Why the EU’s budget must be both bigger and better

While the European Union has a proud record in keeping the peace amongst its members, it always feels like hostilities are breaking out again when it’s time to talk about the budget. There were already signs of mounting tension when EU leaders gathered in Brussels for their summit on February 23, with battle lines forming over the next big budget fight. As the leaders argue about how to fill the hole left by the departing British, they will have to answer existential questions about how they want to spend their money after 2020.

The Brussels summit was just the first skirmish in what is likely to be a long and bitter budget battle.

European Council President Donald Tusk said the 27 leaders present – Britain’s Theresa May was not invited – approached the budget “with open minds, rather than red lines.” But the other leaders were already hinting at the combats to come. German Chancellor Angela Merkel warned that cuts will have to be made to “bureaucratic” policies, like agriculture. Dutch Prime Minister Mark Rutte said the EU needs to modernise existing programmes to find more money. “This is the start of an intense and difficult process,” cautioned Belgian Prime Minister Charles Michel.

The next budget package does not begin until 2021, and it is not yet clear if it will last for five or seven years. Officially known as the Multiannual Financial Framework (MFF), and also called the financial perspective, it is worth around 1% of EU gross national income. This year, the EU is set to spend €145 billion.

The budget always provokes wrangling, notably between net payers and beneficiaries. Some issues should be easier now. For example, Brexit means that the EU can scrap the rebate, the complex offset system set up in the 1980s to compensate the UK. But there are three reasons why this time is particularly tricky:

 

  • The first is the Brexit hole. Despite this, the Commission wants to raise the spending rate from 1.0% of GNI to 1.15%. The European Parliament wants 1.3%. The poorer, eastern European states want their richer neighbours to plug the annual revenue gap. The Netherlands, Austria and Nordic EU countries, all hawkish net contributors, argue that a smaller EU should lead to a smaller budget. The biggest net contributor, Germany, says it is ready to pay more. EU Budget Commissioner Günther Oettinger says half the financial gap “should be covered by cuts” and the remainder “by additional money from net payers”. Various ideas have been floating for new revenue sources, like corporate taxes, money generated by the EU’s Emissions Trading Scheme, the profits from the European Central Bank, and even a plastics tax.

 

  • Second, the EU’s changing priorities. Agriculture and cohesion spending is falling and will fall further in the next budget, not least because of other priorities: migration, internal and external security and possibly new tools to strengthen the euro (the Commission wants a eurozone special “stabilisation” budget for times of need). Budget hawks talk about ‘modernisation’, focusing on investment and technology. Italian Finance Minister Pier Carlo Padoan and Germany’s Peter Altmaier jointly called for a budget to finance “truly European public goods” like managed borders, better cybersecurity and cohesion. There has even been talk of earmarking revenues, reserving them by law in advance for specific purposes, a measure used historically by the US federal government.

 

  • Third, because there is now talk of penalizing some of the net beneficiaries, notably Poland and Hungary, for being bad EU pupils. The Commission and other governments have suggested withholding funds from Warsaw and Budapest over their recent moves to influence courts, media and other independent institutions. France has gone further, demanding explicit ‘conditionality’ not only between EU funding and treaty commitments but also for those who slash taxes and labour rules to undercut their European neighbours. Germany says it should apply to countries that refuse to host migrants. This is the most politically thorny issue. The Commission has already opened proceedings on Poland’s controversial reforms, which could see Warsaw stripped of its voting rights. As Poland is the EU’s biggest budget recipient, this could be a more effective tool to settle disputes.

There is no denying that this adds up to a series of hard choices. How do we deal with them?

The first priority is to raise its budget. If the EU is to remain ambitious, it must have more money to spend, even if it is a modest rise. It’s a law of capitalism that you cannot just stand still. If the EU continues to spend the same as the past seven years, it will be left behind the rest of the world.

Equally, we have to think harder about where the spending goes. The EU has – perhaps surprisingly – weathered a few storms over the past financial framework. As the cliché goes, the time for building houses is when the sun shines. There are so many better priorities that we should be spending money on, from migration management to research, from the Erasmus exchange programme to the European Defence Fund.

We also need to think about the European added value of our budgets. It may be sacrilegious, but we should ask more searching questions about how efficient our funding is. For example, does the money going to Polish farmers help reduce disparities?

It is nature of the EU that we pool resources. But it is for a purpose, and that is to level the playing field. If it does not produce results, then the system has to change. And, as the conditionality debate shows, we cannot keep pumping money into countries if they become less and less democratic.

The Commission is now set to propose a detailed budget in May. Officially, it still wants to settle the budget before the European Parliament elections, in May/June 2019, but that would mean wrapping it up before last Parliament session, in April – a very tall order given that the previous negotiations took more than two years.

More important than meeting that deadline, the EU should use the negotiations to really change its thinking. A bigger budget would be a good result. But the EU should go further and seek a better budget.

Authors: David Harley & Leo Cendrowicz

Related Posts

Saving EU trade policy 26 September 2016
Brussels Brexit Briefing – 2nd August 3 August 2016

Leave a Reply