EU heads of state and government failed to reach a deal on the budget for 2007-13 at a summit in Brussels on Friday. Negotiations to reach agreement by the member states are set to continue in an atmosphere of discord under the UK presidency, which takes over from Luxembourg at the end of June.
The budgetary framework (called the 'financial perspective') covers both the revenue and expenditure sides of the budgetary process:
Revenue
Revenues come from a mix of sources, the most important being the so-called 'fourth resource' -- a gross national income (GNI)-based national contribution which weighs more heavily on the richer member states -- and a share of value-added tax receipts.
Expenditure
Expenditure is divided between "compulsory" (the Common
Agricultural Policy, or CAP) and "non-compulsory" elements (all other expenditure). Currently, the CAP and the structural, social and cohesion funds to regions lagging in economic development together constitute around 80% of
expenditure.
Enlargement impact
With the entry of ten new member states in 2004, the balance
of EU financing changed radically. Per capita incomes in these member states are significantly below the EU average, and they are all net beneficiaries of EU funds. Assuming existing budgetary trends, this implies: a shift in support towards the new member states in the areas of structural and cohesion funding; a greater burden on the current net contributors, and a loss of benefits by existing net beneficiaries; and pressure towards greater expenditure, as there is now a decisive (15 to 10) majority of net beneficiary states in the European Council.
Commission proposal
In July 2004, the European Commission proposed a total
budget of 928.7 billion euros (1,142 billion dollars) representing 1.14% of EU GNI.
The Commission proposal was drawn up assuming the scrapping of the UK rebate (worth 4.6 billion euros to the UK government in 2003), and its replacement by a "generalised corrective mechanism" for the biggest net contributor states. With some further transitional cushioning, the UK contribution would almost double from 0.25% to 0.46% of UK GNI over the period 2006-13, while those of other net contributors (excepting Austria) would fall.
Negotiating positions. Before the Commission published its proposals, the group of the six largest contributors (France, Germany, the United Kingdom, the Netherlands, Austria and Sweden), argued that commitments for the next spending package should be pegged at 1% of EU GNI. Following the appearance of the Commission's proposals, a number of other positions have emerged:
1. Net contributors. Members of the 'group of six' now agree on very little:
Continuing high levels of CAP price support spending is non-negotiable for the French and Germans at least until 2013, since an agreement on this was brokered in 2002.
For its part, the United Kingdom supports the view that the EU budget needs to be refocused on economic growth, convergence and structural adjustment, and with limited agriculture spending.
2. Net beneficiaries
Should no agreement be reached in time for 2007,
emergency budgeting based on the 2006 budget would come into effect. This would not take into account the 'phasing in' aid to the ten new member states. Therefore, the new net beneficiary states support both the Commission's original proposals and the conclusion of a budget agreement before the end of 2006. On CAP spending, this group is aligned with the position of France and Germany, as farmers in Central and Eastern Europe stand to benefit hugely from the CAP.
3. United Kingdom
The United Kingdom's position is a staunch defence of its
budget rebate, which would be worth 7-8 billion euros in 2013 if left unreformed. Opponents argue that the rebate is no longer relevant and is particularly unfair to the new member states who contribute to it. The UK government's view is that, even with the rebate, it has contributed far greater amounts than comparable countries since 1984, and receives the
lowest amount of benefits per capita from the EU budget.
4. Presidency proposal
The Luxembourg presidency tried to find a cost-cutting compromise in its proposed budget:
It is suggested that the 1% limit could be accommodated if it is taken as actual projected expenditure, rather than as a ceiling figure (the latter would then be 1.06% of EU GNI, or 865 billion euros).
Assuming CAP price support spending to be non-negotiable for the 2007-13 period (according to the 2002 agreement), Luxembourg looked for other savings in exchange for a freeze of the UK rebate. Ideas for cuts included a 25% reduction in rural development support, a 50 billion euro cut in research and development spending, and a 10 billion euro cut in foreign policy spending. Also mooted were limits to expenditure from the regional aid programmes focused on the 'old' member states. However, none of these ideas has gained widespread support.
Failed summit
With entrenched and opposing positions, the summit ended with no agreement on the budget. The sticking point proved to be the link in negotiations between CAP price support measures and the UK rebate. A late concession by France to agree to the compromise proposed by Luxembourg -- a freeze on the UK rebate in exchange for including the costs to the CAP of Bulgarian and Romanian accession (8 billion euros) in the general CAP budget -- was nowhere near sufficient for the United Kingdom and its allies in the Council.
Finding compromise?
In order to achieve the broader reform of EU spending which
the United Kingdom seeks, including more support to the new member states, London has signalled that the rebate could be negotiated, particularly in exchange for the reform of CAP price support measures. Abolishing price support alone would take a 30% chunk out of the draft budget, and would even allow for increases in spending to other priorities without breaking a 1% commitments target.
The United Kingdom is likely to promote this position, or one similar to it, when it takes over the presidency of the EU at the end of the month. However, with emotions still running high after the failure of the June summit, it will be difficult for London to find an agreement acceptable to all 25 member states within the next six months. Moreover, the atmosphere of crisis surrounding other large EU projects -- including the constitutional treaty, the euro and future enlargements -- will continue to add tension to negotiations in the short term.
Member states are more likely to be willing to find a compromise on the budget in 2006, when Austria will take over the presidency, the political mood may have changed, and pressure to find an agreement in time for 2007 will be strongest.
The UK government has indicated that it could renegotiate its rebate in exchange for reformed budgetary expenditure focusing on competitiveness rather than agricultural spending. Although countries defending the CAP have not yet made any concessions, there may be some scope for compromise. However, such a compromise is unlikely to happen under the UK presidency of the EU in the next six months, and may instead be postponed until 2006.
By: N. Peter Kramer
