Charles Crawford: How the EU Budget process really works

This is the first instalment of a two-part series looking at the EU Budget. Read the second instalment tomorrow here.

Charles Crawford served in the Foreign and Commonwealth Office for 28 years, latterly as British Ambassador in Sarajevo, Belgrade and Warsaw. He left the FCO in 2007 and was on the Conservative Party candidates' list prior to this year's general election. He blogs here.

The time has come for someone to explain in terms more or less comprehensible to the intelligent reader how the EU Budget process works. A dirty job but someone has to do it.

Key Fact One: Givers and Getters
The EU has 27 member states. Every member state pays into the EU central pot, and every state gets money from it. Most states (Getters) get more than they give. A few rich states (Givers) give more than they get. The UK is, of course, a Giver.

There are far more Getters than Givers. This affects the way the public debate plays out across Europe when the new EU budget is being negotiated. The many Getters emit a deafening howl at the blinkered un-European selfishness of the Givers. The Givers grit their teeth and try to produce something which makes sense, above all to themselves and their taxpayers.

Key Fact Two: the Budget Big Picture
So, how is the size of the central EU pot of funds agreed?

The most important EU budget negotiation is NOT the annual vote for the following year's budget (see eg the recent noisy British proclamation of success in limiting EU spending in 2011 to increase of only 2.9%).

Rather it is the much bigger negotiation which comes around every seven years or so for the next EU ‘Financial Perspective’ period. The outcome of that negotiation sets the financial "envelope" within which annual budgets are then agreed.

We are now working our way through Financial Perspective period 2007/13. The total sums for EU spending over this period were agreed in 2006, with the basic deal struck in late 2005 under Tony Blair's leadership when the UK had the EU Presidency. Next year the serious battle begins over the next Financial Perspective period, going forward to 2020.

That 2005 settlement saw a notable increase in the EU budget. Labour/Blairish perfidy? Not really. The EU in 2004 had grown to bring in ten new members, primarily former Warsaw Pact countries with Poland to the fore. This was a big success for the UK. Conservative and Labour governments alike had pressed long and hard for this strategic post-Cold War reorganisation of Europe. But it meant ‘more Europe’ for the Givers to support.

Note that a rise in the annual EU budgets (and therefore in the flow of UK contributions to the central pot) over this Financial Perspective period is expected, even planned.

The EU plans to increase budgets every year?! Help! It’s even worse than we thought.

The budget grows because it takes time for Getter member states such as Poland to identify and plan projects and finally spend the EU money allocated to them through eg Structural Funds. As their spending accelerates (as planned), the rate at which London has to pay into the common pot edges upwards. But all that spending takes place within the previously agreed framework of the Financial Perspective.

In other words, the Treasury has made provision for a total British contribution over this period as agreed back in 2006. In the greater scheme of British public financing, it doesn't make too much difference what happens in any given year to EU-level spending in that period. That said, anything which holds back the rate of increase is always handy, hence the tough line taken by David Cameron at the end of October.

Note too that not all EU money allocated by Givers to Getters ends up being spent. The UK and other Givers regularly get back slabs of money from Brussels.

Lo!, the cunning British built into the 2007/2013 Financial Perspective some new rules tightening up procedures. This -- plus the fact that many large projects have to be co-financed by the Getters themselves, not easy in tough economic times -- is making it harder for new member states to spend all the EU money allocated to them, opening the possibility that some of "their "money will wind its way back to Givers, including London. The horror.

Key Fact Three: British Leverage
Can the UK block all this if it wants to?

The major Financial Perspective decisions are taken by unanimity. London has a veto -- as does every other EU capital. We can’t be outvoted.

However, the annual budget decisions within the current Financial Perspective envelope are taken under the EU's qualified majority voting rules, which give power to those who can muster a blocking minority (or credibly threaten to do so). Here we can be outvoted, if we fail to persuade enough other member states to agree with us.

Thus at the recent European Council the UK and some other member states formed a group to block larger increases, but there was no such blocking minority for freezing the 2011 budget at 2010 levels.

What happens if either the annual budget negotiations or the Financial Perspective negotiations failed to reach agreement? Good question.

Complicated provisions exist for both eventualities, tending towards a roll-over of existing budget levels if all else fails (even on a ‘flat cash’ basis, meaning that the value of the EU budget erodes with inflation). Note that whatever the European Parliament might say and the gullible media might parrot, the EP can not force through an increase in the Financial Perspective settlement figure.

Whereas some in London might think it a beautiful outcome if, say, the annual budget increase and/or the next Financial Perspective increase were both zero in flat cash terms, most other member states would not. So London has to manoeuvre carefully.

Key Fact Four: That British Rebate
The ‘British rebate’ is the mechanism agreed by Mrs Thatcher back in 1984 whereunder the UK gets back part of the money it puts into the EU pot, to keep net contributions by the Givers in a fairer balance.

This mechanism is needed because (a) for historical reasons the EU budget is historically skewed towards agricultural support, and (b) the Common Agricultural Policy sends so much more money back to France than to the UK. Without a correction mechanism the wealthy UK in effect would be heavily subsidising wealthy France, an absurd outcome.

Points to note about the Rebate:

a) It is the wonderful Thatcherite gift that keeps on giving. It (obviously) grows as the EU budget grows: the more the UK puts into the pot, the more in absolute terms the rebate gives us back.

b) Second, in EU budgeting paperwork each member state "contributes" to the British rebate according to an agreed formula. This allows footling demagogues across Europe to wail about the unfairness of the rebate -- why should poor little country X have to send money back to plump, rich, Eurosceptic UK? The brisk answer to that is that any payments given back to the UK by poor little country X are coming from the money which the UK has given to poor little country X, so maybe poor little country X should be rather more grateful?

c) Tony Blair was attacked in 2005 for "giving up" the British rebate. He didn't. He created a limited exception to the rebate. London kept its full veto on further concessions on the rebate next time round.

d) This limited exception in the 2005 deal excluded the new member states which had just joined the European Union (primarily former members of the Warsaw Pact, all far less rich than the UK) from ‘contributing’ to the rebate. This was a real concession, but as concessions go it was fair -- successive British governments had pressed the European Union to enlarge to include these countries, so it made sense to be generous to them (if we have to subsidise other EU members, let’s subsidise the worse off).

e) One ingenious wrinkle on Tony Blair’s 2005 rebate concession to the new member states. It did not apply to their CAP receipts (London doesn’t like the CAP). So they too have to send back to us some of the money we send them. This keeps everyone honest. Very droll. Who says that British diplomats are no good at ruthless EU knife-play?

Key Fact Five: why not new EU-wide taxes?
The siren argument is heard in Brussels that the current arrangements for funding the European Union are stupid and wasteful. Let’s ease the misery for everyone, by introducing instead a teensy-weensy EU-level tax to raise money for central EU activities in a much tidier way!

This change might make little difference to the total amount of money paid by the UK into the central EU pot. In the short term it might even reduce it.

But it would represent a momentous step of principle towards some sort of new federalistic Europe. Any EU member state can look across the Atlantic and see for itself what has happened to the USA's national finances under federal profligacy. So enthusiasm in capitals for this so-called reform is at best limited. The British could be expected to veto it, and should do so.

If this radical change did not come in but nonetheless the EU budget were spent in a totally different way (in particular if subsidising European agriculture did not absorb so much central EU spending), it is possible to imagine funding the EU without a British rebate. There is no prospect of the EU moving to a sensible funding system. So for the foreseeable future the glorious British rebate stays put.

Key Fact Six: Eurozone Crisis
Remember that these budget manoeuvrings are being played out against the backdrop of severe strains across the Eurozone.

The main problem is not the disastrous predicament of Greece and the parlous state of public finances in other member states. It is that those problems are underpinned by the European banking system, which could be dragged down if things get out of control.

Germany is determined that German taxpayers not be the suckers of last resort, so has been insisting on tighter rules within the Eurozone to punish those countries which do not show reasonable discipline. Germany's problem is that these new arrangements require changes to the hard-won Lisbon Treaty structure. What about David Cameron's promise to give the British public a referendum in such cases? Sell-out?!

The essence of the UK’s Coalition referendum plan is that it provides for a referendum where more powers are transferred from the UK to Brussels. In this latest case this does not apply, as we are not in the Eurozone. No need for a UK referendum if eg Belgium, Greece wittily decide to surrender their national sovereignty to Germans, as Ireland seems to be doing.

Hence the implicit deal just reached by David Cameron. The UK accepted German ideas for "technical" changes to the Treaties affecting only the Eurozone members. Germany went along with London in limiting the next annual EU budget increase and accepting the prospect of some austerity in the forthcoming Financial Perspective period.