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.

EU budget row: How much interest will the UK pay if it refuses to cough up?

300% interest - in the EU it is legal

As most of you will know by now, the European Commission has asked the UK to pay an extra £1.7bn surcharge into this year's EU budget - before December 1. David Cameron has said he won't pay anything "near that amount", which in turn has triggered an almighty stand-off with the Commission itself insisting that if the UK fails to pay, it'll be charged interest from day one.

There has been a lot of confusion as to how much interest the UK will be legally liable to pay if it follows through on David Cameron's threat to refuse to pay. The answer as always lies in an EU Regulation as we pointed out here.

So how much is it? The short answer is a lot. Let's say Cameron holds out for one month. He'll then owe the EU £3.5 million in addition to the original £1.7bn surcharge. If he holds out for six months, UK taxpayers are looking at an additional £39.1 million while one year will increase the bill to £89 million - the annual interest will then stand at 5.25% . If the debt is still outstanding after 10 years, the UK would owe an eye watering £5.5bn of interest on a £1.7bn debt - over 300% interest.

In other words, under EU rules, the penal rate is ever increasing.

This is how it is worked out. Firstly the regulation states an annual interest rate of 2% above base rates per year - making a current 2.5%. It's worth keeping in mind that this is much more than the UK pays itself to borrow (in maturities up to 12 years or so, see UK yield curve here). However there is a sting - a rising penal rate of 0.25% for each outstanding month, and the total interest is all paid at the higher rate. This quickly adds up as you can see below:

So if this drags on, it has the potential to really become messy. However, as with everything in the EU there is usually a political solution. The Netherlands and Italy are also upset at receiving demands while the calculations (particularly around the interaction with the UK rebate) and the EU amending budget that goes with it are still up for 'clarification' and/or amendment. As reports today also indicated, it seems likely the UK will be able to do a face saving deal to pay something more than zero and less than £1.7bn - but if not the implications are huge.

When it comes to the EU budget, the bad news just keeps on coming

David Cameron and George Osborne might be forgiven for thinking that when it comes the EU budget, it never rains, it pours. Fresh on the heels of the Commission's explosive demand for an extra £1.7bn for this year's EU budget, the ONS' annual Pink Book published this morning has revealed that the UK's contribution last year stood at a whopping £11.27bn - much higher than the £8.6bn the Treasury had forecast (see page 14 of this HMT document) and a 32% increase on 2012.

There are a number of reasons why there is such a large discrepancy:

• Partly this can be accounted for by the €11.2bn that was retroactively added onto the EU budget late last year (one of the European Parliament's conditions for swallowing the cut to the EU's long-term budget for 2014-2020). In addition, the growth of the UK's economy resulted in an adjustment and increase of £781m to the UK's contribution (-£190m via a separate VAT adjustment) - the same mechanism partially responsible for the £1.7bn demand. 
• Due to its strong economic growth relative to other EU member states, a situation which looks set to continue in the near future, we also warned that the UK faced an 'EU stealth tax' via higher GNI, VAT and customs contributions.
• We warned last year following the landmark budget cut that the UK might yet end up paying more in net terms due to Tony Blair's rebate cut and a larger share of EU funding going to new member states but the latest developments (the surcharge + stronger relative economic performance) risk pushing this up even higher.

Needless to say, this will only crank up the pressure on the government which is already in a difficult position vis-a-vis the EU budget, EU free movement and the European Arrest Warrant and will make it even harder for David Cameron to give any ground on the £1.7bn surcharge. 

An independent Scotland's forthcoming EU negotiations

The SNP has today published its White Paper on an independent Scotland. Amongst its other analysis it sets out a strategy towards the EU. It has always been clear that if Scotland votes for independence there will need to be a negotiation with the rest of the UK on the terms for divorce, but it is now clear the SNP have an EU negotiating agenda too. Here are the main points:

Firstly, the SNP assume Scotland will remain in the EU and have a smooth transition from corporate UK membership to individual membership. They argue that "discussions [on EU accession] will be held during the period in which Scotland remains part of the UK". These discussions will have to take in the following points:

• A Schengen opt-out: The SNP says it  would "plan to continue in the current Common Travel Area" with the rest of the UK.  As signing up to the Schengen travel area is incompatible with the UK/Ireland CTA and Schengen is a part of the EU treaties this will need a negotiation.
• A Scottish EU Budget rebate: The UK is a net contributor to the EU budget, but would contribute even more if it had not secured a UK rebate. The SNP recognise that "Scotland is likely to be a net financial contributor to the EU" but state they wish to have their own rebate saying they "consider that the division of the share of the UK rebate would be a matter for negotiation". This would obviously be a difficult negotiation as it was for Mrs Thatcher at Fontainebleau.
• A Euro opt-out: The SNP state that it is "our intention to retain Sterling as the currency of an independent Scotland". As well as discussions with the rest of the UK, Scotland will ideally need to gain a permanent opt-out from the Euro. The UK and Denmark are the only two states to have such a permanent opt-out but the SNP argue that the case of Sweden (which is meant to join but shows no signs of joining) shows that the EU can be flexible.
• A Justice and Home Affairs opt-in: The UK has a special deal whereby it can chose to opt in to new JHA (justice and home affairs) measures on a case-by-case basis. The SNP have said that they "will seek to retain the current flexibility to opt into new measures on Justice and Home Affairs" meaning they will ask for their own ability to opt in.

So in an independent Scotland's EU accession negotiations, the SNP will be asking for a number of special conditions already afforded to the UK. Firstly they would like their application to be considered while they remain a part of the UK, something they will also need UK approval for. They will then be asking for opt-outs from Schengen, the Euro, a JHA opt-in and perhaps most controversially a Scottish rebate.

Will the EU be a big deal in the Scottish referendum? The SNP seem to think it might be and are keen to defend themselves from accusations they might inadvertently leave the EU. Indeed they argue that “if we remain part of the UK, a referendum on future British membership of the EU could see Scotland taken out of the EU against the wishes of the people of Scotland.”

It is often thought that Scotland is less 'eurosceptic' than the rest of the UK. But is this true? One YouGov poll for instance suggests that 31% of Scots would vote to leave the EU against the UK average of 34% and that 55% would vote to stay in if David Cameron renegotiated and recommended a new deal the same as the UK average. Perhaps the SNP feel that if they were left inside the EU without a 'Scottish' rebate and their own version of the UK's existing opt-outs they might see a challenge from a tartan version of UKIP?

So at a time when disillusion with the EU is growing in the UK, the SNP is, like the UK parties, keen to demonstrate they will not be ceding more (Scottish) power or money to the EU. They even accept that there are, as in the UK at large, some Scots "arguing for a looser form of partnership" with the EU.

Hyped and almost always misunderstood: the curious case of 'Thatcher's rebate' from the EU budget

Our Director Mats Persson writes on his Telegraph blog:

I once gave a talk at a “high-level” seminar on UK media and the EU, attended by various British and European commentators and journalists. They weren’t exactly natural Sun readers, if you get my drift.

After about an hour of complaining from the participants about how ill-informed the UK media was about Europe, I posed a simple question: can somebody in this room please explain to me how the UK rebate from the EU budget works?

Nervous laughter. Awkward silence. Then the attempted explanations. No one got it right.

Few issues relating to the UK and Europe are so hyped and symbolic as the rebate – the very cost of Margaret Thatcher’s funeral was even justified on the basis that she famously won the rebate in the 1980s. Defending the rebate is now the vocation of virtually every UK politician – and grasping it is vital to understanding the UK's leverage in Europe.

Despite this, I reckon that only about 50 people in all of Britain actually get how it works.

Last week, EU leaders clinched a deal that will see an historic cut to the EU’s long-term budget (to run from 2014 to 2020). Headlines in the British press the day after read that David Cameron had successfully defended the rebate from a vicious last-minute French attack, while the rest of Europe read that the UK had threatened to hold up the budget deal to protect its rebate.

The reality is that both are a stretch, just as stories ahead of that crucial February EU summit – when Cameron managed to muster a group of allies in favour of a cut – claiming that the UK was “outgunned” or “would lose out the most” absent a deal were based on a fundamental misunderstanding of how the rebate works. The deal reached in February protects the rebate, so any change was not driven by the UK anyway.

The rebate effectively involves the UK getting back two thirds of the difference between what it puts into the EU budget and what it gets back. But this mechanism only covers farm subsidies to EU-15 (those countries that joined before 1995) and some farm subsidies to the new member states (the so-called Pillar II of CAP), in addition to the so-called structural funds going to EU-15. This means that the UK gets nothing back on what it spends on the EU institutions, for example, or regeneration cash and a majority of farm subsidies to new member states.

To complicate matters further, the Netherlands, Sweden, Austria and Germany have their own rebates. Unlike the UK’s, however, these correction mechanisms expire at the end of every long-term EU budget.

All of this has three major implications:

• First, the UK rebate is an exceptionally strong bargaining tool. Not only is it always protected by a veto (which is why the alleged French attack was overblown), it’s also the only permanent correction mechanism around. In case EU leaders can’t agree on a new long-term budget, the previous year’s is rolled over (plus 2 per cent to account for inflation). Britain keeps its rebate, whereas other net contributors may have to renegotiate theirs.  

• Second, the more cash that goes to the new member states, the less the UK rebate will be worth. It so happens that the new long-term EU budget deal will see proportionally more cash to central and eastern Europe (rightly in my view), meaning the rebate will drop. This means that though the EU budget is cut, the UK’s net contribution is likely to go up. Claims that Cameron’s managed to increase the rebate by some £200-300m in recent talks are therefore incorrect on multiple levels. 

• Third, the consequence of the above is that in a no deal, rollover scenario, the new distribution wouldn’t materialise. Therefore, in net terms the UK would actually be a winner – again, meaning the UK was more relaxed about a “no deal” scenario in these talks than most other EU countries. 

Those on the continent who think the UK is selfish should think about this one. In EU budget talks, London has actively pushed for more cash to new member states as that is where it can have the most comparative impact – even though that means a net loss for the Treasury. 

So a lot of people at home and abroad have homework to do.

Is the UK rebate still under threat?

There’s been a lot happening on the EU budget front in the last couple of days – the 2014 draft budget was proposed yesterday and this morning a deal was finally struck between the European Parliament’s negotiating team and the Irish Presidency on the EU’s long term budget (more on that later).

Meanwhile, David Cameron has arrived in Brussels for the EU summit pledging to protect the UK rebate, with PA reporting that France is allegedly pushing for a change in the way the rebate is calculated so that it does not cover the rural development part of the CAP, a move which could reduce it by around 10%. 

Cameron said that “It is absolutely essential that we stick to the deal we reached in February and that we protect the British rebate, and I will make sure that we do that”, adding that he wants it “locked down”.

For context – EU leaders agreed in 2007 that the UK “shall participate fully in the financing of the costs of enlargement, except for agricultural direct payments and market-related expenditure, and that part of rural development expenditure.”

This issue first came up in November when Herman Van Rompuy proposed reducing the UK rebate in this way, and David Cameron rejected it out of hand. We flagged this up here and calculated that it would reduce the UK rebate by €3.5bn (11%) over the seven year budget period (Although it should be noted the rebate is likely to fall anyway as a result of greater expenditure in the new member states). The conclusions of the February summit, where the deal was finally struck, clearly state that “the existing correction mechanism for the United Kingdom will continue to apply”.

Given that the rebate is embedded within the EU’s so called “own resources” regulation, which is decided under unanimity and therefore protected by UK veto, it would appear France's demands could only be met by unpicking the entire budget deal agreed in February, for which there is no appetite among other countries. It is therefore difficult to see how this is a credible threat, although it does make for good publicity for both Cameron and Hollande.

How realistic is Cameron's timetable for EU reform?

As Open Europe Director Mats Persson notes over on his Telegraph blog, in his speech today, Cameron has set himself a concrete timetable, despite the fact that timetables in Europe are notoriously difficult to control. A treaty change discussion could drag on for years. Here we look at how a few examples of how slowly or quickly it takes to reach a decision in Europe.

Basically, EU treaty changes or fundamental reform can take an enormous amount of time - or it can happen in months. It's all a matter of political expediency - and how bad Europe needs it / wants it. The single EU patent, for example, took 37 years to negotiate. Setting up a €440bn bailout fund took 12 hours (though it was followed by a year of bickering over what they actually had agreed).

So here are some examples. Those who say Cameron is stuffed, could point to:

Single EU patent – 37 years 
The Convention for the European Patent for the common market was signed at Luxembourg on December 15, 1975, by the 9 member states of the European Economic Community at that time. However the CPC never entered into force as it was not ratified by enough countries. It took until last December for a an agreement on the creation of a single patent system across 25 member states.

Fisheries reform – 21 years and counting 
In 1992, it was determined that there had been over-investment in vessels, overfishing and that numbers of fish landed were decreasing, and that reforms were needed to address these issues. Completing the reform of the Common Fisheries Policy (CFP) by the end of June 2013, in a single reading if possible, is the goal of the current Irish EU Presidency.

UK Rebate – 10 years 
In 1974/75 the Wilson Government sought to resolve the UK contribution question - which was the highest in net terms - during the “renegotiation” of the UK’s terms of accession which it had promised in its October 1974 election manifesto. The UK did achieve a new corrective mechanism but the revised formula (which placed more emphasis on national wealth when calculating our contribution) in practice produced no real benefit to Britain. In 1984, Margaret Thatcher secured the UK rebate in its current form.

European Constitution/Lisbon Treaty – 8 years 
The drafting for European Constitution was initiated by a declaration annexed to the Treaty of Nice in 2001, and the draft Constitution was signed on 29 October 2004 by representatives of the then 25 member states. Following the ‘no’ votes in the French and Dutch referendums, negotiations over the Lisbon Treaty began in 2007 and the new Treaty was ratified in 2009.

...but those who say that, given the enormous stakes, Cameron actually achieve something substantial, could point to:

Limited treaty change to establish new eurozone bailout fund – 5 months 
On October 29 2010, following pressure from German Chancellor Angela Merkel, EU prime ministers and presidents backed "a limited treaty change" to deliver tighter fiscal discipline and allow for the creation of a permanent bail-out fund for members of the eurozone. On March 25 2011, the European Council agreed to amend Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro.

Setting up a new €440bn eurozone bailout fund - 12 hours
On May 9 2010, following 12 hours of talks in Brussels, EU financed ministers agreed to establish the EFSF, a temporary bailout fund composed of government-backed loan guarantees and bilateral loans worth up to €440bn provided by eurozone members.

In EU politics, when you hear someone giving you an easy answer, it's probably the wrong answer...

As much of a 'Nein' as a 'No' - Don’t blame Cameron for the break-down in EU budget talks

On his Telegraph blog Open Europe's Mats Persson analyses the breakdown of EU budget talks, see below for the full piece:

As predicted, the talks over the EU’s long-term budget have broken down. What does this mean? In truth is, not that much. Postponing a decision was always the most likely outcome. A new deal will now have to wait until after the December EU summit when leaders will try to hammer out the details involved in a European banking union. On substance, this is a far bigger issue than the EU budget, as it’s breaking new ground and links to the stability of the euro. The EU budget is a maddening legacy issue.

Had Cameron been forced to pull the veto this time around, it would have been a completely different matter.

There will be those on all sides tempted to blame David Cameron for the breakdown in the talks. This is simplistic. As Angela Merkel pointed out at her press conference just now, there were two main groups who disagree — net contributors and net recipients. Within these groups, as Open Europe has consistently highlighted, there are a series of disagreements. From the Danes who want a rebate to Malta who want to be treated as a ‘special’ case. All positions matter since every country has a veto. In total, eleven countries had explicitly threatened to veto the budget in case they couldn’t secure a favourable deal for themselves. Interestingly, France and Germany struggled to reach a common position, with Berlin leaning towards London on several points, including on cutting the EU’s admin spending. So forget the 26 vs. 1 narrative.

Moving forward, David Cameron remains in a very tricky, but far from impossible, position. His negotiation mandate is exceptionally narrow following the Parliamentary vote in which a majority of MPs backed a cut in the EU budget, rather than the freeze Cameron has called for. He also suffers from a major communication error committed early on in the talks. The British Government decided to use the amount of cash that was actually paid out from the EU budget in 2011, €886bn, as its “baseline”. When this figure is extrapolated to the entire seven-year EU budget period, it creates an artificially low figure – far below the “appropriation ceilings” (the maximum amount of cash that can be paid out rather than the actual cash paid out) — meaning that Cameron has to fight seriously hard to live up to the high threshold for a “freeze” that he had set for himself. But if the Government is using the same measure as everyone else – payments appropriations over the full seven years – it is now on way to actually achieve a freeze or even a cut, when compared to the full 2007-2013 EU budget period. So budget period to budget period, the Government is in a pretty good position.

David Cameron had a very solid press conference after the summit – he sounded plausible (which hasn’t always been the case) – but to date, the Government’s communication strategy around the EU budget talks has been pretty appalling. It’s been very difficult to figure out what, exactly, the UK government actually was pushing for, and by focussing on a 2011 real terms payments freeze it may have been a bit too smart for its own good.

The real tragedy with these talks is that no one is actually focussing on the substance of the EU budget. As we have shown – comprehensively – the EU budget is an economic anomaly. It’s not a huge amount of money, but if targeted properly – rather than wasted on economically inactive landowers or recycling regeneration cash – it would make a real difference.

 It speaks volumes about the current state of the EU that this budget remains unchanged. That’s not only Cameron’s problem, but also the rest of Europe’s problem.

Open Europe publishes (and analyses) leaked draft of Van Rompuy's new EU budget proposal

We’ve got our hands on a leaked copy of the latest HermanVan Rompuy (HvR) proposal for the EU budget (see here for the full doc). The headline spending figure remains broadly unchanged in the new proposal, standing at €1,014bn (a €4bn increase), but more cash is spent on farm subsidies and structural funds, in a move designed to appease France, Poland, Italy and Spain.

(The figures here includes off budget items, if they are discounted the second proposal is actuall a decrease, from €973bn to €972bn. This is mostly due to items which weren't off budget in the original proposal, being off budget in the second version).

No figure is given for payments appropriations – the figure that the UK government is targeting – but given that this figure has widely been cited to be €940bn, it’s likely that it’ll have to come down more if acceptable to the UK (with the government's initial proposal at €886bn).

Also, just like with the previous draft, the latest HvR proposal foresees cuts to the UK rebate – which is a non-starter for Britain.  As a refresher (from our recent flash analysis):

“The proposal also includes an adjustment in the way in which the UK rebate is calculated. This could result in the UK rebate falling by as much as 11% or €3.5bn across the next budget period, solely due to this adjustment.

The plan also suggests that ‘corrections’ such as the UK rebate will be “fully financed by all member states”. It’s not entirely clear what this means, but it does suggest that the UK could actually be responsible for funding part of its own rebate. If this were the case then the rebate could be reduced by a further €3.316bn, cutting the rebate by a further 11.5%, and 21% (€6.8bn) from its original amount.”

The increased spending on CAP and Cohesion moves further away from the spending split which many in the UK would like to see (more growth focused) while although the headline figure has not increased it is still probably slightly too high. See table below for the full break down (click to enlarge):

So, despite talk of progress last night, it still seems that, from a UK perspective (but also likely a Swedish, Dutch and German one) there are some significant divisions.
 

UK would not be ‘biggest loser’ of EU budget failure

We have a letter in the FT today pointing out that the UK would not be the biggest loser if there is no positive outcome from the talks on the EU's long term budget - a fact we have noted at length in two recent flash analyses. We have also highlighted in recent blogs that the UK is far from alone in threatening a veto.

In an article a couple of days ago the FT suggested that if there was no deal on the long term budget the UK would be the biggest loser since the current budget framework would rollover (increasing for inflation), thereby taking it above the UK government's demands and increasing the UK's contribution.

See below for our full response letter:

Sir,

You say that “if there is no agreement” in on-going talks over the next long-term EU budget, the UK could become the “biggest loser” (“EUbudget: the trillion-euro split”, Analysis, November 21). This is incorrect. It is true that “the 2013 budget ceiling would be repeated – plus inflation – for each successive year” and that this would be higher than the freeze the UK has called for. However, this scenario would be far worse for other countries than for Britain.

First, newer member states would probably lose out on a large share of the cash that is due to be allocated to them in the new budget period. Second, unlike the UK’s rebate, all other correction mechanisms – such as the Swedish or Dutch – expire in 2013 and would need to be renegotiated under unanimity rule. Finally, and most importantly, the UK’s net contribution under a rollover is about €3bn higher than under the current proposal by European Council president Herman Van Rompuy. However, the Van Rompuy proposal also includes a reduction in the UK rebate of between €3.5bn and €7bn, meaning the UK contribution would overall be lower under a rollover.

The confusion of EU budget maths

Confused by the various figures flying around in the EU budget talks? When is a freeze a freeze and not an increase etc? Don’t feel bad, everyone is confused. There are a number of ways to calculate the increase or otherwise in the EU budget, depending on whether one looks at:

• payments or commitments
• net contributions before or after rebate
• gross contributions before or after rebate
• on-budget items only or also EU spending outside the main budget
• Current prices or constant prices 

In other words, enough to do your head in. Heading into tomorrow’s negotiations on the EU budget there are essentially two crucial elements to take into account when considering whether Cameron has managed to deliver what he has promised (a real-terms payments freeze): the level of “payment appropriations ceilings” versus “commitment appropriations ceilings”; and share of EU spending covered by UK’s rebate.

The first point is tricky because the UK Government has set its stall out using different measurements to everyone else.

Every annual EU budget includes a figure for ‘commitments’ (which are essentially ‘promises to pay’ or funds that can be earmarked that year) and ‘payments’ (the level of money actually paid out in the given year). The long-term budget on the other hand, which is being discussed tomorrow, includes ceilings that limit the maximum level of commitments and payments that can be made in the years 2014-2020, with payments always lower than commitments.

Now, all the plans on the table at the moment, except the UK’s, compare proposed commitment ceilings for 2014-2020 to the previous long term budget’s commitment ceilings for 2007-13. The UK has taken the level of payments from the 2011 budget (i.e. the money actually spent that year) and, after scaling the figure up to cover the full seven years, used this as its baseline. This helps explain the very large gap in the UK’s proposal compared to the others. Using everyone else’s baseline (2007-13 ceilings), the UK proposal looks a lot more like a real terms cut than a freeze.

Reports overnight suggested that the UK was ready to negotiate a deal based on the Herman van Rompuy (HvR) proposal – on the surface this looks like a significant U-turn given that the UK’s proposal totals around €886bn in payments compared to €1011bn in commitments under the HvR plan. However, this is comparing payments with commitments. New reports suggest that the new version of the HvR proposal includes a payments ceiling of around €938bn, significantly closer to the UK’s position and a slight real terms cut on the current payments ceiling (€4bn). This then is the figure to compare. This figure is likely to have to come down further to be accepted by the UK. But, although it wouldn’t be ideal, David Cameron might be able to sell this as a ‘cut’ or ‘freeze’ at home, because on everyone else’s terms it would be.

The main stumbling block with the HvR proposal falls under the second issue – the rebate. Currently, the plan would change the way the rebate is calculated, removing the UK’s compensation for ‘rural development’ spending in the new member states and requiring the rebate to be funded by all member states (including the UK). We estimate that this could cost the UK between €3.5bn and €7bn over the seven year period – this clearly makes it unacceptable to Cameron, who has pledged to defend the rebate. However, this proposal to change the rebate would appear to be a straw man to knock down (a domestic win for Cameron).

This is because, as we noted a few weeks back – featured by Newsnight - the UK rebate is already set to fall by a similar amount, simply by virtue of the way money is likely to be allocated in future and the way the rebate works. More money is set to go to the newer (poorer) member states and this means there will be less spending on which the UK receives a rebate. This means that the UK net contribution to the EU budget could rise even if there is a freeze or a small cut in the budget. This is unavoidable and much a result of previous rebate negotiations under Tony Blair.

Overall, the UK could end up with a deal where its net contribution increases (due to a fall in the rebate) and the overall budget is above its desired target. But, this is not as bad a deal as it might appear and could still represent a real terms cut in the budget (on all the other member states’ and the European Commission’s baseline). Of course a lot could still happen in the coming days.

That said, the EU budget remains an anomaly and an insult too all economic common sense. We would still much have preferred the UK to push for wider reform of the EU budget in terms of content as well as size, especially since (as our recent blog showed) plenty of other countries were upset at the potential spending increase.  The simple fact that we need to explain all of this speaks volumes about how the UK Government has communicated its strategy. It failed to properly express what it’s position was and why, which has probably made it more difficult to explain its position to both its EU partners and the general public alike. This could cost the Government when it comes home with a deal.