Summary of our analysis:

• Some positive steps – particularly an increased focus on climate-relevant spending.
• Commission needs to follow through on its rhetoric about a “budget focused on results”.
• And the Common Agricultural Policy proposals – focusing cuts on vital rural development and agri-environment spending rather than on less-targeted direct payments – are disappointing.

The Commission has set out its initial proposals for the next “Multi-Annual Financial Framework” – the planning period for the EU budget which sets the priorities for spending, and shares out EU money between programmes and Member States. We’ve been examining what’s at stake for the environment, sustainable development, and Europe’s future. Among the headlines about modernisation, solidarity, and strengthening respect for the rule of law, there are some positive signs for the environment and climate change. But there are also some backwards steps, particularly on rural development and agri-environment funding. Much will depend, though, on the detail of the Commission’s legislative proposals. And this is just the start of a long process of negotiation, both complicated and simplified by the UK’s departure.

Why does the MFF matter?

The EU budget is a very small proportion of the EU economy, and of EU public expenditure. It represents about 1% of GDP, and compares to national budgets representing around 49% of GDP. So using the EU budget to steer the EU economy as a whole can seem a little like trying to steer an oil tanker with a paddle.

However, in some of the member states with lower GDP per head, it represents both a much bigger slice of overall public expenditure, and a key instrument in delivering economic growth and modernisation of infrastructure. In Bulgaria, Hungary and Romania, for example, EU spending is around 5% of national wealth, and forms a really important element in the resources available for public investment.  This in turn means that the EU budget takes on significant political relevance in a number of Member States – as a symbol of European integration, but also as a totem of the negotiating effectiveness of their leaders, and (potentially) as a means of exercising patronage. The Commission’s proposal to link budget receipts to respect for the rule of law (see “what are the rules?” below) is therefore a powerful move.

And the EU budget can be a means of signalling what European leaders see as the EU’s priorities; and it can focus more effectively on long-term challenges than domestic budgets are sometimes able to. Set against this potential for clarity and impact, however, is the way that decisions on the EU budget are taken. This is – and rightly – an open and broad-based process, and involving the input of not just all of the Member States, but the European Parliament, with stakeholders having a wide range of options for exerting influence. Democracy and legitimacy of decision-making can get in the way of clarity of decision-making; and the news that many Europeans receive about the decision-making process will focus on the problems and the sticking-points, rather than on any shared sense of purpose. Things are complicated by the fact that the Treaty requires the EU budget to be in balance; and that Member States in Council decide on the revenue side of the equation – or “Own Resources” – by unanimity. It is thus possible for a Member State to block the adoption of the MFF indefinitely; which is why the heads of government at the level of the European Council have been involved in decisions, with European Council decisions usually setting out detailed requirements for spending programmes and the allocation of funds to Member States. The final stages are usually messy, and out of step with the earlier transparency of the process.

The UK’s departure might make things simpler – since it does away with both the UK rebate, and the complicated “rebates on the rebate” which applied to some of the other net contributor Member States. But it also changes the negotiating dynamic in the European Council; and it creates a funding gap, with the UK’s net €12-13 bn annual contribution no longer available. While some of the wealthier Member States have hinted at a conditional willingness to see an increase in the proportion of EU27 GNI represented by the budget (as compared to the proportion of EU28 GNI represented by the current budget) to make up for the UK’s departure, others, including the Netherlands and Sweden, have made clear they are not. 

The other thing getting in the way of clarity is that the EU is still mulling over its future direction, in a process leading up to an informal heads of government meeting in Sibiu (9 May 2019) during the Romanian Presidency. And while some individual leaders have been good at articulating a positive vision, finding consensus is much harder. The Commission is currently stuck with referring to the platitudes included in the Bratislava Declaration (September 2016) and the Rome Declaration (March 2017).

What are the big issues for discussion?

How much? On what?

The big question, of course, is how much is being spent, on which programmes. The overall limit on the budget is proposed at 1.08% of GNI, although with flexibility and crisis response mechanisms outside that limit. The Commission has suggested a simplification of the budget, combining a number of smaller programmes; and has proposed an increase in research spending, in spending on responding to migration and the European Border force (FRONTEX), and on the defence industry. (Disappointingly for lovers of transparent presentation, the Commission’s communication includes bar chart comparisons with the 2014-2020 period only for the programmes where it proposes an increase).  This comes at the expense of a (widely predicted) reduction in spending on the Common Agricultural Policy (CAP), and also on the cohesion budget. The increase in research expenditure, meanwhile, includes an extra €10 billion for innovation in food, agriculture, rural development and the bio-economy, which could provide a useful additional impetus behind EU ambition in this area. The CAP cuts seem to have been disappointingly focused on the more worthwhile rural development and agri-environment support, rather than on direct payments to farmers (see “Who does the money go to” below), which is clearly not consistent with the Commission’s overall message about better targeting and EU added value, or with the 2016 Cork 2.0 declaration’s focus on the rural environment, natural resources, and rural vitality.

For environmental stakeholders, there will also be interest in the Commission’s proposal to increase the proportion of the budget notionally spent on climate objectives from the current 20% (which is likely to be slightly undershot),  to 25%. This is welcome, although doesn’t go as far as some commentators had called for. And its impact will depend heavily on how strictly the target is measured. We have argued that there should be a stricter approach to climate tracking of expenditure, revisiting some of the elements of CAP funding (for example) currently regarded as making a significant contribution; and the European Court of Auditors has made similar points. And there should also be a clearer identification of whether the expenditure is delivering on mitigation, or on increased climate resilience.

Perhaps even more relevant for climate hopes, however, is how well the proposed new vehicle for catalysing private investment, InvestEU, operates, and how effectively it targets low carbon investment (and, just as importantly, avoids locked-in investments to fossil fuel infrastructure like natural gas). Ensuring that a careful process of climate mainstreaming also applies to the 75% of the budget not covered by the climate spending target is essential.

The rules that guide the big numbers – like climate mainstreaming requirements, and InvestEU – are vital to get right. As ever, the funding directly allocated to climate and environment objectives through the LIFE programme is a smaller part of the picture. However, it is welcome to see an increase in the budget here; and environmental stakeholders should be willing to ensure that this funding is effectively targeted, and that their projects come under pressure to maximise their positive environmental contribution, and their cobenefits for other EU priorities.

To achieve what?

The Commission communication talks about a better focus on EU added value, which is welcome. Implementing that ambition will be challenging, though. Focusing on areas (like research, but also environmental infrastructure and decarbonisation) where cooperation is a more effective means of delivering the sort of radical shift in the economy needed to live within the EU’s climate and sustainability ambitions would be one way to make EU added value a reality.

The Commission has also emphasised the importance of “A budget that performs”, and suggests that the MFF should set clearer objectives and focus on a smaller number of performance indicators. This should mean, for example, a much clearer focus on what climate mainstreaming and biodiversity mainstreaming actually deliver (in terms of reduced emissions, increased resilience, and better delivery of biodiversity targets). A focus on clearer targets is one crucial way of ensuring that the budget genuinely delivers on long-term environmental goals; this is an issue that environmental stakeholders should follow closely, and where they should ensure that the Commission follows through on its ambitions and that Council and the European Parliament supports greater clarity.

Who does the money go to?

A lot of the debate at the level of national leaders will focus on which country gets how much money – this horse-trading dismays the purists in the Commission, who know that it gets in the way of objectives like trying to maximise the impact of funding, and a focus on EU added value. Two elements in the Commission’s proposals are worth drawing attention to here: firstly, some additional criteria for allocating cohesion funding, and secondly a proposal to distribute CAP spending more equitably.

On cohesion funding, the Commission proposes allocating principally on the basis of relative GDP per head (as before), but adding some additional criteria – such as youth unemployment, the reception and integration of migrants, and climate change. Exactly what is meant by the climate change reference is unclear, as yet, but alongside the migrant integration criterion it looks as if it designed to put pressure on those member states which have been reluctant to make progress in decarbonising their economies. Together with the new “rule of law” requirements (see “What are the rules?” below), this could be difficult for some populist regimes to swallow.

On CAP, the Commission has (again) put forward the idea of a compulsory cap on the level of direct payments received by each farm. With the UK out of the negotiating picture, this has a real chance of becoming law. Although current UK agriculture Minister Michael Gove has claimed that being able to stop subsidies going to the wealthiest landowners is a benefit of the UK’s withdrawal from the EU, the reality is that the UK has always blocked this sort of change in the past, and been reluctant to take advantage of the current scope to focus payments on smaller farms.

The more any money saved from this can be channelled to rural development programmes, the better, since rural development spending can be more closely focused on environmental objectives. However, alongside this, it looks as if the Commission has disproportionately focused the reductions in the CAP budget on rural development spending, with commentator Alan Matthews calculating the cut at 25% for rural development, but only 11% for the less useful direct payments. This flies in the face of calls for a budget focused on results and the Commission’s stated ambition to push towards more sustainable and environmentally-friendly farming. These disproportionate cuts and the removal of ring fenced money (so called ‘greening’) for the environment in Pillar 1 (to be replaced by a ‘voluntary eco scheme’ which raises lots of questions) are worrying signals. Asmore detail of the proposals emerges, this is something that we expect green stakeholders and pro-environment member states will want to reverse. We will be looking in more detail at the CAP proposals over the weeks to come – watch this space.

How is it funded?

The other side of the traditional winners and losers analysis is, of course, where the money comes from. Removing the toxic issue of the UK rebate from the discussion should, at first sight, make everything easier; but on the other hand the absence of a single country that all other leaders could criticise may just make the challenge of positive domestic presentation of the results from the negotiations more difficult. The Commission has proposed phasing out the smaller rebates for some net contributors, which clearly makes sense. And in a significant innovation, it has proposed a couple of new elements in the Own Resources system, both with a positive environmental message.

The first is allocation to EU Own Resources of a chunk (20%) of the receipts from auctions of carbon allowances under the emissions trading system. Going even further might also make sense; but on the other hand, getting receipts from ETS auctions is one incentive member states have for agreeing more ambitious caps (so as to drive up the carbon price and increase auction revenues). 

Even more interesting is the suggestion for an element of Own Resource to be calculated on the basis of each Member State’s annual amount of non-recycled plastic packaging waste. This follows an idea trailed earlier by budget Commissioner Öttinger to include a tax on plastic packaging. What has emerged here isn’t quite the same thing, and making it work properly will be hugely challenging. (First thoughts are that the data for calculating it are not that robust, and Member States will have obvious incentives for manipulating them – watch out for an increase in cross-border shipments of plastics “intended for recycling”). But it could set a valuable signal of what European public opinion cares about, and wants to tax.

What are the rules?

Two points to highlight here: first, the headline-grabbing suggestion of a new mechanism to “protect the EU budget from generalised deficiencies as regards the rule of law in the Member States”. This looks to be intended to give the EU, and the majority in Council, greater leverage over populist regimes which have been making worrying steps to politicise their legal system. The treaty mechanism for dealing with such rule of law problems requires unanimity from all member states other than the one against whom action is proposed; but it just does not work as intended when there are more than one, mutually supporting, countries concerned. The new mechanism gets round that by using EU budget receipts as a means of persuasion, and giving a much simpler reversed majority approach to decision-making. Poland has already expressed concern.

The second point, less newsworthy but potentially important, is that the Commission proposes a “single rulebook” for programmes, to make it easier for beneficiaries to find their way around. This isn’t straightforward – beneficiaries often dislike the change that comes with attempts to simplify – but is an excellent objective. And it is one that environmental stakeholders need to follow closely, to ensure that climate and broader sustainability criteria are built in to the rulebook. Drawing inspiration from the current rules on major projects, for example, it would be possible to use the new rulebook to ensure that funding does not go to fossil fuel investments, transport infrastructure that does not fit with a long-term decarbonisation objective, or investments that damage biodiversity.

What next?

We will continue to pore through the supporting documentation the Commission has published; and there is also a helpfully clear timetable for the detailed legislative proposals, with publication rolled out from 29 May to 12 June. While there are some good steps forward on sustainability, there are also some worrying steps backwards, particularly on the CAP rural development budget.  Long-term environmental objectives provide an obvious hook for a refocused European vision, delivering what the public, and in particular younger voters, keep making clear they want to see; and the EU budget is an important vehicle for that message. The Commission has half-seized the opportunity. Member States and the European Parliament now need to take it further; and they will need green stakeholders’ help in doing that.