By Giacomo Benedetto (@ggbenedetto), University of London

EU Money

Resort to reversion points is what happens in politics and policy where a failure to reach a decision has a consequence other than continuing the status quo. If there is no agreement and a reversion point takes effect, the political actor that can influence the reversion point has significant power. In determining what happens if there is no agreement, that actor has a strong negotiating hand before any failure in agreement happens. One of the most common examples of where reversion points take effect is in the politics of budgets, which require annual approval or re-approval. They could also apply to other areas of policy and could provide useful focus in policy analysis. 

My recent article in the Journal of Public Policy (The EU budget after Lisbon: rigidity and reduced spending?) analyses the changes to the rules for agreeing to the budget of the European Union (EU) that took effect with the ratification of the Lisbon Treaty in 2009 and evaluates power according to how and when a reversion point could take effect if a budget is not agreed upon. The paper looks at who is able to dictate the reversion point budget, for how long and under which circumstances.

EU spending is limited to just 1% of GDP, which is less than 2% of total public spending. This does not seem much, so why study the EU budget? This limited spending allows the EU to be more than a simple free trade area: it funds regulation of the world’s largest internal market and limited public goods to cover R&D that supports the market. Two-thirds of the budget, however, is allocated to redistribution towards agriculture or economically-deprived regions. This expenditure assures the support of sectors that otherwise might oppose market deregulation. It could also provide such redistribution more effectively than national schemes. A mere 1% of GDP is still money that has to be funded from somewhere, which makes the provision of limited public goods and redistribution unpopular with wealthier member states like the UK that make net contributions. The rise of Euroscepticism has interacted with the growth of austerity to allow for the formation of large enough groups of EU member states to block EU budget spending in recent years.

My article shows that, whereas the European Parliament and the national governments of the EU used to overrule each other in different areas of spending in the budget (the European Parliament could force through spending amendments on policy areas like R&D or regional development, while the governments could overrule the European Parliament on agriculture), this has been replaced by mutual veto. The governments and the European Parliament must actively agree with each other on everything, failing which a reversion point budget takes effect. If this occurs, so long as the national governments agree among themselves, one-twelfth of the previous year’s budget is approved month by month. Next, the European Parliament may exclusively exercise cuts-only powers to cut (but not increase) any heading or line in the temporary monthly budgets.

This is assumed to reduce the power of the European Parliament, which is seen as more profligate. But if the European Parliament becomes more cuts-oriented in the future, perhaps following a swing to more Eurosceptic parties in European Parliament elections, then it would want to use its new “cuts-only” powers.

Studying reversion points has revealed that the EU budget is going to fall due to the new rules ratified in 2009. The national governments and the European Parliament, respectively, lose the power to impose spending amendments in certain parts of the budget against the will of the other. The European Parliament gains a power to impose unilateral cuts on the budget if there is no agreement. In both senses, the recent rule changes for agreeing the EU budgets are inherently deflationary.

The recent annual budgets for 2011, 2012 and 2013 were agreed under the threat of reversion point budgets in which a European Parliament favouring increases had to accept the amounts that the national governments wanted. The desire for cuts trumped other considerations by increasingly Eurosceptic governments in net contributor states like the UK, Netherlands, Denmark and Sweden. These states have strong R&D sectors and have vociferously supported the reorientation of the EU budget from agriculture towards technological innovation. Because agriculture and regional development spending are defended by a large number of member states, the “cut” in the budget, which has increased under the shadow of reversion points, has been made to spending in the public goods of R&D and other growth-oriented spending—precisely the policy areas that the national governments clamouring for cuts ought to support.

The question for the future is whether the EU will be able to provide only traditional redistribution to agriculture and deprived regions—without public goods. This would be a lowest common denominator outcome threatened by the shadow of reversion point budgets even if it runs counter to the preferences of the wealthier net contributors whose only gain is an overall cut in spending. The alternative for the future could be agreement for budgets parallel to those of the EU as a whole. These could take the form of R&D and innovation spending for the Eurozone (and excluding the UK, Denmark and Sweden), agreed to not by the European Parliament but by participating governments alone. Such outcomes would mean that collective spending for part of the EU would come from outside EU structures and would weaken the core of the EU system. Such is the world of reversion points, deflationary spending and lowest common denominators.

This rather complicated case goes to show that, beyond EU budgetary politics, analysis of reversion points could inform our comparative analysis of likely policy outcomes in the future.

2 thoughts on “What Can Reversion Points Teach Us About Public Policy?

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