Updated: Commission silent as foundation for increased EU budget contributions remains unclear

Update 24/10/14 17.05:
Outgoing Commission President Jose Manuel Barroso has just given his press conference which frankly did not clear much up. Barroso insisted, as the Dutch position below does, that this payment demand is part of an annual adjustment which is based off of the revised figures for annual GNI (which are produced by national statistics agencies and then verified by eurostat).

Essentially, he is suggesting that the final figures for the UK in 2013 proved to be so far ahead  of expectations that they altered the UK's share of the budget significantly.

This is not a completely implausible scenario but it leaves some glaring gaps. Firstly, its hard to imagine the economy outperformed so much and other EU economies underperfomed so significantly that the UK has to stump up another €2.1bn. Secondly, this doesn't fit with the leaked doc from the FT. As discussed below, the figures clearly seem to relate to a longer term assessment based off the ESA changes to the way GNI is calculated.

All that said, its becoming increasingly clear that the positions of the Commission, UK and others are not quite compatible so something will have to give in a negotiation.

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Currently, there is still no clear explanation for where the demand for increased contributions to the EU budget came from or exactly how it was calculated - see our comprehensive analysis here. While the Dutch and the Brits are both concerned about being asked to contribute more, they are actually putting slightly different versions of events forward. These two split the prevailing theories about how this has come about.

The first version of events, pushed by the Dutch, suggests that this is not as surprising has been made out since it is actually down to the regular assessment of the four cycle of VAT receipts and tax returns related to GDP of countries. When asked by Dutch BNR radio ‘Does this revision have anything to do with the new accounting method?’, Dutch Finance Minister Jeroen Dijsselbloem responded,

“No, this seems to come from a [annual] source revision which is something different from the statistical method that is used to calculate [the GDP].” 

The point that surprised the Dutch was that the demand came out at almost double what they had forecast and there is no clear explanation of why this is.

The other version of events ties into the document leaked by the FT. Judging by this document it is hard not to see this cost as a result of a calculation based off the introduction of the new European System of Accounts 2010. The UK is suggesting it was unaware of such a significant overhaul to the EU budget calculations and has not been included in the discussion around the changes. The document clearly looks to alter the budget contributions over the period between the introduction of the previous system of accounts and the end of 2013. The total figures also line up with the reports and are yet to be rejected or even disputed by anyone. The fact the figures are so large also fits more with this version of events than the regular adjustment - in this sense something will have to give (size of demand primarily) for the first version of events to be true.

What do they agree on?

• There is clear agreement that this has been handled poorly by the Commission, who is still yet to provide any clarity into the debate or explain exactly how much they are asking for and why.
• Furthermore, the demand for payment immediately also seems to be a miscalculation by the Commission which caught some unawares at least in terms of the size, if not the timing.

While this may seem trivial it is vitally important that the Commission makes clear and gets to the bottom of what is going on here. Ultimately, Cameron’s options will be very different depending on whether the demand is driven by a unique one off event (such as long terms GDP changes) or part of a regular assessment of the EU budget. In any case, whatever the source serious questions need to be asked about how a bill of €2.1bn can materialise with little or no political discussion.

Why is the UK being asked to pay in more to the EU budget and what can it do about it?

There are a number of headlines today around the EU’s request for a further €2.1bn from the UK in terms of its contribution to the EU’s budget.

Below we breakdown exactly how and why this has happened and what options the UK has now.

How has this happened?

• The European Commission has launched a review of EU budget shares (based of VAT receipts and Gross National Income [GNI]) going back to 1995.
• This is tied in with the introduction of the new European System of Accounts (ESA) 2010 which came into force in September. This is a new approach to assess the true value of a country’s economy (its GDP) by counting some activities which are often missed. Many of you will have read the countless headlines about how GDP will now try to quantify the value of prostitution and the drug trade. However, the new calculations also give more weight to research & development and other softer types of investment. The Commission has estimated that these adjustments will push most member states GDP up, albeit by varying degrees.
• Essentially, since 1995 the UK has performed better than expected and better than many of the other EU member states. As such its economy is larger than originally thought. Under the review this means that its share of the EU budget – which is calculated off the back of GDP and population as a share of overall EU GDP and population – has increased.
• The EU is also in the process of producing an amendment to the annual budget which we discussed here. At some point, very recently, the EU has decided to almost combine the two issues possibly causing a speed up in the payment date for this €2.1bn lump sum.

Why has everyone been caught off guard?

• While the annual amendments to the budget are expected and usual (though often unnecessary and far too high as we have pointed out numerous times) this adjustment on GDP terms is unprecedented and seems to be largely a one off – as such it has caught most people off guard.
• It also seems that the release has been kept under wraps for some time. While the amending budget has been known and discussed for some time, with the final details circulated to member states a week ago in preparation for the current EU summit, the details of this were only released to member states a day ago. Essentially it was somewhat sprung on them ahead of the summit.
• This is exacerbated by the fact that this is clearly an extensive long term process and that the ESA 2010 adjustment has been running for years. To say the release and interaction with member states on this issue has been poorly handled would be a massive understatement.

What are the UK’s options now?

• First, it’s clear the UK is not alone in its outrage. The Netherlands has been asked to pay in a further €640m, while Italy has been asked for €340m. Dutch Prime Minister Mark Rutte has called this “an unpleasant surprise which raises a lot of questions”, adding, “when I say go to the bottom of this, it means to look at all aspects, including legal ones. It is still too early to run ahead on this.”
• The first option is to get an agreement to deduct any payments from future budget contributions. This would avoid having to pay in a lump sum now and also mean that it on net the UK does not pay any extra.
• The second option would be to secure a political or legal agree to ignore these uprated GDP shares and stick with the originals. This should be doable through a vote in the European Council. That said, because some members are getting a rebate – France and Germany in particular – this could prove a very tricky agreement to strike.
• As Rutte has already pointed out, countries may have legal recourse. Exactly what form this could take is unknown but the retroactive nature of the cost and its lack of discussion and warning could provide some grounds.
• Lastly, the UK (and the Netherlands) could simply refuse to pay. As large net contributors to the EU budget, there is little that others can do to force them to pay. Obviously the EU could launch its own legal action in terms of infraction proceedings; however, the maximum fine for the UK is around €225m on an annual basis – much less than it is being asked to stump up here. This could also be combined with the point above, with the UK refusing to pay until the legal proceedings have run their course. ***see update below***

Open Europe’s take
While this does not necessarily seem to be a political stitch up from the EU there is no doubt that it is unreasonable and politically irresponsible. Retroactively taxing someone over 20 years is fundamentally unfair. The fact that the UK and Netherlands are being punished for doing better than expected and better than others almost encapsulates everything that is wrong with the EU’s approach – particularly when the Eurozone economy is struggling to find any growth.

Once again the EU has failed to learn any lessons from the previous budget negotiations and has helped to feed those who want to leave the EU, possibly ultimately shooting itself in the foot. Still, what's interesting is that in a debate marred by splits, the UK political class is almost entirely united in its outrage against this move. It is ironic that in the week when one poll found British support for EU membership at its highest since 1991, the Commission has managed to unite everyone from Lib Dem MEPs to UKIP in outrage. If Cameron manages to resist the demand somehow, he would be able to score a massive victory.

Update 24/10/14 12:05:
One point to add regarding the refusing to pay option and the potential fines. On top of the potential fine from infraction proceedings mentioned above, the amount of €2.1bn will be charged 2.5% interest (standard 2% above the Bank of England base rate currently 0.5%), which increases by 0.25% for every additional month which the outstanding amount is not paid off. Such interest could clearly mount up very quickly and become very expensive. If the UK is eventually forced to accept £2.1bn figure, then it could clearly turn out to be very costly. Ultimately, though, if the UK is prepared to play hard ball, it would lead to a stand-off that will would need to be resolved by a political negotiation. Such disputes rarely reach such escalated levels and resolutions are normally found before costs mount up. 

Another manufactured row over the EU budget?

On the 30th of June 2011, the Commission unveiled its blueprint for the EU's long term-budget (MFF) between 2020-2014. Since then, we've witnessed a rather drawn out and undignified scrap as member states, the Commission, MEPs and a whole assortment of lobbyists and vested interests have fought tooth and nail to ensure their own priorities secure as much funding as possible.

In the past, we compared this process to an ill-mannered round of bartering at a provincial flea market, but in retrospect this may have been an overly generous depiction. The depressing result is a budget that pointlessly recycles far too much cash around wealthier member states while not allocating enough to areas such as R&D which could enable the EU to take advantage of growth opportunities in innovate areas of the global economy.

To recap: this February, following an earlier aborted attempt, EU leaders finally struck a deal on the overall spending levels, agreeing on a historic cut in EU spending. MEPs were unhappy and demanded a whole host of concessions in exchange for their consent to the package, one of which was an additional €11.2bn to top up this year's annual budget. In May, member states approved a first trance of €7.3bn (despite the UK's objections), and two weeks ago provisionally approved the release of the remaining €3.9bn.

The problem was that MEPs demanded that the €3.9bn be officially signed off before they approved the MFF, and therefore postponed the vote until next month. However, this has prompted EU Commission President Barroso to warn that the EU could become "insolvent" by the middle of next month. This issue has become further complicated because the member states have apparently demanded that €400m in appropriations from the European Solidarity Fund - intended to compensate Germany, Austria, the Czech Republic for floods and drought over the Summer - be included in the €3.9bn while MEPs want the money to come from fresh national contributions.

This new argument seems particularly pointless as it affects 0.28% of EU spending this year and 0.04% of the budget for 2014-2020. It is inconceivable that the Commission could not make up this sum from existing allocations. Also, the European Solidarity Fund is primarily a symbolic instrument, especially when it comes to wealthier member states (€360m of the €400m has been allocated to Germany). Instead, this latest institutional argy-bargy has served as just another opportunity for MEPs to try to show off their importance. MEPs are also likely to publicly pick a fight over some of the cuts made by member states to next year's annual budget as a cover to secure some minor concessions.

Surely the EU can do better than this.

'My reaction was excessive, but the journalist was rude': Italian MEP caught on camera responds

Italian MEP Renato Baldassarre has responded to the posting of the video in which he's seen pushing and slapping a Dutch journalist (or at least the journalist's microphone) after being caught on camera allegedly signing in for a day's work, and then sodding off.

We posted a cut down version of the video on our blog, and it has generated quite a bit of interest .

As we're always keen on a right to reply, we've now translated Mr Baldassarre's response below. Again, judge for yourself (and if you understand Italian, the full interview is available here).

"First of all, I’m really sorry about that episode and the relevance which was given to it. But the truth has to be re-established. I answered the questions that I understood in a very correct fashion, until the insistence – and I would also say the rudeness – of the interviewer has triggered a reaction, perhaps excessive, but also justified by the fact I was not exactly in the best of moods given that around that time I had received the news that a very close relative of mine had been hospitalised."

"That said, this is about the usual episodes aimed at highlighting waste and privileges allegedly involving the European Parliament...I have a very high attendance record, 90% in plenaries and 85-86% in the various Committees. On that specific day, I had just arrived and was going to my office where I stayed until 10pm. Therefore, I really believe the whole fabrication around this episode is frankly excessive."

It is also worth noting that this story has unfolded on the same day as the Parliament has told member states it will not accept the latest compromise proposal on the EU's long term budget. In other words, MEPs are still holding the budget cut negotiated by David Cameron and other EU leaders hostage. Not a great day for MEPs from a PR point of view...

The 2014-2020 EU budget: The deal that never was?

After the umpteenth round of talks on the next long-term EU budget between negotiators from the Irish Presidency, the European Parliament and the European Commission, Ireland's Deputy Prime Minister Eamon Gilmore announced yesterday,

"We have concluded negotiations on the EU's multi-annual budget for the next seven years [2014-2020]. I have reached an agreement with the European Parliament's chief negotiator. We have agreed a package that we are both going to recommend to our respective institutions...This is a balanced package that addresses all four of the issues identified by the European Parliament as important for the EU budget." 

In exchange for agreeing (through gritted teeth) to a historic cut in overall spending from the 2007-2013 budget period, MEPs would secure concessions on "more flexibility" between spending areas and annual budgets, plus a mandatory 'mid-term review' of the long-term budget in 2016. There was also an agreement on "a method for carrying forward discussions" on direct taxes for the EU budget - whatever that means - but no binding commitment.

All sorted? Not quite. Alain Lamassoure, the French centre-right MEP who is heading the European Parliament's negotiating team, told a rather different story to AFP,

"Some members of the European Parliament's delegation are very cautious [on the outcome of the talks], and it's for this reason that I couldn't commit the European Parliament."

The leaders of the main political groups in the European Parliament will meet on Tuesday to decide whether or not they are happy with the latest compromise on the table. In other words, it seems the Irish Presidency was so eager to end its term with a landmark deal that it got a bit ahead of itself.

And not without consequences. German MEP Reimer Böge, from Angela Merkel's CDU party, resigned as the EPP rapporteur's on the 2014-2020 EU budget this morning in protest against what he described as "nothing more than a manipulation" from the Irish Presidency. According to him,

"The European Parliament's negotiating team last night decided not to continue the negotiations, if they can be called such at all, and submit the texts to the European Parliament."

A 'deal' that turned out not to be a deal after all. We can only wonder what ordinary citizens make of all this posturing, brinkmanship and back-room horse-trading.

Moreover, several important questions remain unanswered. How would this 'revision' work exactly, and what would it involve? Are MEPs prepared to drop their demand for it to take place under QMV and not unanimity? What's the point of having a non-binding discussion on 'own resources', given that there's no appetite for direct EU taxes across the bloc?

Ultimately, MEPs should be careful not to overplay their hand in seeking concessions - if push came to shove would they really veto the agreement painstakingly negotiated by EU leaders?

Things should become clearer next week. For the moment, it's worth keeping in mind that, whatever the outcome of the negotiations with MEPs, the deal will have to be endorsed by EU member states by unanimity - meaning that the UK would still have a veto over it. 

The Anglo-German axis is stirring up emotions

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

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

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

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

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

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

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

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

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

The EU budget: an updated break-down

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

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

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

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

Let's start from Germany.

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

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

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

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

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

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

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

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

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

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

An editorial in French business daily Les Echos argues,

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

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

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

Claudi Pérez, Brussels correspondent for El País, writes,

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

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

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

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

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

David Cameron (UK)

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

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

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

Angela Merkel (Germany)

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

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

François Hollande (France)

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

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

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

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

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

Mario Monti (Italy)

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

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

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

Mariano Rajoy (Spain)

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

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

Mark Rutte (Netherlands)

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

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

Helle Thorning-Schmidt (Denmark)

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

Fredrik Reinfeldt (Sweden)

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

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

Donald Tusk (Poland)

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

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

Werner Faymann (Austria)

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

Petr Necas (Czech Republic)

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

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

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

Key points

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

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

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

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

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

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

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

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

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

Here are the details:

Net contribution:

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

Essentially, because the share of the EU budget going to the new member states – the ones that have joined the EU since 2004 – will increase, and since the UK gets no rebate on this spending, the UK's net contribution will go up. As we've argued, this isn't a bad thing as it's in the new member states that this cash can make a difference. Still, this could prove politically sticky for the UK Government when explaining the figures to MPs and the Opposition in the months to come – though David Cameron is likely to heap the blame on Tony Blair (with some justification) for giving up part of the rebate in 2005.

Gross contribution:

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

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

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

As we explained here, actual payments 'trail' commitments (or promises to pay). In the context of an ever-increasing budget, this doesn't present a practical problem, because extra funds can always be pledged to meet previous commitments. But now we have a situation where payments are falling well below the level of the commitments that the EU is able to make under the current budget, potentially creating a deficit. The current compromise is also predicated on deeper cuts to payments than to commitments.

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

In theory, the MFF payment ceilings that are being agreed now cannot be altered unless there is unanimous agreement, as it essentially means re-opening the MFF. For example, in 2011, funds were 'redeployed' to fund a shortfall for the International Thermonuclear Experimental Reactor (ITER), although, in this case, this didn't mean increasing the payment ceiling. The current rules say that ceilings can be revised by 0.03% of EU GNI for 'unforeseen' expenditure. More than this would seem to require unanimity.

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

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

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

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

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

The headline figures are:

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

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

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

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

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

So, Cameron remains on solid ground.

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

Policy heading breakdown

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

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

The UK’s net contribution could still increase 

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

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

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

Will the UK's gross contribution go up? 

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

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

Own resources/revenue

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

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

An untimely scandal in the making for Rajoy?

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

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

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

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

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

• Luis Bárcenas served as PP treasurer until July 2009.

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

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

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

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

The OBR's new forecast and the EU budget: What's in there?

On the same day as George Osborne's Autumn Statement, the Office for Budget Responsibility (OBR) published its new Economic and Fiscal Outlook. As usual, the first section we looked at was the one about how much the UK pays into the EU budget. Here is a reader-friendly table we put together, comparing the UK's net contributions to the EU budget in the latest outlook published yesterday with those in the March 2012 outlook (click to enlarge).  

So, the numbers tell us that the UK's net contribution for 2011-12 turned out to be £1.3 billion lower than expected, but the net contribution for 2012-13 is going to be £2.1 billion higher than the previous forecasts indicated. Why?

The OBR is not exactly forthcoming with a clear explanation, but the report (on page 148) notes:  

The largest change [in expenditure transfers to the EU institutions] is in 2012-13, where we have increased our forecast by £1.5 billion [N.B.: Expenditure transfers to EU institutions are something slightly different from EU budget contributions as a whole]. This mainly reflects revised estimates of GNI and VAT bases for all EU countries in 2012 and 2013. Partly because of exchange rate changes these revisions increased the UK’s relative share in both the GNI and VAT bases, particularly for 2012, and thus increased our GNI contribution. 

This increases our expenditure contributions in all future years, but the effects are partially offset by increases in the abatement [the UK rebate] after 2012-13. The expenditure transfers [to the EU institutions] have also been increased in 2012-13 because of lower than expected surpluses carried forward in the EU budget from the outturn for 2011, and to reflect increases in amending budgets in 2012.

Therefore, essentially the OBR suggests that because the UK economy has done relatively well compared to other EU countries, its share of contributions in terms of Gross National Income (GNI) and VAT base have increased. This is natural given the way the budget is calculated, although it once again highlights the fallibility of economic forecasts at the national and international level - clearly the OBR's early forecast of how the UK economy would develop relative to the rest of the EU was some way off.

The OBR also notes the impact of exchange rate changes which have also increased the UK's contributions in sterling terms. Again this is hard to avoid, although the assumption that this will hold in the longer term is far from certain - and paves the way for future forecast revisions. All this is offset to some extent by the automatic adjustments in the UK rebate (designed to account for these sorts of changes), although as we have noted recently the UK rebate could decrease in the next budget period, hampering this offsetting process.

Finally, though, as the OBR warns, much of this is rather academic given the ongoing EU budget negotiations:

The forecast is subject to risks depending on the outcome of the negotiations for the EU budget for 2013, where we have assumed an increase of 2.8%, and for the new EU budget envelope for 2014 to 2020, where we have assumed a small real terms increase.

The first assumption sounds about right - given that MEPs now seem more willing to accept a 2.9% increase in payments in next year's EU budget, as opposed to the inflation-busting 6.8% increase proposed (twice!) by the European Commission. The second assumption is perhaps a bit pessimistic, given that David Cameron has said that he will veto anything different from, at worst, a 'real terms freeze' in the next seven-year EU budget - and Germany, Sweden and the Netherlands are also pushing for a similar freeze.

This is all clearly but another round in the series of forecasts of UK contributions to the EU budget, and far from the last since the negotiations on the next long term budget are under way. But if you are still confused by all these numbers and wondering how it could all end up, we would recommend reviewing our analysis of what could come out of the negotiations on the next long-term EU budget, and how much the UK would have to pay under each scenario.

Meet the EU budget 'veto team'

This EU budget stuff can come across as pretty dull and confusing. To lighten things up a bit, we will turn to the universal language of football. So meet the EU budget 'Veto Team' - the eleven EU leaders that so far have threatened to veto the EU budget unless they get a better deal. Needless to say, given that this is its first outing, the eleven-man team is far from a cohesive unit - with lots of big egos and players who play for themselves.

(Click to enlarge the picture)

CF: David Cameron leads the line, ready to strike and seen as the most likely to pull the trigger on any veto.

RW: Swedish Prime Minister Fredrik Reinfeldt at right winger hugging the line (sticking to his guns), happy to put in a shift for the team and more likely to offer an assist/support for Cameron than to deliver the final blow himself.

AM: French President François Hollande is the mercurial trickster playing between the lines but not quite sure of his role or his aims. Ultimately a selfish player (as are many of the others) but whose own personal gain could ultimately be detrimental to the rest of the team.

DM: Italian Prime Minister Mario Monti is playing the stoic holding role, refusing to budge and occasionally gesticulating wildly at the referee, although never actually getting into the danger zone at the forefront of the action. More likely to break up play and provide a stumbling block than deliver a knockout blow to the opposition. Unlike the rest of the team, not here on merit (elected) but parachuted in by the powers above.

LW: Portuguese Prime Minister Pedro Passos Coelho takes on the Cristiano Ronaldo role as a marauding left winger and not just because of the nationality. His red line that Herman Van Rompuy's proposal is unacceptable makes him more of a threat than many expected. Under pressure to perform from his home fans (electorate) he needs to put in a big showing – the question remains though whether he will rise to the challenge or crumble under the pressure.

MC: Dutch Prime Minister Mark Rutte is playing the 'box-to-box midfielder' role, akin to the days of Johan Cruyff's 'total football'. Usually more inclined to side with Germany (the opposition), Rutte finds himself dragged end-to-end with action not quite sure where he should be or where he is best suited. One things for sure, his hometown team (the VVD party) would love to see him score.

LB: Belgian Prime Minister Elio Di Rupo, naturally inclined to the left, find himself at left back. His demands are relatively minor and he’s not a regular in this team (usually part of the core EU group whose views align closely). He’ll put up a fight for a bit but he’s not a star player in this game.

CB: The towering centre-back, Danish Prime Minister Helle Thorning-Schmidt provides a solid spine to the team. Not one of the more flashy players but they know their job and what they want out of it (a clean sheet). Unlikely to score (pull the veto) but will definitely provide a blocker against any increases in the budget.

CB: Austrian Chancellor Werner Faymann is another unfamiliar member of the team. Stuck in at centre back because of its experience in the eurozone crisis and playing a key blocking role in minimising the liabilities. Unfortunately, his aims are different in this game and, as with Hollande, he may end up scoring an own goal (getting more spending in the budget).

RB: Romanian President Traian Basescu, at right back, is there as a late replacement and now a token entry. The previous incumbent (Romanian Prime Minister Victor Ponta) looked set for an interesting game, but after the substitution this role is unlikely to provide much action.

GK: Latvian Prime Minister Valdis Dombrovskis is in goal because, well, the smallest kid always gets stuck with the worst job.
 

Britain is not about to get completely stuffed in Europe

On his Telegraph blog, Mats Persson argues:

Take a deep breath. Britain is not about to get completely stuffed in Europe.

The FT ran a story the other day claiming that the EU could circumvent the UK’s veto over the EU’s next long-term budget (2014 to 2020) , effectively turning David Cameron into a spectator in the talks and forced to accept spending increases. Stories like these fuel speculation that “Brixit” – the UK leaving the EU – is just around the corner.

But how much of this is actually substance as opposed to noise? The FT story was pretty implausible – ‘circumventing’ the UK’s veto will be very difficult. In case of no agreement before the end of 2013, EU officials could move to roll over the 2013 EU spending ceilings adjusted to inflation with up to 55 individual spending items decided by Qualified Majority Voting (QMV). This would be extremely messy. There's no way 26 countries would agree amongst themselves to take a common position against Britain on 50+ spending areas – at least eight countries have already threatened to veto the EU budget for different reasons.

But let’s do some war-gaming around EU events this autumn, to see how bad things really are for Cameron.
EU leaders will discuss the long-term EU budget this week, starting tomorrow. There are effectively three possible outcomes from the Brussels summit: a new veto moment for Cameron, a deal or postponing the decision. Though all options are on the table – and a deal this weekend isn't impossible – the latter remains the most likely.

Following the recent vote in British Parliament, in which a majority of MPs voted for a cut to EU spending rather than a freeze, Cameron can hardly accept the proposals for an increase that are floating around.
But forcing Cameron to veto the EU budget this week could trigger a “perfect” storm not only for Britain, but also the EU as a whole, in which everyone would lose. A new veto would really sour relations between the UK and Europe, and any attempt to try to press ahead without the UK would be met with fury in Westminster as it would effectively involve taxation without representation. Agreement on an EU “banking union” – the far bigger fish to fry as it links with the stability of the euro – would then be much more difficult to reach at the EU December summit, when leaders will hammer out those details.

The UK also has a veto over the banking union. Though it’s currently broadly supportive, should the UK be singled out in EU budget talks, the banking union will be far more difficult to manage in Westminster as every front page in the land will be splashed with “EU stitch-up” headlines. Cameron will come under pressure to pull a second veto over banking union to take back control over events.

EU officials say they have a familiar back-up plan should this happen: ignore Britain. The EU, they say, could press ahead with banking union under so-called “enhanced cooperation”, allowing a limited number of member states to pursue more integration, if not possible at the level of all 27.  But this would trigger a massive crisis as the UK would, for all practical purposes, find itself “not in the euro but run by the euro” – London’s worst nightmare. Legal challenges and massive uncertainty for the eurozone would follow. Britain would also be half-way through the exit door.

Far-fetched? Most certainly. It could happen. But Berlin and Brussels will get cold feet long before it gets to that. The legal foundations of trying to rewrite the role of the ECB, turning it into a bank supervisor, using enhanced cooperation would be so weak that Angela Merkel’s lawyers could well suffer a nervous break-down.

And this also shows that beyond the huffing and puffing – and the indulgence of “isolation” stories – it’s in everyone’s interest to reach a deal. But that’s only with regards to events this autumn of course. There will be plenty more fraught moments to come.

The long queue of potential 'EU budget vetoes': Who will join next?

Update 21 November, 16:15

Portugal has stepped up its rhetoric by a notch, and has now joined the group of countries that have explicitly threatened to use their veto. Portuguese Prime Minister Pedro Passos Coelho told MPs, "The proposal that has been tabled [by European Council President Herman Van Rompuy] is completely unacceptable for Portugal. By saying this, I mean that I would block a decision [by EU heads of state and government] that had this proposal as its final result."

In practice, this means that one third of EU member states have so far explicitly said that they are ready to veto the next long-term EU budget.  

Update 21 November, 10:40

Another day, another EU budget veto threat - this time from Latvia. Prime Minister Valdis Dombrovskis has said that his country is prepared to veto the 2014-2020 EU budget unless it gets a better deal on agricultural subsidies and cohesion policy.

Update 20 November, 17:00

Italy has today officially moved to the group of countries that have explicitly threatened to veto the 2014-2020 EU budget. Italian Europe Minister Enzo Moavero Milanesi said Italy will be "ready to use its veto" if it considers that the next long-term EU budget is "harmful for the country and burdensome for the Italian taxpayer."

Also, Portugal added its voice to the group of member states that consider Van Rompuy's proposal "unacceptable", but stopped short of threatening a veto. 
 
And here's our original blog post,

You will have read a slew of stories about how the UK is threatening to veto the EU leaders' budget talks later this week and the various terrible consequences that will follow should it do so. The FT has a story today that EU diplomats are working to "circumvent" the UK's veto by moving to annual Qualified Majority Voting, which actually only means that they're working on a scenario for a roll-over, should a deal fail to be struck (we've already looked at that scenario in detail here) so don't get too excited.    
As some European sources have put it, a "miracle" would be needed to strike a deal on the 2014-2020 EU budget when EU leaders meet in Brussels on Thursday and Friday. And the UK is certainly not alone when it comes to putting its veto on the table. In fact, veto threats are flying around all over the place - we count seven veto threats in total. Here is a list of EU member states who have either explicitly threatened to veto the next long-term EU budget or said they are unhappy with the compromise currently on the table - which means they could wield their veto unless something changes.

UK: Has threatened to veto any proposal which does not involve, at worst, a freeze based on 2011 payments.

Denmark: Has warned it will use its veto unless it gets a rebate worth 1 billion DKK (slightly over £100 million) from the 2014-2020 EU budget.

France: Has said the compromise proposal put forward by European Council President Herman Van Rompuy "is not a basis for negotiations". Paris wants EU farm subsidies to be kept at least at 2013 levels, and said it will threaten to veto the talks should CAP spending be radically changed.

Sweden: Has hinted at using the veto in the past and believes Van Rompuy's proposal still does not go far enough. According to Swedish Europe Minister Birgitta Ohlsson, what is missing is "a clear model for reducing agriculture subsidies".

Austria: Has threatened to veto the long-term EU budget unless two conditions are satisfied. Firstly, Austria wants to continue receiving its 'rebate on the UK rebate' over the next seven-year EU budget period. Secondly, the Austrian government is opposed to cutting the rural development component of the CAP.

The Netherlands: Does not want to see the annual or long-term EU budget increase above inflation, and explicitly said it will use its veto if necessary.

Romania: Has warned it could use its veto, calling Van Rompuy's proposed cuts to farm subsidies and regional funds "unacceptable".

Italy: Has not threatened to veto the talks but dismissed Van Rompuy's compromise, saying it is "not a positive contribution" to the negotiations. Italy wants to see its net contribution to the EU budget cut, the reason being that its GDP per capita has now slipped slightly below the EU-27 average. Rome also opposes cuts to farm subsidies and cohesion policy.

Spain: Has rejected Van Rompuy's proposal as "unacceptable". Reports have suggested that, under the proposal, Spain risks losing up to €20 billion in total over seven years in both farm subsidies and cohesion funds. However, Madrid is still to drop the "V" word.

Poland: Has not explicitly threatened to wield its veto, but is clearly not happy with Van Rompuy's proposed cuts to EU regional spending. Poland is trying to muster support from other net recipients from the EU budget, such as Portugal - the so-called 'Friends of cohesion group'.

So, it looks like circumventing a veto on the 2014-2020 EU budget would mean much more than circumventing the UK.

Beyond posturing, Germany knows that the UK is needed in the EU

Our Director Mats Persson has a piece in today's Telegraph, where he argues,

Last week, even as British MPs were voting down the Government’s position on the EU budget, I was attending a European discussion of a very different kind. In a conference room in Berlin – at an event marking the launch of Open Europe’s new German partner organisation – hundreds of academics, journalists and policymakers sat listening to a brilliant speech by Otmar Issing, the former chief economist of the European Central Bank, about the intricacies of the eurozone bail-outs and where the single currency must go next – all blissfully unaware of the fraught debate in the House of Commons.

When you spend time in both Britain and Germany, it is impossible not to notice how distant their stances on Europe have become. When Angela Merkel meets David Cameron at Downing Street today, to discuss the EU budget, they ought to have plenty of common ground. Berlin actually stands to lose more than London: under the current plans, its contribution would rise by about 30 billion euros over the seven years, whereas the UK’s would go up by 17 billion. Nor does Merkel need to be told that the budget is a nonsense: even her Europhile foreign minister, Guido Westerwelle, says that the current set-up “leads to aberrations such as EU subsidies going to day-spas or romantic hotels”. 

So why are the talks expected to be frosty? The problem for the UK is, first, that the EU budget just isn’t that important to Germany at the moment. For the past two years, Berlin has been preoccupied by the eurozone bail-outs, and endless bickering over the lending capacity of the relevant funds (among other fascinating topics). 

Second, Germany still perceives its contribution as a necessary sign of its commitment to the greater good. Indeed, the bailouts – despite their unpopularity – have actually made Berlin more reluctant to kick up a fuss over the EU budget: a few billion more, in return for a bit of goodwill in the austerity-fatigued Mediterranean, is seen as a sound investment given the trillions at stake over the euro. Such subsidies are also a convenient way to hide part of the Länderfinanzausgleich – the unpopular transfer payments to the East. 

Allowing Cameron to take the flak over the budget therefore suits Merkel down to the ground. But what is really driving a wedge between them is the eurozone crisis. A host of recent stories have suggested that Merkel is “losing patience” with Britain’s reluctance to accept more integration, and with hints that the UK is prepared to leave the EU altogether (her best line likened Britain to the old men heckling from the sidelines in The Muppet Show). 

Part of the problem is that Germany and Britain keep on talking past each other. This is not just down to diverging views of the role of the market, or the merits of European project. It’s also down to bad diplomacy. Cameron and George Osborne have made a habit of lecturing the Germans on the “inexorable logic” of the eurozone becoming a debt union – for which German taxpayers would foot the bill. This is a spectacular own goal, since it obscures a key area of agreement: namely, that Europe’s economic malaise should be dealt with by structural, free-market reforms rather than doling out cheap cash. 

Recent reports suggest that Merkel’s frustrations have reached the point where she’s prepared to wave goodbye to Britain altogether. In the past, so the analysis goes, Berlin needed London to balance the Mediterranean bloc. Now, Germany’s chequebook does all the talking. Certain people in Merkel’s office have taken to slipping this into chats with journalists, in case those in Westminster have missed it. 

Beyond this posturing, however, Berlin knows that an EU without the UK would be a much less pleasant place. The single market would shrink by 15 per cent, with 75 billion euros in annual German exports facing extra costs. Germany’s contribution to the EU budget would increase by an additional 10 or 15 billion euros. Nor would Britain’s global clout be easy to replace. If it really came to a situation where the UK was on the verge of leaving the EU, Germany would almost certainly crunch the numbers and conclude that, as Ludwig Erhard said, “without Britain, Europe would only be a torso”. But taking the long view, I am optimistic that a new Anglo-German deal is still there to be struck – one that would not just keep Britain in Europe, but create a Europe that Britain could live with. 

How could this happen? First, both Cameron and Merkel need fundamental change within the EU in order to keep their domestic audiences on side. Almost two thirds of Germans, for example, oppose the idea of giving more cash to Europe.

Second, many in Germany now accept that a flexible Europe, allowing for different modes of membership, is inevitable. Such diversity could be a very good thing. It is also exactly what Britain wants. 

Third, Germany is desperate to ensure that integration does not destroy the single market, which remains an asset. This should include making sure that any eurozone banking union doesn’t push the City of London “offshore”, which would cut off a facilitator of investment and a gateway to global markets for Germany. 

Both London and Berlin support the prudent use of public money, and oppose the papering over of economic cracks through fast and loose money. Both want to boost cross-border trade, in Europe and across the world. If the British Government stops its misguided lecturing, and advocates that kind of change, it may find it has more friends than it realised. 

Nick Clegg’s opposition to renegotiation could risk the UK’s EU membership

Following Nick Clegg's Europe speech at Chatham House yesterday, we argued on the Spectator's Coffee House blog,

Nick Clegg this morning fell into the usual ‘all or nothing’ fallacy on Europe. He said: ‘As soon as we start talking about repatriation, we descend into the in-versus-out debate.’ But the Deputy Prime Minister is wrong: the in/out debate is already underway, and rather than seek to defend the unpopular status quo, Nick Clegg should back renegotiation as the best option for those who wish to put the UK’s membership on a stable democratic footing.

But instead of attempting to address the causes for the EU’s unpopularity, the inflated budget, democracy deficit and bureaucracy etc. Nick Clegg sought to channel the debate into his own in/out debate where the problems of ‘out’ justify doing nothing about the problems of ‘in’.

Clegg said that UK can either be a full member of the EU or outside, like Norway and Switzerland. He is right that Norway as a member of the EEA does indeed implement a large proportion of EU law over which it has little influence and that Switzerland does not have full access for its services industries. He also pointed out that with no EU deal ‘firms who currently pay no import tariffs on the goods they send to the continent would be faced with taxes of up to 22 per cent’.  It is actually more like 10 per cent but the point is the same. However, protesting that no one is suggesting joining the EEA or not having a free trade deal with the EU is missing the point. Nick Clegg is presenting a false choice.

There is not one standard EU membership. The UK is not in the Schengen travel area, others are. The UK has a different deal on EU crime and police law than Denmark, which is fully opted out. There are neutral states and those involved in EU defence, there is the euro, the list goes on. But for Clegg there are only two types.

‘There’s the core: where the Eurozone countries are now pulling together more closely… Then there is the ring around that… And the outer circle… The UK is in the inner circle – but the terrain is shifting. The core is tightening – to what degree we don’t yet know.’

Clegg believes we should remain ‘a strong UK, influential in Europe’, but does not define what he wants to influence or convincingly explain why we should be in anything beyond the single market and some absolutely vital cross-border measures. Clegg’s reasoning:

‘What kind of club gives you a full pass, with all the perks, but doesn’t expect you to pay the full membership fee or abide by all the rules?’

This is an odd justification for the EU’s Common Agricultural Policy, Common Fisheries Policy, social and employment regulation, wasteful regional policy and unnecessary loss of democratic control. Are these accepted as some bizarre self-imposed flagellation for daring to desire free trade? If so, why not just accept a rise in the EU budget and get on with it? It’s the ‘subscription’ fee after all.

So what should the UK aim for? In a recent paper we set out that for now the UK benefits from being in the EU’s customs union and single market for good and services but that all other areas should be decided on a case by case basis. Is this pick -and-mix EU possible? Yes. The EU, as Clegg acknowledges, is changing. The eurozone is renegotiating its membership terms, and the treaties will need to be revisited sooner or later. This will present the UK with the opportunity to reform its membership terms and put it on a stable democratic foundation in line with public opinion.

EU budget talks are heating up (and Brussels isn't doing itself any favours)

EU budget talks are heating up, with member states still unable to agree on the size of the next long-term budget, to run between 2014 and 2020.

EU leaders will try to settle differences at a summit on 22 and 22 November. As things currently stand, a deal looks unlikely, with David Cameron in a particularly tricky position (for just how tricky, see here). Today we got a taste of things to come: the Brussels institutions launched a three-pronged attack on economic common sense.

• The European Parliament voted for 6.8% increase to the EU’s 2013 budget (which is subject to Qualified Majority Voting and co-decision between national ministers and MEPs), thereby rejecting member states’ compromise 2.79% increase, instead going with the Commission.  

• In a report, the EP also backed a 5% increase to the EU’s long-term budget (and a lot bigger increase if off-balance sheet items are included), in line with the European Commission’s original proposal. This proposal has been rejected by all net contributing member states (which doesn’t mean that the net contributors agree amongst themselves).

• Finally, the Commission said today that it needs to amend the 2012 EU budget, since there's not enough cash left. If you’re a government on an EU-mandated austerity programme - or a a household - you’re forced to prioritise and find savings when there’s not enough money in the pot. If you’re an EU institution you ask for an additional €9bn (with roughly €3.1bn from fines imposed on member states, meaning that national governments will have to put up €5.9bn in total).  

Cheers for that.

So if the EP/Commisison 2012 and 2013 proposals stand, which they probably won’t (we’ll return to the long-term budget), UK taxpayers would be forced to cough up another £2bn or so (£1.3bn increase for 2013 + £700m extra funds for this year), depending a bit on exchange rate used and the UK's pre-rebate share of the EU budget (both vary).

And those people who want the UK to leave the EU just got some additional killer campaign material to play with.

Well done Brussels.