Central Europe in the European budgetary politics: can it be still bypassed?

ANTALL JÓZSEF RESEARCH CENTRE

CENTRAL EUROPE IN THE EUROPEAN BUDGETARY POLITICS: CAN IT BE STILL BYPASSED? KRISZTINA ISZÁK

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©Krisztina Iszák, 2020 © Antall József Knowledge Centre, 2020 ISSN 2416-1705

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CENTRAL EUROPE IN THE EUROPEAN BUDGETARY POLITICS: CAN IT BE STILL BYPASSED? KRISZTINA ISZÁK

INTRODUCTION In the last decade it became increasingly difficult for the European Union (EU) Member States (MS) to decide how the common European budget, the Multiannual Financial Framework (MFF), should be allocated between different priorities. The Union faces a raising number of challenges. External threats like migration, geopolitical tensions and trade wars are more common. Such issues make the settlement of internal affairs troublesome as well. Areas such as digitalisation or artificial intelligence (AI), that have received little attention from high politics before, are turning into top priorities along with the fight against climate change and the EU’s lengthy rule of law debate. As a result, interest representation in European politics became ever more complex. In this environment, country coalitions and actor behaviours turned out less predictable in the current MFF negotiations than before.1 Green and digital transition has a growing significance in the European budget

Source: Council of the European Union

1 Peter Becker: A new budget for the EU: negotiations on the multiannual financial framework 2021-2027.

SWP Research Paper 11. August 2019. <https://www.swp-berlin.org/fileadmin/contents/products/research_ papers/2019RP11_bkr.pdf > Accessed: 10 October 2020.

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Budgetary politics is one of the most complicated and most politicised process of European decision-making. The EU has a variety of programmes such as Erasmus, Galileo and Horizon that are financed through various instruments. To maintain financial discipline, the Union operates with long-term budgets setting expenditure ceilings for key categories. The way the budget is allocated amongst different categories reflects the areas which the EU considers as priority. For example, European Commission President Ursula von der Leyen set out ambitious goals in her speech in the plenary session of the European Parliament in 2019.

Her flagship projects include a Green Deal, a digital Europe, and the promotion of a European way of life.2 Thus, while the allocation of money keeps to the traditional lines, financing new elements such as green and digital transition were also introduced in the latest budget.

While budgetary politics is convoluted by itself, there are always additional challenges to tackle. The last two negotiations have taken place in times of turmoil. During the negotiations of the current budget, the EU was hit by the COVID-19 pandemic that reached the continent in the spring of 2020. Many EU economies were already struggling but the public health crisis and the national measures imposing a lockdown affected everyone badly. Existing divisions between MS over central aspects of the budget such as the size or the allocations between policy areas became deeper. To overcome the crisis, a historic agreement on a EUR 750 billion, temporary financial instrument, called Next Generation EU (NGEU) was reached by EU leaders. The NGEU brings in new money by borrowing on the financial markets to boost economic recovery.3 While it nicely tops up the otherwise reduced size of the next budget, the NGEU represents a one-time only addition—far from a true Hamiltonian moment. Additionally, budget negotiations heated up between South and North, West and East with questions about solidarity and legitimacy. At the same time, Eurosceptic political parties are gaining momentum and the future of the EU is debated more extensively putting extra societal pressure on negotiators.4 Commonly, budget negotiations are closely linked to what kind of future the MS envisage for the EU itself and where the integration should be headed. Although the discussions on the 2021-2027 MFF are still ongoing while writing this article, it is worth exploring the EU’s financial debate in general, and the Central European region’s interest in it. This article describes the practicalities of MFF negotiations (e.g. what the MFF is, how the MFF is built up and how the long-term budget is adopted) with a specific attention to the Visegrad Cooperation. The Visegrad Cooperation—commonly known as the Visegrad Four (V4)—originally aimed to facilitate EU and NATO accession of Poland, Hungary, Slovakia and the Czech Republic. Today the V4 countries often coordinate their positions and achieve better outcomes for the region in

European Commission President-elect Ursula von der Leyen’s speech in the European Parliament Plenary Session, Strasbourg. European Commission. 27 November 2019. <https://ec.europa.eu/commission/ presscorner/detail/en/speech_19_6408 > Accessed: 20 October 2020.

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European Commission: Europe's moment: Repair and prepare for the next generation. European Commission. 27 May 2020 <https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940 > Accessed: 2 November 2020.

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4 Thierry Chopin–Nicole Koening–Sébastien Maillard: The EU facing the coronavirus. A political urgency to embody European solidarity. Europe Puissance de Valeurs. Policy Paper No. 250. Jacques Delors Institute.

April 2020. <https://opus4.kobv.de/opus4-hsog/frontdoor/deliver/index/docId/3519/file/Political_Urgency_ ChopinMaillardKoenig-EN.pdf > Accessed: 25 October 2020.

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EU negotiations as it was the case in migration policy. However, despite their best efforts, they succeed with varying degrees in budgetary disputes like in the previous MFF negotiations.5 Against their common interest to strengthen the economic convergence of the region, the countries have differing goals due to different domestic economic and political contexts. The cooperation is also affected by the members’ diverse relations to the core of Europe.6 Albeit the current MFF has not been adopted yet, a lot has changed since the original Commission proposal in 2018.7 Drawing on these, the article examines how far the V4 countries’ interests collided in major issues and what are the major achievements for the grouping.

WHAT IS THE MULTIANNUAL FINANCIAL FRAMEWORK? To maintain financial discipline, the EU’s expenditure is laid down in a common budget.

However, due to its sui generis nature, the EU’s budget is different from that of federal states, such as the US, both in structure and size. The European block operates with long-term budgets, now covering periods of seven years. Albeit having ambitious goals, the Union’s budget is relatively small in size, varying around 1% of the block’s gross national income (GNI). Attempts to increase the size of the budget have remained unsuccessful despite the European Parliament loudly advocating for it.8 The MFF sets out expenditure ceilings for given categories called headings, that are broad enough to include various policy areas (e.g. Single market, innovation and digital or Natural resources and environment).9 These have a crucial role: the allocation between headings determines the direction of EU policies for the upcoming years by defining how much can be spent on commitments and payments in a given area each year. Then, the EU’s annual budgets are set up within the limits of these ceilings and legislation on sectoral programmes is discussed.

The MFF is built up of the EU’s own resources, surplus from previous years and other sources such as fines on companies breaching EU competition rules. While own resources make up most of the revenue, their composition have not changed much over the decades.

Each MS has a GNI based, adjusted contribution, a value-added tax (VAT) based contribution that are added to the EU’s traditional own resources—customs duties and sugar levies.10

5 Nikolett Garai: Challenges faced by the Visegrad Group in the “European dimension” of cooperation.

International Issues & Slovak Foreign Policy Affairs. 2018/1-2. 24–42.

6 Dariusz Kałan–PawełTokarski–Patryk Toporowski: Visegrad’s Winding Road to the EU Multiannual Financial Framework 2014–2020. PISM Policy Paper. 2012/39. <https://www.files.ethz.ch/isn/153778/PISM%20 Policy%20Paper%20no%2039.pdf > Accessed: 20 October 2020.

European Commission: EU budget for the future. European Commission. <https://ec.europa.eu/commission/ future-europe/eu-budget-future_en > Accessed 2 November 2020

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8 Jorge Valero: Parliament wants to top up EU budget with €110 billion. Euractive. 8 September 2020. <https:// www.euractiv.com/section/economy-jobs/news/parliament-wants-to-top-up-eu-budget-with-e110-billion/ > Accessed: 17 October 2020.

9 Multiannual Financial Framework. Fact Sheets on the European Union. <https://www.europarl.europa.eu/ factsheets/en/sheet/29/multiannual-financial-framework > Accessed: 17 October 2020.

Long-term EU budget 2021-2027. European Council and the Council of the European Union. <https://www. consilium.europa.eu/en/policies/the-eu-budget/long-term-eu-budget-2021-2027/ > Accessed: 23 October 2020.

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As more than two-third of the own resources comes from GNI, based MS contribution, the Commission regularly, but unsuccessfully, proposes the introduction of new own resources.

The current MFF also faces the loss of one of the biggest contributors as the United Kingdom left the EU. With Brexit and the need to service the debt stemming from the NGEU reforming the structure of own resources is more pressing than ever.

ADOPTION OF THE BUDGET Since the Lisbon Treaty was signed in 2009, the MFF has been a regulation—a strong legal act of the Union that is directly applicable and binding in all MS. The procedure to adopt the budget is outlined in Article 312 of the Treaty on the Functioning of the European Union (TFEU).

According to this, the European Council (EUCO), gathering the heads of states and governments of MS, defines political guidelines for the European Commission to draft the legislation to be adopted via a special legislative procedure. In contrast to the ordinary legislative procedure, where the Commission’s proposal is adopted jointly with equal say by the European Parliament (EP) and the Council of the European Union (the Council), bringing together national ministers in different formations, the special legislative procedure entails less rights for the EP. Under this procedure, the Council is the sole legislator and must decide unanimously. In respect of the MFF, the EP can merely adopt or reject the proposal, and cannot amend it.11 Although the process appears simple theoretically, the reality is more nuanced. Despite the lack of mention of the EUCO by the legislation on the MFF, major decisions on the size or the allocation between areas are political and discussed in the EUCO. Due to recent changes in the way policy-making is done in the EU,12 financial questions are debated in detail by the EU leaders. Budget negotiations resemble the good old intergovernmental brinkmanship with country coalitions and compromises being made as package deals. The “nothing is agreed until everything is agreed” notion applies to the negotiating box prepared to simplify the discussions and the EUCO always decides with consensus.13 While this is a complex way of decision-making with potential veto rights, it gives certain leeway to countries having little leverage like Hungary. Compromise is usually reached by providing bargaining chips for concession on more important aspects.

Based on the leaders’ political agreements, technical discussions are conducted within the Council while negotiations are ongoing with the EP to ensure the adoption of the texts. While the MS have a strong control over the budget via the EUCO and the Council, the EP’s position

Art. 289 TFEU

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The European integration has extended to policy areas of core state sovereignty. Deliberative and consensus seeking in decision-making, that has been previously used to negotiate the supranationalisation of policy areas is becoming the default mode of governance in the EU. This provides stronger role for the European Council and the Council, with the heads of states and governments often discussing policies in technical details. Puetter called this “deliberative intergovernmentalism.” Read more in Uwe Puetter: Europe’s Deliberative Intergovernmentalism: The Role of the Council and European Council in EU Economic Governance.

Journal of European Public Policy. 2012/2.

12

Multiannual Financial Framework (MFF) 2021-2027: Negotiating Box with figures, Note from the Presidency to the Council. Council of the European Union. Brussels. 5 December 2019. <https://www.consilium.europa.eu/ media/41630/st14518-re01-en19.pdf > Accessed: 10 October 2020.

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is rather ambivalent. If the EP endorses the budget and the Council adopts it unanimously then the work is focused on the sectoral programmes that are mainly going through the ordinary legislative procedure. The EUCO regularly comes back to the state of play of the negotiations. It exercises the “power of the purse” and aims to pressure the EP to took on its line in negotiations. The power of the EP rests in its possible veto and the budget was for example rejected by the majority of the Members of the European Parliament (MEPs) in 2013.14 Such event results in delay and a late start in financing the policy areas as more substantial work on sectoral programmes only starts after the MFF’s adoption.

NEGOTIATIONS ON THE COMMON BUDGET FOR 2021-2027 According to the current state of negotiations, the budget for 2021-2027 amounts to EUR 1824.3 billion and comprised of a €1074.3 billion MFF and the EUR 750 billion NGEU.15 The MFF was cut in size by a lot compared to the EUR 1135 billion originally proposed in 2018 by the Commission.16 The proposal in 2018 also suggested a shift of money from traditional policy areas such as agriculture and cohesion towards green and digital transition, innovation and research. This was a major issue for the Visegrad Group for example, that prioritises cohesion policy and the Common Agricultural Policy (CAP) before others to achieve better economic convergence.

Following the Commission’s proposal, the countries positioned themselves according to three main categories. The group of “status quo preservers,” mainly Southern and Eastern net receivers aimed to keep the level of cohesion and agricultural funds unchanged. These countries, named “Friends of Cohesion” wanted to increase the overall size of the budget to attend to new challenges. Some were even prepared to pay in more such as Poland and Hungary.17 Another group, the “moderate modernisers,” gathers countries such as Germany, France, Belgium, Luxembourg, Finland and Ireland. These countries would opt for modernising Treaty-based policies—for example, the efficiency of Cohesion Policy is highly questionable18— and own resources. While both Germany and France were willing to increase their contribution to the budget, the French government was a strong opponent to any reduction in the CAP.19 This latter was rewarding for the V4 whose main interest is to keep the level of financing for

Johannes Müller Gómez–Wolfgang Wessels–Johannes Wolters: The European Parliament and the European Council: a shift in the balance of power?, in: Olivier Costa (ed.): The European Parliament in Times of Crisis: Dynamics and Transformations, Palgrave Macmillan, Basingstoke, 2019. 53–76.

14

Long-term EU budget 2021-2027. European Council.

15

Legislative Train Schedule: New Boost for Jobs, Growth and Investment. <https://www.europarl.europa.eu/ legislative-train/theme-new-boost-for-jobs-growth-and-investment/file-mff-2021-2027-mff > Accessed: 25 October 2020.

16

Becker. opt cit.

17

John Bachtler–Carlos Mendez–Fiona Wishlade: Reforming the MFF and Cohesion Policy 2021-27: pragmatic drift or paradigmatic shift? University of Strathclyde. European Policies Research Centre. European Policy Research Paper No. 107. 2019/January. <https://www.eprc-strath.eu/public/dam/jcr:079b3969-932f4f7b-9e5a-5de7613c36e3/EPRP%20107_Reforming%20MFF%20and%20Cohesion%20Policy%202021-27.pdf > Accessed: 17 October 2020.

18

Becker. opt. cit.

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Treaty-based policies. Compared to the original proposal that suggested major cuts in real terms for both areas, negotiations developed positively for the Visegrad Group. Funding for the CAP was increased and more direct payment for farmers was added. Furthermore, major reforms of the CAP seem to be delayed to the next budgetary term and the Commission’s proposed 30% requirement for green projects was also reduced.20 The European budget for 2021-2027

Source: Council of the European Union

In sharp contrast, to the first two groups, stand the “rigid savers”—net contributor Sweden, Denmark, Austria and the Netherlands, known as the Frugal Four. Their ideal would be to limit the budget to 1% of the EU’s GNI, with money reallocated from traditional policy areas to new ones.21 The group was sceptical about the NGEU too as the Frugals are not in favour of financial solidarity and they strongly advocate for conditionality to have control over EU money.

NEXT GENERATION EU, COHESION POLICY AND FUTURE FINANCIAL INTEGRATION The NGEU that is financed by a one-time borrowing of EUR 750 billion on the financial markets will be distributed between MS in the form of loans (EUR 360 billion) and grants (EUR 390 billion). On the one hand, the temporary NGEU boosts the available finances of most headings and the budget is of historic size for the EU. This agreement is extraordinary in EU history. It is supposed to facilitate economic recovery from the epidemic and contribute to green and digital transition. On the other hand, both the size and the efficiency of the instrument is questionable. The Recovery and Resilience Facility (RRF)—biggest instrument of the NGEU— Watch out for the political fallout of CAP reform. EuroIntelligence. 23 October 2020. <https://www. eurointelligence.com/ > Accessed: 26 October 2020.

20

Becker. opt cit.

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was placed under the Cohesion Policy heading providing additional money for funding.22 Due to successful Frugal efforts, however, money was reallocated within the NGEU from grants towards loans, reducing the former EUR 500 billion of grants to EUR 390 billion giving more money in the form of loans instead. Although the Frugals’ position is well coordinated, the other groups’ cohesion is not as strong. For example, there is a stark contrast between Germany and France regarding new own resources and the elimination of the rebate system.23 Nevertheless, the sharp contrast between net contributors and net receivers seem to be smoother than in previous years, even if the group of rigid savers advocates for strict control over the budget. While the CAP is an absolute win from a V4 point of view, the RRF is shadowed by the rule of law conditionality that is discussed at the time of writing and strongly targeted at Poland and Hungary. Their positions seem specifically weakened in this regard as the proposal goes through the ordinary legislative procedure with qualified majority voting in the Council.24 This further hinders efficient cooperation in negotiations between the V4 where Slovakia and even the Czech Republic counted as more democratic and more integrated than their two fellows.25 Most of the money from the temporary budget facility is allocated to the Cohesion, resilience, and values category. While on the one hand, the Commission set out guidelines for MS how to spend the recovery money, it is unlikely that governments will follow them. Many fear that regular spending will eat up most of the new money and less will be directed to otherwise new investments.26 Fractions generally exist between the V4 regarding cohesion policy and the flexibility of how to spend the funding. While the Czech Republic needs money for transport infrastructure, the others have already done such investments. For example, Hungary having completed its main highways, can more easily meet Commission requirements for focusing on innovation and green policies.27 On the other hand, while the move resulted in less funding for areas such as health, innovation or climate policies V4 countries are still rather beneficial.

22 Jorge Núñez Ferrer: Reading between the lines of Council agreement on the MFF and Next Generation EU. CEPS Policy Insights. July 2020/18. <https://www.ceps.eu/ceps-publications/reading-between-the-lines-ofcouncil-agreement-on-the-mff-and-next-generation-eu/ > Accessed: 28 October 2020.

23 The rebate system is a compensation for excessive financial contributions to certain MS and originated from special regulations for the UK. Read more about the budgetary correction mechanism at the European Commission’s website at: European Commission: Budget correction mechanisms. European Commission. <https://ec.europa.eu/info/strategy/eu-budget/long-term-eu-budget/eu-budget-2014-2020/revenue/correctionmechanisms_en > Accessed: 28 October 2020.

Recovery and Resilience Facility [2020/0104(COD)]. Legislative Observatory European Parliament. <https:// oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2020/0104(COD)&l=en > Accessed 28 October 2020.

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25 Jiří Lacina: In multi-speed Europe, Czech Republic is not in any rush. EUROPEUM. 25 June 2019. <https:// europeum.blogactiv.eu/2019/06/25/in-multi-speed-europe-czech-republic-is-not-in-any-rush/ > Accessed: 28 October 2020.

26 Wolfgang Münchau: Beware of smoke and mirrors in the EU’s recovery fund. Financial Times. 20 September 2020. <https://www.ft.com/content/0ba23192-5f43-402d-8f26-6fce0ab669f3 > Accessed: 28 October 2020.

Martin Ehl: Visegrad Money Song. The new EU budget. Visegrad Insight. 14 February 2020. <https:// visegradinsight.eu/visegrad-money-song-new-eu-budget/ > Accessed: 28 October 2020.

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Poland for example secured an additional EUR 600 million from the Just Transition Fund28 and succeeded in the elimination of the Emission Trading System-based new own resource from the proposals.29 Allocation between the headings of the 2021-2027 budget

Source: Council of the European Union

Maria Wilczek: Poland celebrates EU budget success but confusion remains over rule-of-law conditionality.

Notes from Poland. 21 July 2020. <https://notesfrompoland.com/2020/07/21/poland-celebrates-eu-budgetsuccess-but-confusion-remains-over-rule-of-law-conditionality/ > Accessed: 28 October 2020.

28

Interview by the author with an official of a Permanent Representation to the European Union, Brussels, 13 October 2020.

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Although the RRF eliminated the preliminary fear of the V4 that the COVID-19 crisis will result in a backtrack on already negotiated allocations for traditional policy areas, it also brought new ones. Common EU borrowing opens the door for closer financial and political integration even if the instrument is coined temporary now. This is a direction not promoted by the group of the region. Even though financial solidarity is considered legitimate by Poland for example, 30 the V4 countries are not in favour of debt sharing and are financially rather prudent.31 The division among the Visegrad Group is also present in this regard, however. While Poland, Hungary and the Czech Republic are clear on their lack of intention to join the eurozone, Slovakia is already a member and in terms of integration is closer to France than to its fellow Central European countries.32 In 2019 French President Emmanuel Macron called again for multi-speed Europe for those willing to take integration further. Although the V4 is reluctant to do more, such direction was clearly refused by Poland in fear of pushing the region towards redundance in negotiations.33 This latter is represented in their refusal of setting up a separate eurozone budget proposed by Macron to stablize the euro area.34

CONCLUSION At the time of writing, negotiations are rather heated with the European Parliament and focused on striking a deal on the rule of law conditionality. Assuming any technical details regarding the outcomes of negotiations would be merely a speculation at the current moment. Nevertheless, it is likely that a compromise will be reached with smoothing the language of the conditionality, as EU leaders will not backtrack on their historic agreement made in July 2020.35 With the COVID-19 situation worsening, delaying the budget would also be hard on most of the MS. The position of the V4 countries is rather controversial with Poland and Hungary being in the spotlight and it is clear that their cooperation in MFF negotiations is not as strong as it was in the case of migration policy in the past for example. Against these, however, three important things can be certainly concluded: First, money allocations turned out positively for the group compared to the original proposal; second, more divisions are expected to emerge within the Visegrad Group in the future; and third, the opinion of the countries in Central Europe becomes more and more difficult to ignore by the core countries of the EU.

Ibid.

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Edit Inotai: Disguised as Solidarity, Central Europe Strives for Maximising Gains at MFF talks. European Liberal Forum. 19 June 2020. <https://www.liberalforum.eu/disguised-as-solidarity-central-europe-strives-formaximising-gains-at-mff-talks/ > Accessed: 20 October 2020.

31

Lacina. opt. cit.

32

Charles Grant: Fast forward to two-speed Europe. Politico. 7 November 2017. <https://www.politico.eu/ article/fast-forward-to-two-speed-europe/ > Accessed: 27 October 2020.

33

Becker. opt. cit

34

Lili Bayer–Hans von der Burchard: EU negotiators near deal to unlock €1.8T budget and rescue package.

Politico. 28 October 2020. Available at <https://www.politico.eu/article/eu-budget-negotiations-enterendgame/ > Accessed: 28 October 2020.

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