Charles Michel’s MFF juggling act

During the past few weeks, the President of the European Council Charles Michel has been meeting national sherpas to sound out Member State positions regarding the Commission’s proposal for the next Multiannual Financial Framework (MFF) for the period 2021-2027. In the next few weeks he will be meeting national leaders face-to-face.

He has called a special European Council meeting which, ominously for national leaders who value their beauty sleep, is scheduled to start on 20 February but which notably has no termination date or time.  Mr Michel may plan to take a leaf out of the Saudi Crown Prince Mohammed bin Salman’s playbook who famously kept the rich elite of Saudi Arabia under lock and key in a luxury hotel until they agreed to part with some of their money.

EU negotiations on the MFF are famously protracted, but some additional agenda items on this occasion make it even more complex. The negotiations must address not only the overall size of the budget, but also the proposed reductions in agricultural and cohesion spending; how to finance new priorities such as security, migration and climate action; new sources of revenue, such as the proposed tax on non-recycled plastic packaging waste or revenue from the EU Emissions Trading Scheme; how to manage the phase-out of the various rebates and ‘rebates on rebates’ enjoyed by individual Member States; linking receipt of EU funds to the rule of law; creating a Euro-area budget; and, last but not least, the always vexed question of Member State net balances.

In his meetings with national leaders, Mr Michel is unlikely to hear anything very different to what the Finnish Presidency heard when charged with forwarding the ‘negotiating box with figures’ to the last meeting of the European Council in December in 2019. There are sharp divisions between many of the net payers to the EU budget, and particularly the ‘Frugal Five’ Austria, Denmark, Germany, Netherlands and Sweden, and those Member States that are net recipients either because of agricultural or cohesion funds.

The Finnish Presidency’s ‘negotiating box with figures’

To assess where the MFF negotiations at the European Council meeting on 20 February will likely take off, the best place to start is therefore the Finnish Presidency’s ‘negotiating box’ proposal to the December European Council. This was the first version with definitive figures. The key figures are shown in the following table in constant 2018 prices in comparison with the current MFF, the Commission’s proposal and the European Parliament position.

Sources: Own calculations based on European Parliament Interim Report on the MFF Nov 2018 and Finnish Presidency Negotiating Box December 2019 The Just Transition Fund part of the European Green Deal not included
Note: The EDF accounts for 0.03% GNI, so the actual 1.00% ceiling for EU28 2014-2020 MFF is equivalent to 1.03% GNI including EDF.

The first thing to note is that the Presidency proposal for the overall size of the next MFF is exactly mid-way between the positions of the European Commission and the ‘Frugal Five’. Recall that the next MFF will include expenditure on the European Development Fund (EDF) intended to support the African, Caribbean and Pacific countries. This fund is currently financed outside the MFF. Thus the ‘political ceiling’ of 1.00% in terms of commitment appropriations as a share of EU GNI agreed as part of the current MFF should be increased to 1.03% for comparative purposes.

Much to the Commission’s dismay, it seems unlikely at this stage that the final landing zone will be very different to this. The European Parliament proposal for an MFF equivalent to 1.30% of GNI seems wildly unrealistic, which may store up trouble later when the Parliament is asked to give its consent.

It represents a sharp drop in the relative size of the MFF relative to GNI compared to the current programming period, where the equivalent percentage spending is 1.16% if it had been undertaken solely by the EU27. This takes account of the departure of the UK, the second largest net contributor to the EU budget. Its net contribution means that the actual MFF burden across the EU28 as a whole is reduced to 1.00% (or 1.03% when the EDF is included).

None of these figures take account of the proposed additional MFF spending of €7.5 billion earmarked for the Just Transition Fund and which the Commission has put forward as additional to its MFF proposal.

The Finnish Presidency ‘negotiating box’ also altered somewhat the composition of MFF spending. Most notably, despite the overall smaller size of the budget compared to the Commission proposal, it added €10 billion to CAP Pillar 2 commitment appropriations allocated to the European Agricultural Fund for Rural Development (EAFRD). This goes some way, though not completely, to redressing the unbalanced reduction between the two CAP Pillars in the Commission proposal.

In that proposal, the overall CAP budget in commitment appropriations is reduced by 15% compared to the equivalent 2014-2020 MFF excluding the UK. However, Pillar 1 was cut by just 11% and Pillar 2 by 27%.  Under the Presidency’s negotiating box, Pillar 2 commitments would be cut by just 17%. The €10 billion extra would still imply a small nominal cut in the CAP in the next MFF and thus would still not fully satisfy those Member States that call for maintaining the CAP budget at least in nominal terms. Of course, the amount is even further away from the European Parliament’s proposal that would maintain CAP spending at the same level in real terms.

While CAP spending is somewhat increased under the Finnish Presidency proposal, there is a further reduction in cohesion spending (although its share of spending in a smaller MFF increases) and a major reduction in what the Commission had proposed for other priorities (though expenditure on these would still increase both absolutely and as a share of the MFF).

Distribution of CAP envelopes

The negotiating box also leaves open a possible small change to the external convergence formula proposed by the Commission in its draft CAP Strategic Plans Regulation which will have implications for the distribution of Pillar 1 envelopes between Member States. The Commission had used a formula whereby all Member States with direct payments below 90% of the EU average would see a continuation of the process started in the period 2014-2020 and would close 50% of the existing gap to 90%. In the negotiating box, text is added in square brackets (indicating no agreement as yet) that all Member States would be guaranteed a minimum per hectare of €X, with X left to be determined.

How the additional €10 billion for Pillar 2 rural development envelopes would be allocated between Member States is also left unclear. I have previously noted that the Commission had already included Member State envelopes for EAFRD spending in its draft Strategic Plan Regulation, contrary to precedent when making the previous MFF proposal. Further, these envelopes were determined by making equi-proportionate reductions in Member State envelopes in the 2014-2020 period prior to the use of the flexibility of Member States to move funds between Pillars. This greater transparency by the Commission, while certainly welcome, has the perverse consequence of reducing President Michel’s room for manoeuvre to offer side-payments when negotiating the final deal with Member States. Council President von Rompuy made effective use of rural development side-payments to clinch a deal on the last MFF.

The equi-proportional principle might suggest that the additional €10 billion will also be distributed so that all Member States benefit equally. However, this additional funding if carried forward to the next stage of the negotiations could also give the European Council President an extra degree of freedom if additional rural development payments were used to buy off opposition from recalcitrant Member States to a final deal.

Conclusions

While Charles Michel seems to be pressing ahead in the hope of reaching agreement on the next MFF on February 20th or shortly thereafter, there is a real risk that the dividing lines between Member States are still too great to be bridged. This debate could then rumble on until the autumn to be resolved under the German Presidency. As final trilogues on the future CAP regulations between the Council and Parliament’s rapporteurs will not begin until the MFF figures are known, this could strengthen the hand of those calling for a two-year rather than one-year transition period to the new CAP.

Failure to agree the MFF in February or shortly thereafter could in any case have implications for the CAP transition regulation that will provide the legal basis to make payments to farmers in 2021 and that is currently under negotiation in the co-legislature. Although the basic principle that the transition regulation should not introduce new elements compared to the current rules is agreed, the intention is that the new MFF ceilings for the CAP would apply to payments to farmers in that year.

Given that the MFF has not yet been adopted, the Commission has, for want of anything better, inserted payment amounts in the draft Regulation that correspond to its own MFF proposal, a proposal that has already been rejected by the Parliament. It is an open question whether the Parliament will accept the Commission’s figures just for this one year as the basis for this Regulation, even with a proviso that the numbers may subsequently be increased if a larger CAP budget is eventually agreed as part of the next MFF outcome.

The Finnish Presidency negotiating box had already yielded to pressure from the ‘Friends of CAP’ and increased the Commission’s proposed CAP budget by a further €10 billion, linked to an overall size of budget that is exactly mid-way between the position of the ‘Frugal Five’ and the Commission. Whether the CAP budget can be further increased would seem to depend on further expanding the size of the MFF beyond 1.07% of EU27 GNI, something that seems unlikely at this point in time.

On the other hand, the negotiating box makes no provision for the initiatives contained in Commission President von der Leyen’s Political Guidelines when candidate for the position of President. Also, the Commission’s proposal for a European Green Deal has come on the table since the Finnish Presidency draft of the ‘negotiating box’ which was already prepared at least as early as 2 December 2019.

While there are still many questions about what the Green Deal implies, the Communication succeeded in highlighting the extent of the changes that need to take place and in energising the discussion around the financing of this transition. Whether this has been sufficient to reframe the conversation on the size on the EU budget and to persuade the ‘Frugal Five’ to look more favourably on supporting a larger budget will only become clear when the outcome of the discussions starting on 20 February are known.

This post was written by Alan Matthews.

Update 14 Feb 2020: The figures for Cohesion spending in the table above have been corrected.

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