The European institutions are currently negotiating the Future EU Budget, a multiannual financial framework for the period 2021-2027. The Commission proposal aims to match current political and economic ambitions with the resources at hand, considering that the EU Budget only accounts to around 1 per cent of the EU’s GDP, and that Brexit will result in around €10 billion or fewer contributions annually.
The new budget will boost investment in research, development and innovation (RD&I) through a reinvigorated Horizon Europe programme; will support more mobility of citizens, students and professionals through the doubling of the current budget of the successful Erasmus+ programme; and will continue protecting consumers and supporting SME competitiveness through the Single Market programme. More funding is also being earmarked for other politically sensitive areas including migration, security and defense. The big losers are two longstanding priorities in the history of the EU budget, namely the Common Agricultural Policy, aimed to support the farming sector to provide food security to the EU; and Cohesion Funds, with the objective of creating more convergence among EU regions, or in other words to close the standard of living gap among EU citizens. Funding for these two categories are proposed to drop by 5 per cent and 7 per cent respectively.
In the end, the budget is an accounting exercise, and therefore, unless member states commit to increasing their contribution towards the common budget, any increase in one policy area requires a reduction in others. The unfortunate reality however is that even the increase in funding forecasted for R&D&I in the next programming period – which is the investment creating the most added value in economic terms – is insufficient when considering that the EU will overall continue lagging behind our global competitors such as the United States and China in terms of absolute investment, and behind most Asian economies in terms of investment as a percentage to GDP.
At the same time, while increasing investment in RD&I may provide the best returns in terms of value added to justify reductions in CAP and cohesion funding, it misses out on an important and sensitive consideration in the current political climate. In the age of growing populism across the EU, cutting funds off from vulnerable economic sectors and from less developed regions or transition regions, would be hurting EU citizens at the core, and could be explained none better than shooting oneself in the foot.
Cohesion funding for instance, allocates substantial funding for regional development through investing in projects such as new or upgraded road infrastructure, health and educational facilities. It also reserves a great deal of investment in people through social programmes focused on upskilling of workers, addressing youth unemployment and social inclusion, among others. These funds clearly enable member states to undertake projects that national budgets would otherwise not permit, particularly when one factors the stringent fiscal rules they are subject to in order to comply with the EU’s stability and growth pact criteria. These projects are the kind of initiatives from which entire communities benefit collectively and many citizens and businesses benefit individually.
Aside from an overall cut in the EU’s cohesion budget, from a Maltese perspective, it is being widely assumed that Malta will experience a reduction in its cohesion fund allocation due to the positive economic growth experienced during the current period (2014-2020), which now puts Malta at 96 per cent of the EU’s GDP per capita average.
While Malta’s growth rates in recent years were clearly strong, for an open economy like Malta’s that is vulnerable to exogenous shocks, this growth accounts for only a too short period of time to ascertain that they can be sustained long term and to therefore start to be considered as one of the EU’s advanced regions. Malta therefore has a strong case in arguing that this growth needs consolidation, and that in this respect it should still be considered as a transition region in the upcoming programming period post-2021, with the right amount of funding allocated for this purpose.
Another challenging prospect resulting from the future EU budget that will have implications on all member states, including Malta, is the fact that the maximum co-financing rate for projects funded through the EU budget, in most cases will be reduced from 85 per cent to 70 per cent. This will therefore require additional commitment from the national budget.
A lower overall EU budget for cohesion funding, a potential smaller package of EU funding for Malta, and a higher share of national contributions to implement projects, will undoubtedly present new challenges for Malta. It is crucial that when the upcoming EU budget takes effect post-2021, the level of public investment by the Maltese government remains consistent, whether the level of EU funding is retained or reduced. Only this way will we be able to sustain and consolidate Malta’s strong economic growth, which in turn will continue transforming the economy to address longer term challenges and to be in a position to cushion future economic downturns.
This article reflects some of the points discussed at a recent business seminar on the Future EU Budget, organized by the Malta Business Bureau and the European Commission Representation office.
The article was first published on the Sunday Times of Malta on 11th November.