November 27, 2020

State of the Union - Week 48 - The way forward for a new 7 year EU budget

After the vetoing of the next 7 year EU budget (MFF) by Hungary and Poland, a new compromise seems unimaginable. But the budget veto is subtended by deep divisions in contemporary EU politics pertaining to core principles and values that could potentially end in a ‘no-deal budget scenario’. Ulobby analyses the most likely outcomes here and explores possible solutions to the budget crisis.

After intensive negotiations between the Council and the European Parliament, compromises on The Rule of Law mechanism and the MFF were reached earlier this month.

As we all now know, the compromise was effectively vetoed by Poland and Hungary not because of the MFF, but the Rule of Law mechanism linked to the MFF. The two Member States have been very vocal about their grievances, speaking against the Rule of Law Mechanism. Furthermore, on November 26th Hungary and Poland reiterated their position at a meeting in Budapest outlining their demands.

On the opposed side of the table we find the EP and the ‘frugal’ countries (the Netherlands, Austria, Sweden, Denmark and Finland) pushing for a stronger wording and a clear aligning of the Mechanism to EU spending. With a ‘no-deal scenario’ an imminent danger, what would the situation look like on January 1st?

The ‘no-deal scenario’.

Even though a ‘no-deal MFF scenario’ is in our opinion highly unlikely, it is still an increasingly plausible outcome. 

A no-deal scenario would occur under the following conditions: 

  • There is no agreement at the European Council level;
  • No majority emerges (<303 votes in favour) or the MFF regulation is rejected by the EP;
  • The Council does not arrive at a consensus;
  • There is no vote in the EP and/or the Council by 31st December 2020.

The implications for the MFF in a ‘no-deal scenario’ are not completely unpredictable. If no compromise is reached by 31st December, a system of ‘provisional 12th’ could enter into force, whereby provisional budgets would prevail until a version of the MFF is adopted. This would drive an atmosphere of uncertainty and it would especially affect the multi-annual programmes as cohesion and structural programmes, which unequivocally require multi-annual funding agreements, thus mounting pressure on the key EU budget net beneficiaries - the member states themselves.

Paving the way towards a deal

All parties - the EP, Hungary and Poland and the ‘frugals’ need this issue to be resolved. It is in all member states’ and EU institutions’ self interests to reach an agreement and to secure a MFF agreement so the spending programmes can enter into force. But nor can the parties respectively afford to lose this game of chicken. Hungary has made this a matter of national interest, calling it ‘political blackmailing’, while the Dutch PM Rutte agitated the debate further in the Dutch Parliament last week, reiterating his earlier position by stating that the current compromise was unfalteringly ‘the lower limit’ to his acceptance. Further exacerbating the crisis, the EP has rejected renegotiations of the agreement, creating a stalemate situation that produces little by way of viable chances for ongoing renegotiations.

It is highly unlikely that the current wording of the text will be changed, but it is safe to predict that reassurances to be added to the accompanying documents and to the implementation guidelines which shape the interpretation of the mechanism. 

Another likely event will see the mechanism being conditioned only to the upcoming budget and therefore inapplicable to the current 2014-2021 framework. Several experts and officials have remarked that this is a feasible solution for all parties involved.

Thirdly, if the wishes of Poland and Hungary are to be met, a process forward could be to adopt the MFF and Own Resources (a pivotal part of the financing of the NextGenerationEU recovery package) separately and further discuss the Rule of Law mechanism at the December European Council Summit. This however, removes the MFF as an instrument in the negotiations and weakens the Frugals bargaining power. 

The EP leadership has announced that they will convene a plenary session between Christmas and the new year to ratify any agreement. Via this extraordinary process, we might well have a live and functioning MFF ready to enter into force on 1st january.

This outcome would enable anyone to claim victory - and, even more importantly, no party would be labelled as a loser.

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