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Will the MFF be agreed this week?

Heads of State and Government meet Thursday and Friday 7 and 8 February in the first European Council meeting of 2013. A second attempt to reach agreement on a Multi-annual Financing Framework (MFF) for the 2014-2020 period is on the agenda. Prime Ministers and European Ministers have been criss-crossing Europe for the past few weeks to drum up understanding and support for their various national positions, with Merkel and Hollande meeting in Paris today Wednesday on the day before the summit begins.
Herman van Rompuy, the Council President, is playing his cards very close to his chest. Unlike prior to the earlier failed attempt to reach agreement in November last year, a third draft of the Council conclusions (HvR-III) will not be formally circulated before the meeting (see this post for commentary on HvR-I and this post for commentary on HvR-II).
The talks at the European Council of 22-23 November were suspended and will now pick up from that point. This means that the compromise proposal from 22 November (HvR-II) constitutes the starting point for the discussions during the forthcoming European Council. Since the end of November President Van Rompuy has continued consulting EU leaders in order to further prepare the ground for a compromise.

Limited time at Council meeting

However, time for discussion at the meeting itself will be very compressed. Press reports indicate that only the Thursday will be devoted to the MFF issue, with the Council moving on to discuss opening trade talks with the US, the Arab uprisings and Mali on the Friday. But the Council participants only arrive at the Justus Lipsius building in Brussels at 3 pm. Most of the first hour is taken up with a formal exchange of views with the European Parliament President and the family photograph. So the Heads of State have 2 hours before their ‘working dinner’, 3 hours over dinner, and then a few hours into the early morning to finalise agreement on all issues (schedule here) . Really!!
With 27 member states around the table, it is clear that what takes place at the meeting in this time frame cannot be a negotiation. The only possible way that an agreement could be reached is that HvR presents a new take-it-or-leave it proposal representing his best estimate of the deal which tries to meet as many member state concerns as possible. [Update 6 Feb: Indeed, this is what HvR proposes in his letter of invitation to the meeting circulated yesterday]. He can rightly point out that no country can get everything it is looking for, that the sums of money in contention are tiny in relation both to the overall budget and to the much bigger problems that Europe is facing, and that there are huge political and economic costs to a further failure to agree.
This will put enormous pressure on any individual country, and particularly the smaller countries, to sign up to van Rompuy’s proposal lest it be branded as the country that throws the spanner in the works. But if it appears in the tour de table that will follow van Rompuy’s presentation of the proposal that perhaps three or four countries find that the deal does not meet their bottom lines, there could be safety in numbers and support for a deal could quickly disintegrate.
There are four key parameters under discussion (as well as a good number of more technical issues that do not make the headlines, see this earlier post for a more extended discussion):

    The overall size of the budget
    The composition of spending, and especially the shares going to cohesion and CAP spending versus under headings in the budget
    Changes to the financing instruments
    The issue of budget rebates

In my view, if the Council fails to agree on an MFF, it will be because of the rebate issue. This is the issue which has been making waves in the past few weeks. Although the HvR-II draft proposed to leave the UK rebate alone, new rebate claimants include the Danes, and, last week, the Italians, with Monti declaring on a visit to Berlin that it was unacceptable that Italy has emerged as the largest net contributor to the EU budget (this was a rather astounding claim for Monti to make in front of Merkel as the EU’s Financial Report 2011 clearly shows Germany as the largest net contributor with €9 billion while Italy contributed net €6 billion, with France also paying a little bit more). But let us examine these four issues in turn.
Overall size of the budget

The most obvious fault line concerns the overall size of the MFF budget (which is measured in commitment appropriations). Here the principal division is between those who support figures closer to the Commission’s original proposal (saying that the EU must contribute through its budget to stimulating ‘growth and employment’) and those who argue that the EU budget must share in the cutbacks being inflicted on public expenditure in national budgets (the ‘austerity’ group).
The Commission proposed a budget of €1,045bn (for EU-28) or €1,092bn including off-budget items (for the breakdown of these figures, see this post). Herman van Rompuy’s last draft proposal (HvR-II) proposed an overall total of €972bn (or €1,011bn including off-budget items), thus reducing the Commission’s proposal by €80bn overall. Press reports suggest that HvR’s final offer will be a further €20 billion reduction.
It is worth noting that, in 2011 prices, the HvR-II budget is already €20 bn smaller than the budget proposed for the 2007-2013 period. Thus the HvR-II proposal already meets the demand of the seven member states that signed a non-paper in May 2012 calling for a freeze on EU spending in the coming period.
The question is whether this will be sufficient to satisfy the UK which has been the strongest advocate of larger cuts in the Commission’s budget proposal. There are mixed views as to whether the UK’s hand has been strengthened or weakened by Cameron’s announcement of a UK referendum on a renegotiated terms of UK EU membership by the end of 2017. Some continental European leaders have remarked sourly that the UK cannot be a decisive influence on the budget if they are not going to be around to pay the bills in the second half of the period.
However, Budget Commissioner Lewandowski has pointed out that, even if there were a decision on UK withdrawal by the end of 2017 (and currently the odds must be against this happening), the process of withdrawal could take some years so that the prospect of a ‘Brexit’ should not influence the budget outcome. He has also speculated on how the final Council compromise might be ‘spun’ to present it as a victory for Cameron when facing the UK Parliament. One issue he highlights is that commitment appropriations are a maximum ceiling and that actual spending (payment appropriations) tends to fall below this ceiling, by around €70 bn in the current MFF period. Maybe this is a point we will hear emphasised in the subsequent reporting.
Composition of spending
Some member states will be willing to go along with a reduced budget provided their own favoured expenditure items are unscathed. So the second fault line concerns the composition of the budget expenditure. Here the division is between the ‘modernisers’ (those member states which want more emphasis on spending on research, competitiveness and infrastructure) vs the ‘traditionalists’ who want to maintain the spending shares going on the traditional ‘big ticket’ items such as cohesion and CAP.
It is unlikely that the CAP budget will be very different to that proposed in HvR-II so the bulk of the additional €20 bn reduction is likely to be borne by Heading 1, with some reduction in the competitiveness heading and some reduction in cohesion spending (the latter focused more on the funds available to poor regions in rich countries rather than the funds flowing to the new member states). Of course, this blog argues that further cuts should be made to the CAP budget and specifically to direct payments where the Commission’s strategy to try to legitimise these payments through linking them to environmental objectives is turning out to be an abject failure. But we don’t expect to be pleasantly surprised by HvR-III.
Changes to financing instruments
The Commission proposal contained some significant restructuring of the way the MFF would be financed. It proposed a new own resources system to include a financial transactions tax (FTT) and a new VAT resource. These new resources could fully replace the existing complex VAT-based own resource, which the Commission proposed to eliminate, and reduce the scale of the GNI-based resource.
On the new VAT resource, the HvR-II proposal kicked it down the road by calling for continued examination of the Commission proposal with only a commitment to introduce it to replace the existing VAT own resource by 1 January 2021.
On the FTT, the Council agreed on 22 January 2013 to proceed with the introduction of an FTT covering 11 member states through “enhanced cooperation”. The Commission will now make a proposal defining the substance of the enhanced cooperation, which will have to be adopted by unanimous agreement of the participating member states.
In its original proposal to introduce the FTT throughout the EU, the Commission proposed that a portion of the revenue could be used as an own resource for the EU budget, resulting in a corresponding reduction of the national GNI contributions of participating Member States.
There is nothing in the Commission regulation as agreed by Council and Parliament on how the funds in the more limited FTT should be used, so what will happen to the revenue from the FTT introduced in the ‘enhanced cooperation’ countries is not yet agreed.
Algirdas Semeta, the Commissioner responsible for Taxation and Customs Union, has said that it will be up to the 11 member states to discuss and agree the FTT they want to implement.
Alain Lamassoure, chair of the EP Budget Committee and one of the champions of using the FTT to fund the EU budget, has said that the next stage now is to allocate revenue from the tax to finance the EU budget. However, there is also strong pressure from development NGOs to earmark a share of the tax for development (France has already earmarked 10%).
The second draft European Council conclusions (HvR-II) is more preemptive. It included the following regarding the FTT introduced under enhanced cooperation.

As soon as a common FTT comes into operation, possibly under enhanced cooperation, it shall become the base for a new own resource for the EU budget. The new FTT-based own resource shall be levied in the amount of a share of two thirds of the amounts collected by Member States according to the minimum FTT rates set out in the relevant Council Directive. The GNI-based own resource of the participating Member States shall be reduced correspondingly. The provision will not impact on non-participating Member States and will not impact the calculation of the United Kingdom correction.

Assuming that this is agreed, the question then becomes whether the promise to introduce the new VAT resource before 2021 and the allocation of two-thirds of the proceeds of the FTT tax as an EU budget own resource in the 11 member states that introduce the tax will be sufficient to persuade the European Parliament that there is a significant move away from national financing to genuine own resource financing. Along with the overall size of the budget, this has been one of the flagship EP demands since the MFF discussions began.
The vexed issue of rebates

These three issues all look eminently solvable within the European Council; it is with respect to the last issue of rebates (corrections in EU terminology) that the EC could trip up. Rebates address the issue of fairness and burden-sharing between countries, and these issues are much more emotional (and public) than the more rarefied issues of the composition of expenditure and the way the budget is financed. Budget Commissioner Lewanowski has admitted that the rebates issue is likely to be the most difficult of all.
The Commission had originally proposed to replace the current complicated system of rebates with a simple system of lump sum reductions to the GNI-based contributions paid by the Member States, and it proposed specific lump sum rebates for the UK, Germany, Netherlands and Sweden. However, the HvR-II draft states that the existing UK correction mechanism will continue to apply.
Currently, four member states – Germany, Austria, Netherlands and Sweden – receive lump-sum temporary corrections which cap the contribution they make to paying for the UK rebate to 25% of the figure which would otherwise apply (incidentally, this means that France makes up the main part of what Britain saves in its net contribution due to the rebate). HvR-II follows the Commission in limiting the corrections to just Germany, Netherlands and Sweden.
However, at least two member states are unhappy with this last HvR-II proposal on corrections. Austria is complaining that it has been struck off the list of countries that receive a rebate on the UK rebate; it accepts that it will pay more into the budget next time, but refuses to be the only country that will lose its rebate. On the other hand, Denmark has insisted that it should be included in the ‘club’ of countries receiving a rebate on the UK rebate, and the Danish government has gone as far as including this money in its forward budget projections to 2020.
France and Italy have called for a single, transparent system that would allow any country meeting certain criteria to ask for compensation. This seems to reflect the option of a generalised correction mechanism which the Commission put forward on previous occasions. However, it is hardly likely that such radical ideas will be put on the table during the end-game of these negotiations.
Prospects for success
In the run-up to the summit, various European leaders have been downplaying the prospects for success and playing up the immovability of their bottom lines. However, this must be seen as standard negotiating tactics and probably tells us little of the true state of the end-game negotiations.
Success is by no means guaranteed, but the balance of probabilities must be that a deal is reached, on the grounds that the remaining differences are, really, of a second or third order of magnitude and that a second failure would be too costly to contemplate for the European project as a whole.
But European Council approval is only one third of the battle; any budget deal must also win the consent of the European Parliament, and the own resources decision must also be approved unanimously by the member states in accordance with their respective constitutional provisions.
The Parliament is unlikely to find the outcome to its liking and it has shown its willingness to throw shapes both in negotiating the 2007-2013 MFF and, more recently, in approving the 2013 annual budget. Commissioner Lewandowski has suggested (one would love to see the underlying statistical model!) that every billion euro cut from the budget means a loss of seven votes in the Parliament. It will fall to the Irish Presidency to persuade the Parliament to support the European Council outcome; my view is that this will prove the more difficult task.
Photo credit used under a Creative Commons licence

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