EU sets the scene for two-year fight with budget overhaul proposal

Good morning. News to start: Brussels has drawn up political “safeguards” to win Paris’s backing for its landmark trade deal with the Mercosur bloc of South American economies, with eyes on a final agreement in December.

Today, our economy correspondent previews the big release of the EU’s next seven-year, €1tn-plus shared budget plan — and the mother of all money fights that will follow in the coming months and years. And our technology correspondent reveals the financial cost of the EU’s cloud computing gap.

B-day

The European Commission will today lay out its proposal to overhaul the EU’s budget from 2028 onwards, setting the scene for what will be a protracted fight to get backing from member states and the European parliament, writes Paola Tamma.

Context: The EU’s multiyear budget is funded by the bloc’s 27 member states, paid out in a variety of different spending streams.

The central idea of the overhaul is to lump together hundreds of programmes into national plans to give capitals more leeway on spending and boost new priorities such as defence and competitiveness.

The traditionally largest beneficiaries of EU funds are already pushing back: farmers and regional authorities, which together account for over €750bn of current spending. According to leaked proposals seen by the Financial Times, the bulk of farming subsidies will be preserved in the next budget, but regions are likely to receive less money.

Another idea is to keep a portion of the budget uncommitted, to be able to deploy funds as needs arise, but that will also shrink the slice each country is going to get.

Brussels is also seeking to tie payouts to reforms, a model deployed for the first time with the Covid recovery fund. Under the current model, countries simply invoice the EU in most cases. Shifting to conditional payouts will be seen as a power grab that will be hard to swallow by some capitals.

But the biggest fight will be about how much money is paid to whom, and who foots the bill. Early drafts suggest a shift of funds towards eastern countries, at the expense of older member states.

Officials who negotiated late into the night were homing in on a deal that would result in a budget worth €1.78tn, or 1.26 per cent of EU gross national income, according to a document seen by the FT. That would result in an over 60 per cent increase in current prices compared to the present budget.

Net payers such as Germany, the Netherlands, Denmark, Sweden and Austria will resist requests for more cash, but are also reluctant to give Brussels revenue raising powers or to approve fresh joint debt to cover the shortfall.

Add in the mix the need for around €25bn in annual repayments of pandemic-era debt, and the commission has its work cut out for itself over the next two years.

Chart du jour: Tariffed

Donald Trump’s focus on the goods of the past is ridiculous, writes Martin Wolf. What matters is competitiveness in the future.

Cloudy outlook

The EU could forgo more than €1.2tn in economic gains over the next six years unless it overhauls its fragmented digital cloud policies and boosts customer choice, according to a new report by Brussels-based think-tank ECIPE seen by Barbara Moens.

Context: American tech giants such as Amazon, Google and Microsoft dominate the European cloud market, which is an increasingly critical infrastructure for sectors ranging from education to banking or healthcare.

The European Commission is currently working on legislation to address Europe’s gap in cloud capacity. 

ECIPE’s study, commissioned by the Open Cloud Coalition, argues that Europe’s lack of choice for customers buying cloud space leads to high switching costs and less capacity to effectively integrate artificial intelligence tools, which use cloud services.

The EU’s lag on cloud computing “limits not only efficiency gains but also hampers AI deployment, public service modernisation, and Europe’s broader digital competitiveness”, the report argues. 

Some EU countries such as France are pushing for “buy European” clauses in upcoming legislation to favour homegrown companies. The report however argues that digital sovereignty shouldn’t be seen as a “preference for national suppliers”. 

Instead, the authors call for short-term fixes such as prioritising more open solutions in the upcoming public procurement rules, and more long-term strategies such as competition enforcement and standard-setting.

“Real change will require decisive policy action in EU digital and data regulation and effective antitrust enforcement”, said Matthias Bauer of ECIPE.

What to watch today

1. Informal meeting of EU competitiveness ministers in Copenhagen.

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