Will the EU get a war budget?

What the diplomat could have added is that a leader the EU does still have, as now the longest-serving in the bloc, is Viktor Orbán — the prime minister of Hungary, who as a friend of Russian President Vladimir Putin, has already made it difficult for the EU to agree to send cash to Ukraine and who has seen some funding destined for his country frozen and then unfrozen as a punishment for democratic indiscretions. That feeds into the debate too.

But it’s not just him. The bloc’s power capitals are deeply divided over what their top priority should be: bolstering their arms industry in the face of an ever-more belligerent Kremlin, or scaling up green investments to reach climate goals. That’s aside from the fact that roughly two-thirds of the budget is spent subsidizing the bloc’s agriculture industry and infrastructure projects in Europe’s poorest regions.Then there’s the economic outlook, which can make extra spending a hard sell. Growth has slumped, partly as a result of soaring interest rates to curb inflation. The economy is expected to grow by just 0.9 percent this year and 1.7 percent in 2025, according to the Commission.

“When there is a very urgent need — such as defense amid the war in Ukraine —  we find the resources, but for other long term needs that are less visible, like climate change, it’s much more difficult to mobilize people,” said Eulalia Rubio, a researcher at the Jacques Delors Institute think tank.Countries that see themselves as less affected by the war in Ukraine — such as Spain — are pushing back against a military spending spree. “Defense can’t be the only priority, we need a balanced approach,” said another diplomat.

Should the EU levy taxes?

And there is the question of where the money comes from.

The backrooms of the European Commission in Brussels, which traditionally pushes for more money to dole out than the bloc’s governments are ready to provide, are rife with lofty rhetoric on the need for a bigger multi-year budget, which currently stands at around one percent of the bloc’s GDP — about €1.2 trillion last time round — but there is strong disagreement on where to find the extra cash. French president Emmanuel Macron on Thursday said he supported doubling the size of the EU’s multi-year budget but that’s likely to run into strong opposition.

The default option — member countries coughing up more money for a central pot managed by the Commission, which is how most of the budget is formed — is opposed by fiscally conservative countries from northern Europe, the so-called frugals.Other countries are proposing new EU-wide taxes levied by the Commission, including on carbon emissions and the profits of multinationals, to generate tens of billions of euros of extra revenue.

But some people’s decades-old dream of the bloc generating its own income to shelter its budget from the whims of national capitals is opposed by northern and eastern European countries. “Theirs is a philosophical issue,” said an EU official, referring to the frugals. “They don’t want the EU to levy taxes.”

Borrowing to fund defense

It took a global pandemic and a major economic slump in 2020 to persuade Germany and the Netherlands to break the long-standing taboo of issuing joint EU debt to create a pot of money standing apart from the budget. The move was sold by the Commission as a one-off to tackle the most severe recession in the post-war era — but several states now want to replicate this model to buy weapons for Ukraine.

Baltic countries such as Estonia — who until recently would have balked at the slightest mention of common debt — backed French calls to issue these so-called eurobonds to bolster Kyiv’s defense. But the move is opposed by the usual suspects. “We are against [eurobonds for defense]. . . because it will lead to a shift in power to Brussels,” Dutch leader Mark Rutte said in March.

Hold your horses

Although negotiations on the MFF haven’t officially started yet, national leaders are already wargaming. “We anticipate a clash with the frugals [over funding to poorer countries]. We are really preparing for this because we need to be ready,” said the first EU diplomat.In addition, the Commission will also have to find new money to pay back interest rates for its post-pandemic common debt and prepare the ground for the biggest wave of enlargement in 20 years.