2 May 2018

Brussels still refuses to face up the fiscal reality of Brexit


The EU budget frenzy of (at least) one year has officially begun. Today, the European Commission, led by Budget Commissioner Günther Oettinger, revealed the first proposal for the upcoming multi-annual financial framework (MFF).

This budget will be being in place from 2021 to 2027, when the current budget of 2014-2020 – the last one featuring the UK — will run out. These seven-year plans — which have a rather Soviet ring to them — have a tremendous impact on the European Union in the medium term, and therefore also, on the reform plans of the likes of Emmanuel Macron, Guy Verhofstadt and other federalists.

Today’s proposal demonstrates two things: that the Commission, and Brussels more generally, have not learned anything from Brexit; and that, as I described two weeks ago, the federalist dream of a much bigger EU is unlikely to come true. Meanwhile, the Commission’s proposal has been met with criticism, with several voices telling them that this budget proposal is unacceptable (and remember, the budget needs to be approved by all member states).

First, however, let’s look at the good in today’s proposal: Oettinger has taken some of the steps that are necessary if the EU is to face up to its financial situation. Brexit has thrown the EU into a disastrous situation, leaving a hole as big as 94 billion euros for the new MFF period. To close this large gap, the EU has two options: either cut spending, or expect bigger contributions from member states, while mixing in some new “own resources”, i.e. taxes or duties that directly go to the EU.

While the best-case scenario would certainly have been to simply cut spending, the Commission has proposed a reasonable compromise – at least at first sight. Yes, contributions, especially from the net payers in the Union, will be higher. However, cuts are also part of the package.

The Common Agricultural Policy (CAP) — the infamous farm subsidies that accounted for 40 per cent of the current budget and which constitute one of the most, if not the most, disastrous policy in the EU — will be cut by 5 per cent. There will be a reduction of 7 per cent in the Cohesion Fund, which amounts to a third of the current budget and which is little more than simple subsidies from richer to poorer member states.

Both projects dearly needed reductions, and it seems like at least modest cuts are in store. That the cut of farm subsidies would hit large companies the hardest is especially welcome news. They have profited immensely in the name of helping small, poor farmers on the countryside.

Unfortunately, that is where the fiscal restraint ends. Instead of leaving the budget smaller than the previous one – which would seem logical considering one of the biggest contributors is heading towards the exit — today’s proposal is actually for a bigger budget than the current one.  In total, the EU would spend 1.279 trillion euros in these seven years, which amounts to 1.114 per cent of the GNI. Compare that to the one per cent cap previously used, which means that indeed, as Politico puts it, the “Commission wants [a] bigger budget for [a] smaller EU.”

Who will get more money? Well, the EU will spend a lot more money from now on on the things they are “good” at (or, at least, think they are good at). This means a doubling of Erasmus+, the student exchange program which often amounts to little more than a few months of binge drinking, but — mysteriously — still has a good reputation with students. Border security will meanwhile be strengthened and Frontex could expand  to have 10,000 employees – a potential tenfold increase. Environmental spending would also increase.

Judging by this spending spree, the Commission seems to think that cutting a little from the biggest programs makes it possible to increase spending massively elsewhere. Just hours after the plan had been unveiled, the opposition to this approach was on display, especially from net payer countries.

Indeed, even before Oettinger unveiled the details of the plan, Austria’s Chancellor Sebastian Kurz  sounded the alarm: “Despite the proposal by the European Commission for a new EU budget including some positive approaches for modernisation, it is still far away from an acceptable solution. Our goal has to be that the EU is smaller, more economical, and more efficient after Brexit.”

He has not been the only one. The Dutch Foreign Minister, Stef Blok, said that “the current proposal is unacceptable for the Dutch government. If income falls [due to Brexit], we will need to spend less.”

Lars Løkke Rasmussen, the Prime Minister of Denmark, sounded just as worried: “The EU Commission just presented an EU budget the size of 28 Member States. But we are only 27 Member States to finance it. A smaller EU should mean a smaller budget!”

Finland and Sweden have already demanded that the budget should not be increased.

The club of net payers, especially those small member states which were once able to hide behind the UK’s loud sceptical voice, seems to be gaining confidence, and is becoming more outspoken in opposition to further EU integration.

Then there is the French uproar to the most minute cuts to farm subsidies. And there’s the fury that the idea of “conditionality” will trigger, with the Commission planning to link payments to member states to their performance in upholding the rule of law. Governments in Eastern Europe aren’t too fond of Brussels at the moment anyway. Imagine the backlash if Brussels even tries taking away subsidies going east because Hungary or Poland aren’t behaving properly.

If one thing is evident after less than a day of fallout from the proposal, it is that the budget in its current form will not pass. There are plenty of arguments that will follow and plenty that will change. Whether the EU will, at the end of that process, have a smaller budget than it has at the moment depends on net contributors standing their ground.

Kai Weiss is a Research Fellow at the Austrian Economics Center.