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Frugal Four vs Friends of Cohesion: The EU's baffling budget battle

[February 20, 2020] By John Chalmers

BRUSSELS (Reuters) - Leaders of the European Union's 27 countries gather on Thursday to haggle over the bloc's next budget for 2021-27.

The debate over how much the bloc should spend over the next seven years and on what makes few headlines across Europe because it is so arcane.

However, it is the talk of the town in the "Brussels bubble", where diplomats, technocrats and journalists bandy around acronyms and jargon that only make it harder for others to understand the MFF - the multiannual financial framework.

WHAT IS THE MFF?

The MFF sets the limits for EU spending over seven years, as a whole and for different areas of activity.

It is spent on a raft of areas ranging from farm subsidies and regional development, to security projects, Erasmus student exchanges, research, fighting climate change, managing migration, security and defense.

WHY IS IT SO DIFFICULT TO AGREE?

Poorer countries always argue that richer net contributors to the budget should pay more, and there is inevitably an acrimonious stand-off. A failure to agree by the start of 2021 risks a spending freeze on many critical projects.

The 2021-27 MFF is even harder because Britain's exit from the EU means there is less money in the pot: the departure of the EU's second-biggest net payer will leave a 75 billion euro hole in the seven-year budget.

Adding to the difficulty are new spending priorities such as climate change, border management, research and innovation. This will mean cuts in the MFF's biggest components, regional development to equalize standards of living across the bloc known as "cohesion policy funds" and Common Agriculture Policy support for farmers.

SIZE MATTERS

The first nut to crack is just how big the budget should be.

European Council President Charles Michel has proposed a figure of 1.094 trillion euros, equivalent to 1.074% of the 27 countries' gross national income (GNI). The European Commission has sought a bigger budget equivalent to 1.11% of GNI.

Net beneficiaries - mostly southern and eastern states that get more from the MFF than they put in thanks to cohesion funds and support for their farmers - like the Commission number. They stick together in a group called "The Friends of Cohesion".

Net contributors frown even on Michel's lower number, and an alliance known as "The Frugal Four" - Austria, Denmark, the Netherlands and Sweden - insist the budget must not exceed 1.0%.

Germany, the MFF's biggest net contributor, is sometimes clubbed with these four but is expected to be more flexible.

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European Council President Charles Michel arrives for the European Union leaders summit in Brussels, Belgium, February 20, 2020. REUTERS/Yves Herman

France, the number two contributor, wants to safeguard CAP funding for its farmers but is uneasy about the fiscal impact of a budget at the upper end of the range.

Net contributors are also fighting to keep a system of "rebates", reductions to their contributions based on a complicated corrections system. Former British Prime Minister Margaret Thatcher pioneered the rebate in the 1980s, but net beneficiaries say it must now be scrapped.

THE CARVE-UP

Just as fraught is the question of how to spend the budget.

The proposal that Michel sent to leaders ahead of their special summit - known as a "negotiating box" - includes steep cuts in CAP and cohesion fund spending from the 2014-2020 MFF.

Michel wants at least a quarter of the 2021-27 MFF to be spent on furthering climate goals, including the ultimate ambition to make the EU "climate neutral" by 2050.

He has also proposed more spending on modernizing Europe's economy through science, research and digital innovation, and increases for border management following the continent's migration crisis of 2015-16.

FUNDING THE GAP

Michel has proposed filling the Brexit gap with revenue from a new tax on plastics and funds from trading carbon emissions.

The EU is also considering other taxes -- on the digital economy, flying, financial transactions and on products made with high CO2 emissions imported into the EU -- as further sources of revenue.

RULE OF LAW

Michel also wants EU funding to be conditional on governments respecting the rule of law - a point many of the net payers have insisted on to keep pressure on Poland and Hungary, which stand accused of violating democratic checks and balances.

EUROPEAN PARLIAMENT

The European Parliament also wants tough rule of law conditions on funding, but more importantly it wants to see a much bigger overall budget of 1.3% of GNI. Everyone expects its headline number will be ignored, but in the end the MFF will have to be approved by the EU assembly.

(Graphic: What the EU pays for - https://graphics.reuters.com/EU-BUDGET/0100B5EX3MM/EU-BUDGET.jpg)

(Writing by John Chalmers; Editing by Hugh Lawson)

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