Money matters as member states prepare budget battle

Date: 03/03/05

Talking about money is never easy and even ministers with the strongest 'communautaire' convictions will fight tooth and nail to ensure the best deal for their national balance sheet. So when the EU's budget ministers got wind last summer of the European Commission's blueprint for the next budget round - for 2007-13 - they knew they were in for an intense battle.

This particular battle is made even more difficult than previous rounds, chiefly by enlargement of the Union, where gross domestic product (GDP) in most of the new members is below 60% of the EU average. As a result, in its seven-year budget, the Commission has hiked regional funds to €336 billion, worrying 'net contributors' to the budget who put in more than they receive.

At the same time only 49% of this will be directed to the new member states, which do not see why they should not derive the same economic benefits from EU membership that previous poorer new entrants, such as Ireland and Spain, have done.

But the draft budget also means that those regions of the 'old' EU that received funds to help them compete with Europe's richer areas will no longer qualify, which has seen previous beneficiaries Spain and Greece fighting to retain their hefty funds.

Secondly, the more economically liberal Commission led by José Manuel Barroso, responding to sluggish European growth and the impending economic challenge of staving off our Asian competitors, wants a significant chunk of the budget piled into research and innovation.

This would see the budget for transport, energy and telecom networks tripled after 2006 and more than doubled for research, competitiveness and entrepreneurship.

That would be a significant achievement and one that most ministers would probably support on paper. But when you have six of the Union's richest members clamouring for a cap on national contributions, a battle over regional aid and an untouchable agricultural budget that already swallows up almost half of the budget, it doesn't take a rocket scientist to work out that the research budget might be slashed.

Rumours continue to circulate that the Commission is preparing to make a revised proposal that would see national contributions for total payments capped at 1.05% of the EU's gross national income (GNI). The original Commission spending plans would see 1.14% of the Union's GNI - 929bn euro- devoted to the EU's budget. The EU executive denies that it will work from anything except its original proposal but it is at the mercy of what national governments are prepared to spend.

The Netherlands, which held the last EU presidency, decided to use a 'building blocks' approach, asking each member state what were its priorities and how much they would cost under each of the budget headings. Under this procedure it came to a range of between €722bn and €1,060bn while the Commission's proposal for commitments comes in towards the top end with €1,025bn.

The six richest nations, Germany, France, the UK, Sweden, the Netherlands and Austria, are still holding out for a cap on contributions of 1% of GNI, or around €815bn, and they have various solutions to where the budget should be cut.

Budget Commissioner Dalia Grybauskaite herself has admitted that there is mounting pressure for talks to reopen the Common Agricultural Policy (CAP) funds, which were frozen by France and Germany in 2002. Solutions range from controversial ideas such as 'co-financing', whereby the biggest recipients of the agricultural subsidies cover some of the costs, to including Romania and Bulgaria in the ceiling. Whatever way, France is unlikely to agree.

Another is the Commission's idea of replacing the UK's €4.6bn average annual rebate in favour of a 'generalised corrective mechanism' (GCM), under which all net contributors to the EU budget receive a partial refund if they give more than 0.35% of their GNI. London is naturally hostile to the idea, which it claims would still mean it was one of the biggest net contributors to the budget.

More likely, the Commission will fall back on cosmetic solutions that will 'save' a few billion euro and not hurt anyone's bottom line, such as abandoning plans to include the European Development and Solidarity Funds in the budget. Ministers will then be faced with the unenviable task of haggling over where further to penny-pinch while avoiding a national veto.

The fireworks are set to begin later in March when national governments begin to discuss the specifics, and the European Parliament begins to put forward its views. Grybauskaite said last week that there were increased chances of a deal by the June summit, which would be in the interests of all those wishing to avoid a compromise found under the UK presidency which begins in July.

Preview of the negotiations on the EU's next multi-annual budgetary framework, the Financial Perspectives 2007-2013, to begin in March 2005 when national governments begin to discuss the specifics, and the European Parliament begins to put forward its views.