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A budget to square the circle

A European growth initiative: not one day goes by without the media, politicians or economists referring to it. It means a combination of sound public finances, deep structural reforms and targeted investment. Not only at the national level but also at EU level, so that we can take full advantage of the potential of our Union.

The European Commission’s proposal for the future EU budget, the 2014-2020 financial framework, is more than just about overall ceilings of future expenditure.

It includes new ideas and rules to better use taxpayers’ money for the benefit of 500 million Europeans, some 100,000 local and regional authorities and millions of small and medium enterprises.

At least as importantly, the proposal offers member states a new toolbox for economic reforms, targeted investments and smart fiscal consolidation.

The EU needs to ensure that competitiveness problems and structural reforms are addressed and carried out early enough. This is what our new economic governance model, including our new rules for EU spending, is all about.

As part of this new governance, we propose a new cohesion policy that strictly links access to structural and cohesion funds to the implementation of growth-enhancing structural reforms.

This will be done through so-called partnership contracts.

Some EU funds (cohesion, structural funds, rural development and fisheries fund – altogether accounting for over 40 per cent of the EU budget) would be suspended if a member state were not implementing required structural reforms in accordance with the partnership contract, in a “carrot and stick” approach.

Structural reforms are a crucial element of any EU growth strategy but on their own they are not enough. The modernisation of economies lagging behind in Europe will also require investments in order to create growth.

It is a well kept secret that the EU budget is one of the main drivers of investments for many member states. Cohesion policy alone triggers a substantial share of the public investment budget of all layers of government. For some countries in southern Europe, it triggers between 35 and 50 per cent of all public investments; for many new member states it is 70 per cent or, sometimes, even more.

Also, we propose that future EU budgets will invest substantially more in research and innovation, energy efficiency, education and infrastructure, in line with our Europe 2020 strategy for smart, inclusive and sustainable growth.

Take the proposed €50 billion for the Connecting Europe Facility.

Its aim is to help fund major cross-border transport, energy and ICT projects by completing the missing links in Europe’s essential economic infrastructure underpinning our internal market of 500 million consumers. The new German energy policy, the so-called Energiewende, is a good example of how important it is to massively invest in new networks, including in cross border energy networks.

Only the EU budget can ensure the cross border investments required to, say, transport power from one end of Europe to the other.

Additionally, we aim at strongly leveraging the EU budget, notably through the support of EU project bonds for key Europ- ean infrastructures.

Some might claim that such a growth agenda will put fiscal consolidation at risk. They are wrong.

First of all, at one per cent of the EU GDP and less than 2.5 per cent of all public spending in the EU, the EU budget is very modest. It is not the cause of Europe’s fiscal imbalances.

Second, the new rules for the EU budget provide strong incentives to stay on the path of smart fiscal consolidation.

Almost all member states and the European Parliament consider the Commission’s proposal to be a good basis for negotiation.

However, a number of member states want to cut the Commission’s proposal by “at least €100 billion” over the seven-year period.

And some of them want to reduce precisely those policies that benefit the most economic growth across Europe: cohesion policy, research and development and the Connecting Europe Facility.

Does this really make sense in the face of the described needs of the European economy? We do not think so. And what would the effect of such a cut be on public finances and deficits? At 0.084 per cent of the EU GDP, the amount certainly does not make or break sound public finances!

The proposed financial framework 2014-2020 is nothing less than an essential piece of a medium to long-term European growth agenda. The new rules governing EU spending will ensure that smart fiscal consolidation, investment funding and structural reforms will go together. This is the best recipe for growth in Europe.

Can it be improved? Certainly and we are very open to listen to proposals and ideas.

But, let’s be clear, the multi-annual financial framework is more than an agenda for growth and jobs.

In the face of the EU’s biggest crisis since its creation, negotiations on the financial framework are also a crucial test for the capacity of the Union to act and shape its future.

Mr Barroso is president of the European Commission and Mr Lewandowski is European Commissioner for Financial Programming and the Budget

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