The New EU Budget Under The Constraints Of Brexit And The Debt Brake

The UK’s exit from the EU means a contributions gap of an estimated €10-14 billion per year, around 7 percent of the EU Budget. Thereby, the discussion about the multi-annual financial framework has already set off in one direction: How do we fill the gap rather than how do we reform the budget?

At the same time, a reform is overdue: Many challenges require European solutions: climate change, shortage of resources, high unemployment in many parts of Europe, social and economic inequalities as well as digitization and global instability. Keeping the status quo intact would send a bad signal about the effectiveness of the political union. Within this context, Brexit has come like any other unexpected event at a bad time.

Budget proposal of the EU-Commission for 2021-2027

Total expenditures for 2021-2027 are an estimated €1300 billion or an extremely modest increase from 1.03 % to 1.114% of EU GDP.

New Budget thinking can be summarized as follows:

• Abolition of all rebates, hitting Germany, Austria, Sweden and the Netherlands.
• Greater linkage between the Budget and private investors: The European Fund for Strategic Investment is due to become a fully integrated investment fund “InvestEU“. The key partner in implementation is as before the European Investment Bank. InvestEU is due to embed all centrally managed financial instruments within the EU in a single streamlined structure.
• Reform support programme furnished with €25bn to promote inter alia structural reforms in the member states. This programme aims to strengthen the resilience of member state economies and support key reforms set out within the European Semester.
• For the stabilisation of the Eurozone €30bn would be set aside (EU-Investment stabilisation function). It is devised to stabilise investment levels in the member states and prevent them from suffering asymmetric shocks.
• Introduction of new own resources, furnished by proceeds derived from the emissions trading system, the Common Consolidated Corporation Tax Assessment Basis and a levy on non- recyclable plastic packaging materials.

Brexit – Occasion for a progressive budgetary reform

The policy-making power of the EU depends on the readiness to boost its sovereignty and on its financial provisions. Now the UK is leaving this comes over more as a ‘spending watchdog’ than as a committed protagonist of a political union. But other member states might take over the UK role. The ‘frugal four’ – Austria, Sweden, Denmark and the Netherlands – reject any increase in their contributions.

To get out of entanglement in net-payer-net-recipient discussions therefore requires a fundamental rethink of the income side of the EU Budget. As before, the political centre of gravity in member states remains how they can achieve a fair return rather than drawing up new strategies.

The Commission, in proposing the creation of new own resources, is taking a first step in the right direction. According to its calculations, the new proceeds total €22bn per year, i.e. 13% of the Budget. These new ressources, however, depend upon the political will of all member states ready to concede more sovereignty to the European Union.

Primacy of Europe’s social dimension

Looking at challenges as set out above, the strengthening of the social dimension of Europe must take first place. The EU Budget must aim for the perceptible improvement of living and working conditions of European citizens and the fight against increasing economic and social inequalities as well as the unacceptably high youth unemployment rate of up to 50%.

The most important instruments of European convergence policy, European Regional Development Fund and Cohesion Fund, are set at €273bn, the European Social Fund+ at €101bn. According to the Commission, both should be more strictly connected to the European Semester. ESF+ should be increased. However, its share of structural funds still remains too low in order to combat unemployment and poverty in an efficient manner. A shift of the Budget from direct payments to rural development (EAFRD) is the order of the day to combat rural migration.

The envisaged new conditionalities have to be handled with great care. Criteria like rule-of-law, structural reform or good conduct imposed from above go unmentioned in Art 174 TFEU for a reason. Cohesion should be a mechanism acting like an incentive not a sanction that threatens funds withdrawal. The programmes and goals should be set at regional level through the affected citizens. Europe can come alive concretely in this way.

The same is true for the stronger links between EU Budget and European Semester: Recommendations in the semester framework often contradict the interests of employees and amplify the centrifugal forces within the Union. This became apparent with the attacks on well-established structures of collective bargaining during the economic and financial crisis.

State design instead of political decisions by private investors

The proposed stage-by-stage financialisation of the structural funds or a redirection of transactions to the European Investment Bank and InvestEU should now be countered very energetically. Long-term that means a shift from subsidies to loans. Worse still: It means handing over the responsibility of policy-makers for deciding upon support measures to bankers and private companies. Public-private partnerships would be fostered by tax-payers’ default liability. Rather than InvestEU and EFSI, establishing a Marshall Plan for Europe would be urgently advised that, similar to the sovereign wealth funds from China, Norway, Saudi Arabia and many others, would develop more strategic ownership of key European technologies and set in train infrastructure investments as European projects.

Outlook

The Commission has the ambitious concept of reaching agreement on the Budget before the elections to the European Parliament in May 2019. This schedule seems over-ambitious. The hope is that the new European Parliament will contain enough progressive forces to approve an ambitious EU policy equipped with corresponding funding.

The multi-annual financial framework may be just a small budget line in national spending programmes but it is an important barometer of how much Europe EU citizens and national governments want in future.