The Multiannual Financial Framework, the EU’s Seismometer

Michel Dévoluy
Professor emeritus in economics, holder of the chair Jean Monnet at the University of Strasbourg

The multiannual financial framework (MFF) translates the major strategic choices decided by the EU into figures. The MFF also reveals the EU’s progress towards political integration. In short, the MFF captures, like a seismograph, the tectonic movements of European construction.

In this respect, the MFF for the period 2021-2027 is exemplary. The introduction of the 750 billion euro recovery plan marks a leap forward.  But the blocking of this new MFF by Hungary and Poland is a reminder that the Union remains, in this field, of an intergovernmental nature.

Putting the MFF in Perspective

Originally, the European Economic Community (EEC) only had annual budgets, presented by the Commission and voted by the Council of Ministers and the EP. From 1980 onwards, the adoption of these budgets gave rise to numerous blockages and even rejections. The proper functioning of the EEC was hindered. Hence the idea of getting out of these repeated crises by inserting the annual budgets into an interinstitutional agreement, valid for several years, between the Commission, the Council of Ministers (the Council) and the EP. But make no mistake about it, this has not prevented member states from jealously keeping their hands on the purse strings.

The Medium-Term Financial Perspective (their original name) dates back to 1988. Scheduled for five years, they have covered a seven-year period since 2000. Known since the Treaty of Lisbon as the Multiannual Financial Framework, this tripartite agreement determines the overall annual ceilings for the major budget headings. The MFF “aims to ensure the coordinated development of Union expenditure within the limits of its own resources” (Article 312 TFEU). Since the Council adopts the MFF by unanimity of the Member States, its validation remains under the threat of a veto.

In practice, the broad lines of each MFF are drawn by the European Council by consensus. Inter-governmentalism plays a decisive role here. We are familiar with the long discussions during which each Member State plays its part, especially vis-à-vis its electorate. Thereafter, the Council merely implements the decisions taken by the Heads of State and Government.

Particular attention is paid to the Union’s own resources. Here again, the role of national governments is crucial since the categories of the Union’s own resources are decided, after consultation of the EP, by unanimity of the Council. The weapon of the veto is therefore still there. This threat is all the more powerful because if new own resources are established, or repealed, they must, in addition, to enter into force, be validated by all Member States in accordance with their respective constitutional rules (Article 311, TFEU). Since the list of own resources has remained stable until now, the latter provision has rarely been activated. But it is fully applicable for the 750 billion that the EU is about to raise on the markets. In short, each Member State can derail the major breakthrough represented by the recovery plan linked to the Covid crisis.

The CFP 2021-2027

The previous MFF (2014-2020), at 28, provided for a total amount of committed credits of 960 billion (starting price), spread over 7 years.  That’s 1% of the EU’s annual GDP. The five main headings of this MFF were, in descending order of importance: Smart and inclusive growth (46%); Sustainable growth and natural resources (38%), including the CAP; Europe in the world (7%); Administration (7%); Security and citizenship (2%).

The MFF 2021-2027 (at 27) does not depart from the rule of the media marathon to reach a consensus. After 4 days of negotiations, the European Council converged, on 21 July 2020, towards 1074 billion euros for the 7 years (at the beginning price). That is 1.1% of the EU’s GDP. With seven headings, the priorities differed from the previous MFF:

1. Single market, innovation and digital (14%) ;

2. Cohesion and values (35%) ;

3. Natural resources and environment (30%), including the CAP ;

4. Migration and border management (3%) ;

5. Security and defence (2%) ;

6. Neighbourhood and the World (9%) ;

7. Administration (7%).

 

Each of the titles is quite explicit about its general objective. It should be noted that the fight against global warming, which does not appear as such, can be found in several headings and is close to the 30% of the MFF. Another precision, the policy of “rebates” (initiated under the pressure of Margaret Thatcher with her famous “I want my money back”) remains topical. It allows certain countries, large net contributors to the budget, to reduce their contributions to the EU’s own resources. This concerns the so-called frugal countries (the Netherlands, Austria, Sweden, Denmark) and Germany, for a total of about €50bn.

The European Council having taken a decision, the tripartite process could then get under way. The EP tried to extract additional resources in order to better finance programmes considered as priorities. While they had hoped for at least 39 billion, an agreement with the Council on 10 November gave them 16 billion euros (out of 1074!). In particular, the EP was able to impose an additional 4 billion for research, 3.4 billion for health, 2.2 billion for Erasmus and 1.5 billion for the surveillance of external borders. The EP thus had a voice in the matter, certainly in homeopathic doses, but all the same. The CFP 2021-2027 therefore seemed to be well under way.

What’s New: the «Next Generation EU» Recovery Plan

The European Council of 21 July also validated the €750 billion recovery plan linked to the pandemic. That’s what’s new! This sum, obtained by joint indebtedness, will be distributed among the Member States. 390 billion will take the form of subsidies to the States most affected by the pandemic. Repayments will then be made from the EU budget. On the other hand, the remaining 360 billion will go through loans to the Member States, which will have to reimburse the sums received from the EU directly. In any case, the loans are foreseen with very long maturities.

The main beneficiaries of this plan are, in descending order, Italy, Spain, France, Poland, Germany, Greece, Romania, Portugal, the Czech Republic, Hungary, etc.

These exceptional contributions from the EU will be integrated into national recovery programmes which the European Commission will be responsible for evaluating. These programmes will then be validated by the Council by qualified majority. It should be recalled that the EU Court of Auditors and the EP carry out important control work in the implementation of EU expenditure.

Until now, the EU has had three types of resources: a percentage of each Member State’s GDP, a percentage of the VAT levied in each State and a miscellaneous item (customs duties collected at EU level, fines imposed by the EU and taxes paid by EU officials). These three resources represent respectively 75%, 15% and 10% of the total MFF. As you can see, the EU does not levy taxes on its citizens, except for its civil servants. From now on, this aspect will have to change. The union will be indebted, on behalf of the 27, to the tune of 750 billion euros. The Union will need new own resources to repay the €390 billion (the €360 billion is directly borne by the Member States).

A €6 billion tax on non-recyclable plastics is planned for 2021. It is moreover destined to be extinguished. In reality, it will be mainly intended to finance the 16 billion euro extension to the MFF that the EP has snatched from the MFF.

Other European taxes are planned for 2023: 1. resources will be added to the CO2 emissions trading scheme; 2. a carbon tax at the EU’s borders; 3. a tax on the digital giants (i.e. between €10 and €25 billion).

By 2026 are also envisaged: 1. a tax on financial transactions; 2. part of the tax on multinational companies should bring in around €15 billion; 3. fines related to infringements of competition law, which would accrue to the States, should remain in the European budget (around €11 billion).

But all these resources, including the authorisation of the 750 billion loan, still have to be validated, in accordance with the treaties, by all member countries, unanimously.

Respect for the Rule of Law, the Risks of Deadlock

The theme of respect for the rule of law was already present in the July 2020 negotiations on the MFF. It became a key issue with the agreement of 5 November between the EP and the Member States. From now on, the funds distributed to the States should be conditioned on the respect of the rule of law (freedom of justice, of the media, of the opposition and of citizens). Belonging to the EU and benefiting from its budget requires respect for the values of the Union as enshrined in the treaties. Another argument is that states, especially the “frugal” ones, do not want to release funds managed by states subject to corruption.  Legally, it will be up to the Council, on the basis of a proposal from the Commission, to suspend funding by qualified majority. This conditionality is not to everyone’s liking. Poland and Hungary are against it and have reiterated their opposition several times. But they know very well that they cannot do anything alone against a qualified majority (65% of the population and 55% of the Member States). So they have chosen another option. As long as this conditionality will not be lifted, each one, they insist, will put a veto by refusing to definitively validate the MFF 2021-2027 and by refusing the new EU own resources.

These two states are thus taking €1800 billion (the MFF and the recovery plan) hostage.  This is the sum that the Union urgently needs to function over the next seven years and to react to the Covid 19 crisis. But that is not all! The recovery plan paves the way towards fiscal federalism, and thus towards more integration. The unanimity rule, a founding pillar of today’s Europe, may well cost the EU’s finances, but above all its political ambitions.

CESI
Centro Studi sul Federalismo

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