The EU Budget Debate Heats Up

By
Pieter Cleppe
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The Council of European Heads of State or Government wishes to reach an agreement on the long-term European budget by the end of this year. The intention is to negotiate this at the informal European summit in Cyprus on 23 and 24 April, and at the European summit in Brussels at the end of June. So far, discussions have mainly taken place at a technical level. The European Parliament also plans to approve an interim report with recommendations by the end of this month, or in May if necessary.

Despite this acceleration in the talks, German Chancellor Friedrich Merz does not believe the intended deadline is achievable. He recently stated: “I am not yet sure whether we can actually finalise this this year.” Romanian MEP Siegfried Mureșan, who is acting as co-rapporteur on this dossier, responded: “2027 will be a difficult year politically, with many elections in the Member States.” He added that he does not see “why it would be easier to reach agreement on a budget in 2027 than in 2026”. Certainly, a victory for the Rassemblement National in France will not make matters any easier. There are also important elections in Italy and Poland.

The question is whether it is a pity to lack an agreement on EU spending between 2028 and 2034. Last year, the European Court of Auditors, the EU institution tasked with acting as a financial watchdog, issued a “negative” opinion on the European long-term budget – also known as the Multiannual Financial Framework (MFF) – for the sixth consecutive year. Nevertheless, the European Commission wants to almost double that spending, from around €1.2 trillion over seven years to €2 trillion. In doing so, it also demanded greater powers in the area of so-called “own resources”, which amounts to EU taxes, particularly on large companies, tobacco, electronic waste and carbon emissions.

Fortunately, the EU Member States are resisting this attempt at a bureaucratic power grab. Even the new Dutch Prime Minister Rob Jetten, a member of the Euro-federalist D66, stated: “A modern MFF does not mean that the figures get out of hand. The Netherlands will examine the figures very closely, and we will debate this extensively in the coming months.”

EU taxes

It is telling that, when presenting one of these new “EU taxes”, the proposed “Corporate Resource for Europe” (CORE), the European Commission received not a single positive reaction from even one EU Member State. CORE is intended to generate €6.8 billion per year by taxing companies with an annual turnover of more than €50 million and a permanent establishment in the EU.

Also the “Tobacco Excise Duty Own Resource” (TEDOR) is meeting strong resistance, for example from the Swedish government. It described this proposal to transfer part of the revenue – no less than €11.2 billion annually – directly to the EU as “completely unacceptable”. It thereby also complained that the Commission intends to target not only tobacco products through significantly higher minimum excise duties, but also alternatives to tobacco, through proposed revisions of the relevant EU legislation.

It is no coincidence that Sweden is one of the fiercest opponents. It is the only EU Member State with an exemption from the EU ban on snus, a nicotine pouch that serves as an alternative to smoking tobacco. Sweden joined the EU in 1995 and has therefore enjoyed this exemption for more than thirty years now. It was recently reported that the number of smokers in Sweden has fallen to below 4 per cent of the population. Also, compared to other EU countries, Sweden has 44% fewer tobacco-related deaths, 41% fewer lung cancer cases and 38% fewer cancer deaths.

At the very least, EU Member States appear to be the more reasonable side here. Earlier this year, the Cypriot Presidency of the Council put forward a new draft compromise on the topic, which somewhat moderates the increase and also provides for a transitional period. Member States have reportedly responded with “cautious satisfaction”, with diplomats confiding the compromise provides a “constructive basis for moving forward in the negotiations.”

An agreement may now be possible in the coming months along the lines of a report by the European Economic and Social Committee’s (EESC) February report, which stresses the need to “adapt the excise framework to market developments, new products and public health objectives.” It also emphasizes that reform should “remain proportionate, predictable and economically sustainable”. It furthermore warns against excessive increases in excise duties which risk fuelling illicit trade. It calls for risk-proportionate taxation, clearer definitions, “sufficient flexibility for Member States”, and “limited use of delegated acts”, which means eurocrats should merely be able to make technical adjustments after legislation is passed. All of this closely aligns with the more measured Cypriot compromise.  

For the European Parliament, none of this is enough. Many MEPs are pushing for all kinds of different “own resources”, as they push for things like EU taxes on US “big tech” or an EU tax on online gambling. Thankfully, Member States are unlikely to go along with this.

A fundamental reform of the EU’s long-term budget

Apart from acquires own resources, the European Commission also wants to merge previously strictly separate components of the European long-term budget, such as agricultural expenditure and regional subsidies. To this end, it wants to establish a major new fund, named “European Fund for Economic, Social and Territorial Cohesion, Agriculture and Rural Development, Fisheries and Maritime Affairs, Prosperity and Security” This fund would merge the traditional cohesion policy funds (ERDF, ESF+, Cohesion Fund, JTF) with the EU funds for agriculture and rural development (EAFRD and EMFF) into a single consolidated structure. The size of this “European Fund” would amount to 771 billion euro of the proposed total of 2 trillion euro.

That figure comes from an internal briefing by the Budget Committee in the European Parliament, which media like Euractiv and Frankfurter Allgemeine Zeitung have been able to examine. It would result in the average EU Member State losing 8% of its funding, a reduction from €759 billion to €698 billion in constant prices.

However, some Member States would emerge as winners. This is particularly the case for Luxembourg (27%), Cyprus (21%), Estonia, Malta (both 3%), Sweden (2%) and Latvia (1%). The losers, on the other hand, are Slovenia and Ireland (both -13%), followed by Portugal, Italy, France, Spain and the Czech Republic (all -12%), Germany (-11%), Denmark (-10%), Austria (-9%), Hungary (-8%), Romania, Poland, the Netherlands (all -5%), Slovakia (-4%), Belgium (-3%), Bulgaria (-2%), Greece and Lithuania (both -1%).

The agricultural sector would not necessarily lose out. After all, the document stipulates that the EU’s minimum expenditure on agriculture would amount to 302 billion euro, whilst the maximum – if all other unallocated funds were to go to agriculture – would be 471 billion euro. Under the current long-term EU budget, agriculture receives 379 billion euro. The question is whether it is a good idea to maintain agricultural expenditure, which is prone to fraud. In Greece, a scandal involving the alleged theft of 300 million euro in European agricultural funds recently led to a major political crisis. In February, the European Court of Auditors warned that it doubts whether with the new system, it will be possible to track where expenditure under the EU’s new agricultural policy will go.

Expenditure on regional subsidy policy is, however, expected to fall. For these so-called ‘cohesion’ funds, only a minimum of 195 billion euro and a maximum of 364 billion euro would be allocated. That is barely more than the 362 billion euro in cohesion funds in the current budget – and this is only if all unallocated funds were to go to cohesion.

At least this represents a small step forward, given the scale of corruption associated with this type of expenditure. Italian professor of criminal law Vincenzo Musacchio, who is affiliated with the renowned Rutgers Institute on Anti-Corruption Studies in New York, warned in 2021: ““Between 2015 and 2020, the EU has allocated around €70bn to Italy in structural & investment funds. Half of these funds ended up in the hands of organised crime.”

A maximum of 56 billion euros would also be allocated for social policy expenditure, and a minimum of 32 billion euros. That is a significant reduction compared to the 96 billion euros provided for in the current budget.

Fraud, waste and abuse

On top of all this, Member States appear to acquire much more power to decide where the subsidies go, based on national plans. However Eurocrats will get a say over those. About this, Adriaan Schout of Dutch think tank Clingendael warns: “The plans extend EU influence into sensitive national areas via loans and conditions, and even imply a choice for economic governance.”

Apart from administrative expenditure, the EU’s long-term budget will consist of three key budget headings: national plans (including existing agricultural and regional policy), a new fund for competitiveness, and the fund for foreign policy, ‘Global Europe’. However, the national plans will still account for 45 per cent of total expenditure. The overall picture is therefore less money for traditional EU expenditure, and more for foreign policy and competitiveness.

According to the FAZ, Germany is mostly keen to retain its own rebate on its contribution to the EU budget, even though the country will receive less money from the EU budget. According to diplomats, only a handful of Member States around the Mediterranean are still resisting, whilst Greens and Socialists in the European Parliament are also doing so.

If everything already seems fine for Germany, will other net contributors resist? For Belgium, there is an ongoing debate as to whether the country is a net contributor, but that may well change. After all, Belgium’s bill is set to rise significantly, from 4.4 billion euro to 7.21 billion euro per year, if the Commission’s original proposal is not amended.

Will the new EU budget be less susceptible to fraud than before? The European Court of Auditors appears sceptical. Apart from raising questions about the transparency of EU agricultural spending, it also criticised the ‘lack of cost analysis’ in the ‘Global Europe’ plan.

Regarding the proposed Competitiveness Fund, the institution warned of the vagueness of the plans. It also pointed out that it had warned “that when drawing up proposals for the MFF, the Commission must take into account the weaknesses in the financing model of [the COVID-19 Recovery Fund],” a temporary emergency fund financed by common European debt, which the Court of Auditors has already heavily criticised.

Even when the Commission presented the new multiannual budget in July, it was clear that there would be no major shift in policy to combat fraud involving EU eufunds. An EU official criticised the lack of a “sense of urgency” on this issue, stating: “If we’re going to ask citizens to accept budget discipline, we should start by showing that the money isn’t being stolen.”

The annual loss due to fraud involving EU funds amounts to 1 billion euros per year already, according to official EU statistics. And that is without even mentioning the inefficient use of all those scarce resources, and the economic distortions they cause. Everything points to it simply remaining “business as usual”, however.

 

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