Commission to propose freezing EU’s long-term budget

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A drawn-out battle over the EU's next long-term budget (2014-2020) is due to begin this week with European Commission proposals expected on Wednesday (29 June). The draft will include a controversial plan for an EU tax aimed at reducing national contributions, but the overall size of the budget is expected to remain close to the current €1 trillion per seven-year framework.

The Commission, which will formally open the debate on the EU's next multi-annual financial framework this week, finds itself torn between opposing demands.

On the one hand, many member states – led by Britain, France and Germany – are asking the Commission to freeze the EU budget, in order to reflect austerity cuts currently being implemented at national level.

The Commission, which will formally open the debate on the EU's next multi-annual financial framework this week, finds itself torn between opposing demands.

On the one hand, many member states – led by Britain, France and Germany – are asking the Commission to freeze the EU budget, in order to reflect austerity cuts currently being implemented at national level.

On the other hand, the EU has enlarged from 15 to 27 member countries since 2004 and the range of areas it now deals with was widened by the Lisbon Treaty, something which is expected to require additional funding.

The face-off will start at the weekly meeting of the college of commissioners, which gathers the 27 members of the European Commission appointed by national governments. In an unusual move, Commission President José Manuel Barroso has reserved two days for the meeting – Wednesday and Thursday – to finalise the proposals, suggesting that discussions will be heated.

The debate will then be extended to include the Council of the EU – which represents the 27 member states – and the European Parliament, and is expected to last well into 2012.

By the end of December next year, a common solution must be agreed to keep EU bureaucracy going.

Paymasters asking for a freeze

In a joint letter last December, the UK, Germany, France, Finland and the Netherlands called for the EU's long-term budget to be frozen.

Germany, the biggest contributor to the EU budget, supports this line. France would also be happy to see cuts in regional funding, since most of that money is now expected to go to Eastern European states, which joined in 2004 and 2007.

The European Commission seems to have heard their appeal and is set to propose a new seven-year budget that is broadly similar to that of the current financial period (2007-2013).

The 2012 budget would appear to be the model. In 2012, funding is expected to reach 1.12% of the EU's Gross National Income (GNI) in commitments, and 1.01% in actual payments. If the 2012 budget were to remain the reference until 2020, overall payments would decrease from the 1.06% of GNI negotiated for 2007-2013. Commitments would instead remain exactly the same, at 1.12% of GNI.

The Commission is also expected to give up its initial idea of splitting the budget into two five-year periods and stick to the current seven-year framework.

Winners and losers

Agriculture and regional policy are set to remain the biggest chapters of the next budget, but their share will decrease slightly.

Eastern European countries, and notably Poland, which assumes the EU's six-month rotating presidency on 1 July, are strongly opposed to any reduction of regional funding. And countries with a strong agricultural sector, led by France and Italy, are not keen to give up funding for their farmers.

The biggest increases are expected in home affairs and migration policy, research and innovation, and sectors where the Lisbon Treaty has given new competencies to the EU, such as foreign policy. 

British rebate in sight

And of course, the British and Danish rebates will again be put on the table. Brussels wants to abolish the so-called zero-sum game whereby member states ask for a return on their investment equal to their national contributions, undermining the EU institutions' attempt to defend a common European interest of benefit to all.

One idea to counter the zero-sum logic is to further centralise EU funding in order to increase coherence in spending and reduce the influence of national administrations.

Another measure is to review existing corrections to the EU budget, which resulted from the application of the zero-sum principle. The British rebate is the first target of the European Commission.

New own resources

The other key battle that will formally start on Wednesday concerns the EU's future own resources or taxes, seen by the Commission as the only alternative to national contributions, which leads to acrimonious negotiations and governments asking for their 'money back'.

The zero-sum game is a direct consequence of the way the EU coffers are currently filled. Three-quarters of the EU budget is financed by direct financial transfers from member states, which are calculated on the basis of their GNI.

This system places national contributions at the forefront and undermines the real purpose of the budget, which is to pursue the genuinely European interest rather than a mixture of national agendas.

In order to free itself from these shackles, the Commission will propose this week a system of new "own resources" or taxes to fund the budget, while gradually phasing out direct transfers from member states.

Six options are currently on the table. Three are in fact old ideas (an EU VAT, an energy levy and a corporate income tax) while the other three have emerged only recently (a financial tax, a tax on the aviation sector and revenues from auctioning greenhouse gas emissions).

Brussels is likely to narrow down these options to a maximum of three. The financial burden should be spread among all the 27 member states in a proportionate way, as happens today with the GNI-based resource.

The EU's current long-term budget envisages commitments from member states of up to €976 billion for the period 2007-2013.

Actual payments into the EU coffers amount to €925 billion. Commitments and payments respectively represent 1.12% and 1.06% of the EU's overall Gross National Income (GNI), which is the benchmark used to calculate the wealth of EU member states, instead of the more common Gross Domestic Product (GDP).

The share of GNI devolved to the EU budget is tiny compared with national budgets, which on average amount to 40% of the EU's GDP. However, the EU budget does not include expenditure on social benefits, pensions, health care or security, which are among the highest costs of national administrations.

The EU budget is mainly funded through direct financial transfers from member states calculated on the basis of their GNI. On 19 October 2010, the European Commission listed a number of options to fuel the EU's future budget, proposing that Europe decreases the share of funding that comes directly from member states.

To compensate for the shortfall, it proposed EU taxes which could take several forms: a tax on air transport or a share of new financial, corporate or energy taxes, as well as an EU VAT.

  • 29-30 June 2011: Commission to make proposals on 2014-2020 financial framework and on new own resources.
  • By end of 2012: EU institutions expected to reach an agreement on new multi-annual financial framework.

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