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The European Added Value of EU Spending: Can the EU Help its Member States to Save Money? Exploratory Study The European Added Value of EU Spending: Can the EU Help its Member States to Save Money? Exploratory Study 3 Table of Contents Introduction . 6 Executive Summary . 8 What is European added value? . 9 Case study 1 . 10 Case study 2 . 11 Case study 3 . 12 Conceptual Framework European Added Value: A Proposal for Clarifi cation . 16 Conceptual framework . 17 Existing methodologies and evidence . 24 Quantifying European added value . 26 Outlook . 31 References . 33 Case Study 1 Does the CAP Cap Agricultural Spending in the EU? . 36 Explaining public expenditure on agricultural policy . 39 Results . 46 Conclusions . 50 References . 52 Appendix . 54 4 Case Study 2 One Embassy with 27 Flags – The Potential Benefi ts from European International Representations . 56 Theoretical and legal aspects of a potential European added value . 58 Potential for centralisation . 61 Quantifi cation of European added value of a common EU diplomacy . 65 Conclusions . 75 References . 77 Appendix . 78 Case Study 3 The Fiscal Added Value of Integrated European Land Forces . 80 What is the status quo of European land forces? . 82 How many soldiers does Europe need? . 86 What is the potential European added value? . 95 Conclusions . 99 References . 101 Appendix . 103 Theoretical Framework Measuring European Added Value: The Problem of Preference Heterogeneity . 110 Economies of Scale in the Public Sector: Concept and Measurement of European Added Value . 120 Project Team . 128 Expert Group . 129 Production Credits . 130 5 Introduction Introduction Critical public debt levels have forced EU member states to pursue fi scal consolidation. Yet, there is a fl ip side to the austerity policies being administered to overcome the sovereign debt crisis. Cut backs in social transfers and public service delivery erode the social welfare architecture of the European economic model. Growing social insecurity, in turn, challenges European integra- tion. Ever declining popular approval rates for the EU speak for themselves. In addition, the scaling back of public investments seems not to be an option either. This only further strangles what is left as potential for growth. Given that ever less money is available, increasing the effi ciency of public spending – one would think – becomes the order of the day. One possibility to achieve such effi ciency gains is the appro- priate allocation of spending across all levels of government. In the EU context, this would mean determining what governance level in the EU – Brussels or the member states – could do what best, and thus be in charge also in fi scal terms. The assumption is that in certain areas where, for example, economies of scale come into play a “euro spent at the EU level brings more benefi ts than if spent at the national or regional level,” as the European Commission puts it. It was the Commission that featured the concept of the European added value when it released its EU budget proposal for 2014 to 2020. According to the EC, added value “is best defi ned as the value resulting from an EU intervention which is additional to the value that would have been otherwise created by member states alone”. The Commission’s argument for reform of the EU budget did not fell on fertile soil with member states. During the budget negotiations, the ques- tion of European added value played at best a tangential role. Instead, old-fashioned juste retour thinking prevailed. The fi ght was, once again, over the size of the budget and the way in which appropriations are distributed. It was not about how the quality of the EU budget can be improved to the benefi t of Europe’s citizens. It may not come as a surprise to hard-nosed political warhorses that even in times of fi scal crisis so little thought was given to a more rational assignment of fi scal activities between the EU and its member states. For them, politics based on empirical evidence is as such a contradictio in adiecto. Unfortunately, thus far political reality offers ample proof that political and economic logic simply do not pair – at least not in budget negotiations. Nevertheless, these realists fall short when it comes to answering how politicians can continue to evade these economic choices, especially at times when neither their nation state nor the EU can deliver the public goods needed to protect citizens in a globalised world. 6 Introduction The following explorative study was initiated by the Bertelsmann Stiftung. Our intention was to underscore the European added value argument by putting a price tag on the savings and losses incurred by EU spending. In research hitherto carried out, European added value has largely been defi ned on the basis of qualitative criteria. This made the concept fuzzy as it became pos- sible to prove the added value of a European policy as well as the opposite. It was therefore our aim to operationalise the concept to be able to rigorously quantify European added value in the previously untested fi elds of agricultural policy, foreign affairs, and defence. In an empirical approach, we entered uncharted waters from the outset. But it seemed worth every effort to pres- ent proof for the fi rst time that the EU indeed can save its member states’ money. The project was run in cooperation with the Centre for European Economic Research (ZEW), which worked on the conceptual framing and most of the data processing. Our case study on the added value of Common Agricultural Policy spending would never gotten as far as it did without the expertise and dedication of Stephan von Cramon-Taubadel from the University of Göttingen. Likewise, we would not have been able to calculate the potential cost savings of integrated land forces without RAND Europe joining our project team. In addition, from the beginning the proj- ect was supported by a group of experts from academia and the policy arena. Their input, be it in paper form or during our four expert group meetings held in Brussels in 2011 and 2012, was invaluable in shaping our research and ensuring that our project’s output is of high quality and benefi ting of policy experience. Stefani Weiss 7 Executive Summary Executive Summary Our research on European added value (EAV) has provided different types of insights. First of all, it demonstrates that more precision in the use and application of the highly popular term ‘European added value’ is desirable. EAV can only be a helpful concept if it is consistently applied. A second insight is that, at least for specifi c, well-defi ned policy fi elds, EAV quantifi cations are indeed possible. While diffi cult and technically demanding, quantifi cations of EAV are feasible and can provide important insight for policy debates. This study has developed defi nitions and concepts that might serve as a guideline for best prac- tices in future EAV studies. The defi nition of a counterfactual must be a defi ning element for any meaningful approach. Real quantifi cations of an ‘added’ value through EU involvement are only possible if the costs or the impact of EU spending can be compared to the costs or the impact of national spending (the national counterfactual, as presented in the case study on the Com- mon Agricultural Policy). The reverse is also true: if spending is still mainly national and the potential of a stronger EU involvement has to be assessed there is the need to derive a European counterfactual with which the actual national policy could be compared (as done in the studies on international representations and defence). Our applications to three very different policy fi elds have demonstrated that the identifi cation of a national or European counterfactual is challeng- ing and that no uniform prescription is possible. Possible approaches comprise the econometric estimation of spending models or the calculation.