17.09.11

Hardly ambitious, but an appropriate basis for negotiations - the proposal of the European Commission for the Multiannual Financial Framework 2014-2020

After the European Commission submitted its proposal for the next Multiannual Financial Framework on June 29, 2011, the EU has now formally entered into negotiations on its future funding structure. This negotiation process, which will be going on now for the next two years, will for at least three reasons deviate from the logic of previous budget negotiations in the EU.

First, these negotiations take place under the constraints caused by the International financial and currency crisis. While most Member States of the European Union are recovering only very slowly from the economic consequences of this crisis, the participants of European Monetary Union were forced to set up a 780 Billion Euro rescue package in order to stabilize the single currency. As a consequence all Member States have the challenge to significantly reduce their public debts without sacrificing competitiveness.

Secondly, the Lisbon Treaty provides for new institutional rules for the negotiations of the MFF. In the past the agreement on a MFF was taken in the form of a voluntary decision, a so-called inter-institutional agreement, made by the Council, the Commission and the Parliament. Now there is the requirement of fixation of the MFR in a formal legislative procedure. The decision on the respective legislation has to be taken unanimously by the Council after approval of the Parliament. There is also the possibility that the Council decides by qualified majority, if the European Council agrees on that by unanimous decision (Article 312). It is not yet clear how the participating actors will strategically adjust to these new regulations. It is, however, certain that it will be hardly possible to have a short-term agreement on a spending increase during the duration of the MFF without another formal legislative process. Therefore, the MFR will be from the very beginning of more binding nature.

And thirdly, a very specific policy process preceded the upcoming negotiations. Already in December 2005, the European Council invited the Commission to make a full and comprehensive review of all the expenditures of the Union at halftime of the current financial perspective 2007 to 2013. This review should concern all sensitive issues on the EU financial structure account, whether it be the expenditures for the Common Agricultural Policy or the British Rebate. The Commission under José Manuel Barroso has taken up this initiative and in 2007 announced that this review would be conducted ‘without taboos'. In their view, it was a unique opportunity to discuss future funding priorities for the Union, without immediate pressure to decide. Furthermore, during the review of the budget, the Commission has made two important institutional decisions. First she decided, to conduct a “health check” for all major EU spending programs, i.e. in particular the Common Agricultural Policy, the regional and cohesion funding as well as research and technology policy, in order to critically evaluate the efficient use of resources at European level. And secondly, the Commission initiated a comprehensive process of public consultation during which the governments of Member States have committed themselves to deliver the opinions and preferences.

Without doubt, the European Commission’s proposal can certainly not be praised for its high reform ambitions, but it will be an appropriate basis for the negotiation process. It is obvious that due to the impact of the financial and currency crises the reform dynamics that had existed during the consultation process have come to a standstill. Both the delayed publication of the Communication from the European Commission on the Budget review, but especially its content have clearly shown that the original intention - setting policy and thus financial priorities for the European Union without immediate pressure to decide – has not been reached. The budget review became at least in two ways a victim of these crises: firstly because the process could not be completed in the foreseen framework, and secondly, because the Member States as a result of the crises made a clear shift in their preferences. The future budget will therefore not be negotiated under the logic of the EU reform; rather it will mirror the rationality of Member States’ fiscal consolidation requirements.

This simply means that traditional negotiating positions and established patterns of interpretation of the Member States’ governments will dominate the upcoming negotiations. The open letter of the five largest net contributors to the EU from December 2010 already showed that the divergent interests of net contributors and net recipients will again play a decisive role.  However, one has to take in mind that the group net recipients in these negotiations will be hardly united, as it is composed of states that are part of the Eurogroup and others that are due to their non-participation in EURO currency less dependent on the solidarity of the net contributors within the Eurogroup.

In this precarious situation, the European Commission has issued a proposal that clearly outlines possible compromises. The fact that the European Parliament - the natural ally in the claim for higher financial resources for the European Union - widely signaled approval shows how appropriate this proposal actually is.

The key conflicts during the budget negotiations will be the overall level of spending, the withdrawal of different rebate models that exist for individual Member States, the issue of autonomous funding sources for the EU, and the generation of sufficient financial means for the political priorities of the European Union. Potential compromise lines can be recognized for all these points. A moderate increase of the total budget (approximately 5 Percent) should be agreeable, especially if single net contributors accept a phasing-out of their existing benefits. This is not unlikely, because a negotiating position of a net contributor, who on the one hand claims for a strict spending limit, but on the other hand refuses to talk about national rebates, will be difficult to maintain.

The situation is different in view of the question of Europe's own taxes and the repeal of the ban on public debt. Both are rejected by a clear majority of Member States. Even if individual governments would support the introduction of a European financial transaction tax, this would not automatically mean that they would also advocate for the delegation of the revenues to the EU. In terms of future policy priorities, the European Commission obviously did not manage to overcome internal resistence against the re-allocation of resources between their different DGs. Although the absolute amount of expenditures on research and innovation quite significantly increased their weighting within the EU Budget remains virtually unchanged. The proposal plans to reduce the share of expenditures for the Common Agricultural Policy from 41 to 37 percent, while the resources  for the cohesion policy increase from 36 to37 percent. Expenditures for research and innovation policy will, however, stagnate at about 8 percent of the total budget.

Thus, funding for new priorities could be generated only through greater flexibility within the Multi-Annual Financial framework. If the European Union has managed the consequences of the financial and EURO-crisis, flexibility rules would allow for re-allocations between fundling lines during the term of the MFR.