February 20, 2014

Carving up Europe’s funding pie

The European Union’s 2014-2020 budget negotiations: a diplomatic analysis.

European Union member states distribute 34-56 percent of the union’s gross domestic product (GDP) through public sector budgets. By comparison, the European Union’s own budget (the multiannual financial framework or MFF) may seem tiny. It makes up around 1 percent of GDP, in the neighborhood of €1 trillion over the course of the seven-year period. It is nevertheless an enormous amount of money, especially if a member state pays more into the budget than it gets back. In addition, the shared funding pool covers the politically sensitive issue of agriculture spending.
At the same time, EU Structural Funds make up a large part of public sector investments in many lower-income member states – 97 percent in Hungary during some years and over 70 percent in Estonia. The simplest example is road construction, but this also includes sewage plants, waste disposal sites and so on. It is a massive amount of money for both net recipients and net contributors, and deciding how to distribute the funds leads to intense diplomatic battles. The current MFF’s (2014-2020) decision-making process, which lasted nearly three years, provides a number of useful lessons.

The package and the opening game

As good practice prescribes, the European Commission submitted the reform programs for the two biggest expenses – the Common Agriculture Policy (CAP) and the Cohesion Policy (together accounting for over two-thirds of the budget) – before presenting its budget proposal. The Commission submitted its draft MFF on June 29,  2011. The expenditure was on par with the previous, 2007-2013 budget – €1.025 trillion euros.
One of the most important new features was a major increase for boosting competitiveness (47 percent more than in the previous framework). There were plans to cut the biggest areas of spending, CAP and the Cohesion Policy, by 12.5 percent and 5.3 percent, respectively. With regard to the Cohesion Policy, a common ceiling was proposed across the board: no more than 2.5 percent of a given member state’s GDP. Up until then, ceilings had been negotiated on a country basis; in Estonia’s case, 2.95 percent of GDP. Countries that had so far received a lower level of CAP funding, were offered equalized direct subsidies, which according to the plan would increase by a third over the course of seven years; in Estonia’s case this would have meant a rise from about 40 percent of the EU average, to 57 percent.
The biggest reform was the creation of the Connecting Europe Facility (CEF), with a budget of €50 billion, in order to implement cross-border infrastructure projects (that is, those involving more than one member state). A €32-billion-euro share was allocated for transport projects, which are overseen by Commissioner for Transport Siim Kallas, an Estonian. Estonia thus came to have quite a multidimensional relationship with one of the Commission’s proposals – we supported an innovative approach, we supported the Estonian commissioner’s area of governance, and we supported the Rail Baltic railway that would run from Tallinn to Warsaw.
In other respects, the proposed legislation did not give Estonia reason to rejoice. Our Cohesion Policy resources (which make up roughly 65 percent of the funds Estonia receives from the MFF) would initially have decreased by €261 million euros at 2011 prices. The Commission’s initiative for a blanket ceiling on Cohesion Funds was disappointing: they argued that member states had difficulties using the funds and overtly pointed out that the Baltics’ net inflow of EU funds was already very generous. In reality, the Commission was just seeking avenues for cuts. But an even greater grievance, the pace of equalizing agriculture subsidies, was politically unacceptable. It was impossible for the Estonian government to go before its people and say that, 16 years after joining the EU, subsidies are still only at 60 percent of the EU average.

Preparations in Estonia, domestic affairs

Such was the basis for forming Estonia’s positions in what would be a long and exhausting negotiation process.
Our main objectives relied on the following arguments:
· The Cohesion Fund ceiling was unjustified because Estonia had not had trouble finding uses for resources and finding matching funds – a blanket ceiling was unfair.
· The schedule for equalization of direct subsidies under CAP was unsatisfactory as it was perceived as unfair treatment by the citizens of a country which had closely followed EU rules and requirements and had a supportive attitude toward the EU.
· Cross-border infrastructure projects required better leadership from Brussels because member states tend to be guided only by self-interest and their own finances; co-operation with neighbors is secondary. Furthermore, we said – and this is indeed the reality of the situation – that if there are cuts made to CEF, it would be the poorer countries, and those with less advanced infrastructure, that would suffer.
The management, framing of information, quick development of standpoints, and co-ordination of such an extensive and complicated process are clearly delicate and labor-intensive matters. In Estonia, after an initial communication failure, an e-mail list was established comprising leaders and experts at key ministries, the EU Secretariat, and Permanent Representations to the EU (on ministry undersecretary level) in order to facilitate prompt information sharing. In addition, , the list was also used for coordinating positions and, to some extent, for discussion. This procedure allowed Estonia to take flexible and swift action in situations where proposals and joint declarations requiring feedback and meeting notices, flooded in on a weekly if not daily basis. It would have been impossible to arrange meetings for discussing all these issues. There was simply not enough time. Yet e-mail correspondence allowed us to act quickly and consistently.
A separate matter was shaping the rhetoric and public relations of an inherently complicated foreign policy initiative which is of great interest to citizens, businesses, municipalities and interest groups. In contrast to the perceptions of officials and politicians, the government’s bureaucratic and dry standpoints are not enough to convince either the public or other member states and partners. Rhetoric and arguments have to be cultivated for daily purposes and for introducing our views. Furthermore, before each meeting there should be consideration about what should be said at that time and place, in view of the interests of the other parties and what is important at that exact moment.
A good example is found in the support for CEF/Rail Baltic. Especially on the European level, politicians were very responsive to the talking point that Estonia has a rail connection with Moscow, but not with Berlin. With the Italians, we explained the benefits of CEF’s cross-border energy connections; with the Poles, we discussed the transport connections. The Germans were told about Estonia’s clean financial slate and prudent use of European funds, and how this could be used to explain to their citizens why the poorer member states should be supported.
Among Estonia’s interest groups, the agriculture sector was understandably the strongest. The always energetic Jaan Sõrra led the way, spitting fire and sending a trailer showcasing a rusty Soviet tractor to Brussels. He did a good job so that I could tell both my and the prime minister’s colleagues, as well as the leaders of the European Parliament, that the Estonian citizens and voters will not accept this kind of inequality on agriculture subsidies. These audiences listened. In November 2012,  European Parliament president Martin Schulz showed up at the tractor demonstration to meet with Baltic protesters, after which he went directly to the European Council and declared that, without a solution to the Baltic farmers’ problem, there would be no MFF agreement!

Actors, allies, opponents. EU institutions

Besides forming Estonia’s policy views and implementing operational procedures, we of course began immediately examining the stances of other member states and EU institutions with regard to the content and politics of this hefty and complex matter. The budget process at hand was influenced immensely by its timing during the crisis. This intensified pressure to tighten the size of the budget. The EU’s joint budget shouldn’t grow if cuts are being made at home. At the same time, the particulars of some crisis-stricken countries were used as rhetoric against EU common policy. An example: “You claim the purpose of the Cohesion Policy is to improve competitiveness, but how has 30 years of funneling Cohesion Funds into the roads and bridges of Greece and Portugal helped improve the competitiveness of those countries?”
The crisis intensified and continues to intensify the general climate of Euroskepticism in the wealthier member states, especially the net contributors of the MFF that receive less from the joint budget than they pay into it. Riding on the authority of their position as net contributors, these countries – Germany, the United Kingdom, the Netherlands, Finland, Sweden, Denmark and Austria – formed a powerful group whose main objective was to curb the overall size of the budget as much as possible. This group also has enough votes in the European Council to block a decision. Meanwhile, 15 Eastern and Southern European countries sought to attain as much from the Cohesion Fund as possible.
Neither of these large groups was joined by France and Ireland, whose main funding comes from the CAP (it seems these were the only two member states whose minimum objectives were achieved in the Commission’s initial proposal); by Italy, whose contribution to the joint budget is on par with the wealthy states, but which receives as much regional support as Cohesion Policy states; or by Belgium and Luxembourg, where most EU institutions are located, and which, despite being among the wealthy countries, are interested in a larger budget (especially with regard to administrative expenditure). The Czech Republic wanted to join both the net contributors and the friends of the Cohesion Policy – to cut the budget, but not to the detriment of the Cohesion Funds!
(Perhaps, if matters were decided purely on conscience, Estonia might also have joined the other group, or a group of its own. First, budget cuts are our middle name and, yes, European spending must also be tightened  in times of crisis.
Second, why do we need agriculture subsidies at all? Let’s get rid of them instead, or equalize them downward for others; in equally competitive circumstances, our farmers would overcome the devil himself! Third, haven’t we poured enough Brussels money into our asphalt? This could lead to a dangerous addiction to foreign aid, like in some African countries!
Fourth, why should everyone, ourselves included, only pay attention to our own net position, how much we pay and how much we get back? For the EU as a whole, it is more important that things throughout the continent are functioning and effective. An experienced colleague once remarked during a break at a nighttime meeting: EU policies are every member state’s priority number 2. Number 1 is always your own net position! In an article published by the European Voice in December 2010, Prime Minister Andrus Ansip said the main problem with the joint budget was that the member states act only based on self-interest.
When push came to shove, we of course accepted that this time Estonia’s muscle would not be enough to change the world and we would have to play by the same rules as everyone else in EU affairs, as in the case of this budget process. But there’s nothing wrong about having dreams.)
Another dimension of the budget process was the dynamics among various EU institutions. The only area where they were in complete agreement was administrative spending. But otherwise the Commission defended its proposal, while the European Parliament demanded a bigger budget (more European money for Europe’s common policies!) and more decision-making power for themselves with regard to both finances and substance of policies. Meanwhile, the President of the European Council had to work together with the rotating presidency to put together a compromise and sell it.

Negotiations in Brussels…

As the holder of the presidency in the fall of 2011, Poland formed a separate group of experts that met on a weekly basis. The results were turned over for discussion to the Committee of Permanent Representatives (Coreper), and from there they went to the General Affairs Council, i.e. the European affairs ministers. While in their individual capitals the finance ministers dealt with the matter, at the EU level the European affairs ministers held the long end of the stick. The reasoning behind this distribution of power was that the finance ministers were only interested in cuts. If we want to have a substantive discussion on European policy, the reasoning went, then it should not be left up to them. This, of course,was a slightly hollow and artificial logic. Nevertheless, the Council of Finance Ministers did discuss the MFF on one occasion (compared to  20 times by the General Affairs Council). Over a two-year period, experts and ambassadors held hundreds of meetings on the budget. Yet by the end of 2011, the only thing that was clear was that the MFF would continue to have a seven-year period and that member states had no desire to change the system of payments, that is, the revenue side of the budget. In the next seven years, this system will continue to use each member state’s GDP to calculate a state’s contribution to the budget. The feared European tax would not be implemented.
Denmark’s ambitions as holder of the presidency in the first half of 2012 were very high. It went straight to the heart of the matter and put together the so-called negotiating box, which contained a list of all of the undecided issues. Numbers were not yet discussed, although the net contributors’ group solidified its ambition, demanding that the budget be cut by €130 billion, or about 10 percent. But we achieved the first fruits of our labor – the Baltic countries (and Hungary) were isolated from the general Cohesion Fund states. This was one of the first exceptions to be  made for member states. The presidency conceded that we should have a higher funding ceiling than the general 2.5 percent of GDP. Wonderful, thank you, now we need to agree on a number that is fair (read: big), we said.
We understood right away that it was very beneficial that negotiations had started on that side of the debate. The inequality of agriculture subsidies was a much clearer political issue, which would be much easier to explain to politicians in the late stages of negotiations than percentages of GDP – whether fair is defined as 2.5, 2.7 or 2.9 percent.

…meanwhile in the capitals

It is clear the member states’ positions are shaped by their own home governments in their respective capitals. In Brussels, you present your rhetoric and get an overview of everyone else’s perspectives, which you then relay to your domestic decision-makers. Thus, from the beginning of the MFF process, contact with other member states was essential for the Estonian delegation (and for everyone else).
This was not only the job of diplomats, but also the job of the Foreign Ministry’s staff. Key ministries, such as the ministries of finance and agriculture, need to have their own co-operation networks. The concrete issues are discussed in a technical, specialized argot. Our closest partners were Latvia and Lithuania, with whom we share common interests regarding the Cohesion Policy and CAP. But we were alone in the Baltic region in our support for CEF. Another major group was that of the Friends of Cohesion Policy, which also met at the level of heads of government. Although in the end it was not possible to defend the overall size of the Cohesion Fund, it is likely that without our close co-operation even less money would have remained and the conditions of using the funds would have been stricter. In the same manner, the net contributors’ group was actively coordinating. Of course, Estonian diplomats kept in touch with them too, especially with our traditional partners – the Nordics and the biggest net contributor, Germany. Indeed, it was in Berlin where we received feedback that our advocacy efforts, as opposed to those of others, had been thorough and regular, with logical arguments, and started early enough to have an impact.

Two Councils

Brussels insiders know that an EU budget has never been successfully adopted at a summit. Such was the case this time around. Denmark would gladly have taken this honor, but the President of the European Council Herman Van Rompuy did not let matters go so far as to begin negotiation over specific numbers. The numbers did not come until October 2012, when Cyprus had taken over the presidency, and even then, it seemed, only so that Van Rompuy could give government leaders a more reassuring message at the November 20-21  summit.
The old fox conducted bilateral negotiations with all of the member states and brought a new proposal to the table: an overall cut of€ 80 billion and an even lower general ceiling for the Cohesion Fund, at 2.35 percent of GDP (with the exception of the Baltics and Hungary at 2.59 percent). The size of the CEF was cut less than we had feared. To our surprise, Van Rompuy proposed raising agriculture subsidies in Estonia, Latvia and Lithuania to the level in Romania, at 75 percent of the EU average, whereas the Commission had offered us 59 percent.
It was a big relief. We had already prepared for a bad scenario, assuming that our two main demands would become clear at the eleventh hour and upon the final night of negotiations we would face a choice. In that scenario we would give preference to Cohesion Funds, and we would still have to deal later with agriculture subsidies in the European Parliament. Fortunately, we did not have to choose, and with the wisdom of hindsight it is possible to see that the one thing Parliament could not do was allocate more funding. It had the power to change terms of use and to make annual processes more flexible. But there was no more money to be handed out.
Of course, we were not the only ones to be given treats by Van Rompuy. There were a number of prime ministers in the halls, from various factions, who were in a good mood. At one point it seemed it would only take another long night before an agreement would be reached this time around. But it didn’t quite go like that. Still, even the most aggressive fiscal cutters departed on friendly terms and in good spirits.
I have written in more detail on my blog about the extraordinary Council in February 2013 (gondorikroonika.vm.ee/07-08-02-2013/). It was a long wait, as tends to be the case in extraordinary situations, but there was not much drama. Most member states received little gifts; in Estonia’s case it was an extra €50 million in rural funding support.
In the final decision, total cuts amounted to €82 billion. The budget for the Cohesion Fund decreased by €14.1 billion , CAP by €13.3 billion. Foreign policy and internal security remained at initial levels and administrative expenses were reduced by 2 percent. The Commission was able to preserve its innovative pet project, the CEF, which was extremely important for us because of Rail Baltic. IT projects were dropped almost completely and energy also sustained significant cuts.
Estonia’s scoreboard at that moment was as follows: the Cohesion Fund ceiling had increased from the initial 2.5 percent of GDP, to 2.59 percent (whereas everyone else was cut to 2.35 percent), which meant an additional €400 million. CAP direct subsidies were increased from 59 percent of the EU average, as was initially proposed by the Commission, to 75 percent. These two things together meant an additional €520 million over the seven year period – 12 percent more than initially offered by the Commission. For every euro we would contribute to the joint budget, we would receive seven in return. Additionally, we helped the European Commission successfully preserve the innovative part of the budget, especially the CEF. All’s well that ends well?

Endgame with the Parliament

Unfortunately it wasn’t that easy. At the same time that Prime Minister Andrus Ansip flew to Brussels airport on the evening of February 8, a joint declaration had been submitted by the heads of the four biggest factions of the European Parliament, saying that in no way could the public’s representative body accept the Council’s budget. The endgame lay ahead in the form of negotiations between three EU institutions – the Commission, the Council, and the Parliament. These dragged on for nine months and were more exhausting than we could have expected. The main reason for Parliament’s dissatisfaction was political and was caused by a certain weakness in the EU’s general decision-making process.
Namely, the Parliament has little scope for real influence in these situations, where the initiative powers are held by the Commission. Before reaching Parliament the draft is chopped up by the members states’ representatives, who understandably see themselves as the real source of EU legitimacy and the supreme decision-makers. Obviously, no public official can be happy when decisions are thrown on the table with instructions to change as little as possible because “I’m sure you understand, 28 sovereign countries have already given approval”. In the case of the MFF, this meant Parliament had no power to change the numbers – both the budget’s overall size and the ceilings of individual earmarks – because the numbers were previously the main battleground between member states, and thus took on a symbolic meaning.
So Parliament did what it could, maximizing its own decision-making powers through the annual budgets, demanding that member states seriously discuss the revenue side of future budgets, and tying down the final MFF decision to several other issues. This was quite successful, although the process in no way generated trust between EU institutions in the run-up to an election year. Nearly half a year later than hoped, on 19 November 2013, the European Parliament finally adopted the budget the Council had endorsed in February. The MFF entered into force on 1 January 2014, the planned date.

Estonia’s experiences

Estonian leaders, diplomats and officials learned a number of important lessons in the course of the process.
First, as always in diplomacy, the diplomacy of EU finances begins at home. Here I don’t mean the healthy state of Estonia’s public finances (although this reputation helped, as we were one of the few Cohesion Fund countries that could persuasively claim that funds had not been wasted), but that the better an issue has been worked out at home, the more successful you will present it to the outside world. This goes for the whole package, not just the issues of self-interest. That’s the only way to be an equal in the ranks of bigger players in all aspects of the discussion.
In addition to being proactive at home, inter-ministry information sharing and co-ordination are also essential. We again demonstrated that it is possible to manage several major ministries with the authority of Stenbock House [the seat of Estonia’s government—ed.] and the prime minister. Of course, there are many risks. Our information sharing and co-ordination system worked smoothly because there were no serious internal conflicts.
Domestic affairs also include working with interest groups. In the end, even the Estonian farmers’ advocates admitted that the government had done a good job. On the other hand, in Latvia, which proportionally had received even more, there was dissatisfaction.
Second, remain realistic. A country of our size cannot have more than two or three priorities in negotiations. Preferably it should have just one on the final night of negotiations. Nevertheless, if there are shared interests with a larger group, as was the case with the Cohesion Fund friends and the remarkably effective co-operation of the Baltic states, then it is possible to strive for even more. But not on the final night.
Third, when backing someone else’s initiative, in this case the Commission’s CEF proposal, you must be confident that the other is determined to fight till the end. We were lucky, but just barely. In the final phase, it was precisely the CEF that was mostly proposed as a source for cuts. Fortunately, the Commission remained firm.
Fourth, you must not only liaise with the similar-minded, but also with countries from other factions. A number of countries that are otherwise our close partners – Germany, Finland, Sweden and others – were diametrically opposed to us in this process. Still, we kept in close contact with them, both sharing our concerns and persuading them. It was the right move because they showed us understanding and our concerns were taken into consideration.
Fifth, in the case of lengthy EU processes, as with elections, the work for the next round begins as soon as an agreement on the present  has been reached. Since in bureaucracy and politics first movers (those making the first proposal) have a major advantage, the European Commission must now start thinking about the future proposal (due by  January 2018). Who should be appointed to the key directorates, and how? How will the use of funds of the current budget period support our next steps? The time remaining till the next proposal should also be considered. When will the budget overview requested by the EP take place? Are there any developments regarding the revenue side, or own funds? Last but not least, what are Estonia’s ambitions as the holder of the EU presidency when we lead the first discussions on the next MFF proposals in the first half of 2018?