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The EU Multiannual Financial Framework (MFF): agreement but at a price

11 February 2013
Fabian Zuleeg (Chief Executive and Chief Economist)



Following the traditional overnight negotiation marathon, EU leaders finally agreed the next EU Multiannual Financial Framework (MFF) for 2014-2020 at the end of last week. After the expected failure to reach agreement last November, this time round most commentators expected a deal, involving further cuts to assuage the net payers, especially Germany and the UK.

In the end, the deal involves an upper limit of commitments of 1.0% of EU GNI (Gross National Income), with payments expected to be 0.95% of EU GNI, equivalent to 908 billion Euros. These are reductions compared to the current MFF of 3.5% and 3.7% respectively, despite the increased responsibilities at EU level, raising the open question of whether all EU policy ambitions can be met through this budget. However, there will be a review after two years (2016) to determine whether this ‘austerity’ budget needs to be adjusted in light of economic circumstances.

Progress of sorts

The two biggest spending blocs, agriculture and cohesion policies, suffered large decreases, while at the same time the funding for ‘growth and jobs’, such as research, infrastructure investment and education, received a significant boost. This follows a long-term trend of a shift away from the more traditional spending areas, although they clearly remain very large – agriculture/natural resources still constitutes 40% of overall spending.

While this shift is to be welcomed, it does represent a reduction in aspiration: the European Commission’s more ambitious spending proposals on research funding and on infrastructure investment, through the Connecting Europe Facility (CEF), were cut back in the negotiations.

Little has happened with regard to the revenue side of the EU budget. Revenue sources remained largely unchanged. From the start of the negotiations, member states were reluctant to move substantially, so a new EU ‘tax’ was always unlikely. The UK rebate was also defended staunchly and, to appease some of the net payers, a number of countries got a lump-sum rebate.

Reacting to the crisis

Some attempts have been made to target parts of the EU budget specifically on the crisis countries, including the creation of a youth employment initiative, with six billion euros. But overall, the budget has to be seen as an opportunity missed. There has been no substantial redirection of expenditure, nor has there been a significant attempt to change what will be done with the money, despite all the attempts to emphasise better spending in the deal.

The demand by the Summit that the new MFF should be fully functioning by January 2014 seems highly optimistic. There is likely to be a time delay in the start of many spending programmes, given the postponement from November – not to mention the ratification and implementation process, which must still follow. Any positive economic effects of the spending  will take a long time to materialise.

Political games

The outcome, predictably, led all countries to claim victory, pointing to a particular aspect of the deal with which they most strongly identified. Of course, this does not guarantee that domestically they will be seen as bringing home the spoils, but even in countries where the response to the deal was muted, such as France, it is unlikely to affect the final agreement. In the UK, whose government had adopted the most hardline pre-summit position on cuts after having been dealt a House of Commons defeat, the papers reacted favourably, making it likely that the agreement will be passed.

The big question mark is what the European Parliament is going to do, given that its consent is necessary – and MEPs will vote in a secret ballot, shielding them from direct pressure by governments. The major parties all indicated that the deal was not good enough to deliver European priorities. There was also significant concern expressed about the gap between allocations and payments, amid remarks that this represents a form of ‘deficit’.

But will the EP really risk paralysing the EU when it comes to the final vote? This seems unlikely. While it might well extract some further concessions – for example, on flexibility or a stronger commitment to the eurozone fiscal capacity – in the end it is likely that the deal will pass.

Innovative?

While much of the spending is still going to be allocated to the traditional blocs, many changes and innovations have also been introduced. These range from “more widespread use” of alternative financial instruments and the greater role of the European Investment Bank (EIB) to climate-action mainstreaming (with at least 20% of the budget earmarked to contribute to this objective), macroeconomic conditionality and increased flexibility. The latter was offered as one of the key bargaining chips for negotiations with the EP, with unspent money potentially being retained at EU level rather than being transferred back to the member states.

Many of the innovations lack clarity and still need to be tested, so it is unclear what impact they will have. But although some seem to be little more than instruments to make political points or to try to address the particular concerns of each negotiating party, others might have longer-term implications. In particular, the potential increased flexibility may alter Commission incentives: in future, prudent spending in areas which are not high priorities might well produce funding which can be directed at high-priority, emerging issues. 

The long term

Now the political drama is largely over, the tendency will be to go back to business as usual. Many will be glad that this issue is off the table, and there is no appetite for any further debates on MFF reforms. 

This is short-sighted: the negotiations on the current MFF (2007-2013) had gone to the wire, prompting the Budget Review which was meant to lead to fundamental reform but failed to deliver in the end. This time round, we even had an abandoned summit and an overdue deal, but there is not even any attempt to aim for fundamental reform ahead of the next negotiations. Maybe leaders are pessimistic about the prospects of reform, but do they really expect the process to be any easier next time?

Changing the negotiation process

In the end, if we want an EU budget capable of addressing European policy priorities, we need to change the way the budget is negotiated. The current negotiation process will always lead to each country arguing over net receipts/expenditure, producing a status quo bias. A reformed structure of the budget, direct political responsibility for expenditure – including linking the budget with the European Commission and Parliament’s mandates – or a genuine own resource with spending and revenue responsibilities at EU level might all change the game. Alas, the reason why neither the negotiations nor the process will change is the same: each country has a veto and countries will not give up control over the process.

The next programming period

The only way forward is to do the best we can with a flawed tool: trying to genuinely achieve better spending outcomes (which will depend on how this general agreement is now translated into actual policies and programmes) and using the innovative changes in the next MFF as effectively as possible.  We should also not forget that the MFF is not the only tool we have available at EU level to produce the outcomes that people care about most, especially in this crisis: growth and jobs. The Single Market continues to be one of the key drivers of EU economies. And, almost unnoticed, the Summit took another step towards negotiations for a comprehensive trade deal with the US and further trade deals with other countries.  Let’s hope that Europe’s leaders prove to be better at delivering these than at reforming the EU budget.

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.

The EU Multiannual Financial Framework (MFF): agreement but at a price