Cause and Effect in European Politics and Law

Negotiations on EU Budget 2014-2020 in Stalemate Pending Leaders` Say

Ralitsa Kovacheva, June 4, 2012

At their summit in late June, EU leaders are to discuss for the first time the next multiannual financial framework (MFF) for the years 2014-2020. A year ago the European Parliament announced that it would insist on at least 5% increase of the EU budget for the next seven years, based primarily on own resources. On June 30th 2011 the Commission presented its vision for the new MFF, on the basis of which the European Parliament and the Council of Ministers must reach consensus in order to allow for the budget to be approved by the EU leaders by the end of 2012.

How have the discussions developed so far you can follow in the special topic of euinside. At this stage there are quite heterogeneous views in the Council on some key issues, and an agreement between the Council and the European Parliament seems even less likely. We can clearly understand where the front lines run through from the notes made by the EP`s negotiating team on a working document prepared by the Danish Presidency for the General Affairs Council meeting on 29 May, which euinside has obtained.

Although no specific figures are being discussed at this stage, one of the most important differences in the positions of the Council and the Parliament is in terms of the budget size (1.025 billion euros, as proposed by the Commission). The Council believes that it must "reflect the consolidation efforts being made by Member States to bring deficit and debt on to a more sustainable path." In the end of 2010, at the initiative of the United Kingdom, several countries (the Netherlands, Germany, France and Finland) came up with a letter demanding a freeze of the next EU budget. The Parliament, however, believes that there should be no comparison between national budgets and the EU budget, as it generally cannot end up with debt or deficit. According to the European Parliament, the EU budget should be viewed as an investment budget and should therefore be increased by at least 5% compared to the current programming period. Moreover, the EP negotiators note that the Commission proposal for the next MFF is based on EU27 and that an increase is necessary because in 2013 Croatia will become the 28th member.

The expenditure structure

In the working paper of the Council expenditures are grouped in five headings: "Smart and inclusive growth", with sub-headings "Competitiveness for growth and jobs" and "Economic, social and territorial cohesion", "Sustainable growth: natural resources" - that is the Common Agricultural Policy (CAP) with its two pillars, "Security and Citizenship", "Global Europe", "Administration".

In Parliament`s view, however, the budget structure must be different for two reasons. The first is to emphasise on the leading role of the Europe 2020 strategy and the second - to avoid the failures of the current MFF, particularly with regard to shortfalls in subheading "Competitiveness for growth and employment", "Citizenship" and "External Relations". The Parliament insists that "the MFF structure should increase the visibility of EU political and budgetary priorities for the European citizens." Therefore, all internal policies should be combined into a single heading "Europe 2020" within which four sub-headings to be created: policies related to knowledge, cohesion policy, policies on sustainability and efficient use of resources (CAP); Citizenship, freedom, security and justice.

Completely understandable, given the economic crisis, one of the most debated issues so far is how to use EU funds for economic growth and employment. There is a dispute between member states within the Council whether and how to cut cohesion policy funds. Friends of Cohesion policy (a group composed mostly of new member states) insists if not increased the funds to be at least maintained at the current programming period levels. That position is also supported by the European Parliament. Lawmakers, however, insist on focusing on R&D, as "funds for R&D need to be radically increased" and procedures to be radically simplified to facilitate the access for SMEs and civil society. The Commission proposed to the countries 11 thematic objectives and minimum required amounts for them, but many member sates are pushing for more freedom to direct EU funds wherever they consider necessary.

Another controversial point is the introduction of the new category ‘transition regions’, initiated notably by Parliament, which to be also eligible to receive funds under the cohesion policy. However, there is no agreement between the member states on the issue, mainly because the new members are concerned that this will affect the poorest regions. MEPs believe that the cohesion policy should focus more on urban areas "as places with a high concentration of challenges (unemployment, social exclusion, environmental degradation, migration)." Another amendment proposed by the Parliament is unspent or decommitted resources of cohesion funds to remain in the EU budget and not be returned to the Member States.

Capping is a particularly controversial element of the negotiations within the Council. The Commission proposed cohesion policy funds received by an individual member state to be limited to 2.5% of GDP. But the new member states and countries with a large decline in GDP argue that this restriction reduces their allocations and insist the ceiling to be increased. In the course of negotiations another option is being discussed - funding for the next financial period to depend on countries` allocations in the current period, but at this stage no specific amount is noted. There is also an option in the working document for member states that have joined the Union on 1 January 2007 (Bulgaria and Romania) the maximum level of allocations to be set at [X] % of 7/5 of their individual total allocations for the period 2009-2013. "The position on capping is not clear, which is surprising...," EP`s negotiation team noted.

Similar disputes are taking place with regard to the CAP too, where the Parliament supports the position of most member states the amount to be maintained at least at the 2013 levels and to ensure a "fair distribution of direct payments between Member States, regions and farmers." According to the notes of the EP negotiating team, the redistribution of direct payments as proposed by the Commission will mainly benefit the three Baltic countries and Romania. The EP supports the introduction of ceilings on payments for large farms and supports flexible implementation of measures related to CAP "greening".

Like many of the member states, Parliament is also against the so-called macroeconomic conditionality. It is an innovation in the MFF which aims at linking the EU structural funds with enhanced EU economic governance. The Commission may suspend all or part of the payments to a country if it does not meet its recommendations under the European semester, the excessive deficit procedure or the excessive imbalances procedure, a bailout programme from the EU or the eurozone rescue fund. The penalty will be abolished when the country implements the recommendations. However, the Parliament believes that the use of cohesion funds to impose sanctions contradicts "the very objectives that cohesion policy is set to pursue, namely the reduction of regional disparities".

Administration costs should be reduced, the Council`s document says, but without citing any specific amounts or where the savings will come from. Without directly opposing, the Parliament notes that this can happen only after a thorough analysis. In its resolution of June 2011 the EP "points to the significant savings that could be made if the European Parliament were to have a single seat," which, however, is difficult to realise, as it is enshrined in the EU founding treaties.

The revenue part

is the most uncertain element of the MFF negotiations so far. It was discussed for the first time within the Council on May 29th. The big question is whether to preserve the current system of financing of the EU budget with contributions by the member states, based on gross national income (GNI) or create genuine own resources, as proposed by the Commission - VAT based own resource and a Financial Transaction Tax (FTT). At the 29 May meeting many countries argued national contributions to be maintained. Austria for example doubted the new VAT based own resource and Bulgaria said it did not provide equal treatment of countries. For months there have been fierce disputes among the finance ministers over the proposal to introduce FTT and use it as own resource in the European budget (two thirds of the amount collected by the countries based on minimum FTT rates, the Council`s document says).

Some countries (like Britain) are against the imposition of the tax at all. Others (like Poland) believe that there is no better candidate than the FTT to become own source of revenue in the European budget. There are also countries (like Germany) that insist on the introduction of the FTT, but want to keep the revenue in the national budgets. The finance ministers have set a deadline by the end of June the issue to be resolved. The Parliament has repeatedly expressed its position in support of the FTT particularly and overall of the Commission proposal to introduce the two new own resources.

Moreover, the Parliament declared that it would not give its consent on the next budgetary framework without a political agreement on a reform of the own resources system. It must end existing rebates and other correction mechanisms and ensure genuine own resources in the European budget. It is expected at its session in mid-June the Parliament to pass a resolution on the issue of own resources. And at their meeting in late June, the EU leaders should send a political signal for the direction of the negotiations from then on. The deadline to reach an agreement is December 2012 in order to allow the EU budget for the next seven years to be finally adopted in 2013.