The other EU negotiation

While all attention in the UK is focused on whether the government and opposition can come up with a clear view of what future trade relationship the UK wants with the European Union, the other 27 member states are focussing on something much closer to their collective heart: their budget after 2021.

This will be the first EU Budget since 1973 without a significant net contribution from the UK. How to cover that gap is likely to prove a divisive issue over coming months.

The EU Budget is very small in relation to the EU's overall size—or indeed national budgets—at only 1 per cent of the bloc’s GDP. Even so, making a big adjustment to a small budget is not that easy. The UK contributed around 15 per cent of total revenue: losing a sixth of your income overnight requires some painful decisions.

Three camps seem to be emerging.

The first is formed of those who think that the important thing is to maintain spending and increase revenue to compensate for the loss of the UK contribution. Although overall EU spending is relatively small, some countries are big beneficiaries: the Commission estimated that in 2015 EU spending accounted for 6.4 per cent of Gross National Income in Bulgaria and 5.2 per cent in Hungary. In Germany conversely it was a blink-and-you-would-miss-it 0.5 per cent.

And even after reform attempts, the EU budget is still very unbalanced, with agriculture still making up 40 per cent of the EU Budget. It is impossible to cut EU spending without reducing farm subsidies. The German EU Budget commissioner, Guenther Oettinger has already indicated that he is under pressure to spend more on other things and that everything has to be on the table. Even the French government is signalling more flexibility—but farmers have proved adept at mobilising in the past.

The opposing camp wants to see spending cut to avoid having to increase their contributions. Covering the UK’s net contribution would not mean big budget hikes—Germany would have to pay around €2bn euros a year more (and seems to be ready to countenance that—after all one of the issues in Germany is what to do with its budget surplus). But other countries are much less keen. The Financial Times reported the emergence of the “frugal four,” led by the Netherlands, keen both to keep the lid on EU spending and their contributions and not to give any more succour to domestic Eurosceptics. This group could normally have counted on UK support—but the future budget is now an issue for the 27 not the 28.

Finally, the Commission itself is proposing a third way to generate what it calls “fresh money”—increasing the resources it gets as of right without making member states contribute directly. Ideas it has put forward include a share of revenues generated from emissions trading or a share of the “relaunched common consolidated corporate tax base.” It is easy to predict what the UK’s reaction would have been, but this may have a more sympathetic hearing from the 27.

There are other issues at stake. Not just what to fund, but a debate on “conditionality” which pits some of the original member states against the new arrivals. Should funding be conditional on, for example, accepting refugees in line with agreed policy? Should it be suspended to member states who fail to respect EU values? These are much more fundamental questions than whether the budget is 1.03 per cent or 1.1 per cent of EU GDP.

The debate on the EU budget after Brexit is just starting—and it’s a debate without us in the room. But that doesn’t mean it’s irrelevant—it will be an important factor in how our own negotiations play out.