Net payer countries push back on EU budget plans

For the first post-Brexit EU budget, Michel proposed 1.074 percent of the EU's gross national income (GNI), over a trillion euros, which, in terms of actual payments, amounted to 1.06 percent of EU GNI.

It is still higher than the one percent demanded by Germany, the Netherlands, Denmark, Sweden, and Austria - all net payers to the EU budget, which now has an annual hole of €12bn because the UK left the bloc.

Writing on behalf of the Netherlands, Denmark, and Sweden in an op-ed in the Financial Times , Austria's prime minister Sebastian Kurz argued that a smaller EU required a smaller budget.

"Now that we have a smaller union of 27 member states, we simply have to cut our coat according to our cloth. The responsible approach in this situation is to prioritise in the interest of our taxpayers," Kurz wrote.

Add, subtract

But the overall figure is not the only issue for the four "frugal" countries.

Michel added more funds, €6bn, to cohesion policy, which is meant to help poorer regions, and diverted a bit more to the least developed regions from the well-off ones.

The new proposal would also allow more flexibility for member states on how to spend the money.

But along with agriculture policy, EU subsidies still make up the largest share of the EU budget, while net payers are arguing that more money should be dedicated toward new challenges, such as digitalisation, climate and security.

"It is crucial for the EU's legitimacy that we focus a significantly higher share of the budget on meeting today's challenges: fostering an innovative and competitive economy, the fight against climate change, migration and security," Kurz wrote.

Michel's proposal makes cuts away from migration and defence. He also cuts into the agriculture policy, which is a red flag for France, and several other member states. However, agriculture subsidies would still make up one third of the budget.

The new proposal includes the Green Deal's Just Transition Fund with €7.5bn to help areas where the greening of the economy will cost more.

Conditionality

The former Belgian prime minister proposed a weaker rule of law conditionality, in a nod to member states such as Hungary and Poland, by making it easier for them to block any suspension of EU funds in case of irregularities.

The commission's ambitious original proposal would have made it difficult for a small number of member states to stop sanctions on "deficiencies" in rule of law, that risks EU fund penalties.

When asked if this was a concession to the central European countries, an EU official said it "is an attempt to put the cursor in the middle where we can find a compromise".

Michel also included so-called "own resources" in his proposal, referring to sums that the EU could itself collect.

These include a national contribution based on plastic waste and revenue generated by the EU's Emissions Trading System exceeding the average annual revenue per country.

And Michel also listed possible future own resources such as the financial transaction tax, digital tax, carbon border tax, and aviation levy.

'We want money back'

The EU council chief proposed to keep a lump-sum "rebate", a financial correction originally introduced for the UK, for the biggest contributors, which would be phased out over the next seven-years.

That irked the "frugal four", who want to keep the rebates.

Kurz argued that it would mean the four countries plus Germany would end up financing 75 percent of net payments to the EU.

"We insist on permanent net corrections to prevent excessive budgetary imbalances and achieve a fair, sustainable outcome," he wrote.

The commission rolled out its original budget proposal almost two years ago, and member states have been digging their heels in deeper ever since.

Michel will attempt to "close a deal" at Thursday's meeting, an official said, when EU leaders will for the first time haggle over the money, and how to fill in the gap left by the departure of the UK.

Countries that want to keep the same level of EU subsidies as in the current budget, and the "frugal four" who do not want to go over the one percent, mark a deep division. Both groups will pay more into the EU budget.

French president Emmanuel Macron warned over the weekend that the EU needs to match its budget with the scale of its ambitions.