CHAPTER 9 The Budget Who Gets What, When, and How? Brigid Loftan and Jana nnes Lindner 909 introduction A thumbnail sketch of the budget 210 The major players and hybrid processes 213 Budgetary politics over time 2 7 6 Phase 1: the dominance of budgetary battles 216 Phase 2: ordered budgetary decision-making Budget management Conclusion FURTHER READING 219 228 22<) 231 Summary The budget is a focus tor repeated negotiation among the European Union (EU) member states and institutions, following firmly established rules. In 1988, the EU moved-after several years of bruising annual negotiations—to multiannual 'financial perspectives', or package deals, for which the Commission makes proposals and the 'Budgetary Authority'-the Council, particularly the European Council, and the European Parliament (EP)-negotiates agreement.This institutional change that was intoZrra,,Zed ^TreatY °f LlSb°n has concentrated budgetary politics co~^T bQr9ainS thQt nQti0nal ^ ^ benefits, reforms of the "°n agricultural policy (CAP) enlargements.This pattern -regional imbalances,future-oriented policies,and (De,0^),in 1999 r77'" Was ^forced bv „ k eStruc^e0fth.K nUQ' Lancia, p " nancia' Perspective for 2001-2m). anü °*** Q*Wion 98 Spe»*g blocks agricultural and regional expends cmZ>0 ° Si9ni'fcon, i"eW Mul^nnuQI °Ü'break °f Covid-1 9 coincided w» nnrt. innovaWon: «finano* FramewQrk 2027) litiCQl outers Qnrt „ , uva«on: Qfter ,„» ' l"w"V ,.«"" °3-eernent ^^^iaries. ,he " '^"^ di~ns. mainly between ne- n°' °nlv °n the n» PeQn Cou™ * July 2020 found a p» c new Mpp ... . thP ,HF-wh.ch by and large stayed within tr* distributive pattern of the previous one—but also on a sizeable package of an additional temporary recovery fund (mainly directed towards member states in the form of grants and loans) financed for the first time by large-scale borrowing on the capital markets by the Union. Introduction Historically, budgets have been of immense importance in the evolution of the modern state and they remain fundamental to contemporary government.1 This chapter enters the labyrinth of EU budgetary procedures in an attempt to unravel the characteristics of budgetary politics and policy-making. Where EU money comes from, how it is spent, and the processes by which it is distributed are the subjects of intense political bargaining. Budgets matter politically, because money represents the commitment of resources to the provision of public goods and involves political choices across sectors and regions. The politics of making and managing budgets has had considerable salience in the evolution of the EU because budgets involve both allocative and redistributive politics (see Chapter 3). Typical distributive (or allocative) expenditure is that spent on research, trans-European networks, and the environment, while cohesion policy and agriculture are examples of redistributive spending. The significance and challenges of budgetary politics are accentuated in difficult economic times. The euro area crisis with its attendant policy prescription of budgetary cutbacks and fiscal consolidation further politicized budgetary politics, including the politics of the EU budget. Turmoil in Europe's southern neighbourhood has increased pressures for the provision of adequate budgetary resources to manage migration and Europe's external borders. With Brexit, the EU has lost a big member state that paid more in to the EU budget than it has received, thus leaving a gap. The ongoing retrenchment in United States foreign policy and related calls for a stronger role of Europe in the burden-sharing of security costs have fuelled discussions on the higher provision of resources devoted to European defence. Most prominently, the Covid-19 pandemic and the high financial needs to support the recovery brought the EU budget to centre stage with intensive debates on burden-sharing but also a remarkable readiness to find innovative solutions for a sizeable common fiscal response. Budgetary issues have inevitably become entangled with debates about the nature of the EU, the competences of individual EU institutions, and the balance between the European and the national levels of governance. Budgetary flows to the member states are highly visible so that 'winners' and 'losers' can be calculated with relative ease. As a result, budgetary politics are more likely to become embroiled in national politics and national electoral competition than is rule-making. Questions about the purpose of the budget and the principles that govern the use of public finance in the Union are linked to wider questions about the nature the EU and its evolution as a polity that goes beyond the set-up of a traditional Hannes I-10""6' ,Bet is also a useful yardstick *itll „ld Lo«°n ond J° -ante*. *e rL. the creation of a single raat. ization. •» *a' that differsft£ chapter 5). ^ utlUty ^ „temaucn^ o*" of irtte^ regulat^ m whicb the Commissi ev'dcnT scenarios on *e P (carry a^ domg much more l0. offer=d 6« * nl maUe. Ea le5S mor üo„ (Commission 2017g). **" Ä more ** ^ ^s for the operation of a vast lh0SC lei changes m he: nave "P1 ^ EU bud 8e'htr) '';„P cope of the EU body of b*(Chalmers and Del,. Ther„f *ies. Moreover. »81* fcr El^^f^l Schraff 2013,my) muth 2015; De«»«*e 0 ten b ^ Qr groups ^ The existence of£ means of side-pay^" ^ Qn further ferentfunctions'- W consensus ana ^ financing European public necessary to gain ion; (b) as t e European citizens at mon response to a shock . The process of managing, rather than just formulating, budgets raises questions about the management capacity of the Commission, but also about that of national authont.es. All EU institutions and bodies, in particular the European Court Auditors, are paying increasing attention to the impact of fraud ™ ti u a 1 searchmg for better ways to protect the financial Z^oEl£ ^ " A thumbnail sketch of the budget In the early years of the Union the h a those found in traditional int ' W3S * nnancial instrument similar to and 1975 led to a fundamental^ orSa™ations. The budget treaties of 1970 framework for the finances , C™fe" These treaties established the constitutional Createda system of <0Wn res our, u * nUmber of important respects. They insisting of three element* W ^ the EU an autonomous source of rev-an °f ,the base "sed f0r ass^S: CUfto** duties; agricultural levies; and a propor-sever!, ^ °f 1%" The Wo S ^ (VAT) in the member states, up or ^eir aM ' re§ardle^ of then\ L ' *** revenue base *hould ' The , o,7 t0 Pa^- This was to 12 the Pattern of EU eXPem to all ndiwre- —v iHf> \\\ V \ 'on a th es,^ififi ^7" The gi H rf npMonas the main ^ ^"^Ww fleeted a view that limited the rol, r °f P"hijc „ ^ ana „ iev «. not always doming * f P"blic * ^ I^anticipated that i„ lhe as e^<^ "Ueg^ ' *- Chapter 7), a larger budge, would h W°n„mic',,'a «. h, "«**le ^ fetal stabilization, which ^ * "eces * naor,^ »n ,„ ^ ,„,„ through management of £ ^ •* ^ « sirong Un.on government focused o„ , ,CUrreneies T "° Her k °cks and >neni^ . ere C0U|d k strong ".......- '^^auzing and on • ",ai ltlCTe <*ul L, with limned financial resources, gained grounH T'ng UP ««ional m*" policies, which emphasized an " CZ totted in favour of monetarist aoDroarW -j., , St role f°r the sia.. ..... in r"7 f 1 *~ an interventionist mi 7""' "s *eyn« the euro areas fiscal capacity, back on the agenda. £ ons' or at least Sincethemid-lQQOs.theconstraintssetbythefiscalframeworkofEMU i , presSures on national expenditure have made many member stales J£ t°0 " cept significant transfers of financial resources to the EU level. Enlargements In 2004 and 2007 have further intensified this trend (see Chapter 19). Although enlargement increased the economic diversity among member states significantly, expansion of the Union-wide redistribution of funds has been strongly opposed by the wealthier member states. In the context of the discussion around a more sustainable EMU, the idea of a euro area budget for stabilization (either within or outside the EU budget) gained some momentum (see Chapter 7). Yet, the fear of permanent transfers led member states to opt for a less ambitious 'instrument for competitiveness and convergence' and to keep the negotiations around it within the context of the new Multiannual Financial Framework. While the Covid-19 pandemic led to an unprecedented fiscal engagement with large-scale borrowing setting a historic precedent, it is not yet clear what will be the lasting impact on the EU as a polity. Three aspects of the political agreement of the European Council in July 2020 are in this respect relevant: first, there is a strong emphasis on the temporary nature of the measures-in line with the legal construction of the package; secondly, almost 90% of the money is paid directly to member s^s on the basis of national recovery and resilience plans rather than through 1genu-^ EU spending programmes (a fact that has been heavily criticized by m , thi«% almost half of the money takes the form of loans rather than grants. The major players and hybrid processes Hetary policy-making in the Union is a hybrid of JJJ^ipW** J fr°* *e diverse purposes of the budget and the tre ty P Jhe neg0 J govern macro level negoliatlons and the annualM ^ ^ an unUSual t,0ns ^at produce the Multiannual Financial Fram combination of a dominant European Council, a mill P cause of its agenda-setting role in relation to the overall MFF and the setting of draft MFF regulations, and also a rather powerful EP because of the consent requirement. The dominance of the European Council in MFF negotiations represents intensive transgovemmentalism that occurs whenever the big budgetary packages have to be agreed. The practice of the European Council exemplifies political reality rather than treaty provisions. In fact, the Treaty of Lisbon (Art. 312(2) TFEU) provides for the Council not the European Council, which does not have legislative powers, to adopt the MFF by unanimity after receiving the consent of the EP. The gap between practice and treaty provision underlines the political salience and visibility of the MFF negotiations. The significance of the Commission and the EP in the MFF negotiations is characteristic of the distributional mode of policy, as is the annual budgetary cycle which follows the traditional Community method with a strong role for the Commission in preparing the draft budget, qualified majority in the Budgetary Council, and a significant role for the EP. The day-to-day management of the budget is characterized by a distributional mode that engages many layers of government, from the Commission to central, regional, and local governmental agencies in the member states in a system of multi-level implementation. The Commission has traditionally been an advocate of a bigger EU budget in order to fund policy integration, but in the 1990s it was forced to pay more attention to managing EU spending. Having repeatedly faced resistance to increasing the budget, the Commission has resorted to options external to the MFF, starting with the European Fund for Strategic Investment (formally established within the European Investment Bank and partly funded by it) and the proposal for a euro area budget (financed potentially by externally assigned revenue) (Becker et al. 2017). In addition, the Commission tries to play the role of honest broker in budgetary battles, charged by the member governments with drafting reports on sensitive issues, such as 'own resources' and net flows to the member states. Its role in proposing and implementing the budget has also allowed the Commission to intervene in policy areas that have traditionally been the exclusive domain of the intergovernmental method, such as the establishment of the European Defence Fund within the MFF (Haroche 2019 and see Chapter 17). Similarly, in the context of the Covid-19 pandemic, the Commission skilfully managed to link the discussion on the financing of the recovery with the review of the MFF, thus preventing member states opting for intergovernmental alternatives outside the EU budget framework. Different configurations of the Council play central roles in budgetary negotiations. The Budget Council, consisting of representatives from finance ministries who approve the annual budget, has well-established operating procedures and decision-making rules. The General Affairs Council (GAC), the Economic and Financial Affairs Council (Ecofin), and the Agriculture and Fisheries Council (AG-RIFISH) each play a key role in negotiating the big budgetary deals. However, the European Council, where heads of state or government broker the final stages of the 'history-making' bargains, still provides the most important forum for striking the big budgetary deals. Unlike the annual budget procedure, where the Council decides by qualified majority, these big bargains are agreed by unanimity. They set the frame for EU budgetary politics for a seven-year period—thus limiting the degree of flexibility—but also the scope for potential conflict in the decision-making process for the annual budgets. Since it was granted budgetary powers in 1975, the EP has regarded EU finances as one of its key channels of influence vis-á-vis the Council. The EP has tried to influence what happens at both the big bargains and the annual fine-tuning. In the annual cycle of determining detailed appropriations, the EP frequently intervenes to alter the sums assigned to specific programmes and projects. The ToL incorporated significant changes to the treaty provisions on budgetary decision-making. Yet, the main elements of the 'new' budgetary procedure reflected the existing inter-institutional agreement (Bauer et al 2018). While Lisbon thus largely constitutionalized the existing modus operandi (see Figure 9.2), the treaty changes had over time noticeable effects, in particular on the influence of the EP in spending decisions which have arguably decreased (Becker et al. 2017; Benedetto 2013; Hoyland and Crombez 2015). Under the ToL, both arms of the budgetary authority have equal decision-making power over all components of the EU budget, including CAP spending, in the annual budget procedure. Similar to the co-decision procedure in legislative politics, a Conciliation Committee features as the key forum for brokering deals between the EP and the Council before their respective final readings. These seemingly innovative features were much in line with the informal arrangements that were in place prior FIGURE 9.2 The budgetary cycle, rules, and practice according to the Treaty of Lisbon Annual budgetary procedure European Commission proposes Source; European Commission 2018 (hftp://ec.europa,eu/budget/library/biblio/pubiications/2018/financial-report_en.pdf) 216 BrigldLaffan and Johannes Lindner u r i Given that negotiations at the conciliation meeting cover all areas of the uTTthe distinction between compulsory and non-compulsory expenditure had become less relevant over time. Under the ToL, the Council may prevent an agree-• ^^Hhation Committee and thus trigger a new budget proposal by the DC^'V rhe concilia"0'1 —— ment in u institutionalized the procedures to the financial £ ^ institutional agreement) for £ annual budge^^uncil and the consent of the EP. If no agree-requinngaunanimousdec ^ ^ multiannual budget plan remain in ment is reached, tne ce * the rules because any significant change pIace. There is thus a strong stat£S and the EP ^t^from ir::n(in°te,institutiona, agreements) to the hard law of the Jb .bo raises the stakes for the EP in the negotiations of the financial perspec-Z Since the EP can no longer renounce the financial perspective once it has agreed to it there is an incentive for it to bargain hard on the terms of the seven-year budgetary deal, as it did following the February 2013 European Council (see later in the chapter). The EPS role in the supervision of financial management has also been pronounced. In March 1999, the EP's criticism of the Commission's financial management provoked the unprecedented resignation of the whole college of commissioners. Budgetary politics over time Since the first enlargement in 1973, there have been two distinct phases of budgetary politics and policy-making in the EU. The first phase (1973-88) was characterized by intense conflict about the size and distribution of EU monies, and by institutional battles between the Council and the EP over the adoption of the annual EU budget. The second phase (since 1988) has been one of relative budgetary calm as member governments succeeded in negotiating the five big budgetary bargains, known as Delors-1, DeIors-2, Agenda 2000, the 2007-13 framework, and the 2014-2020 agreement, and the Council and the EP cooperated closely in annual budgetary decision-making. Each phase corresponds to a specific set of rules and procedures and a distinct budgetary paradigm. Z SZetnmtnts-1" Particulars ^ bar8ain Wished by founders n j instilu«ons were In lT^" 1979 and ]9f*, the member govern** future, which contribute ' Protra«ed dispute about revenue and «" 7«* m the Union durL "° Sma" Wy t0 a ^ "ralatse and laek of poK*" rU'« before ,he UK I** The 1970 treaty ™Un«es, and the main ' The re™ue *>un» suited the six W r (SM Chapter8) I "pending would flow •automatmalr/ to support d*<* \ Package was essentia,ly g French won in «-* A The Budget: Who Gets What, When, and How? 217 for starting accession negotiations with the UK and the other applicants. The rules of the budgetary game were fixed to the advantage of the incumbents, above all France, making confrontation with the UK more or less inevitable (see H. Wallace 1983). Moreover, with the 1970 budgetary treaty, member states half-heartedly delegated budgetary powers to the EP, introducing a complex annual procedure with a number of ill-specified rules. The mismatch between the limited desire of member states to involve the EP and the high expectations of members of the EP (MEPs) due to their newly acquired political powers soon became apparent. The considerable scope for interpretation left open by the vaguely defined treaty provisions intensified this tension. In short, both the UK and the EP entered a budgetary stage that was characterized by a de Gaulle budget1, a budget that was formed by French preferences with an almost exclusive focus on agricultural spending. After accession, successive British governments struggled to get the budget issue on to the agenda and slowly managed to alter the terms of the debate to ensure that distributional issues were taken seriously. Despite being one of the 'less prosperous' member states, the UK was set to become the second largest contributor after Germany. In trying to address the problem, a key concern of British governments was the dominance of CAP expenditure (constituting 70% of the budget), from which the UK, with its small 'agricultural sector1, benefited very little. The European Regional Development Fund, which was set up in 1975 to stimulate economic development in the least prosperous regions (see Chapter 10), brought only little relief. Against this background, it became clear to the British government that the UK problem was structural rather than the result of chance. Hence in 1979, the new British Prime Minister, Margaret Thatcher, began to demand a rebate system, which would guarantee the UK a better balance between contributions and receipts. The Commission and the other member governments were loath to concede the British case at the outset. The Commission had always been reluctant to engage in discussion of the net financial flows to the individual member states, lest this encourage too narrow a calculation of the benefits of Union membership, and lead states to seek juste retour, in other words to extract from the Union budget more or less what they put m.3 The key 'orthodoxy' regarding the budget at this time was that receipts flowed from EU policies and were thus automatic. The implication of this approach was that the consequences for individual member states were not regarded as an issue to be addressed. This orthodoxy was challenged by the problem of UK contributions. Although Thatcher's confrontational approach was regarded as non-communautaire, she finally succeeded. At the Fontainebleau European Council in June 1984, the British government traded its agreement to increase the VAT ceiling from 1 to 1.4% for the establishment of a 'rebate' mechanism for dealing with excessive British contributions on a longer-term basis. The mechanism was designed to deal with the British problem and could not be generalized to other member states, even though other states subsequently became significant net contributors. While the member governments were engaged in restructuring the budget, the EP and the Council were involved in a continuing struggle over their respective powers on budgetary matters. The EP was driven by an institutional and distributive 218 BrigidLaffanonflJononnesLiriu interests (i.e. essentially raising its role in decision-making and expanding the budget). The EP rejected the 1980 and 1985 draft budgets, and the annual budgetary cycle was characterized by persistent struggle between the two institutions, the 'twin arms' of the budgetary authority. The EP actively exploited the broad scope for interpretation that the ill-specified treaty provisions offered. By contrast, the Council sought to limit the level of power-sharing with the EP as far as it legally could. In 1982 (case withdrawn), and again in 1986 (Case 34/86), the Council brought an action in the Court of Justice of the European Union (CJEU) to annul the budget signed by the President of the Parliament as it disagreed with the EP's interpretation of the treaty provisions on the classification of expenditure (compulsory versus non-compulsory). Repeated attempts to solve the disputes over the interpretation of the treaty provisions through joint declarations and agreements failed. Phase 2: ordered budgetary decision-making The year 1988 marked a turning point. After the accessions of Greece, Portugal, and Spain and the adoption of the Single European Act (SEA) (see Chapter 5), it became clear that the intense annual budgetary battles with long negotiations into the night, pressing uncertainty on whether the financial year could start with an adopted budget, and the constant shortage of revenue could not continue. Following a proposal by the President of the Commission, Jacques Delors, the EU embarked on a far-reaching political and institutional reform in the budgetary field. On the institutional side, it introduced the multiannual financial perspective, which balanced revenue and expenditure and constrained the ballooning CAP by dividing the budget into different headings and setting annual ceilings for spending categories across a five-to-seven-year period. Although established by member states in the European Council, the financial perspective acquired its binding nature from the inter-institutional agreement between the Council, the EP, and the Commission. The EP accepted the constraint on annual budgetary decision-making, because the new financial perspective guaranteed a significant increase in resources and established regional spending as the second-largest part of the budget, both long-standing EP priorities. Overall, the 1988 reform changed the rules of the game by supplanting the budget treaty with a set of superior soft-law arrangements among the budgetary actors. Annual decision-making lost its place in the inter-institutional spotlight and became the domain of budgetary experts, who cooperated closely and developed a routine of adopting annual budgets on time and without major tensions. Moreover, the 1988 reform transformed the CAP-centred 'de Gaulle budget' into the 'Delors budget' that, due to its strong regional policy dimension (see Chapter 10), was more redistribu-tive and less CAP-oriented. In subsequent renewals of the financial perspective and inter-institutional agreement, the main institutional and distributive structure established in 1988 persisted. The requirement for unanimity did not change. The Delors-1 package and subsequent budgetary deals required the agreement of all member states. The nationa jj< veto made it very difficult to challenge entrenched budgetary gains, such as t c British budgetary rebate or the French demands on agriculture. The Budget: Who Gets What, When, and How? 219 The introduction of the multiannual framework did not mean that conflict and disputes disappeared. However, tensions among member states or between the EP and the Council were kept at a manageable level during the annual procedures and channelled towards the renegotiation points of the large budget packages every five to seven years. At these renegotiation points, all players were assured that the unanimity requirement would allow them to block a package that would run contrary to their fundamental interests. This had not been the case in pre-1988 times: key players, such as the UK government, had to fight long and hard until their distributive concerns were addressed, and frequently recurring budgetary disputes prevented the orderly adoption of annual budgets. Delors-1 The budgetary agreement reached in February 1988 was a classic EU package deal (see Table 9.1). The fact that, for the first time, all the different elements of the budget were addressed in one reform was instrumental to the agreement. Moreover, the link to the ambitious single market programme and related institutional reforms (in the form of the SEA) motivated the German Chancellor, Helmut Kohl, in particular, to secure an agreement, even though it meant a significant increase in Germany's net contributions to the budget. For the poorer member states, such as Greece, Spain, and Portugal, that did not benefit so much from CAP expenditure, a significant strengthening of cohesion spending was a prerequisite for agreeing to an internal-market project that would pose more challenges to their economies than to those of wealthier member states (see Chapter 10). Delors-2 The pattern established by Delors-1 was replicated in the negotiations on Delors-2. The political link between the SEA and Delors-1 was followed by a similar link between the Treaty on European Union (TEU) and the Delors-2 package. Again, poorer member states established the link between an increase in cohesion spending (i.e. the creation of a new cohesion fund) and further economic integration (i.e. the introduction of EMU). The debate on Delors-2 was as tortuous and controversial as that on Delors-1. The member governments grappled with their desire to reach agreement, on the one hand, and with their determination that the terms of the agreement be as favourable as possible to their own viewpoint, on the other. At the 1992 Edinburgh European Council, an agreement was reached (see Table 9.1). Agenda 2000 In the mid-1990s, the balance of forces in the Union on budgetary matters began to change radically. The sizeable expansion of the budget led to the emergence of a 'net contributors' club, a group of member governments concerned about the level of their financial commitments to the EU budget. At the Copenhagen European Council in 1993, the member governments had accepted the principle of an eastward enlargement of the Union. The accession of so many comparatively poor states would generate pressure for more redistribution and a larger budget. TABLE 9.7 The main elements of the financial perspectives between 1988 and 2013 Delors-l Delors-2 Revenue ceiling Rise to 1.2% of GNP by 1992 and an extension of the system of 'own resources' to include a new fourth resource based on the relative wealth of the member states as measured by GNP UK rebate and Continuation of the other correction complex Fontainebleau mechanisms rebate system Unchanged for 1993 and 1994, but rise to 1.27% of GNP by 1999 UK rebate maintained; slight adjustments for other net contributors Agenda 2000 Unchanged at 1.27% of GNP FP 2007-13 UK rebate maintained; slight adjustments for other net contributors Unchanged at 1.24% of GNI (which is a recalculation of the 1.27% of GDP) with average actual MFF 2014-2020 Slight decrease to 1.23% at GNI. High Level Group ot Own Resources established to support potential spending level ot 1.05% reform UK rebate maintained; slight adjustments for other net contributors UK rebate maintained; slight adjustments toT other net contributors CAP Cohesion expenditure Limiting the growth of agricultural expenditure at not more than 74% of GNP A doubling of the financial resources available to the less prosperous regions of the Community Implementation of 1992 CAP reform (no significant change) Significant increase in the flows to the poorer parts of the Community Only limited changes in the size and policy structure of the CAP Flows to cohesion countries were marginally reduced, leaving some scope for flows to the new member states after eastern enlargement Implementation of 2003 CAP reform (no significant change in level of expenditure) A shift of regional expenditure from old cohesion countries to recently acceded countries Limited reduction in CAP spending Limited reduction in cohesion spending The Budget: Who Gets What, When, and How? 221 Against these developments, it is surprising that the institutional setting and the distributive characrer of the budget proved so robust. The status quo was by-and-farge confirmed, but, in contrast to the significant increases recorded in 1988 and 1992, the Union's budgetary resources were consolidated, with no major increase in the size of the EU budget. The new member states were still not at the table and thus had little impact on the negotiations (see Table 9.1). The Financial Perspective for 2007-13 The negotiations of the 2007-13 financial perspective took place against the background of three developments. First, at the Lisbon European Council in 2000, the EU set itself the strategic goal of becoming 'the most competitive economy in the world' by the end of the decade. Heads of state or government committed to take measures that would increase the competitiveness of their economies and raise investments in research and technology. The Lisbon goal was taken up by a report of an independent group of high-level experts headed by the Belgian economist, André Sapir (Sapir et al. 2004). The report strongly criticized the dominance of the CAP spending and suggested refocusing the budget on European public goods, most importantly research and technology. Although fiercely criticized by some in the Commission, the report clearly established a link between the Lisbon goal and the EU budget. Secondly, most member states, in particular the large euro area members, Germany and France, were experiencing low growth rates and strong pressures on their national budgets. Their failure, in three subsequent years (2002-04), to meet the terms of the Stability and Growth Pact (SGP), which commit members of the euro area to compliance with the Maastricht criteria (see Chapter 7), further limited their willingness to accept increases in the EU budget. Thirdly, for the first time, the ten new member states sat at the negotiation table with high expectations of budgetary transfers and a full veto right. The negotiations for the financial perspective began in early 2004 with a proposal by the Commission. Romano Prodi, then President of the Commission, emphasized the need to give the EU the resources to match its political priorities. The Commission sought to transform the redistnbutive 'Delors budget' into a more distributive Lisbon budget' that would strengthen expenditure for public goods and reduce the emphasis on redistributing resources to poorer regions/member states or to farmers. For the first time since the inception of the financial perspective in 1988, the Commission envisaged an overhaul of the expenditure headings so as to reflect the new policies and priorities of the enlarged EU. Finding an agreement was again not easy. Essentially, three key cleavages dominated the debate. First, net contributors were unwilling to accept an increase in the spending level, while governments from beneficiary member states, such as Spain and Portugal, stressed the continued importance of pursuing the objective of 'economic and social cohesion' (see Chapter 10). Secondly, among the beneficiaries of regional expenditure, 'old' beneficiaries wanted to prevent an abrupt ending of transfers and demanded compensation, while the new member states feared that these compensation payments would be financed by cuts in transfers to them. Thirdly, the UK government strongly opposed any attempt to abolish its rebate through its replacement by a generalized mechanism, which was naturally favoured by all the other net contributors. Significantly, the Commission's ambition to strengthen expenditure for public goods found very few active supporters, except the EP. There was little space left for new spending programmes in fields such as innovation and technology, given that agricultural expenditure was excluded from the negotiations (under a Franco-German agreement concluded in 2002) and that regional expenditure was dominated by strong vested interests in the new and old member states. An agreement was finally reached in late 2005 which broadly retained the status quo (see Table 9.1). However, the 2007-2013 MFF negotiations marked the beginning of a gradual evolution of the budget from a negotiation tool aimed at compensating member states for their political compromises to a policy instrument aimed at solving EU-wide problems (Rolling 2019). Multiannual Financial Framework 2014-2020 The negotiations on the 2014-2020 financial perspective took place against the backdrop of the continuing euro area crisis, the emergence of deep economic divergence within the euro area, and growing differentiation within the EU arising from the challenge of developing the institutions and policy toolkit for managing a single cunency (see Chapter 7). The Commission presented its first set of proposals for the future finances of the Union entitled 'A Budget for Europe 2020' in June 2011 (Commission 2011). The emphasis in the proposals was on the value-added of spending at the EU level with a focus on an innovative budget designed to address pan-European challenges, particularly growth and employment (Molino and Zuleeg 2011). The Commission sought a commitments budget of €1,025 billion (1.05% GNI) and a payments budget of €972 billion (1.01% GNI) over seven years. The proposals looked for increases in spending on competitiveness, infrastructure, citizenship and security, and 'global Europe'. The proposals were designed to shift EU spending from agriculture and cohesion to other policy areas in ways that would test the status quo bias of budgetary politics in the Union. The negotiations took place in multiple fora, including unsuccessfully at the November 2012 European Council. The member states finally reached agreement at the European Council in February 2013, but a tense and difficult period of negotiations with the EP followed. Herman Van Rompuy, in his role as European Council President, was the major institutional player during the end-game of the negotiations, working closely with the Commission to mould an agreement. The member states were divided into three main groupings. The net contributors (see Figure 9.3), consisting of Austria, Finland, Denmark, Germany, the Netherlands, and the UK, sought to limit their contributions favouring a status-quo or even a status-quo-less outcome. The second group was composed of the newer member states from central and eastern Europe led by the Polish Prime Minister, Donald Tusk. The new member states were primarily interested in the two traditional expenditure policies: agriculture and cohesion. The third group—consisting of France, Greece Italy Portugal, and Spain—was committed to a larger budget than was acceptable to the net contributors, which would support economic growth in addition to maintaining agricultural and cohesion spending. These states wanted a status-quo-plus outcome. The Mediterranean states, in particular the old cohesion countries, wanted to ensure that they would continue to benefit under structural The Budget: Who Gets What, When, and How? 22 FIGURE 9.3 Budgetary balances by member state, 2019 -1.00 TT T ! i i i i i i—i—i—i—[—i—r—i—i—i—i—i—i—i—i—i—r—i—i—i—i BE BG CZ DK DE EE IE EL ES FR HR IT CY LV LT LU HU MT NL AT PL PT RO SI SK Fl SE UK Source: Author elaboration based on Commission 2019 (http://ec.europa.eu/budget/graphs/revenue_expediture.html) spending. The French President, Francois Hollande, was torn between promoting policies for growth and the deep-seated French commitment to the CAP Other countries, such as Belgium and Ireland, did not fall decisively into any one of these camps, but sought to get a deal they could live with by focusing on particular issues. The EP was also able to assert itself in the negotiations gaining both concessions from an institutional perspective and highlighting its concern about the social dimension of the European project ahead of the forthcoming 2014 EP election. Despite the protracted negotiations, MEPs approved the MFF (2014-2020) and an accompanying interinstitutional agreement in November 2013 (see Figure 9.4 for evolution of main policy areas). Notwithstanding the high politics of budgetary negotiations and the powerful forces that oppose a larger financial capacity for the Union, there have been important developments in EU finances as the member states have developed further policy instruments to support the single currency. The June 2012 Van Rompuy report and its subsequent follow-up reports in October and December 2012 on creating a Genuine Economic and Monetary Union, as well as the juncker report three years later, made reference to a number of policy instruments with budgetary implications (Van Rompuy 2012; Juncker 2015; and see Chapter 7). Among the most salient were the creation of a single resolution mechanism as part of a banking union that would be supported by backstop, a reference to financial support for euro area member states that enter a contractual arrangement on structural reform, and reference to the possibility of creating a 'limited fiscal capacity' in the euro area to deal with economic shocks (Van Rompuy 2012). This was further reinforced by the ambitious policy agenda that French President Emmanuel Macron brought forward in 2017 (Macron 2017). It had the creation of a discretionary euro area budget as one of its central proposals, but also sought to advance discussion on EU-wide public goods with a fiscal dimension, for example in the area of defence and climate change mitigation. DJ Ü i RCaCtin§ 3lS0 t0 the effect that BreXlt W°Uld ^ °f €1135 billion in f£ °X 9'1), the Commission proposed a long-term budget of • semln rmUmentS' ^ * L11% of post-Brexit EU GNI. These figures^ of EU GNI ? ? abS°lme terms from &e previous MFF, but a decrease as a Pessary by the EP for the EU to meet its objectives. The Budget: Who Gets What. When, and How? 225 nsfor the EU budget The UK's departure from the EU had political and financial implications for the EU's budget. • Brexit-related gap in the EU budget: as the UK has been a net contributor to the EU budget, the primary effect of Brexit has been a hole of between €10 and €12 billion annually (i.e. €75 billion for the whole period of the new MFF). • Divorce bill: the withdrawal agreement aligned the UK's de facto participation in the EU budget with the length of the MFF, ending in 202O.The total divorce bill, which also includes payment of outstanding commitments and the financing of some liabilities as at the end of 2020, amounts on a net basis to an estimated amount of around £33 billion or €43 billion (House of Commons tibrary 2020). • EU-UK relations post-2020: should the UK opt for (and be granted) participation in certain Union programmes, the rules laid down in the MFF for the participation of third countries would appiy. These rules distinguish between (1) EEA countries, acceding countries, candidate countries, and potential candidates; (2) countries covered by the European Neighbourhood Policy; and (3) other third countries. For this last group, they foresee an agreement that would lay down the conditions applicable to the participation of the third country concerned in any programme; ond the agreement 'should ensure a fair balance as regards the contribution and benefits of the third country participating in the Union programmes, not confer any decision-making power on these programmes and contain rules for protecting the Union's financial interests'. • Offsetting contributions from EU27 member states: in its MFF Proposal, the Commission had stressed that '[in light of Brexit,] maintaining a level of support that matches our ambitions across policy areas will require additional contributions from all member states in a fair and balanced way'. Options to offset the Brexit-related budget hole included increasing national contributions, cutting spending, or creating new revenue sources (see also Schratzenstaller 2019). • Budget negotiations: Brexit changed the political equilibria in budget negotiations. The UK had been a historical supporter of a small budget and of the system of rebates. In the negotiations for the new MFF, this role was taken over by the so-called 'frugal' member states, that is, the Netherlands, Austria, Sweden, and Denmark. At the same time, the absence of the UK at the negotiating table may well have facilitated opting, in the context of the Covid-19 pandemic, for a large-scale fiscal response through the EU budget and based on debt issuance. • Flexibility instrument to cope with consequences of Brexit: the European Council in July 2020 reached an agreement on the introduction of a Brexit Adjustment Reserve of €5 billion which—outside the ceilings of the new MFF—is aimed at countering unforeseen and adverse consequences in member states and sectors that are worst affected. In line with the previous MFF proposal, the proposed 2021-2027 MFF included significant re-prioritizations in favour of pan-European challenges that had gained more importance, particularly migration, defence, and innovation. Such re-arrangement would come at the expense of common agricultural and cohesion policy expenditure, which would be subjected to a 15% and 7% reduction in real terms respectively, as well as to an internal re-focusing of cohesion spending. In her 'Agenda for Europe', newly elected Commission President Ursula von der Leyen expressed her intention to steer the budget towards new priorities, including climate change, border management, external action, youth mobility, and the rule of law—coming into line with the proposal from the previous Commission (Von der Leyen 2019£>). The MFF negotiations following the 2018 Commission proposal to early 2020 followed the pattern of previous budgetary negotiations, underlined by the failure of the new European Council President, Charles Michel, to secure the agreement of the member states at a special EU budget summit in February 2020. The failed summit was overtaken by the arrival of Covid-19 in Europe, which transformed the context and substance of the MFF negotiations. While at first the measures taken in reaction to the Covid-19 pandemic were adopted at the national level, the EU budget dimension quickly gained pace as the pandemic spread. Consensus grew on the need for a concerted European response both for the more short-term fiscal measures and for the financing of the recovery. The Commission—after smaller sums had already been activated within the existing budget—presented a proposal for a €100 billion loan-based scheme for member states, called SURE, to support unemployment-related costs. The scheme would be financed by issuing debt backed by national guarantees. After intense debates among member states, this proposal was adopted in June 2020, together with two other instruments: a Pan-European Guarantee Fund from the European Investment Bank, which also used national guarantees to mobilize up to €200 billion; and a Pandemic Crisis Support for health-related costs of up to €240 billion, based on the Enhanced Conditions Credit Line for euro area member states under the European Stability Mechanism. In parallel, discussion started on the financing of the recovery, with strong calls from the hardest hit member states for sizeable financial resources, in view of the limited fiscal space that many of them had for increasing their national debt levels and fears of widening divergences within the Union. The European Council in April asked the Commission to prepare a proposal in the context of the EU budget, together with a new proposal for the Multiannual Financial Framework (2021-2027). In addition to the size of such European support, two key aspects dominated the debate on which the Commission had to take a stance, namely whether the Union should issue debt on a large scale, and whether such issuance should finance only loans, only grants, or both loans and grants. In mid-May, France and Germany intervened forcefully, with a call for the creation of a €500 billion recovery fund, and positioned themselves in favour of the issuance of grants. In mid-May 2020, the Commission presented its proposals for a revamped MFF package and a recovery instrument. The Commission package consisted of two elements: the MFF 2021-2027 amounting to €1.1 trillion over seven years (taking the state of negotiations in February 2020 as the basis) and the Next Generation EL/ instrument of €750 billion entirely funded by borrowing from the capital markets (European Commission 2020a and b). The key elements of the Next Generation EU proposals were: a Recovery and Resilience Facility of €560 billion to be disbursed as both grants and loans, a further €55 billion for cohesion policy, and a Just Transition Fund of up to €40 billion to support the green agenda (European Commission 2020). The Budget. Who Gels Who), When. ond How? 227 Europonn Council decision on Multiannual Financ'-*1 pramework 2021-2027 73.102 >nonn teW"»"---- , cinancial Framework . ■ F'" euros; total: €1.0743 trillion! 'n July 2021), in a four-day mammoth meeting of the European Council a po-»«W agree,,,,,,, was reached (see Figure 9.5). In particular, the strong res sta »«*« group ol member slates called the 'frugal*', namely the Netherlan, to S*«den, and Denmark (with support from F.nland) over the *™ g[ grants, and disputes with Hungary and Poland over matogthe" P EU '"-din, condu,o,ul on compliance with the rule of law, led to very negotiations. With reference to its veto right on the adoption of the new MFF, the EP reacted to the agreement negatively and criticized, in particular, the fact that the European Council (1) had not only increased the share of loans to €360 billion but had also cut the EU spending programmes significantly (compared to the Commission proposal), (2) did not agree on a stronger stance regarding the rule of law, (3) included only a limited commitment on introducing new own resources (4) kept the system of rebates to soften the net contributor positions of some member states, and (5) did not foresee a role for the EP in the governance Recovery and Resilience Facility. It remains to be seen what the Council can provide to the EPto address these criticisms and thus gain its support for the package. Budget management The struggle for budgetary resources in the EU and the inter-institutional battles about budgetary power initially overshadowed questions of'value for money' and the quality of the Commission's financial management. These considerations became an increasingly important focus of budgetary politics as the financial resources of the budget grew Managing a budget that involves around 400,000 individual authorizations of expenditure and payment each year is a major challenge, particularly as the management of the EU budget is characterized by a fragmentation of responsibility between the Commission and public authorities in the member states: 80% of the budget is managed on behalf of the Union by the member states. There is a great diversity of public management and public finance cultures across Europe, and there are limits to the auditing capacity of a number of states. The increasing complexity in the budget monitoring and control system of the EU presents challenges to financial accountability and it creates an overall complex policy architecture (Perreau 2019). Press reports and investigations carried out by the European Anti-Fraud Office (OLAF) have highlighted scams involving the forging of customs documents in order to claim export refunds, avoid anti-dumping duties, and not pay excise duties, or the switching of labels on foodstuffs to claim higher refunds, claiming payments for non-existent animals, and putting non-existent food into intervention storage. The protection of the single market has been one of the Union's prime motivations in the Brexit negotiations, especially in relation to the border on the island of Ireland. No one knows with any degree of certainty the level of fraud affecting the EU budget: estimates ofbetween7and 10% of the budget are often cited but have never been convincingly demonstrated. In the 1990s, attempts were made to improve financial management, but they proved insufficient to prevent financial mismanagement becoming an explosive political issue in 1999, when the Santer Commission was forced to resign. The Prodi Commission, which took over in autumn 1999, was given a mandate to reform the Commission services by the European Council. Commission Vice-President Neil Kinnock, who was given responsibility for administrative reform, proposed a White Paper on the Reform Strategy in March 2000 (Commission 2000a). Not unexpectedly, reform of financial management and control systems was one of four priorities in the White Paper. The implementation of the White Paper led to a new Financial The Budget: Who Gets What, When, ond How? 229 Regulation (Official Journal, L 248, 16 September 2002) and extensive management changes in the Commission services. The Commission also adopted a stricter approach with the member states, taking the unprecedented step in July 2008 of suspending aid worth over €500 million to Bulgaria because of corruption. The Kin-nock reforms have enhanced the regulatory framework and the capacity of EU institutions to practise sound financial management, but the EU budget remains highly fragmented and is dispersed across very many countries and levels of government, which continues to cause problems. The idea of having a European Public Prosecutors Office (EPPO) to protect the financial interests of the EU has had a long gestation. The ToL made provision for an EPPO and, in autumn 2017, agreement was reached to proceed with the EPPO on the basis of enhanced co-operation, with 22 member states choosing to participate. The states that have remained outside the EPPO are Denmark, Hungary, Ireland, Poland, and Sweden. The EPPO has a hybrid two-tier structure with a central office at EU level involving the chief prosecutor and delegated prosecutors in the member stales. On 14 October 2019, the Council confirmed Laura Codruja Kovest as first European chief prosecutor. The implementation of the temporary Recovery and Resilience Facility will add a new dimension to the management of the EU budget, but also to the European semester process (see Chapter 7). It combines the surveillance of economic policymaking and national plans with the provision of European money and thus goes significantly beyond earlier attempts to combine EU spending programmes with the European semester process. Conclusion Budgetary politics in the EU is marked by elements of both continuity and change. The capture of the EU budget in the 1960s by agricultural interests has proved relatively enduring. France, the main defender of the CAP, has been successful in preserving its interests in this policy domain. However, agricultural support has moved decisively since 1992 from market measures to compensation payments, and the funding has started to shift from consumers to taxpayers (see Chapter 8). Cohesion funding assumed a central role in budgetary politics in the late 1980s with the arrival of Spain and Portugal (see Chapter 10). Structural funds remain an entrenched part of the budgetary acquis. However, the outcome of the 2014-2020 budgetary negotiations reduced the weight of these big budgetary items for the first time, and the resources devoted to cohesion policy outstripped agriculture, also for the first time. The new MFF for 2021-2027 confirms this trend. At the same time, in the reaction to the Covid-19 pandemic, it is coupled with a significant temporary increase of the EU budget in the form of financial support for member states based on national recovery and resilience plans. Agreement in 1988 to the Delors-1 financial perspective represented a step change in how EU budgets were drawn up. Since 1988, multiannual bargains have become the norm, and are now part of the acquis. Although difficult and protracted Brigid Laffan and Johannes Lindner negotiations have marked all six budgetary bargains outlined in this chapter, the political process, characterized by a set of integrated Commission proposals, intensive negotiations across a range of Councils, and high-level bargaining in the European Council, demonstrated a capacity to frame an outcome that would enjoy broad consensus. The new recovery fund does not fundamentally challenge this conflict-reducing patter of big bargains as it is temporary in nature as a crisis response and fully linked to the new MFF At the same time, it has the potential to put EU budgetary politics onto a new distributive and institutional path. For the first time, the Union has recourse (temporarily) to large-scale debt issuance and thus becomes the largest supranational issuer. Secondly, the financial support to member states through the Recovery and Resilience Facility follows a different budgetary procedure and introduces a new form of financial support linked to the European semester. Thirdly, the envisaged introduction of new own resources might provide some structural shifts on the revenue side away from the dominant focus on GN1 contributions. Thus, it will be interesting to see whether, at the end of the four years when most of the payments of the recovery fund will have been made, a discussion on revamping the existing MFF will take place. While there will then be the strong status-quo bias—in terms of both institutional structures and the preferences of the major actors—that has long prevented significant changes in the distributive order of the Union, the creation of the recovery fund shows that also in a future crisis the Union is again likely to react together forcefully. It also creates a new distributive and institutional reality that, depending of the economic developments in member states, is likely to induce heightened expectations and interdependencies. It may also provide for another opening in EU budget terms for the discussions on increasingly salient issues, such as climate change, the digital transformation, and other developments on the global stage, and could possibly alter the so far more muted dynamics around the need for a central fiscal capacity for stabilization purposes in the currency union. * ) NOTES 1 This chapter draws on the EU budget chapter by Brigid Laffan and Michael Shackleton in the fourth edition. Michael Shackleton's consent is gratefully acknowledged. Valuable research assistance was received from Valentina Caracci. The views expressed in the chapter do not necessarily reflect those of the European Central Bank. 2 On the redistributive and stabilization capacity of the EU budget, see in particular Fuente and Doménech (2001), Asdrubali and Kim (2008), and Citi (2017). The latest analysis by Pas/meni and Riso (2018) finds that the redistribution and stabilization achieved by the EU budget in terms of equalization and smoothing of income per capita are low. 3 The impact of these corrective measures is, however, not clear-cut. Citi (2017) shows that rebates have had little, if any, effect on member states' net fiscal position vis-a-vis the rest of the EU, and in some cases, they have produced a result that is paradoxically contrary to their intended purpose