By Tony Connelly, Europe Editor, Brussels

In November EU leaders failed to agree a new seven-year budget to run from 2014 to 2020. At the time Taoiseach Enda Kenny said Ireland would not have much authority going into our presidency if a deal wasn’t struck.

The presidency is now under way, with little indication that November’s failure has had any discernible effect. However, failure to strike a deal this week would not do Ireland’s presidency any favours.

“The consequences of no deal are serious and far reaching,” says one senior EU source.

So where do we stand since November?

The original proposal from the European Commission in July 2012 was for a seven year budget of €1.033 trillion.

With Britain and others – Sweden, Denmark, Germany, the Netherlands – clamouring for a cut in the budget, that figure was never going to stand.

The Cyprus presidency presented a lower figure of €998 billion and by the time EU leaders gathered for the budget summit on November 22 it had been reduced further by Herman Van Rompuy, the President of the European Council, to €974 billion.

With no breakthrough overnight to satisfy the budget hawks, the figure was reduced further the following day to around €973 billion.

At the time David Cameron, the British prime minister, could, it’s understood, have lived with a further smallish cut, but the political will wasn’t there to wade into contentious issues, so leaders decided to preserve the relatively good atmosphere and kick to touch.

“Leaders had a good lunch, they went for a long walk – and now they’re returning for coffee,” as one EU source put it.

There is an air of confidence in Brussels that a deal can be reached between 27 heads of government, but there remain several obstacles.

Firstly, whatever headline figure is agreed will have to be endorsed by the European Parliament.

The rhetoric coming from the parliament is combative, since a large number of MEPS on the right and left want Europe to spend more, not less.

“Some of these concerns are genuine, some are articial,” says one senior diplomat.

“But EU leaders will make it clear that the figures, viewed from a budgetary context, mean that it is important politically and practically to do a deal now.”

The question of rebates remains a thorny one. Britain’s rebate is legally and politically set in stone, and any attempt to crack it open is unlikely.

But other countries – Denmark, Sweden, Germany, the Netherlands, Austria – also want rebates. These will have to be haggled over, since they are not legally enshrined the way Britain’s rebate is.

Italy is now one of the major net contributors and it has no rebate. It is likely to be one of the more disgruntled partners around the table. While it may not seek an explicit rebate, it will look for concessions elsewhere.

So what gap must be bridged to make a deal possible? That depends on which set of figures you look at.

EU budgets can be measured by commitments and payments. Commitments are the ceilings for funding across a range of areas, from CAP to fisheries, to Cohesion, Structural and Research funding.

Payments are what is actually spent as we move through the seven-year cycle.

Because of the way projects are managed, what is actually spent is lower (usually by around 5%) than what is pledged.

According to diplomats, the figures on the table are as follows:

A further €15 billion could be cut from the overall “commitments” figure, thus reducing it from €973 billion to €958 billion.

Equally a further €30 billion could be cut from the “payments” figure, thus bringing it down to €905 billion from €935 billion.

Mr Cameron will always focus on the “payments” figure because it will be lower. That means he can trumpet a lower EU spend when he returns to the House of Commons.

During day one of the last summit Pillar I CAP funding – ie, direct farm payments – was cut from the figure proposed by the Cypriot presidency from €277.4 billion down to €269.9 billion, but under pressure from France (joined by Ireland) that figure was restored on day two.

Equally, Cohesion funding – ie monies to help poorer countries and regions to catch up with richer ones – was first cut and then restored.

It appears that Mr Cameron will be content to allow both CAP and Cohesion funding to remain untouched as we go into these negotiations, something the Irish government is clearly comforted by.

Ireland is still – for the moment – a net beneficiary of the EU. In 2011 net receipts amounted to €42.4 billion (not including the EU-IMF bailout funding). A total of 85% of that money goes directly to farmers.

While the 2014-2020 budget will have a smaller CAP pot compared to 2007-2013, Ireland’s proportion of the spend will remain.

There also appears to be more money available for Pillar II funding – ie, rural development – which might offset any net loss in direct payments.

Another area that President Van Rompuy appears keen on defending is the EU’s research and development policy, known as Horizon 2020 (and implemented by the Research, Innovation and Science Commissioner Maire Geoghegan-Quinn).

The European Commission’s original proposal saw an increase in spending from €55 billion to €80 billion. That was cut to €70 billion in the November negotiations, and it’s thought it is unlikely that share will suffer any further cuts.

The feeling is that with economic growth ever-elusive, Europe needs to spend more on R&D.

EU money on that score can be leveraged to attract private funding.

Again, Ireland can benefit from this source depending on the ability of our researchers to secure grants under what is known as the Framework Programme 7 (FP7) funding system. So far Irish researchers have landed a healthy proportion of FP7 money.

Finding the savings

So if these areas are being protected, where are the further savings going to come that will satisfy Britain and others?

The big target will be the so-called Connecting Europe Facility (CEF), a fund for promoting large infrastructure. Savings will also have to come from the EU’s administration budget.

It accounts for just 6% of the total EU budget, but perceptions that EU officials are paid too much is the favoured red meat of Tory eurosceptics.

The European Commission will argue against cuts, saying that all of the new legislation in recent years (enlargement, banking rules) has been done without expanding the workforce, and that Europes needs, especially at this time, a well resourced civil service.

Mr Cameron will insist on savings. “It’s the scalp that Cameron wants,” observes one EU diplomat.

President Van Rompuy also wants money to tackle Youth Unemployment. There are no clear figures yet on how much money will be available, and where it will come from (it can’t be conjured up as new money since the overall budget will have to be lower).

It’s thought the figure will run into several billions, and will be administered through Europe’s regional structure, with those regions where youth unemployment is high being targetted.

It’s assumed that Spain and Greece, which have the highest youth unemployment figures by far (over 50%) will benefit the most, but Ireland is also likely to get a share.

Can an overall deal be struck?

There is certainly pressure for a deal, since failure will mean that EU spending will have to be rolled over each year with no clear legal basis and with no real certainty of the reduced spend that Britain and others are clamouring for.

With Lithuania and Greece holding the next EU presidencies it’s felt that there would be no prospect of holding a further negotiating round this side of the European Parliament elections and the creation of a new Commission.

The European Parliament will have to be cajoled into agreeing the headline figure with, perhaps, the promise of a mid-term review of the budget (especially if the economic climate improves), as well as more flexibility on being able to move money around according to needs and contingencies.

A deal this week would give a major boost to the presidency. Although President Van Rompuy is the man in charge of negotiations, the Taoiseach Mr Kenny and the Tanaiste Eamon Gilmore have been instrumental in nudging netogiations along.

It’s also felt that President Van Rompuy wouldn’t have put the budget on the agenda of this summit unless he was confident of a deal.

He’s been in constant phone contact with the capitals since last November.

One issue overshadowing the talks will be David Cameron’s recent speech on Europe. Will he bang the table any harder in order to reassure Tory MPs that he means business?

He will certainly take whatever figure is finalised and present it as at best a real-terms freeze (expect plenty of creative accounting to make that happen, or “alchemy” as one diplomat puts it).

He may even wield the veto, if he has support from other countries.

But he will also be careful in his dynamic with Berlin.

Chancellor Angela Merkel’s very measured – even supportive – response to his London speech means that Mr Cameron will want to stay close to the Germans, a policy none other than Margaret Thatcher regarded as pivotal to Britain’s attitude to Europe.


Keywords: , .