OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK 3

How can the EU budget support better management
of the EU's external borders?

Leaders have called for stronger external borders as a precondition to lifting internal borders. In 2016, the European Border and Coast Guard was set up based on a proposal from the European Commission. By 2020, the European Border and Coast Guard will have 1,015 staff, including field operatives – as well as at least 1,500 national staff on standby in the rapid reaction pool. Its annual budget of EUR 292 million should increase by that time to EUR 335 million. The EU also provides funding to co-finance national management of Europe's external border by 96,000 national border guards and emergency support through the Internal Security Fund (Borders). Combined, these activities amount to around EUR 4 billion over a seven year period, or 0.4% of the total EU budget.

The future development of the European Border and Coast Guard will depend on the decisions taken on the future Financial Framework. Depending on the level of ambition, several scenarios could be envisaged:

Exploiting the existing European Border and Coast Guard to the maximum would support the continuous development of the information exchange framework (Eurosur), as well as Member States’ capacity investments for border management. It would also ensure that the European Border and Coast Guard has access to the equipment it needs. This would require a budget of around EUR 8 billion over a seven year period, corresponding to approximately 0.8% of the current Multiannual Financial Framework.

An upgraded European Border and Coast Guard would allow support for a fully integrated EU border management system. This would be based on a revised legal framework with an expanded mandate, bringing together and reinforcing the existing tools related to risk assessment and situational pictures; stepping up the operational capacity of the agency with a standing corps of European border guards of at least 3,000 EU staff; providing financial support and training for the increase of the national border guard component in vulnerable Member States; bigger and more operational expert pools; and reinforced own equipment. It would entail a much stronger return role at the EU level; and lower intervention thresholds for the Agency to help prevent serious shortcomings in the external border controls that could lead to a crisis. This scenario would require a budget of around EUR 20 – 25 billion over a seven year period, corresponding to approximately 1.8 – 2.3% of the current Multiannual Financial Framework.

A full EU border management system would imply 100,000 EU staff and a substantial EU equipment pool, comparable to the US or the Canadian system. It would require around EUR 150 billion over a seven year period, taking into account all national expenditure on border protection. This would correspond to approximately 14% of the current Multiannual Financial Framework, the equivalent of an annual EU budget. As an example, the US Customs and Border Protection agency alone has an annual budget of US$ 13.56 billion and more than 62,000 employees. The Canada Border Services Agency has an annual budget of about Can$ 2 billion and more than 14,000 employees.

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

How best to support a true European Defence Union?

The European Defence Fund was launched in June 2017 and is gradually being built up. With a limited initial budget of EUR 90 million for defence research and EUR 500 million for industrial development for the period 2017-2020 (taken together, this represents approximately 0.05% of the current Financial Framework), it will in its first phase only be able to support a limited number of collaborative research and development projects.

What type of defence fund do we want for the future? A true European Defence Union would require a significant budgetary investment.

Given the scale of existing national defence research budgets – France and Germany are each individually spending more than EUR 1 billion per year on defence research – and the high costs of developing cutting-edge defence technologies, including for cyber-defence, the research window of the Fund would need an estimated budget of at least EUR 3.5 billion over the period to make a substantial difference.

Likewise, at least around EUR 7 billion would be needed between 2021 and 2027 to co-finance part of the cost of defence industrial development. This would allow leveraging a significant total investment for the development of defence capabilities of at least EUR 35 billion over seven years. This would correspond to 14% of national spending on defence capabilities. It would be a major step towards the target agreed by Member States in the European Defence Agency to use 35% of their equipment spending for collaborative projects.

The European Defence Fund has the potential to provide an important boost to the EU's strategic autonomy and the competitiveness of Europe's defence industry. However, due to the limitations of the Treaties the EU budget is not able to cover all EU areas of action in the field of security and defence. A separate funding mechanism of around EUR 10 billion for the 2021-2027 period would significantly increase the EU's ability to financially support operations with defence implications. This would compare to up to EUR 3.5 billion under the current period.

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

How best to support the mobility of young people?

After 30 years, Erasmus+ has helped nine million young people to study, train, teach or volunteer in another country, boosting their chances on the labour market. The current Erasmus+ programme 2014-2020 has a budget of EUR 14.7 billion (around 1.3% of the overall size of the current Multiannual Financial Framework), which can only offer learning mobility opportunities for less than 4% of young people living in Europe.

There is a strong consensus for the need to step up mobility and exchanges, including through a substantially strengthened, inclusive and extended Erasmus+ programme. Depending on the level of ambition, several scenarios could be envisaged:

Doubling the number of young people in the EU participating in Erasmus+ to reach 7.5% of young people across Europe would require an investment of EUR 30 billion in the next Multiannual Financial Framework (over a seven year period).

Providing the opportunity for 1 in 3 young people to participate in an Erasmus+ learning experience abroad would require a budget for the 2021-2027 period in the order of EUR 90 billion.

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

How best to power Europe's digital transformation?

EU support for Europe's data infrastructure, connectivity and digital skills amounts to around EUR 35 billion over the seven-year period. This is provided through the European Regional Development Fund (EUR 17 billion), the Research and Innovation Framework Programme (EUR 13 billion), the European Social Fund (EUR 2.3 billion), the Connecting Europe Facility (EUR 1 billion) and the Creative Europe Programme (EUR 1 billion).

Maintaining or even lowering current investment levels would risk compromising the EU's ability to remain competitive in key industrial and service sectors such as industrial production and machinery, financial services, health care, transport, energy or the automotive industry. Underinvestment in digital skills would further widen the gap between demand and available expertise, while automation will replace traditional tasks. This would translate into lower jobs and growth prospects, sub-standard public services and higher vulnerability to cybersecurity threats.

Doubling the amounts currently invested in the digital economy to around EUR 70 billion over the period 2021-2027 would deliver strong progress towards smart growth in areas such as high quality data infrastructure, connectivity and cybersecurity. It would enable the roll-out of new trusted and secure services in e-health, e-government or mobility. It would help secure European leadership in supercomputing, next generation internet, artificial intelligence, robotics and big data. This would reinforce the competitive position of industry and businesses in Europe across the digitised economy. It would also have a significant impact on filling the skills gap across the Union.

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

How best to boost competitiveness through
research and innovation?

For advanced economies like Europe, research and innovation make the difference in enhancing productivity and boosting competitiveness. The future EU budget must therefore allow the EU to invest in the drivers of innovation enabling European industry to grow and thrive. The Union is currently spending close to EUR 80 billion for its Horizon 2020 Research and Innovation Framework Programme over 2014-2020. What research budget should it have in the future?

Maintaining or even lowering current investment levels would not address the problem of underfunding. This would have knock-on effects on national and private investment, and undermine efforts to reach the target set by the Europe 2020 strategy of investing 3% of Gross Domestic Product in research and development. The Union would fall further behind compared to the world leaders. Research support to other EU policies would be reduced.

An increase in the Framework Programme by 50% to EUR 120 billion would create an estimated additional 420,000 jobs by 2040 and increase Gross Domestic Product by around 0.33% over the same period. This would continue the growing trend of recent EU Research and Innovation budgets and ensure an acceptable share of high-quality proposals funded. It would increase the Union's world-wide attractiveness for leading researchers and tackle weaknesses in innovation and scale-up opportunities. It would support progress on priorities such as digital, energy, climate and health.

Doubling the Framework Programme to EUR 160 billion would create an estimated 650,000 jobs by 2040 and add around 0.46% to Gross Domestic Product over the same period. It would enable the EU to emerge as a global leader in large-scale initiatives, preparing full market deployment of solutions in areas like batteries, infectious diseases, smart and clean buildings and vehicles, decarbonisation technologies, circular economy, solutions for plastic waste and connected/automated cars.

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

How can the EU budget underpin a genuine 
Economic and Monetary Union?

In December 2017, the Commission set out a vision of how the euro area and the Union as a whole could be strengthened using the EU's budget – both today and tomorrow. Four specific functions were presented: to support structural reforms at national level; to facilitate convergence for Member States on their way to joining the euro; to provide a backstop for the Banking Union; and to develop a stabilisation function, bringing together different EU and euro area level funds and instruments, to help maintain investment levels in the event of large asymmetric shocks. These functions require a rethink that goes over and above the constraints of the current EU budget. For instance, this could be done through synergies with the European Investment Bank and a future European Monetary Fund. However, our budget post-2020 will also need to play its part:

The reform delivery tool and the convergence facility will need to be able to provide strong support and incentives for a broad range of reforms across Member States. A budget line in the order of at least EUR 25 billion over a seven-year period would provide critical mass and help avoid a concentration of funding on a few Member States only.

The stabilisation function is to be built progressively over time, relying on back-to-back loans guaranteed by the EU budget, loans from the European Monetary Fund, a voluntary insurance mechanism based on national contributions as well as a grant component from the European budget. The amounts required from the EU budget would not necessarily need to be very high but would need to be significant enough to, for example, reduce the interest burden of the loans and provide incentives to properly implement the support scheme.

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

What level of ambition for an efficient cohesion policy?

Cohesion policy is a concrete expression of solidarity with less economically developed parts of our Union. Its purpose is to foster economic, social and territorial cohesion. Support from the European Structural and Investment Funds is currently available to all EU Member States. Should this continue or should the policy be limited to less developed regions and/or Member States? If eligibility is maintained for all, what should the level of ambition be?

If the eligibility for support from the European Regional Development Fund, the European Social Fund and the Cohesion Fund were to be maintained for all Member States and all regions, efficiency gains could be achieved by modulating aid intensities and better targeting support. If current expenditure levels of around EUR 370 billion 4 , accounting for almost 35% of the Multiannual Financial Framework, were maintained, this would allow a strong focus to be maintained on investment across all regions in areas like innovation, industrial transformation, transition to clean energy, climate action, and better employment opportunities.

If the European Regional Development Fund and the European Social Fund were to end support for more developed and transition regions, this would amount to a reduction of approximately EUR 95 billion over the period, accounting for more than a quarter of current allocations from those funds. This corresponds to around 8.7% of the current Multiannual Financial Framework. In this scenario, support for regions in Austria, Belgium, Denmark, Finland, mainland France, Germany, Ireland, the Netherlands, Sweden and many regions in Italy and Spain would be discontinued.

If support were limited even further to cohesion countries, investment for less developed regions in France, Italy and Spain would also need to be discontinued. This would amount to a reduction of approximately EUR 124 billion over the period, accounting for around 33% of the current allocations. This corresponds to around 11% of the current Multiannual Financial Framework.

In scenarios 2 and 3, support for economic, social and territorial challenges would have to be taken over by national, regional and local authorities in line with the principle of subsidiarity.

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

What level of ambition for an efficient Common Agricultural Policy?

In the 2014-2020 framework, the Common Agricultural Policy mobilises around EUR 400 billion to finance market measures, direct payments for farmers and rural development programmes in order to promote sustainable agriculture and viable rural economies. Direct payments represent around 70% of this amount. Rural development programmes support investment, training and more resource-efficient agricultural production and are currently worth around EUR 100 billion over the period. These programmes are co-financed by Member States. Through the Common Agricultural Policy, the Union is helping to address structural problems in rural areas, such as a lack of attractive employment opportunities or skills shortages. Creating new value chains such as clean energy and bio-energy, and helping rural areas to profit from its scenic value are among the key objectives of these efforts.

Discussions are ongoing as to how to make best use of direct payments. A prominent suggestion is to reduce and better target direct payments, in line with the objectives of the policy. Today, 80% of direct payments go to 20% of farmers. Ways to reduce differences of agricultural support between Member States are also being discussed. Changes to the system of direct payments could provide an opportunity to focus payments on expected results, such as sustained agricultural production in less profitable or mountainous regions, a focus on small and medium sized farms, investments in sustainable and resource efficient production systems and better coordination with rural development measures.

Maintaining expenditure levels of around EUR 400 billion 5 over the period for the Common Agricultural Policy, corresponding to approximately 37% of the current Multiannual Financial Framework, would through better targeting allow support in particular for small and medium sized farms to be increased with positive knock-on effects for rural areas. 

A reduction of support for the Common Agricultural Policy by 30% would represent around EUR 120 billion over the period of the next Multiannual Financial Framework, or approximately 11% of the current Multiannual Financial Framework. This scenario could see average farm income drop by more than 10% in a number of Member States and potentially more pronounced income drops in specific sectors.

A reduction of support for the Common Agricultural Policy by 15% would represent around EUR 60 billion over the period of the next Multiannual Financial Framework, or approximately 5.5% of the current Multiannual Financial Framework. In this scenario, the reduction of average farm incomes would be more limited but could still have a noticeable impact in certain sectors depending on the choices made.

These scenarios cannot be seen in isolation. Any reduction in direct payments should be accompanied by better targeting the remaining budget, for example through an increased focus on small and medium sized farms and better coordination with rural development measures.

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

How best to project our interests abroad?

In future, the Union will need to be equipped with instruments that allow it to deliver on existing and new ambitions and challenges. In the 2014-2020 framework, the budget dedicated to external action amounts to around EUR 66 billion. It represents around 6% of the current Multiannual Financial Framework. Furthermore, the European Development Fund, currently outside the Union budget, is the main instrument for providing development assistance to African, Caribbean and Pacific countries and to overseas countries and territories. The total financial resources of the 11th European Development Fund amount to around EUR 31 billion for the period 2014-2020.

In future:

An increase of the current volume of financing for external instruments beyond EUR 100 billion over the period would allow the EU to meet the existing and new ambitions, which range from international cooperation, migration management, investment, governance, human rights and rule of law, to promoting the Sustainable Development Goals, humanitarian assistance, crisis response and conflict prevention. Particular attention will need to be given to supporting the EU's strategy for the Western Balkans as well as the EU's stabilisation efforts in its neighbourhood and in Africa.

A significant simplification and streamlining of external instruments could further enhance the effectiveness and efficiency of the external relations budget. This could include the integration of the European Development Fund in the Multiannual Financial Framework, provided that this is reflected in the overall expenditure ceiling and that existing flexibilities are preserved.

The budget for external relations should also be seen against the backdrop of the EU's and Member States’ collective commitment to devote 0.7% of Gross National Income to Official Development Assistance by 2030. This would entail an additional effort in the next Multiannual Financial Framework in the order of EUR 40 billion over seven years, without the participation of the UK. This assumes that the EU would maintain its current share of 20% of Official Development Assistance. 

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

How to do more with less through financial instruments?

The Commission's Reflection Paper on the Future of EU Finances underlined the importance of guarantees and financial instruments in helping to do "more with less". The European Fund for Strategic Investments is for example expected to mobilise more than EUR 500 billion, a major boost to the European economy. However, the current landscape of EU market-based instruments is fragmented, with almost 40 financial instruments and three budgetary guarantees and guarantee funds managed centrally, which amount to a share of around 4% of the current Multiannual Financial Framework. In the area of small and medium-sized enterprises alone, there are seven financial instruments managed centrally and several hundred in shared management. There is clear scope for rationalisation and greater efficiency.

One option to improve the efficiency and impact of instruments aiming at investment support in the EU could be their integration within a single investment support instrument. This would further reinforce the European Fund for Strategic Investment and have a positive impact on investment levels, economic growth and employment across the EU.

A wider use of financial instruments and budgetary guarantees could more than double the investments mobilised over the next Multiannual Financial Framework up to EUR 2 trillion.

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

How to make the most of decommitted funds?

Currently, funds that have been committed to the EU budget but which are ultimately not spent in the implementation of EU programmes are cancelled. These resources reduce the annual calculations of Member States’ gross national contributions compared to the full implementation of budgetary commitments.

Instead of cancelling these amounts, they could be used as a Union reserve. This reserve could be deployed to achieve common priorities and respond to common challenges. Current estimates suggest that around EUR 21 to 28 billion could become available through this mechanism over a 7-year period. Such amounts could have been used, for example, in 2015 to finance the European Fund for Strategic Investments and address the investment gaps that opened up as a result of the financial crisis. This would have been done instead of cutting valuable programmes like Horizon 2020 or the Connecting Europe Facility. Similarly, the reserve could have been used in 2016 to support the establishment of the Facility for Refugees in Turkey, which required the use of all the flexibility in the EU budget as well as separate contributions by Member States. It would also have allowed more funding to be mobilised swiftly to address the migration crisis.

In today's fast-changing world, unpredictable events will occur with increasing frequency. The Union Reserve would allow a more swift and decisive reaction to such developments. We will still be implementing the next Financial Framework almost ten years from now. This long-term stability is an asset but also a constraint. A Union Reserve would provide a powerful and flexible new tool to tackle unforeseen events and respond to emergencies in areas such as security and migration.

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

Should we make EU funding more conditional?

The potential of the EU budget can only be fully unleashed if the economic, regulatory and administrative environment in the Member States is supportive.

This is why, under the current Multiannual Financial Framework, all Member States and beneficiaries are required to show that the regulatory framework for financial management is robust, that the relevant EU regulation is being implemented correctly, and that the necessary administrative and institutional capacity exists to make EU funding a success. In addition, policy conditionality can foster the cooperation between Member States in areas where economies of scale or externalities are significant. New provisions were also introduced under the current Multiannual Financial Framework to avoid situations where the effectiveness of EU funding is undermined by unsound economic and fiscal policies.

The new Multiannual Financial Framework is an opportunity to look at whether these principles have created a solid platform for results. It is also the moment to consider how the link between EU funding and the respect for the EU's fundamental values can be strengthened.

Any such mechanism would however need to be transparent, proportionate and legally watertight. While it could in principle apply to all relevant policies involving expenditure from the EU budget, any financial conditionality would need to be precise, proportionate and require a sufficient connection between the conditions imposed and the aim of the funding. This debate will also need to consider the impact of possible breaches of fundamental values or the rule of law at national level on the individual beneficiaries of EU funding, such as Erasmus students, researchers or civil society organisations, who are not responsible for such breaches 6 . 

OPTIONS FOR THE FUTURE FINANCIAL FRAMEWORK

What could new Own Resources bring to the EU budget?

Emission Trading System: The European Emissions Trading System is the cornerstone of EU climate policy. A number of allowances are auctioned by Member States and purchased by companies to cover their greenhouse gas emissions. A share of the proceeds from the auctioning of allowances could be made available for the EU budget. Depending on the market prices for allowances, a share of the revenues generated by the Emission Trading System could generate estimated revenues between EUR 7 billion and EUR 105 billion over seven years.

VAT-based Own Resource: Value Added Tax is a consumption tax assessed on the value added to all goods and services sold in the EU. Today, the Own Resource based on that tax relies on very complex statistical calculations. A reformed Own Resource could be levied from a simplified Value Added Tax base. Revenues from the current VAT-based Own Resource are currently around EUR 105-140 billion over seven years and could be adjusted by calibrating the call-rate in function of required levels.

Common Consolidated Corporate Tax Base: Large companies greatly benefit from the Single Market. The Common Consolidated Corporate Tax Base is a single set of common rules for the calculation of companies’ taxable profits in the Union. A contribution based on a harmonised corporate tax base, possibly including a digital component, would reinforce the link between the benefits of the Single Market and the financing of the Union. Each Member State would retain the possibility to tax its share of the profits at its own national tax rate. Depending on the model chosen and the call-rate applied, a tax linked to the common consolidated corporate tax base could bring between EUR 21 and EUR 140 billion over seven years, not including expected revenue from the decrease of tax evasion.

Seigniorage is the term used to describe the revenue which central banks and governments accrue from issuing money. Since monetary income of the European Central Bank for the issuance of the euro is directly linked to the Economic and Monetary Union, it could be considered as a possible new Own Resource. An amount corresponding to a share of the net profits arising from national central banks' shares in euro area monetary income paid out to national treasuries, could be made available for the EU budget as a form of national contribution. A similar logic was applied in respect of the income generated by the European Central Bank and the national central banks from accumulated Greek Government bonds when in 2012 Eurogroup Ministers agreed on a transfer of the equivalent of the income generated by the Eurosystem holding (European Central Bank and national central banks) of Greek government bonds to Greece. Depending on the percentage applied, estimated revenues from seigniorage could range between EUR 10.5 billion (10%) and EUR 56 billion (50%) over seven years.

WHY DO DELAYS MATTER?

The launch of the 2014-2020 European Structural and Investment Fund programmes was significantly delayed. Legislation for the sectoral programmes was only finalised in December 2013 following an agreement on the Multiannual Financial Framework in the first half of that year. This has delayed the adoption of the detailed rules needed to make the programmes work on the ground, as well as the subsequent negotiation of the Partnership Agreements with the Member States.

As a consequence, investments were delayed, as was the support for much needed projects and reforms. This came in addition to an important reduction of commitment appropriations at the beginning of the current period.

Evolution of commitment ceilings between 2000 and 2020 (current prices)

Delays have real consequences for people.

The legal acts for the Asylum, Migration and Security Funds were only adopted in 2014. This meant that to the designation of authorities and adoption of programmes only came in 2015. As a result of the delay, Member States were not able to launch projects in time. This impacted on reception and accommodation capacities in Member States and the management of borders. The delays made it very difficult for the Greek administration to use EU funding to prepare for the crisis in 2015. Shelters were not ready. Conditions to receive refugees were poor at a time people in need of protection were pouring into the islands between June and September 2015. At the same time, other Member States, including Sweden and Austria, did not have EU funding at their disposal to help accommodate people coming through the Balkan route. The EU had to use emergency assistance to support these Member States in these challenging times.

A number of international actions under the Erasmus+ programme could not be achieved in 2014 due to the late adoption of the last Financial Framework. This meant that around 25-30,000 exchanges between students and teachers from our Member States and our partner countries planned for 2014 could not take place that year. If such delays were to occur for the whole programme, as many as 1,000,000 young people would not be able to benefit from an Erasmus+ exchange in 2021.

Delays in implementing the next Research Framework Programme would imply the loss of around 5,000 research jobs per month (around 3-4% of overall EU research jobs) and an additional 7000 jobs in the wider economy. More than 200 research publications would be lost for the same period, including around 100 high-impact articles.

Delays in selecting projects in the early stage of implementation of the cohesion programmes would mean more than 100,000 projects would not be able to start on time. The areas impacted include business support, energy efficiency, health care, education and social inclusion.

A number of large-scale infrastructure projects would also be strongly impacted by delays. Space programmes like Galileo or Copernicus have long investment cycles. They therefore need predictability when it comes to procurements. An ongoing procurement process for a number of Galileo satellites will be concluded in 2019 and can only be fully implemented once the new legal and budgetary requirements are fully in place.

Other examples of the negative effects of delays in agreeing a new financial framework include Rail Baltica. The project will build a crucial railway link into the Baltic States and should be completed by 2025/2027. The project must be able to launch the major procurements it needs for construction in 2021. This is crucial for the completion of a project that will help connect five million people in the Baltic States to the rest of Europe. The high-speed rail link will cater at the same time for freight flows all the way from Finland to Germany, the Benelux and the Adriatic.

The Brenner base tunnel is planned to be completed by 2027, with the rail engineering works due to start under the next MFF. It is a crucial project to shift half of the 2.2 million trucks of the Brenner motorway to rail. This will cut down on pollution in the precious valleys between Munich-Innsbruck and Verona.

The Fehmarn Belt between Denmark and Germany, the Evora-Merida railway link that will finally connect Lisbon and Madrid, the Lyon-Torino base tunnel that will connect the high-speed railway networks of France and Italy are also all due to be completed by the end of the next Multiannual Financial Framework.

Such projects cannot afford to see delays in planning or procurement simply because of the late adoption of the next Multiannual Financial Framework.