How much progress has been made on agreeing the 2014-2020 MFF?

Discussions on the CAP regulations post-2013 and negotiations on a new multi-annual financial framework (MFF) for the period 2114-2020 are inextricably linked. As EU politicians and civil servants take to the beaches for their summer vacation this month, it is timely to review how far the negotiations on the MFF package have come and how close/far we are to/from an agreement. The official view (see the Council MFF website) is that we are on course to reach political agreement on the MFF package by the end of this year. This would allow legislative work to be finalised in sufficient time for the new MFF, new rules on own resources and new spending programmes to apply from 1 January 2014, but this may be more wishful thinking than a real forecast.
The MFF package is more than the MFF Regulation which decides the ceilings for the different expenditure chapters in the EU budget for the 2014-20 period. It also includes legislative acts on own resources as well as the 70 or so sector-specific legal acts on areas such as research, cohesion policy, agriculture and fisheries, environment, justice and home affairs and foreign affairs which are part of the package because the proposals define the conditions for eligibility and the criteria for the allocation of funds. Different decision-making processes apply to the different elements of the package.
The MFF Regulation is adopted by the Council by unanimity after having obtained the consent of the European Parliament (the European Parliament may approve or reject the Council’s position, but not adopt amendments). In addition, there are five legislative acts on own resources. The basic act is adopted by the Council by unanimity and is also subject to ratification by national parliaments; the implementing acts are adopted by the Council by qualified majority. The European Parliament has to give its consent on one implementing act and is consulted on all other acts (i.e. it gives its opinion but has no legal means to influence the outcome, apart from the blunderbuss option of refusing to forward its opinion). The sector-specific legal acts are subject to the ordinary legislative procedure (co-decision). This means that the Council and the European Parliament decide together, and that the Council decides by qualified majority.
As regards the political track of the negotiations, what we have to work on at the moment is the latest version of the Danish Presidency’s ‘negotiating box’ (which covers both expenditure and revenue) submitted on 19 June in preparation for the European Council meeting on 28-29 June, the conclusions of that European Council meeting, the MFF work programme of the Cyprus Presidency released on 2 July, and the Commission’s latest update of its MFF expenditure proposals submitted on 6 July 2012. All of these documents are found on the Documents page of the Council’s MFF website.
In addition, the European Parliament approved a resolution on 13 June restating its views on the MFF prior to the European Council meeting. It emphasised that the Parliament would not agree to a new long-term budget without political agreement on the reform of the own resources system including ending existing rebates and other correction mechanisms (the Parliament’s news service has a useful feature on the Parliament’s attitude to budget issues here).
The issues involved in the MFF are complex
The range of issues under discussion in the MFF negotiations is very wide, and very divergent views are expressed both by member states and the institutions. There is an excellent resume of the debate to date focusing particularly on cohesion policy in this euinside blog post, as well as a good review from a Spanish perspective in this brief from the Real Instituto Elcano but some of the key issues can be briefly summarised. [euinside is an online media based in Bulgaria focused on EU affairs, the Western Balkans, global politics and the place of Bulgaria and the Balkans on the global scene which has a consistently high standard of reporting on this issue].
Overall size of budget. The Commission proposed a financial framework with 1.05% of GNI in commitments translating into 1% in payments coming from the EU budget. A further 0.02% in potential expenditure outside the MFF and 0.04% in expenditure outside the budget would bring the total figure to 1.11%. (Note that MFF commitments represent a ceiling for the annual budget headings and actual commitment appropriations are often lower, except for cohesion spending where the MFF ceilings are carried over automatically into the annual budgets).
In absolute terms, the Commission proposed an MFF expenditure ceiling of €1,025 billion for the 2014-2020 period compared to €994 billion in the 2007-2013 period (all in constant 2011 prices). This represents a modest 3% increase in real terms over the seven years. However, if expenditure outside the MFF and outside the budget is included, the 2014-2020 total rises to €1,083 billion which is a 9% increase on the previous period (these figures are helpfully provided in the European Parliament Note on the CAP in the MFF 2014-2020).
Seven member states in a non-paper in May 2012 called for a freeze on EU spending in the coming period (this number was a reduction from the eight that signed a similar letter a year ago due to new governments in France and Italy which are reviewing their MFF negotiating strategy). However, the European Parliament and other member states have supported the Commission’s proposal for an increase in real terms, thus underlining one major source of division in the negotiations.
Introduction of new own resources. The Commission has proposed a new own resource system to include a financial transactions tax (FTT) and a new VAT resource. These new own resources would partially finance the EU budget and could fully replace the existing complex VAT-based own resource, which the Commission proposes to eliminate, and reduce the scale of the GNI-based resource. The result should be that the new own resources would finance around 40% of total EU expenditures and traditional own resources would account for close to 20% of the total. The GNI-based own resource would remain the single most important resource, financing about 40% of the budget. Other suggestions for new own resources, such as a charge related to air transport and a share of auctioning revenue derived from the bloc’s CO2 emissions trading scheme, were considered by the Commission but rejected.
There are also strongly diverging views on the issue of new own resources. France has taken the lead in supporting the Commission’s proposal for an FTT, placing Paris firmly on a collision course with Berlin. Germany favours simplification of the current system by eliminating the current VAT resource and, apart from the traditional own resources of tariffs and levies, relying entirely on the GNI-based resource. This is anathema to the European Parliament which sees these as ‘national contributions’ and has come to believe that earmarked taxes more truly represent the spirit of ‘own resources’.
Other issues. Other issues also divide the member states, such as the composition of EU expenditure. The Visegrad states want to maximise the share of cohesion funds as well as demanding equal treatment in CAP payments. France wants to keep the CAP as much as possible like it is while willing (at least under Sarkhozy) to see cohesion policy reduced. German demands revolve around no increase of German net payments but at the same time no reduction of cohesion funds and CAP payments. Britain wants to retain its rebate, the Nordic countries would like to see higher spending on research and development, and so on. And for each country how the outcome affects their ‘net balances’ remains of crucial importance.
Then there are more technical issues such as how to provide for flexibility in the EU budget (is placing funds outside the MFF the way to do this?) and how to deal with the accumulation of unused commitment appropriations. The negotiations are not helped by the worsening economic recession in Europe which gives rise to two contradictory reactions – those who see it as justifying the Commission’s proposal to raise EU spending as part of an ‘investment budget’ for Europe, and those who argue that the EU budget must also be subject to the same austerity measures affecting the budgets of member states.
The Commission’s modified MFF proposal
The Commission produced a ‘technical’ update to its MFF proposal in July which responded to two needs: the budgetary impact of Croatia’s accession to the EU on 1 July 2013, and the effects of the most recent economic data affecting member states’ allocations under structural funds.
On this basis, the revised proposal estimates an overall ceiling of €1,033 billion (1.08 of EU GNI) in commitments for the 2012-2014 period as opposed to €1,025 billion (1.05% of EU GNI) in the original proposal. In payments, the amended proposal amounts to € 988 billion (1.03% of EU GNI) as opposed to €972 billion originally (1,00% of EU GNI). The increase expressed in percentage of the EU’s GNI largely stems from a lower GNI estimate than the one of June last year, and, to a lesser extent, from the inclusion of Croatia in the multiannual financial framework.
The minutes of the July General Affairs Council meeting record that many ministers voiced concerns about the amended MFF proposals:

Some considered that the increase in the overall expenditure ceiling was inconsistent with the current economic crisis and member states’ fiscal consolidation efforts, and reiterated their calls for substantial cuts. Several ministers advocated a top-down approach, meaning that the overall expenditure ceiling would be agreed upon ahead of the discussions on the rest of the MFF package. A number of ministers felt that steps needed to be taken to address the issue of “RAL” (reste à liquider) unused commitments.
Other ministers stressed the investment character of the EU budget and highlighted the important contribution that cohesion policy makes in terms of growth and employment. They regretted that as a result of the update, the Commission proposed fewer financial resources for cohesion policy in the current 27 member states. This was inconsistent with the conclusions of the June European Council which recognised cohesion policy as a major instrument for supporting investments in growth-enhancing measures. In their view, the economic crisis requires “more”, not “less” cohesion.

European Parliament position

The Parliament approved a resolution on the next MFF tabled by 5 parliamentary groups on 13 June. The joint resolution was adopted by an overwhelming majority (541 votes in favour, 100 votes against and 36 abstentions). The resolution which favoured the Commission’s proposal for a financial transaction tax as well as a new EU VAT as new own resources also got a large support (486 +, 130 -, 33 abstentions). It was the first time the Parliament had officially backed the Commission proposal for own resources, especially the FTT (the Parliament had voted in favour of the Commission’s proposal for a common system of financial transactions tax in May, but this was separate from making it part of the Commission’s own resources).
Despite the Lisbon Treaty giving to the Council the dominant role in formulating the next MFF, the Parliament is determined to maximise the opportunities for influence it has been given, making an implicit threat to use its real powers of consent and co-decision to hold up the package if its opinion is ignored. According to its resolution, the Parliament:

Strongly demands that political positions agreed by the European Council be negotiated between Parliament and the Council, as represented by the General Affairs Council, before the Council formally submits its proposals with a view to obtaining Parliament’s consent on the MFF regulation pursuant to Article 312 TFEU; stresses that the negotiations on the legislative proposals relating to the multiannual programmes will be pursued under the ordinary legislative procedure and will be finalised once an agreement on their financial envelopes is reached; is determined to make full use, as appropriate, of its consent and ordinary legislative powers, as enshrined in the Treaty.

European Council

In the light of these issues and conflicting views, the first European Council discussion on the MFF in June seems to have a relatively anodyne affair, overshadowed by the negotiations on the growth and jobs agenda as well as the broader eurozone financial crisis. The discussions revolved around two questions posed by the Council President who invited leaders, first, to share their priorities for the MFF: in which areas they think the EU should invest in the first place. Second, the Council discussed how to get the best value for money, by having policies with the right structures, incentives and controls to guarantee the biggest impact on growth.
All agreed an MFF agreement is needed quickly, before the end of the year. However, there is little evidence that the Council has engaged with the nitty-gritty of the details, including actual numbers. The European Council will have further opportunities to discuss the MFF at its meeting in October and also in December. Even at that stage the consent of the European Parliament to both the MFF regulation and the basic own resources decision must still be obtained.
Presidency work programme

The intention of the Cyprus Presidency is to develop the negotiating box so as to reach an agreement by December 2012. The next step is an informal meeting of ministers for European affairs (General Affairs Council) on 30 August when the MFF will be the sole issue on the agenda. Given the continuing distraction of the ongoing eurozone crisis and the wide range of issues on the table, it is hard to see the Cypriots making a decisive breakthrough on the dossier in a four month period. Some of these issues (such as the UK rebate) go back for decades and are hardly likely to be resolved in the immediate future.
In the absence of a strong and determined Franco-German axis, how an agreement will actually be brokered is unclear. Indeed, with the expansion of the Union to 28 countries (with Croatia’s accession next July), it is unclear if even a united Franco-German axis would any longer be sufficient to push an agreement through (see this blog post from Robert Kaiser). As France’s new Socialist government clarifies its position the points of difference with Germany are becoming clearer. Some argue that Germany is in no hurry to conclude a deal, preferring to wait until after its next elections in October 2013 so as to avoid dragging yet another issue involving transfers to other EU member states into its volatile political debate.
What happens if no agreement?
In the event that no agreement is reached on the next MFF in time, the Inter-Institutional Agreement of 17 May 2006 provides that the payment ceiling for 2014 and thereafter will be the same as for 2013, after annual technical adjustment. Some member states might actually prefer that outcome if it maintained the status quo. CAP Pillar 1 payments based on the 2013 level and allocation would be rolled over into the following year.
However, as Peter Becker argued in a post last April,

.. many lines of European expenditure are dependent upon the successful negotiation of a new MFF. The multiannual programmes in cohesion policy, the European Agricultural Fund for Rural Development of the second pillar of CAP and the multiannual framework programme for research will all end on 31st December 2013. Without new legislation, the European Union is not allowed to continue the programmes let alone to launch new spending programmes. And without a new MFF there will be no legislation for new multiannual programmes.

[Incidentally, this Budget in Perspective blog on the next EU Multiannual Financial Framework sponsored by the German Federal Foreign Office is a rich source of information from a German perspective].
The failure to reach agreement on a new MFF thus would risk to bring about a collapse of the integration project itself. The stakes are high, but so are the obstacles to reaching agreement.
Photo credit Investment Insider

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