Cyprus proposes €32.8 billion cut to next EU budget as compromise

The race to agree on a new long-term budget for the European Union reached a major milestone on Thursday, as Cyprus, the country holding the rotating presidency, unveiled its compromise proposal for a 2% overall cut, worth about €32.8 billion.

“Our cut is the compromise that addresses all voices in the Council,” Marilena Raouna, Cyprus deputy minister for European affairs, said on Thursday afternoon.

“We believe this is a balanced text that reflects the position of all member states.”

The EU is negotiating its seven-year budget for the period 2028-2034, which will set its long-term political priorities and spending capacity.

The cut would be made to the draft budget tabled in July last year by the European Commission, which came with an eye-grabbing headline figure of almost €2 trillion, the bloc’s largest ever.

The reduction suggested by Cyprus is a delicate balancing act between a group of member states that pushed to keep the size of the Commission’s draft, or even increase it, and another group, usually dubbed the “frugals,” more recently self-styled as “the modernists”, that demanded pronounced reductions across the board.

One of the loudest voices in the latter camp is Sweden, which, for example, wanted a cut of up to 20%, dismissed by others as “unrealistic”.

“The positions in the Council have been strong and opposing,” Raouna said.

“That was a given from the very beginning. And yet, we all agree that this budget needs to allow the Union to deliver on its strategic priorities.”

The text by the Cypriot presidency includes, for the first time, explicit numbers on the expenditure programs for the next EU budget, whereas previous efforts were mostly focused on agreeing on the overall structure.

According to the diplomats involved in the discussion, it is high time to start discussing the numbers, since it is only then that member states are forced to make tough choices on which should be the priorities for the next years’ spending.

What is in the proposal

At the core of the tensions is the money allocated to each of the main spending lines.

The so-called nego box includes:

€942 billion for agriculture, fisheries, cohesion, migration management and security
€502 billion for competitiveness, research, innovation, defence and space
€182 billion for development aid, humanitarian assistance and enlargement
€104 billion for administrative costs
€134 billion for repaying the COVID recovery fund

While the cuts were applied across all headings, they were not reduced in the same manner, as the national allocations were considered difficult to cut.

This relatively minor reduction of the first spending line is deemed a major victory for the so-called “Friends of Cohesion,” which covers 16 Southern and Eastern Europe who are keen to preserve as many agricultural and cohesion funds as possible.

In addition, the proposal introduces a reallocation mechanism in favour of 15 countries whose Gross National Income (GNI) is below 90% of the EU average.

By contrast, the moderniser camp, which ranges from West to North and covers most of the net contributors, saw the highest cuts occur on what they deem as the EU’s new strategic priorities, such as climate action and cutting-edge technologies.

The Netherlands was among the first to react, calling the proposal a “no-go box”.

“It is unaffordable, unbalanced, and with the wrong focus. The overall volume remains far too high at a time when fiscal space is limited across Europe, and difficult choices are unavoidable,” said Dutch Finance Minister Eelco Heinen.

What comes next

These figures will serve as the starting point for discussions at ministerial level within the General Affairs Council, as well as at leaders’ level in the European Council, both scheduled for next week to set political direction on this sensitive file.

Perhaps even more important than what is in the proposal is what the Cypriot presidency decided to leave out. As it was trying to close certain key chapters of the budget’s expenditure, Nicosia kept the most hot-button aspects open in the text.

The presidency decided not to touch the issue of the correction mechanisms known as rebates, the revenues coming from taxes at the EU level, known as own resources, and the principle of making the budget conditional on the rule of law.

On these topics, Cyprus followed the Commission’s initial proposal.

However, the original suggestions on own resources have proved particularly controversial, prompting the European Parliament to come forward with new tax suggestions that the Commission estimates might yield up to €11 billion per year.

The thorny issue of the repayment of the Next Generation EU, the common borrowing instrument approved in 2020 to cushion the economic blow of the COVID-19 pandemic, has also been untouched for the moment.

The presidency also maintained the Commission’s idea to start repaying this EU debt as of 2028, even though some countries, including France, Spain and Greece, have argued for delaying repayment or even refinancing the existing debt with new borrowing, effectively making it permanent.

The proposal would make the EU budget worth 1.23% of the bloc’s GNI, but that percentage drops to 1.13% when excluding the repayment of the recovery fund.

Member states are under pressure to find an agreement ahead of the end of the year, as several key countries, including France, Italy and Poland, are facing national elections in 2027 and the budgetary discussions risk becoming a topic of contention in the electoral campaigns.

“We are still far away from a deal,” an EU diplomat told reporters about the proposal.

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