The Debate on Europe's Budget
But also — Poland, Aid to Lebanon, Georgia, Electric vehicles
Hi! Today is Tuesday 7 May, and here is your EU news summary for the week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and LinkedIn.
The Briefing
In just over a year's time, the European Commission will put forward a proposal for the EU's next long-term budget. In Brussels, the next EU budget is already the talk of the town.
CONFERENCE • The Annual EU Budget Conference organized by the European Commission took place on 29 April. Although the EU's current Multiannual Financial Framework (MFF) runs until 2027, this conference was an opportunity for European leaders to start thinking about the political priorities and sources of financing for the next MFF.
The MFF is the EU's long-term budget. It determines the maximum amount of money that the EU can spend in the span of seven years. It is adopted through unanimity voting in the Council, after approval by the Parliament (the latter can only approve or reject it). It should not to be confused with the EU's annual budget, which is adopted every year via a specific adoption procedure, but must respect within the maximum amount established by the MFF.
There are many issues on which the 27 Member States must find common ground. The Commissioner said European leaders should ask themselves the following questions: "What do we need? What do we want? What does it cost? What do we want to afford? How can we finance it?”
PRIORITIES • The EU budget is equivalent to around 1% of the EU 27’s' GDP — the current figure is €1074.3 billion. Two-thirds of the budget is dedicated to the Common Agricultural Policy and cohesion policy.
European leaders do not seem inclined to reduce these items of expenditure, but at the same time, they want the EU to tackle other issues such as the war in Ukraine and the weakening of European competitiveness.
The forthcoming enlargement of the EU, which will be the largest since the early 2000s, also requires an increase in the cohesion policy budget.
DEFICITS • These new expenditures raise the question of the size and sources of funding of the next budget. The current, doomy economic outlook — only 0.9% growth forecast for the EU this year and 1.7% in 2025 — is likely to make discussions on the subject more complex.
Furthermore, with EU fiscal rules applying again, eleven Member States could be sanctioned by the European Commission for their deficits exceeding the threshold of 3% of GDP: France, Belgium, Spain, Italy, Romania, Hungary, Poland, Malta, the Czech Republic, Slovakia and Estonia.
As a reminder, the derogation clause of the Stability and Growth Pact (SGP) was activated in 2020 to allow greater budgetary largesse in the context of Covid. This derogation was extended until the end of 2023. In December 2023, the Council found an agreement on new budgetary rules. The new rules will not come into force until 2025, but the Commission will still take them into account when assessing Member States' finances this year.
In June, the Commission will decide on a case-by-case basis whether to implement the excessive deficit procedures (EDP), which in theory apply to Member States exceeding the deficit threshold. But the European Commission's unwillingness to apply these sanctions is often criticised.
The revised budgetary rules stipulate that "increased public investment in defence" can be taken into account when assessing Member States' finances. Poland considers that its deficit of 5.1% in 2023 is partly justified by its important investment in defence.
DEFENCE • Investment in defence will be at the heart of the negotiations.
In order to meet defence-related funding needs, the Commission's legal experts are in the process of reassessing the current interpretation of Article 41(2) of the Treaty on European Union (TEU). This article states that the EU budget cannot finance expenditure "arising from operations having military or defence implications”.
Particularly, they are evaluating whether these "operations" only refer to the EU's own operations. If yes, buying weapons for operations carried out by other entities — such as the Ukrainian army — using the EU budget would be possible.
During the European Council that took place in March, European leaders debated on the various ways to finance the EU’s defence industry. The role of the European Investment Bank (EIB) and the option of taking up new common debt via the issue of Eurobonds were mentioned.
NEW SOURCES • Closer cooperation with the EIB is one of the solutions on the table.
In June, the EIB's Board of Governors will approve a proposal to amend the rules governing the bank’s activities to strengthen its ability to finance defence projects. The lender’s ability to invest in defence projects is currently limited to projects where the revenues from civil use are higher than those from military use.
Additionally, EIB President Nadia Calvino said she was in favour of amending the bank’s debt ratio which currently limits the percentage of the bank's funding that can come from borrowings to 2.5 times of the EIB’s equity.
This would allow the bank to finance more projects linked to the green transition, thus replacing certain EU budget expenditure. However, the EIB only distributes funds to businesses, whereas budget subsidies cover a wider range of financing.
Instruments put in place in response to the pandemic, such as the recovery fund, are also an important source of inspiration for the negotiators.
WHAT NEXT • The Commission will present a formal proposal for the new long-term budget in the summer of 2025. The new long-term budget has to be unanimously approved in the Council before the end of 2027. The European elections in June may have an influence on this topic, as the Parliament has a veto right over the long-term budget.
In Case You Missed It
POLAND • On 6 May, the European Commission announced its intention to close the procedure initiated against Poland under Article 7(1) of the Treaty on European Union (TEU).
As a reminder, the procedure described in Article 7 of the TEU can in theory lead to the suspension of a Member State's voting rights within the EU Council in the event of a "serious and persistent" breach of the EU values listed in Article 2 of the TEU, in particular respect for the rule of law.
The Commission opened this procedure against Poland in 2017 in connection with controversial judicial reforms undertaken by the Member State. The Commission now considers that "there is no longer a clear risk of a serious breach of the rule of law in Poland".
This decision is in line with the gradual normalisation of relations between Poland and the European executive following the election of Donald Tusk last autumn. This is the first time that the Commission has put an end to this procedure, to which only Hungary will now be subject.
The Commission's decision is seen by some as a political concession in the run-up to the elections.
LEBANON • On 2 May, during a visit to Beirut, the President of the European Commission announced a €1 billion aid package for Lebanon for the period 2024-2027.
The aid is intended, among other things, to support the country in its management of immigration, particularly with regard to Syrian refugees.
The President of Cyprus, Nikos Christodoulides, was also present at the meeting: Cyprus is a major gateway to Europe for migrants from the Middle East.
The number of Syrian refugees arriving in Cyprus rose sharply at the start of the year, prompting the Cypriot president to call on the other member states for help at the beginning of April. He also called on Lebanon to stop "exporting" its own difficulties in managing migration.
GEORGIA • On 1 May, in front of the Georgian Parliament in Tbilisi, the Georgian police violently repressed pro-European demonstrators. The latter came to protest against the law on foreign agents which could jeopardise the country's accession to the EU.
The law aims to oblige NGOs, civil society groups and the media to register as "foreign agents" if more than 20% of their funding comes from abroad.
The law is modelled on a Russian law designed to limit freedom of expression. It was prompted by the pro-Russian oligarch Bidzina Ivanichvili, an honourable member of the party who enjoys considerable influence in the country.
Ursula Von der Leyen condemned the disproportionate use of force against the demonstrators and called on Georgia to listen to the will of its citizens.
According to opinion polls, 80% of the population is in favour of joining the EU. Georgia has been granted candidate status for membership in December 2023. In the words of Charles Michel, this law could take the country “further away” from the EU.
EVs • Since the beginning of the year, the European Commission has been extensively using its trade defence instruments against China. Xi Jinping was in fact in Paris yesterday, where he was received by Emmanuel Macron and Ursula von der Leyen.
Last week, Trade Commissioner Valdis Dombrovskis said that the European Commission's investigation into electric vehicle subsidies from China was "advancing". He hinted that customs duties could be imposed as early as this summer.
Remember: this anti-subsidy investigation was announced in September 2023 by Ursula von der Leyen during her annual State of the Union address.
The investigation was officially opened in October — following pressure from France — and aims to determine whether subsidies received by Chinese electric vehicle producers "cause or threaten to cause economic injury” to European producers.
On the basis of the findings of the investigation, the EU could decide to respond to these unfair trading practices by imposing anti-subsidy duties on imports of electric vehicles from China.
The Commission warned three Chinese producers — BYD, SAIC and Geely — that their lack of cooperation with regards to the investigation could lead to higher duties.
Regarding the procedure, the Commission has 9 months to introduce temporary customs duties (by July 2024) and 13 months to finalise the investigation (by November 2024).
Researchers from the Rhodium Group published a report in which they estimate that customs duties of 40% to 50% would be necessary. According to the Rhodium Group, the customs duties that the Commission will impose should be around 15%-30%.
What We’ve Been Reading
In an editorial, the Financial Times endorses enlargement of the EU, citing the success of the bloc’s expansion in the east.
Sander Tordoir and Zach Meyers from the CER advocate for a cautious approach to Washington’s demands that Europeans curtail trade in sensitive technologies with China.
Simon Kuper of the Financial Times analyses the major differences between the United States and Europe when it comes to work-life balance.
This edition was prepared by the What’s up EU team, including Luna Ricci, Maxence de La Rochère, Gianni Gaboret and Marwan Ben Moussa. See you next week!