What Happened

The United Kingdom is finally out of the European Union — along with its cash. With Brexit done and dusted, the Continental bloc must decide how to approach its next seven-year budget taking the loss of the United Kingdom's net contributions into consideration. For the first time since its inception, the bloc will face the prospect of a smaller budget, which could necessitate spending cuts on cohesion funds (which are meant to reduce economic disparities within the European Union) and agricultural funds (which help farmers across the bloc). Cuts in these programs will hurt the economies of several EU member states, mostly in Southern and Eastern Europe, potentially leading to discontent and deeper divisions within the bloc.

On Feb. 1, representatives from Bulgaria, Cyprus, the Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia, Slovenia and Spain — nearly all net recipients of funds from the bloc — signed a joint document calling for cohesion funds to remain at current levels in the bloc's budget for the 2021-2027 period. But that same day, Austrian Chancellor Sebastian Kurz said his country and a few other Northern European nations, including Germany, the Netherlands, Sweden and Denmark, would not support any measures to increase national contributions to the common EU budget to compensate for the United Kingdom's departure.

Why It Matters

The conflicting positions on the future of the EU budget underscore the extent to which the budget negotiation will be one of the main sources of conflict within the European Union in 2020. EU funds represent a significant source of money for countries like Poland, Hungary, Greece and Romania, which are net recipients of the bloc's aid (in 2018, the last year with available data, Poland received more than 12 billion euros in EU funds, followed by Hungary at around 5 billion euros). Countries like Germany, France and the Netherlands, on the other hand, are net contributors — as was the United Kingdom. In 2018, London was the third-largest contributor, providing a net annual payment of roughly 7 billion euros, meaning that Brexit will leave a big hole in the EU budget.

Northern member states are pushing to pass a smaller budget and redirect funding from areas such as agriculture to sectors including renewable energy and the digital economy. Southern and Eastern governments, for their part, suggest that cohesion and agricultural funds should remain at current levels, national contributions to the budget should increase, and rebates (which benefit countries such as Germany, Austria and Sweden) should be eliminated. The European Commission, meanwhile, has suggested creating new, EU-wide taxes that Brussels can collect directly to reduce the need for national contributions, but this is an idea that most EU governments oppose, believing it will impinge on their sovereignty.

And then there's an additional budgetary concern for some countries in Central and Eastern Europe — namely, the fear that Brussels will try to link the disbursement of money to maintaining a strong rule of law. In recent years, the commission has criticized countries like Poland and Hungary for trying to increase government control over the judiciary, as well as those like Romania for weakening the fight against corruption. Countries in Central and Eastern Europe fear that they will be the main targets if the European Union drafts a plan to suspend funding for countries in which the division of powers or institutional transparency is weakening.

What Happens Next

The European Union will hold an extraordinary summit on Feb. 20 to discuss the budget. But considering its complexity, a formal decision seems unlikely during that meeting. The bloc's budget is approved by unanimity, which means that each member state wields veto power. Northern European countries will threaten to veto any proposals that include higher national contributions, while Southern and Eastern governments will threaten to block any proposals that significantly cut funds for them. And even if the member states reach an agreement, the European Parliament will also have to vote on the budget. This suggests that the battle for the budget — and the future of key policy areas such as agricultural subsidies and cohesion funds — will divide the European Union like few others in the year to come.