The view from the capitals: the EU budget summit

On Thursday EU leaders will meet in Brussels to discuss the EU budget for the next seven years. ECFR experts in Spain, the UK, Bulgaria, Denmark, France, Germany and Italy tell us what to expect. 

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Bulgaria by Dimitar Bechev.

As the EU's poorest member Bulgaria benefits a great deal from the EU's Cohesion Policy. In 2011, for example, Brussels transfers accounted for GDP growth of 1.5% (out of a total of 1.7%). 95% of public investment relies on EU funds. Without this money the Bulgarian economy would face even deeper stagnation. Bulgaria's core interest is to avoid cuts linked to a scaling down of the EU budget in 2013-20. According to Capital Weekly, Bulgarian officials are hoping for a slight increase of 3% in the funds they will be eligible to draw (€8.5 billion, excluding CAP subsidies and national co-financing). Bulgaria is against the cap of 2.4% of GDP arguing that it translates into €140 per capita, more than two and a half times less than richer Slovakia or Estonia. 

Success will mean that cohesion money allocated to Central and Eastern Europe (CEE) as a whole does not become the price to keep the UK happy while leaving CAP, France's top priority, intact. Bulgaria – along with the CEE countries but also neighbouring Greece – belongs to the informal “friends of cohesion policy” grouping. Secondly, Sofia needs positive discrimination in cohesion spending where the poorer benefit to a greater extent than the richer member states. 

Failure will involve succumbing to the British proposal for cuts in the overall budget and/or an overall rebalancing of priorities away from the Cohesion Policy. 

Denmark by Jonas Parello-Plesner

Denmark is part of the ‘better spending’ grouping with Germany and wants to see a very moderate rise in the budget in the coming period (rather than the freeze or cut advocated by its frequent EU partner Britain). Denmark would like to see more resources go into Science and Research to future-proof the EU for global competition, as this portfolio risks getting squeezed by any maintenance in agricultural and cohesion funds (through which cash-strapped member states see more immediate returns in national coffers). Finally, Denmark wants a rebate on the British rebate and is ready to use a national veto to get it.  

“We are going to get our rebate, and if we don't get our rebate, then we will have to use the veto. It's very, very simple,” said Danish Prime Minister Helle Thorning-Schmidt, who has already worked the expected €150 billion into its austerity budgets for several years to come. A failure on the rebate would hurt the government and make it look weak to Danish voters. Technically the Danes want a rebate on the British rebate similar to Germany, Netherlands, Finland and Austria where Denmark wouldn’t compensate British taxpayers.

Apart from not getting the desired rebate, a reduced EU-budget that still mainly catered for agriculture and cohesion without sufficient funding for science and research – the supposed bread and butter of an innovative knowledge economy – would be a loss for Denmark and for the type of EU that it champions.

France by Thomas Klau

France is ready to compromises on budget cuts but has its red lines, primarily on the Common Agricultural Policy, as usual. France will oppose Herman Van Rompuy’s plan that includes significant cuts for the CAP and the Cohesion Fund. Prime Minister Jean-Marc Ayrault said “There can be no question of us withdrawing even €1 from the CAP”. France also defends structural funds, the European Globalisation Fund and the EU food aid programme, and is against a major cut in cohesion funds (in alliance with Poland). Bernard Cazeneuve, the Minister for European Affairs, said that rebates should be at least up to discussion, and that the ability to make reductions in France’s deficit would be affected by cuts in the CAP and other EU budgets. He refused to consider the idea of an “alternative” budget without the UK.

Success would be finding a compromise on cuts that do not affect the funds allocated to the CAP while also limiting cuts in the cohesion fund. The deal would have to include the UK and Germany. For François Hollande it is clear that any successful deal will have to include funds for growth and employment programs.

The adoption, without amendments, of Herman Van Rompuy’s plan or cuts in the CAP or cohesion funds will be clear failures for France. However, the continuation of the rebates for the UK, Sweden, Germany and the Netherlands, if not associated with large cuts in the CAP, the structural funds or the cohesion fund, will not be a real failure for France, as the rebates can be seen as bargaining chips for François Hollande, who is under pressure to defend budget measures that the French argue support growth. It would also be a failure for France if the UK does not temper its calls for deep cuts in the budget and decides to use its veto.

Germany by Ulrike Guérot 

The German motto is “better spending”. This means abandoning “old policies” in favour of moving cohesion money to new policy areas where investment is needed (energy networks for sustainable energy, rural broadband, climate protection etc…). This would adapt the budget to ‘Horizon 2020’ goals such as promoting a knowledge society, innovation and research. Germany acknowledges that this will involve combatting much political inertia (for instance over cohesion money).

As the largest budget contributor (20% of the total budget of around €1,000 billion, paying €42 billion more than it gets back from the EU), Germany has firm views on EU spending – the principle should not be about ‘just return’ but should take into account the tightening of national budgets, sound finances and the application of the ‘Golden Rule’ (as anchored in the Fiscal Compact). Berlin argues for a ceiling of 1% of total EU GDP for the budget, and connecting the financial framework and EU budget with policies of economic coordination as laid down in the Stability and Growth Pact and proceedings of the ‘European Semester’. Germany also believes that EU resources are sufficient and is against a new EU tax as suggested by the European Parliament. In addition, Germany would like to abandon the VAT mechanism in order to simplify the European system of own resources.

On cohesion funds (which amounts to a total of €348 billion, or 36% of EU expenditure) Germany is largely in favour of spending on poorer areas of the EU (80% of the total, with 20% promoting competitiveness in wealthier regions), with some of that money benefitting eastern Germany. However, there is strong policy resistance against EU spending in general in German parties, especially within Merkel’s own coalition. The old demon of the “Germany-as-paymaster” argument is gaining ground again in public opinion.

Agricultural policy (accounting for €366 billion, or 42% of the budget) is less of an issue, but if possible Germany would agree to further CAP reductions in order to shift money to climate, energy and competitiveness. Overall, Germany agrees with the UK on limiting the budget to 1% EU-GDP, although in policy terms, this ‘alliance’ is problematic (despite differences with, for instance, France (over CAP) and Poland, which is the biggest net budget recipient, hoping to gain some €50 billion from the budget).

Berlin hopes these budget negotiations stay as much below the public’s radar as possible, as public opinion is already distressed by concerns that Germany is paying for the rest of the EU. Keeping the status quo more or less intact – and definitely not increasing the German contribution – is therefore the biggest strategic goal in these negotiations. Germany won’t pick a fight to change much in the EU budget!

Italy by Silvia Francescon

Italy sees its budget proposals as promoting growth, innovation, investment and employment. Rome wants the EU budget to focus on the EU’s economic competitiveness and the reach of the Europe 2020 strategy objectives. In the words of the Prime Minister Mario Monti: “we look at the future, not to the preservation of the past.” One objective will be to find a balance between the member states over Structural and Cohesion Funds.

Italy would see the summit as a success if Van Rompuy’s proposal for cuts of around €80 billion were amended. It argues that these are disproportionate and a step back from the proposal presented by the Cypriot EU presidency. Italy also wants to preserve funding for innovation and research, and to reduce the British rebate.

Italy argues that a reduction in cohesion funds, and Van Rompuy’s proposed cut pro capite for the southern countries from €185 to €145, would be a failure that would also hurt growth across the EU.

Spain by José Ignacio Torreblanca

Spain is seeking to minimise the impact of a budget that inevitably will hurt. In the past, Spain benefited from both agricultural and structural funds (it was poorer than the EU average). Now Spain is an average country and there won´t be as much money for regions and farmers as in the past. Therefore, despite the crisis, Spain is set to be a net contributor to the budget. The more the UK (and others) gets its way and the greater the reduction in the budget, the worse for Spain. It risks losing around €20 billion over the next seven years, concentrated in crisis-hit regions such as Andalucia, Galicia and Castilla-La Mancha.

Presentational issues are important. While the government does not expect a triumph, it does not want to be seen to lose. Rajoy is widely considered to be bowing to the EU on many issues, so a big story on Spain being ‘defeated’ will be politically hard to swallow. That explains why he has sought to minimise the losses derived from the budgetary proposal with the argument that the high yields on Spanish sovereign debt are much more costly to Spaniards than any benefits they can eventually get from the EU budget (a half-truth).  

In the words of Mendez de Vigo, Europe's Minister, Spain prefers “not to get a deal instead of having a bad deal”, but this is seen more as a tactical move than as a threat of veto. Neither this government nor its predecessor devoted much political energy to the issue of the budget, probably understanding that becoming a net contributor was unavoidable and so rather preferring to concentrate their energies in damage-control. Spain has sided with the Friends of Cohesion, but the bulk of the political struggling is being done by both France and Poland, with the support but not the leadership of Spain. 

At the end of the day, the figures on the table will not make a difference compared to the tight austerity measures imposed by Brussels: ie there is no growth and jobs stimulus programme in the budget that could really help Spain out of the crisis. Beyond that, Spain aims to increase the rate of co-financing from European funds, arguing that regional authorities are not able to put in the remaining money due to cuts. Spain also wants to eliminate (with the support of other countries) what has been described as the ‘double punishment’ emerging from Van Rompuy’s plan, which envisages freezing regional aid to countries with excessive deficits that do not follow EU recommendations.

The adoption of Herman Van Rompuy’s plan (let alone the cuts proposed by Britain) will be bad news for Madrid. Spain would lose more than one third of regional subsidies and 17% of agricultural support. While this may be an unbearable loss and Spain would naturally be tempted to revolt against it, it also demonstrates the dilemma that a revolt would involve fighting the very same countries whose support Spain then needs for the bailouts and other issues which have become central for Spain and the government’s survival. 

United Kingdom by Mark Leonard

Britain should have gone into these negotiations as part of a strong lobby calling for better spending and prudence. Its stated objectives are very similar to those of countries such as Germany, the Netherlands, Sweden, Denmark and other net contributors. There was always a risk of alienating natural allies from the new member states but London should have at least enjoyed strength in numbers – as all member states tend to behave badly in budget negotiations. Instead the government has managed to go into the negotiations isolated, and seems set to waste valuable political capital that it needs for much more important issues such as the negotiations over banking union. David Cameron has given himself precious very little wriggle room going into the summit by committing himself so firmly to a real-terms freeze in the size of the budget. Optimists hope that there might be some flexibility in the definition of what a freeze is. Apparently the government did publish a specific figure in one document: a budget of €887 billion. David Camerons' three biggest concerns going into this summit are: the behaviour of his own back-benchers; the stance of the Labour Party; and the way the press will report it (in that order). The run-up to the summit saw his promise of a real-terms freeze defeated in a parliamentary vote which saw the Labour Party line up with Tory rebels to call for a real-terms cut in the EU budget.  As a result, he does not know whether he can count on the support of the Labour Party in a vote in the House of Commons.

A success, from the government's perspective, will be a deal which can secure a majority in the House of Commons. It is not clear – after last week’s vote – what will be required to deliver this but it seems likely that this would involve a deal which can at least be presented as a ‘real-terms’ cut as well as a cut in the running costs  of the European Commission.

Failure can take many forms. If no deal is reached, it will simply prolong David Cameron's agony. The fiasco of the veto that never was in December already made David Cameron look weak. This would compound that perception. But much worse than this would be a deal at 26 – comprised of ‘a gentleman's agreement’ on the form of a multi-annual framework coupled with annual deals. This would mean that Britain was being treated as if it had already left the EU – a form of taxation without representation. As the other net contributors would lose their rebates, this sort of deal would also maximise resentment with Britain among its natural allies. It would be a far graver – but equally self-inflicted – result than last December's fiasco.