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An introduction to the EU's Multi-annual Financial Framework

Budget07-02-2013 - 15:40

The EU's Multi-annual Financial Framework (MFF) sets out spending ceilings for each policy category or "heading". The MFF, also known as the "Financial Perspectives"), helps to ensure that EU spending takes place in an orderly fashion and remains within the limits of the EU's "own resources" income. It also limits overall spending to a percentage of EU Gross National Income (GNI).

Currently overall annual expenditure cannot exceed 1.23% of EU GNI. However, this limit has never yet been reached.

The EU's annual budgets are currently divided into five spending categories, called headings:

1. Sustainable Growth

1A: Competitiveness for Growth and Employment

1B: Cohesion for Growth and Employment

(This heading includes regional policy)

2. Preservation and Management of Natural Resources

(This heading includes agriculture and environment)

3. Citizenship, Freedom, Security and Justice

3A: Freedom, Security and Justice

3B: Citizenship

4. EU as a global player

5. Administration

When budgets are being discussed within the EU institutions, one often hears, for example, "heading 4" or "H4", rather than "foreign affairs budget". Each heading is divided into "budget lines", each of which can be drawn upon for a specific purpose

REF. : 20130128BKG59902

How is the MFF decided?

The procedure for deciding the Multi-annual Financial Framework is laid down in the Treaty on the Functioning of the EU. The treaty requires the European Parliament, the Council and the Commission to "take any measure necessary to facilitate its adoption" (Article 312:5), and stipulates that the presidents of the three institutions shall hold "regular meetings", at the initiative of the Commission (Article 324).

These meetings started early in 2011 and will continue until the MFF is finally approved. Formally, the MFF is approved by a unanimous decision of the Council of Ministers, but not before Parliament has given it its blessing ("consent").


How is the EU budget financed?

The EU Treaty rule that "the budget should be financed wholly from own resources" (Article 311). Until the 1980s, the EU budget was financed by genuine own resources, mostly import duties collected at the single market's external borders. However, as the EU was very successful in negotiating free trade agreements with major trading partners, these import duties dried up and were gradually replaced by other sources.

Nowadays, 75% of the EU budget is made up of national contributions based on Gross National Income (GNI). Then there is the "VAT-based contribution" which amounts to 11% of total income. "Traditional" own resources (customs duties, agricultural duties and sugar levies), add up to 13%. The remaining 1% comes from fines imposed on companies for beaching competition law and from taxes on EU staff salaries. The current system, with its many exceptions and formulae, lacks transparency and is often described as overly complex.


How are own resources decided?

Own resources decisions, which may establish new categories of own resources or abolish existing ones, must also be unanimously approved by the Council, but the procedure here differs in that Parliament is only consulted.

Furthermore, these decisions must also be approved in accordance with the member states' respective constitutional requirements (Article 311), in effect requiring "double unanimity". Arguments over "national rebates" are settled by own resources decisions.


How do annual budgets relate to the MFF?

The Multi-annual Financial Framework (or "Financial Perspectives"), sets annual spending ceilings for the various policy headings within a multi-annual spending period (e.g. 2007-2013). Annual budgets must always be established within the MFF limits.


What is the EU2020 strategy and why does Parliament want it to be a priority in the budget?

"Europe 2020" is the EU's growth strategy for 2010 - 2020. It aims to make the EU a smart, sustainable and inclusive economy.

In March 2010, the European Council adopted the five EU 2020 headline targets proposed by the European Commission: increasing the employment rate for women and men to 75%, raising combined public and private investment levels in research and development to 3% of GDP, reducing greenhouse gas emissions by 20% compared to 1990 levels, improving education levels and promoting social inclusion. The Commission has proposed a series of "flagship initiatives" to achieve these targets.

To MEPs, it is obvious that these ambitious targets cannot be achieved solely through coordination and legislation, but also need support from the EU budget. In their resolution of 24 March 2011 (general guidelines for the preparation of the 2012 budget), MEPs acknowledged that "delivering on the Europe 2020 strategy's seven flagship initiatives will require a huge amount of future-oriented investment".

They added that "the Europe 2020 strategy can be credible only if adequately funded" and stressed that any attempt to limit or reduce budget appropriations linked to the EU 2020 strategy "would be counter-productive, most likely resulting in the failure of Europe 2020, as was the case for the Lisbon Strategy".


Parliament's stance so far

Parliament stated its stance on the EU's future budget as early as 2011. The report adopted then was the result of the work of a special committee, the SURE-committee. Thereafter, Parliament adopted several resolutions, prior to European Councils in which the MFF featured on the agenda.

MEPs expressed dismay at the latest (November 2012) proposal by EU Council President Herman Van Rompuy. Their key criticism was of a proposed cut of more than €70 billion as compared to the Commission's initial proposal in June 2011.

Parliament had already said in a resolution on 23 October 2012, adopted by an overwhelming majority, that even the Commission's original proposal to freeze the budget at the level of 2013 ceilings would not be sufficient to finance existing policy priorities in the "Europe 2020" strategy, which include the new tasks laid down in the Lisbon Treaty, let alone any unforeseen events. The Van Rompuy proposal was considered incompatible with the "Growth and Jobs Pact" that the European Council itself adopted in June 2012.

In recent weeks, Parliament's President Martin Schulz has repeatedly said that "the more cuts are made to the Commission's proposal, the less likely Parliament is to say 'yes'..."

In November 2012, rapporteurs Reimer Böge (EPP, DE) and Ivailo Kalfin (S&D, BG) voiced deep regret that the key points in Parliament's position, repeated over and over again over since 2011, had not yet been taken up by the member states. These include not only the level of spending but also flexibility to transfer money between budget headings or budget years and changes to the way the budget is put together, i.e. the system of "own resources". 

Parliament insisted that EU leaders in the European Council must reach a political agreement on a far-reaching reform of the financing of the EU budget "to make it fairer, more transparent, more stable and more accountable".