Journey to agreement on new seven-year EU budget will be a long haul

Once every seven years, the European Union plunges into the fraught process of negotiating an agreement, by unanimity, to set the union's next multi-annual framework (MFF) budget .

The current budget involves spending of €1 trillion, about €145 billion a year, and is based on member-state contributions capped at €1 for every €100 produced in the union (GNI).

On Wednesday, budget commissioner Gunther Oettinger will set out his proposals for the next budget – running from the end of 2020 for seven years – against a backdrop of Brexit. A case of quarts into pint pots.

Brexit opens a potential €94 billion hole in that MFF if policy priorities remain the same and the UK no longer contributes.

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As the budget talks start there is no way of knowing what that Brexit deficit will be – a free trade deal could see the UK, for example, contributing at the same level as Norway for access to the single market – as much as €31 billion over the duration of the MFF.

And policies change – the union’s leaders are committed to a whole series of new programmes and the upgrading of old ones. These range from tackling illegal migration and border controls, to new defence structures, and enhancing both the Erasmus student and research programmes.

Rainy-day fund

The European Commission also wants to create an enhanced fiscal capacity for the euro – a “rainy-day fund” to help member states suffering from asymmetric shocks.

All that costs big money, estimated at at least €100 billion for the new priorities for the period.

“We have a choice,” commission president Jean-Claude Juncker warned in his state of the union speech. “Either we pursue the European Union’s ambitions in the strict framework of the existing budget, or we increase the European Union’s budgetary capacity so that it might better reach its ambitions. I am for the second option.”

However, persuading member states, specifically the net contributors, at a time when national budgets are all stretched will be a major challenge.

The commission is expected to propose a 20 per cent increase in the ceiling of member state contributions from 1 to 1.2 per cent of GNI.

Ireland, which is now a net contributor, and France, and many states have already indicated a willingness in principle to contribute more.

But on condition that the budget system is reformed, code for cutbacks and/or new forms of funding.

Two areas currently take up the bulk of EU spending – the Common Agricultural Policy (CAP), which takes 38 per cent, and cohesion/structural policy at 34 per cent.

Not for plundering

That amounts to 72 per cent of EU commitment appropriations, €775 billion between 2014 and 2020.

Both are cherished policies for Ireland, and the Taoiseach has insisted they are not for plundering. Ireland remains hugely dependent on CAP direct payments to farmers,while it says that the new member states must be allowed to share in the cohesion funding that helped this country catch up.

An important paper by Brussels think tank Brueghel argues that inflation-proofed, "real" increases in CAP and cohesion funding are simply impossible given the constraints the EU now faces.

However, “freezing agriculture and cohesion spending in real terms would fill the Brexit-related hole ... new priorities would then need to be funded by an increase in the per cent of GNI contribution. Freezing in nominal terms – thus cutting in real terms – would generate enough to cover most of the new priorities.”

Ireland would face an uphill battle to defend both of these streams of funding in real terms.

Is there room in the CAP budget for cuts? The commission points out that 80 per cent of direct payments go to 20 per cent of farmers. It argues that cuts targeted at high-income farmers could generate considerable savings.

Surplus

On the basis of continued economic growth in the union over the seven-year period, Brueghel estimates that if “CAP and cohesion spending is increased with inflation only, that is by 13 per cent, while other spending and all revenue items grow with the 28 per cent increase of GNI; this would result in a surplus of about €13 billion [or about €2 billion a year] available for spending on other priorities”.

If the EU wants to maintain its current caps on member state contributions it would have to freeze CAP and cohesion spending at the actual levels in nominal terms (a 13 per cent decline in real terms).

“While everything else is increased by 28 per cent; this would result in an overall surplus in the MFF for new spending priorities of about €102 billion,” Brueghel says.

Oettinger faces an almost impossible task of reconciling EU-wide aspirations with the requirements of individual member states. It’s going to be a long haul.