President Michel’s solution to the MFF conundrum

In my previous post I discussed the challenges facing European Council President Charles Michel as he took over responsibility from the Finnish Presidency to prepare the draft conclusions on the Multi-annual Financial Framework for the coming meeting of the European Council on 20 February next.

The Finnish Presidency proposal had been attacked on all sides as unsatisfactory. Yet, in that previous post, I speculated that Mr Michel was unlikely to hear anything very different to what the Finnish Presidency had heard when charged with forwarding the ‘negotiating box with figures’ to the December 2019 meeting of the European Council. Thus, I did not expect Michel’s draft conclusions to be dramatically different to the figures in the Finnish Presidency’s December proposal.

On the other hand, I noted that the new Commission’s flagship proposal for the European Green Deal had been published after the Finnish Presidency had prepared its final draft of the negotiating box, and I wondered if this might be sufficient to reframe the conversation between the ‘frugal Five’ and net recipients on the overall size of the EU budget.

It seems that I was correct in my first assumption and that the European Green Deal proposal has failed to move the dial where the MFF negotiations are concerned, based on a leaked draft of the European Council MFF conclusions uploaded by the Romanian multimedia website caleaeuropeana.ro (link here to the draft MFF conclusions). This is very closely based on the Finnish Presidency draft with the addition of €7.5 billion for the Just Transition Fund financed from Heading 3 (but not the CAP).

CAP figures in the Michel draft MFF conclusions

For readers of this blog, the main interest will be in what Michel has proposed for agricultural spending. The table below updates the similar table in the previous blog post by including an additional column to show Michel’s draft conclusions compared to the spending in the current MFF, the Commission’s proposal, the Finnish Presidency negotiating box last December, and the European Parliament’s position.

Sources: Table in previous post and Council of the European Union Document 5824/20

The key takeaways are the following:

  • There has been a very small upward adjustment in the overall size of the MFF (from 1.07% to 1.074% of EU27 GNI reflecting the addition of funding for the Just Transition Mechanism in Heading 3;
  • Despite the slightly larger overall MFF, the budget allocated to the CAP has been cut back compared to the Finnish Presidency proposal, although there is a slight increase (of around €5 billion over the coming seven years) compared to the Commission proposal in May last year;
  • The Finnish Presidency had increased the CAP budget as compared to the Commission proposal by adding a further €10 billion to rural development spending in Pillar 2 while maintaining Pillar 1 spending at the level proposed by the Commission. The Pillar 2 increase has been significantly cut back in the Michel proposal while there is now a small increase in the Pillar 1 budget, both compared to the Finnish proposal. The small increase in the overall CAP budget as compared to the Commission proposal is now divided equally (in absolute terms) between the two Pillars.
  • These small increases in both the EAGF and EAFRD funds in the Michel proposal will need to be distributed as national envelopes to Member States in the annexes to the CAP Strategic Plans Regulation. While the distribution key for EAGF envelopes will follow the external convergence rule agreed in the MFF conclusions, the distribution key for the additional EAFRD resources is not specified. This may give the Council President some leeway to offer ‘gifts’ if these are necessary to conclude a deal.
  • Unlike under the Commission proposal but similar to the Finnish Presidency proposal, agricultural spending would remain slightly greater than cohesion spending in the coming MFF.

There are further interesting differences in the fine print of the Michel proposal compared to the Finnish proposal, reflecting the political pressures on Michel in his confessionals with Member State leaders.

First, on external convergence of direct payments, the text maintains the further partial convergence that all Member States with direct payments per hectare below 90% of the EU average will close 50% of the gap between their current average direct payments level and 90% of the EU average in six equal steps starting in 2022.

However, the Finnish Presidency draft had held open the possibility that, as in the 2014-2020 MFF, there would be a guarantee of some minimum level of direct payments per eligible hectare by 2027. It was reported that this was a critical ‘red line’ for Poland but it has been removed in the Michel draft.

The other main change concerns flexibility between Pillars. Whereas in the Commission proposal and in the Finnish Presidency drafts, Member States would be able to shift up to 15% of their direct payments envelopes under Pillar 1 to rural development programmes in Pillar 2, this percentage has now been increased to 20%.

The converse arrangement whereby Member States could shift up to 15% of their EAFRD funds in Pillar 2 to direct payments in Pillar 1 has also been increased to 20%. Furthermore, in a gesture to those Member States that would no longer receive a guarantee of a minimum payment per eligible hectare by 2027, the Michel draft would allow this percentage to be increased up to 25% for Member States with direct payments per hectare below 90% of the EU average.

There is a certain rough justice in this proposal as I pointed out in this post. Those Member States that now complain most strongly that they are discriminated against due to receiving lower direct payments per hectare ignore the deal made at accession that the EU deliberately skewed the transfer of CAP funds towards Pillar 2. If these countries now seek to re-negotiate this deal by pushing for external convergence in Pillar 1, the quid pro quo would be some relative reduction in transfers received through Pillar 2. This is in effect what the Michel proposal achieves.

The third major change is that EU co-financing rates for rural development support have been increased from 70% to 75% in outermost and less developed regions. The rates for other regions and minimum and maximum rates are left unchanged.

In the case of the two other CAP measures covered in the draft MFF conclusions, the Michel paper confirms that capping would begin at €100,000 per beneficiary solely for the Basic Income Support for Sustainability and with Member States allowed, on a voluntary basis, to subtract all labour-related costs. Similarly, the figure to be transferred to the agricultural reserve is confirmed at €450 million  in current prices.

Proposed changes to own resources

While the overall size of the MFF and the distribution between spending priorities attract the most attention, the draft MFF conclusions also make proposals with respect to new resources. As the European Parliament, which must give its consent to the MFF, has insisted on the need for new resources, the Michel proposals are worth highlighting.

  • While the Finnish proposal had left open that Member States could retain a range of between 10-20% of traditional own resources (mainly customs duties) as collection costs, the Michel proposal fixes this at 12.5%.
  • While the Finnish proposal had left open the possibility that the VAT resource might be abolished, the Michel proposal comes down in favour of using the Commission’s refined alternative method from January 2019.
  • Two new own resources would be introduced. The first would be a national contribution calculated on the weight of non-recycled plastic packaging waste with a call rate of €0.80 per kg with a mechanism to avoid excessively regressive impact on national contributions.
  • The second would be any revenue generated by the European Union Emissions Trading System that exceeds the average annual revenue per Member State generated by allowances auctioned over the period 2016-2018. This limitation to additional revenues contrasts with the Finnish proposal of a uniform call rate of possibly [20%] on these revenues.
  • There is also a commitment in the Michel proposal to assess possible proposals for additional new own resources in the period 2021-2027. Such new own resources may include a digital tax, aviation levy, or a carbon border adjustment mechanism or a Financial Transaction Tax. These proposals have all been previously considered and rejected, so we can interpret this as a sop to the Parliament that its hopes for significant new own resources are still alive.
  • Finally, while the Finnish Presidency proposal had opted for an end to the current national rebates (corrections) from the end of 2020, the Michel proposal recognises that lump-sum corrections on a degressive basis will continue to be necessary in the period 2021-2027 to reduce the GNI-based contributions of Denmark, Germany, the Netherlands, Austria and Sweden.

European Parliament position

Getting agreement among Member States in the European Council is one thing; any MFF deal must also receive the consent of the Parliament. The Parliament has set out its position (reflected in the table above) in various resolutions. This position was reiterated in a letter from the leaders of the four main political groups (EPP, S&D, Renew Europe and the Greens) to the European Council President earlier this week.  

While the letter does not explicitly refer to the Parliament’s demand for an MFF budget equal to 1.3% of EU27 GNI, it does stress that the MFF must finance the new political agenda and the strategic headlines ambitions of the Union including the European Green Deal. It also states that the Parliament will not give its consent to the MFF without an agreement on the reform of the EU’s own resources system, including the introduction of a basket of new own resources from the very first day of the entry into force of the next MFF. Whether the proposed plastics waste tax and a share of ETS revenues will satisfy the Parliament remains to be seen.

Conclusions

While it may seem unlikely that the differences between Member States will be bridged at the European Council meeting on 20 February, it is clear that the movements of the budget pendulum are homing in on a potential landing ground. It is unlikely that any final agreement will be significantly different to what this leaked draft conclusions contains, although some marginal adjustments in response to national pressures are still possible.

The ‘friends of CAP’, who did relatively well under the Finnish Presidency proposal, have lost some ground in the past two months. Even though the Michel proposal is for a slightly bigger MFF and cohesion funding is kept at the same level as under the Finnish Presidency proposal, the CAP budget is reduced in favour of higher spending on other priorities.

At the same time, the ‘friends of CAP’ have succeeded in shifting the balance of CAP spending back in favour of Pillar 1 direct payments and away from Pillar 2 rural development funding. These two changes may not be unconnected.

This post was written by Alan Matthews

Update 15 Feb 2020: The post has been corrected to recognise that funding of €7.5 billion has been made available for the Just Transition Mechanism (Paragraph 96 in Heading 3). Also small corrections made to Cohesion and Other Priorities spending in the table.

Photo credit: Wikipedia Commons

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