This budget is the first after the report by Mario Draghi that shook the community, clearly revealing Europe’s competitiveness problems. The continent’s economy is stagnating, the gap with the US is rapidly growing, and in many areas, China has surpassed us in technological advancement. This means a simple thing – for the standard of living on the continent to grow and for Europe to be able to respond properly to the challenges it faces, it is necessary to take actions that increase competitiveness.
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Therefore, the new EU budget must be assessed through the prism of competitiveness – will it help Europe become faster, more efficient, and more integrated? Will it become more favorable for companies to create, invest, and hire employees here in Europe rather than in other parts of the world?
The EU budget is becoming increasingly important for Lithuania as well – our economy is growing and catching up with other continental countries – meaning we will contribute more to the common EU pot. Gradually, we will become not recipients of support but supporters – especially in the context of the planned EU expansion. Therefore, it is more important than ever to answer the question – should the EU budget and its functions grow without limits? Or should the EU do less but much better?
Record budget – but a more competitive Europe?
The European Commission, having prepared the initial draft of the new budget, calls it ambitious and dynamic. It states that the proposed budget would provide a “powerful boost to Europe’s competitiveness and help secure safe supply chains, encourage innovation, and ensure Europe’s global leadership in green and smart technologies.” The size of the new budget is indeed ambitious – over seven years, it is planned to spend €1.76 trillion, almost half more than the current 2021–2027 budget period planned at comparable prices. Until now, the EU budget accounted for 1.11% of the continent’s economy; the planned budget could grow to 1.26%.
However, higher spending does not automatically mean a better life and business environment. Especially if it is not accompanied by decisions that reduce bureaucratic burdens on residents and businesses and is directed towards programs duplicating national-level functions. It is not easy to compare how spending on specific areas changes because some budget lines are merged – the number of spending programs decreases from 52 to 16.
For example, cohesion policy aimed at promoting the economies of less affluent countries is combined with agricultural support under the common umbrella of “national and regional partnerships.” At the same time, new spending areas are highlighted, such as the “European Competitiveness Fund,” “Defense and Security,” and “Migration and Border Control.”
The very fact that the EU intends to establish a new fund aimed at increasing competitiveness demonstrates that Europe recognizes the need to improve the business environment. However, doubts arise as to whether the lack of subsidies and other support measures distributed by authorities is the reason for the lost EU competitiveness. Mario Draghi’s report identified that in Europe, compared to the US, company growth is particularly limited by the fragmentation of capital markets, characterized by 27 regulatory and supervisory systems.
As a result, it is much harder for European companies to obtain financing than in the US, which has a unified, massive capital market. Meanwhile, billions of Europeans’ savings remain idle in savings accounts or flow into US stock exchanges. It is precisely the activation of private capital that would be the most powerful boost towards a competitive Europe.
Subsidiarity as a competitiveness test
The EU founding treaties establish that the basis of its community operation is the principle of subsidiarity. This means that the EU “acts only when and to the extent that the objectives of the proposed action cannot be sufficiently achieved by the member states at central, regional, or local levels, but can be better achieved at the Union level due to the scale or effects of the proposed action.” Thus, the question of what the EU should finance is helped by asking: can the country successfully solve this problem itself, or does it cross national borders and is too large for the country to handle alone? This is precisely how the EU budget should be assessed.
Cross-border issues mainly relate to the single market and free movement, for example, railway infrastructure improving connectivity between countries, external border protection, and combating international crime. It is obvious that international student exchange programs also exceed the competence of a single member state. Meanwhile, for example, organizing training for local farmers can be done by the member state itself – it is doubtful that European funding adds value here.
The subsidiarity principle helps distinguish where EU funding can strengthen competitiveness and where it simply becomes redistribution. The European network of analytical centers EPICENTER, which analyzed the proposed EU budget, points out that a large part of the funding programs planned in the EU budget do not pass the subsidiarity test. In other words, funding programs aimed at redistribution, support, or intervention in specific economic sectors should be financed not by the EU budget but at the national level of member states.
EPICENTER analysts note that the merging of programs and the reduction in their number in the proposed budget further complicate the ability to assess whether a particular spending line complies with the subsidiarity principle and creates added European value. For example, border protection (an EU competence) and migrant social integration (a national competence) are grouped into one program. Therefore, it is difficult to assess what portion of funds will go to functions of cross-border importance and what portion to national social policy measures.
New European taxes in a growing budget
New taxes for all Europeans are planned to finance the growing EU budget. It is planned that the number of autonomous EU-level revenues, which can be considered EU-level taxes, will increase from four to nine. Among the proposals are an additional tax on tobacco products, a tax on improperly collected electrical and electronic equipment waste. A worrying proposal is to introduce a new tax calculated on the turnover of EU companies.
Here the paradox of the proposed budget becomes apparent. Although the European Commission highlights competitiveness among the most important priorities and even intends to establish a special fund for it, it simultaneously proposes a new tax that hits the competitiveness of companies operating in Europe. Companies exceeding a set turnover threshold would have to pay it – even if the company is a start-up actively expanding, financed by private capital, and not yet profitable – it will not avoid this tax. Thus, it would become another reason to choose to operate not in Europe but, for example, in the US.
Traditionally, direct taxes (profit, income, etc.) are the competence of EU member states. Even coordinated EU activity in this area is very limited. This is because it is unclear why it is better to collect such taxes at the European rather than the national level. The subsidiarity principle also applies to taxes – corporate taxation must remain the responsibility of the national level. Therefore, the European Commission’s proposed turnover tax is not only economically harmful but may also program new conflicts between countries and EU institutions.
European countries already have a higher tax burden, significantly exceeding the taxation level of the US or other competitor countries. Therefore, to achieve European competitiveness, it would be necessary not to introduce additional taxes on European companies but to seek opportunities to ease the tax burden – precisely what applying the subsidiarity test to expenditures would allow.
EU course – from quantity to quality
For the budget to truly focus on increasing competitiveness, expanding the single market, and European added value, it needs to have limits – EPICENTER proposes 1% of the EU economy size, or €1.54 trillion for the 2028–2034 period. This would create a real incentive for the community to clarify priorities and ensure that funding is directed not to national-level programs or redistribution mechanisms but to productive areas crossing member states’ borders.
At the same time, more moderate spending would avoid new EU-level taxes that directly contradict the EU’s declared competitiveness agenda. Such a limit is not saving for the sake of saving – it would ensure that EU funding is directed to areas where European action truly creates value: the single market, cross-border infrastructure, external border protection, defense. A budget increasing European competitiveness must answer the question of how each euro will help Europe grow.
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