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CESifo Economic Studies Advance Access published online on June 1, 2009
CESifo Economic Studies, doi:10.1093/cesifo/ifp013
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© The Author 2009. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Addressing the Net Balances Problem as a Prerequisite for EU Budget Reform: A Proposal

Angel de la Fuente*, Rafael Doménech{dagger} and Vasja Rant{ddagger}

Conflict among member states regarding the distribution of net financial burdens has been allowed to contaminate the entire design of the EU budget with very negative consequences in terms of equity, efficiency and transparency. To get around this problem and pave the way for a substantive budget reform, we propose to decouple distributional negotiations from the rest of the budget process by linking member state net balances in a rigid manner to relative prosperity. This would be achieved through the introduction of a system of compensating horizontal transfers that would take to its logical conclusion the Commission's proposal for a generalized compensation mechanism. We discuss the impact of the proposed scheme on member states’ incentives and illustrate its financial implications using revenue and expenditure projections for 2013 that are based on the current financial perspectives and own resources decision. (JEL code: H87)

Key Words: EU budget • net balances


* Instituto de Análisis Económico, CSIC, Barcelona, Spain. e-mail: Angel.DelaFuente{at}uab.es

{dagger} Servicio de Estudios del BBVA and Universidad de Valencia, Madrid, Spain.

{ddagger} Faculty of Economics, University of Ljubljana, Ljubljana, Eslovenia. This article is part of a research project co-financed by the ERDF and Fundación Caixa Galicia. Additional financial support from the Spanish Ministry of Science and Innovation under research grants ECO2008-04837/ECON and ECO2008-04669/ECON is also gratefully acknowledged. We thank an anonymous referee for his constructive comments and suggestions.


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