The European Union is entering a new phase with the inauguration of the new European Commission, which was approved by the European Parliament yesterday after a long series of personal interviews. The new President, Ursula von der Leyen, has set a clear course for her commissioners. This is primarily aimed at making Europe climate-neutral. The other major pillar of its intended policy is to increase the competitiveness of the European Union.
The key question, of course, is how she and her fellow commissioners want to achieve these objectives. In the main, that means: research into better production methods and innovating the existing ones. Consequently, funding is needed for this.
Innovation and its investment is a dire necessity, according to the new European governance. In the first place, because the European Union must be completely CO2-neutral by 2050. This means that we will have to live, drive, fly and produce in a CO2 neutral way. So that’s quite a challenge. Secondly, because competing superpowers such as the US (2.8%), South Korea (4.2%) and Japan (3.3%) invest a much higher percentage of their GDP in innovation than the EU does. (2.1% while the target is set at a minimum of 3%). These countries subsequently also score better when it comes to innovating their businesses. Because of this, the EU is lagging behind them, so says Bulgarian Commissioner Mariya Gabriel, She is in charge of the innovation budget for the upcoming period.
As her predecessor Carlos Moedas had already announced last year, Gabriel wants to increase the budget of the research and innovation fund Horizon Europe from almost €100 billion to €120 billion. This amount is to be spread over the 2021 to 2027 budget period. This money should go towards basic research in universities as well as innovation by large companies, start-ups and SMEs.
Not a piece of cake
Which is a noble ambition that no member state should actually be opposed to. You’d think that it was a piece of cake. But it’s not. Life is complicated within the offices of the European institutions. They have to constantly do business with the governments of the 28 – and, if there is a Brexit, 27 – member states. Then those governments have to deal with their constituents in the cities and rural areas of their country. And the constituencies (especially those in the poorer EU regions) may threaten the innovation plans of this new European Commission.
The major battle is being waged via discussions by the heads of state or governments concerning the European Union’s long-term budget. This is something which they will have to hammer out in 2020. Von der Leyen wants more money from the member states to be able to implement her ambitious policy program. But the member states do not want to pay the EU a higher percentage of their GNP, says spokesman Roy Kenkel of The Permanent Representation of the Kingdom of the Netherlands (PV) in Brussels. (As an example, the European Commission wants The Netherlands to contribute 1.11% of their GNP).
“The Netherlands is in favor of a larger innovation budget. We think that’s an excellent idea! But we also believe that this money could come from the resources that the European Commission has at its disposal if we were to continue to contribute the same percentage as we do now. Our GNP is on the rise, so our contribution will in any event deliver more money to the EU with the current, unchanged percentage of our GNP.”
Not mentioned in the budget
It makes more sense for the EU to restructure its budget and adapt it to the demands of our time, says Kenkel. That is what Von der Leyen also said in her speech yesterday. In Von der Leyen’s opinion, the MFF (otherwise known as the EU’s Multiannual Financial Framework) should not be seen as a simple calculation of expenditure, but rather as a policy instrument that will modernize the European Union’s budget.
That might be the case, except up until now the problem has been that you cannot discern this in the document that the European Commission sent to the member states last May and which the member states are currently negotiating. It does not say, for example, that the Horizon Innovation Fund should be increased by €20 billion. Whereas the new European Commission does want to use this extra money to tie into specific industrial policy. Something that is new for the European Union, as the French EU Commissioner for the Internal Market and Industry, Thierry Breton, said to the European Parliament during his hearing last month.
Other expenditure areas
One way in which the extra €20 billion could still be included in the budget is for the European Commission to submit a separate additional proposal to the member states. That’s what Kenkel from the PV in Brussels says. Nevertheless, he thinks that this isn’t very likely as this is a cumbersome process and the negotiations are already underway. He believes that it would be more logical to discuss the matter during ongoing negotiations.
Then there is also the question of how important the member states regard the growth of the innovation fund compared to that of other expenditure. Such as for the common agricultural policy and the cohesion fund. Funding for the development of poor regions must be paid from this. The European Commission actually wants to cut 5% off both of these expenditure areas. And that is definitely something that the countries that benefit most from these funds do not want to happen.
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€88 billion on offer
The signs are not very favorable in this respect, says Guillaume Gillet, He is the director of InnoEnergy in Brussels, an investment company that invests money from private investors and the Horizon Fund in promising, innovative start-ups in the energy field. “It is said that the Finnish chairmanship wants to reduce the budget for Horizon to €88 billion. It will only be possible to raise it to €120 billion if the European Parliament fights very hard for that.”
The question is how bad would that be? After all, European Commission Vice-President Frans Timmermans has already announced that part of the funds for cohesion and agriculture can be used for innovation in the agricultural sector and for the development of rural areas. The intention is that these funds will thereby contribute to making Europe environmentally sustainable.
The difference with financing innovation via these funds, however, is that the funds are distributed by the governments of the member states. Who in turn allocate these to their national constituencies. It now remains to be seen as to what extent this will benefit both European cooperation and European coordination in terms of industrial policy.
Not enough money for scale-ups
According to investor Gillet, the European Commission is also investing directly via Horizon in innovative start-ups who would otherwise be unable to raise money as their profitability is uncertain. That’s going well for now. Although a larger Horizon Fund would make this support more robust, Gillet states. So far, the problem has been that there is not enough money to invest in the further growth of start-ups. This makes it difficult for them to become fully-fledged companies that are able to grow and flourish in Europe. It is precisely these scale-ups that provide employment as well as develop knowledge and bring prosperity. “American and Asian investors are investing money in them. That’s because of their more aggressive culture when it comes to high-risk capital investment. Consequently, Europe is losing a number of successful start-ups.”
Whereas these are in fact what you would prefer to hold on to. Which is also what Von der Leyen said in her speech yesterday. Whether she will be successful in this respect over the coming period will become clear when the new MFF is mapped out next year.