The battle over Europe's budget

Negotiations on the “Multiannual Financial Framework” are getting underway, but how to make up the Brexit-shaped shortfall?

The European Union has just begun negotiating its budget or Multiannual Financial Framework (MFF) for 2021-27, which will soon provoke the usual aggressive wrangling between member states. The EU27 will have to unanimously agree on the budget before it can be signed off. This time, the talks promise to be even thornier than usual. The UK’s planned exit will leave a hole of €10 to €15bn per year, which will need to be filled.

As it stands, net payers contribute less than half a percent of their gross national income (GNI). Nevertheless, the bloc’s finances are a highly charged issue. National leaders are under intense pressure to get a good deal on the budget. They will not want to take home news of higher contributions, or diminished receipts, for fear this could inflame euroscepticism and lose them votes.

In order to plug the Brexit gap, all member states would need to pay just 0.1 per cent of GDP more each. Whilst France and Germany have expressed willingness to step up their payments, the so-called Frugal Four—Sweden, Austria, Denmark and the Netherlands—have been vocal opponents. “I don’t think we should pay one krone more,” Danish Finance Minister Kristian Jensen has said.

Will they have to? The EU’s budget chief, Günther Oettinger, is seeking to increase the EU’s spending commitments to 1.11 per cent from 1 per cent of the Union’s GNI. This is equivalent to €1,279bn from €1,087bn. However, direct comparison is misleading for two reasons. First, Brexit and the loss of the UK’s large contribution makes calculating the budget more complicated. Second, previous budgets did not include the sizeable European Development Fund, which the Commission wants to incorporate into the new MFF. If you include the Development Fund and strip out inflation, there is no increase in the amount being spent. In fact, commitments decrease to €1135bin from €1138bn.

Still, faced with resistance from member states, Oettinger has proposed a 5 per cent cut to certain funding mechanisms, and to fisheries and the controversial Common Agricultural Policy. He has also found new income streams to indirectly increase contributions. For instance, the Commission wants to recoup more customs duties from member states; the 20 per cent that they currently keep would be reduced to 10 per cent.

Whilst the overall sums of money won’t change much, the politics of the budget is highly fraught. Another controversial revenue boost would come from the elimination of rebates, a reimbursement to address large contributions by net payers. The first rebate was secured for the UK by Margaret Thatcher in 1984. Thatcher, unhappy with what she perceived as the UK’s unfairly large contributions, famously demanded: “I want my money back.” Rebates of various kinds were then given to Germany, Austria, Denmark, the Netherlands and Sweden. The Commission wants to eliminate these over next five years, which would increase the money these countries hand over by €6bn per year. But these five countries (with the UK) have worked together to block talk of eradicating rebates in past budget negotiations. It remains to be seen whether they will manage to do so without the UK.

Cohesion funds, allocated to the poorest regions in Europe, will be another battleground. The Commission has proposed a new way to calculate the amount countries are eligible for. This has traditionally been based on GDP per capita, but the proposal includes new indicators, such as youth unemployment and migration. This would see a redirection of funds to southern member states, such as Greece and Italy, a problem for Central and Eastern countries like Poland, Hungary, Slovakia and Bulgaria, which rely heavily on cohesion funds for public investment.

And the Commission’s MFF proposal includes a further kick in the teeth for central European states: the next budget proposes that “rule of law” conditions should be attached to cohesion funds. Member states that flout EU values or the rule of law would have their funds suspended or reduced. The measure is clearly targeted at the EU’s increasingly “illiberal democracies,” Poland and Hungary, which are both embroiled in legal battles with the EU over rule of law issues. During the last round of budget negotiations, Poland rallied a group of 15 member states, called “the friends of the cohesion policy” to defend cohesion spending. Although the rule of law mechanism is separate from the MFF text, it is possible Poland and Hungary could reject the entire budget in protest.

There is every indication that the debate about the next MFF will be even more heated than previous rounds. The shortfall triggered by the UK’s departure, coupled with bold measures on rebates and cohesion funds, will sow division. The Commission insists that “timing is of the essence,” and Commission President Jean-Claude Juncker wants the budget settled before the European elections in May 2019. The current MFF took 29 months to be negotiated, and was approved at the last moment, with some serious consequences. 25,000 Erasmus exchanges could not be funded in 2014, and EU funding for borders and asylum seekers was delayed until 2015. Despite motivational speeches from Juncker, the budget is unlikely to be settled until the turn of 2019-2020.

The budget conflict could be to the UK’s advantage. The British contribution to the EU’s coffers is one of its strongest cards in the Brexit negotiations. Theresa May has insisted that “vast contributions” to the EU must end. Now would be the time to give ground. If May offered contributions to infrastructure investment in Central and Eastern Europe, she might be able to unlock a closer economic relationship with the EU as a whole. But, given her fragile footing and the risk of a leadership challenge from the eurosceptic right, this might prove a step too far.

Beth Oppenheim is a reseacher at the Centre for European Reform.