European Parliament draws red lines on EU budget negotiations

Returning from the COVID-19 summer recess, EU legislators face a number of pressing matters in the coming weeks and months – how to finance the EU’s economic recovery, the green and digital transformations, the many legislative files that have fallen by the wayside due to COVID-19 and now a new Commissioner hearing, the European Parliament decided to focus efforts on trying to find inter-institutional agreement on the Next Generation EU 7-year budget and Recovery Fund.

On 16 September, European Commission President Ursula von der Leyen is set to present her first EU State of the Union to the European Parliament, setting out her agenda for the coming year. With promises ranging from matching her Commission’s ambitious climate agenda to rebooting the contentious Dublin Regulation’s migration pact, her legislative agenda will not only set the direction of the EU for years to come but will also require major financial resources.

Yet, four months before the current budgetary framework ends on 31 December, President von der Leyen’s financial resources for the coming years continue to be in flux as, despite the €1.074 trillion MFF deal reached by EU leaders in July, the agreement still requires approval by the European Parliament. National parliaments also need to ratify the €750 billion COVID-19 Recovery Fund, including authorising the Commission to raise money on the financial markets.

With direct negotiations between the European Parliament and the German Presidency of the Council having now kicked off, MEPs in the Budget Committee drew their red lines of non-negotiables, ranging from new ‘own resources’ to increasing funding for flagship EU projects. In addition, MEPs set deep red lines on linking the distribution of EU funds to the upholding of the rule of law and climate commitments.

On own resources, while Heads of State and Government agreed on the introduction of new EU revenues based on the use of plastics as of 2021 and a new carbon adjustment mechanism, digital taxation, an extension of the emissions trading system as well as a possible financial transaction tax (FTT) over the next 7-year term, MEPs are overwhelmingly demanding a legally binding calendar for their introduction.

A legally binding calendar would exert pressure on Governments to push tax questions through national parliaments, preventing them from stalling progress over national positions. This is particularly important in the context of the Dutch, Irish and other parliament’s opposition to, for example, the introduction of a European digital services or financial transaction tax.

The key stumbling block on reaching an MFF agreement, however, continues to be MEPs’ demand to link the disbursement of EU funds to Member States’ adherence to the rule of law. This demand was further emphasised by a letter to Chancellor Angela Merkel and Commission President von der Leyen, co-signed by the parliamentary leaders of the EPP, S&D, Renew Europe, and the Greens, stressing that “it will be impossible to advance on the MFF” without a formal conclusion between the Council and Parliament on strong legislation on the enforcement of the rule of law mechanism.

While not specifically mentioned, the Parliament’s letter and insistence on linking EU funds to the rule of law are a response to both Hungary and Poland, which are both accused of significantly retreating on the rule of law by civil society organisations and MEPs. While the European Parliament officially launched Article 7 proceedings against both Poland and Hungary in 2017 and 2018, respectively, both countries currently block any meaningful progess or sanctioning in the Council, which requires unanimity on the matter.

With inter-institutional negotiations are expected to proceed throughout September and October, the European Parliament’s plenary is expected to vote on a final compromise at the end of October. National parliaments will then have to ratify the MFF before the end of the year to ensure continued funding for the EU’s flagship programmes and Europe’s economic recovery.