A grand bargain on the next EU budget is possible

In the run-up to a summit on February 1, policymakers are still struggling to tie up loose ends in the midterm review of the current EU budget, which runs from 2021 to 2027. Time spent on this is time not spent on looking ahead. Even if the next budget is years away, it is urgent that political leaders lift their eyes to that horizon.

On the normal schedule, the first proposals will have to be made next year. But on the normal schedule, leaders take years to haggle over hundredths of 1 per cent of gross domestic product, not over the strategic role a budget should play. In the pandemic, they showed strategic thinking by creating the Recovery and Resilience Facility, a separate one-off budget almost as big as the regular one. The need for boldness, however, did not pass with the lockdowns.

The next multiyear budget must be planned for an era of great strategic imperatives. It will have to be significantly larger than previous ones. In part, this is due to the political commitment to Ukraine’s membership talks. Designing a budget going up to 2034 which did not provide for Ukraine joining by that point would be a political gift to Vladimir Putin, on top of being terrible financial planning.

The budget also needs to match the task of decarbonising and digitising the European economy and beef up the region’s ability to defend itself. That requires massive investments, not enough of which will be done if left to national budgets. And to the extent that national budgets could do the job, unequal subsidies between more and less fiscally powerful states would ruin the level playing field between them.

The penny will drop sooner or later in northern Europe: when investment needs are huge, you cannot be both frugal and a protector of the single market, any more than you can be both a fiscal hawk and a defence hawk when war rages on your border.

At the same time, how money is spent has to change. One consistent message from net contributors is that the next budget cannot just “add on” Ukraine — and the transfers that entails — while leaving everything else as it currently is. As the main priority changes from “solidarity” of rich with poor countries to addressing common threats and challenges, so must the composition of the budget.

Forging a new common vision of what the budget could do takes time. The later leaders leave it, the less opportunity they have even to contemplate how things could be changed fundamentally, let alone agree. Old political positions will be locked in and negotiations limited to haggling over relatively small adjustments within the existing framework.

This is also a fruitful time to think big because of fresh or imminent lessons from other policies. One is the flirtation with separate budgets. It has been suggested, for example, that Ukraine could be funded on an intergovernmental “at 26” basis to overcome a Hungarian veto. The recent Franco-German group tasked with imagining treaty reforms opened the possibility of bespoke budgets for purposes not everyone was ready to endorse.

The RRF, which uses common borrowing to fund grants and loans to member states for projects agreed with the commission, has also shown that it is possible to do things in new ways. While the EU-funded national plans have not been without problems, there is a sense that the process of jointly agreeing projects has been constructive. Discussions persist of whether to seek an “RRF 2.0”, and whether the common debt issued to fund the original version should be maintained rather than paid down. It is a mistake for northern contributing states to want to simply shut these discussions down rather than engage on the merits within the broader budget discussion.

The contours of a grand bargain between net contributors and net recipients is clear enough. It would involve a much bigger budget, but a markedly different composition, shifting spending from old to new priorities. It would prefer direct common procurement or RRF-style allocation methods over old-style transfers and co-funding. It would focus much more on pan-European public goods — think power grids and defence procurement — and might be a lot less redistributive.

Each element is anathema to some countries. That is why they must be agreed as a package or not at all. The role of statecraft is to get from the latter to the former. The task of democratic statecraft, moreover, is to involve citizens in the agreement. EU voters go to the polls in five months. The moment to start the big budget debate is now.

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