While the EU Commission can expect push back from the Visegrad group regarding the changes to the next budget, it is where the countries disagree that could be surprising

Smaller envelopes

Despite the fact that the next Multiannual Financial Framework (MFF) negotiation is one of the hardest nuts to crack in the history of the union due to Brexit, the issue was not even on the agenda of the last EU summit. Member States were not ready to endorse the accelerated timetable requested by the European Commission that foreshadows an extended process with no real chance to agree to a deal on the whole package before the upcoming European parliament elections in 2019.

According to the Commission’s proposal, Visegrad countries are set to receive about a quarter less in cohesion funds in the next budget cycle. Several aspects of the Commission’s proposal can be regarded as disadvantageous for them given that V4 countries are among the 11 main beneficiaries of EU subsidies, which account for a large proportion of their public investments.

Due to the economic necessity derived from Brexit and the migration crisis, the Commission has revised the system for allocating cohesion funds by adding criteria related to unemployment, participation in migrant relocation, innovation and efforts to curb CO2 emission. Brussels also stressed that reductions for the V4 are in some way the “price for the economic success” the region has enjoyed, so the change in criteria partly stems from the spectacular development Central Europe has undergone thanks to EU funds they have received in the past two budgetary cycles.

Increased expenditure on migration cannot be considered as a punishment for them, new spending priorities are rather due to the emerging new challenges and new priorities at EU level – said Zoltán Gyévai, the editor-in chief of Bruxinfo. However, he added that the proposed cuts are well over the EU average mainly due to the fact that the CP (cohesion policy) and CAP (Common Agricultural Policy) represent the biggest chunk of their EU transfers. “To put it bluntly, we can say that the MFF-proposal is a political punishment for their misbehaviour” – he said. Given that the budget negotiations are overlapping with a longstanding dispute between the EU and certain member states, namely Poland and Hungary, that aim to weaken the judiciary and restrict political and civil rights, they could unsurprisingly end up in a tough bargaining position.

Szabolcs Takács says the European Commission wants to use the MFF-proposal as a political tool to divide member states and punish the V4 for representing different views on certain questions (e.g., migration, or even accession to the European Public Prosecutor). This argument is hardly surprising given that the Hungarian government’s recurring argument is that criticism concerning the rule of law is actually about PM Viktor Orbán’s anti-migration approach. Takács thinks that – in line with the goals enshrined in the EU treaties – the convergence of less developed regions and countries, and reducing current inequalities must be a top priority in the next financial framework as well.

In line with this, the Polish government also stressed that despite the higher economic development of the EU, inequalities remained in GDP per capita. In Poland, where cohesion funds contribute the most to public investments in the V4 and the 4th most in the EU (67%), the Law and Justice (PiS) government also claims that cohesion policy should remain the largest development policy serving all EU regions and states.

Poland opposes financing new priorities solely by the transferring of resources that come from existing policies. “In this context, Poland was also open to discussing increasing national contributions under the condition of ensuring balance on the expenditure side. For the cohesion fund, structural funds and CAP, predictability is especially important as these tools are directed towards beneficiaries for executing long-term investments, and they ensure the stability of agricultural activity” – said Deputy Foreign Minister and Secretary of State for European Affairs Konrad Szymanski to EURACTIV.pl. He also underlined that thanks to the cohesion policy CEE countries buy more products and services from the internal market, which results in substantial economic benefits for the net payer countries.

In Slovakia and the Czech Republic, the first impressions were positive as the respective governments have perceived the decline in cohesion funds allocated to them in a wider context, as evidence of their success. But in mid-June PM Babiš stated that the budget draft is “unacceptable” as “it is imperfect just like the one for the current budget period.” The Czech Republic will be pushing for more flexibility to have significant competences to make decisions on the distribution of funds at the national level. Between 2015 and 2017, 40% of all Czech public investment was funded from the European Structural & Investment Funds (ESIF).

The main challenge for the Czech Republic will be to absorb EU subsidies in a meaningful way to address the needs of the most undeveloped regions – such as the three coal mining regions: Moravia-Silesia, Ústí and Karlovy Vary.  Another challenge will be preparing for the budgetary framework after 2027, when the Czech Republic might be a net contributor. For example, between 2021 and 2027, it will be important to increase the use of Community programmes such as Horizon Europe, LIFE of CEF. So far, the country has not been very successful in using these resources and depended on cohesion funds instead.

Meanwhile, Slovakia still opposes the introduction of new allocation criteria added to the currently predominant indicator (GDP per capita). “Under no circumstances can the cohesion policy be linked to the degree of solidarity of one or the other country. So, my response will always go in the opposite direction” – Prime Minister Peter Pellegrini said during the EU summit.  However, the Slovak government has already developed its own plan on systematically making up for losses EU subsidies.

As Richard Raši, the Slovak deputy prime minister for investments and informatization explained, Slovakia will strive to learn how to make good use of centrally managed programs. “In a classic cohesion envelope, we want to focus on levelling out regional differences, but also on absorbing money from centrally managed programs for which EUR 178 billion is allocated. So far, we have seen almost zero benefit from these programs” – he stressed. Therefore, the focus on funding programs managed by the European Commission will be one of the priorities of the Slovak V4 presidency’s program next year.

V4 want a larger budget 

Another pressure point is the size of the overall budget after Great Britain leaves a vast €10.2 billion hole in the EU budget after leaving the bloc in 2021. The fact that the Commission’s post-Brexit proposal is to create a bigger budget for a smaller, more ambitious EU benefits the Visegrad countries. Brussels seeks to push the previous budget cap of 1% of the bloc’s gross national income (GNI) to 1.114%. Due to the increasing range of common European policies, V4 countries believe that each member should contribute more to the EU budget. It will be quite difficult to convince the so-called frugal four (Austria, the Netherlands, Denmark and Sweden) to agree, as they stressed that a smaller EU must result in a smaller budget.

The Slovak government’s official position for negotiations is that increasing the EU budget is a key precondition for ensuring the right balance between long-term EU policies and new challenges. “The logical conclusion is that if we want to keep traditional policies such as cohesion and the CAP, contributions from member states must be higher” – stated Peter Javorčík, the Slovak ambassador to the EU.

While Budapest has also stated that they are ready to contribute more, Prague and Warsaw have set out some requirements. “Agreeing on increased contributions to the EU budget will be conditional by ensuring fair conditions for the implementation of the funds of the future EU budget” – Finance Minister Alena Schillerová said. According to Konrad Szymanski, Poland was also open to discuss increasing national contributions under the condition of ensuring balance on the expenditure side.

The hot potato

Divisions between the East and the West, and between net beneficiaries and net contributors are going to be further exacerbated by the proposal to tie EU payments to the rule of law, which is a clear response to the concerns related to the political developments and suspected corruption in the region.

Visegrad has already agreed on a unified stance to follow in case the EU wanted to bind the withdrawal of funds to rule of law-related requirements. The Commission has changed its previous opinion that only infringement procedures can be used to keep member states in check, and now it supports binding payments from the cohesion funds to certain requirements such as maintaining the rule of law. Paragraph 322 of the TFEU is the basis for allowing the EU to suspend or cut EU subsidies to a member state when the general deficiencies in the operation of the judiciary constitute a threat to European taxpayers’ money. Although Brussels insists the new mechanism is not an “issue affecting Poland or another country” exclusively but one that can be used against any member state, it infuriated Budapest and Warsaw.

The Hungarian government thinks this plan must be assessed as fictitious because “the introduction of subjective criteria would be against the EU treaties.” It is not a coincidence that the Hungarian government is one of the most vocal critics of the idea.  If it was implemented, Hungary could be in jeopardy of losing funds for two reasons: first, the share of EU subsidies affected by fraudulent practices is the highest of any member state, while the proportion of investigations concluding with indictments by the European Anti-Fraud Office (OLAF) is the lowest. The proposal would also create a legal basis for suspending EU funds in case the Orbán government does in fact restrict the independence of the judicial branch in Hungary.

Poland, in the midst of the Article 7 procedure launched against it in the wake of Warsaw’s judiciary reform, is similarly critical of the concept. Konrad Szymanski said that Warsaw will not agree to any arbitrary mechanism that “will transform the management of EU funds into an instrument of political pressure on member states”. Radek Vondráček, a member of Babiš’s ANO party and the speaker of the Czech Chamber of Deputies, also considers the European Commission’s proposal “very problematic” in legal terms. Similarly, the Slovak Ministry of Foreign Affairs expressed several concerns about this proposal: they do not particularly like the unclear definition of the term “rule of law”, as well as the uncertain question of what the deficiencies in complying with this principle are.

Even though Budapest and Warsaw emphasized that the amendments proposed by the Commission can only be approved unanimously, the proposal submitted by the EC is in fact a resolution draft independent of the budget framework, which is approved in an ordinary legislative procedure in the Council using qualified majority voting. Consequently, they can only block the proposal by forming a blocking minority (at least four countries and 35% of the population). The population requirement for this is three times higher than the total population of the Visegrad Group. Nonetheless, Gyévai believes there will be a clear majority in the Council in favour of this mechanism mainly supported by net contributors to the EU budget. The question is how exactly the process will look like (i.e., the role of the Commission in it) and, more importantly, how it would be applied in practice.

Separate eurozone budget: Slovaks might side with the mainstream

It is also important that the budget negotiations and the discussion around eurozone reforms overlap. Although a lot of details are still unknown, Angela Merkel and Emmanuel Macron just presented their plan to revitalize the European integration process by establishing a separate eurozone budget.

Hungary is against setting up any exclusive parallel structures because it thinks that it might create a second tier of membership. “Our interest is a strong and stable eurozone, but a separate eurozone fiscal capacity can only be created if its burden is carried solely by the eurozone members and if its establishment does not affect EU policies negatively, most importantly those concerning the Single Market” – the State Secretary of EU Affairs, Szabolcs Takács, commented to Political Capital.

Poland is also conscious of the eurozone’s needs in terms of macroeconomic stabilisation and Warsaw does not oppose discussing mechanisms that serve the purpose of mitigating large, asymmetric shocks. However, Szymanski stressed that this mechanism within the EU’s legal framework can only be considered under specific conditions: the openness of the mechanism for the states with derogation, the lack of costs for states not participating in the mechanism, ensuring that it adds value to the stability architecture of the EU and safeguards against abuses.

Meanwhile the head of the president’s chancellery, Krzysztof Szczerski, added that Polish resistance to the plan is not set in stone yet: “if it will be an instrument where the contributions of participating countries will be minor, having a de facto symbolic character and being a kind of a life-belt for times of crisis that we have already encountered in the eurozone, then it has a completely different character”.

Czechs have articulated a similar viewpoint. According to State Secretary for EU Affairs Aleš Chmelař, there are already adequate instruments in place such as the eurogroup or the European Stability Mechanism and further additions might be redundant. “For instance, it is unclear what is the added value of a eurozone budget [would be] and whether it…would undermine the EU budget,” Chmelař told EURACTIV.cz.

Because of its eurozone membership, however, Slovakia is on a different page: the current government is a longstanding supporter of implementing a macroeconomic stabilisation function in the eurozone, counting the eurozone budget as one of the possibilities. According to the Slovak Ministry of Finance, in case of future macro-economic shocks, the stabilisation mechanism at the supranational level should compensate for the lack of an individual monetary policy.

By Edit Zgut (Political Capital), Adéla Denková (EURACTIV Czech Republic), Marián Koreň (EURACTIV Slovakia) and Karolina Zbytniewska (EURACTIV Poland), 

*This article was originally published on http://visegradinfo.eu/index.php/80-articles/570-post-2020-eu-budget-visegrad-is-closing-ranks-but-exceptions-apply.

Edit Zgut, Adéla Denková, Marián Koreň and Karolina Zbytniewska

Scenarios for cohesive growth

As of 2019 the negotiations about the next Multiannual Financial Framework (MFF) will enter a critical moment. In the face of an imminent Brexit and the fallout from global turmoil, the EU has to reflect on its guiding principles and take decisions to fulfil the promise of a united Europe.

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The Visegrad/Insight is the main platform of debate and analysis on Central Europe. This report has been developed in cooperation with the Centre for European Policy Studies (CEPS).

Launched on 1 October 2019 at the European #Futures Forum in Brussels.