The proposed instruments

The Commission now intends to significantly improve budgetary and administrative flexibility, and is proposing a number of instruments for the 2028–2034 MFF:

1. The first of these is to reduce the num­ber of MFF headings to four, to simplify reallocation. The fewer headings the MFF contains, the easier it to reallocate funds and change spending priorities during the annual budget negotiations, without having to renegotiate the MFF itself.

Furthermore, large, comprehensive funds are to be established within each heading, and the total number of funding program­mes is to be substantially reduced. This is intended to facilitate reallocation within and between individual funding program­mes. It is also proposed to make it easier to reallocate unspent funds to new tasks and priorities. Until now, unused funding has been repaid to the member states or offset against their financial obligations.

2. There are also plans to significantly reduce the proportion of European funding that is already committed to specific tasks or programmes at the start of the MFF period. In the new mega-fund for agricultural, fisheries and cohesion policy, 25 per cent of each member state’s allocation from the EU budget is to be retained as a flexi­bility reserve and will not be allocated in advance to a specific funding programme or region. Three-fifths of the flexibility reserve are to remain unallocated until the mid-term review; another fifth is to be retained for crisis response; and the final fifth is to be earmarked only in or after 2031.

3. Flexibility instruments are to be pro­vided for each MFF heading. Additional resources for crisis situations and larger margins within the existing expenditure headings will enable the EU to respond more swiftly to unforeseen challenges.

A new so-called “EU Facility” is to be created in Heading 1, with a budget of around €72 billion. The Commission intends to use this to finance a separate flexibility reserve and specific measures at EU level, as well as supporting member states in implementing their NRPPs through addi­tional loans from the EU budget. In effect the EU Facility represents a discretionary funding instrument through which unear­marked funds can be used for measures at EU level and to supplement national and regional funding programmes. As examples, the Commission cites funding meas­ures within the framework of maritime policy or to promote social infrastructure and the social economy. The Commission wishes to retain the power to determine how these funds are used.

The Commission also provides for a flexi­bility reserve in Heading 3, covering EU foreign and security policy. The new “Europe in the World” fund will provide €14.8 bil­lion for new challenges and priorities in European foreign policy.

4. Outside the MFF – and thus above the ceilings of the financial framework – the Commission intends to continue the two existing flexibility instruments:

a) The “Single Margin Instrument”, re­ceives unspent funds from the previous year’s EU budget as “a last resort” for unfore­seen expenditure. Its annual volume is to be capped at 0.04 per cent of the EU’s GNI.

b) The Flexibility Instrument can also be used to finance unforeseen expenditure. Its volume is to be more than doubled, to €15.7 billion over the seven years.

5. Finally, the Commission is pressing for an expansion of the EU’s borrowing capac­ity. The New Generation Covid recovery programme opened up the possibility of large-scale joint borrowing for the first time. The Commission now wishes to make this option permanent. To improve crisis preparedness, it is proposing two additional loan-financed instruments outside the MFF ceilings:

a) A new instrument named “Catalyst Europe” is intended to promote investment in the defence industry, energy infrastructure and strategic technologies, channelling EU loans to member states to supplement investment under the National Recovery and Resilience Plans (NRRPs). A total of €150 billion in new EU loans is proposed over the seven years.

b) The second instrument would be a new, comprehensive crisis mechanism designed to address potential risks and mitigate the consequences of acute, severe crises and emergencies. In an emergency, the EU would be able to raise additional “negative revenue” – that is, take out loans – which it could then pass on as loans to affected member states. The Commission envisages a total of €395 bil­lion for this new mechanism over the seven years, equivalent to 0.25 per cent of the EU’s GNI.

Overall scope and graduated flexibility

If one adds together the margins and re­serves within the MFF, as well as the instru­ments outside it (flexibility and crisis instru­ments, funds for Ukraine, loan-based in­struments such as Catalyst Europe) almost €800 billion would be available for unfore­seen expenditure over the seven years.

In essence, the Commission is proposing two changes to improve flexibility in the MFF: firstly, larger funds and support pro­grammes with generously resourced flexi­bility instruments, and secondly, a signi­ficantly increased overall MFF envelope, to enable the EU to tackle new tasks and challenges without making excessive cuts in existing areas.

The Commission has indicated that it intends to deploy these flexibility instruments in stages. First of all, existing budget funds would be reallocated to new prio­rities. Should further funding be required, the second step would be to utilise uncom­mitted funds within the MFF and designated financial buffers. Additional instruments and funds beyond the MFF ceilings – such as the new flexibility instrument – repre­sent step three. Finally, as the fourth and final option, the new loan-financed crisis mechanism may be deployed.

Flexibility in the annual budgetary procedure

Budget flexibility is inevitably associated with reductions in predictability and plan­nability. Expanding flexibility instruments, reducing firm commitments and accelerating reallocations will inevitably diminished the specific advantages of the multiannual financial framework and the multiannual funding programmes. The easier it is to reallocate European funding to new prio­rities, the less secure – or the more short-lived – the funding commitments from the EU budget become, and the more complicated it becomes to plan multi-annual fund­ing and development programmes.

The current MFF negotiations therefore also involve finding a suitable balance between flexibility and predictability that is accepted by all stakeholders. On the one hand, there is a recognised need to ensure flexible budgetary management, enabling swift and decisive responses to change. On the other hand, European funding policy must be predictable and binding to allow funding recipients to plan with confidence. The multiannual development programmes, which protect structural activities from the volatility of day-to-day politics are a defin­ing feature of existing European funding policy.

To address this conundrum and tackle the inherent conflict of goals, the Commission proposes bringing the various flexi­bility instruments under the annual budg­etary procedure, under which the Council and the Parliament can negotiate to amend the annual budget proposed by the Com­mission. Until now, this process has always been constrained by the MFF, which set firm ceilings and allocated EU funds to specific programmes. In future, decisions and reallocations under the new and signi­ficantly expanded flexibility arrangements will be negotiated during the annual budg­etary procedure. The two instances with budgetary authority, the Council of the EU and the European Parliament, will adopt a decision on the modalities of the flexibility instruments on the basis of a proposal from the Commission.

In order to manage that process, the Commission is proposing a new steering procedure involving itself, the Council and the European Parliament. In order to allow changes, new spending priorities and the allocation of flexible budgetary resources to be discussed in good time and decided during the annual budgetary procedure, it intends to present an annual “integrated strategy report” as early as possible. That report will consolidate the specific strategy procedures and reports that that the Com­mission already produces, such as reports on economic policy coordination under the European Semester and others relating to climate and environmental policy coordination. The integrated strategy report will set out political priorities as well as emerging policy and funding needs, and will be dis­cussed in the Council and the Parliament.

The Commission’s proposal for a new political steering mechanism for the annual budgetary procedure remains a matter of debate amongst the member states. How­ever, there are indications that the annual budgetary procedure will be guided by an EU strategy document of that kind from the Commission (which is likely to be adopted by the European Council). Whether this new instrument will make it easier to reach consensus and quantify new expenditure remains to be seen. It seems unlikely that the conflicts between net contributors and net beneficiaries can be resolved by such a strategy report, which is likely to be rather general in nature.