The EU's budget is small. In 2008, it amounted to €129.1 billion. This was equivalent to just over 1 per cent of EU GDP - or 15 per cent less than the British government spent on the National Health Service alone. In budgetary terms, the EU does not come close to resembling a 'federal super-state'. Spending at EU level accounts for less than 2.5 per cent of aggregate public expenditure across the EU27 as a whole. Compare this with the US, where central government accounts for 55 per cent of general government expenditure. The reason the EU budget is small is that EU institutions discharge almost none of the functions of a modern state: despite decades of regional integration, key public goods such as defence, health and education remain primarily matters of national competence.

Despite its small size, the EU budget remains the source of bitter arguments among the member-states. One reason is that its structure looks increasingly out of kilter with the challenges facing the EU, such as climate change. Some 45 per cent of the EU budget is still consumed by spending on agriculture and rural development. Another reason why the EU budget excites strong passions is the scale of disparities in member states' net contributions. Unsurprisingly, net contributors have tended to agitate for change, while countries which are large beneficiaries of disbursements under the Common Agricultural Policy have tried to resist reform.

Against this backdrop, budget negotiations have become increasingly fraught. In December 2005, EU member-states finally agreed, after much wrangling, on a new budget for the period from 2007 to 2013. But the compromise came at a high political price. The new budget has little relevance to the EU's priorities, such as climate change, research and development, innovation, fighting against crime and terrorism or a stronger role for the EU in the world. And the final deal limits the growth of the budget, despite the EU's latest enlargement to ten new countries.

The EU is currently undertaking a review of the EU budget. The exercise will be crucial to the Union's ability to meet its ambitions. The CER has been actively contributing to this debate, and will further explore possibilities to reform the Union's budget in depth.