Fred Romero via Wikimedia Commons
The Fight over the Next EU Budget
Alexander Privitera
AGI Non-Resident Senior Fellow
Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.
Negotiations over the next European budget, known as the Multiannual Financial Framework (MFF), have exposed deep divisions among member states. So-called ‘frugal countries,’ led by Germany, Austria, and the Netherlands, are confronting a group of sixteen nations who call themselves ‘the friends of cohesion’ and are determined to preserve traditional regional development spending. The sixteen favor a bigger EU budget, arguing that because of growing domestic fiscal constraints, Brussels needs to offer more. ‘Frugals’ respond that their domestic public opinions would rebel against them and Europe if they sent more money to Brussels while they are tightening their belts at home. Distance between the two camps is so wide that, after discussions at their mid-June summit, national leaders only briefly mentioned the MFF in their written conclusions.
But recent remarks by French presidential hopeful Jordan Bardella, announcing a 50 percent cut in French contributions to the common budget if a representative of his nationalist party is elected to lead his country, have added new urgency to the discussions.
National leaders have at least agreed on a tentative timetable, namely, to reach a deal by year-end, before France’s presidential elections of 2027. A vast majority of member states wants to avoid an immediate showdown with a possible future nationalist government in Paris. It is just not quite clear how.
But why does a fight over the size of a spending envelope that in any case would hardly exceed 2 percent of European GDP matter so much for the future of the EU?
Not only because of the potential impact of French politics on Europe. Nor is it all merely a question of sheer figures. Part of the answer is that MFF negotiations have become a contest about the balance of power within European institutions. Both Parliament and the European Commission are claiming a bigger seat at a table traditionally dominated by national governments.
By proposing a new spending philosophy, the Commission believes it would not only better respond to shocks but also ensure greater discretion in how future common spending plans are shaped. This would give the Brussels executive a greater say in what member states do. As to parliament, by vocally insisting on a bigger budget, it has stepped into negotiations that are typically exclusively handled by member states and the Commission.
A New Budget for New Times
Ursula von der Leyen’s experts had probably hoped for a warmer reception to their proposals. After all, the greater flexibility in how common resources are disbursed is a suggestion that key national capitals, such as Berlin, have made for years. This is why the Commission decided to deprioritize certain spending areas, such as agriculture and cohesion funds. The Brussels-based institution argues that to tackle new challenges, from increasing trade friction to defense, to the digital and green energy transitions, and all those unknown shocks lurking in the future, the budget needs to be more flexible, with a size fit for purpose. The proposal is an attempt at consolidating the many ad hoc emergency spending pots created over the past decades into a main one, managed by the Brussels executive. One part of the budget should be kept aside for a rainy day.
Conscious of governments’ reluctance to transfer more money to Brussels directly, the Commission proposes to raise more of its own resources, the revenue stream that mainly comes from custom duties and levies on certain products. One open question is whether the next financial framework would also include repayments for the debt the European Union incurred to contain the economic fallout of the Covid shock. If it will, net spending capacity would shrink, even in the unlikely case that the overall size of the budget emerges unscathed from current negotiations.
Berlin’s stubborn refusal to allow the MFF to grow may end up costing German taxpayers more money after all.
Berlin is all in favor of paying back common debt. It also backs the idea of spending money more efficiently to tackle new challenges. Finally, Germany can also see advantages in turning the budget into the main shock absorber. This could reduce the risk that member states immediately ask for new extra spending pots once a shock hits.
But the chancellor vocally disagrees with the size. He insists the proposed budget simply needs to be drastically trimmed. He seems to ignore the fact that by keeping the tightest lid on the common budget there would hardly be any resources available to absorb future shocks. This means member states would almost immediately knock on Brussels’ doors to ask for more funds once the next emergency materializes. And momentum will be on their side. As a consequence, Berlin’s stubborn refusal to allow the MFF to grow may end up costing German taxpayers more money after all.
The so-called ‘friends of cohesion’ have their own concerns with the Commission’s budget proposal. They don’t like the idea of greater spending flexibility because it could mean the Brussels-based executive will keep too much of its powder dry for a rainy day. These countries want to make sure the money from Brussels continues to flow in predictable ways, preferably toward objectives in their own countries. They argue it would be best to continue to allocate a greater deal of resources towards traditional spending targets, such as cohesion funds and agriculture, rather than concentrate on new spending priorities and unspecified future shocks.
The two sides, the ‘frugals’ and the ‘friends of cohesion,’ are locked in a classic standoff. So far, the only real common denominator appears to be their shared desire to prevent a power grab by the Commission.
Headed toward the Usual Lowest Common Denominator?
To break the impasse, member states may, in the end, conclude that spending too much political capital on making the next MFF the central common crisis response tool is simply too ambitious, scarring, and thus politically counterproductive. They will be tempted to defer the thorniest questions and converge toward the usual smallest common denominator, by agreeing on a very modest nominal budget increase whilst dedicating most funds to traditional recipients, and call it all a historic breakthrough. Implicitly, they would suggest they stand ready to do more, but only once circumstances force them to. Such a trade-off would ensure the nature of the budget does not change much. Importantly, it would also keep the Commission’s political ambitions in check. But such a deal would also force the EU to launch into time-consuming searches for ad hoc solutions every time a shock materializes. To be sure, the role of national governments as the main crisis response manager would be cemented. But would such an outcome be efficient?
According to economist Marco Buti, a former senior European official, the answer to that question is “we can no longer afford to treat historic emergencies as temporary anomalies that can be solved with clever, parallel workarounds.” Buti well represents those within common institutions who are convinced that ad hoc measures no longer work.
And indeed, a timid outcome on the MFF risks confirming the views of those EU skeptics who think that if the EU continues to be a hostage of its own old habits, it will fail to be a truly effective player in the brave, unstable, new world.
