Tight EU budgets usher in new era of efficient spending, innovative finance

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This article is part of our special report Efficient EU budget 2014-2020.

SPECIAL REPORT / When there is less money, the only way to cope is to spend it better and more efficiently. This is the age-old principle behind Brussels' approach to the next EU budget, for 2014-2020.

Efficiency has become the Brussels buzzword, even amongst the college of commissioners.

Yesterday (7 November), EU regional policy chief Johannes Hahn hailed the vote in the European Parliament on the reform of cohesion policy, as one introducing elements to make it more ‘effective and oriented towards clear results'."

>> Read: Revamped cohesion policy agreed after one year of negotiations

“To be sure, there needs to be a greater focus on results in meeting EU spending objectives and in financial management. However, there is no consistent view of what those objectives actually are at EU and national level,” said Vitor Caldeira, president of the European Court of Auditors.

In its annual report, published this week, the Court found that EU policymakers had missed a number of opportunities to clarify objectives, simplify programmes and schemes, link payments more closely to results, make internal control systems more results-oriented, and enhance monitoring and evaluation arrangements.

But the budget's legislative framework was too complex, the auditors argued and EU countries had little incentive to spend their part of the EU budget correctly.

“If Europe’s citizens are to be convinced of the need for EU-level programmes they need to see the added value they bring,” Caldeira said.

In recent years, the Court has switched gear and become very vocal on recommending changes and ditching programmes that do not provide tangible results. The number of special performance reports has increased from 12 in 2008 to 25 in 2012.

“Achieving more effective management of the EU’s finances will not be straightforward.  It is a problem which can be solved only through a partnership between EU and national authorities,” Caldeira said.

Added-value of EU funding

Criticism over spending is corroborated by the growing fear that the tightened €960 billion budget for the next financing period, 2014-2020, will not be able to put Europe back on the growth path.

The overall EU budget amounts to only a small share (around 2%) of overall public spending and it is insufficient to deliver the €1.8 trillion of future-oriented investment required to reach the EU's Europe 2020 targets.

In last year’s negotiations for the 2014-2020 budget, which awaits the final green light from the European Parliament, many of the headings considered essential to put Europe back on the recovery track have been either slashed or given meagre funding.

That was the case with the digital support of the Connecting Europe Facility, whose funding was hacked from €9 to €1 billion by EU leaders, compared to the initial Commission proposal. Even though some of the funding might be retrieved from the research and innovation budget line, the so-called Horizon 2020, officials may have to become more creative.

The Youth Employment Initiative also received little funding, with only 0.06% of the budget set for that purpose, in a time when latest figures show that 23% of young people in the EU are without a job. In Spain, 55.6% of under-25s are unemployed and the Commission recently said the figure was 63% for Greece.

Experts suggested a review of the powers of the EU.

“Looking at all the priorities, shouldn’t we test the principle of subsidiarity now that we are entering a new seven-year budgetary period to better delineate which policies are better dealt with at EU level,” said Mercedes Sánchez Varela, head of the EU office of KPMG, the global professional services company. 

Changing the focus from absorption to the impact of spending was a major achievement for policymakers, Sánchez Varela said, underlining the benefits of a more flexible budget.

In the next budgetary period, in fact, EU funds that are not spent will be reinvested in other programmes and not returned to member states. At the same time, the EU will be able to scrap failed projects more easily.

“The goal is not just to spend the money but to spend it wisely,” Sánchez Varela said, adding that pooling resources at EU level might in the long run prove more effective.

Innovative financing

KPMG published this week its Future State 2030 report on the mega-trends shaping governments. In the report, experts underlined that public debt is expected to pose a significant constraint on fiscal and policy options through to 2020 and beyond.

Sánchez Varela says innovative financing and the blending of funds across policy areas are possible solutions that are getting further support. She notes that the EU has already moved towards the use some funding from existing programmes to address the current challenges. 

According to KPMG EU's head, some evidence shows that loans and innovative financial instruments provided for SMEs have proven they might be more effective than grants.

The European Investment Bank uses a range of techniques to increase the impact of funding, especially for financing innovation.

Going back to the added-value and subsidiarity issue, a group of experts has already noted that EU countries might want to consider pulling resources at the supranational level, especially on defence and consular services.

As the Common Agriculture Policy has proved efficient in saving member states' money, it might be useful to see on what other areas that would be viable, experts said.

Inspired by the money saved by the EU's Common Agricultural Policy, experts are wondering where else EU-level cooperation might present added value.

“Now that a window of innovative opportunities is available for those actors that are capable of using them, there is new potential to reach higher impact with lower levels of investment,” Sánchez Varela added.

As the EIB continues to boost financing for SMEsEuropean Investment Bank President Werner Hoyer recently said: “We are well on track with our ambitious targets for an increased support for European SMEs and midcap companies. This underlines our strong commitment to contributing to the creation of jobs and growth in the EU.”

At a summit on 8 February, EU leaders reached agreement on a €960 billion long-term budget for 2014-2020, representing the first net reduction to the EU budget in history.

On 27 June, hours before the beginning of the EU summit, the three institutional top officials announced what appears to be a final compromise

Lawmakers have approved a compromise struck on 4 July on the multi-annual financial framework, the EU's budget for 2014-2020.

The European Parliament and the EU Council are currently entangled in a dispute over the budget for 2014. The European Parliament still has to hold a final vote on the long-term budget for 2014-2020, the multi-annual financial framework, on which a deal was struck over the summer.

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