EUROPEAN FINANCIAL FRAMEWORK
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The EU's budgetary system has developed over several decades in pace with the evolution of the Union itself. It has a number of distinct features and follows several principles. The three main parts of the EU's budgetary system are:
  1. the multiannual financial framework
  2. EU's long-term budget the EU's annual budget
  3. the EU's revenue - mostly own resources.

The multiannual financial framework (MFF) is the EU's long-term budget. It sets the limits for EU spending - as a whole and also for different areas of activity - over a period of at least five years. Recent MFFs usually covered seven years.

But initiated by the current infectious disease, which has shaken Europe and the world to its core, the EU put forward a proposal for a major recovery plan. Complementing national efforts, the EU budget is uniquely placed to power a fair socio-economic recovery, repair and revitalise the Single Market, to guarantee a level playing field, and support the urgent investments, in particular in the green and digital transitions, which hold the key to Europe's future prosperity and resilience. The EU will raise money by temporarily lifting the own resources ceiling to 2.00% of EU Gross National Income, allowing the Commission to use its strong credit rating to borrow €750 billion on the financial markets. This additional funding will be channelled through EU programmes and repaid over a long period of time throughout future EU budgets – not before 2028 and not after 2058.

To help do this in a fair and shared way, the Commission proposes a number of new own resources. In addition, in order to make funds available as soon as possible to respond to the most pressing needs, the Commission proposes to amend the current multiannual financial framework 2014-2020 to make an additional €11.5 billion in funding available already in 2020.

The money raised for 'Next Generation EU' will be invested across three pillars:

  1. Support to Member States with investments and reforms;
  2. Kick-starting the EU economy by incentivising private investments;
  3. Addressing the lessons of the crisis.

 

COMMENT on budgetary proposals  
Paul N. Goldschmidt Director, European Commission (ret.); Member of the Advisory Council of "Stand Up for Europe" wrote May 31st, 2020 (Copyright © 2020 Director European Commission (ret.), All rights reserved):

"The speech of Ursula von der Leyen who presented the Commission's budgetary proposals to the European Parliament for the period 2021-27 struck the right cord both in tone and in content. As in rugby, it is now necessary to "convert the try" and to pull the Union out of the rut in which it is stuck in order to implement a new major step towards European integration.

The crucial idea consists in the willful creation of a financial "transfer" mechanism which – in the light of the significant amounts involved – considerably expands the current limited budgetary framework, overlooks the old disputes over "I want my money back" and ends, at least for the future, the taboo of "debt mutualization". The adoption of this unprecedented framework is still far from assured, but it is crucially important that the modalities of its implementation should avoid, at all costs, compromises that would inhibit the future broadening of the scope to which the new tools available can be put to use.

In the discussion that follows which is somewhat technical – for which I apologize to my non-specialist readers – I draw attention to several notions that seem to me essential if the EU is to take full advantage of these bold proposals. In so doing the EU will demonstrate conclusively, the added value of a common approach to address the challenges that the sanitary crisis has revealed but which clearly extend to many other sectors where a similar logic is applicable (defence, currency, taxes, environment, etc.).

Overall framework:

The proposals call for integrating a massive new recovery plan, aimed at the EU 27's battered economies, within the "multiannual financial perspectives2021-27". Its size reaches € 1,850 billion of which €750 billion, financed through borrowings, are specifically dedicated to the recovery effort.

One should point out that the stupendous cumulative amount, in excess of € 6 trillion, announced by the EU, the EMS, the EIB, the Member States and also the ECB is somewhat deceptive insofar as a part of the debt securities to be issued by the former will end up on the balance sheet of the latter, so that one should avoid double counting. In its commendable efforts to keep interest rates low and avoid impairing corporations' ability to raise equity, the ECB has chosen to ignore the long term fallout of this debt explosion ; it comes on the back of already record levels of public and private debt and could lead, in due course, to rekindling inflation and higher rates of interest. These problems have been deliberately side-lined in light of the developing economic crisis and its potential dramatic consequences in both social and political terms; these unprecedented recovery measures, for which the authorities do not appear to receive the necessary credit, are in fact amply justified.

The borrower:

For maximum transparency and in order to achieve broad acceptance by investors, it is highly preferable that the borrower be the "European Union" itself. The Union is a "legal entity" (which was not the case in the 1990's when it was necessary to resort to the "European Community") which allows to dispense with the creation of a special purpose borrowing vehicle which, in turn, would have needed an EU budget guarantee to ensure its credibility. Indeed the treaty itself requires the EU budget to be in equilibrium which, by construction, confers on its obligations the "joint and several guarantee" of the Member States, justifying the EU's coveted AAA rating.

  The budget:

Every budget is made up of "resources and expenditures". Whether it concerns the Union's plurennial financial perspectives or the annual operating budgets, the treaty imposes that they are always balanced, meaning that any deficit must be covered by the MS. Another important distinction is to be made between the "authorized operating budget" proposed by the Commission and approved (before each 7 year cycle and annually) by the Council (requiring unanimity) and the EP (requiring a simple majority) and the "execution of the budget" which accounts for the actual execution and legal commitments entered; reallocation of funds between budget lines is authorized (Bourlanges procedure); under-execution of the budget leads to carrying forward all legal commitments entered into and the cancellation of the balance which is returned to the MS.

a. Expenditures

They are divided in a series of Chapters which, in turn, are subdivided in "budgetary lines", each of which is accompanied by a description of its objectives and of the modalities/conditionality of access. It is perfectly possible, for ease of supervision, to consider the recovery plan as a specific Chapter of the budget, divided into a series of programs, each represented by a specific budget line with among their specifications, whether disbursements will be in the form of grants or loans and under what conditions.

With regards to loans, it is important to understand that the role of the EU in deploying this new instrument is fundamentally different than the one it played when its function was to act as a mere intermediary between the market and third party beneficiaries: in that situation, the terms of the issue on the market and those of the loan to the beneficiary were simply back to back with the risk taken by the EU limited to the solvency of the borrower, transferring to the beneficiary the full benefits of the EU's more favourable market acceptance.

This template is not applicable to the € 250 billion of borrowings proposed which must remain entirely separate from the many independent loans they will be financing. Indeed, without this specification, unacceptable inequalities would appear between terms granted to MS, based simply on market fluctuations during the 7 year disbursement period. It should be up to the budget to assume the terms and conditions of its borrowings independently of their affectation (see further down under Rates and early Redemption for ways to mitigate this risk). It behoves the Commission to offer identical conditions to MS subject only to the maturity of the loan granted and of other "objective" criteria (as detailed in the commentary of each budget line).

b. Resources

They can be divided into three categories: 1) MS direct contributions, 2) Own resources (taxes and revenues accruing directly to the EU) and – in the future – 3) The proceeds of borrowings on the financial markets. Their total should equate the expenditures budgeted in the corresponding year; among these categories, the first serves as the balancing item: the greater the EU's own resources and the proceeds of its borrowings, the lower will be the calls on MS contributions.

With regard to the EU's own resources, Ursula von der Leyen mentioned the need to broaden their existing base, suggesting a number of possibilities which have already been examined in the past but so far to no avail. It would appear that her aim is to raise sufficient funds to cover all or part of the EU's future "debt service" needs.

The issuance of bonds is more a complex question and deserves closer scrutiny.

 
Amount: The proposal suggests a maximum amount of € 750 billion in tranches (not necessarily equal) over the full period of the financial perspectives.
Maturities: The proposal suggests issues of maturities covering the full spectrum of the yield curve up to 30 years with repayments between 2027 and 2058.

Several financial commentators, among whom George Soros, have suggested that the EU should contemplate the issuance of perpetual bonds (whose service is limited to the interest coupon). While this idea seems particularly appealing in a low interest rate environment, I believe that this is a "false good idea" for the following reasons: first, there is no indication of the capacity of the market to absorb large quantities of such securities; second, the interest rate premium demanded by investors might be substantial for market rather than solvency risks; finally, as soon as interest rates rise - even in a few years' time – the bonds will trade at a corresponding steep discount, giving a poor image of the issuer and inhibiting the EU's capacity to issue new tranches on acceptable terms.

Interest rates and early Redemption: In order to guarantee the EU's access to financial markets on optimal terms and reduce over time the impact of interest rate fluctuations, I will repeat a previous suggestion made in my April 18tharticle ("The EU is the correct level to implement the recovery program after Covid19"). Starting from the observation that long term interest rates for the strongest Eurozone Members hover around 0% and that these same Members guarantee – through the treaty – the securities to be issued by the EU, the latter should be able to borrow on similar terms, i.e. around 0%.

Nevertheless, in order to ensure the stability of their value – independently of interest rate fluctuations - Member States would undertake to accept these securities - at their face value - in payment of any fiscal debt owed by its owner to the national government. In turn, direct contributions of MS to the EU budget could be discharged by presenting the securities that they may have acquired through this process.

These particular characteristics confer on the securities a constant value close to par, as they can be considered a "cash equivalent", regardless of their stated maturity. Thus, no coupon would be attached to any present or future EU bonds, an issue price above or below par being able to account for fluctuations of money market rates (as is the case for US T-bills). This instrument would be particularly attractive to banks as a safe substitute for deposits with the ECB on which they currently pay interest for the privilege.

Securities received from the MS by the budget would be cancelled (reducing the EU's outstanding debt). The "maximum authorized level" (initially € 750 billion) of outstanding debt would be determined by the European Council and the PE, at each renewal of the financial perspectives (as is the case from time to time by the US Congress). As long as the outstanding debt remained below the ceiling, the EU could continue to borrow, reducing its need to call on MS direct contributions.

Such a system would entail setting up a "debt management office" either within the Budget Directorate General of the Commission or independently thereof; the financial regulations of the EU would need to be amended accordingly.

Conclusions:

As soon as a sufficient EU securities were outstanding, a deep and liquid secondary market would develop because, even if stated maturities differed, all securities would be de facto "fungible", because useable at any time at their face value.

 
This characteristic would provide the ECB with a powerful tool to regulate the monetary market by buying or selling securities to provide or withdraw liquidity from the market, in the same way as the FED does in the USA. In addition the financial market would finally have access to an undisputed "safe asset" which could be used as benchmark, the lack of which currently penalizes severely the development of the € denominated financial market.

This development would, in addition, contribute powerfully to the sustainability of the Single Currency, compensating MS for their loss of autonomous control over their exchange rate (as is the case for the 50 U.S. federated States). It should also lead to an accelerated extension of the Eurozone to all 27 MS and reinforce the competitivity of the € versus the USD in both international financial and commercial markets. The EU would considerably increase its weight on the geopolitical stage at a time when American and Chinese domination are increasingly marginalizing the EU's position.

Though it appears prudent to limit the new budgetary proposals of the Commission to the funding of the recovery program, in order not to provoke unnecessarily the opposition of the so-called "frugal" countries and of all "national-populist" parties, nothing should prevent, over time to expand the system the financing of the entire EU budget. Creating greater flexibility and solidarity by focusing more on shared rather competing interests of its citizens would contribute to reducing, through the budgetary transfer mechanism, the trend towards increasing inequalities that threaten the cohesion of the EU. This could turn out to be the trigger leading to the creation of a truly European "demos" which remains to date an impossible dream.

Implementing the Commission's proposal would establish the basis for the EU's own "sovereign debt", relying on the wealth of all its 27 Members. The capacity to finance in the long run the entire budget by relying exclusively on its "own resources" and "debt issuance" seems considerable: indeed if one compares the US Federal debt (exceeding at present $ 22.8 trillion) to that of the EU (currently negligible) and if one considers that the debt of the U.S. federated States as equivalent to the total sovereign debts of the MS, one can easily conclude that their remains a vast amount of untapped resources; its mobilization over the next 30 years and beyond could allow the EU to close the gap in sectors such as digital sciences, AI, investment in infrastructures, health, environment, defense, etc.

These are the reasons why particular attention should be given to the long term implications of the agreements resulting from the forthcoming negotiations and refuse any compromise that might become an obstacle to the Union's further integration.

The solidarity implicit to the implementation of such a program is precisely the reason that it will prove highly controversial; it would, indeed, be a major blow to the hopes of all nationalist and populist parties who are brazenly capitalizing on the pandemic to extoll the virtues of a largely outdated and inefficient concept of "national sovereignty". It is important to understand that, underlying the arguments criticizing the Commission's proposals, lurks a visceral resistance of many MS (and of national-populists parties in particular) to see any transfers of powers to "Brussels" to the detriment of their respective prerogatives. The adoption of the Commission's proposals is an inescapable precondition to deal successfully with the oncoming crisis; at the same time it should, accelerate the need for Treaty change conferring added purpose to the forthcoming "Conference on the future of Europe".

Now is the occasion and obligation– for each Member State – to decide on its own future within or outside of the European project."

 

  DEALS ON EU BUDGET

On 17 November 2016, the Council and European Parliament reached agreement on a 2017 EU budget which strongly reflects the EU's main policy priorities. Total commitments are set at €157.88 billion and payments at €134.49 billion.  "The strength of the 2017 EU budget lies in its focus on priority measures such as addressing migration, including by tackling its root causes, and encouraging investment as a way to help stimulate growth and create jobs. This maximises the budget's impact to the benefit of EU taxpayers, European citizens and companies. And it respects member states' continued efforts to consolidate their public finance", said Ivan Lesay, state secretary for finance of Slovakia and President of the Council.  More money for migration and security 

Agreed commitments of almost €6 billion mean that around 11.3% more money will be available for tackling the migration crisis and reinforcing security than in 2016. The money will be used to help member states in the resettlement of refugees, the creation of reception centres, the support for integration measures and the returns of those who have no right to stay. It will also help to enhance border protection, crime prevention, counter terrorism activities and protect critical infrastructure. 

Investing in growth and jobs 

Commitments of €21.3 billion were agreed to boost economic growth and create new jobs under sub-heading 1a (competitiveness for growth and jobs). This is an increase of around 12% compared to 2016. This part of the budget covers instruments such as Erasmus + which increases by 19% to €2.1 billion and the European fund for strategic investments which raises by 25% to €2.7 billion. The 2017 EU budget also includes €500.00 million in commitments for the youth employment initiative to help young people to find a job. Further €500.00 million were agreed for supporting milk and other livestock farmers with additional support measures announced in July. 

With a view to matching member states' consolidation efforts at national level the Council and the Parliament reminded all EU institutions to complete the 5% staff reduction by 2017 as agreed in 2013.   

   Headings 2017 EU budget (in mln €)
    Commitments Payments
  1. Smart and inclusive growth 74,898 56,522
  - 1a. Competitiveness for growth and jobs 21,312 19,321
  - 1b. Economic, social and territorial cohesion 53,587 37,201
  2. Sustainable growth 58,584 54,914
  3. Security and citizenship 4,284 3,787
  4. Global Europe 10,187 9,483
  5. Administration 9,395 9,395
  Special instruments 534 390
  TOTAL 157,883 134,490

The 2017 EU budget is expected to be formally adopted by the Council on 29 November and the Parliament on 1 December.

The attached table gives an overview, comparing the new MFF 2014-2020 to the previous one
8 February 2013, a deal was reached on the new EU budget. While the focus has been on the overall level of expenditure (which,frankly, was never going to change either upwards or downwards by more than a few percent, in a decision-taking procedure in which every single Member State has a veto), there are some significant changes in the content of spending. Some key points on the deal are:

CAP spending will fall by 17.5% compared to the last MFF, but as it is in continual steady deline, it will have fallen by over 20% by the last year of the seven year period (2020), which will leave CAP spending at about 27% of the overall budget  - a long way below the 75% it was in the 1970s! 
Spending on the growth items (heading 1a, which includes research & innovation, connecting Europe, Erasmus student exchanges, etc)  rises by 37.3% compared to the previous MFF, again on a steady trend so that by the final year it will have risen by  over 40%. Granted, this is not as much as the Commission had initially proposed, but compared to the current situation, it is a significant improvement.

The discrepancy between commitments and payments (the latter are always lower, as commitments can be paid out over several years, for example for big infrastructure projects) is larger than usual, but this is compensated for by flexibility in transferring unused payments from one year to the next, so that there will be adequate payment appropriations to cater for legal commitment.

The final deal is seen as victory for those that wanted an austerity-driven budget. With the focus on spending moderation, it reflects strained times. However many warn that the reduced budget could result in an EU with fewer resources at its disposal, limiting its ability to deliver better results for EU citizens. The Summit is declared by EU circles to be a victory for co-operation and consensus since none of the 27 member countries did use their veto. For most countries their national interests were met and as a result leaders could return to their home countries able to claim a victory.
Article 310 of the Lisbon Treaty calls for a balanced budget.

Commentaries by institutions of the EU:

European Council President, European Council President, Herman Van Rompuy, emphasised in his statement that the budget is ‘future oriented’. Van Rompuy insists it is a budget ‘driven by pressing concerns’. The proposed budget, 3% less than the current EU budget, focuses on balanced growth, the encouragement of new investment and a youth employment programme. The €6 billion allocated for generating youth employment is ‘a powerful incentive’, Van Rompuy says, and has been met with enthusiasm all over the EU. Yet investment in education and regional infrastructure that could help youth employment are among the areas where cuts will be made. Here is the full text of the speech 18-02-2013 from Van Rompuy to the EP.

European Commission President, José Manuel Barosso, praised the budget and said it was a “catalyst for growth” but sees the deal reached as a “basis for negotiations with
the Parliament”. He did argue though that “The levels agreed today by the heads of state and government are below what the Commission considers desirable, given the challenge of promoting growth and jobs across the EU in the coming years”. Mr Barroso express the desire for “maximum flexibility” that could allow the EU to move spending from one year to another for example. David Cameron, UK Prime Minister, said that the EU budget is a “good deal for Britain” and added that Britain could be “proud we’ve cut the seven-year credit card limit for the first time ever”. “It shows that, working with our allies, it is possible to take real steps towards reform for the European Union” Mr Cameron asserted.

Martin Schulz, European Parliament President, has openly criticised the budget saying, “the EU budget is for investment”, therefore savings made there are savings made in the wrong place. “The EU budget is money not for Brussels but for ordinary European citizens”. The budget deficit concerns him as there are “more and more tasks and less and less money”. He emphatically declared, “I will not sign a deficit budget, Europe like the US a few weeks ago, is heading for a fiscal cliff”. Other MEPs have also expressed concern. Joseph Daul (EPP), Hannes Swoboda (S&D), Guy Verhofstadt ( ALDE), Rebecca Harms and Daniel Cohn-Bendit (Greens/EFA) attacked the agreed EU budget, saying it may lead to a structural deficit. “Large gaps between payments and commitments will only store up trouble for the future and not solve existing problems,” the leaders of the four European Parliament political groups stated.

Joseph Daul, leader of the right-wing European Peoples Party, added that he would vote no to the deal because it is a bad deal for Europeans and said, “To those I can already hear declaring us irresponsible; I say to them simply that what is irresponsible is providing payment appropriations that are lower than commitment appropriations”. The EPP believe this budget will lead to deficit and therefore they will remain firm on this point and as such not endorse it.

Brief commentaries by HoSG's:

Chancellor Merkel declared that “the effort was worth it” and ensured that the budget would deliver predictability and solidarity, which in troubled times is what the people want to hear after all. “It gives us the ability to plan for important projects and with a view to growth and employment, that's decisive because the security to plan for investors is the precondition for us to even reach growth and employment again”. The Dutch PM Mark Rutte said that “The Netherlands can be content with this result, we kept our rebate”.

The French media are clearly not so enamoured. Le Figaro ran the headlineCameron et Merkel imposent l’austérité à Hollande’. Francois Hollande, the French President admitted it was not his dream budget, calling it a ‘good compromise’ but the best he could get under the circumstances. An Anglo-German co-operation for once making France the outsider in negotiations and making Hollande somewhat unpopular with his own voters who were expecting a better EU stimulus package. With regards to the all important CAP, Mr Hollande said that “The relative share of agricultural spending in the European budget will decrease, but I made sure to preserve the funding destined for our farmers”. Italy who had previously sided with France in their desire to curtail cuts seemed content with the budget. Prime Minister Mario Monti said it was, “satisfying” and in terms of Italy’s contributions proved to represent a “very significant improvement”.

The Czechs had previously stated that the reduced budget benefited two countries and helped their economies stay afloat at the cost of the rest of the EU. Prime Minister Necas’ threat of veto at the summit meant that although the funds they receive from the EU through cohesion policy will decrease, the Czech Republic will not see as severe cuts as anticipated. The Polish Prime Minister Donald Tusk stated that the day the budget deal was reached was “the happiest day of my life” and added that “Poland is the biggest beneficiary of the EU”.

Although Spain under the new budget will receive slightly less money, Prime Minister Rajoy was pleased by the deal, which will see Spanish workers benefit from a new fund to create jobs for young workers.

Brief commentaries by other institutions:

The OECD is concerned and stated that the ‘economic crisis should not be used as an excuse to cut flows to poor countries’. The EU spokesman for Oxfam stated “The consensus reached could have potentially negative consequences on the ability to achieve global anti-poverty goals, especially in Africa, It comes short of what’s needed to tackle pressing global issues, from sustainable development and increasing disasters, to food security and social justice. It will undoubtedly also impact negatively on the ambitions of Europe as a global player”.


Euro commissioner for Budget
29 March 2011, H.E. Mr. Janusz Lewandowski, Eurocommissioner for Budget, lectured on 'Ambition vs. Realism: the European Financial Framework post 2013'. The long-range budget 2014_2020 will be dealt with in June next. ´Young´ EU member states wants to let grow expenditures. That strikes against countries, which hand over more net amount than they will receive (Germany, France, The Netherlands). But Germany and France are being tenacious of the enormous agriculture budget. All blocks are in the all-round defense position. Dragging a rebate on short term is difficult.
European expenditures 2012 are higher than expected. The same happened with the budget 2011. That delivered a severe fight between European Parliament, that wanted to spend 6% more, and the UK and the Netherlands, who both wants to freeze the budget.

Finally there was a compromise of 2,9%. There is an increase in European expenditure. How much exactly is hard to say. The reason is simple. This budget is part of the long range budget 2007_2013. Projects that started in 2007 or 2008, are now making progress and bills are coming in. One cannot promise projects to countries and when they are in effect, suddenly say: sorry, we don´t pay.
" I make the logic behind the increase in a country that is a net payer to the EU understandable. Explaining it is not a choice of ´Brussels´, but a juridicial obligation, committed in 2007 and that we have to fulfil".

40% is for agriculture. The distribution is tied up every 7 years. One country wants this and another something else. In June negotations will start again. In the mean time we all can make some cuts. There is a letter to all European institutions (50.000 employees) to inform that we have to deliver an example and permit a rise of 1% maximum. That means less expenditure than last year, for inflation is higher.

We are cutting on travelling, meetings. Not well functioning programs will be deducted. The total budget for administration costs are only 6%. 8 à 9 miljard from out total 140 miljard. That is a small part.

Member states are constantly asking for more European cooperation: immigration, energy, milieu, financial supervision, a diplomatic service. At the same time it is wanted that we will do that with less people and less money. The European government is even as big as the one of Paris. It cannot become smaller. Many cities are expending 20 till 25% on administration. The EU 6%.

The EU has to cut in the remaining part, but the 94% that are expenditures, which are to decide by the member-states. That is not 'Brussels', that are the member-states by themselves. Brussel only take care that their decisions will be executed.

The Financial Programming 2007 - 2013
|
commitment appropriations
2011
2012
2013
sustainable growth
63.97466.964
69.957
preservation and management of natural resources
60.33860.810
61.289
citizenship, freedom, security and justice
1.8892.105
2.376
EU as a global player
8.4308.997
9.595
administration
8.3348.670
9.095

The projects of the EU are of enormous value. Everywhere budgets are cut. Youth unemployment is at higher rate than ever. We invest: these projects create jobs, keep the economy on track, promote growth. This is not about money-transfers to poor countries. We are building bridges, co-financing country-development. We are filling a gap, just when governments are focussing on austerity. However, it will become a hot debate on the project of Europe and Europe's money, small growth, debt and 27 member-states with legal obligations. We should not allow to have trouble. We learned lessons from the past and outlooks for 2015 - 2020 are very optimistic: a common platform for Europe in the future!