The £1.7bn question (Part II) - What are other EU finance ministers saying?

Here's a round-up of comments from other EU finance ministers about the UK's £1.7bn EU budget surcharge and the deal struck at today's meeting. This being EU budget negotiations, everyone is claiming either 'nothing to see here' or victory. Apart from the Dutch, who are getting a pretty raw deal.

We've given our take on the deal in this blog post: when all is said and done, the UK will pay £850 million. The question is whether the rebate the UK gets from the EU budget always applied to the £1.7 billion, and whether, therefore, George Osborne is basically engaging in accounting manoeuvres.

Remember, due to the way the UK's rebate from the EU budget is structured, everyone is basically paying for it, so it's not in anyone else's interest to ever talk it up.

Irish Finance Minister Michael Noonan said,

“My understanding is that the UK will pay the whole amount but there will be no penalties attached or interest rate on that.”

Spain's Luis de Guindos argued,

“No-one has put into question the [European] Commission’s figures…as perfectly valid. Basically, what we agreed on is the possibility of a delay in payments.” 

Dutch Finance Minister Jeroen Dijsselbloem stressed,

“The UK has...a rebate, which they have had for a very long time and of course this mechanism of rebate will also apply on the new contribution. So it's not as if the British have been given a discount today. The old mechanism of the rebate will also apply on the UK contribution, which will increase.”  

According to Austria's Hans-Jörg Schelling,

“Whether the money is to be paid in instalments or as a lump sum is a discussion we can have. But the amount cannot be put in question.” 

Sweden's Magdalena Andersson stroke a more positive note,

“Compared to a situation where the Commission was not going to table a new proposal, of course this is a victory for the UK…Given the amounts, I can understand that one wants to discuss both transparency and the calculations.”  

As regards German Finance Minister Wolfgang Schäuble, he avoided taking a clear stance despite several attempts from journalists at his post-ECOFIN presser. All he said was,

“We have discussed instalments…but we haven't discussed the British rebate...which doesn't mean that the Brits do not raise these questions…I don’t have opinion on that.”

So all clear then...

The most depressing part of this episode is that an enormous amount of energy has been spent, and the UK has been pitted against natural allies, not least the Dutch. Secondly, absolutely nothing on the substance of the EU's wasteful budget has changed.

The £1.7bn question - who's right: Osborne, Farage or the European Commission?

Below we give a blow by blow breakdown of what George Osborne did or did not secure at today’s EU finance ministers meeting. This basically comes down to the UK’s rebate and how it’s applied - and whether it was always going to apply to the £1.7bn.  Osborne claimed that:

As PM said EU bill unacceptable. Now we've halved the bill, delayed the bill & pay no interest on the bill. Result for Britain
— George Osborne (@George_Osborne) November 7, 2014

Whilst Ukip leader Nigel Farage has claimed that:

Osborne trying to spin his way out of disaster. UK still paying full £1.7bn, his credibility is about to nose dive.
— Nigel Farage (@Nigel_Farage) November 7, 2014

This is what EU Budget Commissioner Georgieva said at a press conference just now:

“As we all know the UK receives a rebate on their contribution, but in years when the UK has to pay additional because of GNI corrections, normally this payment would be on 31 December and it would be in the full amount. With the proposal [under discussion]…in exceptional years this period of time would be stretched into the next year, and when this happens, and it would be in these exceptional circumstances, then the payment and the rebate on the payment could converge. In a normal year, they would not. In a normal year, you have a payment on 31 December and then next year, in the spring, we have the calculation of the rebate on this payment.” 

So who’s right?

Well, Osborne is right that the UK will pay half of the initial £1.7bn demand, since the UK’s rebate will now knock off the difference. So in that sense, Farage is wrong. Britain “will not pay the full £1.7bn”. However, the Government’s position isn’t’ entirely what it seems either, since it’s possible (though still not clear) that the rebate was always going to apply to the £1.7bn.
 
Confused? Don’t worry. Few people know how the rebate actually works. Below is our attempt to clarify the issue.

What has actually been agreed?

• The UK secured a delay on its payments and will now have until September 2015 to pay. It will probably pay in July and September 2015.
• It was also agreed that the UK’s £1.7bn bill will have the UK’s rebate applied to it (in the same way all annual contributions do). The Government claims that it wasn’t ever clear whether the rebate would apply, however, Commissioner Georgieva’s suggest that it always would. Usually  the rebate operates on a one year time lag, but now it will be netted off at the same time when the payment is made. The UK government also claims that the rebate applied to the specific amount is above and beyond that which applies normally, due to the way different facets of the rebate are applied and the time period over which it was calculated (we're still looking into this one). 
• This accounts for the reduced the bill from £1.7bn to £850m.

So, Osborne has effectively achieved an ‘interest free’ payment plan for the surcharge, which will see it coincide with the rebate on said surcharge.

Would this always have happened?

• It has been unclear for some time how the rebate would factor in here. Either people were purposefully trying to obscure the question or it was genuinely unclear.
• However, now that it has been settled that the rebate would be applied, it can be said that this reduction would always have happened. The main change is that the rebate has been moved forwarded allowing the initial payment to be reduced.
• On net the UK will pay £850m, but this should always have been the case thanks to the rebate.

Does this impact other countries?

• Since other countries essentially pay for the UK rebate, they will on net be hit.
• Our understanding is that the countries will still get the full amount expected from the GNI calculations – i.e. France should still get €1bn.
• That said, since the rebate is being paid and also a year early, it is likely that their annual EU budget contributions will increase in 2015. On net then, the gains for certain countries (such as France) could actually be less than expected.

So are we looking at a cash flow problem for the EU budget?

• One outstanding question is how this will all work in practical terms. Judging from the European Council conclusions, countries who are getting a pay-out from the GNI calculations can still claim the money on 1 December.
• However, countries who are paying in large amounts can delay their payments until September 2015. It is not clear whether there is enough spare cash in the budget to smooth over this gap.
• Furthermore, the UK is using its rebate to offset its payment. This will not be covered until all countries have paid in their (higher) annual EU budget contributions next year. This further worsens the cash flow problem.

A political conspiracy or genuine uncertainty?

• Questions will now swirl around when all this was known. Surely, if the rebate applies, that was always known to be the case? Logically, since all UK contributions are subject to the rebate, it always was going to be. The only thing that wasn’t entirely clear was when and how it would be factored in. While this is tricky to work out, it’s not clear why the HM Treasury and the European Commission let the dispute run for two weeks. If this was a “set up” by the UK government to claim success, then the Commission was in on it.
• Maybe the handover in Commission has helped breed uncertainty.

So what’s the verdict? Who’s right, Farage, Osborne and Georgieva? Well, Farage is wrong, Osborne right on the amount but may be exaggerated the extent of the concession. The most right is probably Georgieva - though, we still don't have evidence that the rebate was always going to apply.

And of course, the UK will still pay an additional £850 million.

We will update this as events unfold, but what a mess.

Britain's £1.7bn budget bill: Who is to blame and what happens next?

Cameron has promised to invoke the spirit
of Thatcher over the EU budget

As EU leaders were agreeing the final details of the EU's new energy and climate change policies on Thursday evening, the FT's Alex Barker dropped the bombshell that the UK had been asked by the Commission to pay an extra £1.7bn surcharge into this year's EU budget. It was clear Cameron had not been expecting this and he angrily accused the Commission of a stitch-up, and refused to pay by the December 1 deadline.

By now, several explanation pieces have been published but there is still some confusion so here is one more try from us to clarify the situation:

Where did the demand come from?

There are effectively two things going on here, lumped together: the standard, annual revision of national contributions to the EU budget, and a one-off recalibration of the way in which national statistics authorities measure the size of their economies, going back several years. It is the combination of the two that have created a “perfect storm” for the UK:

1) Annual adjustment: Every year the EU member states and Commission work out respective national contributions to the following year's EU budget, once the actual economic data for the year in question is available. Member states' contributions can be revised upwards or downwards based on the performance of their economies. EU rules state that:

"The Commission shall inform the Member States of these adjustments in time for them to enter them in the account... on the first working day of December of the same year."

As David Cameron has rightly pointed out, these revisions are usually minor and therefore uncontroversial.

2) Changing the way the size of the economy is measured: Eurostat – the EU’s statistical body – recently reviewed the way in which member states auditing the way in which EU member states assess the size of their economies, concluding that under agreed EU rules (ESA95), several countries haven’t estimated their economies properly dating all the way back to 2002 (1995 in the case of Greece). In 2012, Eurostat instructed member states’ authorities to re-assess the figures – and to do so before 2014 . The ONS published its revised figures in May 2014, which among other re-valued the size and contribution of the UK's charity sector, which meant that overall. the UK economy was larger than previously thought, and had therefore been underpaying towards the EU.

The large UK bill is therefore primarily due to the one-off revision applied retroactively over 12 years, though effectively rolled in with the far less controversial annual adjustment. This is where a lot of the confusion comes from.

Who knew what when – and who is at fault?

This is what the debate has now shifted to, and there is a fair amount of blame to go around; no one really had their political radar switched on.

The European Commission: People within DG Budget (the Commission’s budget department) were briefing media on Thursday and well into Friday that the changes was due to the introduction of ESA10 – basically drugs and prostitution, something which left most people perplexed, and helped to fuel confusion and outrage.

It was also clear that the politics of the hefty bill would be lethal. Of course, Commission officials can claim the robot defense that “we are only following the rules”, but the Commission has always been a hybrid between an executive and a bureaucracy – so it should have handled this with far more care (the December 1 deadline was an over-kill), although some of this can be forgiven given that we’re between two Commissions.

The UK government: The exact figures were presented on Friday a week and half ago, a week before the EU summit. But it’s been clear since May this year that the UK economy was larger than expected following the ONS' revisions – indeed, the UK government itself triumphantly pointed this out. It’s also been clear for some time that other key countries were going to revise their figures. So while no one knew the full picture until 1 ½ week ago, different parts of the Government, including the Treasury, knew earlier a higher bill would be coming, albeit not the exact size. Perhaps the Government hoped this could have been snuck through somehow.

David Cameron: Probably hadn't been briefed until just before the EU summit but chose to adopt a very tough position, leaving himself limited room for manoeuvre. Some say this is a manufactured row to distract from other pressing EU issues like the European Arrest Warrant and EU free movement – a convenient row in which Cameron can ‘stand up to Brussels’ and claim some sort of success. We very much doubt it however,

What are Cameron’s options?

Cameron has effectively promised not to pay by 1 December and not to pay a bill “anywhere near” the £1.7bn mark – he restated that position yesterday in the Commons. So it’ll be hard for him to climb down. At the same time, the annual adjustment is supposed to be automatic – not subject to a separate vote – and the new calculations have already effectively been signed off by the ONS, so Cameron’s practical options are limited:

Rally a coalition to block the change: As a result of the extra €9.528bn that the EU will get due to the revisions, it is cutting the budget by €9.948bn - a net cut of €420m, and the Commission has tabled a draft amending budget to implement these changes. This budget will be subject to a vote among member states and as we set out here, the UK and other net losers have a blocking minority. However, rejecting the amending budget would mean the UK actually paying more (€3.6bn as opposed to €2.1bn), but the flipside would be that almost every member state would pay more too - rather than a €1bn rebate for France and a €779m one for Germany, they would face bills of €562bn and €1.4bn respectively - this could give the UK some leverage, although it could also backfire.

Seek revision of figures: Cameron has said he will launch an "exhaustive" review into the methodology that was used, effectively challenging the basis for the calculations. The figures aren't exactly transparent – and maybe this process will expose something they can run with and muster political support around. It's complicated by the fact that the ONS itself signed off on the underlying figures.  

Unilaterally revise the figures: The UK could check if the ONS went further then it needed to in revising past economic performance under ESA95, and if so, revise its figures again.

Go to court: It is not clear whether the UK would have any grounds for taking the Commission to the ECJ but one potential avenue would be to challenge the retroactive aspect of the bill as well as its unprecedented nature. Either way, it could bog down the process and buy Cameron some much needed breathing space in which to work on alternatives.

Refuse to pay: That could well trigger a crisis However, and the worst-case scenario is that the UK will face potential fines and infraction (see here for the figures).

Veto unrelated EU measures: It has been suggested that the UK could play hardball by vetoing other EU measures such as changes needed for the Eurozone to integrate further- but there are no such measures imminent over which the UK has a veto.

Ultimately, because the money is not needed for the 2014 budget per se, the issue could be kicked into the long grass, allowing for a face-saving compromise to be agreed. Speaking in the Commons yesterday Cameron sounded pretty confident that something can be done. We hope he’s right.