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The EU’s Multiannual Financial Framework and some implications for CESEE countries

Bruegel scholars Zsolt Darvas and Guntram Wolff contributed to the September 2018 edition of the OeNB's Focus on European Economic Integration.

By: and Date: September 12, 2018 Topic: European Macroeconomics & Governance

This article was also published in the September 2018 edition of the OeNB’s Focus on European Economic Integration.

The European Union’s budget – which is fundamentally different from the budgets of federal countries and amounts to only about 1% of the EU’s gross national income – continues to be heavy on agricultural and cohesion spending. The literature shows that the EU’s common agricultural policy (accounting for 38% of EU spending from the current budget) provides good income support, especially for richer farmers, but is less effective for greening and biodiversity and is unevenly distributed. The EU’s cohesion policy (accounting for 34% of current EU spending) contributes to convergence, but it is unclear how strong and long-lasting the effects are. Spending on new priorities such as border control could require additional funds of at least EUR 100 billion in the 2021–2027 period, but there will be a EUR 94 billion Brexit related hole in the EU budget for 2021–2027 if the EU loses the United Kingdom’s share of contributions and the EU’s work program as a share of gross national income remains unchanged.

The European Commission’s May 2, 2018, proposal for the 2021–2027 budget makes several welcome steps in reforming the EU budget, e.g. by reorganizing spending commitments toward priorities which have gained more importance recently, while reducing the share of spending on agriculture and cohesion policies. But many details remain quite fuzzy and need to be spelled out further before a critical appraisal can be made. Moreover, the new draft budget for agriculture foresees larger cuts for rural development support – important for environment and biodiversity goals – than for direct subsidies to farmers. Also, we would argue that the European Commission needs to make a significantly stronger attempt at measuring the actual “European value added” of the various proposed initiatives. Therefore, while we regard the European Commission’s proposal a good basis for subsequent negotiations, we propose a number of significant changes.

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