

proposals, there are far too many side-glances at the short-term national

interests of various member states. This may be politically astute if success

is measured by the ability to reach consensus, in the manner long

established in European politics. Yet such victories are gained at the

expense of policy foresight.

Through creative accounting, a mainstreaming of climate and energy

objectives and a judicious but demanding set of strategy, management and

oversight proposals, the European Commission has offered a compromise

proposal that has been accepted as a base for negotiation by all member

states and the European Parliament. That is no minor feat. If this budget

had been presented in 2004 for the 2007–13 period, it would have been a

radical step forward. Today, however, this politically astute budget may

not be ambitious enough to fulfil its potential role in helping to achieve the

EU’s objectives.

According to the Commission Staff Working Paper published

simultaneously with the Communication, only 43% of present EU spending

is devoted to initiatives supporting the Europe 2020 objectives.

This will

not change much in the reformed budget proposed for the next multi-

Ibid.

European Commission,

A Budget for Europe 2020: The current system of funding, the

challenges ahead, the results of stakeholders consultation and different options on the main

horizontal and sectoral issues,

Commission Staff Working Paper, SEC(2011) 868 final,

Brussels, 29 June 2011(b).

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6 | I

NTRODUCTION

annual financial framework (MFF). By giving priority to continuity and

vested interests, we are about to miss yet another opportunity to make the

EU budget forward- rather than backward-looking.

The Europe 2020 formula presented by the Commission of “smart

growth, sustainable growth, inclusive growth” is attractive but it does not

offer much help when it comes to making sharp budgetary choices. Almost

any kind of EU spending produces short-term growth somewhere, but a

multitude of such effects does not add up to a sensible and durable policy

for growth. In this report we emphasise the need for investment in long-

term growth, and for impact the spread of investment across a wider area

than a single country or region. European money should first and foremost

be used for projects with a clear European dimension.

The stakes are high. The financial turbulence now shaking Europe

has made it even more obvious how much we depend on high-quality

governance. If decisions are made under uncertainty, as they often must be,

it becomes even more important to invest in follow-up, analysis and

appropriate mechanisms for corrections. The missed opportunities and

resources lost directly and indirectly through weak economic governance

far exceed the costs linked to the EU budget.

At the same time we should not underestimate the formidable gains

made through European integration. Imperfect as they still are, the internal

market and the monetary union have already provided very significant

stimuli for growth and employment throughout the continent. Increasing

mobility and an emerging common legal sphere create fertile preconditions

for future economic exchange and cooperation.

EU rules are in many ways more crucial for long-term European

growth than EU expenditures, but the budget has an important role in

supporting rule-making, rule implementation and learning from our

experience with rules.

This rule-making influence of the budget seems to be grossly

undervalued by member states. Formally, one can summarise the roles of

the budget as the following three: first is to assist poorer countries and

regions to develop and to help them integrate into the single market;

second is to support these countries in complying with costly obligations of

the EU

acquis;

third is to help the EU achieve its objectives in areas where

common action generates economies of scale with results of a higher value

than separate actions by member states, i.e. the creation of the often-

misunderstood EU added value. Without EU budgetary assistance many

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BUDGET FOR LONG

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core EU objectives will not be achievable. But there is another powerful

indirect influence, i.e. rule-making. EU budget procedures, from formal

administrative rules and budgetary oversight down to drafting strategies

and programmes, deeply transform the governance systems and the

investment policies of countries at record speed. This influence is far from

negligible.

While small and in no way sufficient by itself to address the crisis in

Europe, the EU budget is the principal financial instrument for

joint action

by member states to face common challenges and reach common objectives.

Given the limited size of the budget and the importance of its objectives,

the costs of wasting resources for political expedience have increased. In

economic terms it means that the opportunity costs of badly spent

budgetary resources are greater. To a certain extent this has been

understood, and proposals by the Commission that would most likely have

been rejected outright a decade ago are today accepted as negotiable, such

as the rather strong strategic planning, management and oversight

requirements of the proposals. Even so, member states seem not to

understand in this age of austerity that the opportunity costs of inefficient

policies are not cuts, but better EU-financed interventions. It is also

important to stress that the decisions are for a budget for the future

running from 2014 to 2020, hopefully stretching beyond the era of financial

crisis. Decisions on the future need to be based on future objectives rather

than immediate, often short-term realities.

This Task Force report focuses on key aspects that should be

preserved and enhanced in the budget in line with the need to promote

growth, employment and competitiveness in the long run. It highlights

areas of European added value and where it would help to rationalise

overall EU public expenditure. It is divided into four chapters: the first

discusses the need to direct the EU budget towards long-term growth; the

second identifies the policies to promote as long-term investments; the

third considers the need to reinforce the targeting of European public

goods; and finally, the fourth looks at governance.

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1. T

BUDGET SHOULD BE A

LONG

TERM INVESTMENT TOOL

ince its establishment by the European Economic Community, the

function of the EU budget has not been clearly defined. The EU

budget is historically unique and has played a pivotal role in the

development of the internal market by making it acceptable for member

states. The budget has evolved over the years from a mainly political

instrument of compensation to one for economic development and pan-

European objectives. It is today a hybrid between a political and an

economic instrument.

While this is perfectly understandable, there has been a lack of

synchronisation with the addition of objectives, changes in policies and the

size of the budget. In size, the budget has remained stable or even fallen in

terms of the share of GNI over the last decade, despite the enlargements to

significantly poorer member states. In the meantime, the ambitions of the

EU have increased considerably in domains in which the EU budget is a

necessary instrument. If the budget had been restructured in line with new

needs as a consequence, this would not pose a significant problem. Yet

such a restructuring has not occurred, nor does it seem politically possible

that it will be undertaken to the level desirable for the next MFF. New

ambitions are thus cash-starved and will remain partially so.

There has nonetheless been a realisation at the political level that

there is a mismatch between the demands, expectations and the principles

that should govern a common budget. The subsidiarity principle, for

example, indicates that the EU should not intervene in areas that can be

better handled domestically.

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The budget deviated significantly in its policies and actions from

applying the criteria that theories of fiscal federalism

and the legally

enshrined principles (subsidiarity, additionality and added value) would

suggest. This means that the European dimension and added value of a

number of actions financed by the EU budget are dubious. That has led to

increasing calls for reform that would reinforce the targeting of the EU

budget on those areas with a clear European added value.

Defining the European added value of policies has not been

straightforward. The European Parliament’s reflection paper on European

added value

by the SURE Committee

mentions that “these enigmatic

words are often used, unfortunately also in an inflationary way. Their

multi-purpose use bears the risk that the phrase turns into ‘fashionable

buzz words’ that quickly lose their meaning.” Despite this warning, the

SURE Committee did identify features with which EU interventions should

comply that include the added value criterion. These are expressed in terms

of policies and expenditures having a transnational dimension, generating

economies of scale from common action, bringing together a critical mass

that single member states cannot provide alone, developing common

policies and preferences that facilitate integration, helping member states to

reach EU objectives or to reduce the costs of doing so through common

coordination (or both).

A number of concepts of European added value have been offered by

the academic literature. According to one study dedicated to defining

European added value, it exists in two cases. The first case is based on the

simple economic rationale of economies of scale “where the limited scope

of the member states and the existence of economic externalities reduce

their propensity to take appropriate action”. The second case concerns the

value of enhancing European cohesion, through common action and

Fiscal federalism is a branch of public policy analysis that seeks to determine the

optimal distribution of responsibilities among different levels of governance based

on cost efficiency.

European Parliament,

Reflection Paper on the Concept of European Added Value,

SURE Committee, Rapporteur: Salvador Garriga Polledo, 21 September 2010.

SURE refers to the Special Committee on Policy Challenges and Budgetary

Resources for a Sustainable European Union after 2013.

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BUDGET SHOULD BE A LONG

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projects that “make substantial contributions promoting the sense of

community and the effective interaction in the European Union”.

Still, these concepts are not easy to make operational at today’s stage

of negotiations on the budget. Given the diverse nature of the objectives

and needs of the European Union, the list of policies and programmes that

can be viewed as adding value is large. Furthermore, it is important to

pinpoint that the European added value of a policy is not only dependent

on its stated objectives, but also on the management system, funding tools

and implementation. Policies that at face value appear to have a high

added value fail to deliver it in practice.

This report tries to bring a view that is more operational and

immediately applicable to the negotiations based on the current situation in

the EU and the problems and objectives outlined in the Europe 2020

strategy.

The EU faces difficult economic challenges and has complex

objectives in the areas of energy and climate change. Defining the role of

the EU budget in those areas needs to be the central focus of the budget for

2014–20. The Task Force members agree that in addition to expenditures

offering European added value, EU funding should represent an

investment

tool

for long-term sustainable growth in the EU. The EU budget is not the

appropriate instrument for expenditures aiming at short-term gains.

This notion of using the budget as an investment tool for long-term

growth has not been taken seriously enough in the past. It is true that the

main instruments of the EU to promote growth are the development of the

single market, the functioning governance of the euro and the influence of

national macroeconomic policies. Common rules and the free movement of

goods and services are the cornerstones of European economic growth. The

EU budget is certainly too small to play a major role in promoting growth

D. Tarschys,

The Enigma of European Added Value: Setting Priorities for the European

Union,

SIEPS Report 2005:4, Swedish Institute for European Policy Studies,

Stockholm, 2005, p. 100.

Contribution by Danuta Hübner (Task Force member) to the debate on European

value added in the SURE Committee meeting of 23 September 2010.

European Commission, Communication on EUROPE 2020: A strategy for smart,

sustainable and inclusive growth, COM(2010) 2020, Brussels, 3 March 2010(a).

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BUDGET FOR LONG

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directly. But that does not mean that the EU budget has no influence, as it

can operate as a

powerful interface.

The EU budget can, through its leverage capacity, mobilise a

multiplicity of funds from the public and private sectors for European

objectives. Through the requirements to develop strategic plans for its use

at the EU, national and regional levels, it influences policy decision-making

on general public expenditures, particularly in cohesion countries. EU

procurement rules also influence the way national public funding is

directed. The EU budget, small as it is, affects the investment priorities of

regions and member states. It clearly communicates with its funding what

the EU is seeking.

Unfortunately, the role of the EU budget has never been

unambiguously defined as a tool for long-term growth. The strategic

planning and monitoring of a large share of the budget expenditures has

been left to national and regional authorities, which may not have had a

long-term vision of investment and have understandably been interested in

local preferences and fund absorption instead of European objectives. It is

thus not surprising that the European Commission’s term review of the

budget

primarily considered strategy and oversight issues rather than

general policy priorities. Approximately 80% of the EU’s funding and its

day-to-day management are in the hands of national authorities,

but the

accountability of their actions to the European Commission and European

Parliament is weak.

EU budget expenditures for the cohesion policy and rural

development are governed at the national/regional levels by strategies and

operational programmes approved by the Commission. Through better

ante

conditionality, better reviews and stronger technical assistance, the

focus of the funds on long-term investment can be sharpened.

Influence in the member states is not limited to those two areas.

Through its much smaller investment in research & development (R&D) – a

European Commission,

Review of the EU budget,

Commission Staff Working

Document, SEC(2010) 7000, Brussels, 2010(b).

More specifically, 80% of the EU budget is handled through shared management,

which de facto means mainly at the national and regional levels.

G. Cipriani,

The EU budget: Responsibility without accountability,

CEPS Paperback,

Centre for European Policy Studies, Brussels, 2010.

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BUDGET SHOULD BE A LONG

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mere 5% of the total EU expenditures on R&D – the EU budget has

contributed considerably to promoting collaboration among research

institutes in the EU with encouragingly positive outcomes.

The

development of the European research area and the European Research

Council are further results of this collaboration. The European Commission

has been using these experiences to move forward and develop new

public–private partnerships in the area of research with the Joint

Technology Platforms and the new energy-related European Industrial

Initiatives. The developments in R&D show substantial achievements with

limited resources, because these efforts act as a steering tool to foster joint

European capacities.

The EU budget thus has the potential to enhance the EU’s single

market and growth by offering support to develop missing links that

require joint EU action and by investing in capacity building, joint

standards, strategic planning and monitoring instruments. One can

conclude that the main objective of the EU budget is the efficient

mobilisation of local resources towards EU objectives through financial

incentives.

The Europe 2020 strategy outlines the EU’s present objectives for

smart, sustainable and inclusive growth, which call for a better, long-term

investment approach to public expenditures, including (or especially) by

the EU budget. Yet the present budget bears little resemblance to the

Europe 2020 objectives. The new proposals by the European Commission

have made an effort to integrate the Europe 2020 strategy without

restructuring the budget radically. As a result, the proposals for the

cohesion policy, the research and development policy (Horizon 2020) and

the policy on trans-European networks (the Connecting Europe Facility)

incorporate the Europe 2020 objectives. Nevertheless, by preserving the

funding distribution and structure of the budget close to the present one,

the funding levels and distribution are still some distance away from

corresponding to new priorities.

We can, however, identify the key areas of investment with a high

degree of European added value and long-term growth implications,

namely

European Commission,

Interim Evaluation of the Seventh Framework Programme,

Final Report of the Expert Group, Brussels, 12 November 2010(c).

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•

reinforcing the innovative capacity of the Union and through this its

future competitiveness;

investing where needed to complete the infrastructure necessary to

fully develop the single market;

investing in EU public goods; and

investing in knowledge-based governance and institutional support.

This report concentrates on those areas, their importance and how they can

be enhanced.

In a nutshell:

•

The EU’s budget is small in relation to its functions and

needs to be very well targeted and efficient in seeking to

achieve its objectives.

The EU budget has a strong influence beyond its mere

investments in redirecting national strategies and funding

towards specific EU objectives. Badly targeted expenditures

have important repercussions, not only wasting EU funds

but also wasting national funds and administrative

resources.

The EU budget needs to assist in the completion of the

internal market, including the energy market through cross-

border power interconnectors.

The EU budget needs to use its leverage instruments to

promote growth-enhancing investments, especially where

economies of scale at the EU level are important, as in the

case of R&D and innovation.

The Commission’s capacity to evaluate strategies and

monitor performance needs to be reinforced.

•

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his chapter identifies the actions that the EU budget should prioritise

for the highest returns to investment in line with long-term growth

objectives. The central instrument for long-term growth for the EU is

the full realisation of the single market for goods, services and capital,

underpinned by the freedom of movement for people. The main

mechanisms to develop the single market are of course regulatory;

nevertheless, the EU budget can intervene in a number of areas:

investing in collaboration across borders through multiregional cross-

border programmes that take advantage of the multitude of

opportunities for increasing economies of scale, particularly in the

areas of research and innovation;

developing the physical elements of a single market that promote

economic integration and competitiveness;

facilitating the integration of regions and countries, by helping

regions lagging behind to develop, to climb up the ladder of

innovation and to benefit from the single market; and

financing European public goods that generate European added

value, which would not have been created in the absence of EU

support.

While these four points seem very clear and are supported by

theories of fiscal federalism and their adapted versions for the case of the

EU, the implementation of the budget in practice has markedly deviated

from them. The origin of the budget was to a large extent a political

construct aimed at compensating groups or territorial entities considered

rightly or wrongly at risk of loss from the creation of a single market. The

use of the budget as an instrument of European economic policy has been

14 |

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gaining importance with the deepening of the single market. The economic

crisis is reinforcing the case for a budget that is used effectively as an

investment instrument. These investments also need to be coordinated,

building on synergies among the different policies and also national

actions.

This chapter explores the areas of the EU budget that are oriented

towards investment and long-term growth, pinpointing the policies that

need to be protected or promoted. These are research and development, the

emphasis on innovation in the structural funds, the development of core

cross-border infrastructure and the development of social and human

capital.

2.1

Investing for excellence in research and innovation

The economic welfare of European nations in today’s highly competitive

international market will greatly depend on the existence of industry that

produces a high level of added value. Europe’s welfare depends on long-

term growth and hence sustained industrial competitiveness. This requires

a strong foundation of innovation on which to build, and such a basis can

only be developed through investment in research, development and

innovation (RDI)

and a pooling of resources and efforts at the European

level.

It is a widely accepted fact that there are considerable advantages in

funding research at the EU level, mainly through economies of scale given

that research becomes more efficient when it is undertaken on a larger

scale. But there is much less consensus on how the funding should be

allocated, and how much of the EU budget should be spent on RDI.

The central funding mechanism at the EU level for basic and

industrial research and innovation comes through the Framework

Programmes, which started in 1984. Today we are at the Seventh

Framework Programme (FP7) with a budget of just over €50 billion for the

2007–13 programming period. This represents less than 5% of total

government expenditure on research in the EU, but it can be significant in

RDI is used throughout the report to refer to support going beyond basic

research and development, funding in addition the stages before

commercialisation – such as testing, demonstration and deployment – that the

private sector is reluctant to support.

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the specific areas in which it intervenes. Public RDI expenditure in the

member states also covers capital costs that the FP7 programme does not

finance. In addition, it is important to point out that the cohesion policy

invests an amount equivalent to the FP7 programme on research and

innovation, albeit with a different focus, namely developing capacity,

promoting innovation through the integration of key enabling technologies

and fostering collaboration between businesses and industries (see section

1.2).

Up to FP6, the main aim was to facilitate collaboration among

research centres and expand economies of scale in research and

development, rather than promote concerted action to reach specific

objectives. Today the EU’s RDI policies increasingly seek to foster the

competitiveness of European industry, leveraging private investment in

RDI and progressively assisting demonstration, deployment and

commercialisation. This is particularly striking for energy, where the RDI

policy has transformed into a ‘mission-oriented’ policy.

This new central relevance of RDI has allowed the budget to increase

in size and enabled this formerly loose policy to take centre stage and

develop into a fully-fledged EU policy. The Europe 2020 strategy by the

European Commission again calls for a substantial increase in RDI

expenditure and coordination in the EU. This is reflected in the proposals

for the EU budget, which call for a rise in funding for the successor

Horizon 2020 programme. The budget proposals bring together under one

financial heading the FP7, the entrepreneurship and innovation part of the

existing Competitiveness and Innovation Framework Programme (CIP)

and funding for the European Institute for Innovation and Technology, in a

single programme with €80 billion for the 2014–20 period – representing an

increase of about 50% compared with the present 2007–13 budget even

after deducting the addition of programmes presently not under FP7.

The EU needs an active policy for RDI because it has important

ambitions, such as creating a single European research area, reaching a

total RDI expenditure (private and public) of 3% of EU GDP (presently at

1.9%) and providing a technology push in the area of energy through the

Strategic Energy Technology (SET) Plan.

Without instruments at the EU

J. Nuñez Ferrer, C. Egenhofer and M. Alessi,

The SET-Plan: From Concept to

Successful Implementation,

CEPS Task Force Report, Centre for European Policy

Studies, Brussels, May 2011.

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level these targets cannot be achieved. Furthermore, without coordination

at the EU level, the risk of duplication between EU and national funding

programmes increases.

Nevertheless, it is very important to keep in mind that the central

weakness in the EU in the area of research is in the private sector. The share

of public sector investment in RDI on average is not less than in the US or

Japan.

Therefore, instruments need to concentrate on engaging the private

sector through active collaboration and new financial instruments to

leverage their investment.

2.1.1

Reasons for public and specifically EU support in the area of

RDI

There are clear reasons for the support of RDI by the public sector, as well

as assistance by the EU in particular. Public intervention is necessary when

•

the research has no immediate commercial value and the results are

unknown. Basic research can fundamentally only be financed by

grants;

the market and financial risks are too high for a private investor, i.e.

the benefits are realised beyond a period in which a private investor

requires a payback;

the technology risks are too high, i.e. if large-scale technologies carry

high risks of failure, for example at the demonstration or early

deployment stages;

a market failure exists, i.e. the real costs to society of some existing

technologies are not internalised because of subsidies or because a

technology does not pay its full cost, giving existing technologies an

advantage over new ones; and

investment in RDI is not rewarded by the market because the

technology becomes freely available before a private investor can

make a profit from it, i.e. there is insufficient return on intellectual

property rights.

•

For comparisons of R&D expenditures among countries and sectors, see K.

Uppenberg,

R&D in Europe, Expenditures across Sectors, Regions and Firm Sizes,

CEPS–EIB report, Centre for European Policy Studies, Brussels, 2009.

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A particular need for the EU to take a leadership role arises in the

case of RDI with important cross-border implications or with EU-wide

scale effects. A leading EU role is especially indicated if the EU

•

promotes cross-border collaboration and economies of scale, thereby

capturing the full capacity within the EU and building upon the

European research area and the more applied ‘Innovation Union’

improving cooperation and coordination;

copes with the risks associated with new RDI projects and helps to

reduce the risk of duplicating national or regional initiatives

implemented in an uncoordinated fashion; and

addresses RDI projects that are too big for any one member state or

requires coordinated actions among member states to provide value.

•

2.1.2

Bringing research from concept to market

In the area of RDI, the EU needs to expand the scope of its support beyond

basic research to drive innovation across the testing and demonstration

phases until it is ready to attract venture capital. While maintaining the

investment in basic and frontier research, there is a need to create a bridge-

financing mechanism to bring discoveries with potential commercial

viability from the drawing board to the market. Expanding support

through grants and innovative financial instruments is crucial to Europe’s

research, technological and industrial leadership. The logic is illustrated in

Figure 1. Basic research and early demonstration phases need to be funded

by grants, as has been the case until now, because their commercial value is

unknown. Once it is clear that the technologies could have potential, the

costs of development may be so high and lead times so long that even if the

economic rate of return (ERR) is theoretically positive, the risks make the

project far too costly for private venture capital. Funding in the form of

grants combined with risk capital by the EU budget and institutions like

the European Investment Bank (EIB) can overcome the gap to the point

where private financing alone is possible.

A key to expanding RDI investment by the private sector is the

development of instruments that allow the reduction of the risk premium

of credit. For this the EU has created the Risk Sharing Finance Facility

The European Commission launched the Europe 2020 Flagship Initiative –

Innovation Union in October 2010 (COM(2010) 546 final, Brussels, 2010(d)).

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(RSFF), providing risk capital to cover potential losses in the financial

sector from RDI investments over the advanced stages of innovation,

demonstration and deployment. The RSFF covers risks through a guarantee

set aside of €2 billion (€1 billion by the EU budget and an equivalent

amount by the EIB) over the entire 2007–13 period to raise private risk

capital in the value of approximately €10 billion, a leverage factor of 5.

Figure 1. Technology cycle and financial needs

Source:

Núñez Ferrer & Figueira (2011), p. 32.

The RSFF has been taken up very quickly, with demand outstripping

resources. Given its leverage factor and limited costs, this instrument has to

be further expanded. It is also a vital instrument for promoting the SET

Plan, as discussed in the next section.

For more information on the RSFF, refer to EIB,

Evaluation of Activities under the

Risk Sharing Finance Facility (RSFF),

Operations Evaluation Unit, EIB, Luxembourg,

2010.

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2.1.3

Investing to achieve the climate and energy objectives: The

SET Plan

The SET Plan deserves particular attention. The SET Plan is part of the EU’s

research and development policy targeting the low-carbon technologies of

the future. The Commission devised this policy because of the low level of

investment and slow rate of development in the area of new energy

technologies, given that without fundamental advances, the long-term

decarbonisation objectives cannot be achieved. In addition, energy

technologies are important economic drivers. The EU has been at the

forefront of renewable energy technologies, but risks losing its competitive

advantage in an increasingly competitive global market.

The European Commission considers that there is a need to increase

the investment in RDI in the energy sector from the present €3 billion a year

to over €8 billion, seeking a total additional investment of €50 billion over

the period to 2020. This is the amount considered necessary to bring to the

market the technologies required to achieve the long-term objectives of the

EU.

Getting the SET Plan right is a priority and it is deeply interlinked

with the growth objectives of the EU, as indicated in the ‘Innovation Union’

strategy launched by the European Commission in October 2010.

Investing in energy transformation in the EU is an investment in a new

economic model and new growth opportunities.

The SET Plan brings a new dimension to the research policy of the

EU, as it clearly addresses the need to cover the full development cycle of

innovations, from basic research down to commercialisation. It offers the

needed bridge financing as earlier shown in Figure 1.

The SET Plan is a key policy because the financial role of the EU

budget in the energy sector is very important. It covers approximately a

third of total public expenditures on RDI in the sector or 11% of the total

combined private and public RDI expenditures in the EU (data from JRC-

European Commission, Communication on Energy 2020: A strategy for

competitive, sustainable and secure energy, COM(2010) 639 final, Brussels, 10

November 2010(e).

European Commission (2010d), op. cit.

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IPTS, 2009). Changes in the level of support by the EU can have a large

bearing on the sector.

For the EU to reach the investment targets in the sector, it is crucial

that the EU budget invests more than the present share of the total funds,

as every push to speed up technology development also represents a push

towards more risky and less well-known technologies. A rise in investment

by the EU budget of €2 billion annually for the SET Plan was considered

necessary by a previous CEPS Task Force

in order to leverage the

necessary funding. It is unfortunate that this critical growth investment

seems to be threatened by pressure to cut the EU budget. The Horizon 2020

proposals, while increasing financial support for this sector, still fall short

of the estimated needs calculated by CEPS research.

Along with higher EU grant support, the SET Plan needs risk-capital

support, such as that provided by the RSFF. This instrument will be

influential in helping to raise the level of RDI in energy and bring new,

significant technologies to the market. If it is to make an impact in the

energy sector, the RSFF will have to be strengthened substantially. The

European Commission’s proposals for Horizon 2020 offer to set aside €1.1

billion of the RSFF for the energy programme over the 2014–20 period. In

the best of cases this would increase total public and private funding from

€3 billion to €6.5 billion, with the remaining having to come from other

private and national public sources. This assumes, however, that the

leverage effect of the RSFF would remain constant, while a higher number

of projects or a higher number of more risky projects would reduce the

leverage size.

See Nuñez Ferrer, Egenhofer and Alessi (2011), op. cit.

Ibid.

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In a nutshell:

•

RDI needs a greater level of funding and the Commission’s

proposed budget increases should be fully supported.

The SET Plan is a key policy that needs a strong support by

the EU budget. The funding that has been allocated to it

should be increased.

Member states should investigate and remove potential

barriers that discourage private investment in innovation.

There is a need to expand bridge capital to bring discoveries

from the drawing board to the market, such as is provided by

the Risk Sharing Financing Facility.

The Risk Sharing Financing Facility instrument is vital to the

technological and industrial competitiveness of the EU and

needs to be expanded at least to the level proposed by the

European Commission.

•

2.2

Investing in innovation as a fundamental priority of the

structural funds

The European Commission has rightly proposed substantial reforms to the

European structural funds, because in spite of the potential of the structural

and cohesion funds to generate long-term growth, this has not happened in

many regions. The policy has been very controversial; the link between

growth and the structural funds has been difficult to establish and the

performance of the funds across regions has greatly varied. High-growth

regions have been presented as examples of regional policy successes by its

defenders, and low-growth regions as negative examples by critics. The

results of the EU’s structural policy have been particularly controversial

because while there has been convergence of GDP per capita among

member states, regional disparities have persisted. The present debt crisis,

which is having particular effects on the cohesion countries, has in addition

raised questions that undermine the policy – notably concerning why

countries that have been supported for decades are so vulnerable.

Still, much of the criticism and also praise for the funds is based on

substantial misconceptions about economic development and the impact of

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assistance. First of all, even if poor regions are assisted to develop, this does

not mean that their comparative disadvantage in relation to high-growth

regions and economic centres will disappear or that their GDP per capita

will catch up. The potential of regions to grow depends on a number of

factors, from geographical to demographic ones. Second, the impact of

regional funds depends substantially on national plans for the distribution

of the funds, and thus performance is strongly linked to the quality of

strategies and their implementation. The European Commission has not

been able to ensure quality across the board. Serious attempts to improve

the strategies of member states and regions have really just started in the

present programming period with the requirement for member states to

present a more integrated and coherent National Strategic Reference

Framework (NSRF), the results of which are too early to assess.

A general philosophy in the past and current programming periods

has been that the funds belong to the regions and that their use should

therefore not be dictated by Brussels. Member states have prevented the

build-up of appropriate monitoring systems and indicators, with the

exception of funds’ ‘absorption’ measures – which would by their nature

encourage the selection of ‘quick-to-spend programmes’ rather than

investments with the highest level of added value and with long-term

benefits. The oversight of strategies and accountability has been and

remains weak.

With the growing realisation that the EU budget needs to be directed

at achieving core EU objectives and address weak growth performance, the

Commission has proposed to integrate rather strong strategic and

monitoring instruments in the cohesion policy. These aim at promoting

strategies that develop the endogenous growth potential of regions.

What regional policy strategies need, and what successful regions

have generally applied, are the following characteristics:

See Cipriani (2010), op. cit.

Endogenous growth is defined as the economic growth generated in a region

based on its internal resources. A short overview of the integration of endogenous

growth elements in EU policies can be found in J. Núñez Ferrer,

The Evolution and

Impact of EU Regional and Rural Policy,

FAO–World Bank Working Paper, FAO,

Rome, September 2008.

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•

better integrated, long-term strategies that are growth-oriented, with

coherence and a deep level of integration among the different

programmes, as well as with national policies;

the use of effective indicators and monitoring systems;

a reduced emphasis on large infrastructure as a growth strategy,

which can lead to overcapacity and generate considerable

maintenance costs; and

much higher investment in human capital and innovation.

•

There is today as much need for a strong cohesion policy as before,

but its objectives, planning and implementation require a far subtler

approach. In the absence of an active cohesion policy Europe could face

two consequences: first, the internal market could be put into question by

poorer countries in particular, which opened their borders; and second,

many EU objectives would not be achieved in poorer regions and countries,

for example the environmental

acquis

or the renewable energy objectives.

It is clear that the cohesion policy should go beyond solidarity and

financial transfers to poorer regions. The main function of the funds has to

be to help the regions become more competitive and increase the rate of

growth in a sustainable fashion, improving living standards and

employment prospects. In addition the funds should provide financial

assistance to help the regions comply with the EU’s standards, such as

environmental regulations, and to achieve EU objectives. Given the

economic crisis, the increasing international competition in trade and new

climate and energy challenges, there are significant and serious areas in

which the EU’s cohesion policy could and should intervene.

The proposals of the European Commission

have correctly

identified the need to focus on developing the economic potential of

regions, placing competitiveness and innovation at the forefront of the

strategies in place. In the present financial perspectives, investments linked

to developing the research and innovation capacities already rival in size

the Framework Programme for research and development, but the quality

of strategic planning needs improving. “Strengthening research,

European Commission,

Proposal for a regulation on specific provisions concerning the

European Regional Development Fund and the investment for growth and jobs goal and

repealing Regulation (EC) No. 1080/2006,

COM(2011) 614 final, Brussels, 6 October

2011(c).

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technological development and innovation” is priority no. 1 for the

structural funds in the proposed new regulations (Article 5).

To this end, the Commission proposes to substantially reinforce

strategic requirements in the planning phase for the structural funds. This

requires the preparation of a national or regional smart “research and

innovation strategy for smart specialisation in line with the National

Reform Program, to leverage private research and innovation expenditure,

which complies with the features of [a] well-performing national or

regional research and innovation system”.

This strategy will need to be

integrated and coherent with the wider Common Strategic Framework, a

strengthened and more comprehensive version of today’s NSRF, which

member states had to submit for this programming period. Most

importantly, the Commission proposes to have the innovation strategies

peer-reviewed. This is a very commendable idea. The review should be

undertaken by selected external experts, avoiding the present

incompatibility of the Directorate-General (DG) for Regional Policy having

to evaluate programmes and simultaneously be under pressure to approve

them on time before the programming period starts.

Tailored strategies need to be developed, as the barriers to innovation

vary across countries and a one-size-fits-all approach is not to be pursued.

The analysis by Reinstaller & Unterlass (2011) from the Austrian Institute of

Economic Research,

which was used as input into the competitiveness

report of the European Commission,

points out that the barriers to

innovation differ substantially by country, related to the stage of economic

development and specific structural factors.

The innovation strategy for the structural funds is not to be confused

with the Framework Programme (Horizon 2020), which emphasises

excellence and research, but should nonetheless be coherent with it. The

M. Landabaso, “Innovation Strategies for Smart Specialisation and the New

Structural Funds Regulations 2013-20”, Regional Innovation Monitor project, 27

October, presented at the CEPS Task Force meeting on 6 December 2011.

A. Reinstaller and F. Unterlass, “Comparing business R&D across countries over

time: A decomposition exercise using data for the EU 27”,

Applied Economics Letters,

Vol. 19, No. 12, 2011, pp. 1143-1148.

European Commission,

Innovation Union Competitiveness Report,

edition 2011,

Directorate-General for Research and Innovation, Brussels, 2011(d).

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structural funds are aimed at improving local capacity and

entrepreneurship through innovative solutions, and a better understanding

and integration of technologies by businesses – ultimately for economic

growth and job creation. The funds should promote endogenous growth,

developing the economy based on investment in the endowments of the

region, making use of what the Commission calls competitive (constructed)

advantage. The word ‘constructed’ denotes new activities that can be

developed from scratch and not just the maintenance and promotion of

existing structures and businesses, as long as the new activities are

sustainable in the longer term. The attention given to the development and

use of key enabling technologies (KETs) is interesting. KETs are considered

the backbone of the future economy, e.g. micro and nanoelectronics,

nanotechnology, biotechnology and photonics.

This is actually a re-

emergence of industrial development policies. The EU’s structural policies

are seen as an instrument to foster and make industries more competitive

through the support of KETs.

The strategy should be linked to the Horizon 2020 programme. The

smart specialisation strategy should aim where appropriate at bringing the

RDI capacity of regions to a standard that enables them to participate in

Horizon 2020.

Furthermore, actions supported by the structural funds are to be

bolstered by a strategy to expand the use of ICT and such instruments as

JEREMIE,

which uses revolving funds to provide loans for businesses and

other financial instruments leveraging private sector funding.

The proposals of the European Commission are commendable and in

comparison with the present policy represent substantial advances in the

right direction. The policy, at least formally, does seem to reduce the

The Commission, in its Communication on Preparing for our Future: Developing

a common strategy for key enabling technologies in the EU, COM(2009) 512 final,

Brussels, 30 September 2009, presented these technologies and a high-level expert

group proposed policy measures to promote the industrial take-up of KETs (see

European Commission,

High-Level Expert Group on Key Enabling Technologies, Final

Report,

Brussels, 28 June 2011(e)).

Joint European Resources for Micro to Medium Enterprises: A European Union

programme to support micro and medium enterprises through

equity, loans or

guarantees, through a revolving Holding Fund funded by the EU budget acting as

an umbrella fund.

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discretion of member states in the use of the funds by requiring better

justification for actions with a more concrete list of priorities. There will be

some resistance to these changes, with a risk that the list is expanded and

thereby the focus is diluted and the meaningfulness of strategies is

weakened.

It is crucial that the strategic orientation of the policy is preserved, as

well as the primary emphasis on innovation. This approach will challenge regions

to improve policy coherence and coordination, as well as promote investments with

positive, long-term growth implications.

A new culture of strategic planning

and delivery based on sound economic analysis and implementation needs

to be introduced with the checks and balances. As guardian of the Treaty,

the Commission should monitor the fulfilment by member states of the

established conditionality and ensure that the use of EU funds is not

affected by non-compliance with the requirements. Nevertheless, the

improvement in

ex ante

requirements needs to be accompanied by

simplification.

2.2.1

Funding level and distribution of funds

The calculation of the funding levels for the regions is a weak element in

the proposals, which does not challenge the idea that all regions need to

benefit from EU funds (Table 1). While there is some rationale for

maintaining some support to regions with a GDP per capita of between

75% and 90% of the EU average and which is correctly digressive, the need

for EU funding at the level proposed for other regions beyond 90% is

questionable. The latter regions already have access to policies like the

R&D Framework Programmes, INTERREG, rural development funds, the

Connecting Europe Facility and the European Globalisation Adjustment

Fund for crisis situations.

The proposals also require a substantial minimal share of the funds to

be invested in the European social fund (ESF), from 25% in less developed

regions to 50.2% in more developed regions.

Taking the subsidiarity principle in its strict sense, the justification for

using European structural funds in more developed regions is debatable,

particularly when these programmes do not have a European dimension

and can be handled better at the local level. This criticism does not

prejudge whether the actual interventions have positive results in the

beneficiary region, but the fact that the EU tackles problems that member

states can finance themselves and whose European dimension is

questionable.

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Table 1. European Commission’s proposals for cohesion funds

Proposed budget

for 2014–20

€ billion

Minimum

ESF share

(%)

–

Resulting

minimum

ESF amount

(€ billion)

40.7

15.6

27.6

–

Less developed regions

Transition regions

More developed regions

Territorial cooperation

Cohesion fund

Extra allocation for the

outermost and sparsely

populated regions

Connecting Europe Facility

for transport, energy and

ICT

162.6

38.9

53.1

11.7

68.7

0.926

€40 billion (with an

additional €10 billion

ring-fenced under the

cohesion fund)

–

Source:

European Commission (2011k), p. 5.

In the case of ESF interventions, for example, action undoubtedly has

to be taken to reduce social exclusion in wealthier regions. The question is

rather one of whether the EU budget should be involved or if that is the

competence and obligation of the member state governments. For poorer

member states, there is a strong rationale for support, as in relative terms

they face higher fiscal constraints. Moreover, many cohesion countries do

not have the appropriate policies, capacity or infrastructure in place.

In the wealthiest regions, the ESF or INTERREG

could still finance

programmes for the exchange of practices and collaboration in this field.

These questions should be posed for a number of actions with a local

dimension. The EU budget should ensure that the programmes supported

by the EU complement and do not substitute for national actions. The

present EU additionality rules

unfortunately look only at total public

expenditure and not at its distribution.

INTERREG is an EU programme funding programme in which regions

cooperate across borders on common projects (see section 2.2.2).

Additionality is one of the official principles of the structural funds introduced in

1988. It requires that EU funds must be additional and not substitute member state

funds. However, it does not look into the specific policy area, thus national funds

can be shifted to another area of expenditure without affecting additionality.

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2.2.2

INTERREG – Underfunded and neglected

More surprising in the proposal is the large financial envelope for the

developed regions compared with the territorial cooperation programme

(INTERREG), an area that is quintessentially a matter for the EU and

central for European integration and the development of the single market.

In financial terms, however, the budgetary priorities of the cohesion policy

seem centred on local benefits, something that can only be defended to

support regions catching up and becoming more competitive and to

finance EU objectives.

The INTERREG programme is probably one of the most understated

programmes in the European budget, weakly financed and generally

unknown to many. It nonetheless carries out one of the fundamental roles

of the EU budget, which is to increase cross-border collaboration and

eliminate barriers in the single market. The funding in regions with a GDP

per capita of over 90% of the EU average should be reduced, while the

INTERREG resources should be augmented to promote cross-border

cooperation programmes.

2.2.3

Earmarking

Since the earmarking exercise began in the present budget to increase

investment in areas in line with the Lisbon strategy, new various areas for

earmarking have been proposed. Earmarking minimum levels of funding

for specific EU expenditures can be useful, but should be used based on a

solid analysis and rationale. In the case of the minimum shares of ESF

expenditure for the structural funds, there does not seem to be such a solid

analysis. Earlier, this report questioned the European added value of ESF

expenditures in areas that should be the responsibility of the member states

and regions, particularly in the more developed parts of the EU. The ESF

policy is wide open to numerous interventions, which often reflect a local

rather than a European dimension. It also does not focus on excellence and

cross-border collaboration, as is the case for the Horizon 2020 programme.

The shares of ESF expenditure across regions and countries vary

substantially and the minimum shares proposed by the Commission will

entail a large increase in some. Is this increase justifiable based on the needs

of the specific regions? An inappropriate use of earmarking can thus be

counterproductive. If

ex ante

strategic planning supported by appropriate

review is seriously undertaken, earmarking for the ESF should not be

necessary.

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NVESTING IN THE FUTURE OF

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In a nutshell:

•

The proposals to make research and innovation the main

priorities of the EU’s structural operations must be

defended and promoted.

Strategic planning is a cornerstone for the effectiveness of

EU funds and needs to be reinforced. The proposals for the

peer review of smart specialisation strategies should be

preserved. The monitoring of progress and the shift to

ante

conditionality rather than

ex post

auditing needs to be

ensured.

Regional funding should not be offered to regions with an

income per capita of over 90% of the EU average, except for

those programmes with a strong European dimension.

Cohesion policy is excessively centred on local benefits,

particularly in the case of more developed regions, which

have the ability to cover such costs nationally.

INTERREG, a quintessentially European instrument that

ticks most boxes pertaining to what the EU budget should

support, is underfunded.

Earmarking exercises should be based on a solid rationale,

as the balance of expenditure priorities should be based on

local needs and potential, not on prescribed figures.

•

2.3

Investing through the Connecting Europe Facility

In the area of large cross-border infrastructure in transport and energy, it is

important that the EU invests through the EU budget and other financial

instruments to support the development of an integrated transport and

energy grid and the transition to a sustainable energy system. Until today,

this has been the role of programmes for trans-European networks for

transport and energy (TEN-T and TEN-E, respectively), which emerged

from a commitment in the Treaty of Maastricht. This led to the first 14

transport priority projects agreed at the Essen European Council in 1994.

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It is not the purpose of this report to evaluate the performance of the

programmes; it suffices to mention that funding was scarce and the

collaboration among member states weak. In 2001 only three of the projects

were completed. The expansion of the TEN-T network did not accelerate

much despite the request of the High-Level Group report in 2003 headed

by Transport Commissioner Karel Van Miert

to strengthen the policy and

speed up implementation.

Developing the trans-European networks has since increased in

importance and the single market is no longer the only reason. Energy

security and climate change policies have added urgency to the

development of the transport and energy corridors and given the trans-

European networks a new lease of life, putting them back in the centre of

EU policy and in the minds of the political decision-makers. Of course the

new policy objectives require a rethink of the network we are seeking to

build, and the European Commission has produced a new strategy with 40

priority transport projects,

integrating the need for a low-carbon transport

sector.

With respect to energy, progress in grid integration has been even

more sluggish than in transport. Energy security and provision has long

been seen as a national priority. Interconnectors have generally not been

promoted by member states except where required for energy security. The

interest in integrating the energy network across Europe has increased, as

member states struggle to reduce emissions in the energy sector and no

longer see the European grid as a threat, but an opportunity to develop

new markets and enhance energy security. Of course the position of

member states on this issue is strongly influenced by the national potential

to generate energy from renewable sources. A change in the way energy is

produced and distributed can create new markets that offer economic and

employment opportunities that member states need. The European

High-Level Group on the Trans-European Networks,

High-Level Group on the

Trans-European Networks,

Report, 23 June 2003.

European Commission,

Roadmap to a Single European Transport Area – Towards a

competitive and resource efficient transport system,

White Paper, COM(2011) 0144 final,

Brussels, 28 March 2011(f).

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NVESTING IN THE FUTURE OF

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Commission has also released new important regulations in this area, on

the guidelines governing trans-European energy networks.

On the financial side, the investment requirements in the area of

transport and energy are very large and will call for assistance from the

public sector

and the elaboration of an appropriate regulatory framework.

The nature and level of support required varies depending on the

infrastructure and the market. The European Commission estimates that to

complete the priority European power and gas networks, the investment

needed is in the range of €200 billion until 2020, half of which will have to

be supported by the public sector. For transport the Commission estimates

that €500 billion will be needed for the trans-European networks, of which

€250 billion is required to complete the missing links of the core network.

Here it does not present any figures on the share of public investment

relative to private investment. For ICT networks, the Commission estimates

that without any public intervention there will be an investment gap until

2020 of €220 billion, a figure necessary to fulfil the objective of having all

businesses and households covered by broadband.

The European Commission has thus proposed a considerable increase

in investment for the trans-European networks for energy, transport and

ICT through the EU budget and also through potentially new financial

instruments supported by the EIB. The proposal of the Commission is to

create a €40 billion facility in the European budget for the next MFF,

boosted by €10 billion earmarked from the cohesion funds.

Compared

with the total size of the investment, this budget line seems to fall short, but

it is important to highlight that the EU budget is conceived to be a co-

financing instrument and a substantial funds multiplier, for example in its

role as a guarantee instrument.

The Task Force recommends that the Connecting Europe Facility be

kept at the level proposed, although modest in view of the challenges,

emphasising that the Facility should operate as a facilitator rather than a

European Commission,

Proposal for a regulation on guidelines for trans-European

energy infrastructure and repealing Decision No. 1364/2006/E,

COM(2011) 658 final,

Brussels, 19 October 2011(g).

This includes national public funds, the EU budget and public investment banks.

European Commission, Communication on a Growth Package for Integrated

European Infrastructures, COM(2011) 676, Brussels, 19 October 2011(h).

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financier of projects. The lion’s share of the investment needed must come

from the market itself. Means provided by the EU budget should not be

perceived as reducing the need for a rigorous economic evaluation of

projects, regulatory development, risk-compensation incentives, cross-

border cost allocations or public acceptance. Energy and transport are

central pillars of the internal market and indirect drivers of Europe’s

economy. Combined with the climate and energy objectives, the transport

and energy networks are the pillars to support the objectives on energy

security, low-carbon energy (renewable energy) and low-carbon transport.

The investments should be understood as opportunities and foundations

for future growth prospects.

One way of making this explicit while at the same time supporting

the long-term objectives of the energy sector to reach decarbonisation is to

actively allocate financial aid from the EU to pilot projects for new

infrastructure technology. One example could be the installation of

AC/DC

conversion with a capacity increase in existing overhead lines.

well deployed,

the returns on investment by the Connecting Europe

Facility through the economic development of Europe will be high.

Marginal savings to the public purse from a cut to this budget line would

be overshadowed by the welfare losses from a weaker internal market, a

lower degree of energy security and higher dependency on energy inputs,

notably on increasingly costly fossil fuels.

2.3.1

Funding level and distribution of funds

Nevertheless, the distribution of funding for infrastructure proposed by the

European Commission (Table 2) is questionable. While it is true that

transport is financed more heavily by the public sector, it is debatable

whether energy funding should be put on a par with ICT and digital

investments. One of the particularities of the ICT and digital sector is that

private sector investment is high, demand is strong and cross-border

operations have emerged naturally. It is clear that the figures have been

selected based on a pro rata calculation of the estimated public share of the

investments. Yet there is no apparent attempt to estimate the variation in

Convertors from alternating current to direct current. Direct current can be

transferred with lower losses over larger distances, while Europea energy system is

based on alternating current.

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NVESTING IN THE FUTURE OF

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the leverage effect or the demand-side characteristics of the energy

compared with the ICT sector.

Another surprising factor is that the amounts earmarked from the

cohesion fund for infrastructure related to the Connecting Europe Facility

are

only for transport infrastructure,

while the energy and ICT needs are

considerable in the new member states. This restrictive focus needs to be

justified, as cross-border energy transmission is also of central importance

in the new member states.

Table 2. Amounts allocated to the Connecting Europe Facility

Areas covered

Connecting Europe Facility, of which

•

Energy

•

Transport

•

ICT/digital

Amounts earmarked in the cohesion fund for transport

infrastructure

Total

Source:

European Commission (2011a), p. 57.

Amount (€ billion)

9.1

21.7

9.2

2.3.2

Using project bonds to develop core infrastructure

The European Commission, in a recent publication, has proposed a pilot

phase for project bonds.

It is limited to investment in the Connecting

Europe Facility for the period 2012–13.

The project bonds, which in no way are to be confused with

‘Eurobonds’, are an expansion of the existing LGTT (Loan Guarantee

Instrument for TEN-T projects), which until now has not been very

effective in attracting private equity, and as the name indicates, has been

limited to transport. Moreover, the infrastructure required to build the

trans-European energy, transport and ICT networks calls for levels of

private funding well beyond the leverage capacity of the LGTT.

European Commission,

Proposal for a Regulation of the European Parliament and the

Council amending Decision No. 1639/2006/EC establishing a Competitiveness and

Innovation Programme (2007-2013) and Regulation (EC) No. 680/2007 laying down

general rules for the granting of Community financial aid in the field of the trans-European

transport and energy networks,

COM(2011) 659, Brussels, 19 October 2011(i).

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The project bonds tackle the difficulties of attracting finance from

traditional financiers (banks and monoline insurance companies offering

debt service guarantees). The project bonds correctly seek to attract funding

from more conservative long-term investors, in particular the pension

funds. To do so this initiative proposes that the EU budget offers a first-loss

debt guarantee of 10% and the EIB a second loss of 10%, which would

increase the credit rating of projects. An increase in the credit rating would

make the project bonds attractive to private equity investors.

The project bonds are a necessary tool to develop the infrastructure,

but policy-makers need to understand that project bonds are another debt

instrument, which ultimately needs to be repaid and is thus only to be used

for projects with a high degree of added value and a sound Economic Rate

of return (ERR). Additional grant support for specific projects could also be

envisaged when the high-value social returns cannot be captured by

private investors. But it is important that projects are not ‘excessively’

subsidised, transferring unnecessary risks to the taxpayer. Subsidies should

not be used to attract institutional investors for projects with unsound

ERRs by raising their credit rating. Project bonds are to be used to make

projects of high added value feasible, not bad projects attractive to

investors.

In a nutshell:

•

The cross-border infrastructure is an essential element of the

internal market and the Connecting Europe Facility needs to

be appropriately funded.

•

The support from the EU budget for infrastructure should not

reduce the need for strict economic criteria for project

selection. EU funding should mainly have the function of

incentivising the private sector and not replacing it.

•

A core function of the funds should be to assist pilot projects

for new grid technologies.

•

The ‘project bond’ initiative should be supported, but the

selection criteria for projects and the rate of total public

support should be based on strict economic criteria. Project

bonds are to be used to make projects of high added value

feasible, not bad projects attractive to investors.

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NVESTING IN THE FUTURE OF

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2.4

Investing in Europe’s human and social capital, and in

employability

Growth depends on the skills of citizens and it is imperative that EU

funding promotes human capital formation through its different funding

programmes. This has to occur, however, based on the subsidiarity

principle, which means that targeting has to be sharpened. The bulk of

investments in education and training are made at the national level. The

EU budget should concentrate mainly on collaborative projects, from RDI

initiatives through its excellence-driven Framework Programmes (the

future Horizon 2020) down to student exchanges through the ERASMUS

Programme.

For poorer regions, the European Commission’s emphasis on

building the capacity for innovation is to be commended. The EU budget

can assist countries to develop their infrastructure for education, training

and research. But even here, its contribution is marginal relative to national

efforts and must therefore aim at particularly strategic interventions, with a

cross-national dimension.

Funding in the area of lifelong learning and rejoining the labour force

should be targeted at the poorer regions and digressively at transition

regions. Regions with a GDP per capita over 90% of the EU average should

be required to provide these services under the national/regional budgets.

The EU budget can still finance common projects in these areas and

promote European best practices, but it should not replace national efforts.

Innovative finance initiatives at the EU level, such as microfinance

schemes for the self-employed and for small and medium-sized enterprises

(SMEs) can be continued, as the leverage factor is important and the results

seem to be encouraging. There is a case to be made for promoting similar

schemes to firms wherever they are located in the EU to avoid single

market distortions, focusing on differences in access to finance among

member states. EU financial instruments should avoid substituting for

existing national schemes and especially avoid unduly subsidising financial

institutions. The EU’s JEREMIE initiative for providing loans to SMEs has

ERASMUS assists student to study abroad and finances cooperation between

institutions, for example by supporting professors and business staff to teach

abroad or by financing training programmes.

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run into difficulties, as it has not always been possible to ascertain that the

subsidised interest rates are de facto transferred to the beneficiaries.

On social capital investments, these should be supported in poorer

regions and to a digressive level in transition countries. The EU budget

should not serve as a substitute for the obligations of the national budgets

in wealthier regions.

In a nutshell:

•

Key support for human capital development is provided by

the European RDI programmes through Horizon 2020 and

by cross-border education programmes such as Erasmus,

and these programmes should be promoted.

The EU should assist in developing the infrastructure for

education and research in poorer regions to enhance

competitiveness and long-term growth potential. This

should be primarily for strategic investments with a cross-

national dimension and to strengthen the ability of the

poorer member states to join Horizon 2020 programmes.

Financial instruments for micro-enterprises and SMEs seem

to bring positive results and could be explored further, but

it should be ensured that they do not substitute for national

schemes and that the benefits are de facto transmitted to

the final beneficiaries and not appropriated by financial

institutions.

The EU budget can assist in developing the social

infrastructure in poorer regions, especially in cohesion

countries.

In wealthier regions the EU budget should refrain from

financing social programmes that do not have a European

dimension.

•

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3. T

UROPEAN ADDED VALUE OF

PUBLIC GOODS AND THE EFFICIENCY

OF EXPENDITURES

3.1

his chapter is devoted to the expenditures related to public goods

with limited relevance for economic growth. A case in point is the

Common Agricultural Policy (CAP) and thus it deserves special

mention. Yet the EU also has a role to play in the environment and has

recently launched a roadmap on resource efficiency, which is briefly

analysed.

A focus on European public goods in agriculture and rural

development

An important area in which the EU budget intervenes is agriculture,

because full competence in this sector has been transferred to the EU, and

therefore it is in fact the only fully common policy. This full financing of

agriculture has large repercussions, as it absorbs a substantial share of

resources available in the EU budget. This has a bearing on the ability to

intervene effectively in other areas.

While the agricultural policy has undergone a number of reforms,

which to a large extent have successfully reduced the market and trade

distortions it generated, its size in terms of cost is substantial. The

agricultural and rural policies of the EU take up nearly 40% of the EU

budget, 70% of which is in the form of direct payments

. Direct payments

The main tool to support the farm sector in the European Union (approximately

75% of the CAP for the MFF 2014-2020) is based on direct payments. These are

mainly payments granted to farmers per ha of land under cultivation or

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are a very inefficient and distortive policy, suffering large deadweight

costs. Unfortunately, rather than continue their phasing-out, the proposals

for the next MFF are primarily geared towards redistributing the

agricultural pie of direct payments, even bolstering such payments while

neglecting the second pillar of the CAP, namely rural development. The

proposals actually weaken the rural development policy, which should be

the first and main pillar of the CAP with income support limited to specific

and justified cases.

The proposals for the CAP seem once again to concentrate on the

wrong things. Rather than redirecting funding based on needs on the

ground and directly tackling the considerable waste of resources, the

reforms are chiefly concerned with redistributing the funding among

member states. In terms of added value, European and even local, the

policy paints an unconvincing picture (Núñez Ferrer & Kaditi, 2007).

The proposed greening of the direct payments loses much of its

meaning owing to the impossibility of transferring the funds among

member states or even regions. Also, monitoring compliance on green

practices will require extensive and costly monitoring. Failing such efforts,

even a reformed CAP will end up being a very weakly enforced policy not

meeting its objectives.

That is unfortunate, because the agricultural sector is confronting real

challenges stemming from climate change. The policy does not allocate

funding based on the expected impact of climate change, nor is the policy

flexible on issues of market price variability. A constant level of subsidy

cannot be justified by market fluctuations.

The agricultural policy is continuing its operations rather impervious

to the realities on the ground, based on ill-defined ‘income’ or

‘environmental’ justifications, badly targeted and subservient to net

balance considerations.

It is clear that politically it will be hard to reform the policy

satisfactorily. Even the limited steps in the right direction proposed by the

maintained in good agricultural condition. Payments are mainly calculated based

on tons per ha produced over a reference period, mainly 1989-1991 for the EU 15

and 2000-2002. A system of support that slows down structural adjustment, are

weakly related to problems in the sector and suffers from low farm income

targeting (Boulanger, 2011; OECD, 2003).

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UROPEAN ADDED VALUE OF PUBLIC GOODS AND THE EFFICIENCY OF EXPENDITURES

Commission may not be adopted. Some proposals are encouraging, such as

those for innovation. The proposed increase in funding for research in

agriculture, an area where investment has been deficient worldwide, is

welcome, but overall the emphasis given to innovation and restructuring in

the sector is still not strong enough.

As more radical reform is difficult to achieve at this time, what

matters is that this state of affairs does not negatively affect the changes

required in other budgetary headings, and does not undermine those

expenditures that are central to the single market and the future economic

strength of the EU.

If the member states are seeking to reduce the level of expenditures of

the EU budget, it is in the area of direct payments (which in large part are

badly distributed and consist of substantial deadweight costs) that savings

could still be made. If direct payments are primarily income support, then

based on the realities of the sector farms in real difficulties could be

targeted and helped better for less money.

Global agricultural markets have changed substantially since the

payments were first introduced in the early 1990s. World commodity prices

are rising and expected to continue doing so. Farms are also producing

non-food products, such as biofuels. These changes do not seem to be

reflected in the distribution of the support, which is rather blind to the very

large income differences and their causes across farms. The political

barriers are clearly significant, but the economic implications for the EU of

well-targeted cuts in areas with the highest welfare losses, such as the CAP,

would be minimal, even positive if one considers the opportunity costs.

It is also unfortunate that while in other areas there has been an

obvious attempt to promote public–private partnerships, this is still foreign

to the CAP proposals. A larger fund for sudden crises in the sector has been

specified without considering the potential of using private insurance

schemes to deal with some aspects of extreme events. The CAP needs a

better distribution of risks between the public and private sectors, which

also promotes precautionary actions. The role of the insurance sector needs

to be explored further.

3.2

Sustainable investment: Environmental and resource

efficiency

The EU has an important influence on the environment, for example due to

the substantial impact on the environment of the agricultural and fisheries

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policies. But the budget has major implications beyond these two policies.

The cohesion funds and regional development funds finance diverse facets

of the environmental infrastructure and are essential to help new member

states comply with the EU’s environmental requirements.

There is still a striking mismatch between ambitions and policies.

Unnoticed by many, the Commission unveiled a resource efficiency

roadmap for 2050.

This document presents an interesting strategy for

resource efficiency, including a considerable number of objectives to be

completed already by 2020. While the objectives are valuable, the EU

budget proposals do not reflect the roadmap sufficiently. There is a need to

bring more coherence to the different objectives and the EU budget. How

will the objectives of the roadmap be taken into account in structural

funding? Why is the LIFE+

programme so small if the environment is so

central to the 2020 strategy, if one is to follow the logic of the roadmap?

There is undoubtedly much to commend the promotion of an efficient,

lifecycle approach to resources.

European Commission, Communication on a Roadmap to a Resource Efficient

Europe, COM(2011) 571 final, Brussels, 20 September 2011(j).

LIFE is the EU’s financial instrument supporting environmental and nature

conservation projects throughout the EU, as well as in some candidate, acceding

and neighbouring countries. The 2014-2020 proposed funding of the programme is

of €450 million a year..

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UROPEAN ADDED VALUE OF PUBLIC GOODS AND THE EFFICIENCY OF EXPENDITURES

In a nutshell:

•

The CAP proposals still retain a large degree of financially

unjustified spending. Cuts in the EU budget should be sought

in this policy unless the policy is further reformed.

As far as possible the Council should press to improve the

targeting of the policy.

Rather than continue to protect the sector from extreme

events primarily through budgetary transfers, which

encourage moral hazard in the sector, what is needed is a

better distribution of responsibilities and risks with public–

private partnerships with the insurance sector.

The EU has outlined important objectives for resource

efficiency, but the budget proposals hardly touch on the

issue. The funding and EU objectives for the environment

should be reviewed, notably those of the LIFE+ programme.

•

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4. K

NOWLEDGE

BASED GOVERNANCE

AND INSTITUTIONAL SUPPORT

urope´s future must be built on a knowledge-based economy. This

was set out clearly in the Lisbon agenda and is once again confirmed

in the Europe 2020 strategy and the Communication on the

Innovation Union. In an ever more competitive world economy,

continually evolving cutting-edge technologies and supreme skills in a

variety of services are needed to secure high levels of employment and

living standards on our continent.

An important precondition for this is excellence in policy formulation

and policy implementation. A knowledge-based economy requires

knowledge-based governance, at both the national and regional levels and

within the European Union. With the progressively increasing impact of

our regulatory sphere, the quality of the EU machinery will achieve ever-

greater importance. European legislation is already decisive for our

economic development and is bound to become even more so in the future.

Growth is more dependent on EU rules than on EU expenditures. But

some EU expenditures are instrumental in the formulation and

implementation of EU rules. These deserve particular attention in the

elaboration of the new MFF.

The cognitive inputs required to provide momentum and sound

directions for EU policy-making reach the EU institutions from many

different sources. Research institutes, think tanks, interest groups,

businesses, NGOs, national governments and regional bodies all make

important contributions. It is vital that the EU institutions are well

equipped to assemble, systematise and digest all these insights, proposals

and criticisms. Much has been done in recent years to improve this process,

particularly since the 2001 governance report. New methods for impact

| 43

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NOWLEDGE

BASED GOVERNANCE AND INSTITUTIONAL SUPPORT

assessment are evolving and the practice of consultations has reached

impressive proportions. But the link between consultation responses and

Commission proposals remains opaque. The new opportunities for better

governance are hardly reflected in the Commission’s financial proposal. Its

discussion on ‘administration’ boasts about cuts already undertaken and

promises a further 5% reduction in the next period.

The administrative

programme put forward is based on such concepts as simplification,

rationalisation and the introduction of single frameworks. An ‘equal pains’

approach suggests that EU institutions should be reduced in response to

similar cuts in the member states.

This is simplistic and at odds with other elements in the budget

proposal. The idea of increased conditionality, for instance, is bound to fail

unless the Commission can deploy sufficient resources to conduct its

dialogue with national and regional governments and perform its own

analysis of their initiatives. Today, several DGs and parts of DGs are

already clearly under-equipped for this task. With the new proposals this

capacity deficit will inevitably expand.

EU legislation plays an increasing role in setting the framework

conditions for European enterprises and private individuals. External

policy analysis and diplomacy are vital to formulating European lines of

action and to asserting European interests in the world. Cramming all these

high-brow, highly qualified activities into the grey category of

‘administration’ is to misrepresent and underestimate the crucial

intellectual infrastructure of the EU.

The traditional label of ‘administration’ is actually singularly ill

chosen for the multitude of critical tasks carried out by the various

segments and sections of the EU institutions. In common parlance this term

conjures up the image of traditional paper-shoving bureaucrats, the tribe so

well described by Balzac, Dickens, Gogol and other masters of European

fiction. Under present conditions, however, it serves as a conceptual

umbrella for a whole batch of indispensable functions: analysis, forecasting,

statistics, implementation, auditing, monitoring, evaluation, impact

assessment, deliberation, adjudication, stakeholder communication and the

ramified activities of some 40 independent agencies.

European Commission (2011a), op. cit.

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A particular reason for the importance of these functions lies in the

inevitable uncertainty inherent in much governance. Policy decisions are

often made without full knowledge of the relevant causes and effects. This

makes it all the more necessary to provide for adequate follow-up

procedures and mechanisms for policy learning. Omissions in this sphere

can be very costly, as evident from the current euro crisis.

A further mistake is to make ‘simplification’ the principal avenue for

the development of EU governance. Pushes in this direction may play some

role but must always be balanced against conflicting interests.

Accountability to the taxpayers requires regulatory safeguards.

Sophisticated policy-making often relies on differentiation and avoidance

of the one-size-fits-all recipe. ‘Red tape’ has a bad name but the formal

requirements linked to obtaining EU funds also have many positive effects

in administrative cultures traditionally characterised by favouritism,

clientelism and cosy informality.

It is also important to note that reducing the size of the EU’s

administration may actually create more costs than cut them. For example,

the European External Action Service has been left underdeveloped, but by

pooling resources member states can actually save more than the costs of

running all the external policy services independently.

Strategies need to be evaluated in detail and reviewed not only by the

Commission. The idea of having a peer review of the smart innovation

strategies is positive, but this should also apply to other strategies for the

structural funds.

The quality of strategies depends on the quality of the people drafting

them. In some areas there is a need for a more proactive relationship

between the European Commission and national administrations, to

increase the capacity of the regions and countries to better utilise the

budget with a long-term growth perspective.

This reinforced role of the Commission clashes with the financial cuts

to administration. In countries where appropriate structures are missing,

the European Commission should be able to participate at local level in

solving the problems of the member states that seem unable to use the

funding correctly.

In conclusion, both the name and the size of the fifth heading of the

Commission’s proposed budget (administration) deserve reconsideration.

EU decision-making must be embedded in a continual pursuit of better

knowledge about policy costs, outputs and outcomes. High-quality

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46 | K

NOWLEDGE

BASED GOVERNANCE AND INSTITUTIONAL SUPPORT

governance mechanisms and strong support for the institutional

infrastructure of the EU are indispensable to strengthening the quality and

impact of EU rules, not least those connected with the internal market.

In a nutshell:

•

The EU’s deepening integration and the number of

responsibilities entrusted to the European Commission and

its agencies require a knowledge-based, high quality

administration. Presently this requires more investment –

not cuts.

In several areas, pooling the resources and having a central

administration rather than 27 separate national ones is a

savings measure. Cutting funding may result in more costs

than benefits.

The ‘administration’ heading in the budget does not reflect

the work of the European Commission and the other

institutions. The Commission should be an effective strategic

and monitoring body. Weakening it will not have a positive

net effect on the size and quality of the expenditures.

The European Commission should be more active on the

ground in countries unable to use the EU budget correctly.

•

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5. C

ONCLUSIONS

his report has emphasised that the EU budget is an important

investment tool for long-term growth and fundamental for the

functioning of the internal market. It is the principal financial

instrument for

joint action

by member states to face common challenges and

reach common objectives. The European Commission’s proposals reflect

the need to approach the budget in this way and it has launched plans that

do promote an investment vision for the budget, but they are insufficient to

reach the goals identified. This report presents the areas that should be

protected and advanced by the Council.

The EU budget should be geared towards

investing in long-term

growth, the development of the internal market, financing key EU objectives and

European public goods.

For long-term growth the report argues that the

focus on research and

innovation has to be protected and reinforced.

Cuts to the EU budget cannot be

undertaken in areas that will undermine Europe’s capacity to compete

globally and generate growth and jobs. No compromise can be acceptable

in these areas. Funding for research and development under the Horizon

2020 programme should be maintained at the level proposed or increased,

bolstering the funding to such vital components as the Strategic Energy

Technology Plan.

This report

recommends maintaining the proposed level of funding for the

Connecting Europe Facility,

but holds that the allocation of the funding

should be reviewed.

The future impact of the EU funds will depend on the quality of the

strategies and their implementation. The European Commission’s

proposals on the governance of the cohesion policy should be supported.

The requirements sought by the proposals in terms of strategies, which

include smart specialisation strategies to be drafted by regional or national

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48 | C

ONCLUSIONS

authorities (or both) for the structural funds, should be endorsed. Yet better

governance needs a stronger EU capacity to analyse, monitor and

implement policies. The Commission’s proposals for cutting administration

come at a time when demands call for the opposite.

Without the so-called ‘innovative’ financial instruments, the EU will

not be able to fulfil its objectives for the single market, innovation, energy

or climate change. Thus a strengthening of the instruments is necessary,

including the adoption of project bonds, which hold the potential promise

of speeding up the completion of crucial infrastructure. However, these

instruments should be used to make projects of high economic and

European added value feasible, not bad projects attractive to investors.

There is understandable pressure to rein in EU budget expenditures,

but cuts should be found in areas where the European added value is low,

not in areas that involve investing in the future innovative capacity of the

EU.

The EU budget should be an important tool to promote long-term

sustainable growth in Europe. It is time that this is recognised and

decisions are taken in line with ensuring it operates effectively and

efficiently towards this goal.

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EFERENCES

Boulanger, P. H. (2011), Distribution of agricultural direct payments: the

case of France, chapter 11 in OECD (2003),

Disaggregated impact of

CAP reforms,

Paris

Cipriani, G. (2010),

The EU budget: Responsibility without accountability,

CEPS

Paperback, Centre for European Policy Studies, Brussels.

European Commission (2009), Communication on Preparing for our

Future: Developing a common strategy for key enabling technologies

in the EU, COM(2009) 512 final, Brussels, 30 September.

––––––––– (2010a), Communication on EUROPE 2020: A strategy for smart,

sustainable and inclusive growth, COM(2010) 2020, Brussels.

––––––––– (2010b),

Review of the EU budget,

Commission Staff Working

Document, SEC(2010) 7000, Brussels.

––––––––– (2010c),

Interim Evaluation of the Seventh Framework Programme,

Final Report of the Expert Group, Brussels, 12 November.

––––––––– (2010d), Communication on the Europe 2020 Flagship Initiative –

Innovation Union, COM(2010) 546 final, Brussels, 6 October.

––––––––– (2010e), Communication on Energy 2020: A strategy for

competitive, sustainable and secure energy, COM(2010) 639 final,

Brussels, 10 November.

––––––––– (2011a), Communication on a Budget for Europe 2020,

COM(2011) 500 final, Part I, Brussels, 29 June.

––––––––– (2011b),

A Budget for Europe 2020: The current system of funding,

the challenges ahead, the results of stakeholders consultation and different

options on the main horizontal and sectoral issues,

Commission Staff

Working Paper, SEC(2011) 868 final, Brussels, 29 June.

––––––––– (2011c),

Proposal for a regulation on specific provisions concerning the

European Regional Development Fund and the investment for growth and

jobs goal and repealing Regulation (EC) No. 1080/2006,

COM(2011) 614

final, Brussels, 6 October.

––––––––– (2011d),

Innovation Union Competitiveness Report,

edition 2011,

Directorate-General for Research and Innovation, Brussels.

––––––––– (2011e),

High-Level Expert Group on Key Enabling Technologies,

Final Report,

Brussels, 28 June.

| 49

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50 | R

EFERENCES

––––––––– (2011f),

Roadmap to a Single European Transport Area – Towards a

competitive and resource efficient transport system,

White Paper,

COM(2011) 0144 final, Brussels, 28 March.

––––––––– (2011g),

Proposal for a regulation on guidelines for trans-European

energy infrastructure and repealing Decision No. 1364/2006/E,

COM(2011) 658 final, Brussels, 19 October.

––––––––– (2011h), Communication on a Growth Package for Integrated

European Infrastructures, COM(2011) 676, Brussels, 19 October.

––––––––– (2011i),

Proposal for a Regulation of the European Parliament and the

Council amending Decision No. 1639/2006/EC establishing a

Competitiveness and Innovation Programme (2007-2013) and Regulation

(EC) No. 680/2007 laying down general rules for the granting of

Community financial aid in the field of the trans-European transport and

energy networks,

COM(2011) 659, Brussels, 19 October.

––––––––– (2011j), Communication on a Roadmap to a Resource Efficient

Europe, COM(2011) 571 final, Brussels, 20 September.

––––––––– (2011k),

Proposal for a regulation on the European Social Fund and

repealing Regulation (EC) No. 1081/2006,

COM(2011) 607 final, Brussels,

6 October.

European Investment Bank (EIB) (2010),

Evaluation of Activities under the

Risk Sharing Finance Facility (RSFF),

Operations Evaluation Unit, EIB,

Luxembourg.

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Reflection Paper on the Concept of European

Added Value,

SURE Committee, Rapporteur: Salvador Garriga

Polledo, 21 September.

High-Level Group on the Trans-European Networks (2003),

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Group on the Trans-European Networks,

Report, 23 June.

JRC-IPTS (2009),

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(JRC), Seville.

Landabaso, M. (2011), “Innovation Strategies for Smart Specialisation and

the New Structural Funds Regulations 2013-20”, Regional Innovation

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BUDGET FOR LONG

TERM GROWTH

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Núñez Ferrer, J. and E. Kaditi (2007),

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expenditure – from market to multifunctionality – gathering criticism and

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and Firm Sizes,

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Brussels.

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PPENDIX

1. G

LOSSARY OF

ECHNICAL

ERMS

Bridge capital:

In the case of RDI, this refers to financial support for the

development of research results into a commercially viable product.

Debt financing:

A form of financial support that will cover the losses of lenders

if a debtor defaults; it is similar to a loan guarantee, but debt financing is

for ‘expected’ losses under normal conditions and thus equivalent to a

subsidy.

First-loss and second-loss risk:

In structured finance, the losses on a transaction or

a portfolio are distributed among various parties. Losses up to a defined

limit will first be borne (by writing off capital, foregoing interest or

otherwise) by a certain class. In the case of the Risk Sharing Financing

Facility, the first loss is taken over by a €1 billion guarantee of the EU

budget. Subsequent risk may be divided further, in this case second-loss

risk beyond the €1 billion and up to €2 billion are taken over by the EIB.

Grant:

Non-refundable financial assistance.

Economic rate of return (ERR):

The ERR is similar to the internal rate of return,

but incorporates the value of the social benefits of the project, which do

not accrue to the promoter.

Internal rate of return (IRR):

This refers to the private economic returns of a

project over its lifetime, minus net costs.

Loan guarantee:

Financial backing that protects the lender from losses incurred

if the debtor defaults.

Opportunity cost:

The value forgone of the best alternative use of resources, i.e.

the missed opportunity(ies) from any expenditure.

Project bonds:

In the project bond initiative, the project bonds are issued by the

project company with the assistance and methodology used by the EIB.

Project bonds themselves are not guaranteed by the EU or EIB. The EU

budget and EIB only offer a risk guarantee to a maximum of 20% of the

project, with the EU taking the first loss up to 10% and the EIB covering

the remainder up to 20%.

Risk-sharing:

The EU has developed a number of risk-sharing facilities. These

cover some of the financial risks of project promoters. Risk-sharing by

the public sector reduces the capital costs of loans (or increases the value

(reduces costs) of issuing private bonds), making projects viable.

52 |

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PPENDIX

2. T

ASK

ORCE

EMBERS AND

NVITED

UESTS AND

PEAKERS

Chair:

Daniel Tarschys

Professor Emeritus in Political Science and Public

Administration, Stockholm University and Chairman of the

Board of the Bank of Sweden Tercentenary Foundation

Jorge Núñez-Ferrer

Associate Research Fellow

CEPS

Sidonia Elzbieta Jedrzejewska

MEP (EPP)

Member, Committee on Budgets

European Parliament

Staffan Jerneck

Director and Director of Corporate

Relations

CEPS

Kamen Kumanov

Active Public Affairs

Anders Ladefoged

Head of the Brussels office

Confederation of Danish Industry (DI)

Barbara Mitosek

Assistant to Sidonia Jedrzejewska

European Parliament

Mathias Normand

Policy and Regulatory Analysis

Vattenfall AB

Rapporteur:

Andreas Brunsgaard-Jorgensen

Consultant, European Affairs

Confederation of Danish Industry (DI)

Vasco Cal

Economic Adviser, DG BEPA

European Commission

Olivier Debande

Managerial Adviser

Institutional Affairs

European Investment Bank (EIB)

Filippo Gasparin

Policy Adviser, External Relations

ENEL SpA

Danuta Hübner

MEP (EPP)

Chair of the Committee on Regional

Development

European Parliament

Valentina Izmirova

Manager

Active Public Affairs

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54 | A

PPENDIX

2. T

ASK

ORCE

EMBERS AND

NVITED

UESTS AND

PEAKERS

Jean-Paul Peers

Vice President

Energy & Sustainability

Siemens AG

Eric Perée

Associate Director

Institutional Affairs

European Investment Bank

Alessandro Profili

Director European Affairs

Brussels Office

Alcoa Europe

Elena Scaroni

Policy Adviser

European Institutional Affairs

ENEL SpA

Göran Svensson

Vice President

Vattenfall AB

Takahiro Tomonaga

General Manager

Strategic Information & Research

Mitsui & Co. Benelux SA/NV

Joana Valente

Adviser

Economics, Regional Policy & EU

Budget

BusinessEurope

Axel Volkery

Senior Policy Analyst/Acting Head

Environmental Governance

Institute for European Environmental

Policy

Peter Witt

Head of EU Representative Office

Siemens AG

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BUDGET FOR LONG

TERM GROWTH

| 55

NVITED

UESTS AND

PEAKERS

Pierre Bascou

Head of Unit, DG AGRI

European Commission

Peter Berkowitz

Head of Unit, DG REGIO

European Commission

Pierre Henri Boulanger

Research Fellow

European Commission

IPTS Joint Research Center

AGRILIFE Unit

AGRITRADE Action

Gabriele Cipriani

Director, Structural Policies,

Transport & Energy

European Court of Auditors

Göran Färm

MEP (S&D)

Member, Committee on Budgets

European Parliament

Anne E. Jensen

MEP (ALDE)

Member, Committee on Budgets

European Parliament

Mikel Landabaso Alvarez

Head of Unit, DG REGIO

European Commission

Lars Jörgen Magnusson

Administrator, DG Budget

European Commission

Paolo Pasimeni

Evaluation Officer, DG EMPL

European Commission

Andreas Reinstaller

Research Associate

Austrian Institute of Economic

Research (WIFO)

Juan Manuel Revuelta

Former Chairman

European Regions Research and

Innovation Network

Pascal Steller

Administrator, DG BUDGET

European Commission

Fabian Zuleeg

Chief Economist, Analysis

European Policy Centre

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