As Covid-19 spreads, causing more countries to take counter-measures, Central and Southeast Europe is no exception. ING’s latest report said that collectively it is downgrading the 2020 GDP outlook on the back of virus fears.
(Peter Linke, Public domain)
With the so-called „Frugal Friends” — the Netherlands, Austria, Sweden and Denmark — wanting to limit the new 7-year budget to 1 per cent of gross national income (GNI) and Polish Prime Minister Mateusz Morawiecki demanding the EU budget for 2021-2027 stay pretty much like its 7-year predecessor at 1.3 per cent, the fault lines running through EU surfaced in late February.
European Council President Charles Michel’s 1.074 per cent compromise was, as expected, rejected by member states. It would have represented a whopping the EUR240bn gap between the EP’s demand for a budget of 1.3 per cent of EU GNI and the 1.07 per cent proposed by the previous Finnish presidency. Mr. Michel was criticized during the summit for aiming too high with a proposed budget of 1.074 per cent (EUR1.094 trillion). So, he then trimmed this to 1.069 per cent, which also failed to find consensus.
The Netherlands, Austria, Sweden and Denmark have the support of German Chancellor Angela Merkel. Germany, the EU’s biggest contributor, is prepared to accept a bit more, but 1.07 per cent is too high for Berlin.
Dutch Prime Minister Mark Rutte said he could not sign up to a budget that allocates one-third for „cohesion funds” to develop poorer regions and another third on support for farmers. For Mr. Rutte, who is facing elections next year it is a particularly important issue. France, now the number two contributor, wants to safeguard subsidies for farmers, as does Ireland.
“I wouldn’t call it a backlash,” Friedrich Heinemann, a professor at the ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung), said. “I think there is a readiness to continue the funding of the EU budget on its current generous levels. But net contributors want to send a clear signal that there are limits to the burden.”
A second key question is how to fill the EUR75bn funding gap created by Brexit. Britain was the second-biggest net contributor to the budget after Germany, at around GBP7.8bn (EUR9.2bn) per year. To help fill the Brexit gap, the Commission has also proposed scrapping rebates on budget contributions that many of the net payers now get. Germany, the Netherlands, Austria, Denmark and Sweden (the main net contributors), all have their own rebates and want to keep them. But at least 17 member states have argued that with the UK rebate gone, all rebates should go. The five countries’ rebates were in current prices worth the EUR6.4bn in 2020, according to European Commission figures — with Germany the biggest recipient at the EUR3.76bn. And this is where German Chancellor Angela Merkel drew the line, rejecting a proposal that would have left Germany paying billions more.
A third issue is cohesion and agriculture funds, which together they take up over 60 per cent of the budget. The Commission proposed the EUR41.3bn for cohesion funds in the 2021-2027 period, down from the EUR63.4bn for the current 2014-2020 period. The overall net cut in cohesion funds would be around 12 per cent, although some member states stand to lose up to 24 per cent of their EU subsidies. Mr. Michel’s proposal would adjust that by diverting money from richer to poorer regions. However, cohesion countries, especially from Central and Eastern Europe, where often over 85 per cent of public funds are financed from EU money, say the cuts are arbitrary. According to the Commission’s proposal, the Czech Republic and Hungary would get 24 per cent less for cohesion policy than in the 2014-20 period, Poland 23 per cent and Slovakia 22 per cent less.
Mr. Michel has also included the EUR7.5bn new money to fund the greening of the economy, and convinced some of the reluctant countries, like Poland, to sign up to the EU’s climate goals by helping their emissions-heavy regions adjust. Others see the Just Transition Fund as a way for net contributors to claw back some funding.
„Negotiating a budget deal is not a purely arithmetical exercise. Rather, it must be a translation of political priorities into a financial framework,” Morawiecki wrote in a recent opinion piece in the Financial Times. The prime minister said the current budget size, at 1.16 per cent of the EU’s GNI, should be a starting point for negotiations. As one of the „Friends of Cohesion”, Mr. Morawiecki opposes cuts to the Cohesion Funds — which support members whose GNI per inhabitant is less than 90 per cent of the EU average.
Mr. Morawiecki argued that given there is a significant relationship between gross contributions of EU member states and the benefits they get from the single market, with at least 50 cents in every euro invested in the cohesion countries flowing back to the net contributor nations through investment and tenders, the focus on net contributions is misleading. “This means that focusing on net balances (whether countries pay in more than they receive) when considering the EU budget is misleading, as it does not reflect the true benefits and costs of integration,” Mr. Morawiecki wrote.
He gave the example of the Visegrad Group (V4) countries, comprising the Czech Republic, Hungary, Poland and Slovakia, which in 2010-2016 received net funds from the EU of 1.5-4 per cent of their GDP. However, the outflow of dividends and property incomes from V4 to investors located in 15 countries of the so-called old EU was 4 per cent — 8 per cent of the V4 countries’ GDP in the same period. „The single market lifted trade barriers and opened access to central and eastern European markets,” Mr. Morawiecki wrote. „We need to communicate the benefits of economic integration better. Emphasizing net balances threatens to exacerbate anti-EU sentiment in some northern European member states,” he added. „We should also show how cohesion policy benefits net contributors to the budget. The implementation of the 2007 to 2013 cohesion policy in the Visegrad countries was worth the EUR96bn in increased exports, and direct capital benefits to the EU15, including the EUR23bn for the „frugal four” of Austria, Denmark, the Netherlands and Sweden,” Mr Morawiecki added. „Deep cuts to both the cohesion policy and the Common Agricultural Policy (CAP), for instance, cannot be justified. The burden of such cuts falls disproportionately on poorer countries in eastern Europe,” he wrote. „New areas of spending, like research or migration, defense or innovation are important policy areas, but they cannot be at the expense of cohesion and the common agriculture policy,” said Mr. Morawiecki.
“Poland has a point here,” Jorge Nunez, a researcher at the think tank CEPS in Brussels, said. “The market for EU and especially German, Austrian companies expanded a lot with the new member states. Companies bought local companies, etc. Of course, cheap skilled labor was also a benefit (but also caused tensions — Brexit). However, the EU also reduced the availability of skilled people in Poland with free movement, negative for Poland. And for those net contributors not wanting immigration, developing the new members is also a way to reduce further migration.”
“But that is not for me the key point,” Mr. Nunez said. “The key point is that the funds which benefit the wealthier member states may well have a bigger impact per EUR. Research and Innovation Funding benefits largely the net contributors and the return to the investment in innovation and research is higher than EUR in cohesion. The OECD seems to confirm this. The support to financial instruments is also very successfully used by the advanced old member states, and there again the attraction of other investors and the returns may well be higher than in new member states. I do not believe that a transfer of a treasury EUR through the EU budget (that has a redistributive element in any case) results in a financial loss of the net contributors, and the kind of impact this funding has also benefits net contributors. The EU budget has been under constant reforms to please the net contributors on strategy, financial control, mainstreaming, thematic concentration etc. Many of the EU standards and targets have been developed by the wealthier EU members, so it is normal they have supported those poorer to implement those.”
The V4 might share some similar interests in the budget negotiations, but it is not a uniform line. The Czech government, for example, is opposed to the notion that it will be the European Commission who would set priorities where to spend cohesion money. This is probably the most contrary position within the V4 group. Net contributors like Germany want to have much more influence and control over where and how money goes, especially if those “frugal” countries will have to fill in a hole in the budget left by the UK.
“The budget talks are often miscast as a showdown between whining CEE countries asking for more cash and frugal northerners insisting their generosity has limits,” said Clotilde Armand, a Romanian MEP, and a member of the budget committee. “The richer countries paint themselves as charitable souls and criticize eastern European voters for electing Eurosceptic autocrats who pocket large EU cheques while railing against Brussels. But look at the bigger picture and a different story unfolds. Much of the wealth in Europe flows from poorer countries to richer ones — not the other way around. Start with the brain drain. Europe’s periphery is hemorrhaging young, bright workers whose education was paid for by taxpayers in their home countries. Between 2009 and 2015, Romania lost half of its doctors. Every year, around 10 per cent of those that remain are actively recruited by human resources agencies seeking practitioners to treat greying western European countries,” he said.
Poland lost at least 7 per cent of its nurses and physicians in a decade. Surveys of Polish medical students show that more than half plan to leave after graduating. In Bulgaria that figure is 90 per cent. Croatia, which joined the EU in 2013, has already lost 5 per cent of its health practitioners.
A single doctor’s education costs the Romanian public coffers around the EUR100,000 and that does not appear in the EU budget negotiators’ spreadsheets. The annual drain of doctors alone represents more than a quarter of the funding that the EU sets aside each year to help Romania catch up with the rest of the club. The profits western European companies make in central and eastern Europe far outstrip the public funding that is transferred to the east. From 2010 and 2016, Hungary, Poland, Czech Republic and Slovakia received EU funds roughly equivalent to 2-4 per cent of their GDPs. But the outflow of profits and property incomes to the west from these countries over the same period ranges from 4-8 per cent of GDP.
“These days, French voters may be fretting about Polish plumbers, but eastern European voters are getting nervous about French chief executives. At home in Bucharest, I shop in a French-owned supermarket, and my phone operator and my water company are French. I pay my gas bill to a French multinational, through a French bank of course,” Mr. Armand says. “EU money is not charity. It is a quid pro quo. The idea that there are winners and losers in the EU budget game is simply wrong — we all benefit from the single market. This path is also politically dangerous. When eastern Europe joined the EU, an unspoken pact was concluded. The east removed trade barriers, allowing western companies to carve out a share of their economies. In exchange, the west promised to transfer EU funds eastward so the former communist bloc could build the infrastructure it desperately needed. The west made profits; the east made progress. The deal was mutually beneficial. But if the west starts reneging on those promises now, they risk tearing up the European social contract,” he added.
How is the money spent?
For the first time, there will be a new tool introduced into the EU budget which is designed to make sure EU money is spent correctly. The compromise put forward by Mr. Michel introduces a mechanism that focuses on protecting „the sound implementation of the EU budget and the financial interests of the union,” but steers clear of any semi-automatic sanctions, originally proposed by the Commission and backed by the Finnish EU presidency.
“Countries like Poland and Hungary look back at an impressive growth history. They should sooner or later accept that the times of the biggest need might be over,” Mr. Heinemann said. “The outcome will be close to the status quo but with some cuts in agriculture and cohesion,” he went on. “The ideal outcome would be a strong shift of money away from the transfer policies towards the new policies – migration, climate, digital economy, security, defense. The biggest problem is that national governments just look at the EU budget to finance election campaign presents to their own voters. They should more think about which European tasks should best be financed.”
“Finally, in my opinion the net contributors show a strong level of hypocrisy declaring the need for climate action, security and better border management and at the same time cutting all of these priorities, but protecting the CAP direct payments which fall to a much larger extent on the old and wealthier member states,” Mr. Nunez said.