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Brexit set to blow hole in common EU budget, Brussels warns

Jim Brunsden
European Central Bank (ECB) President Mario Draghi.
Emmanuel Dunnand | AFP | Getty Images

Brexit risks stretching the EU's common budget to breaking point, Brussels warned as it braces for a clash with member states by setting out ideas to plug the financial gap.

Tapping money that the European Central Bank makes from issuing currency, and applying common energy or environmental taxes to imports were among the options put forward by Brussels on Wednesday in a paper on reforming the EU budget.

"The gap in the EU finances arising from the United Kingdom's withdrawal and from the financing needs of new priorities needs to be clearly acknowledged," the document said. "The new priorities have been accommodated under the current financial framework, mainly by stretching the existing flexibilities to their limits."

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The European Commission paper broached sensitive questions on how to reform EU farm spending and regional aid programmes, saying one option would be to ask national governments to part-finance some farm subsidies.

In a section likely to raise hackles in some national capitals, Brussels also warned that life as a European civil servant was becoming less attractive and that "a further reduction in staff levels could jeopardise the good functioning of the EU institutions".

"Previous reforms have reduced salaries, increased working time and pension age," the paper said. "There is clearly a declining interest of young people from member states with relatively high per capita income to join the EU institutions . . . the trend is clear."

Günther Oettinger, the EU budget commissioner, said the commission wanted to draw attention to the problem of a shrinking talent pool.

"The number of young Germans interested in working for the European civil service is less than 5 per cent, but the corresponding figure at national level is more than 60 per cent," the German commission member said. "As an employer, we need to bear in mind that our attractiveness has decreased."

The EU budget is equivalent to about 1 per cent of EU gross domestic product, and Britain's impending departure means the EU will lose one of its main contributors.

While estimates vary because spending commitments are multiyear, a report from the UK's House of Lords earlier this year put the British contribution at 12 per cent.

The funding gap, and the possibility of a big political fight over how to fill it, is one of the main factors behind the push from EU capitals for Britain to pay a hefty exit bill as part of its Brexit divorce.

In its "reflection paper," the commission warned that Brexit comes as the EU is being asked to take on extra work. Managing migration, fighting terrorism, and defence policy have risen up the EU agenda since its last multi-annual budget was agreed in 2013.

"We are going to be down €10bn-12bn in our budget once the UK departs, so we cannot act as if it is business as usual," Mr Oettinger said. "We need to be shifting expenditure and making cuts . . . But making cuts is not enough."

About 80 per cent of the EU budget is financed by contributions from governments and a share of national VAT receipts, with much of the rest coming from customs revenues.

Some of the ideas for future funding hinge on the bloc agreeing new policy measures, such as a financial transaction tax or common energy and environmental taxes.

Other ideas include levies from the EU's emissions trading scheme, and fees linked to a planned online authorisation system for people travelling to Europe.

Brussels is also straying into the sensitive question of whether countries should be denied support from the EU's various economic development funds if they fail to adhere to the rule of law.

The commission has clashed with Poland's government over reforms that the EU fears could damage the independence of the judiciary. It also had repeated run-ins with Hungarian leader Viktor Orban, most recently over a crackdown on foreign universities.

Corina Crețu, the EU commissioner for regional policy, said: "This is a debate we need to have in the months to come." She added: "The respect or not of the rule of law does influence the quality of administration, the functioning of the justice system, the legal and institutional framework . . . and of course the EU budget."

While Brussels will present more detailed proposals next year, the paper sets out five broad reform "scenarios", including scaling back the budget, establishing a system where groups of member states would establish common pots of money for particular projects, and a "radical redesign".

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