The EU Budget Trilemma  By Iain Begg 

Not All EU Spending Preferences Can Be Attained

The impossibility of reconciling the competing positions of EU member states for the next long-term EU budget has deep-seated consequences. The upcoming negotiations are mainly about the bottom-line of each member state instead of the most effective public spending priorities.

The Multiannual Financial Framework (MFF) is invariably one of the most hotly contested negotiations on the EU’s agenda, yet is usually resolved by concessions amounting to a small fraction of a percentage point of GDP, whether of the EU as a whole or of individual member states. This apparent paradox reflects two main factors, both of which recur with disconcerting predictability when (as is expected in the course of 2020 for the 2021-27 MFF) each seven-year wrangle reaches its conclusion.

Fostering brinkmanship

First, the main decisions are, despite the formal role of the European Parliament in settling EU expenditure (though not revenue-raising), ultimately taken mainly by the European Council. Every member state has a veto which smaller states, in particular, are able to exploit to their advantage. Second, every national government has ‘red lines’ it claims to be unwilling to cross, fostering brinkmanship in reaching an agreement, with each head of state or government determined to portray the result domestically as a testament to his or her negotiating skills.

Brexit introduces a further complication because it means the loss of a substantial net contributor to the EU’s finances. Although the “divorce” bill agreed as part of the withdrawal agreement will mitigate this loss, because a sizeable proportion of the payment will occur in the early years of the next MFF, the UK hole in the EU’s revenue has further polarised positions.

The arithmetic is striking: as can be seen from the chart below, the gross contributions (after allowing for the UK rebate) of the four Visegrad countries was roughly half that of the UK in the period 2016-18, and even adding all the other members states acceding after 2003, the revenue from all thirteen is well short of the UK gross contribution. The reverse is true for expenditure received.

Several net contributors to the EU budget were quick to reject the idea that they should make up the difference, going so far as to argue for the budget to be lowered in real terms.

Despite Germany signalling a willingness to offset the loss of the UK by raising its contribution – as has France – it opposes the proposal from the European Commission for a larger budget.

The Commission, with support from the Parliament, championed more spending on areas deemed to be of concern to citizens today, such as managing migration or securing the external border. At the same time, many member states are keen to maintain spending on the two largest EU budget lines, the Common Agricultural Policy (CAP) and Cohesion Policy (CP).

As the negotiations intensified in the second half of 2019, France reaffirmed its commitment to farmers, while a large grouping known as the “Friends of Cohesion Policy” has objected to plans to curb spending on cohesion.

Debilitating effects

These competing positions constitute what academics refer to as a “trilemma” in which, at best, only two out of three sets of preferences can be attained. The net contributors want to reduce EU spending; net beneficiaries from current EU spending want to retain most of these expenditure flows; and prospective new recipients – whether at member state, sectoral or interest group level – want to see their priorities reflected in the spending from the EU budget. The impossibility of simultaneously satisfying all three legs of the trilemma is evident.

Iain Begg at the European #Futures Forum in Brussels

It also has various debilitating effects on the conduct of the MFF negotiations and makes it probable that the outcome will be both unsatisfactory and resented by a majority of member states, as well as the Parliament.

Radical change in the MFF tends to be inhibited. Since a major reform as long ago as 1988, it is striking how little the EU budget has evolved, with some three-quarters of its spending going to the CAP and CP, although there has been a progressive rebalancing towards the latter.

Yet consider what changed in those three decades: sixteen new members joined the Union in four enlargements; the euro was agreed and launched; there were years of economic crisis, with consequences still being played-out; and the refugee crisis created a whole new set of challenges.

Perhaps the most damaging impact of the trilemma on the negotiations is delay. Although some progress had been made during the Austrian Presidency in the latter half of 2018, it subsequently became clear that optimism about achieving a deal early in 2019 was badly misplaced.

Indeed, long-time observers of EU budget politics now consider it likely that the negotiations will drag on until the second half of 2020, leaving little time to finalise regulations and prepare the implementation of new policies. Not having these regulations in place matters, because it means investment programmes and projects are unable to start promptly, slowing economic development.

The bottom-line

The tensions, captured in the trilemma, around settling the MFF have other, more deep-seated consequences. Politically, the discourse focuses on net financial positions, leading governments to concentrate on the row in their spreadsheets which measures the net inflow or outflow of cash, rather than the added value of the policies supported by the EU budget.

The question many then pose is not “should the EU devote more resources to…”, for example, developing new technologies, managing migration or environmental projects, but “will this be good or bad for my bottom-line?”.

Similarly, it encourages the mentality behind the many rebates accorded to richer member states. The Commission routinely argues that the net budgetary position is only one, relatively minor, component of the net benefits of EU membership, above all from the benefits for all of the single market. But what is often referred to by the French expression juste retour (which, intriguingly, can be translated as either “fair” or “exact” return) has become the norm in assessing how the EU affects member states.

An irony in all of this is that if the EU leaders, MEPs or civil society representatives sat down with a blank sheet of paper and asked “what are the public spending priorities it makes sense to ask the EU level to fund?”, the list would be very different from either what the EU finances today or what is currently on the table for 2021-27. Hence, in other words, there is a very powerful status quo bias.

With a new Commission about to take office and aspiring to pursue new political guidelines, notably the proposed “green deal”, there is an opportunity to revisit the EU’s spending plans, albeit at the risk of further delaying decisions. Faced with the hard logic of the trilemma, will this opportunity be seized? Do not hold your breath.

Iain Begg
21 November 2019
Published in

Iain Begg is aProfessorial Research Fellow at the European Institute, London School

Professor Iain Begg is the Academic Co-Director of the Dahrendorf Forum and Co-Chair of the Dahrendorf Working Group “The Future Of European Governance”. He is also a Professorial Research Fellow in the European Institute at the London School of Economics and Political Science.
The opinions expressed in this blog contribution are entirely those of the author and do not represent the positions of the Dahrendorf Forum or its hosts Hertie School and London School of Economics or its funder Stiftung Mercator.

Visegrad/Insight is published by Res Publica Foundation in Warsaw. The magazine maintains full editorial independence and opinions expressed in the articles are those of the authors and do not necessarily have to reflect or represent official position the Visegrad Group.