3 May 2018

The European Commission yesterday published its proposal for the next Multiannual Financial Framework (MFF): the EU 2021-2027 long-term budget. While this is only an initial proposal that might well change before approval, it will serve as a basis for discussions in the Council and the European Parliament – ultimately, the final agreement will have to be approved by unanimity in the Council, following a positive vote in the Parliament.

While negotiating the MFF is always a delicate issue, the debate around the next one is likely to prove particularly contentious. The UK currently provides approximately 12% of the resources available to the EU budget. With the second largest EU economy set to leave the bloc and stop contributing after 2020, this opens a potential gap in EU finances of more than 10 billion euros per year: the UK net contribution once the British rebate and the money it receives from the EU are excluded.

The Brexit gap is likely to further exacerbate tensions that have traditionally emerged between net contributors and net recipients of EU funds, as countries already contributing the greatest amounts will also be asked to bear the largest burden in filling the vacuum left by the UK’s departure. These challenges combine with a long-standing necessity to modernise the EU budget which, it is generally recognised, overly reflects the priorities of the past, such as the disproportionate share it dedicates to agriculture.

The proposal

To respond to these challenges the Commission has suggested a roughly 50/50 balance of cuts and new resources, and some significant changes for the next MFF. Here are some of the key points European leaders will debate in the upcoming months.

Overview – the big numbers

The Commission’s proposal calls for a long-term budget of 1.279 trillion euros (in current prices) for the period 2021-2017. The figure amounts to 1.11% of the EU27’s gross national income (GNI), a significant rise compared to the previous budget cap at 1.03% of the GNI – including the money spent on the European Development Fund which, although traditionally kept separate from the MFF, has been included in the next budget.

While the relative increase was largely expected, it is unlikely to go down easily with some net contributors, particularly the so-called frugal four (the Netherlands, Denmark, Austria and Sweden), who argue that a smaller EU must result in a smaller budget. Dutch Prime Minister Mark Rutte yesterday insisted that the proposal leaves “the Netherlands paying too high a share of the bill.” Similarly, while praising some “positive approaches for modernisation” in the new budget, Austrian Chancellor Sebastian Kurz yesterday said it was “still far from an acceptable solution.”

The overall size of the budget has the power to become particularly explosive in Council negotiations if combined with another key plan; the Commission’s resolution to scrap (over time) the rebates some states currently enjoy on the UK rebate. This will similarly affect some of the main net contributors – The Netherlands, Sweden and Austria in particular – and strengthen their opposition to putting more money in.

New own resources

Another key point of contention will be the suggested introduction of a series of new “own resources”, which would increase direct revenues and tax-like powers to the EU. A suggested 3% call rate applied to the proposed new Common Consolidated Corporate Tax Base, for instance, is likely to be resisted by some net contributors such as the Netherlands and Ireland. The plan to reduce from 20% to 10% the amount of customs revenues that member states keep for themselves would also mostly impact the largest net contributors.

In line with its environmental goals, the Commission has furthermore proposed it should retain a 20% of the revenues from the Emissions Trading System and has advocated the introduction of a national contribution calculated on the amount of non-recycled plastic packaging waste in each Member State.

Some version of some of the plans might eventually pass, but the debate will be highly contested. Changing the EU’s overall financing system (the so-called Own Resources Decision) requires unanimity, as well as the ratification of national parliaments. Previous similar proposals for reform have encountered fierce opposition. But with the UK, the country traditionally leading resistance in this area, no longer sitting at the table, pressure on smaller countries traditionally opposed to reform in this area will increase. Chances of a breakthrough might be just slightly higher this time around.

Reassessing priorities – some changes but not a revolution?

In terms of priorities, the Commission’s document represents an attempt at modernising the budget, within the constraints posed by the existence of strong vested interests in Europe, particularly in the agricultural sector. The Commission proposes a mix of targeted cuts and budget increases in policy areas with the greatest EU-added value.

The cuts mostly focus on funding to the Common Agricultural Policy (-5%) and regional subsidies (-7%), which would however still respectively account for just below 30% and more than 20% of total spending. Within the agriculture domain, slightly less than 80% of the money is still allocated to direct payments, with the rest left for rural development – these proportions are largely in line with the figures for the EU 2016 budget, the latest available year under the current budget framework.

Conversely, the Commission calls for a doubling of funds for programmes targeting young people, such as Erasmus+, and demands greater investment in research and development. More funds will also be dedicated to strengthening the EU’s global presence, with a particular increase in the money destined to the European Defence Fund – a proposed 22 times growth – as well as greater investments in external border controls.

The recalibration of key priorities goes some way in responding to the demands of many net contributing member states, while also reflecting the need for consensus and therefore falling short of a revolution. It is in line with a marginal trend of gradual decline in the budget share dedicated to agriculture and cohesion in the last MFFs and, as Commission President Juncker has put it, does not represent “a massacre” for the CAP and regional spending.

It is still to be seen if member states will water down this initial proposal in Council negotiations. While French President Macron has opened to the possibility of reducing CAP funds, it remains a contentious topic in the country, and the French Agriculture Minister yesterday dismissed suggested cuts to the CAP as “unacceptable.”

Eastern European countries, which since the economic crisis disproportionally rely on EU funds, will likewise fight any proposed reduction in their subsidies, a large portion of which come from the regional funds. For instance, the share of EU Investment Funds comprising total national government investment in Poland has risen from less than 25% between 2004-2008 to slightly below 50% between 2009 and 2013. In Lithuania it has more than doubled, reaching almost 90%.

But the importance of EU funds has also gone up in some of the non-Eastern European countries most affected by the economic/Eurozone crisis. In Portugal it increased from around 45% to around 60%. In this respect, another source of disagreement could come from Southern European countries’ demands for a greater share of regional spending. They want youth unemployment levels to be considered alongside GDP as a criterion for assigning funds. The Five Star Movement, a contender to lead the next Italian government, yesterday insisted on the necessity to review the Commission’s proposal to greater reflect these issues.

Countries in the south of Europe will also argue to reinforce the provisions dedicated to a Eurozone budget within the next MFF. The Commission has proposed two new instruments: a Reform Support Programme, which with an overall 25 billion euros budget is designed to foster structural reforms, and a European Investment Stabilisation Function, which will provide back-to-back loans guaranteed by the EU budget of up to 30 billion euros. This will in any case have to fit within the context of broader Eurozone reform.

Conditionality

Divisions between East/West and net beneficiaries/net contributors are going to be further exacerbated by the suggestion to introduce conditionality based on respect for the rule of law. Regional funds would come under a new heading in the next budget, “Cohesion and Values”, to reflect the link between the two. According to yesterday’s proposal, the Union “could suspend, reduce or restrict access to EU funding in a manner proportionate to the nature, gravity and scope of the deficiencies.” The detailed plan is yet to be revealed, but the initiative and scope of the penalties should be left for the Commission to decide. The Council would then be able to resist the Commission’s initiative only by QMV.

This was always going to be one of the most controversial aspects of the next MFF. Countries such as Poland and Hungary, who would be the usual suspects and target of such a measure, have made clear in the past that they oppose the introduction of conditionality. The Hungarian government yesterday reiterated that “There are EU Treaties in force, and we work on the basis of these. No other assumptions exist in a legal sense.”

Given the unanimity needed to approve the MFF the prospects for the introduction of conditionality had so far looked slim. However, the Commission yesterday suggested that it could be introduced through a regulation, separately from the main MFF. This would lift the unanimity requirement applied in the Council and potentially bypass the resistance of Poland and Hungary (and some other member states). Nonetheless, the two countries could, and most likely will, still threaten not to give their approval to the next MFF if the separate rules on conditionality are not scrapped.

Conclusion

In short, the Commission’s proposal reflects an attempt to keep everyone on board, balancing calls for change in the context of Brexit and a smaller EU, with contrasting demands pulling in the opposite direction. Because the proposal gives something to everyone, however, it is also likely to prove difficult to digest in many capitals.

Traditional lines of tension between net contributors and net recipients are as usual likely to characterise the negotiations for the next MFF, and in fact they look set to be reinforced. The issue of conditionality has the potential to widen the gap between East and West, as it does the opposition between countries traditionally taking the largest share of regional funding and those most affected by the economic crisis in the South of Europe, which will have to compete for a smaller amount of money allocated to this policy priority.

The first reactions to the budget proposal seem to suggest that the EU is in for intense negotiations before the final version of the MFF sees the light. With other key issues – including Brexit and the reform of the Eurozone – high on the agenda, expect Council debates in the upcoming months to be anything but boring.