July 6, 2017

The European Union has begun thinking about ways to fill the budgetary void that the United Kingdom will leave after Brexit. As financial pressure on the Continent mounts, how the remaining member countries respond to the fallout could provoke fresh conflict. Regional divisions began emerging in the European Union with the financial crisis almost a decade ago, and budgetary discussions and other talks about the future of the bloc could deepen those divides. On June 28, European Budget Commissioner Gunther Oettinger and European Commissioner for Regional Policy Corina Cretu presented a plan to the European Parliament for the future of EU finances starting in 2021. The presentation makes only a series of proposals; formal talks will begin in 2018.

The United Kingdom is a net contributor to the EU budget, and its exit from the union will leave a gap of 10-12 billion euros per year ($11.4-13.7 billion), in a total budget of some 150 billion euros. The shortfall comes at a time when the union can hardly afford it. According to the Commission, new EU priorities in defense and border control will require up to 15 billion euros per year in additional funds.

Without the United Kingdom and its money, the European Union will basically have three options: reduce spending, ask member states to increase their national contributions or increase the revenue it generates. When it comes to reducing spending, the bloc has limited options: It could cut structural spending or funds to the Common Agricultural Policy (CAP), which together account for more than 70 percent of the budget. However, this solution is potentially explosive. The beneficiaries of CAP funding  — especially southern European countries including France, Italy and Spain — will fight hard against a reduction in subsidies to their farmers.

Increasing national contributions is equally controversial, and several net contributors (mostly in northern Europe) have already spoken out against the idea. Increasing EU revenue will also be a difficult endeavor.  Brussels is considering options such as creating a common environmental tax on imports, charging fees for foreign visitors, or adding taxes on financial transactions or on specific sectors. These changes would probably require support from the member states, many of which will oppose to the creation of new taxes.

The Commission is also considering making the disbursement of cohesion funds — money meant to equalize the playing field across Europe — contingent on receiving countries’ ability to adhere to EU laws and regulations. This, too, would be incredibly controversial, especially in Eastern European countries such as Poland and Hungary, which the EU government have accused of ignoring the rule of law.

There is time before EU member states must agree on the 2021-2027 budget, but meanwhile tense dialogue on the subject is expected to worsen Europe’s north-south, east-west divisions. The core issue under debate is an existential one: What is the European Union’s shape and purpose moving forward? Particular issues on this subject, such as budget talks and negotiations on reforming the eurozone, will create space for more conflict on the Continent.


— EU: Brexit Strains Europe’s Pocketbook originally appeared at Stratfor.