MISSION ACCOMPLISHED?

The adoption of the next seven-year budget of the European Union has sparked significant discussions across Europe. The debates surrounding this issue are as intense as those seen before the European Parliament elections. Typically, the key players in shaping these discussions are the major contributors to the EU budget, known as Eurograndees.

Approximately 75% of the EU budget comes from just 11 states, with Germany, France, and Italy leading the pack in contributions. These funds are sourced from various taxes and direct payments from member states.

From 2000 to the present, the EU budget has totalled €3.13 trillion, with a significant portion (€2.67 trillion) coming directly from member states. The top 11 contributors are responsible for 88% of these contributions, while the remaining countries have not directly contributed €459.5 billion to the budget.

In 2024, with a budget of €143 billion, direct contributions amounted to €137 billion, with major contributions from Germany (€30.3 billion), France (€23.5 billion), and Italy (€17.3 billion).

Cohesion Policy: A Balancing Act

Berlin's influence is pivotal in shaping the EU's budget strategy. The European Commission has aligned with a group of financially conservative governments led by Germany, advocating for prudent spending and opposing excessive borrowing to prevent increased debt.

Some critics view this approach as signalling the end of easy access to funds, particularly regarding the Recovery and Resilience Fund (RRF), which was initially funded by combined debts of member states rather than national contributions. While certain heavily indebted EU countries aim to extend the RRF beyond its 2026 deadline and transform it into an investment fund, the European Commission stands in opposition.

The use of the RRF for "cohesion policy" to reduce economic disparities between regions remains a contentious issue. Highly indebted nations fear delays in restructuring the RRF could result in significant deficits for long-term projects.

The European Commission's proposal to allocate funds to cohesion policy lays the groundwork for negotiations among European capitals. However, critical decisions regarding the creation of a new investment fund hinge on the upcoming European elections in June and the formation of a new European Commission in November.

The Cohesion Fund is viewed as a tool by the European Commission to drive reforms across various sectors, such as pensions and democratic standards, promoting progress without resorting to increased borrowing or expanding the budget size significantly. Notably, there is some overlap between projects funded by the RRF and the Cohesion Fund, with both focusing on supporting economically challenged countries like Portugal and Bulgaria.

Supporting Ukraine and Beyond

European officials acknowledge the challenge of "selling" the new cohesion model to economically disadvantaged member states. Countries currently struggling to utilize the allocated funds for "cohesion policy" are unlikely to embrace the strict rules and close linkage of funds to reforms. Member states already complain that excessive bureaucracy hinders their access to Recovery and Resilience Fund disbursements.

On the other hand, the need to secure additional funding for economic growth in states awaiting accession, such as Ukraine and the Western Balkans, exacerbates debt repayment conditions. These countries have not fully recovered from the pandemic's impact.

Regarding Ukraine, in February, the EU Council approved legislation revising the long-term budget for 2021-2027, including provisions for a €50 billion fund for Ukraine. In March, the same body established guidelines for the EU budget in 2025, ensuring stable assistance to Kiev. However, discussions about the next seven-year European budget often revolve around allocations for Ukraine's assistance and defence strategy improvements.

Some politicians propose using the EU's Recovery and Resilience Fund for defence priorities, such as obtaining affordable loans for weapon purchases. Others suggest directing the fund toward subsidizing reconstruction projects in Ukraine or providing loans to Baltic states facing increased defence expenditures.

Meanwhile, the ongoing war in Ukraine persists with no resolution in sight. The European economy faces challenges due to reduced reliance on Russian energy and shifts toward renewable energy sources. Additionally, rising contributions to Ukraine divert funds from other purely economic concerns.

Many Problems, One Budget

The mounting debts of the EU's leading economies, coupled with contentious domestic policies and stringent spending regulations imposed by the European Commission, are constraining the bloc's capacity to secure additional financing.

The withdrawal of Russian assets, estimated at over €200 billion ($214 billion), has been proposed as a potential solution to these challenges. However, despite years of debate, no definitive decision has been reached, and it appears unlikely that one will be made.

Critics argue that such a move could erode investor confidence in Europe. Valerie Urbain, CEO of Belgian depositary Euroclear, warns that "such a decision would not only adversely affect Euroclear but also disrupt financial markets. If clients perceive that the rule of law is no longer upheld and their assets could be seized, it opens a Pandora's box, potentially driving international investors away."

While this topic dominates internal political discussions, European leaders grapple with other equally contentious issues. Chief among them is the cost associated with the planned enlargement of the European Union. Estimates suggest that admitting all candidate countries would require €256 billion ($272 billion). Specifically, Ukraine alone is projected to receive €186 billion over seven years, excluding reconstruction expenses.

The challenge lies in identifying the funding sources. Opinions diverge: some advocate for member states to contribute most of the amount, while others propose raising funds through new taxes. Discussions include the possibility of taxing plastics and implementing mechanisms to regulate carbon emissions.

Certain EU nations are eager for swift accession of new members. Success hinges on the composition of the upcoming EU Parliament, to be elected in June. Sociological polls indicate that far-right politicians stand a strong chance in the European Parliament elections. Given their reluctance toward EU enlargement, adopting the budget's expenditure section after June could pose significant challenges. There's even speculation that extreme-right and right-wing factions might form a coalition, potentially becoming a dominant force in the EU's political landscape. Polls suggest that the radical right-wing groups—Identity and Democracy (ID) and European Conservatives and Reformists (ECR)—could gain 30-50 seats, increasing their share from the current 18% to 22-25%.

Experts at the European Policy Centre observe that radical and populist parties are filling the growing void of distrust in European political institutions. Efforts to counter their rhetoric with traditional liberal values often backfire.

While the center-right European People's Party, Social Democrats, and centrist Liberals currently block the far right, maintaining political consensus, their ability to do so may wane after the 2024 vote. Adopting a new seven-year budget under these conditions remains a formidable challenge.