EU budget battle struggles to get off the ground

By bne IntelliNews November 23, 2012

bne -

EU leaders arrived in Brussels on November 22 set for a bitter battle over the bloc's long-term budget, with the CEE member states part of a coalition pitched against those further west, who are urging cuts in line with the drive for austerity at national level.

However, the gulf between the opposing views is apparently so deep that the two sides struggled to even get close enough to get at one another's throat. The stark divide saw the opening of the summit delayed by three hours as one-to-one meetings ahead of it dragged on. Then, after a brief get together, proceedings were adjourned until November 23.

German Chancellor Angela Merkel and French President Francois Hollande both said they doubts an agreement could be reached at the summit. "I think we're advancing a bit," Merkel said according to the BBC, without elaborating, "but I doubt that we will reach a deal."

After weeks of squabbling, which has seen both camps refusing talk of compromise, negotiations are focusing on a draft budget - officially called the 2014-2020 Multi-Annual Financial Framework (MFF) - presented last week by Herman Van Rompuy. The President of the European Council has suggested cuts to the European Commission's original fiscal plan for 2014-2020. Still supported by the CEE states, that budget proposal called for an increase to €1.025 trillion, or a 4.8% rise compared with the 2007-2013 budget of €976bn.

However, Van Rompuy's proposed compromise, worth €973bn, does not go far enough claim some net contributors, with the UK leading the objections and threatening a veto. Merkel - who also wants to restrain spending - had already said ahead of the meeting that another summit may be necessary early next year if no deal can be reached now.

On the other side of the fence, France objects to proposed cuts in agriculture, while CEE states oppose cuts to cohesion spending, which is used to help improve infrastructure in states that are yet to catch up in terms of development. The biggest budget items, the Van Rompuy plan envisages €309.5bn for cohesion (32% of total spending) and €364.5bn for agriculture (37.5%).

The "Friends of Cohesion" - net recipients of the EU's near trillion-euro budget - are hoping France and Italy can be persuaded to support an expanded budget. Chaired by Poland and Portugal, the group includes Bulgaria, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Romania, Slovakia, Slovenia - and most recently, Spain.

Their opponents, eight of the 11 net contributors, want a 5% - or €100bn - cut from the European Commission's proposed €1.03 trillion budget for 2014-2020. The group - which includes Austria, Britain, Denmark, France, Finland, Germany, Netherlands and Sweden - argues that when many member states are being forced to make cutbacks, the EU budget should do the same. At worst, they appear ready to settle for a real term freeze in spending.

Poland has been in the vanguard of those opposing cuts in the seven-year EU budget, but Prime Minister Donald Tusk said in a joint press conference with German Chancellor Angela Merkel on November 14 that his country is ready to seek a compromise. "In Poland a black scenario would be the European states not reaching a compromise, and we must make sure this scenario does not materialise," Tusk said, according to Reuters.

However, he admitted even as he sat next to the German leader in apparent harmony, that persistent deep divisions will make agreement difficult. "Today Germany is opting for strong cuts. Poland thinks that the cuts should be balanced and that you need to protect the cohesion policy," Tusk said.

Merkel, whose country is the largest net contributor to the EU budget, but which also receives structural funds for states in the former East Germany, said she is determined to find a route. "I know it is very, very difficult but as far as Germany and Poland are concerned, we are committed," the chancellor said. "Some people might think we can live without an agreement, but that is not our goal. We want an agreement and we will speak with all countries about it."

"Some people," presumably includes British PM David Cameron, who is the staunchest advocate of cutting the budget. It remains to be seen if the rest of the EU is ready to support his stance in a bid to entice him to relent on his government's increasing self-imposed isolation from the bloc back into the fold, or whether they may be weary of its obstructions. Tusk has pointed out to Britain that if no deal is cut, the current budget will remain in force provisionally, with a 2% hike added each year for inflation.

Meanwhile, Hungary, having played little part in the process ahead of the summit left it until the week before to announce it will dig its heels in on the other side, with Prime Minister Viktor Orban also threatening to wield his veto due to the fact that the country stands to see its funds cut by 30%.

As analysts at Equilor point out, assuming Hungary has known about the coming cut for some time, it's last monute decision to kick up a fuss looks to have some other design than a fiscal one. "This is rather a political issue than economic," they suggest, "as Hungary has been able to utilize less than 50% of its total funds available [anyway]."

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