The UK in the EU

As the debate on the UK’s membership of the EU intensifies, more and more people are stepping forward and making the case in favour of EU membership. See what they say

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A new direction for the European Union?

Britain and EU migrants

The EU’s Financial Framework from 2013

Introduction

The EU sets a multi-annual financial framework (MFF), usually for a period of seven years, which provides the financial envelope within which the annual EU budget is agreed.  The current MFF was agreed in 2005, came into force in 2007 and runs until 2013.  The process for agreeing the framework inevitably takes some time; the necessary work to agree the framework from 2014 onwards has already begun.

This briefing note covers the main issues in the discussions on the future MFF and highlights some potential difficulties in reaching agreement.  It is worth noting at the outset that the EU budget while involving substantial sums of money constitutes only a small share of Member State’s national budgets; for the current framework, the EU budget amounts to 1.05 per cent of EU gross national income (GNI) – less than in the period 2000-2006.  Between 2000 and 2010 the EU’s budget grew by 37 per cent compared to the 111 per cent growth in the UK’s national budget over the same period.

As in 2005, a key issue during the negotiations will be the future of the UK rebate (explained in greater detail below).  As the UK is the only beneficiary of this rebate (although correction mechanisms, as they are known, also exist for Austria, Germany, the Netherlands and Sweden, they are far smaller), it is hardly surprising that the other 26 Member States resent it and would like to do away with it.  This always makes for difficulties in negotiations but unanimity is required for agreement on the new MFF.  The UK is reasonably well placed to resist change to the rebate but it must take into account the impact of its negotiating stance on its relationship with other Member States, both in these discussions and on other matters.

Background

The details of the current 2007-2013 MFF are set out in a Senior Experts briefing from 2006 – “The Future Financing of the European Union” – available on the European Movement website. 

In 2011 the annual EU budget divides as follows:

33.8% - agriculture, direct aids and market support (Common Agricultural Policy – CAP);

10.67% - environment, fisheries and rural development;

32.96% - cohesion funds (previously known as structural funds);

9.1% - competitiveness;

6.48% - administration;

5.69% - external relations, development and CFSP [1];

1.19% - crime, security and justice.

The first two items are generally counted together, as they both relate to food and farming.  The EU cannot borrow to finance its spending; the budget must balance each year.  Surplus revenue is carried forward and there is always a margin between available funds and spending, providing a small contingency.  As many of the EU’s programmes stretch over several years, its budgeting process distinguishes between pledges to pay (commitment appropriations) and actual payments made in a particular year (payment appropriations).  This approach to financial management has produced stability but at the price of very little flexibility.  As a result, the EU has found it difficult to provide funds to deal with unexpected calls on its resources.

The negotiations for the new framework take place in the very different context of the economic and financial crisis of the last three years.  In addition, at the time of the agreement on the current MFF, it was agreed that there would be an EU budget review.  This was the UK’s price for agreeing to a reduction in the UK rebate from 2009.  The result of the review was a Commission report, issued in October 2010.[2] 

The EU Budget Review

The Commission report argues that the new financial framework should be based on several clear principles:

  • it must deliver key policy priorities for the EU – the financial framework isn’t the only tool for ensuring the EU’s policy priorities are delivered but it is an important one;
  • spending pledges must add value at the European level – spending mustn’t just reflect political priorities but must truly add value to the far larger budgets of Member States;
  • it must be results driven – spending on EU programmes must have real impact;
  • there are mutual benefits from the sharing of costs through the EU – the Commission gives an example the benefit to EU GDP of cohesion programmes;
  • there should be greater clarity about the EU’s sources of income – the Commission argued that EU budget is now less dependent on own resources (mostly customs duties on imports into the EU[3]) than in the past and, taken with other developments such as correction mechanisms, this means less transparency.

It sees the debate about the 2014-2020 framework as not being simply about whether to spend more or less, “but about finding ways to spend more intelligently”. 

The Commission argues that the MFF should be largely based on the EU’s strategy for economic growth – Europe 2020.  Adopted in June 2010, this strategy is the successor to the Lisbon Strategy and seeks to bring about an increase in economic growth and employment in the decade to 2020.  The focus of the 2020 strategy is around generating higher growth through improvements in research, innovation and education and through an emphasis on sustainability.  The intention is to continue the link established in the current framework between the cohesion programme and the EU’s economic strategy with the Commission wanting an even greater degree of coherence in future.

Referring to administrative costs, the Commission observes that it has operated a policy of zero growth in staff numbers since 2007 and expects to maintain that position.  It proposes a number of further measures to restrain administrative expenditure and argues that all of the EU’s institutions and agencies will have to take a similar approach.

The paper looks at new ways of raising funds for EU projects, saying that the using private finance alongside EU funds should be the norm for projects with a long-term commercial benefit.  The role of the European Investment Bank could be expanded as part of this approach.  The Commission also suggests that the EU’s funding should be based less on national contributions and more on resources raised through EU-wide taxes or charges, such as a levy on air travel.

Main Areas for Discussion

Europe 2020

As can be seen from the figures above, about 10 per cent of the current budget is spent on economic development measures designed to improve the competitiveness of the EU.  Although this budget is limited, supporters of it argue that it enables Member States to benefit from large-scale investment that they could not support on their own.  This is particularly true of research and development and infrastructure projects.  The discussion around this heading will probably focus on how to find further resources to support an expansion of research and innovation funding (see separate SEE paper).

Agriculture & Rural Development

With over 40 per cent of the EU budget spent on the CAP, fisheries and rural development, food and farming remain the dominant items in the EU’s spending.  Of course that figure has fallen considerably (it peaked at about 80 per cent in the 1980s) but if the EU is to achieve a positive outcome to the unfinished Doha round of world trade talks, then it is going to have to accept a further reduction in direct payment schemes under the CAP (they currently account for around 80 per cent of CAP budget spending).  This position will be supported by the British, the Dutch and the Swedes but resisted by almost all other Member States.  The report of the European Parliament committee on the future MFF has already said it believes that the CAP element should be no lower than it is in 2013.  Given the new powers of the Parliament in agreeing a new MFF (see below), this intervention has to be taken seriously and will be a factor in the discussions. 

There will be particular pressure from the newer Member States to maintain CAP spending at current levels as they are excluded from the full benefits of CAP support until after 2013 and had expected to receive them then.  The Commission has put forward a number of options for CAP reform, including a greater reliance on market mechanisms; ensuring greater equity in the distribution of direct payments between Member States; and the more radical approach of phasing out direct payments altogether. 

Cohesion Funding

The debate about cohesion funding will be influenced by the Commission’s call for greater linkage with the Europe 2020 strategy but also by fears in several recipient countries that the direction of these funds is likely to switch away from wealthier Member States and towards poorer ones.  This is a political problem for the governments concerned.  Whilst the Commission recommends concentrating funds on the poorest areas, it also says that cohesion funding “is important for the rest of the Union”.  Getting the balance right here will be hard.

Climate Change & the Environment

The Commission’s report reflected the widespread belief in the EU that it makes sense to use EU resources to fund large-scale climate change research, such as testing whether carbon capture and storage has a long-term contribution to make to reducing greenhouse gas emissions.  Some see a linkage between CAP expenditure and that on climate change.  It would be possible to use that part of CAP spending that goes on rural development (so-called Pillar II funding) for climate change projects but a separate fund is likely to be needed given the potential scale of the research projects.  “Greening the CAP” is also seen by some Member States as an attempt to avoid the kind of radical reform they believe the CAP needs.

External Relations

Although external relations constitutes only a small part of the EU budget, it is a high profile area of activity and one where there is increased demand.  The EU has found it difficult to meet emergency funding needs, for example for the Asian tsunami, because of the inflexibility of the budget.  Critics have raised concerns about the effectiveness of EU development spending (although a recent British Government study found EU programmes effective and improving) and about the costs of the External Action Service. 

One of the Commission’s proposals is that the separate European Development Fund, to which Member States can contribute but are not obliged to do so, should be brought within the MFF.  This would increase flexibility, place all developing countries on an equal basis in their dealings with the EU and could make the development programme more coherent (although it would cost the UK more than the current arrangements).

The creation of the EEAS is intended to be cost neutral in time as its staff were drawn from existing Commission and Council staff.  There are cost pressures in Common Foreign & Security Policy work, where the EU has to finance on-going programmes in a number of countries and where, because of the revolutions in north Africa and the Middle East, there will be further calls for EU assistance.  In the area of freedom, security and justice, increasing pressure for immigration will probably require an increase in funding for the borders agency, Frontex.

The UK Rebate

A country’s net contribution to the EU budget is calculated by deducting the resources it receives from the EU in grants and payments from its budget contribution.  Because of the preponderance of agricultural spending, which brings less benefit to this country, the UK’s net contribution has been unacceptably high so, since 1984, the UK has had an annual reduction of 66 per cent in its net contribution.  The total rebate since 1984 amounts to approximately £68 billion.

From 2009, as part of the agreement reached on the current MFF in 2005, non-agricultural spending in the Member States who joined in 2004 or later is excluded when calculating the UK rebate; this is why the UK rebate has fallen since 2009 (i.e. our net contribution has risen).  The UK’s net contribution in 2010 was expected to be £6 billion. 

Other Member States will object to this arrangement but the totemic as well as fiscal significance of the rebate means that it is unlikely that the UK would concede any further reduction in the rebate without radical reform of the CAP (and the latter is unlikely too).

Assessment

The Commission’s recommendation that the financial framework should be based around the core policies of the EU, particular the Europe 2020 strategy, is widely supported.  Given the economic situation in Europe, it clearly makes sense to use the EU’s relatively modest budget – which can only have limited macroeconomic impact given that it is little more than one per cent of GNI – to try to achieve the greatest benefit from the single market.  But not everything the EU does fits within the Europe 2020 programme – including the CAP, cohesion and external relations.   

The proposals for greater use of private financing, or co-financing, fit with the trend in Member States towards such arrangements, particular in the funding of large-scale infrastructure that can have commercial as well as public benefits.  But the suggestion that the EU should raise a greater share of its budget directly is likely to be less popular.  Quite apart from the political problems of selling such an arrangement to Europe’s electors at a time of austerity, it is not easy to identify an appropriate vehicle that would raise a substantial contribution and at the same time be seen as fair right across the EU.

The Commission’s report referred to suggestions – made as part of the debate around economic governance rather than the future framework - that EU funds could be withdrawn from countries that are in breach of the Stability and Growth Pact.  In practice such an arrangement would be difficult to operate because of the potential unfairness of withdrawing funding from an agreed project part way through for reasons that had nothing to do with the project.  This idea is unlikely to proceed further.

Negotiations on the next MFF will be tough; there will be intense argument between those Member States who want a freeze or a cut in the budget and those who want an increase.  However, the European Council agreed, in October 2010, that:

“it is essential that the European Union budget and the forthcoming Multi-annual Financial Framework reflect the consolidation efforts being made by Member States to bring deficit and debt onto a more sustainable path”

David Cameron, along with the leaders of France, Germany, the Netherlands and Finland, followed that up by writing an open letter to the President of the Commission in December 2010 which declared that:

“payment appropriations should increase, at most, by no more than inflation over the next financial perspectives”.

This declaration is likely to put this group of Western and Northern countries on a collision course with newer Member States from Central and Eastern Europe, many of whom want a modest increase in the budget.  The reality is that austerity packages in Member States will influence the final outcome but the finally agreed MFF will need to recognise upward pressures on parts of the budget.  There will be greater emphasis on the concept of European added value (EAV) but to be effective such a tool would need a more precise definition. 

The position of the European Parliament will be more significant than in the past because it is now fully involved in the MFF legislative process.  Past MFF’s were agreed through what is called an inter-institutional agreement; the Lisbon Treaty now requires the MFF to be proposed as a Council regulation, requiring the Parliament’s agreement and unanimity in the Council.

The most likely outcome is that there will be little change in the overall amount but resources will be moved within the total.  The period of this MFF may be shortened from seven years to five – the Commission suggested an MFF lasting 10 years with a major mid-term review, while the Parliament suggested five years.  Greater flexibility in the operation of the MFF to allow the EU to respond to new situations is very likely to be agreed. 

May 2011

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[1] This does not include the European Development Fund, which provides funds to African, Caribbean and Pacific countries and is funded directly by Member States.

[2] There is a useful summary of the Commission’s report in the House of Lords EU Select Committee report, EU Financial Framework from 2014, HL125, April 2011.

[3] 23% of the EU’s resources come from customs duties, other levies and VAT.

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