EU’s Post-Brexit Budget Challenges

Mutaher Khan

With drama surrounding the uncertainty of Brexit mostly over as the United Kingdom officially left the European Union at the January 31 deadline, things are returning back to relatively normal in the European capital. Or at least as normal they get in Brussels. 

That was evident as European leaders gathered on Friday to discuss the bloc’s budget where they were faced with new realities around the lack of resources, intensified by the absence of one of their former biggest contributors: the United Kingdom.

The UK’s Hefty Contribution to the Union

Boasting the third-largest economy in the EU, the UK was a major contributor to the EU budget and in 2018 accounted for 11.88% of its annual outlay, only exceeded by Germany and France. Its absence would now produce an $81 billion gap for the bloc over the 2021-2027 period. 

According to data provided by the European Commission, the UK on an average contributed £7.8 billion a year to the EU between 2014-2018. And these are on a net basis, after taking into the rebates and public sector funds. In gross terms, the amount was even higher at £17.4 billion in 2018. 

The multi-annual financial framework, as the long-term budget is called, sets the limits on spending and defines the EU’s priority areas, prescribing ceilings on different headings while reconciling payments for the same. 

Disunity Among the EU’s Remaining 27 Members

As usual, the internal divisions between different members became apparent with lines drawn along net payers and receivers. The former comprise of countries like Germany and France who contribute more than they receive while the latter ⁠— mostly southern and eastern European countries ⁠— draw more more benefits compared to their payments. 

On the one hand were the “frugal four” ⁠— the Netherlands, Sweden, Austria and Denmark ⁠— insisting on contained spending and asked the budget to be capped at 1% of the union’s cumulative Gross National Income. Meanwhile the European Parliament has proposed that the figure be 1.3%, which would take the total amount to 1.32 trillion euros. In between was European Council’s President Charles Michel, trying to find middle ground, at 1.074%. 

The argument, as put forward by Austrian Prime Minister Sebastian Kurz on behalf of his mini-bloc in a Financial Times op-ed, for spending is that a smaller EU with the United Kingdom gone needs a smaller budget. However, not all take that view as suggested by French President Emanuel Macron that the union shouldn’t have to scale down its ambitions by cutting expenditure. 

Not only the size of the overall pie, but the members were also split over its distribution with countries like France and Poland favoring the agricultural subsidies ⁠— from which their farmers greatly benefit ⁠— that account for a significant share of the EU budget. At the other end were net payers, led by the frugal four, and supported by Michel that there be cuts in the common agricultural policy funds so the money could be re-channeled towards other priority areas such as climate and innovation.    

The Union, already constrained in terms of resources, has made ambitious plans to fight climate change first at CO25, quickly followed by a grand green deal that aimed at zero emissions by 2050 and would require mobilization of upto one trillion euros over the same period. It envisioned that up to 25% of the EU budget be directed towards achieving climate objectives and requires over $100 billion from the respective governments. 

While no breakthroughs were made by the European elite, agreements on the long-term budgets usually take more than one meeting to reach consensus. However, no date has been fixed yet for the future summit. 

Concerns of an EU Economic Slowdown Loom Large

Already gripped with questions over the future of the euro area as the global slowdown comes nearer and growth rates in member states stagnate, EU leaders are faced with the monumental task of ensuring that their obsession with austerity ⁠— often worded as fiscal responsibility ⁠— doesn’t end up alienating people across the continent. 

One member has already left the bloc based on certain grievances ⁠— whether real or perceived it doesn’t matter ⁠— and if the same old dominance of a few elites continues, usually characterized by Germany, more could follow suit. In the end, it’s sort of a chicken and egg problem: to ensure sufficient sums are available for spending, there has to be economic growth but that in turn requires budgetary expansions to spur activity. 

Adding even more to that challenge is the absence of the EU’s financial engine. With London cut off from the customs union, there are going to be costs of doing business and its highly liquid markets won’t be available at the same price anymore to the European business community and investors.