EU cash: start the tough talking now

Date: 10/06/04

THE top two items on the agenda of the European Council, when it meets in Brussels on 17-18 June will be the European constitution and the nomination of a new president of the European Commission. If they have any time left over from these two tasks, they could do worse than devoting it to a serious discussion of the EU's future financing.

Up to the end of 2006, this has been determined by the financial perspectives agreed at the Berlin summit in 1999. This set an annual limit of expenditure of 1.27% of gross national income (GNI), which has been comfortably adhered to so far, including in the budget appropriations made for the next two years.

In February, the Commission published its proposals for new perspectives for the seven-year period, 2007-13. These were fashioned around three priorities - the achievement of the Lisbon Agenda to make Europe the world's most competitive economy (on which progress so far has been disappointing), the completion of an "area of freedom, justice and security", and the projection of Europe as an effective "global partner".

A slightly reduced annual expenditure limit of 1.24% of GNI was proposed, with projected spending averaging out at 1.14% per year. Even before the Commission had produced its proposals, a pre-emptive strike was launched by six member states which are substantial net contributors to the EU's coffers.

A letter, which looked as though it had been drafted within the UK Treasury, but was signed by the heads of government of France, Germany, the Netherlands, Sweden and Austria, as well as British premier Tony Blair, was despatched to Romano Prodi. It demanded that average expenditure "should not exceed 1.0% of gross national income".

This would effectively freeze spending at existing levels and would prevent EU activities benefiting from future growth in the European economy. The six leaders claim to be "deeply committed to the principle of European solidarity, and to the maintenance of cohesion in the enlarged Union".

They make no effort, however to explain how the greatly enhanced responsibilities of the Union, notably concerning enlargement, the Lisbon Agenda and the European Security and Defence Policy - all of which they had approved - could be met, without a drastic reduction of current activities.

The only justification offered in the letter was that member states had recently been cutting back on their own budgets, and that "our citizens will not understand if the EU-budget were exempt from this consolidation process". This argument was recently blown sky-high by Philippe Maystadt, the president of the European Investment Bank (EIB), and previously a highly regarded Belgian finance minister.

In a lecture last month to the Centre for European Policy Studies, he pointed out that the EU budget increased by 8.2% during the period 1996-2002, while national budgets in the 15 member states grew by 22.9%. It is very much to be hoped that Maystadt's lecture will be published, as it is by far the most thoughtful and constructive commentary on the Commission's proposals yet to appear.

It is difficult to escape the conclusion that the letter was based, not on any detailed consideration of the Union's financial needs, but on a crude desire to cut back on their own national contributions.

This view is understandable, as some (but not all) of the six countries are currently paying more than what might be regarded as their 'fair share'. Germany, for example, long the milch cow of the EU, has been feeling the pinch since reunification left it with a massive bill to upgrade the economy and environment of its own eastern Länder, while it is no longer one of the wealthier member states.

Yet, on a per capita basis, it is far from being the biggest single net contributor (see table). That honour now belongs to the Netherlands, whose citizens contribute almost twice as much per head as any others, while the Germans are only the fifth largest contributors, just ahead of the British, who benefit from the rebates negotiated by Margaret Thatcher in 1984.

If governments could be assured that they were not being asked to make a disproportionate contribution, they might be more willing to consider the financial perspectives on their merits. The Commission therefore proposes - not for the first time - a new mechanism for the "correction of budgetary imbalances".

This would have to replace (or incorporate) the present specific arrangement for the UK, which successive governments have declared to be non-negotiable, though they insist that they would not in principle oppose comparable arrangements for individual member states which found themselves in difficulties.

This would not be a starter, however, as the Union will not again commit itself to inflexible arrangements, not subject to a time-frame, or provision for amendment in the light of changing circumstances.

That the British would have to receive a roughly equivalent amount to the present, at least initially, is evident, as without the rebate they would become the largest single net contributor, while being far from the most prosperous nation. But, in the long run, it would surely be counterproductive of them to continue to veto any proposed change, especially as all the new member states are required to contribute to the rebates under the present arrangements.

Similarly, the present net beneficiaries (particularly the Irish) should bow to the inevitable and agree to a gradual redirection of structural fund money towards the poorer nations in the east.

All this will take a lot of hard bargaining, which is likely to continue right up to the deadline for decision at the end of 2005. It would help to clear the air if the summiteers agreed to a full and frank exchange of views next week before the detailed negotiation gets under way.

• Dick Leonard is former assistant editor of The Economist and writes on Belgian affairs for The Bulletin. He is a former UK Labour MP and the author of many books.

Preview of the European Council, Brussels, 17-18 June 2004. The author argues that the Summit should discuss the European Union's long-term financial perspectives.