What happens when four EU leaders get into a rowing boat?

Swedish PM Fredrik Reinfeldt is today hosting David Cameron, Angela Merkel and Dutch PM Mark Rutte, in Harpsund, Sweden - a recreational estate for Swedish PMs throughout the years. The summit apparently features a trip on the "Harpsundsekan" - a worryingly small rowing boat. The tradition involves various world leaders holding on for life and limb in the boat, and was introduced by Tage Erlander, Swedish PM in the 1960s. Nikita Krushchev, Willy Brandt and Kofi Annan have all been in the boat.

Merkel has already had the dubious honour of going on a trip with Reinfeldt in 2008. It should be said that getting four people into any rowing boat is actually a bit of a mission. Given that Rutte is 6'4, Reinfeldt 6'2 and Cameron not a small guy either, this will require some focus.

So what will be discussed?

Well, the summit was decided ages ago and pre-dates the ongoing Juncker row. Initially, the idea was that the leaders of the EU's most competitive economies were going to meet in order to hammer out the priorities for the next European Commission in particular and the EU in general, with a focus on the jobs and growth agenda.

Reinfeldt has said that there won't be any "discussions about personalities" at the summit, but no one really believes that. It'll probably be a mixture of the two. If Cameron can get a better idea of whether Merkel can find a away out of the corner the SPD has pushed her into (a very rare occasion) over Juncker, as well as some reasonably concrete commitments on EU reform, linked to the mandate for the next Commission, he should be happy.

Is it wishful thinking to see this as the "EU reform quad"?  If they could speak with one voice, it would no doubt be a very powerful group which would be hard to ignore. Together with Finland, they are the only EU countries on the World Economic Forum's list of the top 10 most competitive countries in the world. They also account for 41% of the gross contributions to the EU budget (much more if we count net).

The four leaders formed a formidable alliance in February, achieving the first ever cut to the EU's long-term budget. Sweden's Reinfeldt has been very helpful to Cameron on numerous occasions, including shooting down a bunch of proposals for financial regulations. In those EU budget talks, Stockholm deliberately positioned itself further out than London so as not to isolate the Brits. Reinfeldt was also quite helpful after Cameron's "Bloomberg speech" (in contrast to the Swedish Foreign Minister, Carl Bildt). If Juncker is stopped, it'll be in no small part due to Reinfeldt's willingness to stick his head over the parapet, giving Cameron much needed political cover. However, Reinfeldt will probably lose the Swedish elections in September, meaning Cameron will have to negotiate with a centre-left coalition ahead of the potential 2017 referendum.

Likewise, Rutte was key in the EU budget talks and the Dutch have very much emerged as the thought leaders on EU reform, not least when it comes to the role of national parliaments in the EU. In fact, the Hague has been more vocal on many occasions than London itself. Encouragingly, EU reformers in the Netherlands did better than expected in the European elections in May.

As for Merkel - well, we've written endlessly on the need for Germany to row behind EU reform. As the debate over Juncker shows, the country is currently embroiled in a hugely complex debate about how Europe should be governed, and what role Germany should play within it. The Juncker episode was Cameron's first real encounter with Germany's grand coalition politics. It won't be easy.

What's clear is that if Cameron is to achieve the sweeping change needed for the UK to stay in the EU, these four countries will have to be able to agree a common position.

Economic downturn pushes up UK contribution to the EU budget, according to OBR

Yesterday's Autumn statement revealed that, under the latest OBR forecast, the UK’s net contribution to the EU budget is set to increase by a cumulative £10 billion between 2013-14 and 2017-18.

However, it is not quite as bad as it seems. According to the OBR, £4.9bn of the increase is “spending neutral” due to a change in how EU aid contributions are accounted for.

Nevertheless, the OBR does expect a real increase of around £5bn. This is due to lower than expected VAT revenues and customs duties (known as Traditional Own Resources) across the EU due to the economic downturn. The effect is that this will increase direct national contributions from the net contributors, including the UK's.

See the table below from the OBR's report (click to enlarge):

As we have noted before, it was always possible that the UK's net contribution to the EU budget could increase, despite the long-term EU budget real terms cut agreed in early 2013, due to a variety of factors (such as more more money flowing to the EU's poorer countries, which isn't covered by the UK rebate, fluctuations due to exchange rates, and the fluctuating revenues from VAT and customs duties cited by the OBR.)

Although much of the EU budget remains wasteful and irrational, these figures illustrate why it was so important to secure the cut in overall EU spending levels up to 2020. The deal brokered in February does at least mean that over the long term gross and net contributions will be limited in a way that they were not before. In addition greater pressure on overall spending might (we can hope) finally focus minds on reforming how the money is actually spent.

Is the UK rebate still under threat?

There’s been a lot happening on the EU budget front in the last couple of days – the 2014 draft budget was proposed yesterday and this morning a deal was finally struck between the European Parliament’s negotiating team and the Irish Presidency on the EU’s long term budget (more on that later).

Meanwhile, David Cameron has arrived in Brussels for the EU summit pledging to protect the UK rebate, with PA reporting that France is allegedly pushing for a change in the way the rebate is calculated so that it does not cover the rural development part of the CAP, a move which could reduce it by around 10%. 

Cameron said that “It is absolutely essential that we stick to the deal we reached in February and that we protect the British rebate, and I will make sure that we do that”, adding that he wants it “locked down”.

For context – EU leaders agreed in 2007 that the UK “shall participate fully in the financing of the costs of enlargement, except for agricultural direct payments and market-related expenditure, and that part of rural development expenditure.”

This issue first came up in November when Herman Van Rompuy proposed reducing the UK rebate in this way, and David Cameron rejected it out of hand. We flagged this up here and calculated that it would reduce the UK rebate by €3.5bn (11%) over the seven year budget period (Although it should be noted the rebate is likely to fall anyway as a result of greater expenditure in the new member states). The conclusions of the February summit, where the deal was finally struck, clearly state that “the existing correction mechanism for the United Kingdom will continue to apply”.

Given that the rebate is embedded within the EU’s so called “own resources” regulation, which is decided under unanimity and therefore protected by UK veto, it would appear France's demands could only be met by unpicking the entire budget deal agreed in February, for which there is no appetite among other countries. It is therefore difficult to see how this is a credible threat, although it does make for good publicity for both Cameron and Hollande.

Osborne says UK is £3.5bn better off after Cameron's EU budget deal. Is he right?

Coverage of the budget today will understandably focus predominantly on the wider debate about sticking to 'Plan A', and of course the inadvertent 'leaking' of the budget on the front page of the Evening Standard.

However, being the EU obsessives that we are, it is always interesting to look at the latest estimates for the UK's contributions to the EU budget, particulalry in the wake of last month's deal on the long-term budget.

During his statement in the Commons, George Osborne said that as a result of the deal struck by David Cameron in February, the UK would be better off to the tune of £3.5bn by 2017-18. This is repeated in the main budget document (page 23).

So is he right? Well, yes and no.

First, it's definitely the case that the UK government has secured a decent deal compared to previous long-term EU budget periods (at least in terms of absolute cash, not so much on content), for which it should be given credit. The EU budget is always complicated because the UK contribution is presented in several different ways. But the underlying data from the OBR (pages 138-9) does indeed show that due to the reduction in the long-term budget agreed last month, the UK is due to save £3.5bn by 2017-18 compared to the estimates made in the OBR's December forecast - this is the row labelled "New Multi-annual Fiscal Framework deal" in the table below.

However, the OBR figures also show that the UK will lose out due to two other factors: the change in the projected exchange rate, which will see the UK contribute roughly £1.2bn more up to 2017/18, and assumed increases of £0.7bn to the UK's contributions to the 2012 and 2013 annual budgets. It isn't clear what the row "other" refers to, but apparently it will reduce the UK contribution by £0.4bn up to 2017/18. 

We would also speculate that the OBR may have to revise its figure for the 2013 annual budget upwards again because the European Parliament has made its agreement to the long-term budget deal conditional on any funding shortfalls for 2012 and 2013 being financed with new funds rather than from future budgets - there are rumours the Commission is set to table another so-called "amending budget" to top up the 2012 budget, which would mean greater UK contributions.

But notwithstanding all of these intricacies, the OBR's figures illustrate that Cameron's deal on the budget will serve to limit the UK's gross contributions to the EU. But, as we've said before, this may not be the case for the UK's net contributions for several reasons, including changes to the UK rebate.

NB. It is important to note that the UK's actual contributions to the EU are higher than the figures presented above. This OBR table only deals with the UK's so-called gross GNI contribution, which is the largest share, but doesn't include the extra cash from VAT and customs duties that the UK also hands to the EU. It also doesn't reflect changes to payments the UK receives from the EU budget.

MEPs around Europe defy their parties on EU budget

Earlier today we looked at how UK MEPs voted on the EU budget, pointing out that Lib Dems defied the national party line (earning them a telling-off from Nick Clegg). However, we thought it would also be interesting to round up how other national delegations voted, in particular those of member states whose leaders were most insistent on imposing budgetary discipline on the EU.

Germany: Angela Merkel was instrumental in forcing through the budget cut but both her own CDU MEPs and CSU MEPs voted to "reject it in its current form", siding with their EPP group. Likewise, MEPs from her junior coalition partner, the FDP also voted against the budget. At the national level, all three parties have been steadfast in their insistence on budgetary discipline in the eurozone.

Netherlands: Dutch PM Mark Rutte was another key ally for Cameron in pushing for a cut to the budget. However, his VVD MEPs followed the ALDE leadership in voting against the budget.

Sweden: The Swedish Moderaterna MEPs remained loyal to their Prime Minister and backed the deal but in doing so had to defy the EPP group.

Finland: Despite the Finnish government being one of the strongest supporters of the deal its MEPs from the ALDE and EPP groups managed to split both ways within their groups.

Poland: PM Donald Tusk's Civic Platform party backed him and supported the deal but in the process 'rebelled' from the EPP party line.

Are certain governments regretting having given the EP more powers via the Lisbon Treaty we wonder?

Did MEPs really vote to reject the EU budget deal?

There is a fair amount of confusion surrounding the vote that took place in the European Parliament earlier today on the long term 2014-2020 EU budget deal (MFF) struck by EU leaders last month. MEPs voted by a large margin (506 vs 161 with 23 abstentions) on a motion to “reject the agreement in its current form”. So what does this mean?

Firstly, it is important to stress that MEPs have not rejected the budget itself. Unlike other areas of EU legislation, the EP cannot amend the MFF, it can only accept or reject the entire thing. So, what we have now is the EP positioning itself to 'negotiate' with government ministers on some of the details before taking a final decision on the package, expected at some point in the summer.

The figures

Although the motion did not state that the Parliament has accepted the headline spending figures negotiated by member states, it appears most MEPs have come to accept, however reluctantly, that these will not be up for re-negotiation, as evidenced by the Freudian slip in this press release. Instead, they will demand concessions on the structure of the deal.

Settling all outstanding claims for the current MFF

EP jargon: “The European Parliament… Strongly opposes the current accumulation and rollover of outstanding payment claims in the EU budget… Is therefore determined to prevent any further shifts of payments from 2013 to the next MFF… emphasises that it will not start negotiations on the MFF until the Commission comes forward with an Amending Budget corresponding to [all unpaid payment claims for 2012].” 

Translation: MEPs may have to accept lower spending ceilings for 2014 – 2020 but they want to make sure that any funding shortfalls in 2012 and 2013 are paid for with new cash and not money from the 2014-2020 budget. It is rumoured that up to €16bn could be requested to cover spending commitments made for 2012. This is set to be a huge flash point with member states.

"Maximum overall flexibility"

EP jargon: “Agreed MFF ceilings for commitment and payment appropriations be used to the fullest extent when establishing the annual EU budgets; [The European Parliament] considers, therefore, that the maximum overall flexibility between and within headings, as well as between financial years, needs to be ensured in the next MFF and decided by qualified majority in the Council… [and supports] recycling of the surplus of the EU budget.”

Translation:  Essentially the EP wants to be able to adjust the areas where money is spent at some point during the seven year MFF. This is a reasonable demand given that a seven year budget clearly struggles to take account of changing economic circumstances - MEPs may get some joy with national ministers on this.

"Recycling the surplus" refers to the EP's desire to roll back any unspent funds back into the budget rather than seeing them returned to member states as they are now. This is likely to face resistance from member states but could be less of an issue than thought since the surplus is expected to be squeezed under the new MFF anyway.

Compulsory mid-term revision under QMV

EP jargon: “The next European Parliament and Commission – that will come into office following the 2014 European elections – should be in a position to reconfirm the Union’s budgetary priorities and carry out a revision of the MFF 2014-2020; [The European Parliament] underlines, therefore, its position in favour of a compulsory and comprehensive revision of the MFF… considers that the revision should be legally binding, enshrined in the MFF Regulation and decided by qualified majority in the Council.”

Translation:  Same as the demands for "flexibility" above. However, the big target is to introduce majority voting to the MFF, which unlike annual budget is always conducted under unanimity. This idea will hit a brick wall when proposed to national governments.

Direct EU taxes

EP jargon: "The European Parliament… Stresses the importance of reaching an agreement on an in-depth reform of the own resources system… [and supports] phasing out all existing rebates and correction mechanisms… insists that revenues from the Financial Transaction Tax should be allocated at least partly to the EU budget as a genuine own resource.” 

Translation:  The EP wants to see the budget part-funded directly by EU taxes (the Commission proposed the FTT and a new system of EU VAT) and also limit the number of rebates that countries get. Demands for EU taxes will be met with the same derision by national ministers as calls for QMV. Even those countries that eventually went down the FTT road aren't planning on handing the revenue to the EU.

Ultimately today’s vote is a case of the EP trying to flex its muscles by standing up to member states. However, today would suggest that Martin Schulz, who marched his fellow MEPs up the top of hill in the immediate aftermath of the summit by threatening to veto the entire budget, will have to march them back down again, albeit with a couple of minor concessions. Most of the EP's demands will be thrown out immediately.

The Anglo-German axis is stirring up emotions

The political repercussions of the recent EU budget agreement - when London and Berlin stood on the same side and Paris took itself out of the game - are still reverberating.

Yesterday, Former French Environment Minister Jean-Louis Borloo told French radio RTL that the prospect of the Franco-German axis in Europe being replaced by an Anglo-German axis

“is extremely worrying. This means that we’re probably turning our back on the great European ambitions…This is an extremely important political and diplomatic shift.” 

Which is of course code for: 'France fears that the EU is becoming less French'.

Meanwhile, in a debate in the German Bundestag this morning, the SPD’s Chancellor Candidate Peer Steinbrück criticised Angela Merkel for engaging in an “unholy alliance” with David Cameron over the EU budget. He said,

“if you want more Europe in the future [Germany] needs partners who see its future in Europe.” 

FDP faction leader Rainer Brüderle immediately fired back, however, saying that,

“I am glad that our Chancellor Angela Merkel negotiated [in Brussels] and not Peer Steinbrück who sometimes is described as a diplomatic neutron bomb.” 

We shouldn't read too much into this stuff but, clearly, the changing Berlin-Paris-London dynamic is certainly stirring up emotions...

MEPs endorse EU renegotiation (as long as it is on their terms)

This afternoon EU Council President Herman Van Rompuy appeared in front of MEPs to give his account of the deal struck by national leaders on the EU's next long-term budget. MEPs, many of whom have strongly resisted any budgetary discipline at the EU level were far from happy. Below are some reactions from the speakers on behalf of the four largest groups in the parliament.

Joseph Daul - European People's Party

#EPP Group Chairman Joseph #Daul tells Presidents #Barroso & van #Rompuy that this #EUBudget is not acceptable. @eppgroup @ep_budgets
— Siegfried Muresan (@SMuresan) February 18, 2013

Treaty law is 'supreme' says #epp Daul. #MFF deal lacks 'respect' for MEPs, 'not my vision,' he laments zzzz #EUbudget
— Bruno Waterfield (@BrunoBrussels) February 18, 2013

Hannes Swoboda - Socialists and Democrats

Socialist & Democrats Group Chairman Hannes Swoboda: This EU budget deal is unacceptable there will be no majority for it in this chamber
— Open Europe (@OpenEurope) February 18, 2013

Guy Verhofstadt - Alliance of Liberals and Democrats

Verhofstadt: This MFF cannot be accepted by Parliament, it must be renegotiated
— Open Europe (@OpenEurope) February 18, 2013

Isabelle Durant - Greens

MEP Isabelled Durant (Greens, Belgium) wants annual budgets for 2013, 14, and after EU election new budget to be negotiated #mff #euco
— Georgi Gotev (@GeorgiGotev) February 18, 2013

So a pretty united front - so much for pluralism and diversity in the EP (although Martin Callanan of the ECR - the fifth largest group - did broadly welcome the deal). We can only imagine what MEPs from Angela Merkel's CDU/CSU, Fredrik Reinfeld's Moderaterna, Helle Thorning-Schmidt's Social Democrats (and even Ed Miliband's Labour party which backed a cut in the HoC vote) or Mark Rutte's VVD must have made of their group leaders' speeches.

The full-throated desire of many MEPs to renegotiate what they see as a bad deal is also noteworthy as they tend to be the same people who can be counted upon to strike down any talk of national parliaments and/or governments from trying to get a better deal at the EU level as being not only impossible to achieve but also 'anti-European' by its very nature.

The EU budget: an updated break-down

With the Council side of the EU budget negotiations firmly wrapped up, we've updated our figures on the comparison of the current EU budget and the one proposed for the next seven year period - based on the final European Council agreement. We still say proposed since it of course still needs approval by the European Parliament...:

Every little helps: The reintroduction of EU civil servants' "special levy" is small step in right direction

The reintroduction of the EU's special levy tax is good news

In all the discussion of the EU budget for 2014 - 2020 there is one small item that has been overlooked - the welcome reintroduction of the special tax levy on EU officials' pay. In 2012 this was set at a rate of 5.5% on post taxed income but this lapsed in 2013. It will now reappear in 2014 as a part of measures that are hoped will keep the costs of the EU's bureaucracy under control.

 

The European Council Conclusions here say that "the new solidarity levy will be reintroduced at a level of 6% as part of the reform of the salary method. These measures will have a significant impact on the cost for pensions in the mid- and long-term."

This is welcome news, although, even with the reintroduction of the tax, EU civil servants will still pay far less tax than the EU citizens they serve. Let us hope that MEPs do not seek to show their own type of solidarity by attempting to remove it. Over to you Mr Schulz.

European press on the EU budget deal: Behold the birth of the Anglo-German axis

The agreement on the next long-term EU budget (which we analysed here) has been extensively commented on by newspapers across Europe. The main political story was clearly German Chancellor Angela Merkel siding with David Cameron, rather than French President François Hollande - which ultimately made the balance swing towards the group of member states calling for further cuts to EU spending. 

We have written about the need to cultivate the Anglo-German axis (particularly in light of Hollande's election as French President) several times in the past - see our recent analysis of David Cameron's EU speech, this letter we wrote to the FT, several articles in the Telegraph - and many other places. While Merkel's decision to side with London shouldn't be overstated - this is a pendulum after all - it was interesting to note the reaction in the European press.  

Let's start from Germany.

Die Welt's Foreign Editor Clemens Wergin says that even though the EU budget has been reduced for the first time in history, the big chunk of money earmarked for farm subsidies "remains the symbol of the backwardness" of EU spending. He also notes, "The UK does not stand on the margin of the EU anymore, but proved to be an important ally of the Germans."   

Süddeutsche Zeitung's Brussels correspondent Martin Winter points out that the fact that other EU leaders made an effort to satisfy Cameron's demands show that "the EU wants to keep the British at its centre."

FAZ's Brussels correspondent Hendrik Kafsack argues that the new EU budget "does not deserve the attribute 'modern'", as most of it's still spent on agriculture and structural funds in Southern member states.

Die Welt's Brussels correspondent Florian Eder and Silke Mülherr note that together "Cameron and Merkel were able to enforce an austerity budget [on the EU]", while the paper's London correspondent Thomas Kielinger says that "Angela Merkel is the trump card in the British hands."

Der Spiegel Online's Carsten Volkery describes the deal as "a triumph for the budget hawks" noting that "the [German] Chancellor backed Cameron and covered him against attacks" from Hollande and other leaders.

A very interesting comment from the Netherlands. Dutch journalist Fokke Obbema writes in De Volkskrant,

"French President Hollande explicitly positioned himself as the leader of Southern Europe [at the EU summit]. That makes it even clearer why it would be undesirable for the Netherlands if this other historic event - the exit of an EU country - were to happen. Without Great Britain, the balance of power between North and South within the EU would be disturbed."

From a French perspective, Cameron and Merkel fighting side-by-side in Brussels is far from good news - as it means that the Franco-German axis is under pressure. Le Figaro's Brussels correspondent Jean-Jacques Mével says David Cameron hit a "master stroke" at last week's summit. He writes,

"A man can take credit [for the cut in the next long-term EU budget]: David Cameron, whom many saw as already marginalised within the EU, following his decision to ask the British by 2017 whether they want to stay in the [European] Union or not. On the contrary, he goes back to 10, Downing Street, as a winner – for the frustration of French and Italians."

Interestingly, he also notes that the talks have confirmed the "paralysis" of the Franco-German axis. 

An editorial in French business daily Les Echos argues,

"Budget talks have been held hostage by a country, the United Kingdom, which is not sure that it will still be part of the [European] Union tomorrow. David Cameron had come to sabotage Europe’s general interest – and he managed to do so. Noted. But, in this case, let’s get to the bottom of things: given that the club at 27 is doomed to powerlessness, strategic reflections need to happen at the eurozone level. Yet, one would need to repair [France’s] relations with Germany for that. Because this is the other lesson from the Brussels drama: the Paris-Berlin axis is not responding anymore." 

The Anglo-German couple didn't go unnoticed in other Mediterranean countries either. Italian Professor Mario Deaglio writes in La Stampa,

"The pro-rigour Germans, in agreement with the British for once – the Berlin-London axis has in fact replaced, at least on this occasion, the traditional Berlin-Paris axis – and with the help of some Nordic countries, have pushed through the principle that the EU budget can be cut too. The word 'austerity', so far unknown, will start hovering over Brussels [EU] buildings."

Claudi Pérez, Brussels correspondent for El País, writes,

"The EU seems distracted. It walks between the old and the new regime…In the midst of this paralysis, Berlin (with London’s support) accumulates power, and a withdrawal towards the national or the intergovernmental [level] is noticed. And austerity policies remain firmly installed in the driving seat."  

And now a voice from Poland. According to Dziennik Gazeta Prawna, the outcome of the EU budget summit is proof of "a substantial shift in the balance of power in Europe", with France, once the most influential country of the Union, "finding itself on the defensive". Interestingly, the paper argues,

"The Union will head towards the free trade zone dreamed of by the British and supported by the Germans rather than the 'solidarity-driven federal structure' wanted by Paris...There is no doubt that, by imposing cuts, Germany has shown its economic strength. Berlin's dictate will be even harsher, while abundant transfers from Brussels may turn out to be only a nice memory if the Franco-Spanish-Italian-Polish club fails to improve its competitiveness."

EU budget talks: The dust has settled - and they all won!

We've been listening to the national press briefings of several EU leaders following the deal on the EU budget (which we analyse here). And you got it - they all won! (well, almost). Here goes:

David Cameron (UK)

• The British Prime Minister said, "I think the British public can be proud that we have cut the seven-year credit card limit for the European Union for the first time ever." 

• He went on, "The only way you can best protect the British taxpayer is to keep overall spending down, and that’s what we’ve done, and also to keep what remains of the rebate, and it is completely untouched." 

• On the possibility of MEPs staging a secret ballot vote on the next long-term EU budget, Cameron said, "Of course the European Parliament has a role, and we should respect that. But I don't really understand secret ballots. Parliaments and votes should be open, should be transparent, people should be accountable for how they cast their votes."

Angela Merkel (Germany)

• As usual, the German Chancellor - the power-broker - did not give away too much during her presser. She said, "The effort was worth it…in my view this agreement is good and important." 

• She also warned that "the negotiations with the European Parliament won't be easy".

François Hollande (France)

• The French President, a bit sulky, said this was "the best deal" on offer given the circumstances.

• He repeatedly stressed that the UK wanted payment appropriations to be lower than €900bn over seven years, while France was insisting on €913bn (see here if you are not familiar with the commitments vs payments distinction). According to Hollande, given that the final compromise was reached at €908.4bn, "Everyone will say who made the bigger step" - a way to suggest that David Cameron had given up more than he did.

• According to Hollande, France will also save some €140m a year on its financing of the various rebates. On the rebates, the French President made his most interesting remark (see here, around 16:00 in). He said, "I knew that there was no possibility to put into question the British rebate, because you know that it is provided for by the [EU] Treaties [which, by the way, is incorrect]. Therefore, it is immutable" at least until the Treaties are re-opened for negotiations. The British, he added, "should keep this in mind, including when they demand treaty changes." If this is not a threat, then what is?  

• He said that funding for agriculture has gone down overall, but he has made sure that aid to French farmers will remain at the same levels as in 2007-2013. Now, that's what you call 'solidarité', right?

• Finally, the French President admitted that the UK was not on its own in these negotiations, as "other countries wanted more for themselves and less for Europe".  

Mario Monti (Italy)

• The (caretaker) Italian Prime Minister hailed a "particularly significant improvement" in Italy's net position compared to other big net contributors to the EU budget.

• He said Italy has secured an extra €3.5bn in funding compared to the compromise proposal on the table at the November summit.

• Furthermore, Italy will save around €600m a year on its financing of the various rebates.

Mariano Rajoy (Spain)

• The Spanish Prime Minister said the deal is "very good for Spain". Contrary to expectations, Spain will remain a net recipient from the EU budget over 2014-2020 - which is huge. 

• Rajoy was particularly pleased by the fact that Spain "will get almost 30%" of the new fund for youth unemployment included in the next long-term EU budget. 

Mark Rutte (Netherlands)

• The Dutch Prime Minister opted for a lower profile. He said, "Of course you never completely get it your way with 27 member states, but I think that we as the Netherlands can be satisfied." 

• He described the deal as a "sober" budget, and said that the Netherlands "worked well together" with Sweden, Germany, Denmark, and the UK.  

Helle Thorning-Schmidt (Denmark)

• The Danish Prime Minister said her country "came here with three priorities, and we satisfied all of them", pointing out that she had secured an annual rebate of €130m.

Fredrik Reinfeldt (Sweden)

• The Swedish Prime Minister said the deal was "a surprisingly good result".

• He argued that, contrary to fears that Sweden's contribution to the EU budget would increase, it is, in fact, set to drop slightly.

Donald Tusk (Poland)

• The Polish Prime Minister spoke of "a huge success" for his country, stressing that Poland's receipts will increase by €4bn despite the long-term EU budget facing a €38bn cut from the previous seven-year period.

• He went even further, claiming today was "one of the happiest days of my life". Wow!

Werner Faymann (Austria)

• The Austrian Chancellor was less enthusiastic than many of his counterparts. He said the deal struck this afternoon is "presentable" for Austria - which managed to secure a rebate, although it will be phased out by 2016 (see the final deal here).

Petr Necas (Czech Republic)

• The Czech Prime Minister was pleased about his choice to threaten a veto. He said, "If the Czech Republic had not seriously threatened to block the negotiations, then it would not have been possible to negotiate a better outcome."

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

We've just published a new Flash Analysis outlining our thoughts on the final deal on the long term EU budget. See below for the key points:

Key points

 - 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 subsidies, and as a whole, the EU budget will remain largely inefficient and out of date.

Also for a idea of the difference between the this budget and the current one see this handy table (click to enlarge):

Would the UK's contributions still increase under a new long-term EU budget?

Aside from the headline figure, where it looks as though David Cameron will get his cut, in terms of domestic politics, the next most important aspect of all of this is how the UK's contributions to the budget will be affected. In other words, will the UK still be forced to send more cash to Brussels?

As we predicted back in October, the net contribution was always set to go up - so that isn't really news (though we appreciate that not everyone follows this issue on a daily basis...)

Here are the details:

Net contribution:

Despite securing a real terms cut to the EU budget, the UK’s net contribution (what it pays in to the EU after the cash it gets back and rebate are taken into account) is still likely to go up under this proposal (see our earlier detailed explanation of this effect, which was with an earlier budget proposal in mind, but the broad dynamic still applies).

Essentially, because the share of the EU budget going to the new member states – the ones that have 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. As we've argued, this isn't a bad thing as it's in the new member states that this cash can make a difference. Still, this could prove politically sticky for the UK Government when explaining the figures to MPs and the Opposition in the months to come – though David Cameron is likely to heap the blame on Tony Blair (with some justification) for giving up part of the rebate in 2005.

Gross contribution:

This is rather more complicated. Under the deal that looks set to be agreed, the budget is falling in real terms, hence the UK gross contribution should fall in real terms. However, there are two potential issues to be aware of:

Firstly, the likely new payments ceiling of €908bn is higher than the actual payments that have been made under the current budget (i.e. the UK's base-line of €886bn based on an extrapolation of 2011 payments, which we explain here). Historically, 'actual payments' fall short of the 'payments ceiling'. But if, under the new budget, the actual payments hit the ceiling, it is possible that the UK's actual gross contribution could top the ones seen under this budget framework (€908bn is higher than €886bn) - it seems unlikely but is possible. Again, this is nothing new, but a function of the Government's starting position.

Secondly, because this would be the first time the budget has been cut, and because of the way the budget (MFF) is structured into 'commitments' and 'payments', there could be unexpected effects.

As we explained here, actual payments 'trail' 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. But now we have a situation where payments are falling well below the level of the commitments that the EU is able to make under the current budget, potentially creating a deficit. The current compromise is also predicated on deeper cuts to payments than to commitments.

But, as the Commission is always at pains to point out, the EU's bills need to be paid - under the current budget this has already led to so-called 'amending budgets' (albeit within the MFF ceilings) to increase payments to match previous commitments. How much of an issue this might be in the next budget period, remains an uncertain question as it depends on the 'commitment profile' (i.e. what/when has the EU promised to pay for specific projects).

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. For example, in 2011, funds were 'redeployed' to fund a shortfall for the International Thermonuclear Experimental Reactor (ITER), although, in this case, this didn't mean increasing the payment ceiling. The current rules say that ceilings can be revised by 0.03% of EU GNI for 'unforeseen' expenditure. More than this would seem to require unanimity.

Therefore, this second tension between commitments and payments described above, could potentially lead to immense pressure to increase the payment ceiling further down the road. In this hypothetical, albeit not implausible scenario, the UK's ability to block this could be one for the EU and FCO lawyers to thrash out.

Exclusive: How is the new EU budget shaping up - latest draft!

EU leaders look to be closing in on a deal on the 2014-2020 budget (MFF). We will be updating this blog throughout the day.

UPDATE - 10:58am: Talks set to resume at 12pm GMT. Van Rompuy will table another compromise proposal. It seems Romania, Bulgaria, the Czech Rep and Latvia were unhappy with the proposal circulated this morning, which we have analysed below. Austria's rebate has also been scrapped, which could be another stumbling block.

10:00am: We have obtained the latest draft that is being circulated, and it appears there is tentative agreement on the headline figures, and it's looks very close to what we predicted.

The headline figures are:

€999.56 including off-budget items
€959.96 in commitments
The figure for payments is less clear but the figure €908bn has been widely cited.

As we can see from the graph, this would represent a real terms cut compared to the current 2007-13 MFF - the first time that a cut would have been achieved. So, David Cameron can plausibly claim to have lived up to is promise of coming away "with at best a cut, at worst a freeze."

It's worth noting that the gap between commitments and payments has increased (see here for more details on this). As we have noted before this could potentially mean payments increase in 2020-2026 budget period to cover the amount of money already committed. The scope to potentially increase payments through QMV during the budget period could also be problematic although it would be a unprecedented move. 

On the UK rebate and other 'corrections', the current draft says:

"The existing correction mechanism for the United Kingdom will continue to apply."

So, Cameron remains on solid ground.

The current draft also includes lump sum rebates for the Netherlands, Sweden and a new rebate demanded by Denmark. Germany, the Netherlands and Sweden would benefit from caps to their VAT-based contributions. It appears Austria's rebate would be scrapped. This could still flare up as an issue with Austrian Chancellor Werner Faymann previously stressing his country would not be the only one to give up its rebate.

Policy heading breakdown

This is how the current draft would distribute the cash among the EU's policy areas, compared with the current budget and the November Van Rompuy proposal:

As we can see in the graph, the latest proposal cuts spending on "competitiveness and growth" (Europe 2020) by €27bn - not exactly a positive, as this includes R&D and energy infrastructure, foe example. At the same time spending on the CAP has increased by €9bn while spending on regional and cohesion funds has gone up by €15bn, both compared to the proposal in November (presumably split between new and old member states). As we have said before, this locks in the worst parts of the EU budget in terms of outdated and potentially growth destroying spending.

The UK’s net contribution could still increase 

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

This is because the share of the EU budget going to the new EU member states – the ones that have joined the EU since 2004 – will increase. Since this share is not covered by the UK rebate, Britain gets no cash back for its share of the money spent there. This could prove politically sticky for the UK government when explaining the figures to MPs and the opposition – though it’s likely to heap the blame on Tony Blair for giving up part of the rebate in 2005. However, at the same time, more money (though not nearly enough) will be invested in poorer member states, where it can have the most impact, rather than being recycled unnecessarily between rich member states, at a huge administrative and opportunity cost.

It's also worth noting that, due to the payment ceiling being much lower than expected and there being a large gap compared to commitments, it is possible that actual payouts (especially in later years of the budget) go above the payment ceilings. This again could prove problematic for the UK to communicate.

Will the UK's gross contribution go up? 

The UK gross contribution should be falling in real terms since the budget is falling in real terms. However, due to the fact that actual payments may top the payments ceiling (as we explain above), it is hypothetically possible that the UK's actual gross contribution could occasionally top the ones seen under this budget framework - this seems unlikely but is uncertain.

As we explained here, payments 'trail' commitments. In the context of an ever-increasing budget that didn't present a practical problem, because extra funds would always be pledged to meet previous commitments. Now we have a situation where payments are falling well below the level of commitments that the EU is able to make under the current budget, potentially creating a deficit. As the Commission is always at pains to point out, these bills need to be paid. The obvious answer is to increase payments, which would impact on the UK's gross contribution. How much, remains an uncertain question.

Own resources/revenue

One interesting thing to note is that a commitment to continue working on a direct stream of VAT revenue to the budget, to replace the existing VAT contributions to the budget. There is also a vague commitment to examine using the enhanced cooperation FTT as revenue for the EU budget in the future. However, this would not affect non-participating member states or the UK rebate.

Some potential obstacles to a deal remain, but this seems to be a positive starting point for a deal. The UK can plausibly say it has received a decent deal if something close to this proposal comes into force. Unfortunately, the budget as a whole will remain poorly targeted and outdated.

Could the EU budget be cut for the first time?

The rumours are flying in thick and fast from Brussels regarding the latest EU budget numbers and the likelihood of a deal. The range estimates we laid out in our briefing still stand up, with several suggestions that Herman Van Rompuy's latest proposal will be for €959bn in commitments and as low as €913bn in payments. In terms of figures this would represent a significant victory for the UK and other states that want to see budgetary restraint. Below is how such a deal would compare to Van Rompuy's November proposal, and more importantly, the current long-term EU budget (MFF).

Of course there are still plenty of twists and turns to come in the negotiations, not least how the headline figures above are distributed across the different headings such as the CAP, structural funds, administration etc. Follow us on twitter for the latest developments.

An untimely scandal in the making for Rajoy?

Spain's largest daily El País this morning splashed this and other pictures on its webpage (click to enlarge):

The paper claims it has seen hand-written accounting books held by Álvaro Lapuerta and Luis Bárcenas, who served as treasurers of Spanish Prime Minister Mariano Rajoy's Partido Popular (PP) between 1990 and 2009.

These books register donations made to the party by Spanish businesspeople. But most importantly, they seem to show that Rajoy himself and other senior members of PP were handed out sobresueldos (extra pay, bonuses) which were allegedly distributed in envelopes with cash - and therefore completely tax-free. According to the paper, Rajoy received sobresueldos regularly between 1997 and 2008.
 
Such allegations had already emerged earlier this year, and an internal investigation is currently under way. However, the documents published today could be the first concrete evidence of what may, if confirmed, trigger a big scandal in Spanish politics. The names in the books include not just Rajoy, but also, for example, Rodrigo Rato (former Finance Minister, who recently also appeared in court for the Bankia case).

The Secretary General of PP, María Dolores de Cospedal (whose name is also in the secret books) has just held a press conference from the party's headquarters in Madrid's Calle de Génova - perhaps to convey the message that this is a party, not a government issue. The gist of her declarations was: the documents are false, and we will take the necessary legal action to prove it.

Rajoy is not planning to speak to journalists for now. His first public appearance will therefore be on Monday, when a joint presser with Angela Merkel is scheduled. For the moment, a bit of background info could be useful for those who do not follow Spanish politics on a daily basis:

• Luis Bárcenas served as PP treasurer until July 2009.

• It emerged recently that he had up to €22 million deposited in various Swiss accounts. Reports in the Spanish press suggest that the money was moved from those accounts in 2009 (although to where exactly is still unclear), when Bárcenas was involved in another corruption scandal, the so-called Gürtel case.

• Bárcenas himself has now told Spanish prosecutors that he brought almost €11 million of that money back to Spain, through the 'tax amnesty' introduced by Rajoy's government. The opposition Socialist Party has obviously suggested that the amnesty was made precisely to cover Bárcenas and others. 

• When the fact that Bárcenas held bank accounts in Switzerland came in the public domain, sources close to him suggested that he knew enough to put several leading figures of PP into trouble. Interestingly, though, he has moved swiftly to make clear that he does not recognise the secret books published by El País and is considering taking the paper to court.

Very sensitive stuff. And rather untimely, given that Rajoy is about to meet his EU counterparts for key negotiations on the next long-term EU budget. The quicker the investigation, the better for the Spanish government and Spain as a whole.  

The EU budget veto threat festival kicks off again

Remember our EU budget 'veto team'? Well, the next European Council summit - entirely devoted to negotiations over the 2014-2020 EU budget - is only one week away, and the sequence of veto threats may have just begun all over again.

Guess who fired the starting gun (clue: not David Cameron)? It was Italy's outgoing Prime Minister Mario Monti. He told a conference in Brussels yesterday,

“There would be no coherence between what everyone is saying about the need for growth and the adoption of an inadequate [long-term EU] budget…The orgy of cuts that certain countries want to apply is inconsistent. Therefore, I’m not sure that it would be irresponsible for a country to disagree with a budget proposal which is inadequate.” 

That is, a veto threat, Monti-style. This has just started, so keep following us on Twitter @OpenEurope for real-time updates.

As much of a 'Nein' as a 'No' - Don’t blame Cameron for the break-down in EU budget talks

On his Telegraph blog Open Europe's Mats Persson analyses the breakdown of EU budget talks, see below for the full piece:

As predicted, the talks over the EU’s long-term budget have broken down. What does this mean? In truth is, not that much. Postponing a decision was always the most likely outcome. A new deal will now have to wait until after the December EU summit when leaders will try to hammer out the details involved in a European banking union. On substance, this is a far bigger issue than the EU budget, as it’s breaking new ground and links to the stability of the euro. The EU budget is a maddening legacy issue.

Had Cameron been forced to pull the veto this time around, it would have been a completely different matter.

There will be those on all sides tempted to blame David Cameron for the breakdown in the talks. This is simplistic. As Angela Merkel pointed out at her press conference just now, there were two main groups who disagree — net contributors and net recipients. Within these groups, as Open Europe has consistently highlighted, there are a series of disagreements. From the Danes who want a rebate to Malta who want to be treated as a ‘special’ case. All positions matter since every country has a veto. In total, eleven countries had explicitly threatened to veto the budget in case they couldn’t secure a favourable deal for themselves. Interestingly, France and Germany struggled to reach a common position, with Berlin leaning towards London on several points, including on cutting the EU’s admin spending. So forget the 26 vs. 1 narrative.

Moving forward, David Cameron remains in a very tricky, but far from impossible, position. His negotiation mandate is exceptionally narrow following the Parliamentary vote in which a majority of MPs backed a cut in the EU budget, rather than the freeze Cameron has called for. He also suffers from a major communication error committed early on in the talks. The British Government decided to use the amount of cash that was actually paid out from the EU budget in 2011, €886bn, as its “baseline”. When this figure is extrapolated to the entire seven-year EU budget period, it creates an artificially low figure – far below the “appropriation ceilings” (the maximum amount of cash that can be paid out rather than the actual cash paid out) — meaning that Cameron has to fight seriously hard to live up to the high threshold for a “freeze” that he had set for himself. But if the Government is using the same measure as everyone else – payments appropriations over the full seven years – it is now on way to actually achieve a freeze or even a cut, when compared to the full 2007-2013 EU budget period. So budget period to budget period, the Government is in a pretty good position.

David Cameron had a very solid press conference after the summit – he sounded plausible (which hasn’t always been the case) – but to date, the Government’s communication strategy around the EU budget talks has been pretty appalling. It’s been very difficult to figure out what, exactly, the UK government actually was pushing for, and by focussing on a 2011 real terms payments freeze it may have been a bit too smart for its own good.

The real tragedy with these talks is that no one is actually focussing on the substance of the EU budget. As we have shown – comprehensively – the EU budget is an economic anomaly. It’s not a huge amount of money, but if targeted properly – rather than wasted on economically inactive landowers or recycling regeneration cash – it would make a real difference.

 It speaks volumes about the current state of the EU that this budget remains unchanged. That’s not only Cameron’s problem, but also the rest of Europe’s problem.

Open Europe publishes (and analyses) leaked draft of Van Rompuy's new EU budget proposal

We’ve got our hands on a leaked copy of the latest HermanVan Rompuy (HvR) proposal for the EU budget (see here for the full doc). The headline spending figure remains broadly unchanged in the new proposal, standing at €1,014bn (a €4bn increase), but more cash is spent on farm subsidies and structural funds, in a move designed to appease France, Poland, Italy and Spain.

(The figures here includes off budget items, if they are discounted the second proposal is actuall a decrease, from €973bn to €972bn. This is mostly due to items which weren't off budget in the original proposal, being off budget in the second version).

No figure is given for payments appropriations – the figure that the UK government is targeting – but given that this figure has widely been cited to be €940bn, it’s likely that it’ll have to come down more if acceptable to the UK (with the government's initial proposal at €886bn).

Also, just like with the previous draft, the latest HvR proposal foresees cuts to the UK rebate – which is a non-starter for Britain.  As a refresher (from our recent flash analysis):

“The proposal also includes an adjustment in the way in which the UK rebate is calculated. This could result in the UK rebate falling by as much as 11% or €3.5bn across the next budget period, solely due to this adjustment.

The plan also suggests that ‘corrections’ such as the UK rebate will be “fully financed by all member states”. It’s not entirely clear what this means, but it does suggest that the UK could actually be responsible for funding part of its own rebate. If this were the case then the rebate could be reduced by a further €3.316bn, cutting the rebate by a further 11.5%, and 21% (€6.8bn) from its original amount.”

The increased spending on CAP and Cohesion moves further away from the spending split which many in the UK would like to see (more growth focused) while although the headline figure has not increased it is still probably slightly too high. See table below for the full break down (click to enlarge):

So, despite talk of progress last night, it still seems that, from a UK perspective (but also likely a Swedish, Dutch and German one) there are some significant divisions.