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Q&A: The EU budget crisis explained

28 November 2014
The EU is currently facing a serious liquidity crisis. With the European Commission already unable to honour bills legitimately incurred in 2014, Member states have proposed serious cuts to the 2015 budget, including development and humanitarian aid, which jeopardises the EU’s ability to respond to complex global challenges. It also sends the wrong signal about the EU’s ambition to tackle poverty and respond to crises in what is a critical year for the future sustainable development framework.

As yet there is no agreement between the Council and the Parliament over the 2015 budget or how to deal with the issue of unpaid bills from previous years.

This Q&A explains the current cash crisis and the status of the 2015 budget.

1) How is the budget drawn up?

Annual EU budgets are drawn up by the European Commission (the Commission) based on the indicative expenditure ceilings identified and agreed by member states in the 7-year Multiannual Financial Framework (MFF). The current MFF runs from 2014 to 2020, with different categories of expenditure (headings) corresponding to different areas of EU activities:

(i) Smart and Inclusive Growth
(ii) Sustainable Growth: Natural Resources
(iii) Security and citizenship.
(iv) Global Europe
(v) Administration

Around 95% of the EU budget goes to concrete activities on the ground under the first four headings of the MFF. Heading iv, “Global Europe”, covers the EU’s external action, including development and humanitarian aid, and accounts for only 6% of the entire MFF.

Once the Commission has prepared the draft annual budget for a given year, it is submitted to the Council (EU Member States) and European Parliament (the Parliament) – the budgetary authority – who amend and adopt the final budget.

2) Why is the EU facing a cash crisis now?

The budget consists of two different amounts: commitment appropriations and payment appropriations. Commitment appropriations, which refer to planned future payments, are the combined maximum value of contracts that the Commission is allowed to sign each year. Payment appropriations are legal obligations from the past – i.e. the actual bills that the Commission has to pay under the contracts signed.

Over a number of years, the budgetary authority has consistently adopted annual payment appropriations which are below the amount requested by the Commission.

With insufficient payment appropriations in the annual budget, the Commission has been unable to pay bills legitimately incurred. As a result, the Commission has had to delay payment of some bills to the following year.

However rolling payments over year-on-year has created a snowball effect: after successive years of delaying payments, €26bn from the 2014 budget – which was already less than the Commission’s estimated payment appropriations for the year – was used to pay bills carried over from 2013. The amount of unpaid bills has grown from €5bn in 2010 to around €26bn by the end of 2014.

As a result, there are now insufficient funds left in the 2014 budget to pay bills already incurred. In order to stabilise the situation and prevent the deficit from snowballing further out of control, the European Commission has submitted various amending budgets for 2014. The key draft amending budget (from May 2014) proposes a €4.7bn increase in the 2014 budget to cover payment shortfalls. However member states have failed to adopt a position on the European Commission’s various proposals to amend the budget.

Funds committed under the 2015 budget will therefore be appropriated to pay 2014 bills, further exacerbating the liquidity problem.

3) What is the impact of the cash crisis when it comes to development and humanitarian aid?

In September 2014, DG DevCo ran out of payment credits and is facing a funding shortfall of €1.3bn by the end of the year. This €1.3bn will therefore be carried over and paid using the 2015 budget.

If the Council refuses to increase the level of payment appropriations in 2015, it is feasible that DG DevCo will run out of money mid-way through 2015. This will have a severely negative impact on the achievement of the EU’s external policy objectives in 2015 and thereafter, and will ultimately be felt by the beneficiaries of EC-funded development and humanitarian projects.

If the development aid budget runs out, the payment of future instalments of currently running grants could be postponed, meaning that recipients would have to pre-finance their projects themselves until a solution is found. Beyond this, future funding opportunities are likely to be curtailed, with calls for proposals and new contracts delayed. There is a real risk that no new contracts will be signed if a solution is not found quickly.

In terms of humanitarian aid – where the effects of a cash crisis are felt much more quickly and keenly than longer-term development projects – only 50% of grants awarded will be disbursed, meaning recipients will have to pre-finance the additional 50% themselves.

Delaying payments and failing to sign new contracts will jeopardise the immediate actions and financial stability of those NGOs implementing projects funded by the European Commission. In the long-term, progress towards sustainable development achieved in previous years is at risk.

 4) Is the cash crisis going to get worse in 2015?

Given the Council’s current position, the situation is unlikely to improve in 2015. Taking into account the postponement of bills from 2014 and the extremely conservative proposal expected for 2015, much of the 2015 budget will be dedicated to financing existing actions.

This will have a detrimental impact on the EU’s development and humanitarian objectives and risks undoing years of progress. Member states should therefore honour commitments made in the MFF with a robust 2015 budget which allows the EU to respond to complex global challenges.

5) What happens now on the 2015 budget?

On 17 November, after 21 days of conciliation, talks between the Council and Parliament broke down without any agreement on the EU Budget 2015. The Parliament could not accept the position presented by the Council during these negotiations, as it would halve the sum the EC requested to pay the most urgent bills in order to reduce the snowballing liquidity crisis. The Commission has said that the €4.7bn requested in May was the bare minimum needed to make those payments. The Parliament also wants to use the exceptional windfall revenues of €5bn coming from fines to settle some of the most urgent bills, but member states want to channel back the extra income to their national budgets

The European Commission therefore presented a new budget proposal on 28 November, which foresees €145.2bn in commitments (+1.8% on 2014) and €141.3bn in payments (+0.7% on 2014). This proposal includes additional payment appropriations of €87m for the Development Cooperation Instrument and €5m for the European Instrument for Democracy and Human Rights. It also proposes to increase the commitments level for development cooperation for 2015.

This leaves two weeks for negotiations between the Parliament and Council before the Parliament could vote on the agreed text during the last plenary session of the year. Another budgetary trilogue meeting will therefore take place on 4-5 December, and if they reach an agreement the Council is expected to adopt the package by the 15 December, followed by the Parliament at its Strasbourg plenary session on 17 December.

If no deal is reached by 1 January 2015, the EU will have to run on “provisional twelfths”, i.e. one twelfth of the 2014 amount or that of the 2015 draft budget, whichever is lower, chapter by chapter, for each month.