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What does the EU budget deal mean for the UK and Europe?

08 Feb 2013

Summary:

-
For the first time, the EU’s long-term budget will be cut in real terms. The UK government and its allies should be given credit for securing this - especially since this budget will be for 28 rather than 27 countries.

- The final deal shows that compared to the current long-term EU budget (2007-2013), so-called ‘commitments’ will be cut by €34bn and ‘payments’ will be cut by €35bn. This represents a 3.4% cut and a 3.7% cut respectively (in real terms). The unusually large gap between these two amounts – needed to secure a deal – could potentially cause issues down the line.

- The UK’s gross contribution is likely to fall (as a share of UK GNI) but the net contribution could still increase as more money will be channelled towards the new EU member states – such spending isn’t covered by the UK rebate. However, it’s in the new member states that regeneration cash in particular can have the most comparative impact, so the UK government has done the right thing and this should not be seen as a “defeat”.

- The European Parliament could still scupper the deal and, in a very odd move, some MEPs have called for a “secret” ballot, although they can only approve or reject the deal, not amend it.

- In the final proposal, direct payments under the CAP have fallen €62.5bn in real terms - a positive development. However, just under 40% of the budget will still be spent on farm and rural subsidies, and as a whole, the EU budget will remain largely inefficient and out of date.

The EU’s long term budget has been cut for the first time

For the first time, the EU’s long-term budget – Multiannual Financial Framework (MFF) – has been cut in real-terms.

Commitments: This is the credit card limit, i.e. the maximum amount that can be pledged for projects. It will be cut by €34bn in real terms from the previous period, and will stand at €960bn.

Payments: This is the funds which are forecast to be paid out in a given year. This is what the UK Treasury usually focusses on, given that it has an immediate impact on the government purse. This will be cut by €35bn in real terms from the previous period.

Therefore, David Cameron can plausibly be said to have delivered on his promise on “at best a cut, at worst a freeze”.



As Germany goes, so goes Europe

The political significance of these talks was not so much the absolute numbers – after all the cut amounted to 0.3% of EU-wide GNI.

The UK, the Netherlands, Sweden, Denmark and Germany, formed an alliance around a real-terms cut, outflanking France and Italy. The UK Government should be given credit for pulling this one off - it isn’t permanently isolated as some commentators would have us believe.

Unusually, François Hollande and Angela Merkel did not reach a common position going into the talks. This was another step towards a more self-confident Germany, which doesn’t simply write blank cheques – and another spanner in the Franco-German engine.

As expected, Angela Merkel acted as the lynchpin, conducting smaller meetings with Cameron and the ‘Northern bloc’ on the one hand, and Hollande and the ‘Southern bloc’ on the other. More than ever, Berlin holds the balance of power.

There will be a temptation in Westminster to see this as a green light for the UK government to go all in – and that Cameron’s strategy to negotiate a new deal in Europe followed by a referendum will get the unwavering blessing of the German Chancellor. But this would be premature. Both at home and abroad, Angela Merkel thrives on her role as a broker, constantly playing different alternatives against each other depending on the issue at hand. The lesson for the UK is that win enough support for your position among like-minded member states and Germany will back you.

Could the UK’s contribution still go up under the new deal?

Net contributions:

Despite securing a real terms cut to the EU budget, the UK’s net contribution (what it pays in to the EU after what it gets back and the rebate are taken into account) is still likely to increase under this proposal.

Essentially, because the share of the EU budget going to the new member states – the ones that joined the EU since 2004 – will increase, and since the UK gets no rebate on this spending, the UK's net contribution will go up. This shouldn’t be viewed as a ‘defeat’ as it's in the new member states that EU funding can make a difference. Still, this could prove politically sensitive for David Cameron – though he is likely to heap the blame on Tony Blair (with some justification) for giving up part of the rebate in 2005. Most Conservative MPs are likely to back this deal.

Gross contributions:

This is rather more complicated. Under the deal, the budget is falling in real terms, so therefore the UK’s gross contribution should fall in real terms. However, there are two potential issues to be aware of:

Firstly, although the new 2014-2020 payments ceiling of €908bn is lower than the 2007-13 budget payments ceiling of €943bn, ‘actual’ payments (i.e. tangible costs for national governments) historically undershoot the ceiling. This explains why the UK set a reference point of €886bn, which is an extrapolation of actual payments made in 2011. If, under the new budget, actual payments come closer to the ceiling or hit it, then the UK could potentially end up having to pay in more than it is at the moment. This is far from certain but is a possibility. However, crucially, by getting a cut in the ceiling, the upper limit of potential contributions has now been set lower. As a share of UK GNI, the UK’s gross contribution will probably still fall over the budget period.

A second issue, for the budget in general rather than the UK in particular, is the potential for a deficit in the budget, which could lead to immense pressure to increase the payment ceiling further down the road. Because of the way the MFF is structured into 'commitments' and 'payments', actual payments 'trail' the commitments (or promises to pay). In the context of an ever-increasing budget, this doesn't present a practical problem, because extra funds can always be pledged to meet previous commitments. However, now we have a situation where payments are falling well below the level of the commitments that the EU was able to make under the current budget, while the current compromise is also predicated on deeper cuts to payments than to commitments. This could potentially mean unfunded commitments.

In theory, the MFF payment ceilings that are being agreed now cannot be altered unless there is unanimous agreement, as it essentially means re-opening the MFF. The current rules do provide for ceilings to be revised upward by 0.03% of EU GNI for 'unforeseen' expenditure. More than this would seem to require unanimity, but there could be scope for some legal wrangling should this scenario come to pass.

The EU budget is still spent on the wrong areas

But overall, due to the inherent bias in EU budget talks towards the status quo, and the inbuilt stand-off between France and the UK (proportionally Paris contributes the most towards the UK’s rebate from the EU budget), the EU budget will remain inefficient and largely out of step with economic reality.





As the graph above shows, the majority of EU spending will continue to be in the form of growth-destroying farm subsidies and irrational recycling of regeneration cash between richer countries.

It is positive that the spending on these areas will be less than in the previous budget period. In particular, direct payments under the CAP have fallen €62.5bn in real terms - a positive development. However, the original Commission proposal and the proposal presented by Van Rompuy in November both saw more spending on areas such as R&D and energy infrastructure (via the so-called “connecting Europe facility) and even less on CAP and regional funds.

The UK will keep its rebate


The UK has kept its rebate completely intact - this was a red line for the UK government. The deal also includes lump sum rebates for the Netherlands (€650m), Sweden (€160m) and a new rebate demanded by Denmark (€130m). Germany, the Netherlands and Sweden would benefit from caps to their VAT-based contributions. Austria originally saw its rebate removed completely. However, in the end it managed to secure a cap of its share of the UK rebate at €95m.

The European Parliament could still block the EU budget deal  

The European Parliament still has to approve the deal. EP President Martin Schulz and other senior MEPs have hinted at the possibility that the European Parliament could reject the deal if the budget came in too low. Some have even suggested a secret ballot to decide the fate the budget.

For more information please contact the office on 0044 (0)207 197 2333, Raoul Ruparel on 0044 (0)757 696 5823 or Mats Persson on 0044 (0)779 9460 691. 

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