February 14, 2018 / 12:13 PM / 6 days ago

EU executive presents options for next budget, seeks to make up for Brexit loss

BRUSSELS (Reuters) - The European Commission proposed on Wednesday a larger EU budget for 2021-2027, with new sources of revenue and cuts in cohesion spending to cover a hole left by Britain’s departure from the bloc, and said money should be linked to governments respecting the rule of law.

The Commission presented several options that European Union leaders are to discuss on Feb. 23, before the EU executive presents a final proposal on May 2. The Commission wants an agreement from EU governments on the budget by May 2019.

“It (the budget) is ... vital at a time when Europe is in the midst of a fundamental debate on how the Union should evolve in the years to come,” the Commission said in a statement.

“We now have an opportunity to choose the Europe we want and to decide on a budget that helps us build it,” it said.

The Commission’s top budget official Guenther Oettinger said the next budget should be bigger than the current one as the EU faced new challenges it had to finance, like joint defense and border protection projects or migration.

He said the budget should be equivalent to 1.1 to 1.2 percent of EU gross national income. That compares with the current 1.0 percent which, depending on the year, is around 140 to 150 billion euros.

To address French calls for the creation of a special budget just for the 19 countries sharing the euro currency, the Commission said the overall EU budget should have a dedicated line of at least 25 billion euros for the euro zone.

This money would finance structural reforms at national level and help countries still outside the euro zone to bring their economies closer to the single currency area.

Separately, there should be money available for a “stabilization function” for the euro zone to help protect its members from crises.

This would be built progressively over time and based on loans guaranteed by the EU budget, a voluntary insurance mechanism based on national contributions as well as a grant component from the European budget, the Commission said.

This is a compromise between the more ambitious position of France and the German view that there should be no special euro zone budget at all.

PRESSURE ON POLAND

To put pressure on countries such as Poland, where the Commission believes the government is not respecting the rule of law and is violating its constitution and undermining the independence of courts, money from the next budget should be conditional on respecting such democratic values.

The Commission outlined several options for funding of joint new projects like an EU border management system, which in its full form would cost about 150 billion euros over seven years, or a stepped-up student exchange program which could set the budget back 90 billion if one in three young people were given the opportunity to learn abroad.

The most ambitious approach to research and development spending would be to double the amount earmarked for it to 160 billion euros, which would create 650,000 new jobs by 2040 and boost EU GDP as well, the Commission said.

At the same time money spent on equalizing living standards across the 27 countries, now accounting for more than one third of the total budget, could be cut by up to a third, or 124 billion euros, ending support for regions in Austria, Belgium, Denmark, Finland, mainland France, Germany, Ireland, the Netherlands, Sweden and many regions in Italy and Spain.

Also, spending on the common agriculture policy could be cut by almost a third, or 120 billion euros, the Commission said.

The EU should also consider tapping new sources of revenue.

The Commission suggested taking over a share of money from the trade of greenhouse emissions permits, modifying what it gets from the value-added tax across the EU, getting a contribution from corporate taxes and the revenue generated by the European Central Bank from issuing money, known as seigniorage.

To better use the money available, the next EU budget could make use of financial engineering like leveraging, drawing on the success of the EU’s investment scheme which used 21 billion euros of public money to generate investment of 315 billion.

Jan Strupczewski Alissa de Carbonnel; Editing by Hugh Lawson

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