New EU budget and the biggest challenges ahead

What do you identify as the biggest challenge for discussions about EU’s multiannual financial framework, and why? Read few comments.

Iain Begg, Professor, European Institute, London School of Economics and Political Science

The obvious answer to your question is how to fill the Brexit-sized hole in the budget because it will intensify the tensions between net contributors and net recipients. The gross (not net…) amount paid into the budget, after the rebate, by the Brits is as much as all thirteen members to have joined the EU since 2004.

The more subtle answer is how – assuming as most commentators do that the budget will remain at roughly its current size as a proportion of EU27 GDP – new priorities can be accommodated without causing a backlash from current recipients. The EU still spends three quarters of its budget on direct payments (mainly to farmers) and cohesion policy. Will it be possible to reduce CAP spending, perhaps by co-financing from national budgets? Will CEE countries, having seen their prosperity increase, be willing to see some reduction in cohesion policy?

On the revenue side, there may be an opportunity, with Brits no longer there, to end the various ‘corrections’: rebates etc. But if the Dutch, Danes, Swedes, Austrians and Germans are asked to pay even more, they will fight hard to retain their ‘money back.

Ida Musiałkowska, Associate Professor, Department of European Studies, Poznań University of Economics and Business

Among the biggest challenges are:
1. Brexit and its impact on the budget revenue (the estimated loss to the yearly budget is ca. 12-14 bn EUR , according to the European Commission) and the question is how to fill the gap. There are some preliminary proposals, supported by V4 countries, e.g. to increase the GNI-based source of revenue.
2. The shape of future Cohesion Policy (CP): whether it should keep its current inclusive character for all the regions (scenario 1), less developed regions and cohesion countries (scenario 2) or only cohesion countries (scenario 3). There are beneficiaries of CP (like CEECs) who strongly support continuation of CP, but are aware of other challenges that EU has been facing (fighting with terrorism or strengthening the EU role in the world).
3. Another disputable issue is introduction of another conditionality related to linking  respecting e.g. the rule of law and the payments from the budget via EU funds. Proposal was supported by net contributors to the budget – Germany and France but is currently strongly opposed not only by Poland or Hungary but also other Member States of the EU.
4. Setting the priorities followed by the allocation of EU budget among headings/ different policies: Common Agriculture Policy (and the level of compensation to farmers, where big discussion has already started on the levels of compensation, e.g. the Baltic States, Poland, Slovakia and Romania opt for equal payments and the other countries are not support this idea so strongly), innovation and the future research programme (follower of the Horizon programme), Cohesion Policy, etc. Also better coordination among policies ahs been claimed.

Zsolt Darvas, Senior Fellow, Bruegel

In my view, the biggest challenge is to break the inertia of EU budgets, in particular regrinding the Common Agricultural Policy and the Cohesion Policy. These two policy areas account for about three-quarters of the EU budgets, and there are several question marks about their effectiveness.

Other important issues are related to border control, defense, mobility of young people, the digital single market, research and innovation, but I expect that the discussion of these new priorities will be less demanding than the discussion of the Common Agricultural Policy and the Cohesion Policy.

Let me also highlight an issue while I believe will not be so challenging: replacing the UK’s diminished contribution. If a deal will be signed between the UK and the EU27 according to the agreement reached December 2017 which closed the first phase of the negotiations, then the UK will contribute with significant amounts to the next MFF in the form of an exit fee (Brexit bill). Furthermore, if the UK will get a preferential access to the EU’s single market, then most likely (similarly to Norway) the UK will also contribute additional funds on an annual basis, so overall much less will be missing from the EU budget than the amount of the UK’s contribution to the current MFF. Of course, this depends on signing a deal, because if the UK will leave the EU without a formal deal, the UK will not pay anything.

Robert Ackrill, Professor, Nottingham Business School, Nottingham Trent University

Last year, associated with the European Commission’s White Paper on the Future of Europe, five Reflections Papers were published, the last of which was on the Future of EU Finances. Brexit is relevant, first and foremost, because it leaves a hole of a few billion euros in the budget, given its current structure. But also it provides a moment for the EU to reflect on how it wants to progress from here. The Brexit vote itself is an indication of issues the EU collectively cannot ignore – a situation reinforced by current political events in several Central European countries, as well as the possible danger last year that might have come from elections in the Netherlands and France (although, of course, in the end the nationalist parties did not do well in the final votes). Hence the White Paper and the Reflections Paper explored future directions, ranging from doing a lot less collectively as ‘the EU’, through something more or less like the status quo, to doing a lot more collectively.

The fundamental problem, as I see it, has two elements to it. First, Brexit will leave a hole in the budget. Second, the EU Budget is very small indeed relative to national budgets, but its political significance far outweighs this small economic size – which makes the political bargaining important and deeply divisive. Thus although the Brexit-shaped hole is small, just a few billion euros, there are already deep divisions between countries over how to resolve the situation. The principal net contributors want to see spending cut. The main net beneficiaries do not want to see cuts to agricultural and cohesion policies, because these are the ways in which they get so much out of the budget.

It is from this basic starting point that we can begin to explore ways forward. To start with the most controversial, there have been suggestions that countries such as Poland and Hungary could have EU spending withheld if they fail to uphold basic EU principles such as rule of law and independence of the judiciary. This will only affect a small amount of spending and is not a long term solution to the budget situation.

One possible way to reduce, but not totally fill, the size of the budget hole is for countries to take current levels of contributions to the UKs budget rebate (strictly an abatement on its net contribution) and for those to become part of the EU budget, available for spending. Those payments are made in proportion to countries’ relative wealth, so that would be an equitable way to fill some of the gap. Moreover, it might be seen as more acceptable to have that money going for collective EU projects, rather than to the UK.

Past negotiations over the MFF suggest that from very divergent starting points, countries are usually able to iterate their way towards a final agreement. What makes this more difficult this time is that, instead of the member states, in the European Council, essentially reversing any major changes to spending proposed by the European Commission (proposals which are often supported by the European Parliament), the battle is more about either maintaining spending (and thus who will pay more) versus maintaining contributions (and thus seeing where spending will be cut).

One problem that the Netherlands and Sweden in particular will be facing is that with Brexit and the departure of the UKs budget rebate, the European Commission wants to get rid of all budgetary adjustments. If this happens, these two countries will see their net contributions rise immediately – even before any possible additional increases to fill the remaining Brexit hole. Moreover, its economic size and standing in the EU will inevitably see Germany facing a still-higher bill were the hole to be filled by rising contributions. The departure of the UK will see total EU GNI fall, thus each individual country’s share will change. This will affect individual contributions, but not by very much. One recent suggestion is that the Brexit budget hole might be filled by a new plastics tax. Whilst a nice idea in principle, the member states have consistently opposed new, EU-level taxes to help fund the EU budget. In the current political climate, even with widespread agreement over the need to address problems with plastics, it is hard to see how the EU27 countries would agree to this.

On the spending side, with each MFF small changes have been made to the technical details around eligibility for cohesion spending, maximum possible receipts, etc. This may well continue this time. One feature of cohesion policy spending is that every country has always received something, however little. This begs the question – is it reasonable to continue to provide cohesion funding to the richest member states? If they were cut, those countries NET contributions to the EU budget would rise, but the gross contributions could be held steady. If that was balanced against further small reductions in maximum transfers to poor countries (limits that are expressed as a percentage of GDP), then that could be a way of trimming a bit of money from each country’s cohesion receipts.

A more radical option to reduce spending, perhaps the most radical in terms of the entire history of EU spending, is to tackle the CAP Pillar I direct payments to farmers. These could be capped further. But one recent suggestion is to make at least part of them co-financed. They remain by far the single largest of all EU policies to be fully financed from the EU Budget (one of relatively few policies overall). Having them partly co-financed by the member states could, without doubt, enable a sufficient reduction in overall spending to fill in the Brexit hole. But the political sensitivities around CAP spending are such that this would lead to massive divisions between member states. Moreover, it would for example in all probability make allies of, say, Poland and France – countries who, in other areas of the negotiations, may be on opposite sides. As such, alliances like this would make it even harder to reach agreement on such reform proposals.

I would, as we say in English, love to be a fly on the wall for all of these talks. I have no doubt that a last-minute resolution will be found. It will probably involve minimal change overall and also require possibly very small side-payments/policy tweaks to bring everybody on board. But failure is in nobody’s interests, current divisions notwithstanding.

Mikel Larreina, Vice-Dean for Postgraduate Programmes, Deusto Business School, University of Deusto, Bilbao

I think that a major concern will be to plan different scenarios of national budget contributions depending on whether Brexit actually happens or not, and if so under which conditions (the Norwegian, Swiss or Canadian options;  the total breakup; or any other intermediate formula).

Besides this, how money will be allocated to the main challenges that we are living through might be a  matter of discussion between pro-EU and Eurosceptic governments, and between more progressive and conservative governments, and quite likely will show different political stances.

For instance, how money will be assigned to the EU borders and wether or not there might be a significant amount dedicated to mitigate the need to flee those countries that are currently posing migratory pressure on the EU will be a hot topic.

Advancing the Fiscal Union, and strengthening cohesion funds to this regard could be matter of discussion as well (here an improved control framework should be designed so that regions do use these funds wisely).

Digital issues, like industry 4.0, FinTech and adjusting workloads and fiscal policies adapted to an increasingly robotised economy (including the discussion of setting taxes to robots or the launch of minimal universal income)  would require an important boost in the budget  as well.

Unfortunately, I do not expect to see a clear acknowledgement of the environmental threat: quite likely it will not shape the budget (and it should).

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