The Winners and Losers in the 2020 EU Budget

By: Allison Fedirka

It’s budget season in the European Union, and that means competing interests among the bloc’s different economies are on full display.

The conversations taking place now over the 2020 budget, which was finalized just this week and is expected to be approved next week, will shape the framework for the bloc’s next seven-year budget, talks over which are currently underway.

The key points of contention will be member contributions and spending priorities.

A final agreement on the 2021-27 budget will be drafted in the not-too-distant future, but the results of the 2020 budget discussions provide some insight over what lies in the EU’s financial future – namely, more fragmentation.

Finding Common Ground

With the global economy slowing down, the EU needs to show it has not only economic value but political value as well.

Its response to the 2008 financial crisis and multiple aftershocks – which resulted in high unemployment rates and high debt levels for many of the bloc’s members – stoked nationalist sentiments that clashed with the pro-EU stances of the parties that were in power at the time.

The main question was whether the EU did more harm than good for its member states.

As a result, the EU now faces a greater sense of urgency than it did in the past to reach consensus on key issues; it needs member states to buy in to agreements even if these agreements don’t address the root causes of the problems the members are facing.

But doing so is becoming increasingly difficult.

Just two days before the EU reached an agreement on the 2020 budget on Nov. 18, major players like Germany expressed doubt over whether a deal could be reached – a worrying prospect considering that, if a budget was not drafted by Nov. 19, the European Commission would have to go back to the drawing board.

EU budget commissioner Guenther Oettinger acknowledged that not having a budget in place by Jan. 1 would put Europe in a more “difficult economic and geopolitical situation.”

When similar impasses came up in the past, member states’ commitments to EU funding diminished, and that’s precisely the type of thing the EU wants to avoid as it tries to counter the idea that enforcement of EU rules stirs up discord and conflict within member states.

The core issue in the budget discussions is finding common ground on how to address the social and economic problems facing EU member states.

The sensitivity around this issue explains why the EC has struck a cautious tone when reviewing country compliance on fiscal rules.

It has been careful in its approach to Germany, merely suggesting that prosperous countries should invest more to try to stave off a serious downturn. It has also shown caution in dealing with other heavy-hitters like France, Italy and Spain, saying these countries are “at risk of non-compliance” over their public debt levels (France and Spain currently have debt-to-GDP ratios of nearly 100 percent, while Italy’s stands at 136 percent) but stopping short of issuing severe criticism, direct orders for change or threats of punitive measures.

This approach shows that the EC understands the political pressures in each country – the Catalan separatist movement in Spain, the yellow vest protests in France and the recurring political standoffs in Italy – that are behind some of the economic choices these countries have made that put them at risk of non-compliance.

Encouraging these countries to make tough cutbacks that could have consequences for the wider population could lead some to question whether being an EU member is worth it in the first place – which could put the EU’s own future at risk in the long run.

Thus, the EU has been relatively lax in its enforcement of fiscal rules – lest it be accused of forcing problematic policies on members against their will.

The 2021-27 budget talks, however, will force the bloc to address head on many of its core challenges.

The talks will hinge on the size of the EU budget for the next seven years, the contributions from each member state and how funds are spent.

With 27 members at the negotiating table, it’s sure to be a heated debate.

Net contributors (Europe’s larger economies like Germany) want to reduce EU spending for the “new member states” of Eastern Europe and make sure they too see some benefit from their contributions – by, for example, addressing problems related to migration or the stability of the eurozone.

Net beneficiaries (including Eastern European countries) want to maintain the status quo.

Whereas previous seven-year budgets prioritized efficiency and development for the bloc as a whole, the next long-term budget will reflect the divisions that have emerged as the political and economic needs of the member states have diverged.

For clues into what these divisions might be, look no further than the 2020 budget.

Winners and Losers

Before we examine the 2020 budget itself, we need to understand the broader geopolitical context within which it was negotiated. Since the 2008 financial crisis, the future of the European Union has repeatedly been questioned.

The crisis brought to the fore the monumental challenge of running a monetary union without having complete control over the economies of its members.

National interests were at times pitted against the bloc’s interests, and this ultimately sowed the seeds of disunion within the bloc.

Having to bail out Greece and usher Italy through its banking crises sparked doubts about the eurozone’s utility and that of the whole EU.

External issues – like the rise of the Islamic State, civil war in Syria and the influx of hundreds of thousands of migrants – compounded these problems, particularly for countries like Germany and France that have the largest financial burdens within the EU, whose economies are closely integrated with other members, and that were the main EU destinations for many migrants heading to Europe.

Indeed, as these issues arose, border security and free movement within the Schengen zone became another point of contention for member states.

As the 2020 budget, which will total 168.7 billion euros ($186 billion), was being negotiated, these issues came to the fore.

Information on individual members’ contributions isn’t yet available, but the changes in spending by category indirectly reveal who is calling the shots and what their priorities are.

In comparison to the 2019 budget, the 2020 budget provides more funding for youth employment, migration integration and support, security, growth and competitiveness.

This reflects the priorities of the EU’s largest contributors: France, Spain and Italy have struggled to reduce youth unemployment rates (which register at 19 percent, 32 percent and 27 percent respectively), and Germany and Italy have both faced internal political pressures resulting from the growing number of immigrants in their countries.

All of these members want to stimulate their sluggish economies by enhancing tech development and increasing competitiveness of their goods. (Germany narrowly avoided a technical recession, producing 0.1 percent growth in the third quarter after displaying negative growth in the second quarter.)

Areas that will likely see a decline in funding include infrastructure, agriculture (save for research) and social inclusion. Eastern European countries on the whole are less developed than Western European countries and would be particularly hard hit by declines in spending on infrastructure and social inclusion, which includes, among other things, programs for the economically vulnerable, unemployment, basic services, income inequality and education.

While all members have veto power over the budget, Eastern European countries don’t want to perpetually hold up the bill since, as has happened in the past, this would risk a drop in funding commitments and further exacerbate political differences.

Their needs diverge from those of larger, richer European countries that have an upper hand in appropriating funds and are using it to focus spending on their own concerns.

To what degree other spending categories will be affected won’t be known until the final documents are released.  

But as with all budgets, there will be winners and losers, and the EU’s main contributors are more likely to tip the scale in their favor now more than ever, given the current economic climate. 

Between the political shifts evident in the 2020 budget and the bleak economic outlook, tensions in EU budget talks will only intensify.

In addition to the economic uncertainty, other major problems loom on the horizon.

The question over how to fill the void left by the U.K.’s departure will have huge impacts on the next seven-year budget.

(The U.K.’s net contribution to the EU in 2018 totaled roughly $14 billion, or about 8 percent of the budget.)  

In addition, think tank Copenhagen Economics recently released a report warning that European banks might need an infusion of up to 400 billion euros to comply with new financial regulations.  

Not only is Europe entering a new period of economic uncertainty, but it’s doing so from a weaker starting point than it did 10 years ago.

The 2021-27 budget talks will be an indicator of the forces that are likely to drive a wedge in the EU for years to come.

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