Hello, this is Phep Stokes, the podcast series of the Foundation for European Progressive
Studies in Brussels. My name is Lars Luander, I'm the Secretary General of Phep's and today I have the pleasure to talk to you from Cambridge and have a discussion with Professor Ian Begg, who is a professor of the London School of Economics and Political Science from the European Institute, where he has been working for a long time and remained in the recent decades a very active contributor to discussions about the functioning of the European Union,
especially when it comes to questions like economic governance, the European Union budget, questions of cohesion, economic and employment policies, and you name it. And sadly recently, he also had to be an expert on Brexit. But today my intention is not to talk about Brexit. I think we should focus on some interesting reports to start with. In the recent months, the Brussels debate when it comes to economics was focusing on two interesting reports delivered by two former
Italian Prime Ministers, one of them, Enrico Letta, the other one, Mario Draghi. And I really wonder what you think about these processes, the outcomes, to the extent we are aware of the outcome. Are we looking for the right issues when we want to discuss the internal market and competitiveness? Are we getting closer to find the key to a better functioning European economy here? It's very clear that the single market remains at the centre of the European project. If
you look at any European Union document, the words "single market" appear somewhere. So it's entirely appropriate that Enrico Letta, someone for whom I have great respect, has been charged with looking at the future of the single market. The problem sometimes is that these reports come out, they have plenty of exciting recommendations, and then not very much happens afterwards. This time, we have to hope that some of the analysis by Enrico Letta will lead to genuine action, and
therefore it's worth looking in a little bit more detail at some of the things he's proposing. He clearly wants to complete the single market. That's always on the agenda. Computing the single market is never easy because the more difficult things are the ones that get left behind, and it's the more difficult things that would make the biggest difference if they were realistically
achieved. For example, not having a single market for energy is in itself a problem when your major concern at European level is trying to make the green deal work to separate Europe from the Russian hegemony on energy supplies and to find a way of moving towards a much cleaner energy system. If you cannot interconnect between European countries, that's much more difficult. If you cannot transfer
production capabilities among European countries, that's much more difficult. So energy is clearly one where it's difficult, but ought to be done. The same goes for one of the other areas that is touched on in the Letta report, which is capital markets union. Europe does not have an integrated financial space, and the absence of an integrated financial space is itself an impediment to competing a single market, which covers areas beyond the traditional four freedoms, the freedoms of
movement of goods, services, labour and capital. It's the capital one which suffers when you don't have a capital markets union. In addition, I think one of the messages that comes out from the Letta report is you need to go beyond the traditional four freedoms. He mentions the fifth freedom, which is a freedom of research, of innovation and so on, the things that underpin
today's competitiveness rather than the 20th century competitiveness. It is worth noting, though, that the Slovenian presidency is as long ago as 2007 already put forward the idea of a fifth freedom to do with knowledge. So clearly it's something that has a background to it, but which really ought to be developed. That's the Letta report. The second report by Mario Draghi we know has been delayed. However, the three broad headlines of it that Europe needs to operate on
scale. A fragmented Europe is one which is less able to compete with the giants of the rest of the world, particularly China and the United States. Fragmentation naturally means the same sort of thing as the absence of a single market. If you're an integrated system economically, you also have a better single market. So the two reports coincide in that respect. What Draghi apparently is also going to advocate is that a Europe with better public goods is necessary. And in this context,
it's again very straightforward. If you're not able to generate the public goods at European level, which are required to underpin the economy because of national sensitivities, because there's a reluctance to provide the necessary finance, you're going to have a less productive European economy. So public goods I would entirely agree with Mario Draghi are things that need to be done. But he has a third dimension to this, which I think is derived from the notion of strategic
autonomy. And that is that Europe needs to be able to ensure that it has sources of supply that it can rely on. Strategic autonomy came about during the pandemic because of concerns about the dependence on China for particularly certain chemicals for protective equipment in hospitals and so on. But it's also an economic phenomenon. You don't want to have supply chains which can break at any time or which can be taken over by others if they decide they want that particular
supply. So it does make sense to do this. To sum up, in both reports, yes, the directions are good. The problem always is implementation. Great ideas probably going to be endorsed by the European leaders and then they sit back and do nothing about them. And that's where, to me, the policy challenge comes in. Is it not another problem that this discussion about the two reports has been somewhat disconnected from another part of the economic governance discussion, which is
about the fiscal rules. So seemingly, we have closed a discussion on fiscal rules before the European elections. And then when it comes to fiscal capacity at the European level, which Mario Draghi would seem to advocate, then it's a different thing. So would we not need more organic connection between the two sides? I agree, Laszlo, but I would say that you need to separate it into two categories. The first is the economic governance, the fiscal rules as
applied to member states. They constrain in some ways what member states are able to do. They can't run big deficits. They can't use debt as a means of propelling the economy forward. But separately, there's a question about whether the European level needs to have a new approach to
being able to finance things. Now, we saw this during the pandemic with the creation of the next generation EU package, particularly the recovery and resilience facility, which generated public investment aimed at moving forward to the big dossiers at European level, namely the Green Deal and the digital economy. That could provide a basis for a new approach at European
level. But we also need to come back to the fact that the EU budget overall is one percentage point of, it's officially called gross national income, but it's more or less the same thing as gross domestic product GDP. Yes. One percent at European level compares with US having 23% at present as
a federal level budget. With one percent, especially when it's highly constrained on the things that the EU level is able to do, cannot do the kinds of things that the federal level elsewhere, be it in the United States, in China, or even in Germany, is able to do to move the
economy forward. So I'd separate this into the two debates. Are the fiscal rules as agreed at the end of 2023 something that's going to make it easier or more difficult for member states to take initiatives to transform the economy and separately should we be rethinking the whole notion of EU finances. And I use the word finances deliberately because it's not the same as the EU budget. The trend over recent years has been for more of EU funding to come through what's
called off-budget mechanisms. And those off-budget mechanisms were taken to a new level by next generation EU because it meant borrowing for the first time by the EU level directly to fund EU policies. Yes, but in the EU there is a precedent of everything. As we discussed the letter report,
there was before by another Italian Prime Minister, Mario Monti, a report on the internet market. When it comes to this investment capacity, I think we should compare the current stage to the efforts of Jacques-Mcgarde-Juncker since 2014 when indeed it was understood that there is a deficit, a gap in the financing capacity of the European Union and a European fund for strategic investment was created to leverage private finance and capital increase for the EIB, the European Investment
Bank. But my impression is that this evolution is taking place with the speed of the snail. And we would need to switch gear and have a much faster progress when we have so much financing needs, when it comes to green investment, maybe defensive investment in today's contemporary security environment and many other issues. I quite agree. The European funds for strategic investment, which in the current round, the budgetary round, has been consolidated into what's
called "invest EU" was a useful innovation. Some of us were skeptical at the time that it would be another gimmick, but it does seem to have succeeded in boosting investment at European level. What it did not do was in that for the innovation led investment. The areas where Europe is lagging behind, particularly the United States and China, if we regard them as the two other poles of the global economy. Europe does not have the new technology leaders. If you
look through a list of the 50 biggest AI companies, one is in Europe. If you look through the list of even the high technology digital companies, the first one on the European list comes in around number 20. The others are in the US, in China, and even Taiwan has higher place companies
than the EU does. So there's clearly something going wrong with the economic model. And while something like "invest EU", the new version of the EFSI, is a useful instrument for this purpose, it's not on a scale capable of making the difference in the way that the Americans can, because they have big institutions and a successful financial system, and the Chinese can, because they have state capitalism.
So you would agree that this is a matter of scale as Mario Draghi is trying to stress. And again, I remember a previous debate when the discussion was about the multi-annual financial framework in the period of 2018-19, still under the UNKER Commission, when Maria Namatsu Kato was invited to also advocate maybe a doubling of the EU capacity which is used to horizon in order to boost
research and innovation. So should we this time focus on how much we spend on this, or there are other institutional factors as well which would be needed? Well, the institutional factors to start with that is very straightforward. The Member States do not want to give a power to tax to the EU level. And by doing that, they inhibit the EU level from raising revenue that it could use for the sorts of purposes
we're talking about. The EU budget, as I already mentioned, is capped around one percentage point of GDP. And with that amount of money, you simply cannot compete on the same terms with the Americans and the Chinese. So that's where the big institutional blockage is. How do you get round it? Well, a couple of years ago in her State of the Union address, Ustuf Onderlayen,
talked about a sovereignty fund. It seems to have been motivated by what was going on in the United States with the creation of the oddly named Inflation Reduction Act, which was really a massive industrial policy subsidy to promote green industrial activity in the US. It's been successful. Some query whether it's the right kind of approach, but there's no doubt that European companies have been dragged across the Atlantic by the incentives provided by the IRA.
The sovereignty fund idea seemed to take hold for some time after Onderlayen's mentioning of it, and then it gradually became less and less. It's like a nice lump of Hungarian salami, which is sliced and sliced and sliced, and in the end you only have a tiny bit left.
And what happened with the midterm review of the multi-annual financial framework earlier this year, it was concluded in February 2024, was that the one component of that idea which was left, something called STEP, the Strategic Technology for Europe platform, was indeed given more money. And how much more money? 1.5 billion. The outcome of the midterm review was to increase the EU
budget for the remainder of the seven-year period by 21 billion. And even the 1.5 billion for STEP is to be concentrated on defense research and production, and is to be funded by taking 2.1 billion away from the Horizon Research Program. So what started as potentially a very ambitious idea, a sovereignty fund that would be transformative for Europe, has been salami-sliced to next to nothing? Well, you are inviting me to go back even further in history, because what came to my
mind is the McDougal report from the late 1970s. And occasionally we refer to this when, of course, there were fewer countries in the European community at that time, so before it was called the Union. But they already opined that this 1% of the GNI which you have referred to several times, is something like a non-starter. If you really want to address the common needs of the European
economies and societies, they also consider defense in a way. So maybe before a new MFF work would begin, something like this, a new McDougal report could be justified. You're right. You're right. The McDougal report was an influential one at the time. It's also worth looking at the numbers in it, which was that for a fully functioning economic and monetary union, you ought to have an EU level fiscal capability of five to seven
percentage points of GNI or domestic product. Mention that kind of figure today and you will be laughed at because the 1% has been stuck in the way of thinking and the gulf between 1% and even the lower figure of 5% or even another assessment that McDougal did, which was just to make a monetary union tolerably functional, 2% of GDP. All these figures look fantasy now. So there is clearly a cognitive problem about this, which is can we envisage a European budget that
is fit for the demands being placed on it. There's a nice phrase that's often used in the foreign policy debates, which is that, it's attributed to Professor Christopher Hill, who's now at Cambridge University, which is the capability expectations gap. We have plenty of expectations of the EU level, but we don't give it the capabilities. And this applies very much to the budgetary area. Why can't the EU level do something? Is a question that citizens will
pose. Why isn't the EU able to respond much more forcefully to the pandemic, to the Ukraine crisis or anything else? Still the question. And the answer is because the member states won't allow it. I frequently have to explain to interlocutors from across the Atlantic or from the Far East that Europe is still the United, is not the United States of Europe, it's the United Europe of states where the states hold the power. And they are reluctant to grant that power to the European
level. Yes, this credibility grant is a very interesting concept. And I think it indeed is recreated all the time. In election times, a lot of lofty ideas are put forward, expectations are rolled out. But when you ask some of the countries that would you be happy to give up your rebate, they are not really happy to give up a rebate. And we have not yet spoken about doubling or tripling the budget to use it collectively for the common good of the Europeans.
But there have been a few efforts in the recent decades to address this gap. Since about 2005-06, a lot of financial engineering was invented and attached to the Cohesion Policy, partly with the involvement of the European Investment Bank. And I wonder if you have a kind of retrospective view on this. Is it something you would consider hopeful to develop the capacities of the EU budget to draw in and leverage private finance and use
similar engineering instruments? There is certainly the possibility of raising more money for European investment through something like InvestEU, which brings in private money, through the activities of the European Investment Bank beyond Israel and InvestEU, because it is able to mobilize private capital. We saw this with next generation EU, that borrowing to be used to finance EU policies was the breakthrough of next generation EU. Some of us thought at the time, maybe this is
a Rubicon being crossed to use the Julius Caesar metaphor. However, if you look around Europe now, the enthusiasm for next generation EU version two is very limited. You don't see the major players in this that willing to countenance a new version of such a borrowing fund. It's a one-off, it was a temporary arrangement, it's a one-off for the pandemic. Big countries which would have to take on some of the risk, like Germany, like France, are not that comfortable with the idea of
going forward with it. I think it is part of the solution, because the budget is so heavily constrained through the seven-year multi-annual financial framework, that if you want to fund something additionally to the budget, you really have to go outside its mechanisms. We saw this with next generation EU, we've seen it again with the Ukraine facility agreed earlier this year, which is going to rely on further borrowing. The EU is capable of borrowing, it has a AAA rating.
So it should be an element in the way that the EU moves forward. And in this context, I think that there is an odd paradox, which is the EU dictates very heavily how member states should adapt their fiscal frameworks through the economic governance changes that occurred at the end of last year. There isn't really an EU-level fiscal framework, which would encompass the borrowing as well as
the incoming expenditure of the conventional budget. So there is indeed a room and reason to search for possibilities when it comes to the assessment of the next generation EU and potential follow-ups. There is a key part of this, which is the so-called recovery and resilience facility. And I think most people in process would still say that the jury is out to judge the performance of this, but even if the jury is not yet speaking, some would say that this should
inspire some kind of reform of the cohesion policy. And I think we could zoom a little bit on the cohesion policy, because there's been a recent report published by the Commission. And basically, the speculation about the future of it is twofold. One is about qualitative issues, whether it should function as it has been, or it should take in more from the RRF model. And the other one is quantitative. But maybe you want to comment first on this qualitative aspect.
The way the debate is moving is that the Commission is very interested, and this will be for its entire proposals for the next round of the Martigno Financial Framework, in moving in the direction of what's called performance budgeting. The concept of performance budgeting is that you're not paid because you submit the invoices, you're paid because you achieve the results that you promised.
And the RRF typifies this because it has this notion of milestones, which are qualitative changes and targets, which are quantitative changes that you have to achieve before you get the next round of payment. The principle behind this is that it motivates those spending the money to make sure it's used well, and not just that it's used properly from an audit perspective. Does this translate into cohesion policy? Well, potentially it does, and already is doing,
because there were reforms in 2016 that led in this direction. And with those kinds of reforms, we can hope at least that a future cohesion policy will be far more orientated towards results in the evaluation literature. We talk about inputs, which is the money, outputs, which is direct consequences, bridges or roads or training places, results, which are things like, is the economy more competitive or are more people taken into employment, and longer
term impacts, which are transformative of society. The performance budgeting approach is somewhere between outputs and results. And I think it's a coming trend in many public administrations, very much pushed by the OECD and other bodies. Having said all that by way of introduction, I think, yes, that is the direction cohesion policy will want to go in. A concern behind this, which is that cohesion policy operates under one model at present, the RRF under a different one,
and sometimes they're chasing the same projects. And you can get confusion in the authorities at national level or more often at regional level about which is the best channel to follow. And you want to avoid that, especially when you consider that in addition you have the European Investment Bank providing financial mechanisms, sometimes aimed at the same kinds of targets. So some rationalization of all of this would be highly desirable.
And do you think it is possible in the next two years or before the new MFF would need to be presented? I think it's almost certain that the proposals the Commission is expected to produce in 2025 will strongly advocate a performance budgeting approach. I think one concern about
this is, let's say, the perspective of the local actors. I think there is some fear that local actors, municipalities, for example, or civil society organizations, which play some role or SME actors, so they would fear that if everything is so much top down and driven by the center, then they would lose their influence and capacity. How would you address this concern?
It is true. There's some risk to local actors' autonomy in this. But I think the notion of monitoring performance is tangential to whether or not the local actors have a sufficient input. They can have the input and say, here's what you want to do, define the milestones and targets in relation to what you want to do, and then you are judged on whether you deliver it.
Okay. Let me mention the quantitative aspect, which I think is looming around the cohesion question, which is this huge drive to re-energize the enlargement process of the European Union. I think whenever this takes place, obviously, there is an assessment of the needs of countries which potentially would exceed the European Union. How do you think this can be factored in into the budget debates in the coming period? Because maybe with some of the Western Balkan
countries, we do not speak about enormous economies or enormous populations. On the other hand, when it comes to Ukraine, let's not beat around the bush. It's a large population, as long as people return to Ukraine after the war. For both cohesion and agriculture, this would be a major impact on the EU budget. How can we prepare for this? Certainly a challenge with a future enlargement. If we take the maximalist position,
I think it would be useful to divide the candidates into two groups. The first is the welkin, the Western Balkans plus Moldova and Georgia. If you add up the size of their economies, they are somewhere between adding another Bulgaria and another Romania. Therefore, the budgetary impact is not that great. Montenegro is an economy the size of Malta. In a tenth of a percentage point of the EU economy,
assimilating that in budgetary terms is not that difficult. Bearing in mind one factor in all this, which is that their price levels are much lower than the EU average. That means if there's a net transfer to them, the order of 2% to 2.5% of GDP, because their nominal GDP is low, which is a combination of real GDP and the low price level, the cost to the EU budget is not very high. Ukraine, as you mentioned, is different. The size of the economy is clearly more than twice
all the other candidates put together. Plus, it is a very big agricultural sector, pre-invasion, it was around 11% of GDP. That is going to pose a major challenge for the common agricultural policy and therefore for direct payments. Ukrainians naturally would love to receive direct payments on the same terms as current members of
the EU. But Ukraine is a very productive agricultural sector. It doesn't need the support from an economic perspective in the same way as farmers do in current EU member states. So I think it will be necessary to review how the common agricultural policy works if Ukraine is to come into the EU in the next multi-annual financial framework. Now, there are many ways you could accommodate this. One is to have a transitional arrangement. Say that Ukraine is a
big bite to swallow and it's not something that can be done immediately. Transitions are normal with the new member states and therefore you slowly build in the Ukrainian, particularly agricultural sector. A second way would be to co-finance at national level some of the agricultural policy. That would not be at all popular with French farmers and you can guarantee they'd be blocking the Rudladouin, Brussels and the Champs-Élysées in Paris within minutes of this being proposed.
But let's face it, the agricultural policy is quite anomalous and the idea that such a big subsidy should go to a single small industry is something that is going to be at least under scrutiny in the proposals. Ukraine is also a very successful exporter and we've seen the tensions that has created in Poland, Hungary and the other countries bordering Ukraine because their exit route through the Black Sea had been blocked. So agriculture is going to be a big
problem with a potential Ukrainian enlargement. So I'd separate the two. Ukraine, difficult for the EU budget, the rest of the candidates easily assimilated. Well, Professor Imbaga, I would like to thank you for all these comments and insights. I think because of Brexit you have now a complete
objectivity and you are not biased for any player inside the European Union. So I think we both regret Brexit but maybe there is so much benefit in it that you can look at it from the outside and indeed judge all these questions from the point of view of good functioning rather than representing the interest of this or that player. Yes, the only thing I can hope for is that somehow or other Scottish independence enables me as a Scott to become an EU citizen again.
Should we cross fingers for this? We are supposed to be let's say also objective and neutral on this question because it's a matter for the citizens of the United Kingdom I suppose. So thank you again for the conversation and we count on your contributions and insights also in future opportunities at Peshash. Thank you. Kiss and then. Kiss and then. [MUSIC PLAYING]