Thursday

28th May 2020

Magazine

The big European budget battle - who is fighting for what?

  • EU Commission president Jean-Claude Juncker said the cuts to cohesion and agriculture policies are "no massacres" (Photo: European Commission)

The EU is gearing up for its most complex and toughest haggling - as diplomats start to discuss the next long-term EU budget that will define funding for citizens and regions.

According to the traditional dynamic of budget negotiations, participants start out with hefty calls for better, more efficient policies, high principles and common goals.

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  • Regions that have seen economic growth are expected to get less funding (Photo: European Parliament)

By the end, however, talks gradually descend to 28 countries bickering over money. It is not a pretty sight, but luckily only happens every seven years.

This time there will be only 27 states (with the UK leaving the bloc next March) contributing to and receiving from the budget until the end of the cycle at the end of 2020 - presuming a EU-UK divorce deal is agreed soon.

The European Commission unveiled its budget proposal in early May with the aim of wrapping up talks before the European elections in May 2019 – an unrealistic scenario.

The EU executive faced two challenges: plug the hole struck by the departure of the UK, which contributed around €14bn annually to the budget, and find money for new challenges, such as migration and security, while maintaining key traditional EU policies on agriculture and economic convergence.

Despite early warnings from some net contributor countries, such as the Netherlands and Austria, to draw up 'a smaller EU budget for a smaller EU', the commission increased the overall budget figures slightly.

The biggest net contributor, Germany, supported the commission's approach, which irked fiscally disciplined allies of Berlin.

The EU executive proposed a €1,135bn budget for 2021-27 in an effort to boost funding for defence, migration, and research in the post-Brexit EU. This means a €192bn increase compared to the previous multi-annual financial framework (MFF).

In 2018 prices, it accounts for 1.114 percent of the EU-27's gross national income (GNI), compared to the one percent under the current budget with the UK still a member of the club.

While both cohesion and agriculture policies face cuts, the commission proposed to boost funding for the Erasmus student exchange program, digitalisation, research and development, and external border security.

The Netherlands, Austria, Sweden and Denmark, all net contributors, argue that this is too much, while countries in eastern Europe which directly benefit from cohesion funds do not want to see further cuts in these two key policies of the EU - which account for about 70 percent of the total budget.

Pivotal battle

That will be the pivotal battle between the two groups of countries.

Central and eastern European states also feel targeted by the commission's proposal on other fronts.

The allocation of EU cohesion funds, aimed at poorer regions, will this time tilt towards the southern counties, such as Italy, Greece, and Spain, which have gone through a deep financial and economic crisis, while central and eastern European economies have seen growth.

The commission argues this proves the success of cohesion policies: that these largely former communist economies are catching up with the richer part of the EU.

However, countries that are set to lose the most, such as Hungary and Poland accuse the EU executive of attempting to punish countries that have clashed with the EU executive over political and legal issues, such as the independence of the courts. These two countries have also been the loudest critics of the EU's migration policy.

The EU commission says that GDP growth is still the main indicator when it comes to calculating allocations.

But some central and eastern European member states have criticised the introduction of new criteria to determine the sum for member states, for example introducing measures on youth unemployment, climate change and the reception and integration of migrants.

Central and eastern European countries are also worried about a possible new mechanism the EU executive wants to introduce to discipline countries where the judiciary has been put under political pressure.

The commission wants to be able to "suspend, reduce or restrict access to EU funding" in a proportionate manner to protect EU investments and European taxpayers' money. But plans for the new procedure, the so-called "conditionality" clause, are still vague.

Rebate row?

Another front where member states are expected to clash is the issue of rebates. The UK's controversial rebate, the partial refund for their payments into the EU budget first negotiated by Margaret Thatcher in the 1980s, will disappear with Brexit.

In a complex mechanism, Germany, the Netherlands, Austria, and Sweden, who are also net contributors, pay only a share of the UK's rebate.

The commission is arguing that with the UK rebate gone, all rebates should be gone. Yet the net contributor countries want to retain their own rebates, arguing that they need a correction mechanism so that their contribution does not inflate.

The ever-present debate between those who want the EU to have the ability to tax independently, and those who want to keep the right to tax solely in member states competencies, is emerging again this time too.

The commission is proposing that customs duties, contributions based on value-added tax, and revenues from the emission trading scheme (ETS) to be collected at EU level, not a national level, plus revenue from the European Central Bank issuing money.

Over the summer, the commission outlined the details of its planned budget to EU diplomats - but as the European elections of May 2019 are approaching fast and the campaign intensifying, there is little chance for any significant debate until after the poll.

The new budget will then most probably be voted on by a new European Parliament - one that is expected to see a surge in populists, who have very different ideas about EU priorities.

This story was originally published in EUobserver's 2018 Regions & Cities Magazine.

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