Iron Lady’s legacy fuels EU budget battle

Date: 28/01/1999

Fifteen years ago, former British Premier Margaret Thatcher won a deal to cut the UK's contribution to Union spending. Now other member states are seeking similar treatment. Tim Jones reports

THE British government is both blessed and cursed by its cut-price payments to the EU's budget.

Like good looks, the UK's €3-billion annual rebate to compensate it for officially recognised "excessive" contributions to the Union's budget arouses envy laced with resentment among other paymaster countries.

Dutch Finance Minister Gerrit Zalm wrote to European Commission President Jacques Santer last spring advocating the creation of a 'generalised correction mechanism' to refund any country which contributes more than its share of EU gross national product to the budget.

In his letter, he claimed that the British rebate was a "discriminatory arrangement" and warned that, if it were maintained, "the Netherlands will keep paying for the correction of one member state while finding itself, just like some other countries, in a comparable position".

As negotiations over the EU's 2000-06 spending plans move towards their climax, the German, Dutch, Swedish and Austrian governments are asking themselves: how did the British ever win such a generous concession? Can they emulate it? And, if not, how can they get their hands on the British cash?

The UK won its rebate for two reasons. The Germans and the Dutch share the first of these - the justice of their case; but they will never be able to match the second - Margaret Thatcher. For all their anger, German Chancellor Gerhard Schröder and Dutch Prime Minister Wim Kok would never mimic her tactics.

The former British premier did not suffer hang-ups about being communautaire. Even before taking power in 1979, Thatcher calculated that the British were paying "£1 billion" too much into Community coffers and she disrupted every summit until she got what she called "our money" back. The haggling became such a fixture at ministerial meetings that it acquired an acronym: 'BBQ' (British budget question).

The case for a rebate lay and continues to lie with the Common Agricultural Policy. There are four sources of revenue for the EU's budget: customs duties and levies on imports from outside the Union, levies on imported farm produce and the amount which would be raised if value added tax up to a maximum 1.4% were levied on a range of goods and services in each member state. A final lump-sum payment is required from each member state, related to the size of its economy, to bridge the gap between the first three resources and total EU spending.

When the rebate was devised, the British were substantial importers of foodstuffs from outside the Community and therefore paid heavily to the budget through agricultural levies. The country's propensity to import and consume also boosted the import duty and VAT bill.

On top of this, the ferocity of the industrial revolution in the UK meant that its agricultural sector was relatively small and efficient.

While London was contributing heavily to farm subsidies, which swallowed up half of the EU budget, it only recouped a 7% share of the receipts.

Thatcher's case was strong and she threw away the Queensberry rules in fighting it. Between 1980 and 1984, she managed to negotiate annual refunds averaging €900 million at current exchange rates, but wanted this to be enshrined and made untouchable under Community law.

She went to the Fontainebleau summit in June 1984 seeking agreement on a specific 'correction mechanism'. Under this plan, the percentage difference between the UK's share of VAT-related payments and receipts would be compared to total Community spending within the member states and multiplied by 66%. There was, says a senior participant at the summit, method to this baffling formula. "We had long been thinking in terms of a percentage," he said. "It was the culmination of a long and detailed assessment."

German Chancellor Helmut Kohl was prepared to offer 55% instead of 66% but, to get a deal, French President François Mitterrand went up to 65%. In true Thatcher style, she refused to accept. It was 66% or nothing. "Margaret held out for that extra 1%," said one British diplomat. "That may sound unreasonable, but it was worth an extra £100 million to us."

The rebate would be funded by all other member states in line with their contribution to Union GNP (excluding the UK) but, in recognition of Germany's already high net contributions, Bonn would only have to pay two-thirds of its share. The deal was outlined in the summit conclusions and then battened down in law by the 'own resources' decisions of 1988 and 1992.

During the current negotiations over the Agenda 2000 reforms to the EU's spending programmes, the rebate has been challenged as never before by other member states. The Germans and the Dutch want a slice of it, while the French and the Belgians fume that the UK will not be paying its fair share of the costs of enlarging the Union into central and eastern Europe if it remains intact.

While the UK only funds 13% of the budget, compared with its share of Union GNP of 16%, British ministers point out that only 8% of the EU budget is spent at home - making the UK the lowest per-capita recipient of all member states. They also remind colleagues that, without the rebate, they would be financing 21% of the Union's spending.

Even with the rebate, the UK is the Union's fifth-largest contributor while measurements of national wealth put it ninth in the EU league table. The UK still pays twice as much as France, Italy, Belgium and Luxembourg.

If the other paymasters were to win a generalised correction mechanism, then the British rebate would have to be folded into it. The door to this was left open by the Fontainebleau conclusions, but London is adamant that the UK will not pay for other member states' corrections.

The British are right that the key to contribution reductions is serious cost-cutting CAP reform; a fact recognised by the European Commission when it came forward with the idea of 'co-financing' (allowing national authorities to take over responsibility for paying a quarter of direct subsidies to farmers).

The real argument is not about net contributions or budget-capping. The debate that still dare not speak its name is CAP revolution.

The Fontainebleau budget deal

"Expenditure policy is ultimately the essential means of resolving the question of budgetary imbalances.

"However, it has been decided that 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. The basis for the correction is the gap between the share of VAT payments and the share of expenditure allocated in accordance with the present criteria.

"As far as the UK is concerned, the following arrangement is adopted:

• for 1984, a lump sum of 1,000 million ecu is fixed,
• from 1985, the gap (basis for the correction) is corrected annually at 66%.

"The correction will be deducted from the UK's normal VAT share in the budget year following the one in respect of which the correction is granted. The resulting cost for the other member states will be shared among them according to their normal VAT share, adjusted to allow the Federal Republic of Germany's share to move to two-thirds of its VAT share.

"The correction formula will be part of a decision to increase the VAT ceiling to 1.4%. One year before the new ceiling is reached, the Commission will present a report setting out the state of play on:

• the result of the budgetary discipline,
• the Community's financial needs,
• the breakdown of the budgetary costs among the member states, having regard to their relative prosperity and the consequences to be drawn from this for the application of the budgetary corrections. "The Council will re-examine the question as a whole and will take the appropriate decisions ex novo."

Major feature on the background and details of the UK rebate scheme to the EU budget, and the call by other Member States for similar treatment.