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.

Are things heading towards a showdown on the new EU foreign policy chief?

UPDATE (18:20) - The FT's Peter Spiegel and Alex Barker are reporting that Belgium's Karel De Gucht, currently serving as EU Trade Commissioner, could be a late entry into the race for High Representative.

Like former Estonian Prime Minister Andrus Ansip (see below), De Gucht is a member of the liberal ALDE family - that has joined the 'grand coalition' supporting Juncker in the European Parliament and now looks to be asking for something in return.

ORIGINAL BLOG POST (17:07)

EU leaders will meet in Brussels tomorrow to get on with the assignment of the remaining top jobs. Priority will probably be given to the appointment of the EU's new foreign policy chief (aka High Representative for Foreign Affairs and Security Policy).

Italian Foreign Minister Federica Mogherini is still regarded as the frontrunner for the job. However, things may not go as smoothly as initially thought. Sources close to European Commission President-elect Jean-Claude Juncker have told Italian news agency ANSA that "ten-eleven [EU] countries" are currently against Mogherini's appointment.

The sources didn't name any names, but it is understood that Eastern EU member states are particularly reluctant, since they believe Italy did not take a hard enough stance against Russia during the Ukraine crisis.

The Lisbon Treaty establishes that, similarly to the European Commission President, the High Representative is appointed by EU leaders under qualified majority. And Italian Europe Minister Sandro Gozi has made clear Italy is prepared to go to a vote. He said:

"[The appointment of] Juncker is part of an agreement whereby the High Representative goes to the socialists." 

"Juncker has been designated by [qualified] majority. No-one ever raised objections [against Mogherini] with us. If there were any, that would mean the High Representative will also be designated by majority."

Therefore, things may be heading towards another showdown. This time, though, the outcome of the vote could be a lot more uncertain. A group of ten or eleven countries (very likely to include Poland, a qualified majority heavyweight) would have good chances of success in forming a 'blocking minority' to reject Mogherini's appointment. That would be a blow for Italian Prime Minister Matteo Renzi, who seems to be investing a good deal of political capital trying to secure a post that he considers as of great prestige. But it could also shift the balance in the distribution of the other top jobs - notably the Presidency of the European Council.

Mogherini is from a centre-left party. This means her appointment would make it less likely for Danish Prime Minister Helle Thorning-Schmidt, another centre-left politician, to succeed to Herman Van Rompuy as European Council President. However, this argument could no longer be valid if the new High Representative were to come from a centre-right party.

This would be the case with Bulgaria's Kristalina Georgieva, who looks to be gaining momentum as an alternative to Mogherini, although, as our dove-hawk axis showed, Bulgaria has so far also been quite soft on Russia.

Another option could be to offer the post of European Council President to someone from an Eastern European country in order to assuage opposition to Mogherini. Polish Prime Minister Donald Tusk could be an option, although with Polish domestic politics in a precarious state he may prefer to stay put. In that case, former Estonian Prime Minister Andrus Ansip - who has already been nominated as Estonia's next EU Commissioner - could be one to watch. Ansip's Estonian Reform Party belongs to the liberal ALDE group, that has joined the 'grand coalition' supporting Juncker in the European Parliament and would presumably be keen to get something substantial in return.  

In other words, a few surprises may come out of tomorrow's European Council. Stay tuned.