Brexit is leaving the European Union with a big problem on its hands and a “very tough” negotiation ahead, European Commission Vice-President Jyrki Katainen told CNBC on Friday.

The U.K. has been one of the main contributors to the European budget, but once it has left the bloc there will be a gap in the EU budget that will have to be worked out somehow, Katainen said.

“It is certainly a problem and we have to address it,” he said at the World Economic Forum (WEF) in Davos, Switzerland.

“If I should bet something, we need to adjust the budget to a certain extent but also we need fresh money from member states. We also have to look at how money is spent, how we could get more out of less.”

But many EU members do not want to pay more to compensate for the U.K.’s decision to leave the union. Denmark, for example, made it clear last year that it would not step up its financial commitment because of Brexit.

Katainen told CNBC that one solution could be using more financial instruments, including equity investments, to finance European projects rather than direct financial contributions.

“This is what we are planning or exploring at the moment… it’s going to be a very though negotiation,” he said.

The current EU budget is planned out until 2020. The European Commission is due to come up with proposals on the future of the budget in May.

During a speech in September, EC President Jean-Claude Juncker said: “An important element will be the budgetary plans the commission will present in May 2018. Here again, we have a choice — either we pursue the European Union’s ambitions in the strict framework of the existing budget, or we increase the European Union’s budgetary capacity so that it might better reach its ambitions. I am for the second option.”

Source: cnbc
Europe has a financial problem as Brexit leaves a gap in its budget, says top EU official