The E.U. Budget: Champions of Austerity Win a Big Battle–for the Most Part

Sleep-deprived EU leaders adopt a vastly reduced 2014-2020 budget that leading European parliamentarians vow to send back.

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Marathon negotiations between European Union leaders in Brussels produced a deal Feb. 8 on a seven-year budget following 36 hours of tense discussion. Indeed, that compromise appears as much a reflection of the considerable differences still dividing the 27-nation bloc as it is a convergence of vision and priorities. The budget for the 2014-2020 period is being viewed as a success for EU champions of austerity, because while it outlines maximum credits of €960 billion ($1.3 trillion), it limits actual spending to around €908 billion ($1.2 trillion). Overall the document represents a 3% cut from the plan covering 2007-2013—the first budget reduction in European Union history.

The accord announced Friday afternoon represents a victory for UK Prime Minister David Cameron and his German budget ally, Chancellor Angela Merkel. The pair had teamed up with demands the same belt-tightening national governments have applied to address debt-swamped public finances also be extended to the EU through budget cuts. That drive led an initial budget proposal of nearly $1.4 trillion to be scaled back to $1.3 trillion during a November summit that ended without a full agreement. The final budget came after the UK-German duo—supported by countries like Sweden, Denmark, and the Netherlands—clawed back around $15 billion more from the November proposal. Overall, EU officials say, the penny-pinching camp erased about $45.8 billion in previously proposed spending.

(MORE: A Deeply Divided European Union Faces Budgetary Cliff)

One way the austerity camp did that was by imposing an additional condition that only €908 billion of the total €960 billion credited to the budget will actually be spent—effectively slapping a reduction on a cut. Leaders who resisted those slashing efforts tried to paint them as an inevitable evil within the context of the enduring European financial crisis and economic slump. But even as they sought to put the best face on an accord they clearly disliked, the anti-reduction crowd suggested they’d averted even worse cuts that London had sought to impose.

“My responsibility was to put forward what I thought was the best [compromises] under the circumstances, [and] the circumstances are the fiscal situation,” said French President François Hollande, who had been backed by Italy, Spain, Poland, and other countries opposing the clamp-down they blamed primarily on Britain. “Britain wanted less than €900 billion [in actual spending], and France thought €913 billion was the necessary sum. Everyone can decide for themselves who bent the most.”

In the wake of the agreement, most observers seemed to think France and its allies did the most bending. Though the final real spending ceiling of €908 billion may have been closer to France’s €913 billion than the UK’s lower position, it was still a far cry from the nearly €975 billion budget Hollande and his peers had come to Brussels defending. Cameron seemed to be quite mindful of that as well, and used the budget outcome to again fan the Eurosceptic fires he’s used of late to warm his domestic political fortunes.

“I think the British public can be proud that we have cut the seven-year credit card limit for the EU for the first time ever,” said Cameron—who in January pledged to hold a referendum in coming years to allow British voters to decide whether they want to remain in the EU or not. “It’s a good deal for Britain.”

(MORE: Out of Europe? U.K.’s Cameron Pledges Referendum on E.U. Membership)

It would be hard to argue the budget accord isn’t a good one for both Cameron and the UK—at least for now. It not only imposed the kind of economic austerity remedies on Europe that the Cameron government has staked its future on in Britain. It also appeared to distance core EU members like Germany and the Netherlands from other pillars like France and Italy on fiscal questions, when their common stands on wider EU issues—including the necessity of greater European integration and regulation—tend to run opposite of Britain’s. With Cameron sounding like he’s slowly ushering Britain towards the EU exit, his return to the habitual outlier role in European affairs will likely find him more isolated once the partnerships forged in the budget battle have cooled.

Meantime, beware the proverbial devils in details. Closer inspection may find the difference between winners and losers looking a lot fuzzier over time. For example, while big budget defenders like France, Poland and Italy lost the macro battle, they triumphed in  insisting that the funding of the Common Agricultural Policy (CAP) remain virtually untouched. The CAP represents about 40% of all EU spending, and it just so happens France, Poland, and Italy are among the biggest recipients.

“The objective on the CAP was obtained,” Hollande said of agriculture funds he earlier vowed he wouldn’t budge on.

And while his claims that British austerity had won out in Brussels, Cameron tends to skim over the areas where he didn’t do quite as well. Though initial reports suggest Cameron indeed fought off pressure from France and its backers to terminate the huge rebates the UK has gotten since the mid-1980s—and which generated related refunds that Germany, Denmark, the Netherlands, and Sweden now enjoy—his victory on that matter may be relative at best. The British rebates—which represent about $3.4 billion annually—are slowly being reduced under rules adjusting imbalances between finances contributed to and received from the EU. That means despite Cameron’s defense of the refund, Britain’s actual payments to Brussels may well increase in coming years.

Meantime, though the budget fight between EU leaders is over, the wider war isn’t yet won. The 2014-2020 budget is the first the European Parliament has the power to vote on, and indications are that the largely activist, pro-European legislators hate the skinflint proposal they see coming their way—and are ready to vote it down. Worse still, many of those parliamentarians suspect the creation of €960 billion in budget credits to cover only €908 billion in slated spending is an invitation for over-spending down the road.

“The European Parliament will not accept this deficit budget if it is adopted in this way–that is certain,” said Martin Schulz, the German president of the European Parliament. “As President of the European Parliament, whose signature is required for the definitive adoption of the budget, I cannot, will not and, indeed, may not accept what amounts to deficit budgets…We are talking about massive real cuts. I don’t know if this can be described as realistic financial planning.”

In other words, despite Friday’s hard-fought agreement, Europe’s budget drama is apparently only just beginning.

(MORE: Why the Europeans Don’t Really Want an E.U. Budget Deal)

16 comments
bojimbo26
bojimbo26

Problem is is that most UK citizens want out of the EU ( it is costing too much and cutbacks at the same time ) , but Mr Cameron won't let us . He says he will call a referendum if the same government wins the next election ( 2015) , but if this situation continues , they will NOT be re-elected .

charleskaye
charleskaye

Coming to a nation near you America!

Nations in the EU overspent, bloated their social welfare programs, relied on the ridiculous "borrow our way to prosperity" ideology and now are faced with massive spending cuts in order to stay afloat.

If Americans can't learn from these mistakes and force our politicians to get serious about spending cuts, along with a refusal to accept deficit spending, we will foolishly follow in Europe's footsteps.

I honestly don't know voters can be so blind in supporting this same sure-to-fail "borrow our way to prosperity" policy. It's been attempted and it fails each time. Only a fool follows a certain to fail path, then expects a different result. Either that, or as evidenced by the economic illiterate comment below, American voters are simply clueless.

heropass
heropass

Cameron and Merkel will go down in history as the pair that destroyed the Eurozone. 

heropass
heropass

@charleskaye Right. That's why Denmark and Sweden and Norway are doing so well. They not only pay for their social programs, they prosper. What you don't understand is arithmetic and accounting. The bursting of the housing bubble caused a plummet in tax revenue and wealth and an upsurge in paying for the unemployed. Now, if you want to  let those unemployed go permanently on to the public dole (welfare and food stamps), just keep pushing for what you're pushing for. Apple is sitting on a cash hoard, so don't expect leadership from the private sector. The only person with pockets deep enough to work our way out of this hole is Uncle Sam. Get over it, and stop preventing our recovery. If you didn't notice, Britain slipped back into a second recession thanks to their stupidly thought out austerity program. And now it's looking like a triple dip is on the way (they just don't see it yet).

charleskaye
charleskaye

@heropass @charleskaye This is why economically ignorant people shouldn't t vote. In YOUR fantasy world, a gov can just keep borrowing and there's NEVER an end to the money supply, Ask Greecehow well that worked for them.

Newsflash - Just like you, a gov can't just keep borrowing and increasing their debt. At some point, creditors say "Hey, you owe too much, you're spending too much and you don't have enough income to pay your bills." Your credit rating drops because your credit is over extended (note the drop in the US credit rating as proof). Then, when no one will lend you money without special conditions (Austerity), you are forced to live within your means. 

Your citing of the UK's recession just shows how economically ignorant you are. Of course they will face "recession". Why? Because, just like the US, their GDP is calculated by including gov spending... INCLUDING money that is BORROWED and spent. This creates an illusion of economic growth (to people like you). Let me explain it in simple terms. If you put $20k on credit cards last year, you could claim to your friends that you "made and spent" $20k more than you actually did. You could say, "look at how great I'm doing", Except, if you did that year after year, you'd run out of credit. Then what? No more $20k income and compared to the previous years, you'd have less income, less spending once you stopped borrowing. You'd have two choices at this point. Massively cut spending so you can pay your bills (in government terms, that's Austerity) or default on your loans (BK). You could NOT borrow any more money.

When a gov does this, it affects GDP and therein lies the problem. When an economy relies upon borrowed dollars for growth, when the borrowing slows or stops, growth diminishes or goes away (recession) - see US 4th Qtr 2012 GDP drop. The UK's "recession" would occur as a mandatory by product of relying on borrowed dollars for growth (as you propose).

Get it into your head. There IS an end to the money supply. Ironically, it's short-sighted people like you that CAUSE a nation to be stuck with Austerity. If the UK didn't bury itself in debt, it would have never faced massive spending cuts.

Now, go read a book on economics. I'd suggest ones by John Maynard Keynes, or Milton Friedman. You've been schooled. Would you like to take another shot Scooter?

BTW - I know this sounds arrogant and sarcastic, but let's face it. When people are dumb, that kind of response is justifiable.


charleskaye
charleskaye

@heropass @charleskaye  - did it ever occur to you that I didn't put arguing with you on the top of my to-do list? You're not that important. But, as you can see, I did respond and presented my case. Have fun with YOUR "educated" (lol) response. 

heropass
heropass

@charleskaye The only time a person appeals to their authority based on their degrees from nameless institutions in areas that do not specialize in the topic at hand is when that person's argument is not only weak but wrong. If the strength of your argument held up, you would present it. But instead you give some flimsy, worthless piece of papers that you supposedly earned as a reason that anybody should believe you. That horse don't trot in these parts, mister.

heropass
heropass

@charleskaye so, what was your grade in systems engineering? A big, fat zero, no doubt.

heropass
heropass

 @charleskaye MBA. sigh, I should have known. The only thing more dangerous than an ignorant person is a slightly educated person who thinks they are not ignorant, such as you. Scooter.