EU may need budget top-up for Ukraine, energy crisis

Good morning and welcome to Europe Express.

One development that may have gone unnoticed earlier this week in the maelstrom created by Russia’s renewed rocket offensive in Ukraine is the realisation, at the top EU level, that the bloc is quickly burning through cash — in part because of the fallout of the war and spiralling energy costs. We’ll explore the options and likelihood for a top-up next year.

Defence officials from around 50 countries will meet at Nato HQ today for talks on increasing weapons supplies to Ukraine. Top of the wishlist is air defence equipment, with US officials hopeful that others will follow Washington and Berlin’s recent moves to expedite shipments of the systems. Nato defence ministers will stay on for talks over dinner with their Ukrainian counterpart.

In Brussels, the European Commission today publishes its annual reports on the Western Balkans and Turkey (enlargement newbies Ukraine, Moldova and Georgia will be included as of next year). We’ll look at what the draft report says on Bosnia and Herzegovina, a country falling behind the ones who joined the waiting line this year.

Money too tight to mention

Pity Europe’s finance ministers. Even as they fork out eye-watering sums keeping household energy bills down, fresh budgetary demands from the EU are heaving into view, writes Sam Fleming in Brussels.

European Commission president Ursula von der Leyen on Monday delivered the blunt assessment that less than two years after settling the EU’s current seven-year budget, Brussels is running low on spare cash — a problem the Financial Times reported back in May.

EU resources and flexibility in its funding lines are “extremely limited” because the current multiannual financial framework (MFF), which runs from 2021 to 2027, was not designed to deal with the challenges the EU now faces, von der Leyen said.

Drains on EU resources include the war in Ukraine and associated refugee crisis, which has forced over 4mn individuals to register for national protection schemes in Europe. Soaring inflation and interest rates are imposing a further strain, as are ambitious projects aimed at boosting the union’s strategic autonomy in areas ranging from semiconductors to space and defence.

The MFF was agreed by member states back in 2020, and was supplemented by a one-off Covid-19 recovery package fuelled by €800bn of common borrowing. But the budget, von der Leyen warned, was not designed to deal with “multiple challenges at this scale”. Cushions of spare cash for emergencies are running low, restricting the EU’s ability to respond to future crises.

Johannes Hahn, the budget commissioner, is now preparing a plan for dealing with the EU funding crunch. It will involve bringing forward a planned midterm review of the MFF to next summer, at which point the commission will put forward recommendations.

Three options lie ahead:

1. Leave things as they are and struggle on regardless, something that seems less and less likely given von der Leyen’s call for EU resources that fit “our new needs”.

2. Revise the MFF itself — for example by requesting additional resources from member states to bolster the heavily depleted funding lines dedicated to projects and outreach in the EU’s neighbourhood and the wider world. Any changes would require unanimous consent from the member states, however, triggering messy and complex negotiations.

3. A one-off whipround the member states to top up EU resources, outside the framework of the MFF, for a specific goal.

All this comes alongside the rising demands from Ukraine both for more regular supplies of cash to support its public finances, and for the massive reconstruction job in the country.

After a haphazard and disjointed approach to budgetary support that has earned criticism not only from Kyiv but from Washington, the commission is looking to source as much as €18bn in funding for Ukraine for next year. That would require member states to come on board, however, something that is by no means guaranteed given the EU still hasn’t settled on a remaining €3bn of a €9bn programme agreed way back in May.

This leaves unresolved the far larger cost of Ukraine reconstruction — the topic of a conference in Berlin later this month.

All these calls for extra EU resources will face resistance from member states, given the mounting strains being imposed on their own budgets from the energy crunch, rising prices and the risk of a recession across the continent. Some capitals will look extremely sceptically at any new funding demands from Brussels.

Expect some very difficult conversations in the months ahead.

Chart du jour: Shrinking economies

The IMF forecasts that the first and third-largest economies in the eurozone, Germany and Italy, will shrink next year, in stark contrast with its previous outlook dating back to spring.

Quo vadis, Bosnia

The one assessment in today’s enlargement reports that Balkan observers will look out for is that of Bosnia and Herzegovina, which is still waiting for a positive recommendation to be given candidate status and start accession talks, writes Marton Dunai in Budapest.

According to the draft report seen by Europe Express, Bosnia has been struggling to make progress in key priority areas.

As a reminder, when the bloc gave Ukraine and Moldova candidate status, several capitals, including Berlin and Vienna, insisted that Bosnia, which has waited in line for many years, would not be left behind. They asked the commission to report back on “14 key priorities, with special attention to those that constitute a substantial set of reforms”, the draft report reads.

Progress on those 14 preconditions remains sluggish. This is in part a structural problem: Bosnia, which emerged from brutal wars after the break-up of Yugoslavia, has one of the world’s most complex constitutional systems, designed to represent all ethnic groups in government.

Although elections earlier this month brought some upsets, sending some long-established politicians packing, Bosnia is unlikely to grow reform wings any time soon, analysts have warned.

In the 2018-22 government cycle things slowed down even more, just when the European Commission was supposed to measure progress. Instead, the two halves that make up Bosnia — the Serb Republic and the Bosniak-Croat Federation — are stuck in political paralysis.

The commission’s draft report acknowledges this, saying Bosnia displayed an “almost complete standstill in reforms during that period”. Listing various areas of reform, its assessment is blunt: “limited progress on public administration reform”, “early stage of preparation” and “no progress” in reforming its judiciary, and “the independence and impartiality of the judiciary did not improve”.

Parliamentary parties could not agree on bringing the constitution in line with EU law, according to the report. There was also no progress in the fight against corruption and organised crime. On the economic front, Bosnia “is at an early stage of establishing a functioning market” and “the country’s internal market remains fragmented”.

Whether all that can be glossed over to nudge Bosnia forward on the accession path remains to be seen, with advocates noting that all these areas will still be negotiated over in the years to come, once accession talks start in earnest. All eyes will be on the commission today as it delivers its verdicts on the aspiring EU member states.

What to watch today

1. Nato defence ministers meet in Brussels

2. Energy ministers meet in Prague for an informal council

3. European Commission publishes enlargement reports for Turkey and the Western Balkans

Notable, Quotable

Talks can be either with another head of Russia . . . or in a different configuration

• More missiles: Ukraine’s president Volodymyr Zelenskyy has called on G7 countries to speed up supplies of air defence systems and impose price caps on Russian energy exports. He ruled out any peace talks with Russia as long as Vladimir Putin is in charge.

• Belgian relief: Belgium’s Prime Minister Alexander De Croo announced a winter relief package yesterday, RTBF reports, with households continuing to receive €196 per month until March to pay their energy bills.