Brexit is a dark cloud hanging over the European Union, but its silver lining is the opportunity for far-reaching reform of the EU’s finances.
Sadly, it’s an opportunity that Jean-Claude Juncker and Günther Oettinger appear ready to waste.
The EU budget is not fit for purpose — but not so broken that it warrants root and branch repair. That is the logic underlying the European Commission’s proposal for the next budgetary cycle, from 2021 to 2027.
For more than two decades, the EU’s finances have been blighted by the United Kingdom’s rebate, which was introduced in 1984 as a corrective to the unfavorable terms on which the U.K. was admitted to the Common Market in 1973. Ever since, the rebate has been an obstacle both to arithmetic simplicity and to wholesale reform. While the EU’s finances have acquired further layers of complexity (rebates for those countries that contribute most to the U.K.’s rebate), budget negotiations have become ever more entrenched struggles between member countries that define themselves as “net contributors” and those regarded as “net recipients.”
With Brexit on the horizon, Budget Commissioner Oettinger and his president, Juncker, have a unique chance to rationalize the EU’s finances, liberated from the shackles of the U.K. rebate and its concomitant sub-rebates. Additionally, the prospect of losing the U.K.’s contribution to the general purse — about 12 percent of the total — provides justification for a thorough reassessment of where the EU gets its money from and where that money goes.
Moreover, the arguments now raging over the economic consequences of Brexit — not just for the U.K., but also for neighboring member countries — are making most observers aware that the value of EU membership cannot be reduced to a simple netting off of a member’s contributions to the EU’s budget against its receipts.
Yet the Commission’s proposal for the EU’s next Multiannual Financial Framework (MFF) is barely three weeks old and already we are in horribly familiar territory: heading toward a well-rehearsed standoff between net contributors and net recipients.
Moderation in innovation
The Commission’s proposal is not entirely devoid of innovation. One of the most eye-catching and talked-about novelties is the idea of making receipt of cohesion funds conditional on compliance with rule-of-law standards — a measure widely perceived as an attempt to exert leverage on Poland and Hungary.
Less controversially, the Commission is proposing that spending on the European Development Fund — aid to the African, Caribbean and Pacific countries — should be included in the EU budget. Hitherto, it’s stood apart as an intergovernmental agreement.
There are also changes proposed to how the spending is distributed across designated subject areas, with seven budget headings in place of the previous five.
On the revenue side, the Commission is proposing that an EU-wide tax be levied on plastic. And it is proposing to change the amount that the member countries can retain as the administrative cost of levying customs duties, which they pass on to the common EU exchequer.
Such innovations are not, however, sufficient to make this a radical proposal to reshape the EU’s spending. It continues the shift away from old spending priorities (farmers, de-industrializing regions) toward research and smarter forms of economic stimulus, but at a leisurely pace.
Reform of the EU’s finances has never been easy, and usually only comes when the member countries are caught between a rock and a hard place. In 1984, when Margaret Thatcher achieved her breakthrough at the European Council in Fontainebleau that instigated the U.K.’s rebate, it was because the EU needed a unanimous agreement to raise more revenue — and the budget negotiations were holding up talks on admitting Spain and Portugal into the EU.
In a similar way, it was the prospect of enlarging the EU at the turn of the 20th century — to countries that had been behind the Iron Curtain — plus the pressure from world trade talks, that forced a wave of reforms to farm support and regional aid. The reformers still met resistance — most egregiously from Jacques Chirac, then president of France, who stitched up a deal in 2002 with Germany’s Gerhard Schröder that sought to preserve French advantages.
Indeed, when the EU expanded from 15 to 25 members in 2004, the Common Agricultural Policy was common in name only, with the new countries joining on discriminatory terms. But in 2005, Tony Blair made concessions that reduced the U.K. rebate, because demanding that the impoverished Central and Eastern European nations contribute to the rebate was incompatible with U.K. support for enlargement.
The prospect of the U.K. leaving the EU is similarly a watershed moment for the Union. Yet a fundamental reform of the EU’s finances is nowhere in sight. The Commission is proceeding with extreme caution — even with the rebates that other member countries receive on the basis of what they pay toward the U.K.’s discount.
Oettinger is ready to allow those rebates to persist, even after the U.K. and its rebate are gone. He says they should be phased out gradually over five years, because to end them more abruptly would create too sharp an increase in some net contributions. That’s an argument that you might expect from a Dutch finance minister, but it’s not one that the Commission should be making and certainly not at the launch of the proposal.
Oettinger’s overriding concern appears to be getting a deal — no matter the price — this side of the European Parliament election next May (and, by inference, before the end of his own mandate as commissioner). He said earlier this month that because the initial complaints that greeted his proposal came from both contributors and recipients and from the European Parliament he’d got it — “about right.” Such is the mindset of someone who thinks of the MFF as an exercise in triangulation.
Juncker’s calculation, if he sees a bigger picture, is probably that he wants to restrict the extent to which the EU’s finances become poisoned by disagreements over migration. Germany and its allies are at loggerheads with Hungary and Poland over both the cost and principle of dealing with inward migration and those arguments will not easily be resolved. When the Commission claims that it is proposing a modern, simple and flexible budget, the last of those adjectives is the most telling: What the Commission wants is a budget that will allow it to redeploy money as and when crises arise.
But flexibility will come at the expense of greater complexity. The EU’s finances, already Byzantine, are to be layered with yet more technical workarounds. The experience of the U.K.’s referendum campaign suggests that at times the opaqueness of EU’s finances can be an existential threat: Those in favor of EU membership struggled to counter their opponents’ false claim that the U.K. was sending £350 million a week to Brussels. The proposal for 2021-2027 won’t make things any easier to explain.
Tim King writes POLITICO‘s Brussels Sketch.