Horse-trading Europe’s long-term future: Will infrastructure and research investment be sacrificed in the MFF negotiations?

At the end of this week, EU leaders will converge once again on Brussels to discuss the next Multiannual Financial Framework (MFF) for 2014-2020. Unlike at the abortive summit in November 2012, this time expectations are high that a deal is on the cards.

 

 

What has changed since last time? One factor is simply the elapse of time, which makes a deal more pressing. Even if an agreement is reached now, the start of spending programmes is likely to be delayed well into 2014. The November summit also provided some leaders with the necessary political theatre to sell a deal domestically by demonstrating their strong defence of their country’s position. The announcement of the in-out referendum in the UK might well reduce any immediate domestic pressure on David Cameron. The less negative reaction to his speech countries like Germany might also be a strong signal that more cooperation is now expected on the MFF.

 

And the deal will look different: in addition to some creative budgeting aimed at letting every country claim victory, more is now likely to be on the table: albeit more cuts rather than additional spending. These cuts will go further down the route demanded by many net payers – although not as far as initially demanded by the UK – and they will most probably provide ‘sacrificial lambs’ in the form of cuts to administrative expenditure – of particular importance to a number of EU governments.

 

 

While such a deal is likely to be bearable for member states and the European Parliament, these cuts will come at a price. While the net payers drew a red line in the sand to achieve further cuts, France, as well as Mediterranean, Central and Eastern European countries benefitting from the traditionally large areas of EU spending, in particular the Common Agricultural Policy and the Cohesion/Structural Funds, demanded further protection of these policy areas. This form of negotiation turns the budget into a zero sum game – and something will have to give.

 

The outcome is likely to be further reductions to the more innovative and forward-looking budget proposals, in particular research funding and the Connecting Europe Facility (CEF). While some cuts were to be expected, the level now being discussed – coming on top of reductions already agreed at the November Summit – is much closer to the bone, making these programmes unlikely to live up to high expectations, in particular in terms of fostering economic transformation, innovation, investment and, ultimately, creating growth and jobs – in essence, delivering the Europe 2020 strategy.

 

This is especially worrying, given the longer-term impacts of the current crisis. Public investment is clearly constrained by the need for public finance consolidation, and it is always longer-term capital budgets that are cut back first.

 

Private investment has also fallen significantly during the current crisis. Part of this can be put down to financial market limitations, but there is also a lack of confidence, leading firms with high capital reserves or institutional investors to hold back their investments, not only but especially in the crisis countries.

 

The decline in investment in infrastructure in Western Europe has been marked: for example, according to the Infrastructure Journal, it fell by 21% in 2011 compared to the previous year. Joint public/private investment has also declined: for example, the development of Public-Private Partnerships for transport infrastructure fell from

€18 billion in 2007, before the crisis, to an expected level of three billion during the first six months of 2012.

 

This is particularly regrettable, as investments in infrastructure could have a very positive short-term impact on Europe’s labour markets. The crisis has hit the construction sector especially hard, resulting in large-scale unused capacities, also in terms of human capital.

 

 

But investments in infrastructure and innovation also have a far-reaching impact, addressing Europe’s long-term growth crisis and long-term challenges in areas such as climate change and resource scarcity. These investments increase future productive capacity and competitiveness, and, in the case of energy, reduce Europe’s dependency on unreliable producers. They also help with the transformation towards a smart and green society: for example pan-European smart grids (with cross-border interconnectors) and smart meters are needed to help manage individual energy consumption and to incorporate renewables into a reliable energy supply.

 

But the up-front investment required to realise these enormous benefits are equally huge. The European Commission estimates that total investment needs for the period 2010-2020 amount to 1.5-2 trillion euros, with transport and energy infrastructure representing the largest components of the investment required. The necessary investment in energy transmission alone is estimated to be around €200 billion. While the EU budget clearly cannot be the only answer, the funding can serve as a catalyst and also provides a signal that the importance of these investments has been recognised. The CEF in particular also has the potential to lever in private investment, ensuring that limited public resources have a much greater impact – delivering a bigger bang for every euro.

 

 

Fortunately, the game is not quite over yet. There ought to be pressure on the negotiating parties, including from and on the EU institutions, to fulfil their promise to deliver an investment budget. Countries publicly demanding EU reforms and further reductions to the MFF should be made aware that their focus on overall cuts is simply reducing future EU investments while leaving the traditional policy areas broadly unchanged, thus failing to deliver the demanded objective of fostering jobs and growth.

 

If successful, while some cuts to the CEF and Horizon 2020 are inevitable, a significant investment potential can remain, especially when the full potential to draw in private sources of funding, in conjunction with the European Investment Bank and innovative financial instruments, is realised. Using domestic public investments, in many countries in conjunction with regional funds, to finance parts of this infrastructure should also be a priority. In addition, there is more scope to develop the Single Market and to create greater, long-term regulatory certainty, which can further encourage private investment.

 

The EU is not in a position to waste this chance. Europe’s infrastructure needs to be renewed and innovation needs to be encouraged. Budget Commissioner Janusz Lewandowski asked at a recent EPC event: “Can we offer the predictability of investment that Europe so badly needs?” Ensuring that these areas are a key focus of the next MFF is at least a step in the right direction.