Why and How should the EU budget be reformed?

If there is one subject that has been thoroughly explored for many years it is the EU’s finances. Institutional actors, like the Commission or the European Parliament, or many academic experts have all provided valuable and largely converging “diagnoses” on the “weaknesses” of the EU budget. The analysis of the allocation of functions in a multilevel Europe can fruitfully start from the lesson of the fiscal federalism theory. This theory can give many useful insights to the existing European effort to review the current allocation of functions between the European Union and member states. Although this theory has been developed in quite different contexts from the present European one, it can be helpful in providing guidelines for the future European construction. The conventional wisdom – the conclusion of the traditional fiscal federalism theory – argues that the functions of redistribution and stabilization should be attributed to the central level of government, while the function of allocation, in particular in the case of impure or local public goods19 should be transferred to sub central level, namely national governments. However, this theory has always been referred to federal countries and has been applied in federalist contexts while the current European Union is quite far from this dimension. Moreover, fiscal federalism is per se a static theory that stems from mature federations, while the present-day EU needs a dynamic, flexible approach that may guide the institutional process and the economic building. The design of competence allocation in a well-settled, mature federation, it is quite an easy task, while finding the right mix of competence distribution in an evolving process, from an economic union to a quasi-federal entity, is a different and daunting issue. What the European Union needs is a simple but sound rule which can help in its building process and in revising the distribution of government responsibilities among the central tier and the national ones along the road of European integration. Of course, this does not imply that the path has been definitely charted and that we are bound to move to a federal dimension. Even better, recent institutional developments seems to show that the European Union can even remain a single market or a simple economic union; but a flexible blueprint is needed. In this paper we address major pitfalls of the current Eu budget and we propose some possible reforms in the structure of its financing and current revenue.