MFF: Multiannual Financial (in)Flexibility

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Many forget the deal still often hailed as ‘historic’ reached in the midst of the pandemic was not only about joint borrowing to the tune of €750 billion but also the EU’s ‘normal’ €1.1 trillion seven year budget running to 2027, the multi-annual financial framework (MFF).

The MFF, child of months of haggling, was agreed only after the initial shock of the pandemic gave way to the economic rationale of joint recovery lest the EU repeat the mistakes of the eurozone crisis.

As it goes with budgets, they tend to be hard to keep, especially when they are tight. And this one leaves little wiggle room, as European Commissioner Maroš Šefčovič admitted recently.

The EU executive’s chief for Interinstitutional Relations said “you know how it is: budgets are fixed, and there is little flexibility usually, and it is the same with the European Union budget”.

Pointing out the current seven-year EU budget was agreed before the pandemic and the Russian invasion of Ukraine, he said: “it is quite tight, I have to admit, with little flexibilities.”

In the beginning was the Coal. Then Oil. Then came REPowerEU.

The European Commission’s current plan to eliminate all imports of Russian fossil fuels by 2027 will cost the bloc a total investment of €300 billion by 2030.

Money for this monumental project is supposed to come from various sources. The Commission hopes EU countries will use the remaining COVID recovery loans (currently €225 billion) and auctioning of €20 billion worth of Emission Trading System allowances, the EU’s flagship climate policy tool. Another €7.5 billion could come from transferring the EU’s farming subsidies, part of the MFF.

These plans leave almost everyone unhappy. Emissions analysts say the move ‘undermines’ the hard-won stability in the carbon market, while farmers’ reactions are lukewarm, at best.

Firefighters of today…

However, it is hard to blame the executive, facing giant problems with its hands tied tight by budgetary realities. And as previous experience demonstrates, the Commission will have no choice but to demonstrate budgetary creativity that risks undermining the bloc’s long term goals.

When European cities started to deal with the influx of refugees from Ukraine, the Commission loosened rules governing the EU’s long-term structural investment policy, saying member states will now be able to use EU cash leftover from the previous budgetary period of 2014-2020 to feed, clothe, house, employ and educate people fleeing the war.

The logic of extending the funds meant for the EU’s cohesion policy, an investment scheme designed to reduce economic disparities between the bloc’s regions, is not new. It follows a similar move by the Commission in the wake of the coronavirus outbreak.

Then, the European executive loosened the bloc’s cohesion policy rules, which represent about a third of the EU’s budget, to allow unspent money from the 2014-2020 funding period to be re-budgeted to address the immediate fallout from the pandemic.

“So once again, cohesion policy … is called to play the role of first responder. Again, we have long term policies, but we have been also working as firefighters,” EU regional policy boss Elisa Ferreira said in April.

All this in a context, where rising prices are already threatening cohesion projects, while the Commission is placing the responsibility for solving the problem on a case by case basis on national fund managing authorities.

… or policies for the future?

The question remains whether a budget with little flexibility is able to deal with major, unforeseen, multifaceted challenges like a pandemic and a war that prompted a complete reorganisation of Europe’s energy supply chains.

What is clear, however, is that expecting the European Commission to conjure new money if (and when, were we to believe climate scientists) the next global challenge arises from thin air is bound to leave everyone disappointed, particularly those who were promised they would not be left behind.

Chart of the Week

One of the biggest achievements of the French presidency is the agreement reached earlier this week on the minimum wage directive less than half a year after the talks began.

This in a context where some of the countries (looking at Denmark and Sweden) who pushed back hardest against EU-level rules are the ones with highest wages across the bloc, but no minimum standards.

Currently, Italy, Sweden, Finland, Denmark, Cyprus and Austria, have no statutory minimum wage.

In Italy, meanwhile, the ruling parties are struggling to agree on a common stance on the issue.

The final text states that statutory minimum wages could be considered sufficient if they are set at a level of at least 60% of a country’s median salary or 50% of the average.

It is thus worth taking a look at where we stand now.

In the graph above, EURACTIV takes a look at the minimum wages across the bloc in Purchasing Power Standard, an artificial currency unit that attempts to control for differences in price levels across the bloc. In other words, theoretically, one PPS can buy the same amount of goods and services in Hungary as in France.

At first, it seems that the oldest members of the club are also setting the highest level of minimum wages for it.

However, once we look at where those who earn the statutory minimum stand when compared to their peers earning an average wage, the picture becomes more heterogeneous.

The legislatures of the Iberian peninsula, Slovenia and Poland secured a minimum income at least half of the average pay, while France and Germany are lagging behind.

Literature Corner

Speaking of minimum wages, the final compromise struck on the law will require all EU member states to aim for collective bargaining coverage of at least 80%. This will become a particularly salient issue going forward, as growth of self-employment will redefine how we think of the labour market. The next big development in this respect is set to be the negotiations on the platform workers directive. Read Bruegel’s Gruber-Risak, Hatzopoulos, and Mulcahy’s contribution on why they consider that the protection of all workers will be central for ensuring that labour law stays fit for purpose today here.

Hindsight is twenty twenty, as they say. An important detail of the hard-fought compromise on the sixth sanctions passage against Russia that finally saw the EU agree to ban Kremlin oil, is the proviso that it will only start in six months, or even longer in the case of countries (cue Hungary and Slovakia) who got exemptions. Now, most in Brussels do not even want to hear about a gas embargo. Yet, some would argue that the most economically efficient choice would have been to ban both the black gold and its transparent counterpart straight away, instead of taking the current piecemeal approach. Read renowned Russian economist Sergei Guriev’s and his co-author Oleg Itskhoki’s argument here.

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