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What’s next for the ‘Friends of Cohesion’ in EU budget talks?

Pressure is mounting on EU leaders to agree on the bloc’s next seven-year budget, a framework crucial for most economies in emerging Europe.

A special summit on February 20 and 21 dedicated to the Multiannual Financial Framework (MFF), the European Union’s budget for 2021-2027, failed to result in an agreement. “We have observed that we need more time,” European Council President Charles Michel told the press, with Germany’s chancellor Angela Merkel saying that the differences between the positions of EU member states were “simply too big.”

The two-day summit saw two, very different groups of countries emerge: Austria, Denmark, the Netherlands and Sweden – referred to as the frugal four – stressed that the contribution of EU countries to the next MFF should be one per cent of their GNI, while the so-called Friends of Cohesion Group, uniting the Central, Eastern and Southern European member states, the largest beneficiaries of EU cohesion funds, rejects cuts in the Common Agricultural Policy (CAP).

France and Germany, the two largest powers within the bloc since Brexit, subsequently slammed the Dutch prime minister Mark Rutte for being arrogant unwilling to make a compromise.

“If we really want to get things done in Europe, such as digitalisation, border protection, agriculture, cohesion, infrastructure, we cannot stop at a one per cent budget,” said Hungary’s prime minister Viktor Orbán, renewing calls for contributions from EU countries to be raised to 1.3 per cent of their respective GNI. At the same time, sources told Politico Europe that certain beneficiary countries would have been open to a compromise put forward by the EU Council’s president Chares Michel, whose revised proposal is around 1.07 per cent.

In their opposition to any potential cuts, eight countries – Bulgaria, the Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland and Romania – signed a declaration defending the CAP.

“Following the expansion of the EU agriculture’s market orientation, producers’ incomes are becoming more and more unstable. Keeping that in mind, it is important to maintain the economic balance via implementation of the direct subsidies system,” their agricultural ministers said in a statement on February 24.

As of now, there is no date for a new summit and pressure is growing on the EU to deliver in the coming months under Croatia’s presidency in the Council of the European Union since the new budget would also require technical preparations from both European institutions and member states.

What is at stake for Central and Eastern Europe?

The original proposal the EU Council president put forward on February 14 represented a budget of 1,095 trillion euros in commitments for the next seven years, including 323 billion euros as the total amount of cohesion funding and 329.3 billion euros for agricultural funding – more than 53 billion euros less than what the EU is spending on agriculture under the current MFF – as well as 7.5 billion euros under the Just Transition Fund, a newly created part of the programme to help secure one trillion euros of green investment over the next decade.

Much could be lost for the eleven EU economies of emerging Europe since all Central and Eastern European member states are net beneficiaries of the 2014-2020 MFF; that is, they receive more money than they pay in.

The stakes are particularly high for Hungary and Poland, given the widespread criticism they have faced over their alleged backtracking on the rule of law that led the previous European Commission to call for the conditioning of EU funds.

Prior to the landmark EU summit, four parties in the European Parliament – the European People’s Party, the Socialists, the Liberals and the Greens – stressed that paying EU funds under the next budgetary cycle should be tied to the rule of law, with the European Parliament threatening to veto the agreement if it does not reflect its expectations.

While Mr Michel has preserved the idea of making funds conditional, he has proposed a formula by which any sanctions against those abusing the rule of law would require a qualified majority of EU heads of state and government (15 states, representing 65 per cent of the EU’s population). This disappointing proposal was widely seen as a gesture towards Hungary and Poland.

For Poland, EU assistance in transitioning to a green economy also remains a key issue. When the Just Transition Fund was announced, the Polish government was the ultimate winner with a share of two billion euros, the largest share of the new funding instrument. In his latest proposal, however, Mr Michel cut this in half – most likely in a response to Poland’s refusal to commit to climate neutrality by 2050, leaving the country to lobby for more green funds. The Polish government is also seeking millions of euros for new gas infrastructure, claiming that the country’s CO2 emissions could be reduced by 60 per cent with improved natural gas facilities.

“New areas of spending, like research or migration, defence or innovation are important policy areas, but they cannot come at the expense of cohesion and the common agriculture policy,” the Polish prime minister Mateusz Morawiecki pointed out.

In Hungary, EU funds have become a politicised issue: while Hungarian opposition parties repeatedly say they are the lifeline of the country’s economy, the Hungarian government rushed to downplay the importance of EU money despite Mr Orbán actively leading lobbying efforts for more funding. The size of the country’s share will inevitably have a political impact.

Although emerging Europe has been the largest beneficiary of EU funds for some time, countries in the region cannot claim themselves the ultimate winner.

“The richer countries paint themselves as charitable souls and criticise eastern European voters for electing eurosceptic autocrats who pocket large EU cheques while railing against Brussels,” Clotilde Armand, a Romanian MEP and a member of the European Parliament’s budgetary committee explains.

In an opinion piece published in the Financial Times, she notes that we must look at the bigger picture.

“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 haemorrhaging young, bright workers whose education was paid for by taxpayers in their home countries,” she continues, noting that Hungary, Poland, the Czech Republic and Slovakia received EU funds roughly equivalent to two to four per cent of their GDP between 2010 and 2016, while the outflow of profits, property income and labour to Western Europe amounted to some 4-8 per cent of GDP during the same period.

The case for a new EU budget framework

“There is no question that the EU could do more with a bigger budget, but it is clear that it could achieve more with the current budget if the leaders were willing to reform European institutions,” László Andor, a former EU Commissioner for Employment, Social Affairs and Inclusion tells Emerging Europe, adding that the time has come for a debate on how to improve the process.

He suggests three changes.

“Firstly, it has to be made clear what sort of long-term programmes the MFF is aiming to implement. The so-called Europe 2020 strategy supported this goal during the last EU cycle. This was sidelined by Mr Juncker and Mrs von der Leyen has changed to a one-issue strategy for 2050 centered around carbon neutrality. This is not convincing enough in its current shape,” he says.

Secondly, he suggests that the MFF should be better connected to EU elections and the setting-up of the new European Commission, arguing that budgetary directives should be approved together with the election of the new EU Commission president and his/her programme.

Thirdly, he believes that direct financial sources – an EU tax to be more exact – would make a revolutionary change.

“As long as this does not happen, budget talks remain a kind of horse trading between EU heads of state and government,” Mr Andor says. “This makes the EU neither more effective nor more popular,” he adds.

“The next MFF will probably not be able to deliver on the EU’s objectives in innovation, climate neutrality and Europe’s global role, even though national leaders and citizens expect the EU to do more in these areas,” says Martha Pilati, a policy analyst at the Brussels-based European Policy Centre.

“With a disappointing MFF as the only remaining option, the focus should be on containing the damage and adopting a final deal quickly, since a delayed start of EU funding programmes in 2021 already looks inevitable.”