Europe’s budget battle begins as leaders spar over China challenge

BRUSSELS — It’s not easy being an EU leader. On Thursday, they’ll explore how to face down China’s threat to the economy. On Friday, they’ll argue about who pays.

The two discussions exemplify the challenges confronting the EU at one of the most difficult moments in its history. Global pressures mean Europe is battling to secure its place in the world — while the rise of populist politicians at home means its room for maneuver is ever more limited.

“We meet against the backdrop of geopolitical fragmentation, economic reconfiguration and a rapid technological change,” European Commission President Ursula von der Leyen said on Monday. That was before the summit of G7 leaders in Evian-les-Bains, France, which kicked off a week of global diplomacy that continues over the next two days in Brussels.

But while the G7 was dominated by the world’s hottest issues ― the Iran peace plan, military support to Ukraine and sanctions against Russia ― the European meeting is purposely intended to allow leaders to take a step back. As their final gathering before the summer break, the summit will aim to answer the China trade question and provide at least some impetus to breaking a deadlock that’s already emerged over the bloc’s next seven-year budget, something that’s shaping up to be the biggest internal negotiation in Brussels this year.

So this meeting gives leaders like France’s Emmanuel Macron, Germany’s Friedrich Merz and Italy’s Giorgia Meloni, who attended the G7 earlier in the week, and the 24 others, an opportunity to think more strategically. The continent’s waning economic might gnaws away at the EU but frequently gets nudged aside as leaders fight fires instead. Likewise, the next seven-year budget doesn’t kick in until the start of 2028, but getting a deal among the 27 governments, let alone with the European Parliament, which must happen afterward, is notoriously devilish, and needs a steer from the top.

A firmer approach

The EU’s governments seem to be falling into two camps. While the two main topics at this summit ― global economic competitiveness and the bloc’s central budget that includes roughly €2 trillion to spend on projects as diverse as farming subsidies, cultural initiatives and new roads ― don’t appear to have much in common at first glance, the dividing line between national capitals is strikingly similar. 

Broadly speaking, the governments in the northern and western portion of Europe want a smaller EU budget. Traditionally, they’ve been called “frugals” for their preference to keep a tight hand on the purse strings. Now they call themselves “the friends of modernization” in recognition of how they want the cash spent in different ways. Governments in the south and east generally wish for a bigger pot of cash in Brussels, and now push to protect traditional spending priorities. They call themselves the “friends of cohesion” ― cohesion being EU jargon for investment in Europe’s less-developed regions.

For the first camp, which includes Germany, Sweden, the Netherlands, Austria and several others, China’s rise, Russia’s war in Ukraine and U.S. President Donald Trump’s transactionalism have fundamentally changed the debate. 

In their view, Europe is being squeezed from all sides. Chinese manufacturers have become dominant in sectors the EU once dominated, from the auto industry to clean-energy tech. At the same time, the U.S. has deployed tariffs and increasingly sought to attract investment and production away from Europe. 

With European industry under pressure from Chinese competition, Washington’s industrial policy drawing investment across the Atlantic, and longstanding assumptions about American security guarantees increasingly uncertain, governments are under pressure to ensure EU spending reflects a far more volatile world.

“We need to be able to adapt our budget to new priorities and allocate more own resources, rather than remaining stuck in outdated frameworks,” said one senior diplomat from a country in this camp. 

The prospect of the EU falling behind two economic superpowers willing to use state power far more aggressively to support their industries should scare governments, said one diplomat who, like others in this story, was granted anonymity to speak freely about a sensitive topic. 

‘Outdated frameworks’

It’s the competitiveness issue that’s driving the push by northern and western European countries to overhaul how EU money is spent.

For these countries, too much of the EU budget remains locked into spending categories designed for a different era. They argue the bloc cannot continue devoting vast sums to agricultural subsidies and funding to less developed regions while struggling to finance defense, innovation, energy resilience and industrial competitiveness.

But this argument doesn’t wash with the friends of cohesion group, who argue that from the next budget cycle cohesion funding can be channeled to new priorities such as defense, housing and competitiveness, which weren’t eligible in previous years.

Agriculture and regional payouts have already taken a big hit in the initial proposal for the budget put forward by the European Commission last July, they say.

“We do not consider traditional policies to be sufficiently safeguarded,” Italy’s minister for European affairs, Tommaso Foti, told counterparts during a meeting on Tuesday. The combined share of agriculture and regional payouts has shrunk from 60 percent under the current budget to 41.4 percent in the latest negotiating document presented by Cyprus, in its role at the helm of the six-month rotating presidency of the Council of the EU.

‘Simply unthinkable’

Friday is the first opportunity for leaders to discuss the latest version of the spending plan.

 “It’s unsurprising that the positions are not fully convergent — but the point is that these discussions need to contribute to consolidate the path towards an agreement by the end of the year,” said one senior EU official working on the budget. “In the current geopolitical context, the prospect of not having a working budget in 2028 is simply unthinkable. For that to be possible, we need to have full agreement at the end of this year.”

A diplomat from a nation in the middle ground of the debate said capitals had not yet caught up to the changing geopolitics the EU must contend with. 

“These countries are still talking like it’s 2008 and there’s no threat,” the diplomat said. “We need to say ‘look, we’ve built the roads and the motorways and the bridges, now we need to invest in border regions, in defense and security.’ The only way there’s going to be a compromise is if new money comes with ways to spend it better.” 

That frustration is increasingly shared among governments that believe EU leaders have spent years highlighting new geopolitical realities without reflecting them in the budget. 

Two diplomats expressed irritation that successive European Councils have called for greater investment in competitiveness, economic security and strategic autonomy, only for negotiations to circle back to protecting the traditional pillars of the budget. 

The northern bloc slammed the Cyprus-proposed 2 percent cut to the overall budget as insufficient. They were also disappointed that most savings came from industrial competitiveness and aid to developing countries, while regional payouts were topped up by €5 billion over the next budget cycle. 

Issues such as energy costs, research and innovation, defense and security should have been given greater priority, the two diplomats argued, lamenting that many member countries remain too dependent on agricultural and cohesion funding to contemplate a fundamental redesign of the bloc’s finances. 

Political constraints

The result is a growing disconnect between the challenges leaders describe and the spending priorities they are prepared to defend. That could play out very obviously between the China and trade debate on Thursday evening and the budget discussion on Friday morning.

That tension is likely to become even more acute because, despite demands for a more ambitious budget, governments face severe domestic political constraints.

“How can we tell the electorate that we want to put more money in than we get out?” asked one Western European diplomat. “Who can even draft a budget at the moment?” 

The diplomat pointed to mounting pressure from nationalist and far-right parties across Europe, making it politically hazardous for governments to support higher contributions to Brussels. 

The populist right wing feels “revived,” the diplomat said. “What better excuse to tell voters? ‘Your money is being taken away from you and given to Brussels — to diplomats having Champagne and caviar?'”

Carlo Martuscelli contributed reporting.