Food Fight in EU Set to Erupt as Budget Faces Gaping Brexit Hole

(Bloomberg) -- As the European Union braces for political battles over its post-Brexit budget, a farm in the poorest member country shows what’s at stake.

AJD Agro Ltd., a Bulgarian grain producer and exporter, owes its existence to European agricultural aid. That support now faces the threat of cuts as the EU seeks to fill a Brexit-induced budget hole and ramp up spending on security in a much-anticipated proposal due on May 2.

The company was losing money until the first EU payment arrived in 2008, a year after Bulgaria joined the bloc. Since then, the business has grown into a profitable seller of wheat, barley, corn and sunflower, Bulgaria’s top maker of alfalfa and a national economic asset that relies on EU funds for a third of its annual investment budget of 5 million euros ($6 million).

“EU funding rocketed us into space,” Dimitar Machuganov, who runs AJD Agro in the northern town of Letnitsa, said in an April 24 interview, washing engine oil off his hands from a machine he helped repair. “Without it, we had no chance to get where we are now. We became a modern farm. This helped us win the trust of banks, gave us the experience to develop.”

Shrinking coffers will test the EU’s ability to address the needs of people like Machuganov and pose a fresh challenge to European political cohesion as deliberations begin over the bloc’s 2021-2027 spending program. Relations have been frayed in recent years by the Greece-triggered debt crisis, the largest flood of refugees since World War II, the U.K.’s vote to leave the bloc and democratic backsliding in eastern Europe.

Key Funding

While amounting to only 1 percent of EU economic output, the European budget of about 140 billion euros a year provides key funds for farmers, poorer regions and researchers in everything from energy to space technologies.

With national transfers filling about 80 percent of the EU’s coffers and Britain being the No. 2 net contributor, after Germany, Brexit will leave a 10 billion-euro annual hole just as the bloc faces calls to spend more on border controls and defense amid heightened concerns about Islamic terrorism, Middle Eastern and African migrants and Russian aggression.

This has put the spotlight on EU farm subsidies and regional aid, which together account for about 70 percent of the bloc’s outlays. The budget proposal due on Wednesday from the European Commission, the EU’s executive arm in Brussels, will foresee a 6 percent cut in those two programs, according to an official familiar with the matter.

“The EU’s best bet is to spread the pain fairly with a balanced combination of spending cuts and increased contributions,” the London-based Centre for European Reform said in an April 24 report.

Region Divided

That’s easier said than done. The multi-annual EU budget needs the unanimous support of national leaders and rich, western European countries are split over the way ahead. France leads a group that strongly supports farm subsidies, while the Netherlands is allied with Austria and Sweden in ruling out higher national contributions.

As a net recipient of EU funding, Bulgaria is keenly aware of the economic importance of farm aid and of the political need for allies like France.

The Bulgarian agricultural industry has been earmarked 7.4 billion euros in the EU’s current 2014-2020 spending plan. The sector accounts for nearly 7 percent of the country’s jobs and more than 4 percent of its economy, almost three times the EU average. Grains are about a third of farm production in Bulgaria, the current holder of the 28-nation EU’s rotating six-month presidency.

“We received serious support, including from contributors like France, in our position to preserve this policy,” Liliana Pavlova, the Bulgarian minister in charge of the country’s EU presidency, said in Sofia on April 20.

EU-Funded Wine

Last August, Bulgaria showcased local wine made possible by EU funds in a bid to cement political ties with France. While French President Emmanuel Macron and his Bulgarian counterpart, Rumen Radev, discussed workers’ rights in a residence near the Black Sea city of Varna, their wives lunched on a restaurant terrace above the water and drank a Chardonnay-Pinot Gris label from Orbelus Organic Winery JSC.

It took Blagoy Rusev, the chief executive officer of Orbelus, 14 years and European farm subsidies to build the winery. After he and a friend bought seven hectares of land in 2000 to produce organic wine, initially as a hobby, they purchased their first tractor with EU aid several years later and completed a 3.2-million lev ($2 million) barrel-shaped winery in southwest Bulgaria in 2014. Half of that money came from the EU.

“Reducing agricultural funding would seriously affect the whole wine sector,” Rusev, who exports to such countries as the U.S., Canada, France and Poland, said in his Sofia office on April 19. “Even now, the farm subsidies are not enough to keep Bulgaria competitive.”

Solidarity Needed

Back north in Letnitsa, a town of fewer than 3,000 inhabitants located near a series of waterfalls that attract tourists, AJD Agro’s Machuganov is anxious. While boosting security spending is understandable, it would be short-sighted to do it at the expense of farm subsidies, he said, adding that political courage is needed to ensure higher contributions to the European budget.

“I hope the decision makers in Europe are more wise,” he said. “Europe needs more solidarity.”

To contact the reporters on this story: Slav Okov in Letnitsa, Bulgaria at sokov@bloomberg.net, Jonathan Stearns in Brussels at jstearns2@bloomberg.net.

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Alan Crawford at acrawford6@bloomberg.net, Vidya Root, Nikos Chrysoloras

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