Commission gets glimpse of post-Brexit EU budget horrors

In the worst-case scenario, radical budget cuts would mean no more cohesion funds in most of Western Europe.

The European Commission has started to look into the impact that Brexit will have on the next EU budget plan — and wants to show the remaining countries that deep cuts are a bad idea.

Cutting the post-Brexit budget by a sum approximately equivalent to the U.K.’s current share (of 12.5 percent, or 14 percent if you don’t take the rebate into account) would mean halting funding for Western European countries from the EU’s regional aid program, according to a study carried out by the Commission’s  regional affairs department (DG Regio).

Under such a scenario, the EU would be able to provide “support for less developed regions only,” says the study, obtained by POLITICO. That means only the poorest countries in the EU, and regions with a GDP per capita of less than 75 percent of the EU average, would continue to get EU funding.

“Support for Germany and mainland France would be discontinued,” the paper says. Benelux and Scandinavian countries, Ireland and Austria would no longer receive any money under the EU’s main subsidies regime. (French overseas regions such as Guiana would be an exception).

Outside of Eastern Europe, only Cyprus, Greece and Portugal and the southern regions of Italy and Spain would continue to have access to EU “cohesion funds,” which currently account for roughly a third of the EU budget.

The Commission’s biggest departments were asked to prepare studies on the impact of three different post-Brexit scenarios on their policy areas and budget commissioner Günther Oettinger sat down with the Commission’s vice presidents on Wednesday to discuss their findings, according to Commission officials.

The departments were asked to look into two scenarios, as well as a continuation of the status quo (which would mean a de facto budget increase because of inflation since 2011, when the current seven-year budget was set): cuts of 15 percent and axing 30 percent from the current €1 trillion seven-year budget.

Radical cuts of 30 percent would mean that only Eastern European countries plus Cyprus, Greece and Portugal would continue to benefit from cohesion funds, while “the support for less developed regions … in France, Italy and Spain would also be discontinued.”

The status quo scenario would allow for net contributors such as Germany to redistribute money to their own poorer regions, such as eastern Germany, via Brussels. This is DG Regio’s preferred option, of course. “The policy should continue targeting all regions post-2020,” the paper says.

DG Regio finds a natural ally in the EU’s Committee of the Regions, whose president, Karl-Heinz Lambertz, told POLITICO: “There are economic, social and territorial disparities in all EU regions.” For that reason, he said, “solidarity cannot be limited to only few regions, because there are people needing European intervention to provide jobs, training, broadband or public infrastructures everywhere.”

Cohesion in economic and social affairs is “a founding objective of our European Union,” said Lambertz. The money used “is only 0.37 percent of the EU’s GDP. Let’s not undermine this effective policy.”

The way regional aid works today makes Germany’s powerful regions an ally for Europe’s East and South, while the federal government in Berlin is keen to avoid picking up a bigger share of the bill once the U.K. leaves the bloc and is especially eager to see a resolution to the dispute on Britain’s financial settlement.

“Cuts will affect the future MFF [multiannual financial framework] and its expenditures as a whole,” says a German position paper adopted by Angela Merkel’s government earlier this year. The paper called for a stronger link between EU subsidies and countries’ performance on economic reforms and the rule of law, though Commission President Jean-Claude Juncker called the latter “poison for the EU.”

The Commission’s political approach must be decided by next May, when Oettinger’s proposal for the next seven-year budget is due. But the administration is already keen to show it heard the message from the EU’s biggest contributor and wants to accommodate at least some of Germany’s requests, such as calls for stricter conditionalities if countries don’t comply with Brussels’ economic and fiscal recommendations.

The EU’s cohesion policy should “contribute to sound economic governance,” the DG Regio paper says. The policy should be linked to country-specific recommendations under the European semester to ensure that “cohesion policy makes an important contribution to the implementation of economic reforms.”