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The rocky road to a new EU budget: Winners and losers in on-going budget talks

19 Nov 2012

Key Points:

  • At least seven countries have threatened to veto the on-going EU budget talks – an agreement at the EU summit this week looks unlikely.

  • The net contributor that stands to lose the most under the various options in absolute terms is Germany with €18bn difference in contributions between a real-terms freeze and the Commission’s proposal.

  • Contrary to media reports, the EU could not “circumvent” the UK’s veto. Instead it would move to roll over the 2013 spending ceilings adjusted to inflation with up to 55 individual spending items decided by Qualified Majority Voting. This would be extremely messy and the UK’s veto remains powerful.

  • The proposal put forward by Herman Van Rompuy would reduce the UK’s rebate by between €3.3bn and €6.8bn over seven years – 11.5% to 21% of its current value.

How do the various EU budget proposals compare?

As some European sources have put it, a "miracle" would be needed to strike a deal on the 2014-2020 EU budget when EU leaders meet in Brussels on Thursday and Friday. There have now been numerous proposals put forward for EU spending levels under the EU’s next long term budget from 2014 to 2020. Below we compare the key proposals under discussion, including the Commission’s original proposal, the UK and German plans, Herman van Rompuy’s recent adjustment to the Commission plan (HvR) and the likely outcome if no deal is reached and the current ‘budgetary framework’ rolls over (rollover).

   
Source: European Commission, HM Treasury[1](2011 prices)
 

The UK’s proposal for a freeze, based on 2011 payments, is clearly well below the other options. Although Germany lies closer to the UK’s preference than to the Commission’s original plan, the HvR compromise proposal could tempt Angela Merkel.

As a large net contributor to the EU budget, the UK’s contribution would change significantly under the different plans (however the graph below does not take account of potential changes to the UK rebate under the new proposals).

As we noted in a previous flash analysis, the UK’s net contribution could also increase as the abatable part of the UK rebate – i.e. spending covered by the rebate, mostly to old EU member states – may decrease under the new budget framework. This highlights an advantage of the ‘rollover’ scenario above, where such a shift in the rebate may well not take place, compared to the other proposals where some adjustment in the rebate seems likely.

 Source: European Commission, HM Treasury, Open Europe Calculations[2] (2011 prices)

How would other countries net contributions look under these proposals?  

However, the country that stands to lose the most under the various options is Germany, with an additional €18bn in contributions between the UK’s and the Commission’s proposal.  


Source: European Commission, Open Europe calculations (2011 prices)
 

Could the EU move ahead without the UK?

Contrary to recent reports this is not really an option. There is undoubtedly planning going on to create a budget which can be rolled over on an annual basis using qualified majority voting (QMV). However, this is simply planning for an outcome where no new agreement is reached. No country is “circumvented”. This is represented in our tables above by the “rollover” plan where the current budget spending ceilings are kept but increased for inflation on an annual basis.  

This is far from a desirable outcome for anyone as EU leaders will need to renew up to 55 regulations on EU spending in 2014 that expire after the current budget period in order to release new funds. These regulations will all have to be decided by QMV following hugely time-consuming talks and amid a cobweb of disagreements between member states over how the money should be spent. This therefore represents a very messy outcome for all member states. In addition, all other budget corrections – including the Swedish and Dutch rebate on the UK’s rebate – will expire in 2013, while the UK rebate remains regardless, meaning many net contributors will be keen to avoid such an outcome.[3]

Is the UK rebate under threat?  

Looking at these graphs, the HvR proposal seems to be a reasonable compromise. However, the proposal also includes an adjustment in the way in which the UK rebate is calculated. This could result in the UK rebate falling by as much as 11% or €3.5bn across the next budget period, solely due to this adjustment.  

The plan also suggests that ‘corrections’ such as the UK rebate will be “fully financed by all member states”. It’s not entirely clear what this means, but it does suggest that the UK could actually be responsible for funding part of its own rebate. If this were the case then the rebate could be reduced by a further €3.316bn, cutting the rebate by a further 11.5%, and 21% (€6.8bn) from its original amount.[4]   

What does this mean for the UK’s veto?
 

The fact that a rollover looks more attractive than the Commission’s original proposal means that the veto remains a very useful option for the UK. Meanwhile, the HvR proposal’s potentially significant impact on the UK’s rebate would more or less wipe out any benefits to the UK from the lower spending limits (the difference in the UK’s net contribution in the two proposals is approximately €3.5bn, the minimum which we expect the rebate to fall by under HvR’s proposal).  

Where do other key member states stand on the proposals?
 

So far, UK is far from isolated in its opposition to the various EU budget proposals. One of the key reasons for various countries’ objections is due to cuts / increases in the levels of spending on specific items. The Commission proposal and the HvR proposal represent significant changes to the current package – the UK and Germany haven’t spelt out how their plans would differ.[5]    

Source: European Commission (2011 prices)

Cuts to regional and cohesion funds are of particular concern to newer member states, such as Poland, explaining its aversion to the HvR plan. The same can be said of the CAP funds and France. Other countries are simply against seeing their net contribution increase substantially. Many other member states have already explicitly threatened or at least hinted at using their veto. Below is a sample of their positions.  

Explicitly threatened to use veto:  

France:
Has taken objection to many of the proposals – the Commission’s due to the size of the increase and to HvR’s due to strict limits on CAP payments. France has threatened to veto the budget if it does not “maintain” the current level of CAP spending.

Netherlands: Doesn’t want to see annual or long term budget increase above inflation. Has explicitly said it will veto if necessary.

Austria: Is critical of the UK rebate and has threatened to veto the budget if it does not get its own rebate. Has also threatened to veto the long term budget if subsidies for rural development are cut.

Denmark: Called for its own lump sum rebate and vowed to veto unless it is delivered.

Sweden: Lines up fairly closely with the UK and is very keen to see budget increase limited, including a reduction to CAP funding. Willing to use its veto if necessary.  

Romania: Sees the reduction in CAP and Regional spending under the HvR proposal as unacceptable.

Hinted at using veto:

Germany: Continues to pursue its own proposal but is sympathetic to the HvR proposal as a basis for negotiation. Agrees with the UK on the need to limit spending, although is not in favour of reducing it as far as the UK. Keen to reach a deal soon in order to move on to eurozone issues.

Finland: Would like to see the Commission’s proposal cut by approximately €130bn. It is keen to maintain its current rural development receipts and ensuring that its poorer regions continue to receive structural funding.

Italy: Keen to see its net contribution limited due to its stalling economy and the fact that GDP per capita has fallen below EU average. Not explicitly threatened a veto but keen to protect areas such as regional spending.

Spain: Has expressed broad concerns about the HvR proposal, likely linked to a significant loss of CAP and regional funds, although it is yet to spell out its specific opposition.

Poland: Similarly to the other large net recipients Poland has expressed significant concerns over potential cuts to cohesion funds, particularly under the HvR proposal.  

Malta:
Wants to be seen as a special case and maintain current funding levels. Currently holding bilateral negotiations with the European Council.  

For more on what happens if the UK vetoes the EU budget see our recent flash analysis - Cameron’s threat to veto the EU budget: What is it worth? For Open Europe’s line by line analysis of the EU budget see here.

For Open Europe’s analysis of and recommendations for improving EU structural funds see here.

For Open Europe’s reform proposals for the CAP see here.

For more information please contact the office on 0044 (0)207 197 2333, Mats Persson on 0044 (0)779 946 0691 or Raoul Ruparel on 0044 (0)757 696 5823.


[1] All proposals are presented in 2011 prices. The HvR proposal is taken from a leaked document, the German proposal is taken to be 1% of GNI with EU GNI projections taken from the European Commission’s budget proposal. The Rollover is calculated using the proposed commitments for 2013 under the current budget period assuming a 2% increase for inflation (which is ignored since this is presented in 2011 prices). The UK proposal is set using actual payments which the UK government wishes to become the new commitment levels. The payment level is calculated using 2011 payments scaled up to the whole period.

[2] All shares and levels of contributions are calculated using shares of 2011 payments and own resources revenue taken from the European Commission. This is far from ideal as these shares will change under new proposals, however due to lack of detail and information on all these proposals this is the only viable way to compare shares at this stage.

[3] For a full discussion of this issue see our previous flash analysis on the EU budget, at: http://www.openeurope.org.uk/Article/Page/en/LIVE?id=9489&page=PressReleases

[4] For a full explanation of our rebate calculations see here. The figures are calculated using actual payments from 2011 extrapolated for the whole period. Other estimates given by UK officials have suggested the overall cut in the UK rebate under the HvR proposal could be as high as 28%. Cited by the Guardian, ‘Britain's rebate could be cut under proposed EU budget changes’, 15 November 2012, see: http://www.guardian.co.uk/world/2012/nov/15/britain-rebate-cut-eu-budget

[5] The figures for the spending areas are taken from the official documents on both the COM and HvR proposals and from the European Commission for the current ones. Since no such documents are available for the other proposals, they have been excluded. The headings shown are not the official headings but simplified versions to highlight the broad programmes where money is spent. The specific details on the spending areas can be found at: http://ec.europa.eu/budget/figures/fin_fwk0713/fwk0713_en.cfm 

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