MNI: European Commission Sounds Out Expanding Its Budget

The European Commission is sounding out member states about a possible expansion of its multi-year budget or establishing a major new fund for green industrial expansion, as it prepares a mid-term review of its 2021-27 spending plans against a backdrop of inflation, rising rates and costs associated with the Ukrainian conflict, officials told MNI.

While achieving agreement on any such change could prove challenging, financial conditions have changed dramatically since the Commission agreed its 2021-27 Multiannual Financial Framework, whose review will come a couple of weeks after the draft 2024 budget proposal on June 7.

The EUR724 billion NextGenerationEU programme to kickstart Europe’s economy after the Covid pandemic was designed assuming rates of only 0.55% in 2022, rising gradually to 1.1% by 2027, producing annual interest costs of EUR15 billion at current prices. But the European Central Bank has already raised its key policy rate to 3.25% and is preparing to raise it higher still in coming months, meaning the Commission will have to revise its estimate of borrowing costs in its draft budget. (See MNI SOURCES: Most At ECB See 4% Rate As Only Outside Chance)

INTEREST PAYMENTS

The EU is also due to start repaying EUR15 billion per year in principal on NextGenEU from 2028 until 2058, which together with rising interest costs would take up to 15% of the Commission’s annual EUR190 billion, according to rough estimates by European parliamentarians.

One option when the Commission publishes its MFF review would be to consider increasing its annual spending limit of 1.4% of gross national income. All headroom in the current budget has already been deployed to guarantee loans to Ukraine, and more fiscal flexibility is needed to help continue support for Kyiv as well as to cope with other crises and longer-term challenges such as the green and digital transitions, officials said.

Another way out could come from Commission President Ursula von der Leyen’s proposal for a “European Sovereignty Fund” to finance a response to the massive help to U.S. green tech industries from Washington’s Inflation Reduction Act.

One option being considered by the Commission is a Juncker Plan-style approach, which would leverage via co-financing a relatively small amount of EU public funding to generate much larger private sector investment in strategic sectors.

Discussions on these and other options are ongoing, officials said, but as with lifting the spending limit, opinions on such ideas are said to be divided both within the Commission and between member states.

The Commission is in contact with national capitals to try to find a politically acceptable way forward, but raising the spending limit or embarking on a big new spending plan is bound to run into determined opposition, not just from so-called “frugal” states such as Sweden, Denmark, Austria and Netherlands, together with Germany, but also from Hungary.

RULE OF LAW

With rule of law issues still blocking Commission approval for Hungary’s NextGenEU funds, it is unlikely Prime Minister Victor Orban will easily sign off on an EU spending increase.

With ever increasing demand from some states for increased EU spending and political stalemate over how to pay off NGEU borrowing, Director of Research at the Centre for European Policy Studies Cinzia Alcidi warns that the Commission’s credibility may start to be questioned by financial markets. (See MNI: Italy Tells Brussels Will Miss June NGEU Deadlines-Source)

"If there is no willingness to expand own resources against growing expenditure , financial market actors may start to wonder ‘ok, these guys continue to borrow but they have basically no solution on the table to make sure this debt gets paid back’,” she said. “I think in the Commission there is a very high awareness that borrowing conditions for the EU may change, not least because of the new macroeconomic environment."