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7th Jun 2020

Insight

These are the crunch issues at the EU budget summit

  • The EU's 2021-2027 budget, as proposed by the president of the European Council, Charles Michel

Thursday (20 February) will be the first time EU countries get together to hammer out an agreement on the next seven-year budget without the UK, often seen as a trouble-maker. At the last budget marathon, then prime minister David Cameron threatened a veto unless the EU budget was frozen in real terms and Britain's rebate maintained.

With the UK now leaving, the EU-27 will have to plug a €60-75bn hole in the forthcoming seven-year budget.

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  • EU leaders could end up staying until the weekend in Brussels to find a compromise - or call another summit

Some member states, with the Netherlands' at the forefront, argue that this calls for a smaller budget. But within a changing geopolitical context, five years after the migration crisis, and a commitment to digitalise and green the European economy, there is also a need to invest, these same member states often argue.

"This is supposed to be the cornerstone of how to implement our policies," said one EU diplomat.

As with all EU budget negotiations, it starts with high ambitions, and it ends up a wrangle over every billion between member states.

The EU budget still remains relatively small, with EU Council president Charles Michel's latest proposal of 1.074 percent of the EU's gross national income (GNI), for seven years and 27 countries.

The cohesion funds, designed to help poorer regions converge, are currently pencilled-in at €323bn for the regions of all EU countries until 2027. In comparison the total German federal budget for this year is €362bn. The entire migration and border management policy is planned to be financed with €21.9bn over the next period.

Here is a look at some of the key issues facing EU leaders.

One percent

The overall size of the first post-Brexit EU budget is proving to be one of the toughest nuts to crack.

The biggest net contributors to the budget, including Germany, and the so-called 'Frugal Four' - Denmark, Sweden, Austria and the Netherlands - want the budget to be kept at no higher than 1.0 percent of the EU GNI. For Dutch prime minister Mark Rutte, who is facing elections next year, and has pledged this in his coalition agreement, it is a particularly important issue.

At the other end of the spectrum is the European Parliament, which has to consent to the budget, and wants to see an overall spend of 1.3 percent. The commission, which originally proposed a 1.11 percent, is arguing that national budgets run at 45 percent of GNI usually. All EU countries are paying less than 1.0 percent of their annual earnings into the budget.

Cohesion and agriculture

Two of the biggest policy areas will still take up over 60 percent of the EU budget, even though both are to be deeply cut. Despite an overall cut in cohesion funds of around 12 percent, some member states stand to lose up to 24 percent of their EU subsidies. Michel's proposal adjusted that by diverting money from richer to poorer regions.

However, cohesion countries, especially from central and eastern Europe, where often over 85 percent of public funds are financed from EU money, think the cuts are too arbitrary.

"There is a general feeling of unfairness," one diplomat said. Such criteria as migration, youth unemployment and GDP growth in calculating the distribution of EU cohesion funds tilt it towards southern EU countries.

Under the loose coalition of the 'Friends of Cohesion', 15 central and southern European countries recently argued that cohesion funds should remain at current levels. They also point out that at least 50 cents in every euro invested in the cohesion countries flows back to the net contributor nations through investment and tenders.

Farmers are meanwhile planning to protest in Brussels on Thursday, as agriculture is also facing a a steep 14 percent cut.

Inside the negotiating room, Michel can expect pushback from major farming member states like France, plus others on rural development and direct payments to farmers. There is also €11bn planned for market-support schemes, but it is not yet clear how it will be spent - but it could be used to ease the pain of some of the countries losing the most.

Rebate

The rebates will pose one of the biggest political hurdles. The UK's rebate, the partial refund for their payments into the EU budget, disappears with Brexit.

In a complex mechanism, Germany, the Netherlands, Austria, Denmark and Sweden (which are net contributors) have their own rebates and want to keep them. But at least 17 member states are arguing that with the UK rebate gone, all rebates should be gone.

Michel proposed to keep a lump-sum as a correction for these countries, whose EU contributions will increase because of Brexit, but which should "degress" over the next seven years. Specific figures will only be part of the negotiations. According to some calculations, €14.5bn could be saved if rebates were scrapped. "Frugal countries obviously can't have both 1.0 percent and rebates," said one senior EU official.

Greening

The commission's green push has reached the EU budget: Michel has included €7.5bn new money to fund the greening of the economy, and convinced some of the reluctant countries, such as Poland, to sign up to the EU's climate goals by helping their emissions-heavy regions adjust.

However, other central European countries are sceptical and see the Just Transition Fund as a way for net contributors to get back some of their funding.

Rule of law

For the first time, there will be a new tool introduced into the EU budget which is designed to make sure EU money is spent correctly. Previously dubbed the "rule of law mechanism", it was originally coined as an answer to the bloc's struggle with countries backsliding on rule of law issues, mainly Poland and Hungary.

The compromise put forward by Michel introduces a mechanism that focuses on protecting "the sound implementation of the EU budget and the financial interests of the union", but steers clear of any semi-automatic sanctions, originally proposed by the commission and backed by the Finnish EU presidency. "The idea here, this is about protecting the budget, it is not about the rule of law," a senior EU official admitted.

Own resources

The debate between those who want the EU to have the ability to tax on its own, and those who want to keep that power close to member states will be back.

Michel proposes a contribution on plastic use, a contribution on the basis of the EU's emissions trading scheme, and to consider further 'own resources', such as digital tax, an aviation levy, a carbon border tax and a financial transaction tax. "If endorsed by EU leaders, this would be single biggest change in the own resources system ever," confirmed one senior EU official.

Timetable?

EU leaders will get together Thursday afternoon, and then meet bilaterally for more detailed negotiations. Talks could run into Friday. There is little optimism that leaders will strike a deal at the first try.

Michel could convene another summit in a few weeks, if there is no breakthrough this time. Programmes under the current budget run out this year, which means payments can still be done - but no new programmes and no new commitments can be made if there is no agreement on the EU budget by the end of the year (with enough time for the parliament to vote, and finalise, related legislation.)

Rebates would also automatically disappear if there is no agreement.

EU leaders face major clash on rule of law budget link

One major issue dividing member states in the ongoing budget negotiations is inserting a direct link between EU subsidies and the rule of law. While the biggest battle will be over figures, the rule of law conditionality also creates tension.

Net payer countries push back on EU budget plans

As EU budget negotiations enter a nasty phase, EU council chief Charles Michel tries to please two divided groups of member states, but Austria's Sebastian Kurz has warned net payers cannot be pushed for more.

Von der Leyen warns on EU budget cuts

The new EU Commission president will tell EU leaders next week that they need to put money behind their pledges for border protection, defence policy and fighting climate change.

Unhappy EU leaders begin budget haggle

EU leaders arriving at the Brussels summit criticised the budget proposal of EU Council president Charles Michel, as richer member states insisted holding onto their rebates, while poorer countries wanted to avoid deep cuts to their subsidies.

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