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CEP policy analysis

Fighting over Peanuts? The European Union Budget

• Top of the agenda at the European Union (EU) summit on 15/16 December 2005 is the budget for 2007-13. The original proposal from the European Commission was for a budget of one trillion euros or 1.21% of EU gross national income (GNI). The proposal at the end of the Luxembourg presidency, rejected at the summit in June 2005, was for 871 billion euros (1.06% of EU GNI). Six months, and much discussion later, the UK’s proposal is for 847 billion euros (1.03% of EU GNI). • Any changes to the overall size and composition of the budget as a result of the summit are likely to be marginal. The current UK proposal includes cuts in development aid to new member states, cuts in rural aid to old member states, a major review of all spending in 2008 and a small reduction in the UK’s rebate. • Of the current EU budget, approximately 45% goes on the Common Agricultural Policy (CAP), 35% on structural funds (the EU’s supra-national regional policy) and 7% each on aid, administration and a diverse range of other policies. • The CAP has several negative effects. These include artificially inflating food prices in the EU, which is bad for consumers, particularly poorer ones; driving down the world price of food, which is bad for countries that produce food, many of which are poor and middle-income countries; and encouraging overproduction and specialisation by farmers, both of which may be bad for the environment. • Major reform of the CAP would use the principle of subsidiarity to repatriate the CAP to national level where it clearly belongs. • There are two main problems with the EU’s structural funds. First, the allocation of expenditure is highly political and as a result not well targeted on the poorest regions in the poorest countries. Second, the expenditure itself has not been very effective: no Objective 1 region (those targeted by the funds) has moved out of the category.

December 2005     Paper Number CEPPA002

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