Fighting over the EU Budget

German Chancellor Merkel called him ‘childish’, and French President Macron used the phrase ‘what arrogance’. These were the remarks concerning Dutch Prime Minister Rutte at the Special European Council meeting on 20-21 February 2020 (Pieters, 2020), where the heads of EU member states gathered to discuss the EU’s long-term budget. Work on the multiannual financial framework (MFF) for 2021-2027 began in early 2018 with the European Commission adopting an MFF package proposal in May that year, as shown in Figure 1 (Baczynska, 2020). Several changes have since been introduced, the latest being Council President Charles Michel’s compromise proposal in February 2020. This essay examines the nature of the contention surrounding Rutte in the European Council, and how other EU member states fall in line. The essay also investigates some of the ways to tackle the deadlock in the EU budget negotiations.

Figure 1. What the EU pays for

The EU’s Budget Tribes

MFF negotiations “are notoriously difficult” (Bayer, 2020) and typically take a few years. “After high-drama bluffing, bullying, blackmail, and betrayal, such negotiations usually result in minimal changes” (Pisani-Ferry, 2020). All this feuding is basically about how much the total budget should be, how it should be financed, and how it should be spent. Naturally, every EU member state takes a unique, self-centred stance because of differences in the economic development level and industrial make-up, as well as a host of political reasons. Based on their points of divergences concerning the EU budget proposal, the 27 member states could be put into several groups of similar interests, as shown in Figure 2.

Figure 2. The EU’s Budget Tribes

The Frugal Five — The most notable of all groups is perhaps the frugal five. Austria, Denmark, Germany, the Netherlands and Sweden do not want to see their shares of national contributions increase (Bayer, 2019). Arguing that the overall budget size should shrink after Brexit, the frugal five have made it clear that the EU budget should be capped at 1% of the EU’s gross national income (GNI). Furthermore, they want to retain the rebates, the budgetary correction instruments that are meant to ease the burden on the member states with larger shares of contributions. Naturally, these countries want to see reductions in cohesion and agriculture spendings, which make up 34.5% and 29.7% of the total budget, respectively (European Council, 2020). Led by Dutch Prime Minister Rutte, these 1-percenters do not intend to budge in the budget negotiations, causing a deadlock (Bayer, 2020).

Friends of Cohesion — At the opposite end of the spectrum are the friends of cohesion (Bayer, 2019). All 17 of them are net receivers, meaning that the EU spending within their borders is higher than their national contributions to the EU budget. Naturally, they benefit from the EU’s regional development spending and wish to keep it at or close to the 2014-2020 level. The Commission’s 2021-20207 MMF proposal, after the Finnish presidency and Michel adjustments, implies that the regional funds would see massive cuts, as much as by a quarter for countries like Poland and Estonia. The friends of cohesion argue that such cuts would undermine the European mandate of reducing disparities within the Union. Within this group, some divergences exist concerning the overall budget size: a few are pushing as far as 1.16% or 1.30% GNI while some settle at 1.11% GNI.

Friends of Farmers — The largest of the EU’s budget tribes, the friends of farmers strive to maintain the agricultural spending at current levels (Bayer, 2019). The Commission’s initial budget proposal aimed to introduce a significant reduction in agricultural spending compared to the previous MFF period, in order to shift focus on other policy priorities, such as research, defence and migration. However, the friends of farmers have been able to assert tangible pressure in the budget negotiations. As a result, the Commission’s initial agriculture budget of €337 billion saw minor increases, growing to €354 billion in Michel’s compromise (Fontàs et al., 2020). This single-issue coalition manages to maintain its level of influence particularly “with supporters in both main camps and, through agricultural ministries, a lot of internal lobbying power in practically every national capital” (Bayer, 2019). However, others think that these countries have diverse interests and views, for instance, whether direct payments to farmers should be equalised across the Union.

Democracy Promoters — Denmark, Finland, France, Germany, the Netherlands and Sweden have indicated that they would like a budgetary mechanism to protect the rule of law (Bayer, 2019). While not a formal coalition, these are largest net payers of the EU as well as countries with well-established democracies, with their 2019 Democracy Index scores averaging at 8.95, as compared to the EU average of 7.89 (The Economist Intelligence Unit, 2020). The democracy promoters are concerned about reports of threats to the rule of law, as well as reports about the misuse of EU funding in several Central and Eastern European countries. However, on the opposite side are Hungary and Poland, who are informally allied to veto any attempts to link the EU budget to the rule of law concerns (Bayer, 2019).

Questioning the Frugal Five’s Case

With the issues of the overall budget size, cohesion spending, agricultural spending, and the rule of law presenting as obstacles in the way of the MFF negotiations, we shall explore possible ways of resolving the deadlock. Above all, Rutte’s claim “we are net payers and I don’t see why we have to pay more” (Arak, 2020) should be examined.

Firstly, the EU budget is, in fact, decreasing. With the UK having left the EU, the average member state contribution has increased slightly. However, the overall budget size has shrunk from €1,138 billion for the 2014-2020 period to €1,094 billion as per Michel’s proposal for the 2021-2027 period (Fontàs et al., 2020:5). It should be noted that the annual EU budget for 2019 was only €148 billion, a tiny fraction (2%) of the combined national budgets of all 28 EU countries (European Commission, n.d.). The EU budget is primarily used for investment, and the average EU citizen pays an amount less than the price of an average cup of coffee per day for it. By contrast, an average national budget in the EU is 46% of the value of its economy (European Commission, n.d.).

Secondly, the regional development fund plays a crucial role not only in the so-called net receivers but across the EU. “For each euro spent another one and half is created in trade in the Netherlands. Everybody in the single market with the help of the cohesion policy is a net receiver” (Arak, 2020). For instance, the Netherlands benefits from the influx of migrant workers from net receivers, who brought an additional value of €15 billion in 2018 to the Netherlands (Arak, 2020). The cohesion funding spent between 2007 and 2013 is expected to yield a 274% return by 2023. Also, it is anticipated that the €460 billion regional spending allocated over the 2014-2020 period would, among others, help over 1.1 million companies, improve healthcare for 44 million Europeans, protect 27 million people from floods and fires, and connect 17 million people to sewage plants (European Commission, n.d.).

Thirdly, agriculture is ever more relevant in the EU. While the frugal five have been pushing for a shift of focus from agriculture to knowledge and innovation, the agricultural sector remains an active user of the latest innovations (Arak, 2020). Industry analysts suggest that the EU farmers should be given greater access to crop protection products, seed biotechnology and precision farming technology, which would allow the farmers to “produce more with less” (Michalopoulos, 2018). Also, maintaining a reasonable level of CAP funding is crucial, to minimise the damage by climate change as well as to prevent insolvencies of European farmers who have already experienced bad harvests in the past several years (Arak, 2020). Taking less than 30% of the EU budget, the relatively large share of the agricultural spending is justified as the only policy funded almost entirely from the common budget, effectively replacing most of the national expenditure (European Commission, n.d.).

Lastly, the rebates, which the frugal five insist on keeping, have the adverse effect of distorting the figures and complicating the MFF negotiation process. Darvas points out that the rebates and corrections place a burden on 22 EU countries only to benefit six net payers (2019:11). The most damaging impact of these corrections is that they make national contributions to the EU budget regressive, with richer countries contributing less to the EU budget as a share of GNI than poorer countries, as shown in Figure 3 (Darvas, 2019:11). For this reason, Darvas argues that “the rationale for the rebates should be spelt out clearly and a transparent correction system built on clear principles should replace the current ad-hoc, opaque, complicated and regressive system of rebates” (2019:12).

Figure 3. GNI per Capita vs National Contributions to the EU Budget, 2014-18

Reforming the EU Budget

In his evaluation of the issues surrounding rebates, Darvas reasons that the net payers wish to limit their contributions because they think that a large portion of the EU budget is redistributed to countries for spending that does not qualify as European public goods, or that there are risks of improper use of money (Darvas, 2019a, as cited in Darvas, 2019:12). One effective way to resolve this would be by reforming the EU budget so that all spending only concerns European public goods (Darvas, 2019:12).

Echoing this idea, Fuest and Pisani-Ferry cite examples of foreign economic relations, climate change mitigation, digital sovereignty, and migration policy and the protection of refugees as viable European public goods that generate added value with high levels of efficiency at the Union level (2019). The argument is that this new focus on European public goods can effectively address the challenges the Union is facing today and, at the same time, resolve the state of lethal deadlock caused by each member state seeking its self-interest. How, then, would this new initiative be funded? The simplest solution would be increasing the overall national contribution to the EU budget in proportion of GNI, and the most radical solution would be introducing a Union-level taxation system and thus establishing a fiscally federalist Union. Since both methods would face severe political resistance, Fuest and Pisani-Ferry suggest that identifying new own resources would solve the deadlock with minimal resistance (2019:47).

The introduction of new own resources, for the goal of maximising European public goods without putting an additional burden on EU citizens, also shines as the central theme in the 2016 report by the High-Level Group on Own Resources (HLGOR). They recommend, for example, reforming the EU budget to maximise European added value and achieve budget neutrality without increasing the overall fiscal burden and introducing new own resources such as a corporate income tax-based own resource and those related to the Energy Union, environment, climate or transport policies (HLGOR, 2016).

Conclusion

The MFF negotiations are currently in a deadlock situation because every member state is seeking its self-interest. The so-called net payers oppose any further increases in their national contributions to the EU budget, while the net receivers insist on keeping the funds flowing in their direction. Countries also stand by issues concerning the EU’s CAP spending and fiscal mechanisms for ensuring the rule of law. Since the MFF requires a unanimous decision before it can be presented to the European Parliament for final consent, member states not willing to nudge means a stalemate for the budgetary negotiations. However, several analysts are calling for a reformed EU budget, particularly with a greater emphasis on the provision of European public goods and the introduction of new own resources. Once the EU embarks on this journey, the question will no longer be “whether Spain will gain more than Poland, or whether Dutch citizens will end up paying more than French, but whether there is added value in joint policies” (Pisani-Ferry, 2020).

References

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