Court of Auditors highlights errors in EU spending again

Each year the EU's Court of Auditors issues its opinion on the EU's spending and each year it is the same - "material errors" amounting to billions of euros probably misspent.

First of all, let's get the usual caveats out of the way - the auditors have signed off the accounts, which means that they are a reliable picture of EU revenue and spending. However, there remain significant errors in how the money was spent.

This is from the ECA press release:

The ECA’s estimate of the error rate is not a measure of fraud, inefficiency or waste. It is an estimate of the money that should not have been paid from the EU budget because it was not used in accordance with EU rules.

The other defence that the European Commission will make is that much of this spending is a shared responsibility between national governments and the EU institutions. But that does not excuse the fact that the errors keep rolling in year after year with little improvement and that much of this results from the complexity and Byzantine nature of EU spending programmes.

So how bad was it this year? 

Well here are some of the main findings for 2013:

•  93% of the EU Budget is affected by "material errors"
•  The error rate was 4.7%, amounting to c.€7bn euros "that should not have been paid out from EU budget"

Illustrative examples of waste highlighted by the EU's Auditors:

• Claims under the CAP for grassland that was actually forest.
• Claims for four Spanish border control helicopters that spent little time controlling borders.
• The salary of a private school director in Portugal charged to an EU project.
• €150 million of pre-accession exenditure validated by the Commission on the basis of estimates rather than for incurred, paid and accepted costs.

Is control of spending getting better?

Rate at which EU funding is misspent

One of the more depressing aspects of the EU budget is that the rate at which money is misspent remains consistently high. As we can see over time, it has gone down and then back up leading to the conclusion that the problem is persistent. This year it was 4.7%, which is lower than some previous years but still higher than others pointing to the fact there has been no "solution" to poor financial control.

Same old suspects?

Although there are a number of examples of misspending in Southern Europe, examples are also catalogued across the EU including in regional funding within richer states such as Germany. This begs the question as to why the EU is funding poorly controlled programmes in states that are net contributors and able to pay for their own, probably better quality programmes.

A solution - reform the budget?

Cutting regional funding in rich EU states would cut the EU error total, the EU budget and give states more autonomy all in one go as Open Europe has consistently argued.. Likewise Open Europe has also proposed radical CAP reform moving spending back to national governments. This would allow for more scrutiny of spending as well as well as remove some of the incentives to national governments to spend the money as fast as possible whatever the quality of projects.

Other Court of Auditor suggestions:

The Auditor's make a number of sensible recommendations and observations, including the following which are particularly interesting: 

• A better harmonisation of how GNI is calculated: The Court of Auditors has found that there are inconsistencies as to how different states calculate their "unofficial" economies. Given that the EU budget contributions are based on relative sizes of member states GNI and that recent statistical revisions have led to the UK receiving a large £1.7 surcharge any inconsistencies will no doubt be looked at very closely in HM Treasury.
 

• EU value added often difficult to discern: The EU's globalisation fund was picked out as an example of funding that has a low rate of EU "value added." That begs a question as to why it exists.

Verdict: Good report but, unfortunately, we will no doubt be returning to the subject of misspending when next year's report comes out... 

Balance of Competences round-up: Part II

Further to our previous post on the Government's Balance of Competences report on free movement, below we pick out some of the key points from the other reports published today:

The report on the services stated that:

“Incomplete and ineffective implementation of existing services legislation has hindered the development of the free movement of services, but full implementation of existing legislation within the current level of EU competence may have implications for Member States’ ability to make decisions in this area.”

The report also echoes Open Europe's recommendation that if further liberalisation cannot be achieved at the EU28 level, a group of like-minded member states should push ahead using the so-called 'enchanced co-operation' mechanism.

“There is scope to go further on services liberalisation, extending the application of the country of origin principle, either within specific sectors or across the piece, and either at EU-level or within a smaller group of Member States through enhanced co-operation. Further liberalisation could also be achieved through a sectoral approach, focusing firstly on those sectors of greatest economic importance.”

The report on financial services noted the risks to non-euro member states from deeper eurozone integration - something Open Europe warned about back in December 2011 in our Continental Shift report:

“There were significant concerns that the advent of the banking union could have an unfair or damaging effect on Member States outside the euro area [such as] EU-wide regulation that is appropriate for the euro area but is not suitable for all Member States; the practice of caucusing and the development of a common euro area position on financial services issues which are at odds with a single market that is open internationally, dynamic, innovative and globally competitive; the fragmentation of the Single Market with barriers erected between its euro area and non-euro area constituents; the undermining of economic benefits associated with liberalised capital markets; and the marginalisation of non-euro area interests.”

The report warned that:

“The risk of discrimination against non-euro area Member States has already crystallised with the ECB location policy that euro-denominated financial instruments should be cleared only by a clearing house physically located in a euro area Member State.”

And recommended that:

“The creation of the banking union underlines the fact that the EU has become so large and diverse that ‘variable geometry’ is necessary.”

The report on the EU budget noted that:

"The value of expenditure in the budget, where in particular... on research and innovation, was seen as a priority for a greater share of the budget, although views were also heard in support of structural and cohesion funds, particularly in poorer Member States. The value for money of the Common Agricultural Policy (CAP) was questioned by a large proportion of respondents, with particular concerns about the value of Pillar One of the CAP."

The report on cohesion (regional) policy picked up on many of the points raised by Open Europe's seminal 'Off Target' report - which recommended limiting the structural funds to less developed member states - arguing that:

"support for the general principles of cohesion policy and the need to provide support particularly for poorer Member States, was shared by many respondents... The evidence as a whole is inconclusive but where significant positive impacts have been identified, they tend to have been in the poorer regions or Member States."

But adding that:

"A key question is whether structural funds should be used in richer regions of Member States, given the alternative sources of funding available, the more limited additionality and the goal of reducing disparities. This was sometimes expressed in terms of concerns about paying money into the EU only to get it back with conditions attached. Many respondents recognised that the UK might be better off financially if it did not contribute to cohesion policy in rich Member States or regions."

"Finally, it is important that funds available for cohesion policy are well managed. However, the complexity of rules and the perceived burdens of applying for, reporting on and auditing projects are potential barriers to the effectiveness of the structural and cohesion funds."

The report on agriculture also picked up on Open Europe's criticisms of the CAP, noting that:

“respondents put forward evidence that, notwithstanding the reforms, the CAP’s objectives remained unclear and that the criteria for allocation of funding were irrational and disconnected from what the policy should be aiming to achieve. The majority of respondents argued that the CAP remains misdirected, cumbersome, costly and bureaucratic.”

The report on fundamental rights noted that:

"There was mixed evidence on the case law of the ECJ; while some considered that the ECJ has simply upheld fundamental rights, others considered that some of its judgments have undermined national sovereignty and the EU’s legislative institutions... in comparison to other human rights protections in domestic law, fundamental rights can have a wider scope and can result in the disapplication of primary legislation. Therefore, with an increasing domestic awareness of EU fundamental rights, the evidence suggests that their impact will increase."

Compared to the first two stages of the BoC which were rather underwhelming, this third tranche of reports has at least been more explicit in identifying some of the most pressing challenges that need to be addressed while - for the most part - steering clear of setting out solutions.

Hyped and almost always misunderstood: the curious case of 'Thatcher's rebate' from the EU budget

Our Director Mats Persson writes on his Telegraph blog:

I once gave a talk at a “high-level” seminar on UK media and the EU, attended by various British and European commentators and journalists. They weren’t exactly natural Sun readers, if you get my drift.

After about an hour of complaining from the participants about how ill-informed the UK media was about Europe, I posed a simple question: can somebody in this room please explain to me how the UK rebate from the EU budget works?

Nervous laughter. Awkward silence. Then the attempted explanations. No one got it right.

Few issues relating to the UK and Europe are so hyped and symbolic as the rebate – the very cost of Margaret Thatcher’s funeral was even justified on the basis that she famously won the rebate in the 1980s. Defending the rebate is now the vocation of virtually every UK politician – and grasping it is vital to understanding the UK's leverage in Europe.

Despite this, I reckon that only about 50 people in all of Britain actually get how it works.

Last week, EU leaders clinched a deal that will see an historic cut to the EU’s long-term budget (to run from 2014 to 2020). Headlines in the British press the day after read that David Cameron had successfully defended the rebate from a vicious last-minute French attack, while the rest of Europe read that the UK had threatened to hold up the budget deal to protect its rebate.

The reality is that both are a stretch, just as stories ahead of that crucial February EU summit – when Cameron managed to muster a group of allies in favour of a cut – claiming that the UK was “outgunned” or “would lose out the most” absent a deal were based on a fundamental misunderstanding of how the rebate works. The deal reached in February protects the rebate, so any change was not driven by the UK anyway.

The rebate effectively involves the UK getting back two thirds of the difference between what it puts into the EU budget and what it gets back. But this mechanism only covers farm subsidies to EU-15 (those countries that joined before 1995) and some farm subsidies to the new member states (the so-called Pillar II of CAP), in addition to the so-called structural funds going to EU-15. This means that the UK gets nothing back on what it spends on the EU institutions, for example, or regeneration cash and a majority of farm subsidies to new member states.

To complicate matters further, the Netherlands, Sweden, Austria and Germany have their own rebates. Unlike the UK’s, however, these correction mechanisms expire at the end of every long-term EU budget.

All of this has three major implications:

• First, the UK rebate is an exceptionally strong bargaining tool. Not only is it always protected by a veto (which is why the alleged French attack was overblown), it’s also the only permanent correction mechanism around. In case EU leaders can’t agree on a new long-term budget, the previous year’s is rolled over (plus 2 per cent to account for inflation). Britain keeps its rebate, whereas other net contributors may have to renegotiate theirs.  

• Second, the more cash that goes to the new member states, the less the UK rebate will be worth. It so happens that the new long-term EU budget deal will see proportionally more cash to central and eastern Europe (rightly in my view), meaning the rebate will drop. This means that though the EU budget is cut, the UK’s net contribution is likely to go up. Claims that Cameron’s managed to increase the rebate by some £200-300m in recent talks are therefore incorrect on multiple levels. 

• Third, the consequence of the above is that in a no deal, rollover scenario, the new distribution wouldn’t materialise. Therefore, in net terms the UK would actually be a winner – again, meaning the UK was more relaxed about a “no deal” scenario in these talks than most other EU countries. 

Those on the continent who think the UK is selfish should think about this one. In EU budget talks, London has actively pushed for more cash to new member states as that is where it can have the most comparative impact – even though that means a net loss for the Treasury. 

So a lot of people at home and abroad have homework to do.

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.

Commission's draft budget for 2014: The Good, the Bad and the Ugly

While all eyes will be on George Osborne and Ed Balls this afternoon, the EU Commission has slipped out its draft annual budget for 2014. This is important as it the first budget to be drawn up using the reduced expenditure limits (or 'ceilings' in EU-speak) agreed by David Cameron and other EU leaders in February. However, the European Parliament so far refused to sign off on these, so they remain provisional for the moment (more on this later). Here is our breakdown of the content of the budget according to the good, the bad and the ugly, continuing an earlier OE tradition.

The Good

Compared with 2013, there's a cut to the 2014 EU budget. The headline figure is a cut in both commitments and payments from €151.6bn and €144.5bn down to €142bn and €135.9bn respectively. This is a 6% cut in commitments and a 5.8% cut in payments. This is clearly a win for David Cameron who was mandated by parliament to secure a real terms cut in spending, but is also not all what it seems to be (see below). Next year's savings would be even lower if not for the fact some spending - such as the new €6bn youth unemployment initiative - is being 'front loaded' onto this years' budget.

Some particularly wasteful spending has been cut, for example the commitments on 'Communication actions' defined as spending aimed at "increasing the interest, understanding and involvement of citizens in the EU integration and policy-making process" has been cut by 20%.

The Bad

Somewhat bizarrely, the above savings have only materialised because a lot of money has been added onto the 2013 annual budget via a number of 'amending budgets' (a favourite tool for the EP and Commission) - increasing the total from €132.8bn to €144.5bn. If not for this additional cash, we would have seen an overall increase in 2014. While some of this additional spending can be justified - for example to accommodate Croatia - many believe that the bulk has been requested by the Commission simply to use up all the available money left under the current long-term budget rather than because it corresponds to an actual need for funds.

The European Parliament has made payment in full of this amount a pre-condition for agreeing to the 2014-2020 budget, and so far most of it has been pledged by member states (although the UK was recently outvoted on committing an additional €7.3bn of the additional funds requested as annual budgets are decided by QMV, not unanimity). In total, €3.9bn remains outstanding, so taking this off the total means we only have a reduction of 3.2%.

The Ugly

The substance of the budget remains broadly unreformed with the bulk of the budget still going towards distorting farm subsidies and regional development subsidies for wealthier member states (although the proportion of the latter has been reduced). In fairness overall spending on the CAP has decreased by 2.3%, but the amount going on farm subsidies tied to land ownership or production levels (the new CAP rules allow some re-coupling) will go up by 0.3%.

Administrative spending is set to go up again by 1.5% overall. The table below gives the full breakdown:

• While the drop in spending on European Schools is welcome, many of the other headings see increases at a time when the EU should be busting a gut to cut down on administrative spending, as member states have been for the last couple of years.
• The Commission has made some cut backs but due to salary increases of 0.9% it sees a 0.1% increase (or 0.8% increase when including cost of Croatia's accession). 
• Spending on EU officials' pensions has also increased by 7.2% due to the number of staff retiring ahead of the entry into force of the new Staff Regulations. This highlights the need to make further and more urgent progress on making EU expenditure on former officials' pensions sustainable.
• While the Court of Auditors, an institution that often flags up EU waste and mismanagement, sees its budget cut by 4.2%, the European Parliament sees its budget go up by 1.7% despite the fact that it has not committed to reducing its headcount unlike other institutions. This news comes the day after we highlighted a video of two MEPs pushing and shoving a journalist who had the nerve to challenge them for allegedly signing in to claim to their daily allowance before 'sodding off' straight away.
• Spending on the EU's 'decentralised agencies' which form the bulk of the EU's 52 quangos are set to receive a 3.8% increase while the European and Economic and Social Committee and the Committee of the Regions see a 0.2% cut and a 0.3% increase respectively despite the fact that these organisations are outdated, with no evidence of their usefulness whatsoever.
• While expenditure on the EU's external policies (aid and development) sees a fairly substantial cut of 8.2%, for some reason the institution that manages this expenditure - Baroness Ashton's External Action Service - has been awarded a 3.2% increase. In contrast the FCO sees an 8% cut in todays spending review.

The deal all rests on the European Parliament agreeing to the 2014 - 2020 MFF otherwise the 2014 budget will revert to 2013 ceilings + 2% for inflation. While this would not be an awful result for the UK mainly because of the security guaranteed by the rebate (see here for details), it would nonetheless most probably not result in an actual cut, thereby undermining David Cameron's claim to have achieved a degree of EU reform by cutting the budget for the first time in EU history.

Meanwhile, MEPs' initial responses don't exactly inspire confidence...

The EU budget proposal of the Commission for 2014 is again supporting the recession and unemployment instead fighting it.
— Hannes Swoboda (@Hannes_Swoboda) June 26, 2013

The China-EU trade war begins, China adopts divide and conquer approach

As expected, China did not take the new tariffs on its exports of solar panels to the EU lying down, nor did it see it simply as an ‘opportunity to negotiate’ as the Commission suggested.

China has announced that it is investigating illegal EU subsidies to the EU wine industry. The rational is, as the Chinese Commerce Ministry put it, because, "Wine imports from the EU enter our market via dumping, subsidies and other unfair trade practices, and have hit our wine production."

Our headline is of course exaggerated for effect but the main point stands. This dispute has escalated significantly with the retaliation now raising the prospect of a tit-for-tat trade dispute.

It’s also been well documented that the EU is divided on this issue, with quite a few countries (led by Germany) openly expressing their opposition to the Commission’s tariffs. Other more traditionally protectionist countries have been decidedly less vocal. With this in mind, it’s interesting that China has launched an investigation which focuses on a sector heavily located in France and the Mediterranean rather than one in Germany. This could be a mere coincidence, but then it could not.

AFP reports that French President Francois Hollande has called for an EU-27 meeting to be convened to discuss the issue and create a united EU position on it (possibly to counter such a divide and conquer approach).

There are a few other interesting points to note with this investigation:

• The Chinese do have a case given the influence of the CAP, which still provides significant subsidies to farms including vineyards.
• It’s hard to say exactly how large the subsidies are. Under the reformed CAP programme in 2008, National Support Programmes for wine growers totalled €2.8bn.
• As with much Chinese data it’s hard to pin down the exact size of the market. The Commission notes that in 2011 China and Hong Kong together accounted for €1.47bn in wine exports from the EU. This has certainly increased since then as China represents one of the largest growth markets for wine. Reuters suggests that Chinese imports of wine amount to €1bn from France alone.
• Whatever the size, this market is smaller than the solar panel one. EU imports of solar panels from China amount to around €21bn.

Would an 'independent' UK get a better US trade deal than the EU?

Could the UK sucessfully negotiate a trade deal with the US?

Yesterday MEPs voted on a resolution to back defensive measures to exclude cultural and some agricultural products, such as genetically modified foods from a proposed free trade deal with the US (TTIP).

Understandably US farmers have already taken exception to what they see as EU protectionism. This raises concerns that the potential gain from an EU/US trade deal may be watered down, delayed or even blocked all together by vested interests on both sides of the Atlantic.

As a member of the EU the UK's foreign trade is governed by the EU's common commercial policy and so has to be done via an EU deal. After the EU the US is the UK's most important trading partner. Some involved in the UK-EU debate - particularly Outers - suggest that if the UK left the EU it could negotiate a deal with the US on better terms than it could potentially gain via the EU. But is that the case? Here are some of the factors that could be important.

UK exports to the US in £bn (ONS 2011) are big...

A mismatch in negotiating power. Although the UK exports a lot to the US, as a % of it's total exports, the US sends only 4% to the UK. So although a trade deal should be mutually beneficial, reaching a solution would be disproportionately in the UK's interests. Therefore, there would be an imbalance of negotiating power. For this the EU's weight could help on issues where the UK's interests are aligned with it.

Would the US want to go through the hassle? Given this asymmetry, and the relative small market the UK is for the US, one question is if the US would go through all the political hurdles -  approval in Congress, taking on the unions etc. Indeed, talk to people in Washington and there's some scepticism about this. (However, the US has signed agreements with 23 states, some very small, so perhaps it is more a matter of the terms you would get?)

But US exports to UK (US BEA 2011) are small...

Fewer protectionist hold ups. At the same time, the US and the UK are more compatible economies than are the US and EU. The UK negotiating on its own account would not be hindered by protectionist issues emanating largely from France and MEPs, that could hold up US agreement or require concessions, such as the protection of agriculture, genetically modified foods or geographical indicators. However the UK is still unlikely to wish to see the US allowed to subsidise its agricultural exports, so tough negotiations would still be required.

Access for financial services could be a tough negotiation. The UK negotiating with the US on financial services would come up against a powerful US lobby attempting to protect its banks from what is New York's main rival - London. However, the UK negotiating on its own would arguably have a better chance to strike a deal on 'reciprocity' with US funds, a more generous arrangement than that which currently exists under regulations such as the AIFM Directive or UCITS. Additionally the UK would not bear the burden of having risky eurozone banks getting in on the deal. In recent negotiations with Singapore the US gained a better deal than the EU on financial services, partly because while Singapore was happy with UK banks it was wary of giving access to all eurozone banks (a big untold story in all of this).

If the idea is that an 'independent' UK can automatically join some gigantic Transatlantic free trade zone, in place of its current EU membership, there will be plenty of hurdles and a good deal is by no means guaranteed. Added to that there's also the small matter of negotiating an equivalent free trade deal with the EU....

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):

The case for bringing back some powers from Brussels... by Nick Clegg

As we noted in our guest piece over on Lib Dem Voice last week, if the Coalition needs inspiration for what to put in its "half-time" report or ideas for what reforms to target in Europe, a good place to start would be  revisiting Nick Clegg's chapter in the Orange Book. As an MEP in 2004, he put forward some sensible and innovative ideas for EU reform, including the repatriation of certain powers.

For example:

General approach to EU powers:

“A liberal approach to the allocation of responsibilities to the EU should be founded on a rigorous application of the principles of subsidiarity and proportionality… the EU must only act if there is a clear cross-border issue at stake, or when collective EU action brings collective benefits to all member states that they would not be able to secure on their own… This would help correct the lopsided nature of the EU and so make it more logical and comprehensible to British voters.” 

On Agricultural policy and farm subsidies:

“It would be more logical for the EU to wield strong powers in the manner in which agricultural products are traded across Europe, especially to guarantee high quality and animal welfare standards, whilst leaving much of the system of production support to national governments themselves, subject to EU rules on subsidies and fair competition.” 

On regional policy and the structural funds:

“There is a danger that the system of EU regional subsidies has reached a point of such excessive complexity that the value added of collective EU funds is being undermined. The founding logic of the so-called EU structural funds remains compelling – that the richer parts of the EU should help provide resources to those parts in dire straits, especially in helping to cover high infrastructure investment costs. Yet, in practice, regional funds are still being channelled to all member states, even Britain, France and Germany who are the main contributors in the first place. Logically, those governments should take full responsibility for the channelling of funds to their own regions, rather than rely on the recycling of funds via the EU… That, in turn, would allow the EU structural funds to concentrate wholly on those countries where the economic need for financial assistance is overwhelming.” 

On EU involvement in social and employment law:

“While it is, of course, entirely understandable to support EU measures because of their beneficial effects – working time and parental leave legislation spring to mind – doing so in order to supplant the normal domestic policy making process risks undermining the basic tenets of democratic accountability. If the EU were to be used systematically as a means to bypass domestic political debate, voters will be even more perplexed about who is responsible for what… It disrupts the key relationship between voters and those elected to public office if domestic issues with no obvious EU dimension are arbitrarily shuffled off to Brussels for resolution. For these reasons, there is a compelling case to curtail the EU in its responsibility in the social policy sphere.” 

On the EU budget:

"The multitude of small and dispersed EU budget lines, in everything from youth programmes and tourism, should substantially be reduced. It is highly doubtful whether their marginal benefits justify the scarce personnel resources in the European Commission allocated to them".

It's hard to disagree, and indeed we have echoed many of these points our reports over the last 18 months, for example on employment law, structural funds, CAP, the EU budget and EU 'localism'.

Time to get to work? 

Britain has the perfect chance to work out how to loosen its ties with Brussels

Open Europe Chairman Lord Leach of Fairford has an op-ed in today's Times, where he argues,

If Britain pulls out of the EU, that will be as much due to our condescending Eurozealots, who have called every turn wrong for 30 years, as to UKIP. Both alike tell us that radical change in the European structure is out of the question.

Moderate sceptics, who want to stay in the EU but might want “out” if the Government can’t negotiate a changed relationship, are the majority of the electorate, but their voice is too seldom heard. The BBC neglects them, presumably calculating that pitting Nigel Farage against Denis MacShane does more for its audience ratings than analysis of the most important issue facing the country.

Circumstances, however, have conspired to deliver our fate to the moderates. While the eurozone faces a polarised choice between economic union or break-up, Britain has three options: “more Europe”, exit or renegotiate. And since “more Europe” has become unthinkable, the effective option is exit or reform. In a word, the Europhiles have lost. The sceptics, however, have not yet won. For this, the coalition is to blame for its failure to articulate a constructive vision of a Europe that would meet the aims both of the integrationist countries and of those that put self-determination first.

Whether Britain withdraws or remains, it will have to negotiate terms with an EU that has lost its way after the triumphs of its first 50 years, when tariffs were cut, enemies reconciled and a haven given to victims of dictatorships. Its icon, the euro, has awakened resentments unknown since the Second World War. Unemployment in the South is at 1930s levels, with nothing but depression and endless financial chicanery in sight. The region has slid inexorably down the global economic league tables.

Brussels treats the catastrophe predictably as a pretext for “more Europe”, but Germany’s reaction, caught between the appeal of European solidarity and reluctance to be the milch cow for Mediterranean indiscipline, has been cautious and ambivalent. There is nothing in Berlin’s response to suggest a closed mind to a new deal with the countries outside the eurozone. They know that a British government that signed up to deeper economic integration wouldn’t last a week. They also read the polls, showing UKIP neck-and-neck with the Lib Dems. It is not in Germany’s interest to drive Britain to withdraw, depriving the EU of its financial centre, its principal advocate of democracy and free trade, and one of its two foremost military powers, not to mention its highly lucrative market.

Germany is ripe for change. After two thirds of a century’s atonement, it no longer has to disprove a wish for domination or to pretend that without uniformity there can be no peace in Europe. It can admit that the proudest European heritage - German music, Italian painting, French civilisation, English literature - is utterly removed from the integrationist obsessions of the European political class. Liberated from guilt, Germany begins to recognise again democracy’s ability to reconcile voters to political defeat, to repeal unworkable laws and dismiss bad leaders, and to tackle difficulties with the grain of national traditions, institutions and instincts, not by the imposition of one-size-fits-all European-level solutions.

The shape of a new Europe therefore writes its own script - a neighbourly alliance, partly federal, partly by treaty between independent states, in which those who want to share a currency and economic sovereignty and those who just want co-operation would be equally welcome. Only trade, the bedrock of the original Common Market, would be universal.

In truth, it is not the eurozone that is the “core” of Europe - it is the single market. In the new, flexible model for EU integration, the UK would remain a full member of the customs union and single market and maintain its vote on making Europe’s trading rules. But it could limit Brussels’ involvement in areas such as policing and crime, fisheries, farming, employment law and regional policy. 

The EU’s institutions would be adapted so as not to discriminate against countries who have chosen to be less integrated. Likewise, the UK would not vote on EU laws that did not apply to itself. The presumption of travel towards a common destiny would cease to apply, since all forms of EU membership would be equally legitimate. 

 Instead of institutional tinkering and going round in circles on the euro, national democracies would start working out how to succeed in the globally networked modern world. Each country would find its own way back to prosperity. That, after all, was how Europe became rich and civilised in the first place. Relieved from unwanted legislation and desperate sacrifices for the euro, we would rediscover the amity of neighbours. 

We might even find that a confederate EU had become a magnet for Norway and Switzerland. That would be a delicious irony - sceptical Britain bringing about a strengthening of Europe that has eluded the zealots. 

EU farm subsidies - the mother of all misallocations

Its been a busy few days on the EU budget front with the inconclusive EU leaders’ summit on the EU’s long term budget, and the Commission’s new proposal for the 2013 annual budget (largely unchanged from the version MEPs and member states were unable to agree on). Much of the attention in the talks were given to absolute numbers over substance, which is why Tuesday's Court of Auditors' report on the 'single farm payment' – accounting for roughly one third of the EU budget – is very interesting. The CAP as a whole (comprising the rural development component and the remaining market distorting subsidies) accounts for around 40% of expenditure - €56.8bn this year alone.

Specifically, the report looks at the effectiveness of the ‘Single Area Payment Scheme’ (SAPS) which is just EU jargon for the bulk of farm subsidies to most of the new EU12 member states under the CAP (The EU15 states plus Malta and Slovenia have a different support scheme called the Single Payment Scheme. A unified scheme for all 27 states is due to be introduced in 2014. The generic terms for both is usually 'the single farm payment').

The language is, as usual, cautious but it's quite clear that by EU standards, the Court of Auditors absolutely slams these subsidies. In the report’s executive summary we read that:

• The definition of ‘farmers’ is inadequate leading to subsidies being paid out to "beneficiaries not or only marginally involved in farming". In some of the Member States concerned, SAPS aid was paid to organisations not involved in farming, including public entities managing state land, hunting associations, fishing clubs and ski clubs. So the farce continues.
• The subsidies fail to take into consideration either the specific regional characteristics of farming activity, nor the contribution of farmers to the production of public goods. 
• The payments disproportionately benefit large landowners (who are more likely to be relatively wealthy) while the majority of farmers receive very small amounts of aid. 
• There is no option to differentiate payments within member states to take into account the agricultural potential of regions or environmental criteria. In other words, those who say the CAP in its current form is the best tool for delivering 'food security' or environmental objectives (including bio-diversity) don't know what they're talking about.
• The Commission has not analysed the effects of SAPS aid on the restructuring of the farming sector - a huge 'blind spot' given that modernising agriculture is one of the stated objectives of the CAP, and given that by giving people income support irrespective of the economic activity their engaged in (if any) is usually an active disincentive for reform. 
• The Commission has also not yet analysed the effects of the subsidies on land prices. Again a massive blind spot given that the regime is effectively subsidising landowners. 

So in other words, the single farm payment is a ill-targeted subsidy with no clear links to either the delivery of public goods or economic reform. In today's economic climate, to maintain such a fundamentally irrational policy must be considered something of an accomplishment.

What should we have instead? As we argue in our dedicated report on this issue, there could be a broad rationale for having a publicly subsidised system for delivering public goods in the countryside such as bio-diversity. One way of achieving something at least remotely sensible, would be for the CAP to be slimmed down (we proposed a 30% to the direct subsidies which would have saved over €12bn this year) and refocused to deliver a range of environmental benefit through a system of transferable agri-allowances (if intrigued, check out the full study).

But the current system just has to go. 

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.
 

Deja vu anyone? EU auditors refuse to sign off EU spending for 18th year running

This morning, the EU’s Court of Auditors published its report on the EU’s 2011 accounts. Although the auditors concluded that the Commission’s accounts are reliable, they also found that the actual spending was “affected by material error”, and for the 18th year in a row they refused to sign off on it.

Here are the key points:

Total spending in 2011 was €127.2bn, of which 3.9% - or €4.96bn - was “affected by material error”. In 2010, the corresponding figures were 3.7% and €5.38bn, meaning an increase of €580m in the amount of erroneous spending.

Breaking down the budget into policy headings, we see that only the areas of External relations, aid and enlargement and administrative spending were deemed to be “free from material error”, i.e. an error rate of below 2%. For the other policy areas:

Agriculture: market and direct support
Total Spending = €43.8bn
Estimated error rate = 2.9%
Erroneous Spending = €1.27bn

Rural development, environment, fisheries and health
Total Spending = €13.3bn
Estimated error rate = 7.7%
Erroneous Spending = €1.02bn

Regional policy, energy and transport
Total Spending = €33.4bn
Estimated error rate = 6%
Erroneous Spending = €2bn

Employment and social affairs
Total Spending = €10.2bn
Estimated error rate = 2.2%
Erroneous Spending = €0.22bn

Research and other internal policies
Total Spending = €10.6bn
Estimated error rate = 3%
Erroneous Spending = €0.32bn

The Court also found that controls over 86% of the EU budget were only "partially effective".

The Court also highlighted a few practical examples of how such errors were made. Here are a few examples from the report:

• A farmer was granted a special premium for 150 sheep. The Court found that the beneficiary did not have any sheep. The corresponding payment was therefore irregular.
• In two Member States Italy (Lombardia) and Spain (Galicia), the Court found cases where ‘permanent pasture’ reference parcels were recorded as being 100% eligible despite the fact that they are fully or partially covered with dense forest or other ineligible features.
• European Social Fund - one of the so-called structural funds - gave money to a commercial association, as support for its activities, which included advising small and medium-sized enterprises (SMEs). The costs of several staff members of the association were charged to the ESF project, although evidence supporting the charging of their time to the project could not be provided. The Court considers that the project staff costs have been overcharged by 60%.
• A beneficiary from the EU's research funding pot declared overheads amounting to €366,891 and included the indirect costs of all its departments while only considering the research personnel as an allocation key when charging these costs to research projects. This resulted in non-related costs being charged, leading to an over-claim of €180,670.

Vitor Caldeira, the ECA's chairman, is quoted in the Telegraph as saying that auditors had "found too many cases of EU money not hitting the target or being used sub-optimally", an argument we have also made repeatedly, not least in recent reports on the EU’s largest spending areas – Regional and Agricultural policy. Caldeira concluded that: 

“With Europe's public finances under severe pressure, there remains scope to spend EU money more efficiently and in a better targeted manner. Member states must agree on better rules for how EU money is spent, and member states and the commission must enforce them properly. In this way, the EU budget could be used more efficiently and effectively to deliver greater added value for citizens." 

We couldn't have put it better ourselves. Brussels needs to get its own house in order (albeit many of the faults lie with national managing authorities) rather than demanding ever more money from European taxpayers.

Why David Cameron can threaten to veto the EU budget

Over on the Spectator's Coffee House blog, we argue,

When in 1996 the US Congress threw out Bill Clinton’s Federal budget they precipitated a partial shutdown of the US Government. However, anyone looking at the growing prospect of a UK EU budget veto and cheerfully imagining Eurocrats being shut out of their offices on 31 December 2013 will be disappointed. Because when it comes to EU budgets, a veto is not quite a veto – the EU will continue one way or another to claim its dues.

Nethertheless, a UK veto is not meaningless. Not least because, as we have set out here, the scenarios that could play out after a UK veto may not be that much worse for the UK than those already on the table (including, ironically, the UK’s own suggested ‘freeze’). It is important to realise that a ‘freeze’ in the overall EU budget could actually mean a rise in the UK’s net contribution. This is because the UK’s rebate only applies to spending in the ‘old’ member states and so shifting funds to the newer states would leave the UK out of pocket. We estimate that even under a ‘freeze’ the UK’s net contribution could rise by between €1 billion and €2.4 billion over seven years.

After a veto there are broadly two possibilities. The first is that the EU carries over its 2013 budget ceilings, adjusted for inflation. Member states would then have to negotiate an ad hoc deal, based on a Qualified Majority Vote rather than unanimity, which could see the overall EU budget increase above and beyond anything Cameron wants to see. However, this could actually mean a limited rise in the UK’s net contribution as the rebate reduction would not kick in.

Secondly, and less likely, the European Parliament could tear up the current budget altogether. Should they do so, the Commission could then table a completely new proposal for the annual budgets without any spending ceilings. These would be subject to QMV and could also lead to a large increase in the UK contribution.  This would also be a major act of hubris as MEPs aren’t exactly popular as it is.

However, a clear majority of member states desperately want a new deal. The new member states would lose out from the previous year’s budget. In addition, all other budget corrections – including the Swedish and Dutch rebates on the UK’s rebate – will expire in 2013, while the UK rebate would stay, meaning many net contributors would also stand to lose if there’s no new deal.

This all gives the UK veto potency which should be used all the way up to 2014 to push for radical reform of the largest spending items such as the Common Agricultural Policy and to repatriate EU regional policy.

How to make Cameron's EU veto threat actually count

On the Telegraph blog, we argue,

Europe has just sailed up the agenda at the Tory party conference, with Theresa May suggesting curbs on EU immigration and David Cameron hinting at another EU veto. Speaking of the ongoing talks over the EU’s long-term budget (2014-2020), Cameron said: "If it comes to saying no to a deal that isn't right for Britain, I'll say no." 

The problem for Cameron is that unless anything changes, the EU budget talks will almost certainly generate a bad deal for Britain, both in terms of content and cash contribution. 

For various reasons, EU budget talks are always biased towards the status quo, as special interests – such as the farming lobby – block meaningful reform through individual member states’ vetoes. Therefore, on its current path, the UK will keep its rebate from the EU budget, but the EU’s odd spending priorities will remain. This means that around a third of the EU budget will continue to go towards subsidising landowners – irrespective of whether they’re engaged in any meaningful economic activity. 

Another large portion – the so-called structural funds – will continue to see cash pointlessly recycled between some of Europe’s richer regions and countries and spent on projects with little, no or negative impact (though another chunk goes to Europe’s genuinely poor regions). 

The EU’s new long term budget could account for roughly €130-140 billion a year – not a huge amount in the grand scheme of things – but with Europe facing a solvency, competitiveness and banking crisis all at once, this money could still make a big difference if targeted properly. It’s therefore absolutely maddening that the EU budget remains unreformed on its content. 

At the same time, even if the UK manages to get what it’s pushing for – an inflation-adjusted cash freeze (based on 2011 payment levels) – the UK’s net contribution will still increase, since more money will (rightly) go to newer member states which aren’t covered by the UK’s rebate. In turn, any actual increase – and it’s heading in that direction in the ongoing EU talks – will naturally mean an even larger net contribution for the UK. 

 Therefore, Cameron is a very unenviable situation: even if he gets what he wants in negotiations, UK taxpayers will still be forced to cough up more cash to pay for the EU (in net terms). Clearly, this could be politically damaging. 

So how can he get out of this? 

As I’ve argued before, he should instead use the veto to seek the repatriation of the structural funds for richer member states (with a GDP of 90 per cent or above the EU average). This would reduce the UK’s net contribution substantially – possibly by several billions over next budget framework. At the same time, the UK would remain committed to support Europe’s poorest, as all post-communist member states that joined in 2004 and 2007 would do better from the funds (for how to deal with Italy, Spain and Greece – the only countries in the EU actually losing out under this proposal – see here). 

UK regions and urban areas also need far better tailored and targeted cash than what is offered by EU funding. In addition, as this was originally a Labour policy, it has the potential to gain cross-party support at home.

Now, as ever in EU politics, this isn’t uncomplicated. If Cameron insists on the veto, it won’t necessarily stop the process. At worst, it could lead to an ad hoc deal decided on a year-by-year basis through Qualified Majority Voting. But most member states have a huge incentive to avoid this happening. It would be extremely messy and most of them would lose out substantially compared to a new deal. 

Therefore, targeting the structural funds for reform remains the best option for Cameron – by far. Beyond party politics, it’s the right policy to pursue, as it would benefit both the UK and Europe – and finally inject some common economic sense into the EU budget.

Labour and ‘Europe’: substance or party politics?

Open Europe has just returned from holding two fringe events at the Labour Party Conference (write ups of these to follow here), an occasion that can be a useful barometer for assessing opinion within the party.

Shadow Foreign Secretary Douglas Alexander used our joint event with BNE and CER to state that “there is almost total unanimity for Britain’s continued membership in the European Union.” And, though Alexander made several valid points (including the Tories' poor handling of the announcement of the 2014 EU JHA block opt-out) it's clear that in large part, Europe simply remains a stick with which to beat the Tories. Shadow Cabinet Minister Jim Murphy’s suggestion that, “at some point, there will have to be a referendum on the EU” would seemingly fall into that category. Mr Murphy added "My preference would be an in-or-out referendum when the time comes” and that “almost everyone” in the Labour Party would campaign to stay in the EU, “because it is good for our economy and good for Britain”.

It must be extremely tempting for Labour to go for that in / out referendum and witness the Tories tearing themselves apart (or so the thinking goes). But a) that's hardly a noble motive for putting a hugely important issue to the people (Labour likes to talk about putting national interest before party) and b) it would be an absolutely massive gamble: if held now, the "in" side would almost certainly win, but in 2015-16, all kinds of unpredictable stuff could have happened in Europe that would change the equation. The dropping popularity of Hollande and Rajoy, just months after entering office, is a reminder that 'political honeymoons' are shortlived in European politics these days. Therefore, even calling a referendum right after being elected is no guarantee.

There was much talk of lost ‘influence’ at the conference but little of substance to suggest how Labour’s approach would be different to the current government on the fundamental issues such as the fiscal treaty (would the party opposed to 'mindless austerity' really want to sign a treaty enshrining the doctrine?), the EU budget (Labour recognise the need for reform as do the Lib Dems and the Conservatives), and banking union (Although it does not necessary like to admit it, a Labour government would need to go out to bat for the City in Europe).

However, encouragingly, there are some senior figures in the party who are willing to enter into a debate about the future of the EU. Shadow Treasury Minister Chris Leslie told our joint fringe meeting that the tensions between Eurozone-level decision making and national democracy were “at risk of undermining the European settlement.” He added that the Eurozone needed to find an answer to the question of how to “hold accountable those who make executive decisions in the Eurozone.”

He said that the continuing EU budget negotiations were the “next big diplomatic test” for the UK and that he was disappointed that there was not enough focus on the content of the budget – an argument we have made both of the CAP but also the Structural Funds, where a previous Labour Government policy would actually save the UK around £4bn over the budget period and better focus the remaining EU funds. In contrast, the current government has taken a somewhat less assertive approach (contrary to popular belief).

New figures show that 51.4% of UK goods exports are sent outside the EU and we run an EU trade deficit – does that tell us anything?

New trade figures out today show the UK exports more goods to countries outside the EU than to countries inside EU. But what is the relevance of this or the fact that the UK continues to run a trade deficit with the EU?

Key facts:

UK goods exports to EU in July 2012 £12.5 bn (48.6%)

UK goods exports to non EU in July 2012 £13.2 bn (51.4%)

As the graph below shows, the UK has for most of recent history sent far more than 50% of its total goods exports to the EU. The UK's services trade is more diversified but it is a traditional argument that the EU's customs union is vital to the UK's goods exports. The recent figures for July 2012 seem to buck the trend due to weak EU export and better non-EU export figures. As an aside, the proportion of UK goods exports going to eurozone countries fell to 43.6%, the lowest share since records began in 1988.
 

So is 50% significant?

The simple answer is no. 50% is a rather arbitrary figure;** it would make little difference if the UK only exported 40% to the EU - it would still be vital to ensure it continued, although it could be argued that the less the UK relies on the EU for its exports the stronger its hand politcally.

But the more important question for now is whether the UK’s membership of the EU is the best way to promote trade and if so whether this benefit is offset by the other costs of membership (budget, regulation, CAP, etc).
 

Is the UK’s trade deficit with the EU a strong card to play if we left the EU?

The second potentially significant trade figure out today shows a UK trade deficit with the EU in goods of £4.3bn - bigger than that for non-EU goods.

However, the UK's record in goods also needs to be considered along with its more healthy balance in services trade, but even when services are included the UK still posts a total trade deficit with the EU.
 

So is it a strong card?

If the UK left the EU would it be able to strike a deal that preserves the UK’s trading relations with the rump EU without the costs? One argument goes that its deficit is a ‘trump card’ that will force the remaining EU to conclude a favourable Free Trade Agreement (FTA).

Yes the UK has a deficit but what is more important is total volume of trade. For the UK total EU trade is now less than 50% of its exports. Less than it was, but for the EU (ex UK) the UK would amount to only 22% of its total exports (E306bn out of E1,348bn) – who has the upper hand? Clearly for the EU 22% of its total exports is a lesser consideration than the UK's 50%. Striking a trade deal should be mutually beneficial, but things are seldom that clear and, given recent hostility to UK financial services exports, the comparitively weaker UK position could be significant.

Does the UK’s membership of the EU discourage its trade outside the EU?
 

Mostly no, although the future is less certain. The UK’s non EU trade is governed by the EU’s Common Commercial policy which includes the EU's network of free trade agreements and its seat at the WTO. In outsourcing its foreign trade policy to the EU, the UK is trading off its specific negotiating requirements against the weight of a common negotiating position, backed by the incentive of the Single Market. The EU has a reasonably good record in pursuing liberal trade deals, where its combined weight helps, however sometimes UK priorities (services) get subsumed to others' priorities. One area where being in the EU does not help UK trade is the protectionism surrounding agriculture, where the UK on its own would probably chose to import cheaper products from outside the EU than currently allowed.

What is the best way to increase UK trade?

In our recent paper “Trading Places” we looked at the operation of the EU from the perspective of UK trade and concluded that it was currently working. Not at as well as one might like, but still working. However the outlook may change; the benefits of the Single Market may not be increased due to problems implementing further liberalisation in services and the EU may lapse into protectionism in its external policy leading to less favourable trade deals for the UK that stop it benefiting from growth markets for its services.

But, of course, UK membership of the EU includes other membership costs (EU Budget, CAP, regulation etc.) so in order to ensure that EU membership remains beneficial for the UK, the Government needs to reduce these costs as well as increasing the benefits where possible.

Given that the UK, with mixed success and too different degrees, has been pursuing a liberal trade agenda in the EU for some time and the caveats noted above, this is no longer enough to ensure the benefits will continue to outwiegh the costs over the long term. The Government therefore needs to do far more to reduce the cost side of the equation, which requires the renegotiation of the UK's terms of membership.

** We accept that the UK’s trade to the EU is inflated by both the ‘Rotterdam Effect’ and import displacement particularly as a result of the CAP.

What does the reshuffle mean for Europe (clue: police and crime)?

In any major Government-led event, there’s always a Europe sub-story. The Government reshuffle today is no exception. So what does this mean for the Coalition’s EU policy? Well, there’s one area to look out for: EU police and crime law. With respect to Europe, here are the significant moves so far:

• Europe Minister David Lidington stays (as expected – the speculation that he was going to replaced was mostly bogus).
• At Justice, Ken Clarke is replaced by hard-line EU reformer Chris Grayling, which could prove significant for the 2014 ‘block-opt’ out from EU police and crime laws, and also struggles over the ECHR.
• Owen Paterson – also with strong views on the EU - has moved to DEFRA, taking responsibility for EU-dominated Fisheries and Agriculture.
• Baroness Warsi replaces the veteran Lord Howell as FCO spokesman in the Lords
• Both Cabinet Treasury Ministers remain.
• No EU-related game-changing movement on other areas under heavy EU influence such as environment, energy or business.

By accident or design, the most significant move is Chris Grayling, as it sets up the Coalition to take the 2014 EU JHA block opt-out, perhaps announcing it at the October Conservative Party Conference. Indeed, as we’ve argued before, this is precisely what David Cameron should do in order to get some much-needed credibility on Europe. To recap: this opt-out, included in the Lisbon Treaty, means that the UK must decide before June 2014 whether to remain inside 130 EU Crime and Policing measures, including the European Arrest Warrant (EAW), and transfer the ultimate jurisdiction over them to the European Court of Justice (ECJ), or whether to opt out of them altogether – which would significantly reduce the EU’s influence over policing and crime law in the UK. The Government then will have the chance to opt back into these laws on case-by-case basis. 

In other words, this is a huge choice between a lot more, or a lot less, Europe. Expect a dog fight. Cameron will no doubt come under pressure from the Police and Liberal Democrats to stay inside the lot or, at least, opt back into as many laws as possible, no questions asked, including the EAW, Eurojust and measures on data sharing, for example. Chris Grayling could well add a lot of weight in opposing such moves (contrast and compare to Ken Clarke) and could perhaps argue for a deal whereby the UK opts back into some vital measures if the EU agrees to give the UK an exemption from ECJ power over this sensitive area. Grayling could also add momentum to Tory demands to restrict the jurisdiction of the ECHR, in particular prisoners' votes. The Government has to announce by November how, exactly, it intends to implement the ECHR's ruling, so this is another imminent issue.

This could work out for the best: As we argued in a report published in January – a recommendation which drew backing from 100+ MPs - David Cameron should take the block opt-out and only opt back into the absolutely vital laws on a case-by-case basis. And the party conference would be the perfect place to announce this.

The second most important move is Owen Paterson’s transfer to DEFRA. Paterson is one of the most trenchant EU reformers and a supporter of some sort of EU-related referendum. He has now been given responsibility for two policy areas – fishing and farming – which are almost entirely decided in Brussels. Paterson was the shadow fisheries minister under Michael Howard, when he called for the repatriation of the Common Fisheries Policy. This could set Cameron up for a second announcement at the conference – or at least an attempt to show his party that the Coalition is achieving EU reform – since, as we speak, the Common Fisheries Policy could, possibly, be moving in the direction of more ‘regionalisation’ , i.e. neighbouring member states being given more discretion to sort out quotas amongst themselves. Still a long way off from Patterson’s proposals though and amongst backbench MPs and the grassroots, it is likely to be perceived as a fairly minor concession in any case.

On Common Agricultural Policy Reform, currently part of the negotiations over the EU’s next long term budget (to run between 2014 and 2020), despite his strong views, Paterson is unlikely to be able to change the direction of travel. The UK is pushing for an overall freeze to the EU budget, meaning that the CAP will largely stay unreformed (see here, here, here  and here for detailed discussion). In addition, Paterson may not want to rock the tractor, so to speak, given that his constituency is pretty rural, while the brief is led by the FCO and the Treasury anyway. Paterson also has a climate change-sceptic streak which may have an impact on how he handles the environmental side of the DEFRA brief and when this crosses over with EU policy (though DEFRA is more biodiversity than emissions).
 
That the re-shuffle won’t bring in people who will shake-up the Coalition’s EU budget policy is a shame, since the EU budget doesn’t only need to be frozen but also radically reformed on substance – as we’ve shown repeatedly and comprehensively.
 
Other less significant moves are Baroness Warsi’s replacement for a retiring Lord Howell as FCO spokesman in the Lords. Lord Howell, another EU reformer with a great personal commitment to the Commonwealth, carried out his role with charm and expertise and will be a hard act to follow. It’ll be interesting to see how Warsi will work out in that role.

Could Europe be an unlikely area of consensus for the revamped Coalition 2.0?

Over on Liberal Democrat Voice's the 'Independent View', we argue that:

Following the bad blood within the coalition over the collapse of Lords reform and the constituency boundary review, there has been much speculation that the two parties will enact a policy ‘reset’ after conference season, with Oliver Letwin and Danny Alexander already reportedly working out the details. Most people looking for potential fresh common ground between Tories and Lib Dems would hardly place ‘Europe’ at the top of their list. However, while the parties are unlikely to ever see eye to eye on the EU, given political will, there are a number of areas of potential agreement.

For example, both parties already agree on the need to amend the Working Time Directive. However, in terms of immediate action and potential achievability, there is no better target than reforming the EU budget. While the UK and other member states struggle to balance their books, the EU budget has grown year on year despite the vast majority of spending going on policies at best irrelevant, and at worst outright damaging, in the fight to deliver the jobs and growth Europe so desperately needs. 

Around 40% of the budget still goes on the Common Agricultural Policy; mostly subsidies to farmers and landowners which act as an outright disincentive for modernisation given they are de-linked from any meaningful economic activity. It is difficult to think of a policy more offensive to liberal values than the CAP: market distorting, sustained by effective lobbying from vested interests, staggeringly wasteful and inefficient, and disproportionately harmful to the least well off in society via higher food prices. Moreover, despite the Commission’s rhetoric, the CAP’s ‘green’ credentials are poor. Slimming down and radically refocusing the CAP by explicitly tying it to environmental objectives such as biodiversity would not only be hugely efficient, it would add credibility to the coalition’s claim of being the ‘greenest government ever’.

Another area in need of overhaul is EU regional spending; the current structure involving all regions in all member states, irrespective of their relative wealth, is economically irrational. For this reason, spending should be limited to the least wealthy member states where it can have the biggest positive impact, an objective endorsed by Nick Clegg. This would save the UK around £4bn net over seven years which could be ploughed straight back into developing the UK’s least wealthy regions, helping the Lib Dems to achieve their long-standing ambition of ‘rebalancing’ the economy away from its over-reliance on London and the South-East.

These measures would require the coalition adopting a much tougher line in the on-going negotiations over the EU’s next long-term budget than it has done, or else risk the existing flawed spending patterns becoming locked in until 2020. While achieving these reforms will not be easy, if pitched correctly, they could command support all across Europe.

These measures would deliver a number of wins; saving UK taxpayers’ cash, soothing coalition tensions, and securing electoral popularity – Lib Dem members and voters are in tune with national opinion in wanting more national control over many policy areas currently significantly influenced by Brussels. Having shown that they can be ‘tough’ on the EU, Lib Dems would then have greater credibility when making the positive case for its continued involvement in other areas.