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No complete breakdown – at least not just yet

23 November 2012
Fabian Zuleeg (Chief Executive and Chief Economist)



After intense expectation management by a number of EU leaders, it comes as no great surprise that the negotiations on the EU’s next Multiannual Financial Framework (MFF) did not produce a deal. In the end, the positions of the member states were too far apart.

Almost a deal?

The second proposal from Council President Herman Van Rompuy – maintaining the cut of roughly €80 billion (in relation to the European Commission proposals) already suggested in the first package, but shifting spending from research and infrastructure to agriculture and cohesion policy – helped to persuade France and the net recipients, as well as to ensure that the European Parliament was still on board. But for the net contributors, this did not go far enough: further cuts were being demanded.

In truth, unfortunately, this was where the negotiations were always likely to end up. The inherent status quo bias, arising from each country defending their area of interest, makes it virtually impossible to deviate very significantly from the current MFF. This leads to the proposals being cut in precisely the areas where EU spending is needed most to encourage future growth and jobs, with real reform of any of the major budget items unlikely. In the end, this means that the MFF is not as effective as it should be – nor does it play the role it should in combating the effects of the crisis.

But at least it looked likely that a deal could be found. Some small further cuts – including some sleight of hand, a refocusing of spending to ensure that the net recipients are happy and maybe a (somewhat vague) commitment to a future ‘eurozone’ budget – could have clinched the deal for all but one country. While it would not have been the progressive budget that Europe needs, at least it would not have led to breakdown.

The UK's new exceptionalism

But this kind of deal was never going to go far enough for the UK. David Cameron – under intense pressure from (partially self-created) expectations in the British media and politics, and having lost a House of Commons vote on the subject to the opposition and his own party rebels – needed to come home with a far more substantial cut, while also protecting the British rebate.

In the end, political expediency prevailed: better to postpone negotiations than to end with the complete breakdown of a veto (as had already been threatened) by the UK. This at least creates the illusion that a deal is still possible. Most likely, EU leaders will return to the issue at the beginning of February to avoid having to discuss the budget at the same time as Economic and Monetary Union (EMU) governance at the December summit.

While European leaders downplayed the impact of such a postponement, the reality is that this makes it virtually impossible to start the new programmes early in 2014. At the very least, the price for postponement is that European spending will be delayed, at a time where economies across Europe are likely to be performing badly and will need this additional injection.

A future deal?

In addition, there is no guarantee that a postponement will help, as it is uncertain whether a deal will be concluded in early 2013. This is most unlikely. The big question is what new deal could be put on the table which can square the circle: substantial cuts but maintaining spending on cohesion and agriculture. And the UK will be in exactly the same bind as it was at this summit.

There is actually a substantial risk that things will get worse: conflict in discussions on the banking union, EMU governance or the annual budget for 2013 could all spill over into the MFF negotiations.

Controlled breakdown ahead

By January/February, this means that there are few options on the table. A new deal is unlikely and a further postponement impossible. So it will come to a very long weekend of negotiations, which, in the end, will most likely provoke a British veto.

If the budget negotiations fail, there will be no alternative than to invoke the new provisions of the Lisbon Treaty. In the absence of an MFF deal, the planned budget of the last year of the current MFF will
be continued.

Legal uncertainty

But what this means in practice is far from certain. While there would be an EU budget, some lawyers question how you could spend the money in areas such as Structural Funds, where detailed legislation – based on an agreed MFF deal – is needed to define the programmes. There is also a big question on new spending areas – such as the EEAS – which were not budgeted for in the last MFF.

Neither case bodes well for the European integration process. Either the EU could no longer spend in some critical areas, making it difficult to fulfil its role in a number of policy fields including combating the crisis. Or the EU would continue to spend as before, despite a UK veto. This would be politically unpalatable in the UK and would inevitably lead to the threatened referendum on redefining the UK-EU relationship.

A breakdown postponed – but not avoided

It is crucial that there is definitive legal advice which details what would happen in the event of a negotiation breakdown. But both these options will lead to a real challenge to the EU integration process. So, in the end, EU leaders face a breakdown whatever they do.

The time has come to put this stark choice on the European agenda. In a Union of 27, soon to be 28, all must compromise. When a country is no longer willing or able to agree a deal, there has to be a more fundamental decision. It is time for the UK to make a real choice: is it able to work with the rest of the EU, or must it be permanently outside? Almost nobody in Brussels wants a British exit, but having a member state that can no longer be a constructive partner is not an option when the EU is facing challenges which threaten its very existence.

So, David Cameron must either change his approach to Brussels or call his referendum now – and it should be about being in or out.

Fabian Zuleeg is Chief Economist at the European Policy Centre (EPC) in Brussels.

Disclaimer: The views expressed in this Commentary are the sole responsibility of the author.

No complete breakdown – at least not just yet