Setting the scene
European institutions and national governments are currently negotiating the European Union's budget for 2014-2020, a traditionally divisive exercise.
The multi-annual financial framework (MFF), as it is known in EU jargon, is a €1.025 trillion package of spending and commitment ceilings. It was presented by the Commission in June 2011.
At roughly €130 billion per year, the EU budget accounts for less than the budget of Denmark, but can nonetheless be extremely time-consuming for national leaders, who wrangle to ensure the best deal for their country. Each seeks to maximise returns and minimise contributions, and convince national public opinion that their interests are being well preserved.
The reform of budget is a significant test for the EU as it attempts to adapt its action to address today’s issues, including the immediate challenges of supporting employment and growth but also in view of the Union's increased role on the international scene, the “greening” of expenditure to address environmental concerns, and the need to support investment in research and development.
At stake in the negotiation of the 2014-2020 budget is therefore not only the money itself, but whether the EU can reconcile divergent national interests - on agriculture, regional funding and research.
The negotiation will ultimately require unanimity and a deal will likely only be reached in the second half of 2012, towards the end of the Cypriot presidency.
The Commission proposal: A 4.8% increase
The Commission's original MFF proposal for 2014-2020 amounted to €1.025 trillion, up from €976 billion in the previous period (2007-2013).
This represents a 4.8% increase, which is beyond the average 2% inflation recorded in the last decade. But is also amounts to 1.05 % of the EU's expected gross national income (GNI), less than the 1.12 % for the current MFF.
The Commission’s proposal seeks to reform the budget to better implement the EU’s so-called “Europe 2020” strategy for “smart, sustainable and inclusive growth” and its various economic, social and environmental targets.
To this end, the Commission proposed a decisive shift away from the EU’s traditional budget items – agricultural subsidies and regional redistribution – in order to support new programmes for research, infrastructure and technology.
In a bid to woo member states that are opposed to further rises in the EU budget, the Commission proposed to reduce national contributions, in line with austerity measures adopted across Europe in the wake of the financial and economic crisis.
To allow this, the Commission suggested levying new taxes directly in order to increase the Union's so-called "own resources", a proposal that was strongly rejected by the UK, which labelled it "unrealistic". Germany is also opposed while France has taken the lead in defending the Commission's plan.
The Connecting Europe Facility is a new scheme to fund transport, energy and ICT priority infrastructures of pan-European interest. It will be centrally managed by the European Commission and will be funded (€40 billion + €10 billion from the cohesion policy) from a new section of the budget. Co-financing rates from the EU budget will be higher when the investments take place in Europe’s poorer regions.
Innovative financing tools are proposed to speed up and secure greater investment than could be achieved only through public funding, in particular EU project bonds.
The EU budget for 2014-2020 also provides for the costs related to the accession of Croatia, which is expected to join the Union on 1 July 2013.
Other proposals relate to the management and administration of existing policies.
The most controversial is a proposal to link disbursement of EU regional funds to budget discipline rules, in the wake of the eurozone sovereign debt crisis. In practice, this means that only countries whose budgets deficits are lower than the agreed ceiling of 3% of GDP will be eligible to receive the money, which is aimed at helping poorer regions bridge the gap with richer ones.
Cohesion funding will continue to be concentrated on the less developed regions and member states. However, in order to allow a smooth transition from regions ‘phasing out’ from the convergence objective and to put regions of a similar level of prosperity on an equal footing, a new category of transition regions (whose gross domestic product (GDP) per capita is between 75% and 90% of the EU average) will be established.
The Commission proposes to conclude partnership contracts with each member country in order to achieve a more results-oriented programming. These partnership contracts may also include macroeconomic conditions to improve the coordination of member states’ economic policies.
In terms of administration, the Commission proposes bringing the European Regional Development Fund , the European Social Fund and the Cohesion Fund together under a common strategic framework, which will also cover the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund.
Many of these changes are not politically neutral however. Behind them lie the starkly divergent visions and interests of the member states – notably between the more austerity-minded net contributors to the EU budget on the one hand and net beneficiaries, especially in southern and eastern Europe, on the other.
As a report by Notre Europe, the think tank of former Commission President Jacques Delors, notes: “Too often, talks about ‘modernising’ the EU budget by rendering it more growth-oriented are a euphemism for sharp cuts to CAP [agriculture policy] and [redistributive] Cohesion.”
A budget for austere times
The wider climate of austerity and rising scepticism towards the EU have affected the Commission’s budget proposals.
At the time of the proposal's presentation, Budget Commissioner Janusz Lewandowski had said the EU executive's philosophy consisted of “financing more Europe with the same levels of money, taking account only of inflation.”
This came as many powerful member states pushed for a smaller budget. In May 2012, Germany, Italy, Britain, the Netherlands and three other countries sent a joint letter to the Commission opposing any increase. They said: "The Commission proposal is too high. … The new MFF should not lead to an increase in national contributions to the EU budget … We need to spend better, not to spend more."
France, which had initially signed a similar call the previous year under then-President Nicolas Sarkozy, is still undecided but appears opposed to such a hardline stance. Seen from Paris, the EU budget must reflect the government's priority to support economic growth while keeping with national commitments to rein in public deficits.
"Despite constraints, there is an ambition for the Union's budget," said Europe Minister Bernard Cazeneuve, adding that France was "very aggressive" in supporting "own resources" for the EU budget, placing Paris firmly on a collision course with Berlin, which wants to retain national contributions as the biggest share.
The protracted negotiation process will pit these essentially wealthier member states that are net contributors, and the backers of a bigger budget such as the Parliament and many central and eastern European countries. Last year the European Parliament, which is a co-legislator on the matter, called for a minimum 5% increase in the MFF, setting the stage for a confrontation with EU member countries.
Decline of the agriculture budget
Perhaps the most significant feature of the new financial framework is the stark decline in farming policy. This was long by far the biggest item in the EU budget, a legacy of then-heavily rural France’s commanding influence in the European communities’ early years. In the 1970s, the Common Agricultural Policy (CAP) represented 80-90% of the budget.
In a speech to the Parliament in January, Lewandowski said spending on agriculture will be “nominally constant” that is, not adjusted for inflation. This would represent a significant decline in real terms. Under the Commission proposal, the CAP’s share of the EU budget would drop from almost 40% to around 33% by 2020, approximately the same as regional policy.
The EU is also committed to “greening” the CAP, notably by tying 30% of its funds to environmental criteria such as diversifying production, rotating land-use or maintaining permanent pastures.
The complexity of the reform is apparent even in determining the budget’s size. A report commissioned by the Parliament’s Agriculture Committee finds that the decline in agricultural funding has been overstated by shifting some ‘traditional’ CAP spending under new headings or placed outside the regular budget.
Traditional CAP expenditure is to be reduced by 10.9% for 2014-2020 compared to the previous multiannual budget. However, if one includes other farming policies, the decline is only 7.2%. The report says these budgetary acrobatics “allow the Commission to under or over exaggerate the real terms of the budgetary cut, depending on its target audience.”
The Commission may find such audience-targeting necessary as many member states are set to lose funds in the proposals as the CAP’s budget not only shrinks but also shifts towards Central and Eastern Europe.
This could mean an up to 7% decline for western countries. The major beneficiaries of agriculture policy will no doubt fiercely oppose this. France and Spain have already made their discontent known.
Regional policy: Rich, poor and 'transition' regions
The EU budget’s second signature programme is regional policy, also called cohesion policy, which redistributes funds from wealthier to poorer regions to fund infrastructure, development and other projects. This budget is broken down into several funds including the Regional Development Fund (ERDF), the European Social Fund (ESF) and the Cohesion Fund.
Under the Commission’s proposals regional policy would represent €336 billion for the 2014-2020 period, or 33% of the total EU budget.
As many regions, thanks to EU funding, are now out of the convergence criteria, covering Europe’s poorest regions whose GDP is less that 75% of the EU’s average, a new ‘transition region’ category is to be created, which will make regions whose GDP is equal to 75-90% of the EU average eligible for funding, This will effectively allow regions in the wealthier member states to continue their access to these funds, and prevent their being monopolised by new member states.
Countries like France, Germany and the United Kingdom will therefore maintain a stake in the programme. So-called ‘less-developed regions’ – mostly in Central and Eastern Europe but also in parts of they Mediterranean and represent just under a quarter of the EU’s population - would still receive almost 70% of the funds.
Another major new feature will be the extension of ‘macroeconomic conditionality’ to regional funds to help enforce budget discipline among national governments. This has already been partially implemented since the entry into force in December 2011 of the so-called “six-pack” reinforcement of the Stability and Growth Pact.
It requires member states to converge towards a debt of less than 60% of GDP and have deficits equal to less than 3% of GDP, or risk losing cohesion funds. Earlier this year, the EU executive tested these rules for the first time by threatening to suspend €495 million of Hungary’s funding as a sanction for the country’s excessive deficit.
The Commission says its proposal means “the process of the suspension of funding will now be more automatic and extended to all funds.” These are detailed in Article 21 of the Commission’s general proposal on the various funds.
Conditionality has come under repeated criticism from Europe's local and regional elected representatives for tying the funds their authorities receive to budget decisions of national governments.
Also, the EU is to have for the first time binding objectives for sustainable development in the use of regional funds. They would include objectives in areas such as resource conservation and the shift towards a low-carbon economy as well as incentives for developing energy efficiency and energy infrastructure.
Friends of the Earth, an environmental group, praised the draft legislation as “clearer and legally stronger than existing regulations”.
New budget items: Research and infrastructure
The decline in the EU’s traditional areas of spending, farming and regional policy, will free up significant funds to invest in new programmes. Instead of a focus on agriculture or redistribution, these will aim to meet the Europe 2020 objectives, in EU jargon, for “smart, sustainable and inclusive growth” through investments in research, high technology and infrastructure.
Horizon 2020 is the EU’s 2014-2020 research programme proposed by the Commission with an €85 billion budget for that period. It aims to guarantee the EU’s “industrial leadership” in areas such as information and communication technologies, nanotechnologies, biotechnologies and space. These projects would seek to meet “societal challenges” such as lifelong health and wellbeing, sustainable energy, resource-efficiency and climate change.
As part of this, the European Research Council (ERC), a body which provides grants to scientists and universities, would see its funds increase by 77% to €13.2 billion for the same period.
There is concern, however, that these new innovation and research funds – which are non-redistributive – are being developed to the detriment of newer member states.
In the case of the ERC, funds are disbursed according to “excellence alone” criteria for a given project. In practice, this has meant projects have been monopolised by wealthier member states. According to the ERC’s 2011 report, the institution actually granted more research grants to non-EU countries, Israel (34) and Switzerland (44), than all of the 12 new member states since 2004 put together (13).
Another major initiative is the Connecting Europe Facility, which would provide €50 billion for the EU’s transport, energy and digital networks (of which €10 billion would be drawn from cohesion funds). EU transport ministers agreed to the plan in principle in March 2012 although many question marks remain over the funding of specific projects.