27 Apr Battle lines are drawn for the EU’s Post-Brexit Budget
by Eszter Zalan
The European Commission will roll out its budget proposals for 2021-2027 next Wednesday proposing more EU spending after Brexit. While the EU’s executive aims for a quick agreement that could boost the bloc’s confidence, its plans will pitch Central and Eastern member states against net payers. The present study investigates these issues and highlights how the key stakeholders plan to address these areas of contention now that the UK, one of the largest net payers, will leave next year.
The EU’s traditionally grueling negotiations on its budget will kick off next week with a proposal that the European Commission hopes will prove that the bloc can emerge from Brexit strengthened and more united. German budget commissioner Guenther Oettinger will perform the overture on May 2, when he will present the overall figures and the basic structure for the period 2021-2027. These negotiations will be followed by a series of legislative proposals to be published by mid-June.
The European Commission is expected to propose a more substantial budget even though one of its largest net payers, the UK, will leave the club. The EU executive wants the future EU budget to be between 1.13 and 1.18 percent of the bloc’s gross national income (GNI) compared to the current 1.0 percent, which amounts to a seven-year 1 trillion euro budget.
With the UK leaving – and taking its annual 12-14 billion euros contribution with it -, the EU 27 is asked to pay more to plug in the hole. “Brexit is a game changer,” said a senior EU official. The Commission wants the huge gap to be replaced with 50% of the fresh money from the 27 and with 50% cuts from existing programs. On top of this, new policies – such as migration, defense, border protection and the fight against terrorism – will also have to be paid for too. The Commission wants countries to cover 80 percent of these with new contributions and “offers” 20 percent by restructuring the budget. With the bloc re-emerging from the bruising euro crisis and the politically upsetting migration crisis, and with the French-German tandem working again,
One crisis – that of the rule of law – remains and the Commission wants to address it within the budget. Its proposal, however, risks pitching Western and Eastern member states against each other. With the introduction of new indicators for calculating the allocation of cohesion funds and a new rule of law conditionality, Eastern Member States are set to lose from a fund that will suffer cuts in the new budget.
The Commission wants to wrap up negotiations before the European elections next spring. It wants the current European Parliament to approve the deal. The EP holds its last plenary session in April 2019, giving a year barely for talks. There is growing concern that the next EP will see a surge in populist, eurosceptic forces, and their MEPs will want to rewrite the numbers. But even within the Commission, officials believe that the ambitious timeline is far from the EU’s political reality. The previous talks on the multi-annual financial framework (MFF) ended up in a two-year-long wrangle.However, failure to meet the Commission’s deadline would also risk having the budget talks entangled in the negotiations on who will be the next president of the European Commission and the European Council.
Net payers vs. Recipients
EU budget negotiations usually begin with strong ideas and broad ambitions on what the bloc should achieve together, and end up with countries bickering over how to secure their national benefits to the fullest. “We talk about new priorities, but it’s back to normal and the good old money horse trading”, said one EU official. “Everyone wants his piece of cake,” the official added.
The most significant net payers, Germany and France, pledged they are willing to pitch in more, though they did not reveal by how much. The Netherlands, Austria, Denmark, Sweden and to some extent Finland are more reluctant and do not want to increase their contributions. They argue tenaciously that a “smaller EU should lead to a smaller budget.” Some say that anything more would be a difficult sell to voters. With the eurosceptic UK leaving, and fiscally conservative Germany not stepping up to fight, it is up to the Netherlands to lead those who want the budget to stick to 1.0 percent of GNI. It is just one of the examples of the Netherlands that have to take a more assertive role in the EU after Brexit.
The Commission argues that the mindset of net payers is outdated. Their officials insist that on every euro spent on cohesion, net contributors get back 70 percent through investments and procurement. Cohesion funds could also boost imports of countries where those funds are spent. Some EU diplomats argue that without the UK’s contribution in the current budget period, the 27 would have to pay the same 1.3 percent of GNI the Commission is now asking, arguing that the actual amount to be paid will not increase. This time around, coalitions among countries will be less robust than during previous negations.The cohesion coalition will be split between southern member states and their Eastern partners, while Nordic countries may be reluctant to pay a prolonged war for cutting costs. “Not sure we want to play bad guys,”
CAP and cohesion funds
The most obvious place where those cuts could be made are the two most significant EU policies that account for over 70 percent of the 140 billion euros spent each year, the Common Agriculture (CAP) and the cohesion policies. Commission officials said the two areas, worth some 775 billion euros in the 2014-2020 budget, would have to endure at least 6 percent cut. Those countries reluctant to pay more are arguing that cuts in CAP and cohesion alone should make up for the Brexit gap. The expectation in Brussels is that agriculture policy will suffer less, partly because the area’s commissioner, Phil Hogan has more leverage in the EU executive than his colleague responsible for structural investments, Corina Cretu.Also, France is still expected to protect the policy, despite the pro-EU liberal stance of French President Emmanuel Macron. Defenders of the agricultural policy argue that the possibility of pushing down some of the aid to national level only reinforces differences: poorer countries will be less able to support their farmers on a national level than richer ones. They also argue that cutting direct payments would risk the livelihood of farmers.
Within the cohesion funds, 350 billion euros in the current budget, the Commission plans to introduce new indicators to measure the eligibility for the funds in a way that could benefit crisis-ridden southern countries at the expense of eastern states. The national “envelop”, “the portion of the cohesion funds for each country has so far been mainly based on the GDP per capita in an EU member state – this method favored countries that joined in 2004 and 2007. Officials are now expected to add youth unemployment, the reception of migrants and other social indicators to the calculations.
The plans, reported by the Financial Times, caused alarm among some member states. While the Commission argues that they serve to strengthen the EU’s social pillar and help offset the social consequences of the euro-crisis, Central and Eastern European countries see it as a political move against them. There has been growing frustration in some of the corners of the EU with the Eastern states, such as Hungary and Poland, which have not taken refugees and have challenged the rule of law. Hungary and Poland suspect the Commission’s move is the manifestation of that irritation.For their part, they argue that while southerners have already enjoyed the EU’s goodwill with years of bail-outs, their economies went through tough structural changes and produced economic growth – a achievement that should not be punished, diplomats say.and Eastern European countries see it as a political move against them. There has been growing frustration in some of the corners of the EU with the Eastern states, such as Hungary and Poland, which have not taken refugees and have challenged the rule of law. Hungary and Poland suspect the Commission’s move is the manifestation of that irritation. For their part, they argue that while southerners have already enjoyed the EU’s goodwill with years of bail-outs, their economies went through tough structural changes and produced economic growth – a achievement that should not be punished, diplomats say. At a EU ambassadors meeting this week, defending the Commission’s position, the newly appointed secretary-general of the executive, Martin Selmayr called the FT report “fake news.”
Opponents of the new method argue that since the crisis-hit countries’ GDP has already declined compared to the EU average, the original method of calculating the tilts towards the south anyway. They also point out that the role of cohesion is defined in the treaty as a tool to reduce “disparities between the levels of development of the various regions and the backwardness of the least favored regions”. Diplomats argue that while solving the migration crisis is essential, it is not a goal set out in the treaty, whereas convergence is.
Another possibility for reducing the size of the cohesion fund, as the EU Commission argues, could be to stop giving money to rich regions as a kickback to net payers, and focus on areas where GDP per capita is less than 75 percent of the bloc’s average . Another idea is to create a financial tool to boost the countries’ ability to secure loans that could make up for the lost funds.
Politically, the proposal could divide the group of around 15 countries that during the last budget negotiations labeled themselves as “friends of cohesion”. The Baltic countries, which, unlike the Visegrad Four, comprised of Czech Republic, Hungary, Poland and Slovakia, had no political run-ins with the Commission, are also set the lose out. This situation could create tension among eastern supporters of cohesion funds. But that will only become clearer once diplomats will be able to calculate their national envelopes after the Commission’s detailed proposals are out at the end of May or early June. This situation could create tension among eastern supporters of cohesion funds. But that will only become clearer once diplomats will be able to calculate their national envelopes after the Commission’s detailed proposals are out at the end of May, early June.
Conditionality
Migration policy is not the only area that is fueling frustration among the member states with the eastern flank. While the Dutch coalition agreement even states that EU subsidies should be cut to countries that do not participating in the redistribution of migrants across the EU, countries such as Germany and France want EU cohesion funding to be conditional also on the rule of law. Other net contributors also ran out of patience with countries such as Poland and Hungary, which recently challenged EU law.
The Commission is set to introduce a so-called rule of law conditionality to the allocation of cohesion funds. It argues that the goal is to protect investment and European taxpayers’ money and for that, it needs to guarantee that courts across the bloc are independent of government pressure. Details are still being worked out and the Commission is preparing several options. But the core idea is to have the EU executive check specific legislation in case of a rule of law and decide on suspending EU funds with the Council’s approval unless the Council decides by qualified majority to reject the recommendation.
Commission officials add that the rule of law conditionality will be incorporated into a proposed regulation, therefore technically it would only require approval of a qualified majority of member states, not unanimity. But EU officials admit that the political reality is that these eastern countries would have to agree to the conditionality too under the overall budget, which requires unanimity. Officials know that these will be difficult and sensitive discussions. The idea of conditionality has divided the commissioners as well as net contributors. Cohesion countries feel targeted and have been pushing back. Poland has been vocal about wanting an “objective” trial made by a “legitimate institution.”Diplomats are suggesting that the issue could stall the whole budget negotiations.
It is a tricky question how to create an incentive for cohesion countries to agree to conditionality. One theory in Brussels is that some of the reluctant net contributing member states who want to see the conditionality, such as the Netherland, would open up their wallets if conditionality would be agreed. Another possibility is that if the EU budget is only raised on this issue, investors and the market will put enough pressure on Hungary, Poland and others to agree to the MFF with conditionality attached. Seeing the often principled, less pragmatic stance of the Warsaw and Budapest governments, this sounds like wishful thinking.and others to agree to the MFF with conditionality attached. Seeing the often principled, less pragmatic stance of the Warsaw and Budapest governments, this sounds like wishful thinking.
Euro-budget and rebates
While the full-fledged, separate eurozone budget proposed by French President Emmanuel Macron will have to wait, an embryo-version has made it into the Commission’s proposal. The idea is to create a financial instrument that will help structural reforms, provide a backbone against asymmetric economic shocks, and create a pre-accession fund for countries that want to join the single currency. Macron’s proposal fell on deaf ears in Berlin, but Germany is set to support the structural reforms in member states. One of the Commission’s ideas is to give the bloc more leverage to underwrite cheap loans to eurozone countries hit by future economic shocks to avoid bail-outs.The Commission also plans to link EU funds to country-specific recommendations, a yearly set of economic policy guidance to member states.
The UK’s rebate, the partial refund for their payments in the EU budget, will disappear with Brexit. The Commission is arguing that with the UK rebate gone, all other rebates should go also. Net contributors Germany, the Netherlands, Austria and Sweden pay a share of the UK’s rebate and get some of that money back. This rebate argument is emerging as a “red line” for those net payers, who worry that their contribution to the EU budget will get out of control without rebates. and Sweden pays a share of the UK’s rebate and gets some of that money back. This rebate argument is emerging as a “red line” for those net payers, who worry that their contribution to the EU budget will get out of control without rebates.
Own resources
The Commission has long been seeking its budgetary resources to ease the dependence on member states’ contributions. The EU’s ability to tax on its own has been at the center of the debate between those who reject the bloc’s further centralization and those who embrace it. Some member states, for example, the Netherlands, do not support any central resources for the EU as it is perceived as a step towards supranational integration. The Commission will, however, propose additional duties, from the European Central Bank issuing money, to be collected at EU level, not the national level, from the emission trading scheme (ETS). Budget commissioner Guenther Oettinger is also expected to add his plastic tax idea to the mix, center of the debate between those who reject the bloc’s further centralization and those who embrace it. Some member states, for example, the Netherlands, do not support any central resources for the EU as it is perceived as a step towards supranational integration. The Commission will, however, propose additional duties, contributions from the European Central Bank issuing money, revenues from the emission trading scheme (ETS) to be collected at EU level, not the national level. Budget commissioner Guenther Oettinger is also expected to add his plastic tax idea to the mix, which had received a lukewarm response when he introduced it in early January.
The planned digital tax to levy internet giants and allocate revenue to the EU budget will not be part of the Commission’s plans this time. The projected tax has divided EU countries, as members debate the Commission’s proposed 3 percent tax plan. Ireland and Luxembourg strongly oppose the levy because of their advantageous tax system.
The Brexit conundrum
Diplomats in Brussels say that the member states are also keen to see how the Brexit negotiations unfold and if they have an impact on the current and thus the future budget. The agreement on a transition period for the UK between their withdrawal in March 2019 and December 2020 is still not carved in stone yet.
The attempt to deal with the EU was that the UK is applying EU rules, pays its dues, but without political representation during the transition period: essentially acting as a member without having to say in the decisions. It is significant because the UK will still honor its financial obligations during the transition, so pay into the budget. honoring its financial obligations during the transition, thus paying into the budget.
But without an agreement on the border issue on the island of Ireland, there will be no withdrawal agreement, and without an exit deal, there is no transition. Talks are still in progress to find a solution to avoid a hard border between Ireland and the Northern Ireland after Brexit. To solve the Irish border issue, the UK may still decide to stay in the customs union or for a financial contribution to the EU budget. The EU-27 wants to see the Brexit package out of the way before agreeing to the next EU budget, some officials warn.
What’s next?
Soon after Oettinger rolls out the Commission’s proposals, on 14 May EU affairs ministers will have a chance to hold a first debate on the budget and ask questions from the German commissioner. Diplomats in Brussels expect a minimum of all-night summits on the budget before a deal is reached. The EU’s agenda, already massive with Brexit, terrorism, migration, Russian interference, US trade war, the rise of populism, will only get more onerous. And the pressure will get higher. “With Britain leaving, we need a positive story for the EU,” said one diplomat.
Eszter Zalán is also a Brussels-based reporter for EUobserver.
© CEID 2018
