Finances in perspective

As some of you may be aware, national governments, the European Commission and the European Parliament are currently negotiating the EU’s new multiannual “framework budget” (Financial Perspectives) for the years 2007-2013. This agreement between the EU’s main players outlines its strategic policy choices for seven years to come, and probably more. Its precise contents are therefore incredibly important for the EU’s future.

Pressure on the negotiating parties has increased considerably after the double ‘no’ in France and the Netherlands, but in two opposing directions: Firstly, to come up with some good news to keep the EU going, which means being flexible and reach an agreement. Secondly, to take voters’ concerns into account, which means standing firm for “the national interest” and use the veto when necessary. So although the Luxembourg Presidency intends to finish the negotiations this month, during the European Council meeting of 16-17 June, it is by no means clear that it will succeed.

Reading the British press and weblogs from the anglosphere, one could easily get the impression that abolishing the British rebate, which limits the UK’s net contribution to the EU budget, is the main issue on the negotiating agenda and that it was put there by a French government in trouble blaming it on the Brits. If only it were that simple, and the UK that important.

The current “negotiating box”, a document published 6 June on the Presidency’s website, outlines the Perspectives’ main budget lines and unresolved dilemmas. Net contributions per country are only one of them, but the most striking thing here is not that Britain is paying more than France, but that both the UK and France pay considerably less than other net contributors.

How much do we pay: the group of six

Infobox: The budget is an onion
An easy way to think of the EU’s budgetary arrangement is as an onion: it consists of several layers, each of which contains (and constrains) the layers it encloses.

The outermost layer is the Own Resources Decision, which regulates the height and composition of the EU’s income as well as the arrangements concerning the UK’s rebate. As the Treaties prohibit the EU from running a deficit, its expenditures can never be higher than the ceiling set by the Own Resources Decision. This is currently 1.24% of the EU’s GNI (Gross National Income).

The layer in the middle consists of the Financial Perspectives, which basically is a contract between the national governments, the Commission and the European Parliament on the main characteristics of the annual budgets for seven years. The Financial Perspectives were created in order to bring more discipline and continuity in the EU’s spending policies, and to allow for better planning. Current Financial Perspectives run from 1999-2006, which is why we are now negotiating on the 2007-2013 Perspectives. For 2005, the Financial Perspectives set the EU’s total payments at 1.09% of the EU’s GNI.

The inner core of the budget, finally, contains the annual budgets. They have to be agreed between the national governments in the Council, and the European Parliament. Eventually, Parliament has to consent with the entire package, but under the current treaties it can only amend the so-called “non-compulsory” part of the budget. Compulsory expenditure consists mainly of agriculture subsidies (about 45% of the budget). Payments under the 2005 budget amount to 1.00% of the EU’s GNI.

Although the ceiling of own resources (see infobox: the budget is an onion) has been 1.24% of the EU’s GNI for years, annual budgets have never really exceeded 1% of GNI. For the new Financial Perspectives, however, the Commission is proposing a payments ceiling of 1.14% on average. It says higher expenditures (relative to GNI) are necessary because member states have been transferring more tasks to the EU level (Lissabon process, external policies, justice and home affairs), and because of the Union’s enlargement which increased the EU’s population with 30% but its GNI only by 5%.

A group of six member states, all net payers, disagree. These six (the UK, France, Germany, the Netherlands, Austria and Sweden) want to limit the EU’s expenditures to a maximum of 1% of EU GNI. Brushing aside the Commission’s arguments, they say 1% is possible, because most budgets in the past did not surpass that limit either. They add: “In view of the painful consolidation efforts in Member States our citizens will not understand if the EU budget were exempt from this consolidation process.”

Rather cheekily but not without grounds, the Commission’s reply to this is that national budgets, which take up 45% of EU GNI, increased more than twice as fast over the past seven years as the EU’s budget of just over 1% of EU GNI. The Commission also expects an end to underexpenditures in funds allocated to the ten countries that joined the EU in 2004, as a result of improving administrative capacity. It therefore fears limiting the EU’s budget to 1% of GNI requires more serious budget cuts than it would seem at first sight.

What the “group of six” are looking for is, of course, a way to limit their own financial contributions to the EU. A closer look reveals that there is actually more that separates, than unites them:

net contribution in 2003
country per GNI [%] per head [€/yr]
“group of six” net contributors:
DE 0.36 92.7
UK 0.16 46.6
FR 0.12 32.1
NL 0.43 120.7
SE 0.36 106.8
AT 0.15 41.5
other net contributors:
IT 0.06 13.8
BE 0.28 74.5
DK 0.11 39.6
FI 0.01 4.0
LU 0.28 140.5
net recipients:
ES -1.21 -214.6
EL -2.22 -306.2
PT -2.66 -334.8
IE -1.40 -391.2

As we see, the UK’s net contribution relative to both GNI and population size, is one of the lowest in the group of six. Swedish and German taxpayers pay twice as much, and Dutch taxpayers even three times what Britons pay to the EU. Note, also, that Ireland is the highest net recipient per head of the population, despite the fact that it is now one of the richest countries in the EU.

Such anomalies emerge, in the first place, because we calculate them at all: No one ever calculates regional net contributions to the national budgets of Member States because it is not seen as relevant. But if we did, we would probably see the same kind of anomalies as we get here, although the differences are likely to be smaller. This is the result of the lop-sided way (compared to national budgets) in which the EU budget is composed, with about 40% going to agriculture and 30% to regional funds. Countries with large areas qualifying for either, receive a large share of the EU’s budget, even if their GNI is relatively high.

Naturally, with such discrepancies between countries’ financial means and their actual contributions, the other net payers want to see the UK’s special rebate replaced with a general rebate that is available to all. Such a General Correction Mechanism has in fact been proposed by the Commisson. The idea is supported by all net contributors, except the UK.

The result of all this is that net payers may or may not have a common interest in limiting the total size budget – depending on the composition of the funds they receive. Even in case a common interest exists regarding the total size of the budget, it may disappear depending on which funds are cut in order to reduce the budget to the desired level. For the UK, giving up the rebate in return for cuts in the Common Agricultural Policy makes sense, as the net effect on the UK’s contribution is the same. For France, cutting the CAP in order to get to a general spending level of 1% of GNI may even lead to an increase of its net contribution. Similarly, cutting regional funds is a no-go for net contributor Italy, let alone for current recipients Spain and Portugal.

What do we pay for: Luxembourg’s moves on the budget chessboard

So in the end, how much the EU costs you depends on how it spends its money. Add to this the enlargement with ten poor countries wanting a share of the cake, weakened French and German governments unable to take the lead, and 25 nervous government leaders each in possession of a veto, and you have in a nutshell why the negotiations on these Financial Perspectives are so much more unpredictable than the previous ones.

For a clever Presidency, however, it could still be possible to achieve results, provided the will to reach an agreement at all is strong enough to outweigh all other considerations (as I said at the beginning, I do not know if that is the case). And it must be said that Luxembourg, in the incarnation of its prime minister (and Mr Euro) Jean-Claude Juncker, is doing its best by skillfully applying divide-and-rule tactics. Let us first have a look at the Commission’s proposals and how Luxembourg is proposing to change them:

Table Financial Perspectives

For comparison, the table shows one column with figures for 2006 (under the current Financial Perspectives), and one with figures for 2007 (new proposals). It also lists totals for the entire 2007-2013 period, and the differences between Luxembourg’s current proposals and the Commission’s in both absolute and relative terms. All amounts are in million euros, 2004 prices.

Obviously, Luxembourg’s figures are considerably lower than the Commission’s, as Luxembourg is trying to comply with the group of six’ request to reduce the budget to 1.0% of EU GNI. It did not entirely succeed in doing so: payments according to Luxembourg’s proposal would amount to about 1.06% of the budget. This is where we see the first cracks in the common front of the Six, as apparently, Germany and Austria are already giving off signals that 1.06 is close enough to 1.0, while the others insist that it is not.

More interesting, however, is which budget lines Luxembourg is proposing to cut in order to arrive at a grand total of 1.06%:

  • 58 billion euros (44%) in chapter 1a – competitiveness for growth and employment: this is the Lisbon agenda which is so dear to both the Commission and the market-oriented countries in the EU (UK, the Netherlands, Scandinavia and others)
  • 43 billion euros (13%) in chapter 1b – cohesion for growth and employment: the regional funds dear to Spain and countries in Central and Eastern Europe
  • 6.5 billion euros (35%) in chapter 3 – citizenship, freedom, security and justice: Tony Blair and a number of others will not be happy
  • 45 billion euros (47%) in chapter 4 – the EU as a global partner: this excludes aid to developing countries, but includes the pre-accession policy for Romania and Bulgaria, the European Neighbourhood and Partnership Instrument (Ukraine, the Balkans, Georgia) and the Development Cooperation and Economic Cooperation Instrument – in short: long-term stability and safety in the EU’s neighbourhood

Note, also, an inexplicable increase of 23 billion euros (79%) for the administrative expenditures of EU institutions other than the Commission. This is probably just change to negotiate with – or an attempt to move foreign policy money for the Council to “administrative expenditure” in order to keep it out of sight for the European Parliament.

As you may have noted as well, Luxembourg is not (yet?) proposing to reduce spending on the Common Agricultural Policy (CAP). The problem here is of course that agreement in this area is notoriously difficult to reach, and that there is a relatively recent agreement (2002) to freeze CAP spending at the 2006 level. The fifteen members of the old EU agreed this among them just before the accession of the ten new members, anxious as they were that they would demand even higher CAP spending if they waited until they got in. Attractive though it may seem to break open this agreement in order to solve the budgetary dispute and at the same time set off serious reform of the CAP that is long overdue, which seems to be the strategy of the British government, there is always a risk of backfiring because new member states start demanding more CAP subsidies.

The conclusion of all this is that Luxembourg is trying to force a result by setting everyone against everyone. Risky, as it could end with everyone in the trenches and unable to move until all deadlines have passed, but great fun to watch. And if the pressure on government leaders to come up with some good news is great enough, it might be the only strategy that works.

Next: for a change, putting the general interest first?
Where is the greater European ideal in all this, you may ask – solidarity, peace, common goals? Totally absent, it seems, and that is unfortunate. Not even because every national government is trying to get the most out of it, for its narrow, national, self-interest, by getting as many subsidies for as little money as possible. That is sad, but it could be expected. What is more worrying, is that national government leaders are doing so little effort to define common goals and policies which are in everyone’s own interest as well.

Cohesion funds, for instance, could be used in such a way: The funds themselves may only benefit specific (poorer) regions and countries directly, but if they contribute to developing a region and increasing its wealth this is also in richer countries’ interests, through increased trade and better social and political stability. Likewise for their external policy equivalents allocated to the EU’s neighbours. Agricultural subsidies spent on production or income support, on the other hand, are unproductive as they do not provide recipients with incentives to invest and improve until they no longer need to be subsidised, and are therefore doomed to be needed for ever by every farmer who ever received them. Yet instead of keeping cohesion funds, directing them to the new member states, increasing funds allocated to the European Neighbourhood, and decreasing spending on the CAP, the summation effect of each nation looking after its national interest is that we do the exact opposite.

I have said it before, and I say it again here: what Europe really needs to move it forward is better leaders. But that is the subject of another blog posting I am hoping to get finished soon.

10 Responses to “Finances in perspective”

  1. Georg Says:

    Thank you for this clear and informative post. Better leaders: something everybody needs to work for at their own national level.

  2. David Weman Says:

    Great post.

    We’re from the Anglosphere?

  3. eulogist Says:

    Hm… well, indeed… But Edward is!

  4. Lucaas Says:

    Excellent post. Too bad the BBC and other European media have failed to provide an equivalently coherent picture. It seems like everybody is focusing on the British-French squabble, rather than on the overall European situation.

  5. Monjo Says:

    Actually, UK spending variations have been considered. There was a piece about the Sovietisation of the UK a while back. The SE and London’s economy was roughly 33pc Government, the north-east and Scotland was more like 60-66pc.

  6. Huon Says:

    Just a little remark. There are calculations that show that Belgium is actually the biggest net-payer, because a lot of contracts are allocated to Belgium for technical reasons, (while Belgium may not see real economic benefits from them.)

  7. eulogist Says:

    @Huon: I think you mean calculations where Belgium is the largest *recipient*? Well, yes, it is always the question where to put Belgium, let alone Luxembourg, in comparisons like these. That is why I always leave them out :-) Anyway, I used the Commission’s own calculations rather than trying to devise my own system with the risk of forgetting amounts or making mistakes. I think it is safe to assume accuracy and impartiality in the Commission’s calculations of the net contributions, because they are used to calculate the British rebate and each other Member State’s contribution to it.

  8. Soren Vejrum Says:

    Interesting budget numbers. The major economies and net contributors are:

    Germany: net contribution €7.7 billion = 0.36% per GNI = €92.70 per head
    United Kingdom: net contribution €2.8 billion = 0.16% per GNI = €46.60 per head
    Netherlands: net contribution €2.0 billion = 0.43% per GNI = €120.70 per head
    France: net contribution €1.9 billion = 0.12% per GNI = €32.10 per head
    Sweden: net contribution €1.0 billion = 0.36% per GNI = €106.80 per head
    Italy: net contribution €0.8 billion = 0.06% per GNI = €13.80 per head

    The United Kingdom seems to get off cheap compared to Germany, Netherlands and Sweden – but even more so does France and Italy. However, the United Kingdom still pays more than other, even richer countries (measured by GDP/head) such as Austria and Denmark:

    Austria: net contribution €0.3 billion = 0.15% per GNI = €41.50 per head
    Denmark: net contribution €0.2 billion = 0.11% per GNI = €39.60 per head

    Cancelling the United Kingdom’s Ł3 billion rebate would bring United Kingdom’s net contribution per GNI and per head on level with the Netherlands as the largest net contributors per GNI and per head paying quite a bit more than Germany and Sweden and much much more than France and Italy (and Austria and Denmark):

    United Kingdom (without rebate): net contribution €7.3 billion = 0.42% per GNI = €121.90 per head

    It is not as if France and Italy are poor countries – their populations and economies are roughly the same as the United Kingdom’s:

    United Kingdom: population: 60 million – $1,782 billion GDP
    France: population: 60 million – $1,737 billion GDP
    Italy: population: 58 million – $1,609 billion GDP

    No wonder that the United Kingdom will not accept cancelling their rebate to keep funding the hopelessly inefficient French farmers.

    No wonder that France would like the United Kingdom to pay even more to keep funding the hopelessly inefficient French farmers.

    No wonder that the Netherlands are pissed off and wants a rebate too.

    Instead of attacking the United Kingdom for starving the new Central/Eastern European member countries, maybe France (and Italy and Austria and Denmark) should get their wallet out and contribute their fair share through additional contributions and/or budget reforms.

  9. Debate on rebate « akatsukira Says:

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