EU to shrink its next seven-year budget over Iran war fallout

An energy crisis triggered by the war in Iran will make the European Union’s next seven-year budget smaller than the current one, according to a confidential European Commission document.

The document, seen by Rapporteur, states that an inflation surge triggered by the conflict has reduced the share of the Commission’s proposed 2028-2034 budget within EU gross domestic product (GDP) from 1.11% down from 1.15% when it was proposed in July last year.

This means that the effective size of the next budget, officially known as the Multiannual Financial Framework (MFF), will be smaller than the current 2021-2027 plan, which accounted for 1.13% of EU GDP when it entered into force in 2021.

This situation appears to contradict European Commission President Ursula von der Leyen’s claim that the proposed budget is the “most ambitious ever”.

“In terms of spending capacity (i.e. without taking into account the repayment of [pandemic debt]), the size of the next MFF proposal stands at 1.11% of GNI, which is below the relative size of the 2021-2027 MFF at the time of its adoption,” the 2 October document states.

The document also emphasizes that “the relative size of the total national contributions of the EU-27 countries is expected to decrease.”

The decrease stems from inflation exceeding the Commission’s 2% “deflator” rate over the past year.

Brussels uses this rate to adjust the size of the MFF to account for annual price increases, thereby ensuring that the MFF does not shrink in “real terms” each year.

According to the EU’s latest economic forecast, which underpins the projections in the document, average inflation across the EU is expected to reach 3.1% this year.

The economic forecast was published in May this year, three months after the start of the US-Israeli war against Iran, which pushed global energy prices and inflation to peak levels.

The Commission’s previous forecast regarding the size of the framework budget had assumed an inflation rate of just 1.9% in 2026.

Despite the smaller budget, the so-called “frugal” group of northern European countries, led by Germany, has demanded cuts of “several hundred billion euros” to the Commission’s budget plan.

This pressure is fiercely resisted by several southern and eastern capitals, which argue that the Commission’s proposal already includes severe cuts to agriculture and regional spending.

Ireland, which holds the rotating EU Council presidency, is set to present a compromise proposal on Saturday, which is also expected to feature cuts.

However, the European Parliament, which must approve the MFF, has demanded that the post-2027 budget reach 1.27% of GDP, excluding Covid-era debt repayments, to ensure that future EU spending is effectively higher.