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13 November 2018

A mod­ern bud­get for Eu­rope

  • The European Union needs a budget that is modern and future-proof. Given the current challenges and the impending withdrawal of the United Kingdom, one of the EU’s largest contributors, the ongoing negotiations on the 2021-2027 multiannual financial framework are likely to be the most difficult in the history of the EU.
  • The European Commission is proposing to increase its spending in forward-looking areas such as education, research, innovation, youth, external border protection, security, defence and migration. The volume of the two largest areas of spending – the Common Agricultural Policy and cohesion policy – is to be reduced from 71% of total expenditure to approximately 60%. On the income side, new own resources are to be introduced.
  • The proposed reorganisation is a step in the right direction, but it does not go far enough. To many, the call for fresh money seems like an easy way out. It is part of the German Federal Ministry of Finance’s job to keep an eye on financial viability. The Finance Ministry therefore advocates a more far-reaching modernisation of the EU budget.

Challenges

Developments in recent years have made it clear that the European Union’s finances are in need of fundamental reform. Current challenges – such as migration, defence, security and the need to enhance competitiveness – illustrate the fact that too many resources are currently tied up in certain areas for purely historical reasons. At the same time, there are insufficient funds to tackle areas that would be more effectively addressed at the EU level. Moreover, the withdrawal of one of the EU’s largest net contributors will leave an annual financing gap of tens of billions of euros.

Proposals of the European Commission

The European Commission has put forward its response to these challenges in the form of proposals for the 2021–2027 multiannual financial framework (MFF). The proposals include the MFF Regulation, 37 spending programmes, and a proposal for a reform of the own resources system.

Infographic shows the multiannual Financial Framework according to the European Commission's proposal from 2021 to 2027.

Volume

The European Commission proposes an increase in the total volume of appropriations for commitments by roughly 18% (approximately €192 billion) compared with the current 2014–2020 MFF. This would put appropriations for commitments at €1.279 trillion, 1.11% of the economic output – as measured by gross national income (GNI) – of the EU’s 27 remaining member states. A further €30 billion are earmarked for spending outside the MFF. The proposed total volume thus stands at €1.309 trillion, or 1.14% of the EU’s GNI. After deducting EU expenditures currently used for programmes in the United Kingdom, the Commission’s proposal would represent an increase of about 24%, or approximately €244 billion.

As for appropriations for payments, which are the relevant measure for calculating transfers of own resources from Germany’s federal budget, the European Commission proposes a total volume of €1.246 trillion, or 1.08% of the EU’s GNI. This represents an increase of €220 billion, or 21%. Here too, the proposals include an additional €30 billion beyond the MFF ceilings. The proposed total volume of appropriations for payments amounts to €1.276 trillion, or 1.11% of the EU’s GNI.

Appropriations for commitments in €

Appropriations for commitments

2014-2020 MFF 2021-2027 MFF

in € bn

EU 28

EU 27

I. Single market, innovation and digital 126 187
II. Cohesion and values (structural policy) 394 442
III. Natural resources and environment 420 379
IV. Migration and border management 10 35
V. Security and defence 2 28
VI. Neighbourhood and the world (external policy) 66 1231
VII. Administration 70 85
Total 1,087 1,279

European Development Fund

(EDF, excluding the African Peace Facility)

28

-

Total including EDF 1,115 1,279

1Including EDF (but excluding the African Peace Facility)

Source: European Commission

According to initial calculations, the Commission’s proposal would cause Germany’s transfers to the EU to rise by an average of about €15 billion per year. But even if the current EU budget limit of about 1% of the EU27’s GNI were maintained, the member states would face a considerable additional financial burden, with Germany’s contributions to the EU budget increasing by an average of about €10 billion every year.

Developments on the expenditure side

Under the Commission’s proposal, the percentage of spending allocated to ‘traditional’ expenditure categories (the Common Agricultural Policy and the structural funds) would decrease from more than 70% to approximately 60%. However, this is more a result of the €192 billion increase in the MFF’s total volume than of any substantial reduction in spending on these areas. In the case of the Common Agricultural Policy, funding would fall by about €41 billion. In the case of the structural funds, it would remain roughly unchanged. In Germany, there would be cuts of approximately 8% in the area of structural policy, but these are primarily a result of favourable economic trends leading to less need for structural support.

Simultaneously, the European Commission is proposing significant increases in spending on the internal market, education, research, innovation and digital technology, migration and border protection, security and defence as well as EU external policy (‘neighbourhood and the world’). Under the proposals, key external policy instruments would be pooled and integrated into the EU budget together with the European Development Fund. In addition, the European Commission wants to bring together the European Fund for Strategic Investments (known as the Juncker Plan) and all financial instruments in the EU budget to form the InvestEU Fund.

Reform of structural policy

The European Commission is proposing that, when programming the European structural funds, greater weight be given to the structural challenges identified for individual member states in the context of the European Semester, which forms part of economic policy coordination at EU level. In this way, the Commission is addressing a concern raised by Germany. The proposals also feature other, separate instruments:

  • A Reform Support Programme with a total volume of €25 billion over a period of 7 years, consisting of:

    • A Reform Delivery Tool to support structural reforms
    • A Convergence Facility to support member states seeking to adopt the euro
    • An expansion of the existing instrument for providing technical support
  • The new European Investment Stabilisation Function (EISF), consisting of:

    • Loans of up to €30 billion to promote public investment in the member states, guaranteed by the EU budget in order to absorb asymmetric shocks
    • Interest subsidies

The EU’s structural support should be geared more strongly towards the implementation of country-specific recommendations in order to support national structural reforms. The EU’s limited funds should be used in a much more targeted way so as to facilitate economic catching-up processes on a long-term basis. This would allow the EU budget to make a stronger contribution to economic stability in the EU.

The low take-up rate of existing EU funds in this area is another indication of the need to reform structural policy. A recent study commissioned by the European Parliament notes that, by the end of 2017, only 11% of the budgeted funds had been disbursed across the European Union. This has led to payment arrears of around €270 billion, which has also been criticised by the European Court of Auditors. The study found that although the funds had been pledged, they were not being drawn down. One reason given was a lack of suitable projects. In a recent special report, the European Court of Auditors also identified shortcomings in connection with the two largest structural policy instruments, the European Regional Development Fund and the European Social Fund. It found that the selection and monitoring of projects was still not sufficiently outcome-oriented.

It is important to review the use of EU funding critically without skirting around the question of volume. A reduction of the payment arrears would be in order, not least because these will have to be paid off and financed by the member states in addition to expenditure under the 2021-2027 MFF.

Support for national structural reforms

In order to deploy the many billions of euros of EU structural funding more effectively, the European Commission plans to link the structural funds more closely to economic policy coordination, which takes place as part of the European Semester. To this end, the EU’s structural support is to be geared more strongly towards the implementation of the European Council’s country-specific recommendations. The European Commission’s proposals for this represent a step in the right direction. However, it is important to ensure consistent implementation, which is currently the subject of intensive debate at the European level.

Developments on the revenue side

Unlike in national budgets, expenditure in the EU budget is always fully matched by calls for contributions from the member states. Borrowing is not possible under the EU treaties. EU budget expenditure is mainly financed by means of own resources. These include traditional own resources (customs duties), VAT-based own resources, and GNI-based own resources. With the exception of other revenue (a category that includes fines and penalties), own resources are paid by the member states. The total financing ceiling is currently 1.20% of the GNI of all member states. This represents the absolute limit of permissible spending under the EU budget.

Infographic shows the own resources of 2017.

The European Commission’s proposal includes the following changes on the revenue side of the EU budget:

  • Increase of the own resources ceiling to 1.29% of the EU27’s GNI for appropriations for payments with the aim of enabling:

    • The creation of the Stabilisation Function
    • The integration of the European Development Fund
  • Reform of VAT-based own resources and increase of the ‘rate of call’
  • Introduction of three new own resources categories:

    • 1. A share based on each member state’s revenue from the European emissions trading system
    • 2. A national contribution calculated on the basis of non-recycled plastic packaging waste in each member state
    • 3. A contribution calculated on the basis of each member state’s share of the Common Consolidated Corporate Tax Base

The European Commission calculates that these new own resources categories could contribute an annual €22 billion to the funding of the EU budget. In addition, shares of the profits of the European Central Bank (seigniorage income), which currently go to the national central banks, are to be used to finance the planned interest subsidies within the framework of the Economic and Monetary Union. Finally, the rebates currently granted to Germany, Denmark, the Netherlands, Sweden and Austria are to be gradually phased out and completely eliminated by 2025.

The German Federal Ministry of Finance is the government department with lead responsibility for EU own resources. In the negotiations on the European Commission’s proposals, the Finance Ministry is pushing for a simplification of the own resources system. The existing financing system works well. It guarantees fair burden-sharing, in particular through GNI-based own resources, which are linked to each member state’s economic strength. The Federal Ministry of Finance therefore welcomes the European Commission’s approach of preserving GNI-based own resources as the foundation of the revenue side of the EU budget. The Federal Ministry of Finance also shares the European Commission’s objective of making the financing system simpler, fairer and more transparent. The German Finance Ministry’s view is that abolishing VAT-based own resources would bring us closer to these goals. When reviewing the new own resources categories proposed by the European Commission, the BMF will focus on the question of whether they would make the own resources system simpler, fairer and more transparent.

At the ministerial meeting in Luxembourg in June 2018, German Finance Minister Olaf Scholz and his French counterpart Bruno Le Maire proposed to the finance ministers of the other member states involved in enhanced cooperation that talks on the introduction of a financial transaction tax (FTT) be resumed. In order to speed up the negotiations on the introduction of the FTT and encourage other member states to join enhanced cooperation, they initiated discussions on the introduction of an EU-wide FTT based on the existing French model and proposed that the revenues generated in this way be used to finance EU spending.

Procedure and time frame

The MFF regulation proposed by the European Commission has to be approved by the European Parliament and then adopted unanimously by the Council of the European Union. The German government is represented in the Council by the Federal Foreign Office, which has lead responsibility in this matter. Council meetings are prepared by the Permanent Representatives Committee in Brussels (Coreper). Coreper in turn is supported by the Ad Hoc Working Party on the MFF. In particular, this working group provides advice on horizontal issues as well as on funding for individual expenditure programmes.

The legal bases for the 37 expenditure programmes (the so-called sectoral regulations) are also discussed in the relevant Council working groups and then adopted by qualified majority in the Council in the ordinary legislative procedure, with co-decision by the European Parliament.

First, the Council must unanimously adopt the Own Resources Decision governing the EU’s own resources system after consulting the European Parliament. All member states must then approve the Own Resources Decision in accordance with their constitutional requirements. In Germany, approval is given by means of a law passed by the Bundestag with the involvement of the Bundesrat.

If possible, the European Commission would like to conclude the MFF negotiations before the next European Parliament election in spring 2019.

Divergent interests

The negotiations are characterised by divergent and often conflicting interests. Member states that receive large amounts of money for agriculture and cohesion are against cuts in these areas, while other member states are calling for precisely such cuts in order to cover the gap left by Brexit and finance a focus on new priorities. A number of member states are prepared to increase their contributions, while others have categorically rejected this. Within the various policy areas, almost every single member state has a different focus. Germany, with its moderate position, can take on the role of a bridge builder.

The views of the European Parliament must also be taken into account. It will ultimately have to approve the MFF and be consulted on the Own Resources Decision. It has called for an MFF with a volume of 1.3% of the EU27’s GNI and rejected CAP and structural policy cuts, even following the United Kingdom’s withdrawal. It wants new priorities to be fully financed by means of additional resources.

Conclusion

The EU’s finances need to be targeted more effectively towards joint EU challenges, issues affecting the future, and European added value. The total volume of the MFF will have to be reviewed in the context of the MFF package’s overall quality and the subject of fair burden-sharing (the rebates are a key issue here). A volume of 1.11% of the EU27’s GNI, as proposed by the European Commission, would mean average annual contributions of around €45 billion for Germany. That is not realistic. Keeping the MFF volume at 1.0% of the EU27’s GNI would already result in a considerable additional financial burden for the member states. This means that compromises have to be made. Nonetheless, the European Commission’s proposals represent an important first step in the negotiation process, which has now clearly picked up speed.

In addition to the MFF’s volume, another key issue that will determine the Federal Finance Ministry’s ability to approve the package will be the question of whether the MFF offers a new start in terms of content. Strengthening the EU financially is not an end in itself. Any such step would have to go hand in hand with a successful modernisation of the EU’s budget.