31 January 2024

Delors Centre: What does it cost? Financial implications of the next enlargement

Despite a broad consensus on the necessity of enlargement, it is far from a done deal. Especially the financial implications a Ukraine accession pose uncertainties. Lindner, Nguyen and Hansum show the next enlargement round would have less of an impact on the EU budget than is generally assumed.

This is largely because the EU’s multiannual financial framework (MFF) has inherent adaptation mechanisms to mitigate significant fluctuations. At the same time, we stress that is impossible to predict precisely what the EU’s MFF, under which accession will happen, will look like as the rules and allocations are subject to political negotiations. Lastly, enlargement is not the only issue adding pressure on the EU budget in a Union that faces huge challenges.

 

Introduction

On 8 November 2023, the European Commission recommended the opening of accession negotiations with Ukraine and Moldova. At the summit on 14/15 December 2023, the European Council is expected to decide whether to follow this recommendation or not. The accession of Ukraine poses challenges as it is not only a big and poor country but at war. Despite a broad consensus across member states on the necessity of enlargement for geopolitical and security reasons, it is far from a done deal. And support of citizens is equally far from certain posing a possible source of backlash against new members, especially the more costly and financially detrimental enlargement is perceived to be.       

Discussions on the EU’s “absorption capacity” and the necessary reforms to prepare for enlargement, both institutionally and policy-wise, are in full gear. In particular, the financial implications of enlargement, and specifically of Ukraine‘s accession, have emerged at the heart of this debate. The accession of a number of poorer member states (and, with Ukraine, a populous one bigger than Poland) will inevitably impact the distribution of funding, in particular within the EU’s common agricultural policy (CAP) and cohesion policy. Specifically, there is the claim of an EU internal study that Ukrainian accession would cost the EU an extra 186 billion Euros over seven years, which would be greater than the EU’s annual budget, and turn a significant number of net beneficiaries into net contributors.

We show that such claims are unfounded for two reasons. First, the EU’s multiannual financial framework (MFF) has inherent adaptation mechanisms to mitigate significant fluctuation in the amounts of funds received by individual member states, including maximum caps on national allocations. According to our calculations, in a hypothetical scenario applying the data and budgetary rules of 2021, no member state would turn from net beneficiary to net contributor if Ukraine joined. The accession of Ukraine, Moldova, Bosnia and Herzegovina, North Macedonia, Montenegro, Albania, and Serbia would result in total annual additional spending of about 19 billion Euros, i.e. a bit more than 10% of the current budget which would still lie under the EU’s current own resource ceiling of 1.40 percent of EU GNI.

Second, it is impossible to predict what the MFF, under which accession will happen, will look like as the rules and allocations are subject to political negotiations. In the past, during such negotiations, bespoke arrangements were always found, which took into account the distributive interests of both incumbent and future member states, even though more often than not bargaining power was clearly tilted in favour of the former. At the same time, these marginal adjustments happened within the existing budget without any fundamental alterations.

Moreover, this time, enlargement is not the only issue adding pressure on the EU budget. There is growing demand on EU funding in areas such as energy and decarbonisation, digital and research, and defence and security, which will be run into a cliff in 2026 when the Recovery and Resilience Facility (RRF) expires. At the same time, the debt issued under the NextGenerationEU (NGEU) programme will have to start being repaid as of 2028, with interest payments already in train. It is fair to assume that, in the next MFF negotiations, the key method of settling conflicts, namely through incremental adjustments, will face greater challenges than in previous rounds.

Against this background, this policy paper has two objectives: First, in the context of the European Council meeting, we aim to inform the debate surrounding the financial implications of enlargement. Second, we argue that the next MFF will come under substantial pressure, even without enlargement. The upcoming negotiations should therefore not be dominated by talk of the costs and benefits for old and new members. Instead, what is needed is a fundamental rethink of the size, structure and priorities of EU fiscal policy if it is to cope with the demands of a bigger Union facing huge challenges....

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