José Manuel Fernandes, Member of the European Parliament and of the MFF and own resources negotiating team

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The EU budget: a legal constellation for the recovery

I. Introduction

The approval of the Multiannual Financial Framework (MFF) is followed by an Interinstitutional Agreement (IIA) and a Decision on the EU system of Own Resources (ORD). Because of the pandemic, the Council, after Parliament’s insistence, and with strong support from Angela Merkel and Macron, put forward an historical and solidary decision: the use of a common guarantee based on the EU budget for the Commission to contract a debt of € 750 billion and establish the European Union Recovery Instrument through a Regulation^[1] aiming to support the recovery in the aftermath of the COVID-19 crisis (NGEU). This decision was the only possible solution. Member States did not have the financial means to, for example, increase the EU budget. The decision increases the need for new own resources (sources of revenue). In fact, the NGEU has repercussions on the IIA, the ORD and the MFF 2021/2027 itself: these are all part of a negotiation “package”.

II. The Multiannual Financial Framework 2021/2027 and the European Union Recovery Instrument

The EU’s annual budget is framed and outlined by the MFF Regulation^[2] establishing headings and spending for a specific period of budgetary discipline: at least five years, according to Article 312(1) TFEU. 

The MFF corresponds to a multi-annual expenditure program that reflects the Union’s political priorities. Also known as ” Financial Perspectives ” or “Multiannual Budget”, it dates to 1988, but only became part of the Treaties when the Lisbon Treaty entered into force. From 1 January 2021^[3], we entered the sixth multiannual financial period: the MFF 2021/2027.

The approval of the MFF implies a unanimous decision from the Council, after approval by the European Parliament, which gives its opinion by a majority of its Members (Article 312(2) TFEU). The preparation of a MFF involves hundreds of meetings between institutions that culminates in the Council’s “final meeting”, which is tense and usually time-consuming. The approval of the MFF 2021/2027 was done on 17 December 2020. According to the President of the Council, Charles Michel, that was the longest meeting ever. 

The unanimity demanded in the Council leads to a blackmail, an exchange of gifts, as well as to camouflaged compensation: the so-called rebates. Hence, it is not surprising to see that the biggest obstacle to obtaining unanimity in the Council regarding the MFF 2021/2027 and the corresponding ORD was not a disagreement between the Member States on EU funds, programs or contributions, but rather on the Rule of Law Regulation^[4], which does not require unanimity. In the negotiations of the MFF 2021/2027, some countries (especially Hungary and Poland) have taken advantage of the need for unanimity in the Council to try to impose their agenda in other areas, where such unanimity is not required. Yet, in the decisions in which a vote by unanimity is required, there seems to be a rule without exception: all Heads of State and Government “sing” victory, even if all of them have lost.

On 10 November 2020, the Parliament reached an agreement with the Council regarding the MFF 2021/2027, with an overall amount of more than a billion euros. I worked on this file since 2017, both as Coordinator of the European People’s Party in the Committee on Budgets and as Member of the Parliament’s negotiating team. The Council is always a problem in the negotiation of the MFF, although it accounts for only 1% of the EU GNI. This happens because Member States look at the EU budget as an expense: a huge mistake. The EU budget has a great added value: more than 93% is devoted to investment; administrative expenses do not exceed 7% of the budget. Each Member State is always looking for a juste retour. One of the reasons for this rationale is related with the budgetary revenues: 85% of them resulting from transfers of the national budget, whereas the other 15% derive from custom duties. We must end the distinction between net payers and net recipients. All benefit from the EU budget. Moreover, the so-called frugal countries are those who benefit more from the internal market.

The European Parliament tries to counter the selfish logic in the Council. If we look at the MFF and the NGEU, the Council has divided 93% of its amount by national envelopes. After all, where is geopolitical Europe? How come we talk about European autonomy and sovereignty? There are lessons that we should have learned from the pandemic. The EU needed to strengthen critical and strategic investments. For example, not every country has to produce medicines or ventilators, but we have to do so at European level. The strengthening of the research and innovation program – the Horizon Europe – fosters the competitiveness of the whole EU and benefits all Member States. It is quite clear that there was no sense in dividing Horizon Europe’s € 95 billion by each of the Member States. In the negotiations, we managed to reinforce European programs with € 15 billion, such as the Horizonte Europe, the EU4Health Program, the InvestEU, the Erasmus +, the Neighbourhood, Development and International Cooperation Instrument and the Creative Europe.

In fact, the European Parliament made the MFF 2021/2027 viable, despite an overall amount that is lower than the European Parliament’s proposal, namely by virtue of the cuts in the Cohesion Policy and in the Common Agricultural Policy. These policies represent around 70% of the EU budget and are essential to support farmers, rural development and promote economic, social and territorial cohesion in the EU^[5].

However, one question must be asked: why did the European Parliament accept these cuts? The answer is simple. The NGEU, worth € 750 billion, disguises and to some extent eliminates these cuts. Adding the MFF and NGEU, we reach a value of more than € 1.8 trillion. The negotiation of the MFF thus considered the amount of the NGEU: an answer to the negative economic and social effects resulting from the COVID-19 pandemic.

In a historic decision, the Council paved the way for common guarantee that allows the European Commission to finance itself on the markets to finance the NGEU: € 360 billion in loans and € 390 billion in grants. This is a reflection of a de facto solidarity in the EU. Before the pandemic, this step would be unthinkable.

The grants from the NGEU will be financed by the EU budget. In the period 2021/2027, only interests will be repaid. However, after 2027 and until 2058, the principal of the funds to be used for expenditure under the NGEU will also have to be repaid, which will represent an average annual cost of € 15 billion, that is, about 10% of the annual budget of the EU. Without the introduction of new own resources in the EU budget, the repayment of the NGEU will result in cuts in the next MFF or in an increase in national contributions – in other words, more taxes on European citizens.

For this reason, we have agreed to introduce a basket of new own resources that are sufficient to cover the repayment of the NGEU. These new sources of revenue i) shall aim at not reducing expenditure for Union programmes and funds; ii) cannot increase the overall tax burden of the citizens; iii) and must be in line with European policies: contribute to the strengthening of competitiveness, to a better environment and to the fight against tax fraud, tax evasion and tax avoidance^[6]. Whoever does not pay, must pay. For instance, the European Parliament proposes that “tech giants”, and the products from countries that do not have the same environmental standards as the EU, should be taxed.

III. The Interinstitutional Agreement and the roadmap for the introduction of new own resources

In principle, the MFF is followed and published alongside a legally binding Interinstitutional Agreement (IIA) on budgetary discipline, cooperation in budgetary matters and sound financial management. In the IIA annexed to the MFF Regulation for the period 2021/2027, for the first time, a roadmap for the introduction of new sources of revenue was established. This roadmap will follow three steps. A first step, in 2021, with the introduction of a contribution calculated on the weight of non-recycled plastic packaging waste. A second step, in 2022-2023, with the Carbon Border Adjustment Mechanism, a Digital Levy and a revised EU Emissions Trading System. Finally, a third step, in 2024-2026, envisaging the creation of additional own resources, including a Financial Transaction Tax, a new contribution linked to the corporate sector or a new common corporate tax base. In fact, there is a unilateral declaration by the Commission on the Financial Transaction Tax, that is, a commitment to start discussions on this own resource and on the use of enhanced cooperation with a view of its introduction by 1 January 2026 at the latest.

The IIA strengthens the involvement and the role of the European Parliament as a budgetary authority with regard to the implementation of the NGEU. Furthermore, if the Council puts forward legislation pursuant to Article 122 TFEU, the European Parliament must be involved through a structured dialogue^[7]. In fact, as a budgetary authority, it just does not make sense for the European Parliament to be excluded from the decision to move towards solutions like the NGEU, whose legal basis is Article 122, when there are immediate and long-term repercussions on the EU budget.

By strengthening the role of the Parliament and paving the way to the intergovernmental method beyond the framework of the Treaties, the IIA, the roadmap and the Joint Declarations thereof increase the transparency and democratic legitimacy of Council decisions with a budgetary impact. The IIA contains provisions for monitoring expenditure related to the United Nations’ climate, biodiversity, gender equality and Sustainable Development Goals objectives. The IIA further clarifies the methods to be used for monitoring the 30% target for climate action expenditure through the general budget of the Union and the expenditure of the NGEU, for setting a new expenditure target under the MFF in favour of biodiversity of 7.5% from 2024 and 10% in 2026 and 2027, as well as for the assessment of expenditure in favour of gender equality. 

IV. The Decision on the EU system of own resources in the context of the European recovery

The own resources are the sources of revenue the EU budget and are comprised in the so-called ORD^[8], which sets out, in particular, the types of budgetary revenue, the own resources ceiling, the ceiling for payments and commitments, the allocation key of national contributions and the rebates^[9].

Since 1988, there are three types of own resources. First, traditional own resources: these are mainly customs duties on imports from third countries and sugar levies. Then, own resources based on value added tax (VAT): a uniform rate of 0.3% is levied on the harmonized VAT base of each Member State. Finally, GNI-based own resources: each Member State transfers a uniform percentage of its GNI to the EU. Although designed solely to cover the balance of total expenditure not covered by other own resources, this last own resource has become the main source of revenue for the EU budget.The other sources of revenue (around 1%) consist of taxes and other deductions on the salaries of EU staff, bank interest, contributions from third countries to certain programs, interest on late payments and fines.

 According to the legislative procedure preceding the entry in force of this Decision, the Council acts unanimously, after consulting the European Parliament. Yet, the Decision only comes into force after approval by the Member States, in accordance with their respective constitutional rules. This means that most national parliaments must ratify this decision. It should be noted that the European Parliament issues a legislative opinion without which, however, the Council cannot decide: this opinion is mandatory and non-binding.

The ORD is one of the most complex and time-consuming legislative procedures in the EU. On average, it takes more than a year and a half for the ORD to enter into force, due to the need for ratification by most national parliaments. It is not by chance that new sources of revenue pursuant to the ORD entered into force more than 32 years after the last introduction.  

As from 1 January 2021, the EU budget is financed by a national contribution based on the quantity of non-recycled plastic packaging waste generated in each Member State, linked to environmental objectives. According to Article 2c of the new ORD, this contribution will derive from “the application of a uniform mobilization rate to the weight of waste from non-recycled plastic packaging generated in each Member State. The uniform call-up rate is EUR 0.80 per kilogram”.

Until last year, the complexity of the ORD legislative procedure had never been noticed, since the decision had a retroactive effect to the date of the approval of the MFF and adjustments were then made, in particular those relating to Member States’ contributions. As long as the new decision was not in force, the previous decision remained.

The importance, complexity and meaning of the ORD was only truly acknowledged in the context of the approval of the NGEU. In fact, there will be no NGEU without the entry into force of the ORD, because the Commission will only be able to use the budget guarantee to go to the markets to get the € 750 billion once the own resources ceiling is increased in accordance with the new ORD^[10].

On 16 September 2020, the Parliament gave its opinion on the ORD, which allowed the Council to decide unanimously under Article 311 TFEU. But the Decision was blocked until 9 December 2020, because Hungary and Poland wanted to impose their will on the Rule of Law Regulation^[11], in which their claims had been defeated. Once more, the unanimity rule has been blackmailed.

V. The Rule of Law Regulation and the protection of the EU budget

Most unfortunately, the Rule of Law Regulation is necessary. Respect for European values, the acquis communautaire and the rule of law is not an option, but an obligation. It is striking to see Member States taking steps backwards with regard to the European values. If, in order to join the EU, the countries must respect the rule of law, a minori ad maius,they must comply with it after the accession.

I am not fond of the Rule of Law Regulation, but I support it because there is no other option. To be activated, Article 7 TEU requires unanimity in the Council, with the sole exception of the targeted Member State. Hence, this unanimity can never be achieved because when the procedure is initiated, for example vis-a-vis Hungary, another Member State will always oppose, for example Poland, and vice versa.

The Rule of Law Regulation was approved after a struggle between the European Parliament and the Council. The Parliament demanded a tougher and faster procedure. In particular, it supported the approval of decisions pursuant to said Regulation by reversed qualified majority: the European Commission’s proposed sanction would enter into force unless the Council rejected it by a qualified majority. The Council did not accept this position and its understanding prevailed: the Commission’s proposals will thus have to be approved by a qualified majority of Members of the Council.

Among the measures to be taken pursuant to the Rule of Law regulation are, for instance, the “suspension of payments”, the “prohibition to enter into new legal commitments”, as well as the “suspension of the approval of one or more programmes or an amendment thereof”, the “suspension of commitments”, a “reduction of commitments”, a “reduction of pre-financing”, “an interruption of payment deadlines”, or a “suspension of payments”^[12].   

One relevant point is that, unless the decision adopting the measures provides otherwise, the adoption of measures shall not affect the obligation of government entities or Member States to implement the programme or fund affected by such measures, and in particular the obligation to make payments to final recipients or beneficiaries. Moreover, “the measures adopted shall be proportionate to the nature, gravity and scope of the generalised deficiency as regards the rule of law. They shall, insofar as possible, target the Union actions affected or potentially affected by that deficiency”^[13].

Since the violation of the European values can lead to a financial penalty, the final beneficiaries of the EU budget may indeed be affected. In fact, if the costs of the measures adopted pursuant to the Regulation are borne by the national budget of the respective Member State, the citizens of that country may end up taking on that penalty with their taxes. It is possible to breach rule of law in exchange for a penalty that is in practice a fine. For this reason, I don’t like the Rule of Law Regulation. However, as said before, I support it as the best solution, despite its flaws.

In the end, all sides agreed to a compromise negotiated by Germany, the holder of the Presidency of the Council at the time of the negotiation. According to this deal, the new Regulation will only be applied after its legality is challenged in – and ruled by – the ECJ. Therefore, in the conclusion of the European Council meeting in which the Member States reached their agreement, they asked the Commission to refrain from implementing the Regulation until a decision on the Regulation was issued by the ECJ. In practice, with their blackmail to the ORD, Hungary and Poland did nothing but “buying additional time”. They may now resort to the ECJ and question the legality of the Regulation and the decisions adopted in its framework. I am convinced that the ECJ will confirm the legality of the Regulation and the decisions adopted on its framework. In addition, the Commission has already stated that the Regulation is in force.

VI. The budget correction mechanisms – the rebates

The budget correction mechanisms are designed to correct the contributions of certain Member States that are considered excessive in relation to their national wealth. According to Article 2(3) of the ORD, the new own resource based on non-recycled plastics will be followed by the following corrections: “[t]he following Member States are entitled to a fixed annual reduction, expressed in current prices, to be applied to the contribution referred to in paragraph 1 (c), in the following amounts: EUR 22 million for the Bulgaria; EUR 32.1876 million for Czechia; EUR 4 million for Estonia; EUR 33 million for Greece; EUR 142 million for Spain; EUR 13 million for Croatia; EUR 184.0480 million for Italy; EUR 3 million for Cyprus; EUR 6 million for Latvia; EUR 9 million for Lithuania; EUR 30 million for Hungary; EUR 1,4159 million for Malta; EUR 117 million for Poland; EUR 31.3220 million for Portugal; EUR 60 million for Romania; EUR 6.2797 million for Slovenia; EUR 17 million for Slovakia”.

However, this compensation will continue. According to Art 2(4) of the ORD, “[f]or the period 2021-2027, the following Member States benefit from a gross reduction in their annual GNI-based contribution under paragraph 1 (d), in the amount of 565 million EUR for Austria, EUR 377 million for Denmark, EUR 3 671 million for Germany, EUR 1 921 million for the Netherlands and EUR 1 069 million for Sweden”.

Finally, there are other concealed sources of compensation, especially for the Member States with the highest revenue from customs duties. They receive 25% of the total amount of revenue from this source^[14].

VII. Final remarks

The legislative “package” behind the EU budget for the next decade is a constitutional and legal masterpiece whose value is to be determined to its full extent.The establishment of the NGEU paved the way for a constitutional evolution of the principle of budgetary balance in the context of the European recovery (Article 310 TFEU). For the first time, the European Commission will go to the markets to borrow at a large scale and to finance all the Member States through the EU budget. Furthermore, the European Parliament’s involvement in this “package” has been strengthened to the limits of the Treaty: Article 122 TFEU cannot be interpreted without a view to the Joint Declaration on budgetary scrutiny of new proposals with potential appreciable implications for the Union budget in the framework of this Treaty provision. Moreover, after three decades without significant innovation in the revenue of the EU budget, the legal package for the next decade provides a roadmap for the introduction of numerous sources of revenue.

For now, the ORD has only been ratified by seven Member States. This is unbelievable since the use of the ORD to finance the recovery through the NGEU is urgent. During the Portuguese Presidency, the ratification shall be completed, so that the European Commission can go to the markets to seek the € 750 billion deemed necessary to establish the NGEU. In addition, Member States need to accelerate the development of NGEU and partnership agreements. There is no time to lose. 

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[1] Council Regulation (EU) 2020/2094 of 14 December 2020 establishing a European Union Recovery Instrument to support the recovery in the aftermath of the COVID-19 crisis.

[2] Council Regulation (EU, Euratom) 2020/2093 of 17 December 2020 laying down the multiannual financial framework for the years 2021 to 2027.

[3] See Article 22 of the MFF Regulation.

[4] Regulation (EU, Euratom) 2020/2092 of the European Parliament and of the Council of 16 December 2020 on a general regime of conditionality for the protection of the Union budget.

[5] See Article 174 of the TFEU.

[6] See Recital D of the Preamble and Point 2 of Part A of the Annex II to the MFF Regulation.

[7] Where the Commission submits a proposal for an act of the Council under Article 122 TFEU with potential appreciable budgetary implications, the procedure as set out in the joint declaration of the European Parliament, the Council and the Commission of 16 December 2020 on budgetary scrutiny of new proposals based on Article 122 TFEU with potential appreciable implications for the Union budget (OJ C 444, 22.12.2020, p. 5) is applicable.

[8] Council Regulation (EU, Euratom) 2020/2053 of 14 December 2020) on the European Union’s own resources system.

[9] See Article 311 TFEU.

[10] See Article 5 of the ORD.

[11] Regulation (EU, Euratom) 2020/2092 of the European Parliament and of the Council of 16 December 2020 on a general regime of conditionality for the protection of the Union budget.

[12] See Article 4(1) of the Rule of Law Regulation.

[13] See Article 4(2) and 4(3) of the Rule of Law Regulation.

[14] See Article 9(2) of the ORD.

Pictures credits: Social Media by Daniel_B_Photos.