Janusz Lewandowski: The Brexit Budget Gap Is Not the Problem
Brexit is a huge impediment in Multi-annual Financial Framework negotiations but also an opportunity: it opens the window of opportunity to reform the income side of the EU budget – says Janusz Lewandowski in an interview with Konrad Niklewicz.
KONRAD NIKLEWICZ: How advanced is the process of negotiating the next Multi-annual Financial Framework?
JANUSZ LEWANDOWSKI: As we speak, nothing indicates we can reach the publicly declared goal of agreeing on the Multi-annual Financial Framework 2021 – 2027 before the European Parliament Elections in May 2019. That should not come as a surprise, at least not for me. I have never been an optimist, my own experiences, related to Multi-annual Financial Frameworks, suggested such a feat would be almost impossible. I remember all too well that it took us two and a half years to agree on the current MFF (2014 – 2020).
This time, the European Commission presented its project of the MFF in the middle of 2018. One would need a genuinely exceptional political will to reach a common position on the level of Member States’ governments, and receive the European Parliament’s consent in the scope of nine months. Only nine months! European Parliament goodwill (it adopted its initial position very quickly, on 14 November) and Budget Commissioner Günther Oettinger’s pleas were just not enough. How quickly negotiations progress
at present depends on the Austrian Presidency of the EU.
The Austrian Presidency has managed thus far to map the negotiating positions of different governments, allowing it to prepare the “discrepancy report”. The formal negotiations have already started, albeit only on technical matters. By the time the December 2018 European Summit convenes, we should all know if the governments feel ready to go to the next level – political negotiations. I personally doubt they will. Having said that, I understand the willingness to reach a deal before the European elections.
The Multi-annual Financial Framework, the EU budget in short, is the vision of the Union expressed in real money, not in empty words.
The Multi-annual Financial Framework, the EU budget in short, is the vision
of the Union expressed in real money, not in empty words. We can only guess what the next European Parliament and the following Council composition will look like. The rise of Euroscepticism, adverse to the very notion of the Union budget, is unfortunately probable.
Are the countries of the region, Poland in the first place, well prepared for the upcoming MFF negotiations?
Allow me to focus on Poland, by far the largest country in the CEE region and so far the biggest recipient of EU funds. The Law and Justice government has only weak cards in the EU budget game. It is confronted not only with the European institutions in Brussels but also with the many Member States. In the first place, it is in conflict with Germany, the biggest net-payer to the budget.
For the last three years, the Law and Justice government has been peddling anti-German propaganda and demanding reparations for World War II. Poland’s current position in the negotiations is precisely the opposite of what it was the last time. I remember well the negotiations we led in 2011 – 2013. I remember the adverse conditions, the deep economic crisis in the background and the repeated calls for “austerity”. And yet a miracle happened: for the first time in history the Multi-annual Financial Framework shrank (compared to the previous one), but the allocation for Poland, the MFF main beneficiary, grew.
Poland received 120 billion euro in cohesion funds and direct payments to farmers. This was a record-high amount, never to be repeated. It would not have been possible without PM Donald Tusk’s government credibility. The position the Law and Justice government has maneuvered itself into means painful losses for Poland.
To what extent will Brexit complicate negotiations? Once the U.K. leaves the EU, its current net contribution to the budget will be no more. How problematic is it from the Central European perspective? Do governments and EU institutions have any idea how to fill this several-billion euro gap?
Contrary to what the Polish government says, Poland’s worsened position in the draft EU budget (as proposed by the European Commission) is not related to Brexit and the subsequent termination of the British contribution. Many European governments, including the one in Berlin, have declared that they were ready to contribute more. Based on the willingness of the governments to pay the note, the European Commission proposed an increased,
I repeat, increased the amount of the Multi-annual Financial Framework, both in commitments and in payments. The European Parliament was even more ambitious. So, looking from our perspective, the “Brexit budget gap” is not the problem. The problem is the Law and Justice and Fidesz governments’ lack of credibility! It is precisely because of the policies of Orbán and Kaczyński that we will probably face the transfer of some funds from our region (the CEE) to the South.
Of course, one might always ask if the European Commission proposal will stand. Governments and the European Parliament can change the substance of MFF.
The European Commission’s proposal is well structured, it addresses the new competencies and obligations transferred to the European level, related to the migration policy, protection of the EU external borders and to the defense union (in statu nascendi). Fortunately for our region, the long-discussed budgetary instruments reserved for the Eurozone members (55 billion euros) are within the EU budget.
The Law and Justice government has only weak cards in the EU budget game. It is confronted not only with Brussels but also with the many Member States. In the first place, it is in conflict with Germany.
I purposely said “fortunately”: should the Eurozone instruments be outside the Multi-annual Financial Framework, we would face irrefutable proof of “a two speed Europe”. A disaster for us, if you ask.
It should come as no surprise that the Member States governments’ initial reaction to the European Commission proposal confirmed the existence of two major “clubs” in the EU, friends of the “better spending” (which translates into cutting the budget) and supporters of an increased budget. Net payers, with the notable exception of France and Germany, are in favor of reducing overall spending to 1% GNI (Gross National Income).
The European Commission proposed 1.11% of the GNI. The Commission proposal includes the European Development Fund. In the past, the EDF was not considered part of the MFF. If we extract, however, the EDF, the Commission proposal stands at 1.08% GNI.
The European Commission wants the MFF to finance new activities. The overall increase in the EU budget, if any, will not be substantial. Does this mean the financial framework will guarantee less money in traditional areas, such as cohesion policy and agriculture?
Indeed, the European Commission proposed financing the new policies at the expense of the old ones, especially the Cohesion Policy and Common Agriculture Policy. For the last 30 years, the two have been dominating the subsequent Multi-annual Financial Frameworks. The Cohesion Fund might be the most affected: the European Commission proposed shrinking it by 46% compared to the 2014-2020 budget.
Looking from our perspective, the “Brexit budget gap” is not the problem. The problem is the Law and Justice and Fidesz governments’ lack of credibility!
Simple comparisons might be misleading, however, as the structure of the draft budget 2021-27 is different. The Social Fund, for example, currently part of the Cohesion Policy, is to be moved to a new heading: “Investing in People, Social Cohesion and Values”.
There is a new element in the European Commission proposal. For the very first time in the EU’s history, the national allocations are drafted as well (in the past, the Commission drafted them at a later stage). By doing so, the European Commission clearly indicated who would be the winner and loser of the new Multi-annual Financial Framework.
The differences in net positions are going to be huge, hence, finding common ground will be difficult. Our region is in a particularly dangerous situation. The European Commission sees the Czech Republic, Hungary, Estonia and Malta losing 24% of their allocations. Poland’s and Slovakia’s cut is at 23%.
What countries will benefit?
Mostly Spain, Italy, Greece, Romania and Bulgaria. There is without a doubt some justification for such a change: these countries bear the costs of the immigration crisis. The suggested differences between national allocations are so high, however, that they may render an agreement impossible to reach.
As far as the Common Agriculture Policy is concerned, one should note that the direct payments are not levelled ambitiously enough; the cuts are concentrated within the second pillar of the CAP: European Agricultural Fund for Rural Development (EAFRD).
The reduction of the allocation for the EAFRD is steep in the case of Poland: 26%. Moreover, the European Commission proposed limiting the so-called “modulation”, allowing a transfer of the funds from the second pillar to the first pillar. Poland used to be allowed to move 25% of the funds from the second pillar to the first pillar.
The Commission now proposes 15%. Even more importantly, the cohesion funds criteria also changed, in a way that favors Southern Europe. In the European Commission proposal, the GDP criterion weighs less; youth unemployment, the quality of education, the costs of fighting the climate change and the costs of accepting immigrants – they all gained in importance. This explains the sudden change of national allocations in the Cohesion Policy envelope.
Locked in a bitter dispute with Poland and Hungary, the European Commission has been raising the idea of connecting the EU budget, especially the cohesion funds, to rule of law. Is this threat real?
Unfortunately, yes. The European Commission was serious about tying the rule of law to EU budget payments. We need to look at this issue from the perspective of Brussels. The case of Poland and Hungary has clearly demonstrated that the European Union is institutionally not prepared for a situation in which a member state deliberately breaks the fundamental rules.
Article 7 of the Treaty turned out to be weak as a tool to sanction countries. The European Commission, therefore, decided to introduce a financial sanction in the draft budget proposal for the 2021-27 period. The mechanism was added to the already existing macroeconomic conditionality.
Our region is in a particularly dangerous situation. The European Commission sees the Czech Republic, Hungary, Estonia and Malta losing 24% of their allocations. Poland’s and Slovakia’s cut is at 23%.
It allows for suspending payments in case the rules are breached. And I am sorry to say that Poland and Hungary inspired this new kind of conditionality. There is, however, a silver lining: at the request of the European Parliament, measures were taken so that sanctions should not hurt the end-beneficiaries. Once the rule of law conditionality kicks in, the EU funds will be suspended, but the Member State in question will have to pay the program beneficiaries from its own, national budget.
Will the anticipated Brexit serve as an opportunity to get rid of the notorious system of budgetary “rebates”? Margaret Thatcher’s idea has been effectively poisoning each and every budget negotiation as of 1985.
Brexit is also a huge impediment in MFF negotiations but also an opportunity: it opens a window of opportunity to reform the income side of the EU budget. London’s categorical refusal to surrender the rebate practically froze any discussion on the EU budget own resources system.
It is exactly the same as what it was in the 1980s. Years passed, their own resources remained unchanged, becoming more and more opaque and less and less justifiable for its citizens. The British rebate was a sort of “exception to the exception” people usually detest. The very existence of the British rebate pushed other countries to follow anti-European logic known as “juste retour” – a just return. It is as if the EU was a limited liability partnership, where all the partners expect to gain only the monetary profit, nothing else.
Even more importantly, the cohesion funds criteria also changed, in a way that favors Southern Europe. In the European Commission proposal, the GDP criterion weighs less.
As you said, the rebate created tensions among the Member States each time they negotiated the MFF (or annual budgets). I remember the last time we tried to get rid of the British rebate in 2011 and introduce a financial transaction tax and simplified VAT rules. Our efforts were torpedoed by Prime Minister David Cameron, under the excuse of defending the “juste retour”. By the way, that was the beginning of PM Cameron’s preparations for the wretched referendum…
Now, with the United Kingdom leaving us, the time has come to reform our own resources system, including the rebates. The European Commission proposal is going in this direction. The Commission proposes introducing new sources of income of the EU budget: it will receive part of the income from the corporate tax and the European Trading Scheme.
A new levy – plastic packing waste – will also finance the EU budget. Unfortunately, the European Commission also proposes a package of “corrections” (it is avoiding the word “rebate”) for Austria, Denmark, Germany, the Netherlands and Sweden. Corrections are supposed to be phased out over the course of MFF 2021-27.
I am a bit surprised that the Commission proposed such a mechanism already at the initial stage of negotiations. If I were the Commission, I would keep it as a last night bargaining chip, used to win the support of the net payers. Last but not least, we need to remember that any agreed own resources system will have to respect the fiscal sovereignty of the Member States. All the national parliaments of the EU will have to ratify the end of the rebates. I’m looking forward to it.
What does the European Parliament expect from the new Multi-Annual Financial Framework?
I was one of the co-rapporteurs of the EP’s Interim Report, adopted on 14 November 2018 in Strasbourg. And I was not the only Pole among the four co-rapporteurs – my colleague Jan Olbrycht was part of the team as well. So it is fair to say that the European Parliament position, as described in our document, clearly reflects the Central European point of view.
First of all, the European Parliament is asking for a 1.3% GNI budget. Secondly, we demand stricter linking of the income and payments side of the budget. Thirdly, we reject the idea of financing the new activities (such as the protection of external borders and immigration) at the expense of the Common Agriculture Policy and Cohesion Policy. We also call for an increase in funding for research, innovation and small and medium enterprises.
The case of Poland and Hungary has clearly demonstrated that the European Union is institutionally not prepared for a situation in which a member state deliberately breaks the fundamental rules.
We also are pushing for the Erasmus+ program budget (student exchanges) to be tripled. Finally, we reaffirm the readiness of Parliament to start the MFF political negotiations now, to successfully end them by May 2019. Looking at the progress in the Council and bearing in mind my own experiences from 2011 – 2013, I doubt if it is possible.
JANUSZ LEWANDOWSKI
is a Polish Member of the European Parliament, Co-rapporteur of the Interim Report on the Multi-annual Financial Framework 2021-2027. Former EU Com- missioner for the Budget and former Minister of Treasury. He is a member of the Civic Platform (PO). He graduated in economics from University of Gdańsk, received a doctorate and was a lecturer there until 1984. Later he worked for Polish Oceanic Lines (Polskie Linie Oceaniczne). He was also a lecturer at Harvard University and the founder of the Research Institute for Market Economy in Gdańsk (Instytut Badań nad Gospodarką Rynkową w Gdańsku). From 1980–1989 he was an economics adviser to the Solidarity anti-commu- nist movement. He was the Minister of Privatization and his major successes were the foundation of the Warsaw Stock Exchange and the mass privatization programme (Program Powszechnej Prywatyzacji). He is an author of a book on famous liberals and he also writes short articles for several newspapers and magazines, including Rzeczpospolita, Gazeta Wyborcza, Parkiet, Polityka, Wprost and Newsweek.
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