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The European Union is facing a serious risk of failing to reach a compromise on the size of the budget for the next seven-year financial period 2014-2020. The reason is that among the member states there is a hard core of countries insisting that the total expenditure ceiling should be reduced, while the European Parliament warns it will block the budget if that happens.

Budget cuts inevitable?

According to a working paper of the Cypriot Presidency of the EU, "an agreement cannot be found at the overall level [of the budget] proposed by the Commission in its proposals, as updated on 6 July 2012." The conclusion of the Presidency is a result of bilateral consultations with all Member States. Therefore, the Presidency acknowledges, it is "inevitable that the total level of expenditure proposed by the Commission, including all elements inside and outside of the MFF, will have to be adjusted downward."

The European Parliament, for its part, is ready to block the EU 2014-2020 budget if Member States do not comply with its opinion and cut the Union's spending. The Informal meeting of the EU ministers for European affairs on 30 August in Nicosia, dedicated to the 2014-2020 budget, failed to bring a breakthrough in the negotiations. All participants from both the member states and the European institutions stated they were willing to conclude the negotiations by the end of the year. However, all of them declared that they would not depart from their previously stated positions.

At the Nicosia meeting, the Parliament was presented by MFF rapporteurs Ivailo Kalfin (Socialists and Democrats, Bulgaria) and Reimer Boege (EPP, Germany), as well as by the chairman of the budget committee of the European Parliament Alain Lamassoure (EPP, France). According to Ivailo Kalfin, a possible reduction of funds should be done in parallel with a new review of priorities and withdrawal from some declared political ambitions: "It is not serious the European leaders to adopt well-sounding decisions for future policies and then to ruin their own decisions by the lack of resources."

Alain Lamassoure in turn criticised countries willing to reduce the budget while calling for a new European treaty. Obviously he was referring to Germany, which heads the group of countries calling for budget cuts. Mr Lamassoure noted that it took nine years to prepare the Lisbon treaty and its possibilities have not yet been used, but the member states now wanted to cut the funding for its policies.

Member States themselves are not united on the issue of budget cuts. EU Budget Commissioner Janusz Lewandowski counted eight countries who firmly insisted on cutting the budget. According to Cypriot Deputy Minister for European Affairs Andreas Mavroyiannis, it was about a reduction of around 140 billion euros. In its updated budget proposal of 6 July, the European Commission has set an overall ceiling of 1.033 billion euros. These countries, led by Germany, form the so called "Friends of better spending" group and apart from the budget cuts they call for more stringent conditions for obtaining EU funds and for more effective use.

Another group of countries, called "Friends of Cohesion Policy", is strongly opposed to reduction of the cohesion funds. Moreover, these countries do not agree with the restrictions imposed on their cohesion allocations. According to them, the ceiling of 2.5 percent of GDP is too low, especially in times of a crisis when GDP decreases or at least does not increase. Another point of concern is the so called ‘reverse safety net’. It is a kind of a second cap on transfers for individual countries, limiting them to a certain percentage of funds received by countries in the current financial period.

According to the Cypriot Presidency working paper, there is "growing consensus" among the countries that the reduction of cohesion funds should affect more the transition and better developed regions rather than the less developed regions, where support should be further concentrated upon.

During his visit to Sofia on 31 August, asked by euinside whether he believed it was possible to reach a compromise on the budget by the end of the year, European Commission President Jose Manuel Barroso said: "These negotiations are very difficult but I hope we can find a compromise by the end of the year." He urged the donors in the EU budget "to be consistent with their commitments and to support that ambitious, balanced and reasonable budget." Jose Manuel Barroso, who was in Sofia to attend the opening of a new metro line financed with EU money, said that "the EU budget is not just in the interest of the cohesion countries, it is good for all European countries. Cohesion is not just a policy for, let's say, less prosperous countries, it is a principle in the Lisbon treaty for all the EU."

The revenue side remains disputable

As for the revenue side of the Multiannual Financial Framework (MFF), there is a large majority of Member States in favour of some kind of reform of the system of financing of the EU budget, the Cypriot Presidency summarised. "Quite a few" countries support the Commission's proposal for introduction of new own resources, changing correction mechanisms and rebates, aimed at simplification and transparency of the budget. Others prefer to keep the current system. It has become clear that no compromise could be found on the introduction of a financial transaction tax (FTT) across the EU, and its introduction in the form of enhanced cooperation "would create a new situation requiring careful analysis," the Presidency working paper notes.

The issue appears to be dividing the two leading European powers France and Germany. Paris, which has already introduced FTT at national level, supports the Commission proposal part of the tax revenues to go to the EU budget. Berlin, however, although generally supportive of the introduction of FTT, insists the tax revenues to remain in the national budgets and the European budget to be financed as before by contributions from the member states.

For its part, the European Parliament calls both for the adoption of FTT and its use as an own resource in the EU budget. We must overcome the deadlock in the negotiations for new sources of tax revenues in the EU budget and thus reduce national contributions, Alain Lamassoure said in Nicosia. Already last year, the Parliament warned that it would not accept a new budget if no decision was found in terms of the own resources.

In its resolution of 13 June 2012 the EP said "it is not prepared to give its consent to the next MFF regulation without political agreement on reform of the own-resources system, putting an end to existing rebates and other correction mechanisms and leading to more transparency, fairness and sustainability." MEPs expressed their support for the Commission's legislative proposals for the reform of the own resources system, including the introduction of the FTT and a new VAT. The goal is to reduce the share of national contributions in the EU budget to 40% by 2020 which, according to the EP, would support the countries' efforts for fiscal consolidation.

Obviously, at this point the differences among the Member States themselves, on the one hand, and between individual European institutions on the other are so large that they cannot be overcome within the routine formats where the EU budget is discussed. That is why there will be an extraordinary European Council summit in November, devoted solely to EU budget 2014-2020. The leaders are expected to find a compromise on key issues, so that smaller differences can be settled by the end of the year and the deadline for completion of negotiations to be met. Given the current positions, however, reaching a compromise seems akin to a miracle. The factor that could seriously affect the course of negotiations is the development of the debt crisis. The direction of change, however, at this time is difficult to predict.