Europe’s strategic environment calls for new priorities

On February 23, EU members began negotiations on the bloc’s multiannual financial framework for 2021-2027. But, with all countries focusing on net balances – how much they receive minus how much they pay – will the composition of spending bear any relatio

But this time, there are four reasons why the discussions matter, and why complacency would be misplaced.

The first is Brexit. Because the United Kingdom was a net contributor, it will leave a EUR 15 bln funding gap and force the EU to decide whether to substitute missing revenues or to cut spending. Adding to the drama, the misers’ bloc to which Britain belonged has fractured, with Germany indicating a willingness to be generous, while the Netherlands and Sweden are adamant they will not contribute a penny more.

Second, there is a growing gulf between money and politics. Poland’s net receipts from the EU amount to EUR 10 bln annually, making it the leading beneficiary of the EU budget. But the Polish government’s priorities, and even values, are increasingly at odds with those of the EU. It opposes taking in asylum-seekers, it faces a European Commission-initiated procedure for Sahel, the EU’s immediate neighbourhood is either unstable or in turmoil. Meanwhile, the United States no longer provides the reliable shield to which Europeans had grown accustomed. The EU grew up in a world where it could safely concentrate on its own prosperity. That world is gone.

What we are facing is a redefinition of EU public goods, and this must entail deep budgetary consequences. The European Commission has bravely put some numbers on the table. It proposes to spend about EUR 3-4 bln per year more on border security and a still-modest EUR 5 bln per year on defense, as well as increases for research, innovation, and the Erasmus program. It also envisages annual spending cuts for regional aid and agriculture that could reach EUR 30 bln.

Numbers, at this stage, merely flag issues. But the Commission’s boldness is justified. Regional policy and agriculture comprise nearly three-fourths of the EU budget, and both are questionable. Regional policy fuelled instrument would cushion country-specific shocks and complement the European Central Bank’s monetary policy when facing common shocks. Whereas the EU budget performs no significant macroeconomic role in cross-country stabilisation or in aggregate terms, as it does not record surpluses or deficits, the opposite would be expected from a eurozone budget.

There is no agreement yet on the contours of such a budget, especially as Germany is wary of creating a channel for cross-country transfers and joint borrowing. But this does not mean that the discussion has no future. If the EU27 prove unable to agree on sensible reforms of their budget, the eurozone’s 19 members (which include neither Poland nor Hungary) could gradually move toward creating their own. The EU budget would eventually morph into it, or become a small relic.

Understandably, citizens do not care much about the EU budget, especially if they