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Friday, November 23rd, 2012

EU Budget Numbers 'Immaterial' for Britain posted by Brian Biggs

According to the BBC, the absolute worst thing that can happen is that the UK’s annual contribution to the EU budget increases by £500mn for the 2014-2020 budget.

This works out to around 0.03 per cent of UK GDP, so the numbers concerned aren’t enormous.

The political element of these debates overshadows the relatively small, in percentage terms, numbers.

On the one hand, net creditor countries are calling for a cut in one way or another to the European Commission’s proposed 1,025bn budget.  These countries include the UK, Austria, the Netherlands, and Sweden.  Despite calls for shrinking the proposed budget coming from these countries, they still have their own pet projects in it.  Austria, for instance, is critical of cuts to rural development subsidies it receives from the budget.  Similarly, the UK refuses to budget on the size of the rebate on its contribution.

On the other hand, net beneficiary countries, primarily from central and eastern Europe, want to maintain levels of spending.  Poland, a rising star within the EU and seen by many to be leading the “Friends of Cohesion” bloc of 15 countries arguing against cuts to the budget, has taken a particularly strong line against cuts to structural funds dedicated to help central, eastern, and (increasingly) southern Europe “catch up” to northern Europe in economic terms.

A compromise budget submitted by president of the European Council Herman Van Rompuy strikes a balance between the Commission’s budget and the UK’s proposed cuts.  Under the Van Rompuy proposal, the 2014-2020 budget would stand at 973.2bn, high than the UK’s proposed 886bn but still lower than the Commission’s request.  The Van Rompuy plan also cuts CAP spending and decreases Britain’s rebate by as much as 21 per cent.

What happens if there is a veto?

All parties have much to lose if a compromise cannot be found during the budget talks.  Contrary to some accounts, an “EU26” group cannot “circumvent” a UK veto.  Instead, if a budget cannot be approved by all 27 member states, spending in 2014 will be determined by Qualified Majority Voting (QMV). 

QMV does not require unanimous approval by member states.  Under the QMV system, expenditure would be frozen in real terms at 2013 levels (i.e. an increase of approximately 2%, in line with inflation) and EU leaders will have to renew up to 55 regulations on EU spending, which would almost certainly be an arduous affair. 

From the UK’s perspective, this situation is not ideal.  David Cameron wants to freeze EU expenditure at 2011 levels, so the QMV system would entail a larger increase in the UK’s.  This contribution would be partially offset, however, by the UK’s rebate, but other “rebates on the rebate” such as those the Swedes and the Dutch enjoy would expire.

Alternatively, the European Parliament could structure an agreement between itself and EU ministers, but this is unlikely as the Parliament is already facing criticism about democratic legitimacy, which would only get worse if they forced through an unapproved budget.

What are the chances Cameron will veto?

Cameron could certainly veto the budget.  But, given what has been discussed above, it seems unlikely.  Vetoing the budget would earn Cameron some political capital at home – he promised in the House of Commons to get a “fair deal” for Britain – but the reality of a drawn out, cumbersome QMV process may push the prime minister to come to a compromise.  Other EU leaders will also be keen to avoid spending time on QMV when more pressing issues surrounding the future of the Euro remain.

Though the Van Rompuy plan entails a cut to the UK’s cherished rebate, it may be more desirable than resorting to QMV.  Van Rompuy’s plan is also gathering some support from countries with positions close to the UK’s, such as Germany, meaning that the UK might be increasingly isolated in the group of countries demanding a budget cut.

Even if Cameron does not outright veto the budget, he can still influence its shape.  He could, for instance, demand the repatriation of structural funds so that wealthier member states can invest in poorer areas of their respective countries.  He might also push for revising down the current 7 year time span for EU budgets to a 5 year time span.  This would allow the budget to be more responsive to changes in fiscal and macroeconomic conditions.

If Cameron can agree to a budget that caps spending at a level less than the real terms freeze implied by a QMV scenario, he might be able to claim a small victory.  This is because the UK is calling for a freeze at 2011 levels while the QMV freeze would be at 2013 levels.  He could argue that he managed to cut the proposed budget in real terms compared to the last period of the current budget.

What will be the implications for the UK’s relationship with the EU?

The UK has butted heads with other EU member states repeatedly over the last year.  The budgeting process represents something of a fork in the road for UK relations with the EU.  With anti-EU sentiment growing in the UK Parliament, the budget debate acts as a way for the UK to signal its intentions regarding its future in the EU.

If the UK can be a constructive contributor to the budgeting process – advocating for its own interests while ensuring a solution can be found – then these talks can be a way to reassert the UK’s commitment to and influence in European affairs.  It can also show other member states that the UK can be a productive participant in pan-European discussions.  This could improve relations with countries such as Germany, who share many of the UK’s positions and might want allies in discussions on other European issues, such as the Euro. 

On the other hand, by pushing its position, the UK is set to anger some countries with which it has had historically good relations, such as Poland.  The UK will need to be conscious of demands from central and eastern European member states, as their power within the EU is only set to grow.

If the UK vetoes the budget they will likely face considerable scorn from the other 26 member states who will have to dedicate time and resources to the QMV process.  Perhaps more importantly, a veto could act as a signal that Britain is unwilling to compromise on long-term issues affecting the EU, leading other member states to put more faith in a sentiment expressed in the Houses of Parliament recently: maybe it’s better if Britain just leaves.  Even without resorting to this extreme, a veto would still likely move European leaders towards figuring out how to minimise UK involvement on big questions in the future.

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