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.

Timing, not substance, is the biggest obstacle to David Cameron's reform agenda

Our Director Mats Persson writes on his Telegraph blog:

In a recent Sunday Telegraph article that received surprisingly little attention at the time, David Cameron came close to setting out a “shopping list” of what he wants to change in Europe. He outlined seven areas, though they were more principles than policies: powers flowing back, a beefed-up role for national parliaments, less regulation and more free trade, limiting the influence of European judges (possibly opting out of the ECHR, which is not an EU institution), tightening welfare benefits for EU migrants, tougher controls on future EU accession countries and no more “ever closer union”.

Nick Clegg – in a strange kind of way – has almost endorsed the plan, saying that "Now [Cameron] doesn't even talk about repatriation, instead proposing a mild seven-point plan, most of which wouldn't even require treaty change." European Commission President Jose Manuel Barroso has said that the EU wants to "cater" to the UK without "threatening the Union’s coherence" (though he was all over the place on EU treaty change). And in the Financial Times this week, Jean-Claude Piris, former legal guru of the European Council – the key decision forum for EU leaders – concluded that Cameron's changes could pretty much be done without actually changing the EU treaties.

For Cameron, this is a double-edged sword. Sceptics at home already see Cameron’s starting position as a “sell-out” – mere presentational changes that will allow him to recommend a “Yes” vote in the 2017 referendum. This is a premature accusation as there’s a huge range within the Sunday Telegraph piece, from token reform to sweeping changes.

Cameron could cobble together a decent package without changing the EU treaties. First, areas like toughening up rules on access to benefits, removing trade barriers, signing free trade deals or scrapping red tape – key planks in Cameron’s renegotiation agenda – just fall under normal Brussels decision-making (which doesn’t meant it will be easy. Think European Parliament). Secondly, “repatriating” powers wouldn’t necessarily require EU treaty change but could still be meaningful, for example devolving the EU’s irrational regional policy (saving UK taxpayers £4bn over an EU budget period) or exemptions from maddening working time rules for the NHS.

Finally, the EU specialises in legal acrobatics. When pushed – say when the bloc’s second largest economy risks leaving – it can be amazingly creative. For example, it created a €440bn bailout fund out of thin air and via so-called political agreements, the Danes got four surprisingly effective opt-outs after having rejected the Maastricht Treaty in 1992, which were incorporated when the next EU treaty came around. Something similar can be done for some of the reforms currently being discussed, including giving national parliaments the right to block or revise EU laws.

So it's right that Cameron seeks to maximise the reforms that can happen without EU treaty change. However, not only would a Treaty change be a form of political insurance to the Tory party and public that things have changed but it's also needed since the treaties simply aren’t fit for purpose. With a more integrated eurozone, we need new organisational principles and practical measures to avoid the EU becoming the eurozone, while allowing powers to flow back to countries that wish to be less integrated. A 2017 referendum should be the start of a slimmed down, flexible Europe, not the end destination. A quick and dirty solution will only bring us back to where we are today – and could well generate a referendum result too close to call, solving nothing.

Ironically, the strongest and most plausible contender for a Treaty change is one measure that Cameron – oddly – didn’t mention in his piece: safeguards against the Eurozone writing the rules for the rest of Europe, which will also effectively kill the notion of "ever closer union". Exactly how this principle will be organised needs careful thought (ideas here), but it’s highly desirable that this principle is firmly enshrined in EU law.

Since it’s the eurozone that is now changing the rules via banking union and other measures, not the UK, Cameron would be given a fair hearing in national capitals on this point. It is conducive to a "grand bargain": the Germans and French solve their catch-22, agreeing to beefed up supervision in the Eurozone in return for Berlin underwriting the euro, while the British ask for safeguards against Eurozone stitch-ups in return for nodding through EU treaty change at 28 (which Berlin still prefers). In this scenario, it’s the German-led EU treaty change that may trigger a referendum in France, not the UK’s.

It's whether it can be done before 2017 that remains the biggest question.

The EU's structural funds - still heading in the wrong direction?

A new report published by the EU’s Court of Auditors yesterday provides an interesting reminder of the failings inherent in the current EU regional policy, whereby the cash is recycled between every region in every member state – irrespective how wealthy – via the EU's structural funds.

The EU has allocated around €65bn towards co-financing the construction and renovation of roads between 2000 and 2013, and the ECA report focuses on 24 projects in Germany, Greece, Poland and Spain, coming in at a total cost of around €3bn. The good news is that, unlike in one particularly notorious case in Southern Italy, the money was actually used to build or upgrade roads which “delivered savings in travel-time and improved road safety”.

However, the report then goes on to state that:

“insufficient attention was paid to ensuring cost-effectiveness. Most of the audited projects were affected by inaccurate traffic forecasts. The result was that the type of road chosen was often not best suited to the traffic it carried. Motorways were preferred where express roads could have solved the traffic problems. 14 out of 19 projects recorded less traffic-use than expected.” 

“due to the lack of appropriate indicators (such as actual employment created, share of new transit traffic, number of new enterprises in the region)… it is not possible to assess whether the funded projects actually generated the expected economic impact.” 

This is a microcosm of the wider problems with EU regional policy. As we argued in our 2012 report on this topic: “There are still a number of problems with the funds, including an unsatisfactory correlation between funding and results.” We also flagged up that, contrary to some of the Commission’s more boastful claims, due to the inability to consider individual indicators in isolation, it was virtually impossible to objectively assess the economic impact of the structural funds.

Essentially, project selection across the EU is driven more by the fact that there is a pot of money that has to be spent, and less by the existence of a genuine economic case or by seeking to maximise added value. The report also found that the cost of constructing roads varied hugely both between and within countries. Interestingly, the German projects were the cheapest, followed by Greece and Poland, with Spain being the most expensive.

Fundamentally, this also illustrates another point we raised in the report – namely that the structural funds come with significant opportunity costs – i.e. where spending leads directly to other, more productive economic opportunities being wasted. For example, the money spent on the La Herradura project in Spain – where actual traffic was 50% lower than planned - could have been spent on a different project with higher economic returns or not raised via tax and sent to Brussels via national governments in the first place.

This also underlines another critique set out in the report – that far too much cash from the structural funds has been funnelled into infrastructure construction (some of it clearly not corresponding to a genuine economic need) in the countries most affected by the eurozone crisis – Spain, Portugal, Greece etc. resulting in a number of ‘white elephant’ projects.

In wealthier EU countries – and also those most affected by the eurozone crisis – EU structural funds are simply the wrong tool for boosting regional development. While there is a case to be made for continued support to less wealthy member states via the EU budget, wealthier member states could both achieve a much needed financial saving but also regain the ability to tailor the rules to better suit their own circumstances rather than being constrained by Brussels’ one-size-fits-all framework.

In the UK, such a move would broadly enjoy cross party support and could save the government around £4bn net over seven years – something for Mr. Cameron (or indeed Mr Miliband) to target during the 2016 mid-term review into the long-term EU budget?

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

Dutch government: "Time of ‘ever closer union’ in every possible area is behind us”

Dutch PM Mark Rutte (VVD) and Foreign Minister Frans
Timmermans (PVdA) discussing what the EU should
and should not be doing?

For anyone involved in the EU reform debate, this is a must-read. The Dutch government has today published its “subsidiarity review” – an assessment of what the EU should and shouldn't be involved in. Again, we're first to the punch in publishing an English version of the document on our blog.

This is likely to be welcomed with open arms in Whitehall – and should be studied carefully by MPs in Westminster. Though not all good news for David Cameron’s renegotiation strategy – the Dutch have explicitly said they don’t want EU treaty change for example – this is clearly a major step towards a reformed Europe.

First, it shows that discontent with the EU status quo is not simply a UK phenomenon – or a Tory problem as some commentators would have us believe. Secondly, the ideas the Dutch are putting forward are in themselves pertinent, and would go quite some way in achieving a better functioning, more democratic and better focused EU. Finally – and this is where it gets really good news for Cameron - countries like Sweden. Denmark and Germany are far more likely to be persuaded down the reform path if the Dutch are prepared to take a lead with the UK.

So what does the document say? Well, it sets out nine broad principles and 54 specific recommendations, relating to what the EU should and shouldn't do. Many of the proposals have also been championed by Open Europe in various forms (it’s worth re-visiting our “European localism” paper). Most significantly, in the press release, the Dutch government proclaims that the “time of an ‘ever closer union’ in every possible policy area is behind us”. This is not going to go down well in certain corners in Brussels.

The guiding principle is described as “European where necessary, national where possible”, and the tone of the entire document chimes well with Cameron’s EU speech, calling for a “European Union that is a more modest, more sober and at the same time more effective.” Interestingly, it notes that the Dutch EU Presidency in the first half of 2016 “could play a role in promoting such an agenda” – this could coincide with the beginning of the EU referendum campaign in the UK should Cameron be in power.

The 9 general principles include:

• Where the European Court of Justice interprets EU law in a way that EU legislators had not provided for and/or did not intend, then this should be possible to address by amending the EU rules on which the Court based its ruling (this could well be a key plank in Cameron’s renegotiation strategy. An example of where the ECJ ruled in precisely such a way is the Working Time Directive, where the ECJ's interpretation of rules governing on-call time and rest periods for doctors has caused havoc in the NHS);
• Every EU intervention needs to be motivated by a clear legal basis in the EU Treaties, and the Commission shouldn't be making proposals on a legal basis that is tenuous or insecure. The Dutch Government explicitly mentions the English term “creeping competences” (this is very similar to what the UK government wants); 
• EU legislation should focus on main points to achieve shared goals rather than to prescribe in detail how those goals should be achieved (again echoes Cameron’s speech);
• When there are widely shared objections to EU legislation, there should be a mechanism to stop the Commission taking any further initiative in that area – this is a bid to stop new EU laws in areas where national governments don’t want them.

As regards the 54 specific recommendations, they mention individual measures where EU power should be scaled back. There are many overlaps with UK ideas. These include:

• Halting the further harmonisation of social security systems. The document says: “It is necessary to combat the negative impact of labour migration, including the abuse of social security systems” – an issue UK Home Secretary Theresa May has been keen to highlight; 
• Limiting the EU budget - the Dutch hint at scrapping the EU's Globalisation Adjustment Fund and structural funds outside of the poorest regions in the poorest countries on the basis that these do not demonstrate added value (the latter is a proposal Open Europe has championed and which the previous Labour government had pushed for. It’s also gaining traction amongst Tory backbenchers) 
• No expansion of agencies’ remits and no increases in their budgets – Cameron was very critical of EU quangos in his EU speech;
• Working conditions, which should only be regulated in broad outline (health and safety and working time, for example);
• No EU regulation of media pluralism; 
• A two-year freeze in salaries of EU officials;
• Sunset clauses should be incorporated in EU proposals (an old UK demand);
• The Financial Transaction Tax is heavily criticised, because "it has been designed in such a way that even parties outside the FTT area, like Dutch pension funds, will be taxed when they trade financial instruments issued in FTT countries";
• CO2 emissions should be dealt with at the global level rather than via EU legislation.  

There are also some further detailed examples of where the EU has gone too far and where powers should be rolled back. For example, the suggestion is made that flood risk management should only be harmonised at European level for truly trans-boundary water courses. The report also recommends the phasing out of the EU programmes for school milk and school fruit, and heavily criticises the recent proposal to ban refillable olive oil jugs from restaurant (which was eventually dropped by the European Commission).

However, the document also sets out clear limits to what the Dutch government says it is prepared to consider and it does not does call for entire policy areas to be returned to national governments. The Dutch government also says it is “not interested in treaty change or opt-outs” for itself.

Nonetheless, the fact that one of the EU’s founding members has stated that "the time of ever closer union is behind us" is clearly a major development.

"Why EU mandarins refuse to learn"

Has anything changed since the 15th century?

Die Welt’s Foreign Affairs Editor Clemens Wergin today has a blistering op-ed on the current state of affairs in Europe, entitled “Why EU mandarins refuse to learn”. Here are the key parts:

“The disastrous decisions regarding the future of Europe have been completely without consequences. Despite all the mistakes made the system appears to be incapable of adapting. The tanker remains on the wrong course.”

“It belongs to the biggest disappointments for convinced democrats that up until now, neither on the European level or on that of the nation states, there are no noteworthy efforts to clarify the causes of the euro crisis… The Bundestag has also not covered itself in glory. There has been no cross-examination of Hans Eichel and Gerhard Schröder why they agreed to let Greece join the euro despite the fact that already then there was a strong suspicion that the Greek figures were problematic.”

"Democracy is adaptive and able to correct itself. However this is out of the question in the worst crisis to hit Europe after the war. Here, the euroscepticism of many of the continent’s citizens is justified. They see that in this crisis that this Europe is not created on transparency, enlightenment and accountability. This creates the impression that they are dealing with a conspiracy of the elite, conspiracy against common sense."

“EU elites are afraid of washing their dirty laundry for fear it will portray the European project in a bad light… It is part of the pride and ethos of a democratic polity to clarify failures and to draw consequences.”

“With the exception of the changes to the eurozone’s regulatory framework forced through by the Germans there have been no intentions of rethinking the fundamental assumptions of the EU… One gets the justifiable impression that nothing can divert EU mandarins from their current path and their pre-conceived opinions. The euro has not worked? Ok, let's try an even higher dose of community building… In Brussels they mourn over bad poll numbers and believe that this is only down to national populists who have wrongly explained Europe.” 

"With Portugal, Spain and Greece there was once the quiet hope that good European governance would be diffused via a kind of osmosis process from the EU headquarters in Brussels into the periphery. That has worked only in part. In some respects, the abundant money from the EU’s structural funds has had the opposite effect to that which was intended. They have strengthened clientelistic structures and made people there believe their system somehow works. Ultimately, politicians always had enough money via Brussels assistance to distribute to cronies and voters. As long as money was available, many people profited from this system. Then along came the crisis which showed that it just does not work and carries with it significant competitive disadvantages.” 

"At present, the EU is obviously not an adaptive system. Nothing is solved, no one is held accountable. Responsibility for consequential mistakes is lost somewhere between the many capital cities and the corridors of Brussels. As long as this does not change, one should not be surprised by the bad reputation that this European undertaking enjoys among citizens."

 Taking no prisoners. For German speakers, it's worth reading the entire piece. 

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? 

Fact-checking Commissioner Lewandowski (Spin alert!)

When the Commission talks about the EU budget, it's always worth taking their "facts" with a pinch of salt - they have a record of spinning the figures pretty shamelessly.  

The issue of the EU budget is refusing to go away – the torturous discussions over the 2014 – 2020 financial framework have only been deferred, while the European Parliament and member states are still at war over the 2012 and 2013 annual budgets. However, rather than working on constructive proposals to trim expenditure, EU Budget Commissioner Janusz Lewandowski (pictured) seems to be conducting a PR campaign in favour of greater EU spending.

And you guessed it, he's being generous with the truth. 

In an interview with Bild, he made a few points that were either highly contestable or outright factually incorrect. Here is our quick fisk of some of his arguments:

Bild: Why is the Commission not making any savings?
Lewandowski: That is not quite true. With regard to 2013 our proposal is consistent in real terms, which means we are only seeking an adjustment in line with inflation. 

Lewandowski is being disingenuous – the latest draft for the 2013 budget forward by the Commission foresees a 6.7% increase in spending, well above inflation. The real terms freeze refers to the ‘commitments’ section of the budget, not the actual cash contributed by member states.

Lewandowski: Many German states such as Brandenburg, Schleswig-Holstein and Saxony are dependent on EU funding. 

Well, "dependent" is an interesting choice of words. For richer member states, the structural funds involve recycling cash. As we have shown, there's no good reason for the EU’s continued involvement in the regional policy of wealthier member states such as the UK and Germany. In fact, there's no conclusive evidence that the structural funds offer the best comparative use of public money considering their contradictory criteria, and their deadweight, opportunity, and administrative costs.

But Lewandowski also shows poor understanding of the redistribution flows within Germany - and the relative wealth of German länder. If by "dependent" he means "net recipient", he is correct that Brandenburg and Saxony (both formerly in the DDR) are net recipients of EU structural funds. However, Schleswig-Holstein is definitely a net contributor, and a big one at that. According to recent research published by Open Europe’s German sister organisation, Open Europe Berlin, Schleswig-Holstein pays €3.80 into the structural funds (via general taxation) for every €1 it gets back. If Lewandowski wanted to prove our point that the structural funds suffer from irrational redistribution patterns, he did a good job. But such a poor grasp of the basics is worrying from the Budgetary Commissioner.

Bild: All member countries have to save - why not the EU?
Lewandowski: It is misleading to use national austerity programmes to justify cuts to the EU budget. The EU budget is far too small to significantly affect the deficits [in national budgets]. It accounts for only 1% of EU GDP. 

Leaving aside the boring and completely arbitrary debate about the EU budget ‘only’ being 1% of EU-wide GDP, Lewandowski is on shaky ground when asserting that contributions to the EU budget only have a negligible impact on national deficit targets. For example, France is seeking to reduce its budget deficit by €33bn next year (a mix of cuts and tax increases) whereas its contribution to the 2013 annual budget is set to be €21.8bn - hardly insignificant. 

Lewandowski also ignores the symbolic impact of the EU demanding higher contributions at a time of national austerity – one of the factors contributing to citizens’ widespread disillusionment with the EU. 

So not Lewandowski's finest hour. If he is stuck for inspiration we would recommend he takes a look at our ‘alternative EU budget’ for 2012 which cut EU spending by €41bn (almost 30%) while also re-focussing the remaining spending far more effectively on boosting jobs and growth.

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.

Cameron’s EU budget veto is a powerful tool for change

Over on the Telegraph blog, we argue:

Labour has joined the battle over the EU’s next long-term budget. The budget, to run between 2014 and 2020, will be discussed at an EU summit on 22 and 23 November. David Cameron wants a “real terms freeze” (based on the cash that was paid out from the 2011 EU budget), Labour says he should go for a “real terms cut”, though it is not clear how that is defined. A motion will be debated on Wednesday in Parliament calling for a cut in the EU budget. It’s not binding, but if Labour MPs side with Tory backbenchers it could be embarrassing for the Government. The discussion is generally confused. 

Cameron is running short of allies in Europe for his real terms freeze – the Swedes and the Dutch are still with him. Cameron looks unlikely to back down, however, and it may come to him vetoing it. So what happens if Cameron vetoes the EU budget? The spin from some is that the talks move to QMV, and Cameron is toast anyway.

It’s a bit more complicated than this, however. If there’s no agreement by the end of 2013, there are two, broad possible outcomes:

Carry over the current EU budget:  If EU leaders fail to reach a deal before the end of next year, the 2013 budget structure is carried over, adjusted to inflation (the standard GDP deflator of 2pc). How the cash is allocated is decided by Qualified Majority Vote (QMV) rather than unanimity, circumventing the UK’s veto.

The point is that the UK uses 2011 payments as its baseline figure and this is likely to be considerably lower than the budget allocations or the overall ceiling for subsequent years. The combination of QMV and switching baseline scenario could therefore substantially increase the size of the EU budget, compared to both Cameron’s proposal and the various compromise deals floating around.

Tear up the budget completely and create a new proposal: The European Parliament could go rogue, tearing up the so-called “inter-institutional agreement” between itself and EU ministers, meaning that each year the Commission has to table a completely new proposal for the annual budgets although without any spending ceilings. These, also, will be subject to QMV.

So is Cameron’s veto pointless? Not at all. For a range of reasons, many EU countries would will desperately want to avoid this minefield:

• Under a “no deal” scenario, EU leaders will need to decide some 55 separate EU spending areas, through individual QMV decisions, all subject to a cobweb of disagreements. This would be hugely time-consuming.

• The powerful block of new member states would lose out massively from the previous year’s deal being carried over, since under the new budget period they are expected to receive proportionately more money. They will badly want a new deal.

• In addition, the UK isn’t the only country with a “rebate”. But unlike the UK’s rebate, all other budget corrections – including the Swedish and Dutch rebate on the UK’s rebate (yes, there’s such a thing) – will expire in 2013, while the UK rebate remains constant (courtesy of Margaret Thatcher). Many net contributors are therefore keen on a new deal.

• For its part, it would take a lot of nerve for the European Parliament – which is already struggling with democratic legitimacy – to tear up the inter-institutional agreement altogether (I dare them).

There’s another twist involving the UK’s rebate which may not make an ad hoc deal appear that bad for the UK either. Even under  Cameron’s “freeze”, the UK’s net contribution could go up by between €1bn (2.2pc) and €2.4bn (5.4pc) over seven years, as more cash would go to new member states not covered by the UK rebate. Under a “no deal” this effect may be mitigated to a significant extent, meaning the UK’s net contribution wouldn’t be greatly affected (for the detail, see here).

Cameron could have done some other things – including repatriating structural funds for richer member states – but at least he’s trying to achieve some change and do the right thing.  Ultimately, this episode shows just how politically and economically unsustainable the EU budget is. It needs to be one of the first items up for re-negotiation as the UK seeks new EU membership terms.