The following article is from our December 2004 issue.

"We are not Santa Claus". The European Union's future depends on its next budget. By Petra Pinzler

Now that the European Union is getting its own constitution, it can concentrate on other things, like finding a reliable source of funding.

Americans and Europeans have one thing in common. They do not like to pay taxes.
And they dislike it even more when the money goes to a distant political institution. No wonder that the European Union has never been allowed to raise its own taxes, but lives mainly off contributions from its member states. Very few people want to change this in the foreseeable future. Any politician who suggests a new E.U. tax would probably ruin his career. Nevertheless, most governments agree that Europe needs money to do its job properly. But who should pay for it?

At the end of this month, the 25 European heads of state will start haggling over money, and the debate will be more heated than ever before. During their traditional winter summit in Brussels, they will talk about the E.U. budget from 2007 to 2013. That sounds like a rather dull subject, but what makes the debate explosive is the hidden agenda of Gerhard Schröder, Tony Blair and Co. By determining the total amount of money and by assigning certain sums to certain policies, they will redefine the European Union. Will it become an institution with a small budget that basically controls a common market, a common currency and a highly subsidized agricultural sector?

Or should the European Union grow into an institution with a modern economic strategy and something to say in the areas of defense, justice and foreign and domestic affairs?
And last but not least: Will the European Union spread out the monetary responsibilities among the rich and poor member states and regions as it has up to now? Europe has a very complicated system of raising revenues and spending them. To work through all this will take time, and since the E.U. budget requires the blessing of every single member state, consensus is indispensable. The first big fight will be about who pays for what.
For a long time, the system was easy: Germany paid for everything no one else wanted to pay for.

Up to now, the biggest net contributor to the European Union never hesitated long when it came to being generous for the European cause. The land of the post-war "economic miracle" often found a way to settle conflicts - by spending more. Chancellor Helmut Kohl was especially famous for his "policies of the open wallet." He made the Germans pay for French farmers, British Euro-skeptics and the poor Spanish regions. This was not pure altruism. Kohl proved the old proverb that says, "money is power." Thanks to his politics, the French-German friendship became stronger than ever and dominated European politics for a long time, and he pushed the Union into the biggest enlargement ever.

When the European Union accepted ten new members in May 2004, it translated into huge benefits for Germany. For the first time in history, the country finds itself surrounded only by friendly neighbors - and open markets. Unfortunately, the good times are over. The spending policy had to come to an end. Economic growth is slow, unemployment high and public debt is growing. In addition, the reunification proved to be a much heavier burden than anyone had anticipated. Every year, Germany transfers four percent of its gross national product from its western states to its former eastern states. Consequently, Germany has been struggling with the strict E.U. budget rules for the last three years, during which time its deficit has been higher than the so-called E.U. Stability Pact allows.

Thus, the 20 billion euros Germany will contribute to the E.U. budget in 2005 - about one fifth - hurt. As a consequence, Chancellor Gerhard Schröder has no choice but to change his attitude toward spending. Even if he wanted, he could no longer just buy his way through the European Union. That is why he was so happy when, a year ago, Sweden suggested a ceiling for the Union's future expenditure. The Swedes brought together six governments, including Germany, and got them to sign an open letter that declared, "One percent is enough." The future Europe was not to spend more than one percent of its total gross national product. The E.U. commission could barely hide its annoyance. "Every summit resolution reads like a Christmas shopping list of the governments," complained one of its commissioners. "Every year, they want us to do more, but at the same time they refuse to give us the necessary means."

Romano Prodi, until recently the commission president, joked publicly: "We are not Santa Claus." His officials quickly informed the public that member states themselves spend an average of 45 percent of their gross national product. Then they presented a draft E.U. budget with a ceiling of 1.14 percent of the gross national product. "We cannot shoulder any additional burden," has been the favorite reply of the German finance minister ever since. He argues that Europe should at least take note of the costs of Germany's reunification.

To illustrate his case, his ministry displays a graphic with the title "net contributions." It shows how much every country contributes to the E.U. budget and how much it gets back.
The lesson to be learned: Germany pays much more than it gets, whereas other countries, for example Ireland, get more than they pay, though today Ireland's citizens are richer on average than Germans.

"The big problem with the European Union is not that the rich do not want to pay for the poor," explained one commission official. "The problem is the unjust burden shared among the rich." The commissioner called this a mistake of the past. Take Great Britain as an example. Twenty years ago, Margaret Thatcher taught a fascinating lesson on how to get the most out of the European Union. At an E.U. summit held in the beautiful French Chateau de Fontainebleau, the Iron Lady frankly refused to accept the budget. To end the deadlock and the endless debates, the others finally gave in and accepted a rebate for Britain.

Even years later, Helmut Kohl, who was still chancellor at that time, recalled that he would have given Thatcher more just to have his peace and quiet. Ever since the days at Fontainebleau, the British pay less into the E.U. budget than other countries. Last year, they saved four billion euros, even though they are now among the richest in the Union.
The British government justifies its special treatment with the fact that it cannot control the way the E.U. money is spent. They may have a point. Until now, almost half of the European budget is still spent to subsidize farmers. Another third goes to poor regions.
What remains after that can be spent on timely issues like research and development or foreign policy, but it's not much.

For a political institution that recently authored a constitution, has a common currency and soon will have a foreign minister, this is a hard burden to bear. How can the European Union stand on the same level with the U.S. administration when most of its bureaucrats are busy handing out subsidies for cattle and olive trees? How can it work efficiently when the designated foreign minister does not even have a modern airplane to travel the world?
Not only in political but also in economic terms, the E.U. budget does not reflect the Union's aspirations. The number of economists who criticize spending habits is countless, but the chances for a change in the foreseeable future are zero.

"None of the broad reform ideas have a chance to be get put into action," writes Friedrich Heinemann, an economist from the German think tank ZEW, who would prefer a big bang approach - a drastic change of policy. Just two years ago, France proved how difficult this would be. With the backing of Germany, Jacques Chirac, the French president, made sure that until 2013, agriculture will continue to receive huge parts of the budget. Chirac is not the only one fighting to keep privileges. As soon as people or countries get used to subsidies, they fight hard to keep them. And because Europe still needs unanimity of all member governments to change the way it spends money, change only comes in small doses.

At least one area is ready for a shake-up: The E.U. structural policy. This boring technical term hides a fascinating European idea. E.U. politicians believe that poor regions and countries can be made rich through wise public spending. Once the process is completed, they will have stable political systems and open markets. This worked quite well in Spain, Portugal and Ireland. The E.U. provided those member states with all kinds of financial help.

Today, Spain still receives huge amounts of money from Brussels, but soon the country will be expected to join those who pay more to Brussels than they receive. The same will happen with Ireland. The structural policy will have to change, if for no other reason than because of the recent Eastern enlargement. Ten new member countries, most of them much poorer than the average, would over-stretch the old form of solidarity. If Europe played according to the traditional rules, none of the old members would receive money from Brussels any longer. Every euro would have to be spent in the new Eastern member states. However, this would decrease the European Union's popularity among the western states even more.

Change is needed, and change will come - if only because the European Union cannot keep spending the bulk of its funds on poor regions and farmers forever. "The budget has to be directed to where it works most efficiently," said the Belgian economist André Sapir, who demanded a major reshuffling. He wants more money to go toward research and development in order to increase growth and employment.

The German government likes these ideas, in part because many of these programs could benefit its own industry. So who will pay the bill? And who will get what? The solution will probably be a complicated compromise - like always in the European Union.

Germany will still remain the largest backer of the European Union, but its share will have to decrease. The new member states will receive funds, but less than they would have received in earlier times. And slowly but surely, larger shares of the budget will be channeled into more timely areas, to fund the E.U. foreign service and its research programs, thus allowing Europe to grow into an international player with money in its pockets.

All of this will probably come at a slow pace, but maybe this is exactly what Europeans want - after all, everybody must have a say.

- Petra Pinzler is a European Union correspondent for Die Zeit.