Photo: European Commission
The leaders of the EU have been coming and going all day for their “confessionals” with the monk-like president of the European Council, Herman Van Rompuy.They have been telling him what they can and cannot concede in their latest contest over the EU’s trillion-euro budget for the next seven years.
After a long delay, the presidents and prime ministers finally sat down for their first full session close to midnight.
Mr Van Rompuy told them: “Maybe this meeting will be long and complicated. Fortunately this issue only comes up every seven years!”
At about 1% of the EU’s GDP, the union’s budget is minor compared with total public spending (about 50% of GDP). But the budget debate brings out the worst in leaders, turning the negotiation into the nastiest of zero-sum (Reuters has a useful guide here here).
This haggling session is particularly charged because it takes place against the background of the crisis of the euro zone, and the prospect that Britain might detach itself from the EU. In the tug of war, Britain stands at the most austere end of the rope, while the European Parliament is at the most profligate. Both have threatened to veto a budget that does not meet their demands.
The European Commission has proposed a budget that, at €1.09 trillion for 2014-2020, is about 5.5% bigger than the one for the previous seven-year period ending in 2013 – when calculated in real terms, and taking account of all items that are both in the official Multi-annual Financial Framework (MFF). The chart above sets out the details.
The proposed budget irritates net contributors. The commission claims the money is needed, in part, because the EU has extra functions, such as its new diplomatic arm (the European External Action Service) and in part because new members have joined since the last budget was drawn up (Romania and Bulgaria in 2007, and Croatia next year).
Spending on the two big-ticket items – subsidies to farmers (part of “Natural Resources” in the chart) and cohesion funds for poorer parts of Europe (part of “Smart and Inclusive Growth”), which together account for about 80% of the budget – was squeezed in real terms. The aim was to make space for more “modern” areas of spending, including research-and-development, and the Connecting Europe Facility (CEF), a programme to promote cross-border infrastructure (energy, transport and broadband).
This is precisely the sort of thing that the EU should be concentrating its resources on, were it to be reinvented (see my column “Coming off the Rails” here). It would increase EU spending on infrastructure more than three-fold to €50 billion. Even so, it is modest when compared with €379 billion for cohesion and €283 billion for direct agricultural subsidies (see ,my column this week, “Milking the budget”, here). But the CEF has few champions, except for the weakened commission, and makes a tempting target for leaders as their old priorities re-assert themselves.
The overall budget was trimmed by €50 billion by Cyprus, which holds the rotating presidency of EU ministerial meetings, and then by a further €24.5 billion by Mr Van Rompuy, who took over the negotiations. He presented a new compromise proposal over a dinner of cold dishes and salads – plainly no leaders wants to be seen feasting while applying the knife to EU support for (some) hard-pressed farmers and poorer regions. It is roughly the same size, but tries to shove more money into agriculture and cohesion (but makes no change to the administration budget)
As leaders broke up for the night, they were likely to be bargaining well into the weekend. The unusually crowded press room prepared for yet another long summit. Journalists passed the time in a quest on Twitter for the most appropriate summit song (#eucoplaylist). Favourites include Pink Floyd’s “Money”, Simply Red’s “Money’s Too Tight to Mention” and Talking Heads’ “Road to Nowhere”. Below is the view from some of the key countries.
First in this morning was David Cameron, the British prime minister. He is the most hardline of the fiscal hawks, demanding a real-terms budget freeze (based on spending in 2011). But that has not enough to stop backbenchers inflicting a defeat on the government in a (non-binding) resolution demanding actual cuts.
An even bigger priority is to defend the British rebate. Tony Blair had conceded part of it in the name of helping the new members from eastern Europe. And Mr Van Rompuy has niftily suggested a new way of “paying” for the British rebate with contributions from all countries, including the British themselves, as a means of eroding the refund. But Mr Cameron knows he cannot survive any concession to the rebate won by Margaret Thatcher in 1984.
In Brussels many wonder whether Mr Cameron can agree to any likely compromise. If he vetoes the budget and becomes isolated, might Britain enter a cycle of confrontation that ends with it leaving the club? (see my column, “Europe’s British problem”, here). Asked if EU leaders would be able to keep Britain aboard, Jean-Claude Juncker, Luxembourg’s veteran prime minister, quipped: “The British know how to swim.”
Mr Cameron’s tone has changed of late. In his view Mr Van Rompuy’s proposal now goes in the “right direction”, but still leaves too much fat. Though the British traditionally complain loudest about the fossilised nature of EU spending, they too are taking aim at the hapless CEF.
Mr Cameron is also taking potshots at the hated Eurocrats. What about shaving some €6 billion from the administration budget, he suggested, by cutting Eurocrats’ salaries by 10%, raising their pension age to 68 and capping their pensions at 60% of their salaries rather than 70%?
The Commission shot back with ready briefing notes: under its proposals EU staff numbers are already being cut, working hours are rising and the retirement age is being pushed up. On most of these measures, says the commission, Eurocrats fare worse than the British civil service, whose most senior officials earn substantially more than EU ones.
For all the tough talking from Britain, it is using a different unit of reckoning from just about everybody else. The EU budget, based on the French model, uses two sets of numbers: “commitments” and a slightly lower figure for “payments”. The British insistence on using payments sound tougher, but it also provides some wriggle room if the gap between payments and commitments is stretched a bit.
France (from S.P in Paris)
France’s President François Hollande went into the summit with one over-riding objective: to protect as far as possible the Common Agricultural Policy (CAP). In some ways, this might seem surprising from a Socialist government. The party is run by urbane Parisian types; the rural world is largely conservative; and the biggest beneficiaries of agricultural support are the country’s big wealthy farmers.
Yet many members of government are also elected in rural bits of France. Pierre Moscovici, the finance minister, for instance, is deputy for Doubs, in the Jura of eastern France. And even if only a tiny fraction of the population still works in farming, links to rural life, through food, fresh markets and terroir, have a strong hold on the French imagination. No serious French presidential candidate would miss a visit to the annual Paris agricultural show so as to be pictured stroking a cow’s bottom. Mr Hollande set a new record by spending 12 hours there earlier this year.
Defending the CAP is a popular and cross-party concern, as is any form of European Union spending at a time of recession, and the French are determined to keep cuts to a minimum. Even though France is becoming a net contributor to the CAP, agriculture is still the domain where France earns the greatest retour from the EU budget. Jean-Marc Ayrault, the prime minister, has called Mr Van Rompuy’s proposal to reduce the CAP budget by nearly €50 billion over the seven-year period “unacceptable”.
The French argue that farm support is about not just subsidies but guaranteeing food security and quality in Europe.
As the second-biggest gross contributor to the EU budget, the French will use the traditional bargaining chip of the British rebate to try to fight CAP cuts. Mr Hollande sounded a warning note this week a few days ahead of the summit by denouncing those countries that “come to collect their cheque, their rebate, their refund”.
France’s difficulty this time, however, is that the president goes into the negotiation without having secured a deal with the German chancellor, as a former French president, Jacques Chirac, managed to do ahead of budget talks in 2003. Instead, in a bid to win support, Mr Hollande unusually went to Poland this week, carrying the message that agriculture should not be at the expense of cohesion funds; rather they should be on a par.
Poland (from K.T. in Warsaw)
As the biggest net recipient of EU funds, Poland’s priority has been to defend cohesion funds that are used to help poorer regions catch up with the rest of the EU. It has taken up a leadership role in the so-called “Friends of Cohesion”. And the fact that its economy is growing gives it new political clout – not least in Germany. In the process, though, it has parted ways with Britain, until recently Poland’s close ally on issues such as defence, the free market and national sovereignty.
Poland has long been at odds with France, though it is now being wooed by Mr Hollande. During the time of President Nicolas Sarkozy, the Poles feared being shut out of an elite club of euro-zone nations that he was keen on creating. But Mr Hollande sought to assuage such fears by supporting the idea of Poland’s “associate membership” of the euro zone. Mr Hollande also brought 30 French corporate bosses with him
Poland uses the free-floating zloty, but says it is committed to joining the euro. President Bronislaw Komorowski said Poland should be ready for euro membership within three years. Whether the Polish people want it is another matter.
Germany (from A.K in Berlin)
As always, all eyes are on the German chancellor, Angela Merkel. As the biggest country in the EU, and its biggest paymaster, any compromise will revolve around Mrs Merkel’s ability to balance her belief in fiscal discipline with the need to placate key allies.
The summit coincided with the annual debate about Germany’s own budget in the Bundestag, the lower house of parliament. Even in normal times, this is an occasion for the opposition to mock and harangue the government. But this time the
chancellor-candidate of the Social Democratic Party (SPD), Peer Steinbrück, who is trying to recover from recent controversy about the speaking fees he has been earning on the side, went in with full-bore assault on another aspect of EU policy: the (third) rescue of Greece (see my blog post here), which has not yet been settled by finance ministers.
Mr Steinbrück said the chancellor must start to “be honest” about what German taxpayers can expect in bailing out Greece. The implication is that she has been deceiving German voters. He also threatened that the SPD might withdraw support for Mrs Merkel’s policies. This has more than rhetorical significance, because it is only with the votes of the SPD and another opposition party, the Greens, that Mrs Merkel was able to pass the main rescue efforts this year – the creation of the permanent rescue fund known as the European Stability Mechanism, and passage of the “fiscal compact”, a treaty on budget discipline. “If we feel deceived,” he thundered in her direction, “we will no longer bail you out when you need our support.”
This may not make an immediate difference in Ms Merkel’s negotiations on the EU budget. Germany is firmly in the camp of the net contributors, looking askance at Gallic tolerance of high spending. Mrs Merkel is said to have demanded another €30 billion worth of cuts in addition to Mr Van Rompuy’s proposal – a position opposed by France.
Rainer Brüderle, the parliamentary leader of her junior coalition ally, the liberal Free Democratic Party (FDP), sent Mrs Merkel off to Brussels with the quip that “every time I’m in Brussels, I get the feeling that they have an awful lot of personnel.”
German officials say the summit is unlikely to find agreement, and that another one may have to be held in March. But as Germany’s campaign for next autumn’s general election heats up, Mrs Merkel will have less room to manoeuvre – which might make a deal even harder to find.
Sweden (from K.L. in Stockholm)
One of EU’s net contributors and a strong critic of the latest budget proposal, Sweden is the closest Mr Cameron has to a real ally. It wants to see a smaller budget overall. Like Britain, Sweden is also fighting fiercely to keep its rebate (a proposed cut by Mr Van Rompuy was deemed “provocative”). But unlike Britain Sweden is concerned with how the money is spent within the budget. It wants less money dedicated to agricultural subsidies, and a bigger share of cohesion funds to be directed to the EU’s poorest countries. And to boost the EU’s competitiveness, Sweden wants more spending on innovation and research.
Italy (from J.H. in Rome)
The budget summit comes at an awkward moment for Italy’s technocratic prime minister, Mario Monti. He is a staunch pro-European (he is a veteran of the European Commission and still has a home in Brussels). But polls suggest that Italians, while generally keen on the EU, are profoundly disillusioned with the euro and sceptical of the benefits that membership of the union has brought them.
Italy, moreover, has quietly become the EU’s biggest net contributor (as a share of economic output), and it stands to lose more from proposed cuts to both farm aid and cohesion funds.
This may explain why his government has threatened to veto a deal if it includes deep cuts to the subsidies provided to Italian farmers. With a general election looming – March 10th is now the most likely date – Italy’s prime minister may well prefer a postponement to a compromise that would put him under pressure from Italy’s vociferous and influential farming lobby.
Click here to subscribe to The Economist
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.