Analytics, Budget, EU – Baltic States, Financial Services, Legislation

The reforms will be one of the most contentious parts of the European Commission's draft 2021-2027 EU budget, which will be unveiled next month, and mark a dramatic redesign of the 350-billion-euro "cohesion policy" that aims to support less developed parts of the union.

Brussels wants to end the practice of distributing cohesion money almost exclusively on the basis of gross domestic product per head, replacing it with much broader criteria covering everything from youth unemployment, education and the environment to migration and innovation.

On top of revising the allocation of funds, the commission is reinforcing conditions on eligibility, including rule of law compliance, and applying more restrictions on how the EU money can be used. A draft policy paper seen by the FT puts the program under a new "cohesion and values" heading -- a clear signal about the expectations that come with EU funding.

The overhaul will be particularly worrying for Warsaw and Budapest, two big beneficiaries of cohesion funds who have clashed with Brussels over the rule of law and democratic standards. Poland has warned that tough conditions for EU funding linked to judicial independence would cause "enormous problems" and encroach on sovereign rights.

EU officials are also revising the rules around the requirements for member states to match EU funding, which would require some member states to use more national money in projects.

Diplomats and officials expect the outcome of the reform to be a redirection of funds from Poland, the Czech Republic and Baltic states towards southern states such as Italy, Spain, Greece and even some regions of France. The changes to allocation terms would not just redraw the geography of EU funding, but would establish a new rationale for the bloc's wealth redistribution policy. Following the wave of EU enlargement after 2004, the EU's so-called structural funds were heavily geared towards closing the economic gap between old and new member states, the FT said.