MEPs miss an opportunity to do their job

Last week, the European Parliament had the opportunity of doing what most other elected bodies in the free world consider a core task: making sure taxpayers' money is spent in a transparent, accountable and regular way.

MEPs were asked to provide discharge to the 2012 EU budget, in which according to the European Court of Auditors, the rate of error rate had increased to 4.8% compared with 3.9% in 2011 and affected every area of EU spending. The COA's own benchmark for acceptable levels of error is 2%. Of the total €138.6bn spent by the EU in 2012, €6.7bn was affected by errors.

However, MEPs voted to approve the discharge report, drafted by German CDU MEP Markus Pieper, with 488 votes in favour, 121 against and 10 abstentions - effectively signing off the budget.

The report admits that: 

"For the 19th time in succession, the Court of Auditors was unable to grant a positive statement of assurance regarding the legality and regularity of the payments underlying the accounts". 

(Yes, we know the Court of Auditors signed off the Commission's own accounts, so no need for any Commission officials reading this to make that well-worn point). The MEPs provided various justifications for nodding through the budget despite the errors, including:

"a distinction must be drawn between errors and fraud, and [the EP] considers that, in the vast majority of cases, errors stem from administrative mistakes, many of which are linked to the complexity of Union and national rules, which can be corrected".

They have a point. Errors and fraud are not the same thing - though the line can be awfully blurred. However, we doubt the average taxpayer would be entirely content with that explanation. The bottom line is that the cash should not have been paid out. As we've argued before, the high level of error is primarily due to the nature of the EU budget itself - it's size, complexity, confused objectives etc - and this will persist until it's fundamentally reformed.

What's interesting about the MEPs' behaviour is that they are a lot less forgiving when it comes to the spending by European Council/Council of Ministers - i.e. the member states.The EP decided to postpone the approval of the Council's accounts "because of its lack of cooperation".

EU Anti-Fraud Commissioner Algirdas Šemeta reacted to the EP's decision by saying that "The EU budget is the one of the most transparent and accounted for public budgets in the world", while arguing that "For the past 5 years, the overall error rate has been consistently below 5%. In other words, over 95% of all EU spending is in line with the rules."

The Netherlands, Sweden and the UK- three of the biggest net contributors to the EU budget collectively responsible for 20% of the funding - take a radically different approach. They again voted against discharge in the Council of Ministers, regretting that

"the overall error rate in recent years has increased to 4.8 %, being significantly above the acceptable threshold of 2 %."

Surprisingly, Labour and Lib Dem MEP, but also Dutch VVD MEP Hans Van Baalen voted against the position taken by their member states in the Council.

Not inspiring confidence.

Osborne says UK is £3.5bn better off after Cameron's EU budget deal. Is he right?

Coverage of the budget today will understandably focus predominantly on the wider debate about sticking to 'Plan A', and of course the inadvertent 'leaking' of the budget on the front page of the Evening Standard.

However, being the EU obsessives that we are, it is always interesting to look at the latest estimates for the UK's contributions to the EU budget, particulalry in the wake of last month's deal on the long-term budget.

During his statement in the Commons, George Osborne said that as a result of the deal struck by David Cameron in February, the UK would be better off to the tune of £3.5bn by 2017-18. This is repeated in the main budget document (page 23).

So is he right? Well, yes and no.

First, it's definitely the case that the UK government has secured a decent deal compared to previous long-term EU budget periods (at least in terms of absolute cash, not so much on content), for which it should be given credit. The EU budget is always complicated because the UK contribution is presented in several different ways. But the underlying data from the OBR (pages 138-9) does indeed show that due to the reduction in the long-term budget agreed last month, the UK is due to save £3.5bn by 2017-18 compared to the estimates made in the OBR's December forecast - this is the row labelled "New Multi-annual Fiscal Framework deal" in the table below.

However, the OBR figures also show that the UK will lose out due to two other factors: the change in the projected exchange rate, which will see the UK contribute roughly £1.2bn more up to 2017/18, and assumed increases of £0.7bn to the UK's contributions to the 2012 and 2013 annual budgets. It isn't clear what the row "other" refers to, but apparently it will reduce the UK contribution by £0.4bn up to 2017/18. 

We would also speculate that the OBR may have to revise its figure for the 2013 annual budget upwards again because the European Parliament has made its agreement to the long-term budget deal conditional on any funding shortfalls for 2012 and 2013 being financed with new funds rather than from future budgets - there are rumours the Commission is set to table another so-called "amending budget" to top up the 2012 budget, which would mean greater UK contributions.

But notwithstanding all of these intricacies, the OBR's figures illustrate that Cameron's deal on the budget will serve to limit the UK's gross contributions to the EU. But, as we've said before, this may not be the case for the UK's net contributions for several reasons, including changes to the UK rebate.

NB. It is important to note that the UK's actual contributions to the EU are higher than the figures presented above. This OBR table only deals with the UK's so-called gross GNI contribution, which is the largest share, but doesn't include the extra cash from VAT and customs duties that the UK also hands to the EU. It also doesn't reflect changes to payments the UK receives from the EU budget.

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.