Between those Member States that want to scale back their commitments and those calling for more resources to fund new European priorities, Luc Frieden (CSV) is seeking a third way. That, in essence, was the message conveyed by the Prime Minister of Luxembourg to the President of the European Council, António Costa, who visited Luxembourg on 2 September as part of his tour of capital cities to discuss the forthcoming European budget.

The task ahead is a considerable one. For the period 2028-2034, the European Union must continue to fund its traditional policies, notably the Common Agricultural Policy and cohesion policy, whilst allocating more resources to defence, support for Ukraine, competitiveness, reindustrialisation, the energy transition and infrastructure. Added to this is the repayment of loans taken out under NextGenerationEU. The European Commission has therefore proposed a multiannual financial framework of close to €2,000bn. To finance this, it is relying in particular on five new own resources: a share of the revenue from the ETS and the Carbon Border Adjustment Mechanism (CBAM), a levy based on uncollected electronic waste, a resource linked to excise duties on tobacco, and an annual contribution from companies with a turnover of at least €100m. Together, these are expected to generate around €58.5bn per year.

New policies require funding.

Luc Frieden, Prime minister

Luxembourg does not see itself as part of the ‘frugal’ camp, even though it shares their commitment to financial discipline. Germany, Denmark, the Netherlands, Austria, Finland and Sweden are calling for a substantial reduction in the draft budget and regard the resort to new joint debt as the wrong response to Europe’s budgetary constraints. Luc Frieden, for his part, advocates a Europe with resources commensurate with its ambitions.

“I believe we must retain the European Union’s long-standing policies – the cohesion policy, which is a policy of solidarity, and the Common Agricultural Policy, which was one of the cornerstones of the European Union – and, at the same time, we must also have funding for new policies relating to artificial intelligence, innovation, research, defence and space, which are also very important to us,” he said.

The Prime minister is, however, opposed to this European ambition resulting in an increase in the tax burden on businesses. “I will oppose, at European level, any move to undermine the efforts we are making at national level to boost competitiveness through new, excessively high taxes,” he warned. For Luxembourg, therefore, the debate centres less on the principle of new European resources than on their design and economic impact.

Two taxes in Luxembourg’s sights

The government is therefore clearly opposed to the EU levy on large companies. This levy is considered particularly detrimental to Luxembourg, given the structure of its economy. There is similar opposition to the allocation of a portion of the revenue from tobacco excise duties to the EU budget. The government is, however, more open to the idea of using CBAM revenue to fund the EU budget. Luc Frieden also suggests other options, such as a possible tax on sugar – which is at least as harmful as tobacco, but sold in similar quantities across all EU countries – or a tourism levy that could target visitors from third countries, using the European travel authorisation system (Etias). The aim is to find new sources of revenue without compromising European competitiveness – and, above all, Luxembourg’s.

No blank cheque for shared debt

The same logic applies to European debt. The EU already makes use of joint borrowing. NextGenerationEU enabled the Commission to raise hundreds of billions of euros on the markets to finance the recovery plan following the Covid crisis. However, the scheme was linked to a specific, temporary programme, with a guarantee backed by the EU budget and, as a last resort, by the Member States.

Luc Frieden does not rule out repeating this model. However, he refuses to make it a new, permanent source of funding for the European budget.

In his view, joint borrowing may be justified as a response to a crisis or to finance a clearly identified strategic investment. The €90bn in support for Ukraine is one such example. Defence or the green transition could also justify similar mechanisms. This position explains, in particular, Luxembourg’s support for the Defence Security and Resilience Bank project – also championed by Canada – which is intended to facilitate the financing of European defence companies and could enable certain joint borrowing mechanisms. The articles of association for this future bank could be signed in Luxembourg in the coming months.

Mobilising more private capital

As for the rest, Luc Frieden favours a different approach: making greater use of European savings and private capital. “Given limited public funds”, the Prime minister wants to speed up the capital markets union, with the aim of seeing it completed by the end of the year. In particular, he wishes to facilitate cross-border financial products and develop securitisation.

Behind the debate over the €2,000bn in the next European budget, a fairly clear Luxembourg position is therefore emerging: yes to a financially stronger Europe, no to a Europe that would systematically finance its new ambitions through further debt or through levies deemed detrimental to competitiveness.

It is this critical position that Luc Frieden will now have to defend in the forthcoming negotiations.