#EUBudget

Modern EU finances for a sustainable future

For a sustainable economic recovery: the new Multiannual Financial Framework has a key role in shaping Europe’s future.

As a result of the coronavirus crisis, Brexit and the transformation of our societies, we need to completely rethink the EU’s finances.
Olaf Scholz, German Finance Minister

Emerging from the crisis with renewed strength

The Next Generation EU recovery plan, which was adopted at the European Council of 17–21 July 2020, aims to spur economic recovery and growth in the aftermath of the coronavirus crisis. The recovery plan will be linked to the EU budget as part of the new Multiannual Financial Framework (MFF) for 2021–2027. The European Commission will be granted borrowing rights to finance the Next Generation EU programme. The legal basis for this borrowing option – which will be limited in terms of both time and amount – will be set out in the EU’s new Own Resources Decision. Together with the new MFF, the Own Resources Decision will lay the groundwork for new EU revenue.

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Multiannual Financial Framework
Multiannual Financial Framework

To carry out its tasks, the EU needs its own budget. The Multiannual Financial Framework (MFF) sets the limits for the EU’s overall expenditure for a period of several years. In addition, the MFF defines the EU’s policy priorities and areas where action needs to be taken. It also specifies total spending amounts for these priority policy areas. The EU’s annual budgets must stay within the limits of this framework.

Strategic financial planning for Europe’s future

At the European Council of 17–21 July 2020, the member states reached agreement on a new Multiannual Financial Framework (MFF), which now goes to the European Parliament for consent. The MFF sets the upper limits for the EU’s expenditure between 2021 and 2027.

The 2021–2027 MFF is particularly important for a number of reasons:

1. EU finances to tackle the coronavirus crisis

At the European Council in July, EU member states adopted the Next Generation EU recovery plan in addition to the new 2021–2027 MFF. The recovery plan is designed to help the regions of Europe that were hit hardest by the coronavirus pandemic. To finance the plan, the European Commission will be able to borrow €750 billion on the financial markets. This will enable the Commission to provide grants and loans to support the countries and regions most severely affected by the crisis.

Funds provided by the plan must be spent in a targeted manner as follows: First, they must be targeted towards those regions and economic sectors that have been hit hardest by the crisis. Second, they must focus on overcoming the challenges of the pandemic and its after-effects.

The aim of the recovery fund is to increase the resilience, convergence and competitiveness of European economies, increase investments particularly in the green and digital transformations, and promote research and innovation. In return, recipient countries must commit to pursuing ambitious economic policies.

2. EU finances for new political priorities

The new MFF is designed to ensure the consistent implementation of EU policy priorities. It places a particular focus on facilitating economic modernisation in the member states. EU funds will be deployed in a way that enhances Europe’s fitness for the future and that advances the digital and climate-friendly transformation of European economies.

3. EU finances without the UK

With the UK’s withdrawal from the European Union, the EU has lost one of the biggest net contributors to the EU budget. In the 2021–2027 MFF, the additional budgetary burdens resulting from Brexit are divided up among the member states.

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EU budget
EU budget

The annual EU budget sets out in detail the EU’s expenditure and revenues for a fiscal year. Currently the EU has approximately €160 billion per year at its disposal, for example for investments in major European projects such as transport and energy networks as well as education programmes like Erasmus.

A modern budget for Europe

In contrast to the Multiannual Financial Framework, which sets ceilings on spending in individual policy areas, the annual EU budget allocates resources at the level of individual programmes and specific funding measures. The EU budget is broken down into sections aligned to EU institutions. The European Commission’s budget, which finances the EU’s biggest spending areas such as agricultural and structural policies, accounts for the largest share of expenditure. The remaining sections of the EU budget mainly cover the administrative budgets of the other EU institutions.

Europe is facing major challenges, including climate action, digitalisation, migration and boosting economic growth. In order to take action, the EU needs a modern budget to provide the necessary financial resources for these tasks. One of the tasks of Germany’s Council Presidency will therefore be to ensure, together with the other member states, that the annual EU budget is focused on the challenges currently facing the EU and on future-oriented investments.

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154

The EU budget adopted for 2020 includes expenditure of approximately €154 billion.

7

The new Multiannual Financial Framework will apply for 7 years (2021–2027).

73

At 73%, direct contributions by the member states represent the largest source of EU revenue.

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Own resources
Own resources

The EU budget is financed by revenue from the member states, known as “own resources”. A member state’s share of the EU budget is based on its share of the EU’s economic power based on gross national income.

How does the EU finance itself?

The general budget is financed primarily by own resources, which are made available by the member states. The terms for financing the EU budget are set out in the Own Resources Decision, which stipulates which categories of own resources are to be introduced or abolished. The Own Resources Decision must be adopted unanimously by the Council following consultation with the European Parliament. After that, all member states must ratify the Own Resources Decision (in other words, they must approve it in accordance with their respective constitutional requirements). Ratification in Germany requires the adoption of a legislative act with the consent of the Bundesrat.

These are the main categories of own resources:
 

These are customs duties that member states levy on goods imported from outside the EU, along with sugar levies.

VAT-based own resources are contributions from the member states’ national budgets. These contributions are calculated on the basis of the harmonised VAT base of each member state.

Based on the conclusions adopted by the European Council during its special meeting on 17–21 July 2020, the EU plans to introduce a new category of own resources starting on 1 January 2021. These new own resources will take the form of a contribution calculated on the basis of the weight of non-recycled plastic packaging waste in each member state. Like VAT-based own resources, this “plastics contribution” will be paid out of member states’ national budgets.

GNI-based own resources remain by far the most important source of financing for the EU budget. These are based on a fixed percentage that is applied to the GNI of each member state. GNI-based own resources are used to finance the part of the EU’s expenditure that is not covered by the first two types of own resources.

In order to finance the Next Generation EU recovery plan, the member states agreed at the European Council in July that the European Commission will be granted temporary rights to borrow funds on the capital markets. This borrowing will take the form of a one-time, exceptional bond issue. This bond issue will be time-limited, with a clearly defined volume and a binding repayment plan (liabilities are to be paid back by 2058).

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European public goods
European public goods

Goods that are made available to the public at the EU level and that create added value equally for all Europeans are referred to as “European public goods”. EU finances must place a central focus on these public goods, which include key priorities such as climate action, digital transformation, research and innovation.

Creating European added value

EU member states face a number of international challenges that they can no longer effectively solve by acting on their own. These challenges include climate change, global trade relations, the taxation of multinational corporations, financial market stability and migration.

This situation raises a crucial question: How can competencies at the national and European level be redistributed in specific policy areas in a way that (a) optimises the use of financial resources and (b) creates greater European added value? A reorganisation of how tasks are distributed at the European level – with a clear focus on European public goods – can strengthen the EU and enhance its ability to master international challenges by taking a more concerted approach.

For this reason, it is essential to strengthen the EU’s ability to meet the demands of the future. EU finances must place a central focus on the advancement of joint tasks and objectives such as climate action, digital transformation, innovation and research.

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