EU budget 2014-2020: The €1 trillion deal

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Is €1 trillion too much or not enough to fund the many activities of the European Union for the next seven years? This is the main question that European institutions and the 27 member countries’ leaders will have to answer early next year.

At roughly €130 billion a year, the EU's annual budget is equivalent to around 1% of EU national wealth, or €244 per EU citizen.

The European Commission proposes raising it to €146 billion over the next seven-year period (2014-2020), or €1.025 trillion in total.

The EU budget covers all of the Union’s activities, and only complements national budgets. As much as 80% is spent by national or regional governments in EU member countries. These governments are responsible for selecting beneficiaries. They are the first port of call for ensuring the money is spent correctly. While critics claim that most of the budget is spent on administration; in reality, these costs usually amount to less than 6% of the total.

With the enlargement of the Union, the budget has grown as well, a trend which is set to continue as Croatia prepares for EU entry in 2013.

But in the context of the eurozone crisis, while most member states adopt austerity measures at the national level, several governments, led by Britain, believe that the EU budget should be slimmed down too.

The European Commission, many MEPs and most of the new member states have taken the opposite view and have claimed that money spent at EU level has a higher added value and contributes towards combating the financial crisis.

The EU institutions now have to decide on the budget for 2014-2020. In EU jargon, this is called the multi-annual financial framework (MFF). They have set themselves the goal of reaching a compromise before the end of 2012.

Actions and projects funded by the budget reflect the priorities set by the EU. These are grouped under broad spending categories (known as ‘headings’) and 31 different policy areas.

The percentages of spending in the main budget headings for the last MFF (2007-2013) were:

  • Competitiveness and cohesion: 44.6%
  • Natural resources, agriculture, rural development, environment and fisheries: 42.5%
  • Citizenship, freedom, security and justice: 1.3%
  • The EU as a global player: 5.7%
  • Other, including administrative expenditure: 5.9%

Following bilateral negotiations on 22 November 2012, European Council President Herman Van Rompuy presented heads of state with a revised EU budget. In the new version he proposed heavy cuts in certain categories and increases in others.

>> Read: The EU's new budget blueprint in figures.

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.

What’s new

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.

The Cypriot presidency published a paper, summing up the state of play. One of the important conclusions of the Cypriot presidency appeared to be that the budget should be smaller, despite the Commission's proposals (see background).

“The bilaterals have confirmed that an agreement cannot be found at the overall level proposed by the Commission in its proposals, as updated on 6 July 2012. The Presidency recognises that it is, therefore, inevitable that the total level of expenditure proposed by the Commission, including all elements inside and outside of the MFF, will have to be adjusted downwards,” the presidency's document stated.

The paper recognises that “contradictory views” were expressed on many key issues. “This applies in particular to the overall level of the MFF for 2014-2020," The paper states. "A number of delegations expressed the view that the EU budget should better reflect the fiscal consolidation efforts undertaken by member states at the national level and therefore requested a substantial reduction in the overall MFF in relation to the amount proposed by the Commission."

"A group of delegations, on the contrary, underlined the need for adequate financing of the Union’s policies and supported the overall amount proposed by the Commission and some an even higher amount. Furthermore, there were divergent views among member states as regards the composition of the MFF and in the event that cuts were to be made, opinions varied among delegations as to how much each heading/policy should be affected,” the document said.

Views also differed on the revenue side of the budget, with France taking the lead in supporting the Commission’s proposal for new "own resources", such as taxes on financial transactions. Germany, on the other hand, insisted that the present system of own resources should be kept and even reduced, with national contributions remaining the biggest share of the EU budget. As for the different EU budget categories, the Cypriot presidency considered that readjustments and reductions were needed, including for programmes contributing to the fulfilment of the Europe 2020 strategy. On cohesion policy a “growing consensus” was noted for “downward adjustment”, while on agricultural policy “sharply opposite preferences” of member countries were indicated.

EURACTIV learned that Germany had tabled a document calling for “better spending” of EU funds, providing for strict discipline and reporting, as well as for a substantial increase of “own funding” by member countries of projects receiving EU support. Germany also foresaw a strong conditionality on the release of EU funds with the country’s conformity with the requirements on economic governance, as well as with an effective fight against corruption, tax evasion and money laundering.

“There is general agreement that the future MFF must contribute to growth, investment and jobs. Views also largely converge on the need to ensure a true quality of spending, the simplification of instruments and a sufficient degree of flexibility in a number of areas,” said a paper about negotiations for the new EU budget published on the Cypriot EU presidency website.

Partizio Fiorilli, spokesperson for the commissioner for financial programming and budget, Janusz Lewandowski?, said the day after a ministers’ meeting in Nicosia on 30 August:

"Around 20 member states believe that the Commission's proposal is a sound one. Some think it's not a good one because it has to be higher in their view. And then we got 6-7 member states who hold the view that we need to have cuts. Those are the main conclusions from what I have got that happened in Nicosia yesterday.”

Fiorilli continued: "Increases in the budget do not correspond, at least in my view, to the increase in the size of the EU. if you look at other periods like 2010, national budgets in all member states had increased by 62%. Over the same period, the EU budget increased by 38%. So if you compare that plus the fact that the percentage of the EU budget in relation to GNPs of member states which is down every year means we can do more Europe with less."

"But there are limits. If member states keep asking us to do more and create agencies which will supervise financial matters, three new agencies, we need extra people to do all this. And you need a minimum of resources," Fiorilli added. 

Commissioner Janusz Lewandowski told EURACTIV in an exclusive interview: “Current MFF negotiations are being pursued under difficult circumstances. In fact the ongoing crisis makes a call for timely adoption of MFF even more pertinent, so as to unlock the EU budget potential to spur investments, growth and create jobs.”

Soon after the new EU’s draft budget was released, Britain, Denmark and Sweden criticised the plans, deeming them “unrealistic”, given the union’s current economic situation.

European Commission President Jose President Jose Manuel Barroso then hit out at the criticism.

"This is an extremely serious, credible proposal, and to say 'no' to something which was only adopted two or three hours ago is not serious or credible," he told reporters.

Barroso also stressed the value of EU-wide budgets across all sectors compared to national policies, citing: "EU funding makes it less expensive than 27 national agricultural policies."

French minister for European affairs, Bernard Cazeneuve, said: "It is possible to open the debate on own resources for the European Union without calling into question the need for austerity," Cazeneuve stressed. "And this is the reason why we are very aggressive on the issue of own resources."

An analysis by eurosceptic think-tank Open Europe claims that if one includes spending not in the regular EU budget framework, the spending increase is actually of 7%. This would be around the same as the hoped GDP growth over the same period, meaning the EU budget might not grow faster than the general economy.

Bulgarian MEP Ivailo Kalfin (S&D), vice chair of the budget committee, told EURACTIV that while the Parliament was united in its position on the MFF, the member states themselves were divided. He also warned that the EU legislative would not allow national leaders to “set a fait accompli” by deciding for themselves, as had been the case previously before the Lisbon Treaty was adopted, giving the Parliament expanded powers over the budget.

  • 18-19 Oct.: European Summit to discuss economic governance
  • 22-23 Nov.: European Summit to discuss long-term EU budget for 2014-2020
  • 13 Dec.: European Summit expected to agree on 2014-2020 budget

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