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3.4.  The finances of the European Union

    The conventional international organisations such as the UN or the OECD are financed by contributions from their member countries. In most instances their financial requirements amount to staff and operational expenditure. If they are entrusted with operational tasks, their financing is generally provided on an "à la carte" basis by those member countries which agreed on those tasks. It is virtually never a question, in such organisations, of financial transfers or even of financial compensation. The European Union, on the other hand, although it is not a federation in the formal sense, pursues many federating common policies, which call for a transfer of resources from the national to the supranational level.

    Some common policies of the European Community/Union are clearly in the interest of the stronger and wealthier Member States. This is the case notably of the internal market, competition and taxation policies, because they open the markets of the poorer and less developed Member States to their products and services. Therefore, some other policies are needed to balance the benefits of the integration process, by operating capital transfers in favour of the poorer Member States: e.g. agricultural, regional and social policies. These transfers of capital are also in the interest of the wealthier Member States, since they allow their poorer partners to buy more of their products and services. This balance of the benefits of the Member States, which distinguishes, inter alia, a multinational integration scheme from a free trade area one, is organised by the Union budget.

    The implementation of many common policies requires, indeed, not only legal but also some financial means. Certainly, not all common policies need common financing. For example, competition and taxation policies are based almost exclusively on legal measures. But the implementation of most common policies is based on a mixture of legal and financial measures. Common regional, education, aid to development policies, e.g., would be seriously restrained without European financing of their common programmes. There could be no common agricultural or fisheries policies, in the sense that we know them, without common support of prices and/or incomes [see sections 21.4.2  and 22.3]. It is a political value judgment whether there should be more or less common financing of this or that common policy and this judgment is subject to a long debate carried out every year among the budgetary authorities of the Union - i.e. politicians from the Member States sitting in the Council and the European Parliament - on the basis of technical reports and proposals provided by the Commission. The result of this multinational political debate is recorded in the budget of the Union.

    In the beginning of the European Economic Community, the contribution of the Member States to the Union budget was determined on a scale according to GNP shares or other criteria. Provision had been made in the EEC Treaty for replacing the Member States' initial contributions by own resources after establishment of the Common Customs Tariff (CCT) [see section 5.2.1]. The transfer of customs revenue to the Union budget was a spillover effect [see section 1.1.1] of the realisation, provided for in the Treaty, of a genuine customs union [Decision 70/243]. In such a union the country of import of goods from a third country is not always the country of final destination of those goods. The revenue from customs duties is therefore often collected in a country other than the country of destination or of consumption. Only the payment of that revenue to the Community (now the Union) makes it possible to neutralise that effect. This is, moreover, an important integrating element, which again differentiates a customs union from a free trade area [see the introduction to part II].

    However, since the realisation of the customs union in 1968, the importance of customs duties was continually diminishing inasmuch as they were being progressively abolished or reduced under the General Agreement on Tariffs and Trade (GATT) and the various tariff concessions granted to the least developed countries [see section 23.4 and chapter 24]. For that reason it was decided, in 1970, to use a proportion of the value added tax (VAT) as an additional source of Community/EU financing. That tax, which has a uniform basis of assessment, takes fairly accurate account of the economic capacity of the citizens of the Member States, as it is levied at the consumption level [see section 14.2.1]. The "uniform base", which was adopted for calculating the proportions of the VAT yield which countries must pay to the EU, is made up of all taxable supplies of goods and provisions of services in the Union [Decision 88/376].

    Since 2001, the system of the European Union' own resources is based on the following elements [Decision 2014/335 and Regulation 608/2014]:

    ·       the maximum ceiling on own resources is fixed at 1.29 % of gross national income (GNI) of the  EC/EU (+/- 70% of the resources);

    ·       traditional own resources - essentially customs and agricultural duties - minus 20% retained by the Member States as collection costs (+/- 15% of the resources);

    ·       0.5% of the maximum call-in rate from VAT resources, aiming at correcting the regressive aspects of the system for the least prosperous Member States (+/- 15% of the resources);

    ·       technical adjustments aiming at the correction of budgetary imbalances in favour of the United Kingdom and originating in the famous battle cry of Margaret Thatcher of 30 November 1979: "I want my money back".

    However, EU expenditures still represent little more than one percent (actually 1.03%) of the EU gross national income (GNI). More than 90% of the receipts of the European Union are redistributed to the 28 Member States and serve to finance the objectives of the various common policies (redistributive function of the Union budget). Thus, out of a total € 155 billion in commitment appropriations of the 2016 budget, the most important commitments were: € 69.8 billion (45.0% of the total) for smart and inclusive growth, including regional growth and cohesion, employment, research, energy and transport networks, education and training; € 62.5 billion (40.3% of the total) for sustainable growth and natural resources, including agriculture, rural development and the environment; and € 4.1 billion (2.6% of the total) for security and citizenship. Only € 9.2 billion (5.9% of the total) were allotted to 'Global Europe', i.e. EU actions outside the Member States, including pre-accession aid for candidate and potential candidate countries, the neighbourhood policy and aid to development and humanitarian efforts around the world. The administrative costs of EU institutions and organisms amounted to € 8.9 billion (5.7% of the total commitments).

    The multiannual financial framework (MFF) is the EU's long-term budget framework that translates the political priorities of the Union for a period of at least five years in economic terms. Actually, the total commitment appropriations of the MFF for the years 2014 to 2020 are fixed at 959.988 billion EUR [Regulation 1311/2013, last amended by Regulation 2017/1123]. Annual budgets must be compatible with the MFF. The MFF enforces financial discipline ensuring that the Union's expenditures are growing in a predictable way and within the limits of own resources. It also facilitates the procedure for reaching agreement on the EU's annual budget between the Council and the European Parliament, which are the two institutions responsible for the adoption of the Union's budget.

    Each year, the European Commission prepares the preliminary draft budget, and submits it to the Council in April or early May, taking account of the multi-annual financial perspective in force and the budget guidelines for the coming year. The budgetary authority, consisting of the Council and the European Parliament, amends and adopts the draft budget, the latter having the final word, as it may reject the budget, in which case a system of provisional twelfths applies until the two branches of the budgetary authority reach an agreement. An Interinstitutional Agreement between the European Parliament, the Council and the Commission aims to implement budgetary discipline and to improve the functioning of the annual budgetary procedure and cooperation between the institutions on budgetary matters as well as to ensure sound financial management [last amended by Decision 2009/407].

    The Treaty of Lisbon abolished the distinction between ''compulsory'' expenditure (i.e. resulting from the treaties and the decisions adopted pursuant thereto) and ''non-compulsory'' expenditure, with the result that the European Parliament and the Council have equal powers for the whole budget (Articles 14 TEU and 314 TFEU), which is renamed from ''budget of the European Communities'' to ''Union budget'' (Article 310 TEU).

    The management of the Union budget is entrusted to the Commission (Article 317 TFEU, ex Article 274 TEC) and is exercised according to a Financial Regulation, which sets the principles and ground rules governing the establishment and implementation of the budget and financial control, ensuring more efficient and effective management and control of European taxpayers' money [Regulation 966/2012, last amended by Regulation 2015/1929 and Regulation 1268/2012]. Article 325 TFEU (ex Article 280 TEC) stipulates that the Member States must coordinate their action aimed at protecting the financial interests of the Union against fraud and must take the same measures to counter fraud affecting the financial interests of the Union as they take to counter fraud affecting their own financial interests [COM/2000/358].

    It is interesting to note that the guarantee of the Union budget covers lenders when the Union floats an issue under one of its financial instruments, such as the balance of payments facility or the financial assistance for certain non-member countries. A Guarantee Fund for external actions is designated to reimburse the Union's creditors in the event of default by the recipient of a loan given or guaranteed by the Union or of a loan guarantee issued by the European Investment Bank for the benefit of in a non-member country [Regulation 480/2009 and Decision 466/2014].

    In a report entitled “Financing the European Union - Report on the operation of the own resources system”, the Commission concludes that the correction granted to the United Kingdom should be replaced by a “generalised correction mechanism”. It also proposes the introduction of a new system for financing the European Union centred around a main fiscal resource based on the taxation of energy consumption, value added tax (VAT) or corporate income tax by 2014. At the Brussels European Council meeting (15-16 December 2005), the United Kingdom accepted a reduction of the increase in the rebate, from which it has benefited since 1984, to EUR 10.5 billion during the period 2007-13, decoupling the rebate from all enlargement expenditure until 2013. The calculation of the correction in favour of the United Kingdom shall therefore be adjusted by progressively excluding expenditure allocated to Member States which have acceded to the EU after 30 April 2004, except for the agricultural and rural development expenditure [Decision 2007/436, last amended by Regulation 1377/2014].

    Like other public funds, the European Union budget runs the risk of having fraudsters enrich themselves at its expense or embezzle the levies which normally should be transferred to the Union. Therefore, the management of the Union budget is subject to several controls. As far as anti-fraud is concerned, the Commission has developed an effective information system based on the IRENE database, which stores the cases of fraud and irregularities reported by national authorities in any budgetary area. It has established an anti-fraud strategy and an annual work programme in this field [COM/94/92 and COM/95/23]. The Commission has also set up an Advisory Committee for the coordination of fraud prevention, which provides a forum in which the most important cases of fraud can be tracked and horizontal matters relating to prevention and prosecution can be discussed [Decision 94/140] and the European anti-Fraud Office (OLAF), a body independent of the Commission whose members are appointed by decision of the Parliament, the Council and the Commission [Decision 1999/352, last amended by Decision 2015/2418], in order to conduct investigations concerning the Union's financial interests [Regulation 883/2013]. The Hercule programme promotes activities in the field of the protection of the Union' financial interests, notably training, technical assistance, development and distribution of know-how and data exchange projects [Decision 804/2004]. Finally and most importantly, the Commission adopted Regulations concerning irregularities and the recovery of sums wrongly paid to the Member States in connection with the financing of the structural policies and the Cohesion Fund [Regulation 1828/2006], as well as of the common agricultural policy [Regulation 1848/2006]. A Council Regulation lays down general arrangements on inspections carried out by Commission staff in the Member States, providing a legal basis for conducting inspections and on-the-spot checks as part of anti-fraud operations [Regulation 2185/96].

    However, the anti-fraud strategy necessitates an active cooperation between national and EU administrations. Indeed, as national customs officers are in reality Union customs officers, since they collect customs revenue on behalf of the Union, so national anti-fraud officers should also be agents of the management of the Union budget. On the basis of this Treaty stipulation, the Regulation on the protection of the Communities' (nowadays the Union's) financial interests seeks to protect taxpayers' money more effectively by introducing a common legal framework to combat the waste and misuse of Union resources [Regulation 2988/95]. It applies to irregularities involving budget expenditure or revenue in all areas covered by common policies and establishes appropriate administrative penalties to be applied uniformly in all Member States in accordance with the same principles and methods. To amplify the Regulation, a Convention on the protection of the Community's financial interests drawn up on the basis of Title VI of the TEU requires Member States to establish a specific criminal offence of "fraud against the Community's financial interests" and provides for convergence in respect of penalties. The multiannual action programme ‘Hercule III’ (2014-2020)  promotes activities against fraud, corruption and any other illegal activities affecting the financial interests of the Union [Regulation 250/2014]

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