Northern states pay the Union piper but Santer calls the tune

Date: 23/07/1998

While the Union's paymasters continue to play to the domestic gallery in demanding reduced EU budget contributions, Tim Jones considers how much they can realistically expect to get back

ONE of the biggest mistakes a government can make is to hold an unloaded gun to the head of an adversary.

The hapless Conservative administration in the UK broke this basic political law four years ago when, keen to play to the Eurosceptic gallery back home, it threatened to fight to the death over how many countries were needed to block the passage of a European law. When the government was forced to back down, it just looked stupid.

They will deny it vociferously but, if they are not careful, this is precisely what the German and Dutch governments are about to do over how much they should contribute to the EU's 85-billion-ecu annual budget.

During the recent summit of Union leaders in Cardiff, German Chancellor Helmut Kohl threatened to withhold payments to the Union's budget from next spring unless his demand for a significant cut in Bonn's donation was met.

Kohl, who is coincidentally engaged in an increasingly hopeless-looking election campaign, has found strident support from the re-elected Dutch left-right coalition and other net contributors Austria and Sweden.

The headlines trumpeted nuclear options: Kohl meaning business and the Dutch getting their money's worth. But the truth is that neither The Hague nor Bonn really expects to obtain its publicly stated goal: a mechanism for capping net contributions at a maximum 0.4&percent; of gross domestic product.

For the record, both state that the mechanised budget rebate given to UK Prime Minister Margaret Thatcher to shut her up at the 1984 Fontainebleau summit should either be abolished or extended to them.

Yet they know full well that when they are offered a monetary olive branch it will look more like a reallocation of EU spending than a reduction in contributions, and nothing like the kind of return they have been gearing up their middle-class bean-counters back home to expect.

To his credit, European Commission President Jacques Santer has not knowingly lied to the EU's paymasters. Right from the start of this debate, he has had no intention of handing them back their money and has carefully avoided telling them that he would.

No wonder. Commission number-crunchers have already done their internal sums. Ask them privately about the chances of the northern member states getting rebates on their budget contributions and, after they have stopped chuckling, they say: “When we show them what the options really are, they will see what it really means.”

The Court of Auditors, the EU's financial watchdog, has detailed this in a so-far unpublished report. Extending the Fontainebleau agreement to all four net contributors would cost the Union's poorer countries 12 billion ecu in extra annual payments. The European Policy Forum think-tank calculated that reducing Germany's current net contribution (58&percent; of the total) to 40&percent; and the Netherlands' 9&percent; to 5&percent; would boost France's from 5&percent; to 11&percent; and Italy's from 3&percent; to 9&percent;.

Both sides can argue over the details of the figures till the accountants come home, but the plain fact is that a reduction in the net contributors' payments would have to be paid for by someone else or spending would have to be slashed.

All Santer has told them is that their concerns will be addressed, promising them a Commission review of the way the EU finances its budget 'own resources'. That is what he will deliver in October.

“I have tentatively taken account of your hopes, especially of your wish to get a balanced distribution of the net burden,” he wrote in a letter to the truculent 'sugar-daddies'.

The keyword here is 'net'. Since posting his four letters, Santer has spelled out more precisely what he meant, in the unlikely setting of Bavaria, home of the most ardent campaigners for a cut in German budgetary contributions and, at the same time, one of the biggest beneficiaries of the Common Agricultural Policy (CAP).

While acknowledging that the financing system had to be “seen to be fair and balanced by all member states or we could jeopardise acceptance of the European unification process”, Santer reminded his Munich audience that these “imbalances” needed to be addressed by redirecting spending rather than cutting contributions.

This is even articulated in the now-ignored first sentence of the Fontainebleau agreement, coming as it does before the more popular: “Any member state sustaining a budgetary burden which is excessive in relation to its relative prosperity may benefit from a correction at the appropriate time.”

An obvious way of returning EU cash to Austria, Sweden, the Netherlands and Germany would be to double the amount available for investment in the big-ticket cross-frontier transport infrastructure programmes known as Trans-European Networks (TENs).

Coincidentally, the biggest of these are a bridge and tunnel project between Sweden and Denmark, a German-Italian tunnel to take pressure off the overland Brenner Pass through Austria, a rail-freight track from Rotterdam to the Ruhr valley and a high-speed train link between Amsterdam and Brussels.

Secondly, the Commission is giving the nod and wink to the Germans in the new plans relating to 'aid intensity' in so-called Objective 1 regions: the poorest areas in the Union. The proposals in Agenda 2000 would allocate extra cash to regions with high levels of unemployment - in other words, the eastern German Länder.

Even cannier is a proposal, hidden away in the planned reform of the CAP, to calculate direct payments to milk producers according to their production per cow. By eroding the importance of fixed payments to farmers per head of cattle, 'efficient' cows in the Netherlands would be rewarded and the effective punishment of productive dairy farmers would come to an end.

At least the Commission is trying to meet some of the concerns of the northern member states, even if it is not employing their stated methods.

The same cannot be said for the reform proposal which landed on Santer's desk from Madrid, with Greek and Portuguese support, at the beginning of this month.

The Spanish government's call for member states' contributions to be based less on their relative GDP and more on average per capita income was treated with the seriousness it deserved in Brussels.

The plan would increase contributions from Belgium, Denmark, Germany, France, Italy, Luxembourg, Austria and the Netherlands and reduce those from countries where the GDP was less than 90&percent; of the EU average.

While Spain found support in Athens and Lisbon, the Irish remained aloof from the old 'poor four' club. At the pace the Irish economy is growing, Dublin wants to prepare itself for joining the Union's paymasters.

The Spanish proposal reminded Santer that he was bound by Article 10 of the decision establishing the EU's resources to consider introducing an extra 'fifth resource' for the budget. The Commission looked into this idea back in 1991-92 during the last round of negotiations over the future financing of the Union and concluded, between the lines, that this was not a realistic prospect.

Yes, the EU could introduce a tax on carbon energy use but, if it worked, the revenues from the tax would drop. Yes, the Union could levy a single withholding tax on interest income, a tax on corporate profits or a pan-EU income tax, but who would agree to that?

As it stated in the Agenda 2000 package, the Commission believes a new resource is not a realistic prospect, at least as long as spending is capped at 1.27&percent; of Union GDP.

The Commission will honour its Article 10 commitment, but only to keep fifth resource pressure groups like the European Parliament sweet. Santer's fingers will be crossed behind his back the whole time.

If they start preparing their electorates now for the victory they will achieve in this phoney war, the paymasters might still come out of this with some pride intact. It is, however, more likely that they will come out looking like John Major.