73rd International Atlantic Economic Conference

March 28 - 31, 2012 | Istanbul, Turkey

Time to start a serious budget debate?

Friday, 30 March 2012: 12:00 AM
Lubor Lacina, Ph.D. , Faculty of Business Economics, Department of Finance, Mendel University, Czech Republic, Brno, Czech Republic
Luděk Kouba, Ph.D. , Economics, Mendel University in Brno, Brno, Czech Republic
In this paper, we aim to propose preconditions for reform of the EU budget expenditures. The proposal is targeted to the year 2014 when the new mid-term financial perspective should come into existence and therefore it respects the current level of EU economic and political integration. It means that it respects mainly the facts that the EU is not a federation, not all EU Member States are members of eurozone, some of them have status of neutrality, citizens of Member States mostly do not consider themselves as being citizens of the EU. The last fact does not allow feeling of interstate solidarity at personal level that would e.g. make acceptable EU-wide social security schemes or even harmonise corporate income taxation. For these reasons, the reform proposal cannot accept all suggestions that literature on fiscal federalism makes concerning division of responsibility for public finance management across different layers of public administration. Positive approach to the presented reform proposals, that is mainly their political acceptability, will be discussed at the end of the paper. The paper presents a proposal how the EU budget expenditures should look like according to the theory of fiscal federalism (respecting the current level of EU economic and political integration), not how it might look like when all political aspects are taken into account. 

Special attention will be given to the evaluation of stabilization function of EU budget. The eurozone debt crisis showed in a full glance the missing ability of EU budget to compensate asymmetric shocks among eurozone member countries. Most of the transfers to indebted countries had to come outside EU budget and, in total, several times exceeded the size of annual EU budget. The limited size of EU budget in terms of GDP compared with the size of federal budgets of comparable monetary unions (or in other words optimum currency areas) like USA thus is viewed generally as the decisive weakness of European economic and monetary integration project. Even the USA are frequently used as a benchmark while analysing the functioning of federal budget as an automatic adjustment mechanism within monetary union in our paper we will use instead the example of German federal budget as an source of experience for EU (eurozone) discussion about possible reform of EU budget.