Budget crunch

Germany among losers if EU cuts subsidies after Brexit

Farmers march to the Parliament in Lisbon with flags and their old tools
Hankering for more structural love from Brussels. Source: Reuters

Although it’s the biggest contributor to the European Union’s common budget, Germany gets a surprising amount back in the form of infrastructure subsidies. From lush new parks to sleek highways and museums, regions with once-rickety infrastructure gleam when the European Union turns the funding taps on, particularly in Germany’s former Communist east. But this could all change in 2021, if Brussels cuts its funding to disadvantaged regions.

Officials at the European Commission, the EU’s executive body, argue that well-to-do countries such as Germany, Europe’s largest economy, should support feebler parts of the country out of their own pockets, rather than from the so-called Structural Funds and the Cohesion Fund. These EU facilities, which have €351.8 billion at their disposal between 2014 and 2020, aim to reduce regional disparities in income, wealth and opportunities. The European Commission’s president, Jean-Claude Juncker, wants to discuss the matter on February 14, Handelsblatt has learned.

The motivation of Mr. Juncker, himself no stranger to financial scandal, is a growing shortage of money in the European Union. In three years’ time, Brussels’ budget will develop a €10 billion ($12.5 billion) pothole after the UK, currently the EU’s second-largest net contributor, stops paying its fair share. Clearly, Brexit comes at an inconvenient time for the EU and its lengthening to-do list — to better protect its external borders, fight terrorism, mount a common defense and send aid to refugees’ home countries, particularly in Africa.

Spending cuts will be necessary in the EU’s next seven-year budget period from 2021, even if wealthy members increase their contributions. Not all these countries are prepared to do so, either. Austria’s new government, led by youthful populist Sebastian Kurz, has made clear that his government wants to freeze its contribution at the current level.

In the EU's current seven-year budget, Germany will receive up to €27.9 billion in structural subsidies.

At the same time, members states are placing hefty demands on Brussels. Countries most affected by the sharp influx of refugees want to expand EU border protection. So far, the border task force that was assembled last year, Frontex, consists of officers deployed at the national level. Now, EU leaders are eyeing the creation of a bona-fide European border control force, at a staggering cost of €150 billion.

Some richer EU members are also keen on the Erasmus program, a provider of student-exchange scholarships within the EU. Proponents say the popular scheme enhances the EU’s appeal to young people, which is why they called at last year’s EU summit in Gothenburg, Sweden, for its funding to be tripled. This would cost another €60 billion.

According to details from Brussels, “intelligent austerity measures” in the Structural Funds could absorb at least part of these additional costs. If all countries with a per-capita income above the EU average were excluded from subsidies, expenditures could be reduced by around €100 billion, officials say. This would affect at least nine countries including Austria, the Benelux states, Denmark, Finland, France, Germany, and Sweden, many of whom are likely to contest such a measure.

However, it is questionable whether the Commission will have the political oomph to get it through. The Structural Funds are an important source of income for the prosperous EU countries. In the current seven-year financial period, Germany will receive between €19.2 and €27.9 billion, depending on the calculation method. This includes funding from the European Regional Development Fund, the European Social Fund and the Rural Development Fund.

In Germany, the lion’s share of this cash goes to the eastern states, with Saxony alone due to receive €2 billion over a seven-year period. But on the other side of the country North Rhine-Westphalia, home to rustbelt industries such as coal mining, is another major recipient. Even Germany’s wealthiest states – Bavaria, Baden-Württemberg and Hesse – each draw hundreds of millions from the EU’s structural pot.

Ruth Berschens is Handelsblatt’s bureau chief in Brussels. Jeremy Gray adapted this story into English for Handelsblatt Globat. To contact the author: berschens@handelsblatt.com

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