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.

The closest Cameron has got to setting out an EU "shopping list" yet few have noticed

What do David Cameron's seven EU 
reform commitments mean?

Writing in the Sunday Telegraph, David Cameron set out seven objectives - or eight if you read between the lines - for a Conservative EU reform agenda ahead of that potential 2017 EU referendum. Surprisingly, despite this being the most explicit that David Cameron has been in setting out a 'shopping list' (an unfortunate term), it has generated surprisingly little attention, in the UK and abroad.

To be fair, none of these objectives are completely new, one is not strictly to do with the EU, while in the case of some of the others it would be rather difficult to define success. Interestingly only the point about removing the commitment to “ever closer union” would definitely require treaty change.

In large parts, these are broad principles rather than specific policies - which is wholly appropriate given that it would be silly to set out a set of clear polices so far in advance (though some of these could easily get under way now). Here are the seven:

Commitment	What does it involve?	Treaty Change?
“Powers flowing away from Brussels, not always to it”	This is an overarching principle which would take a number of forms, including repatriating entire areas of EU powers, such as regional policy, to repealing specific regulations, to structural changes in the EU (incl. possible Treaty changes) that makes it easier to roll back the acquis such as a "green card" for national parliaments.	Depends. Reforms to regional policy and repealing individual rules, such as the Working Time Directive, would not require treaty change. Removing entire EU powers or structural changes might.
“National parliaments able to work together to block unwanted European legislation.”	At present a third or more of national parliaments can require the European Commission to reconsider proposals (a yellow card) - but it has only been used twice. There are various proposed ways of strengthening this mechanism to allow national parliaments collectively the power to strike down EU laws. This could give them a legal veto – the ‘red card’ or simply strengthen the existing mechanism.	If placed into EU law it would require treaty change. However, the Dutch Foreign Minister has suggested this could also be done through a "political agreement" between the Member States requiring the Commission to treat the yellow card as a de facto veto.
“Businesses liberated from red tape and benefiting from the strength of the EU’s own market – the biggest and wealthiest on the planet – to open up greater free trade with North America and Asia.”	De-regulation is very difficult to quantify. It could involve proposals to exempt small business from EU regulations. It could also involve imposing a repeal mechanism (a green card operated by national parliaments), sunset clauses, for EU laws as well as reviewing old EU regulations. This agenda also suggests further services liberalisation and the completion of the Trans-Atlantic Trade and Investment Partnership (TTIP) and further free trade agreements.	None of the "competitiveness agenda" requires Treaty Change. However, it is far from certain that TTIP will be agreed and then ratified while cutting EU red tape is always a challenge in the face of interest groups and the European Parliament - but far from impossible in the face of political will.
“Our police forces and justice systems able to protect British citizens, unencumbered by unnecessary interference from the European institutions, including the ECHR.”	This could involve withdrawal from the ECHR, successful reform of the ECHR or a UK Bill of Rights limiting its impact in the UK. The reference to “European Institutions” could imply removing the European Court of Justice’s (ECJ) jurisdiction over EU crime and policing law.	Withdrawing from the ECHR would not require EU treaty change as it's not to do with the EU. Removing ECJ jurisdiction over EU crime and policing laws would.
“Free movement to take up work, not free benefits.”	This could involve a number of changes to EU rules around free movement including strengthening the link between economic contribution of EU migrants and access to benefits and ending "exportability" of child benefits.	Reforming the Free Movement Directive and the Social Security Regulation could be done without treaty change. Putting an outright cap on EU migration - which Cameron has NOT suggested - would require Treaty change.
"Support for the continued enlargement of the EU to new members but with new mechanisms in place to prevent vast migrations across the Continent.”	This would involve imposing tougher transitional controls on all future EU accessions, for example by extending the existing 7 year maximum transitional period or linking the right to free movement to population size and/or relative wealth levels.	EU enlargement requires a new Treaty with the accession state(s) over which all existing EU members would have a veto, so London could push this demand as the price for its agreement. However, enlargement does not alter the underlying EU Treaties themselves.
Dealing properly with the concept of “ever closer union”.	The EU treaties currently include a commitment to “ever closer union”. Removing these words would be largely symbolic but could have some political, and possible indirect judicial, impact.	Yes, given that the concept is itself enshrined in the treaty.

In addition, though he has not said so specifically, apart from a passing reference to need to achieve a union for both eurozone and non-eurozone countries, another priority for David Cameron will most definitely be to secure safeguards against eurozone caucasing.

A number of questions still remain of course, including the various reform ideas not touched on this article, including the EU budget, employment law or dealing with the ECJ (though they all could fit under the general principles he has laid out).

Lastly, David Cameron has said he will pursue this reform agenda followed by a referendum “if he is Prime Minister”. This is important as he appears to be setting down a red-line in any future negotiations with the Liberal Democrats to continue the Coalition.

The big question is if these reforms were to fail, would he campaign to leave or stay in regardless?

Do Ed Miliband and David Cameron actually agree on Europe?



An emerging cross-party consensus on EU reform?

On Europe, Labour doesn't exactly shy away from turning the debate into a discussion of "Tory splits". Ed Miliband had another go in Wednesday's PMQs, perhaps a vintage attack inspired by a folk memory of the advantage Labour gained from the Maastricht rebellions twenty years ago. He said: "When it comes to Europe, it is the same old Tories: a divided party, and a weak Prime Minister."

It has been less clear, though, what Labour would actually do differently - to put it mildly. In the past, Ed M has also attacked the Conservatives for endangering the single market and jobs. In one such attack:

"Can he confirm that what he actually proposed was to unpick the existing rules of Lady Thatcher’s Single European Act as regards the internal market? Given that those proposals would have changed 25 years of the single market, why did he make them in the final hours of the summit?"

But this morning on the BBC's Today Programme, behind the bluster, the big news is that he actually agrees with David Cameron (and a laterday Clegg) on more than anyone perhaps would like to admit: 

Miliband said he wanted "change Europe" to "better reflect our interests." Who could object to that? He also said:

“I think we are moving to a more flexible Europe, a more flexible EU. Why do I say that? Because we will have some countries in the euro, Britain’s not going to be joining the euro, won’t be joining the euro if I’m Prime Minister, and therefore by the nature of it, we’re going to have some countries that are in the euro and some countries that are out. That makes, what I would call, a more flexible European Union.

"It’s a more flexible European Union. That needs to be reformed urgently to work in Britain’s interests." 

This is almost exactly what Cameron says. Zero difference. But absolutely right. 

He also supports the Government's "referendum lock";

"Clearly there is legislation on the books which we don’t propose repealing, which says if there is a transfer of powers to the EU then there would be a referendum. If there is a transfer of powers, there’s legislation on the books that says there would be a referendum."

Like Cameron, he also thinks that the UK needs to repatriate powers:

"Other areas, let me give you other areas. Regional policy, the way that a national government can have an industrial policy. I think there are areas where Britain actually needs some powers back."

Reforming regional policy is a great area to target, so well done Ed. Bringing 'powers back' in order to have an "industrial policy" would, as he has accused the Tories of doing, clearly mean unpicking the single market - and is an open invitation to the French to let the state aid flow - so perhaps not the greatest idea. But let's not split hairs...
  

Disagreements? Well:

“The debate here is between essentially those who say reform Europe and the European Union to change it to work in our interests, and I fear the Prime Minister’s strategy which is leading us towards exit, which would cause real damage to our economy.”

"I think in some areas, and this is a difference from this government - I say, for example, the European Arrest Warrant, which is something where Europe cooperates with the European Union, that helps our country... "

But he is only able to cite one policy example - the EAW - where he takes a different view to the government. And even here, from the Government's point of view, the real question is reform of the EAW and the jurisdiction of the ECJ post 2014, and whether to opt back into this particular measure.

Leave aside the current shouting match - and look at the bigger picture of Britain's role in the world and Europe - and this a country far more united on the need for anew relationship within the EU than the politicians would dare to admit.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are the key points:

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

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

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

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

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

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

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

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

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

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

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

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

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

Why David Cameron can threaten to veto the EU budget

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

Cameron needs credibility on Europe – here are two things he can do immediately to get it

Over on Conservative Home, we argue, 

The Coalition has already done some good work on the EU, the ‘referendum lock’ and the recently launched ‘audit’ of the EU’s influence on the UK to name two. However, the constraints of coalition government have tested the loyalties of Conservative MPs, party members and potential voters who wish to see substantial changes to the UK’s EU membership terms. As a result, Europe could damage the electoral coalition the Conservatives need to muster in order to win an outright victory. This is borne out by recent polling by Lord Ashcroft, which shows that 10% of Conservative voters say they would now vote for UKIP. Of course this may not happen, those who say they will vote UKIP may, when it comes to it, vote to keep the Labour party out. But it would be foolish to advocate complacency, not least as this also links to general trust in politicians. So what can be done?

Some talk of deals with UKIP, some talk of promises of a referendum, some talk of the need for a better defined Conservative vision for a post-2015 Government. These proposals all have specific problems and one major problem: Credibility. Would anyone (including in the first instance UKIP-inclined voters) believe them? Increasingly, the answer is no.

For this group of the electorate and party base, the Conservatives’ credibility on Europe has been hit by a series of forced and unforced errors. Whether perceived or real, the overselling of the Lisbon Treaty ‘cast iron’ guarantee, the revelations that before the election David Cameron’s policies may have been framed with Coalition in mind, the CCHQ prohibition on candidates campaigning on Europe, the opting in to EU crime and policing laws, lecturing the French and Germans on the need to create a Fiscal Union and now Cameron ruling out forever leaving the EU, all chip away at his credibility. In short, Cameron could promise to spend every waking moment committed to achieving new, improved EU membership terms, jump over the EU parapet, look back, and see his troops have opted to stay in the trenches.

Fortunately for David Cameron he has two great opportunities to address these concerns and reassure the electorate he means business, two opportunities where he can either act unilaterally or use a veto. Importantly both these opportunities come before the next election.

Firstly, David Cameron should use a quirk of the Lisbon Treaty to activate the 2014 block opt-out and repatriate around 130 EU crime and policing laws, rather than allowing them to fall under the jurisdiction of the European Court of Justice. He should then avoid squandering this gain by resisting pressure from within the coalition to opt back into them piecemeal. He should instead argue for either a better deal, under which the European Court has no jurisdiction in the UK over criminal law, or stay outside permanently.

Secondly, the UK should demand root and branch reform of EU regional policy, repatriating responsibility for regional funding to the UK and other richer member states. Limiting EU-managed regional funds to poorer countries would mean that 23 out of 27 EU countries pay less into the EU budget than at present, saving the UK £4bn net over seven years (in addition to the £8.7bn it currently gets back through the EU regional funds). This is achievable but Cameron must make it clear that he is prepared to veto the next multi-year EU budget, currently up for negotiation, in order to make this demand more credible.

These two measures would achieve several objectives simultaneously – a reduced EU budget contribution, repatriation of two areas of power from Brussels and limiting the powers of the EU judges – an early opportunity to get some ‘balls in the net’. If Cameron takes these two opportunities, this would be a substantial down payment for future electoral credibility which he will need when he promises a wider renegotiation with the EU. Without it, any future manifesto promise may be skilfully crafted but will not sway many voters’ minds.

 

Campaign to devolve EU regional policy gathers momentum

Last Friday, the Parliamentary Select Committee for Communities and Local Government's inquiry into the European Regional Development Fund, to which Open Europe submitted both written and oral evidence, published its final report. Among others, the report recommended that:

“We support the principle of repatriating regional policy funding, provided funding could be protected and ring-fenced over the long-term to ensure that the poorest English regions continued to receive the same level of support they would have received under the current system.” 

 In our recent report on the subject, Open Europe recommended that:

"Limiting EU regional spending to poorer countries [GDP below 90% of the EU average] would be a win-win situation for both Britain and Europe. It would channel more cash to the newest member states and allow the UK to spend exactly the same amount on its regions as it does now, with the option of adding the several billion that it would save from streamlining the structural funds. It would also eliminate a range of additional costs and allow the Government to radically improve the targeting of funds towards poorer areas and to viable projects.” 

We are therefore delighted that MPs accepted the central tenet of our recommendations, especially as Open Europe was the only organisation profoundly critical of the status quo to submit evidence. However, we consider that there is a realistic prospect of the government being able to secure this reform in 2014 – and that the government should be prepared to veto the next MFF, currently up for negotiation, in order to make this demand more credible – whereas the Committee sees this as an objective for 2020 and beyond.

Just to briefly recap the arguments why the reform would be a win-win for the UK and Europe:

• While it can generate added value in individual cases, involving all member states in EU regional spending, irrespective of their relative wealth, is economically irrational. In richer member states, the structural funds mostly serve to redistribute income within the same regions. As the Commission itself has admitted, this exercise creates “considerable administrative and opportunity costs”;
• Over the 2007-2013 EU budgetary period, the UK is contributing roughly £29.5bn to the funds, and getting back around £8.7bn. Of the 37 regions in Britain under the EU’s classification system, 35 are net contributors to the structural funds, with only West Wales and Cornwall net beneficiaries. Some relatively poor areas lose out substantially; for example, the West Midlands, which has the lowest disposable income per capita in the UK, pays £3.55 to the structural funds for every £1 it gets back;
• Limiting the structural funds to poorer countries would result in 23 out of 27 EU countries paying less into the EU budget than at present. - all new EU member states would be better off. The UK would save around £4bn net over seven years in addition to the £8.7bn it currently gets back through the structural funds. This option could therefore attract strong political support in many capitals, especially given the current need for governments to make savings;
• Domestically, it could enjoy cross-party support given that it was originally a policy championed by the previous Labour government, and areas represented by Labour MPs stand to be the biggest winners under this reform. 

All in all, the campaign to reform EU regional policy is gathering momentum...

How much change is there down the back of the structural funds sofa and what can it be used for?

A recent Franco-German paper (leaked to EurActiv and others) outlined a set of proposals on how to achieve a better balance between austerity and pro-growth measures in tackling the eurozone crisis. One suggestion was:

“the establishment of a fund for growth and competitiveness in programme countries and other countries facing serious structural challenges should be considered. At this stage, this fund should pool a certain amount [25%] of the 2011 automatic decommitments of these Member States from the Structural and Cohesion Funds”

Decommitments refers to money that has been allocated to a member state from the structural and cohesion funds (SCF) and not spent two years after the year in which it was allocated.

Unsurprisingly many EU politicians were very excited about a potential fresh pot of money to pump into lagging economies, with Merkel stressing there was “a lot of money” in the structural funds, while Spain’s Europe Minister, Íñigo Méndez de Vigo, speculated the amount could be up to €100bn (although it is not clear if he was referring just to the SCF or other EU funds as well – the EU has a lot of different, overlapping funding instruments). Rumour has it this idea will be further discussed at today's EU leaders’ summit.

However, EU Commissioner for Regional policy, Johannes Hahn, popped up on Friday with an interview in Süddeutsche to puncture this particular balloon, describing the plan as “unrealistic”, and claiming that the total value of funds unused in 2010 and 2011 only amounted to €30m.

Hahn said that about three-quarters of the total €350bn value of the SCF over the current 2007-13 budgetary framework had been allocated to projects, meaning:

"This leaves 25%, and there is always the misconception that the money was not used. But it is used. It is budgeted, which means that it has been assigned to individual countries, but not yet mapped to specific projects."

There is a huge difference between €30m and €100bn – so clearly there is a lot of ambiguity as to what portion of the funds is theoretically still available. Quite possibly the Frano-German paper treated funds allocated to countries but not projects as ‘unused’ – something Hahn clearly disputes.

However, irrespective of how much extra funding could be found from this source, as shown in our recent report on EU regional policy (which we hope Mr. Hahn will find the time to read), and as we have argued previously, the nature of the funds means that they are simply wholly unequipped to serve as a backstop in a debt and solvency crisis.

We argued that countries such as Greece, Spain and Italy (all with a national income over 90% of the EU average) should no longer be eligible for SCF, as their record in these countries was at best inconclusive, while their pro-cyclical nature may even have exacerbated the credit bubble. Our report argued that a new fund could, in theory, avoid the many faults built into the structural funds (see section 2 of the report for a detailed cost/benefit analysis) and prove to be a huge benefit to countries such as Greece, Spain and Italy in bouncing back from the eurozone crisis; for instance by better targeting labour market mobility and re-skilling significant sections of the labour force.

However, this would have instead of, and not an aside to, the existing SCF framework. This could feasibly only be achieved in the next long term budget, as allocations for every country up until 2013 have already been agreed. As Hahn pointed out in the interview, channelling money from the SCF to a new purpose-built fund will require the agreement of member states (and the European Parliament). Given how territorial member states are over payments from the EU budget, it is far from certain they would agree to something which would fundamentally alter the balance of their payments and receipts.

Either way, given the fundamental structural failings in the eurozone, this looks like yet another classic example of eurozone leaders tinkering around the edges of the problem…

Off target: The case for bringing regional policy back home

In a weighty new report published today we take a critical look at the EU’s structural funds which are the means through which the EU implements its regional policy. We estimate that over the course of the current 7 year EU budget, the UK will pay in around £30bn to the EU’s so-called structural and cohesion funds, but will get back just under £9bn.

In our press release, we argue that:

“Limiting EU regional spending to poorer countries would be a win-win situation for both Britain and Europe. It would channel more cash to the newest member states and allow the UK to spend exactly the same amount on its regions as it does now, with the option of adding the several billion that it would save from streamlining the structural funds. It would also eliminate a range of additional costs and allow the Government to radically improve the targeting of funds towards poorer areas and to viable projects.”

What exactly is the problem?

The EU aims to reduce regional disparities but under the current system, every region in every member state receives at least some financial support, regardless of how wealthy it is. This means a significant part of the UK’s contribution goes to member states with a comparable level of income. According to our calculations, of the UK’s overall contribution, 70% goes to other member states, 25% is redistributed within the same UK region in which the funds were raised, and only 5% is redistributed between richer and poorer regions within the UK.

This recycling exercise is fundamentally economically irrational, and even the Commission has recognised that it creates “considerable administrative and opportunity costs.”

It also means that most UK regions, even the most disadvantaged, are short-changed because they pay in more than they get out. For example, the West Midlands, which has the lowest disposable income per capita in the UK, pays £3.55 into the structural funds for every £1 it gets back. Other regions that do badly from the current set-up include the North-East, Merseyside, Lincolnshire, Northern Ireland and parts of inner London.

While there is a strong case for having an EU regional policy to assist the poorer member states that have joined the EU since 2004, there is literally no “added European value” – the criteria for justifying EU-level as opposed to national-level decision making – to keeping all member states locked in.

So what can be done?

Our proposal would see the implementation of an eligibility threshold of 90% of EU average income, above which member states would no longer receive any support. This would on one hand enable the remaining funds to be focussed exclusively on the poorer member states, while allowing richer member states to still make significant savings and regaining control over their regional policies and spending. This is broadly in keeping with the position adopted by the previous Labour Government.

What impact would this have?

Such a measure would create a whole range of winners, and a handful of ‘losers’. To illustrate, if this policy had been adopted for this EU budget period (2007-2013):

• France would have emerged as the biggest winner from focussing the funds on the poorer states, cutting up to €12.8bn from its net contribution to the EU budget over seven years.
• The UK comes second, with a net saving up to €5.1bn (£4.2bn) over seven years.
• Importantly, all new Central and Eastern European member states would see a rise in the amount of subsidies they receive (except for Slovenia under one possible scenario), with Poland gaining the most.
• Italy, Spain and Greece would all lose out substantially, but they are already set to get a smaller share of EU subsidies as recent enlargements continue to erode their net receipts. More importantly, to cope with the eurozone crisis, these countries need far more responsive and targeted support than is currently being offered by the structural funds.

The way ahead for the Coalition

It appears the Coalition has opted for a ‘safety first’ approach with regards to negotiations over the EU’s next long-term budget (focussing on keeping the overall amount down and protecting the UK rebate). However, pushing for a more ambitious reform along the lines of our proposal would see a significant reduction in the size of the budget and would be better suited to building alliances with like minded member states.

Devolving regional policy from the EU would be a good move for the Coalition if it is to come good on its commitment of ‘rebalancing’ the UK economy away form its reliance on the South-East and financial services, and place to start. The UK could then launch a revamped regional and re-generation policy which would start with the £8.7bn that the UK currently spends via the structural funds, and then re-invests the additional £4.2bn saving from the reform. This would mean virtually all UK regions would experience a rise in the amount of subsidies they receive by around 45%.

In 2003, then Chancellor Gordon Brown argued that:

“the economic and social, as well as democratic, arguments on structural funds now and for the future so clearly favour subsidiarity in action, there is no better place to start than by bringing regional policy back to Britain”

Almost a decade later, this statement still points out the path ahead for the UK.