Jumping from headline to headline isn't a Europe strategy

Our #EUwargames exercise has already received extensive coverage, but today we'll publish our own, widely anticipated, analysis of the simulation (within the next hour or so).

In the Times, Open Europe's Director Mats Persson trails the analysis. Bringing the simulation back to reality, he argues:

David Cameron heads to another EU summit today. The focus will be on the eurozone’s stuttering “banking union” but the PM will be stalking the corridors seeking support for EU reform. The good news is the appetite for change across Europe is growing. The bad news: Mr Cameron risks wasting the opportunity.  

In a unique exercise, Open Europe has just “war-gamed” UK-EU negotiations and the results were instructive. Once the posturing is over, there’s scope for a range of reforms, including cutting the cost of Brussels and veto rights for national parliaments. Mr Cameron has achieved an EU budget cut and financial services safeguards but the exceptional statesmanship required forsweeping reform is lacking.  

First, he’s fallen behind the curve. In January, he gave a good Europe speech but there was no follow-up plan. Mr Cameron had years to change the rules on benefit entitlements prior to Romanians and Bulgarians gaining full free movement rights but only now are changes being rushed through. Last-minute panic action will never deliver substantial reform.  

Second, there are government malfunctions. On EU migration the Home Office, the Department for Work and Pensions and No10 have pulled in different directions. All governments suffer from internal tensions, but multi-party coalitions such as the Dutch or Finnish are far more joined up on Europe.  

Finally, there’s a failure to understand EU partners’ interests. In our simulation, presented with evidence that France has the most to gain from limiting EU regional spending, Paris was open to budget reform. The UK must identify the reforms that could allow others to buy anygrand bargain. The deals are there to be done.  

Mr Cameron should appoint a lead negotiator or an EU reform task force to co-ordinate work across all departments and tour national capitals testing ideas. France has successfully defended agricultural subsidies for decades using this technique. Jumping from headline to headline may work for domestic issues but on Europe, it’s a sure way to end up pleasing no one.

The EU budget is a disaster that cannot save Greece

Our Director Mats Persson argues on his Telegraph blog:

Ever driven on a motorway in Spain or Portugal? You’ll notice it’s not exactly the M25 – often, cars are few and far in between (some pretty heavy congestion around Gibraltar not included).

According to some estimates, 25 per cent of the EU’s so-called regional funds in Portugal has been invested in roads, heavily contributing to a ridiculous situation where the country has 60 per cent more kilometres of motorway per inhabitant than Germany and four times more than Britain (H/T FT). Meanwhile, around one third of EU structural funds in Spain has been invested in infrastructure, further inflating an already critical construction bubble, while, like in Portugal, creating a whole host of ghost roads, airports and harbours. The EU’s own auditors have hammered EU spending on roads, noting that 74 per cent of the project they monitored in a recent investigation recorded less traffic than expected.

Welcome to the folly of the EU budget. This economic anomaly is at best irrelevant for the Eurozone crisis – at worst outright damaging.

Consider Greece. In the last week, there has been some talk of the EU budget being used in a third bailout for Greece. Although it’s not entirely clear how this could work – or how even how credible this speculation is – one way could be to reduce the amount of its own cash the Greek government needs to put up in order to unlock EU funds, known as co-financing. Depending on the circumstances, this usually ranges between 25% and 60% of a total grant. Greece currently has special permission to put up only five percent, and it wants this extended to the next EU budget period, to run between 2014 and 2020.

This is politically convenient since it draws from a cash allocation that has already been agreed (easier to sell to German taxpayers) while not coming with new, tough bailout conditions (easier to sell to Greek citizens). However, such an arrangement will also do absolutely nothing to save Greece:

• Most fundamentally, a quick look at the records shows that Greece has been allocated over €64bn in structural funds over the last two decades (to which the UK has contributed around 12%). Per capita, this is amongst the highest in the EU, yet the country is still bust and uncompetitive. 

• It follows therefore that it’s the wrong type of funding for Greece. It can’t be used for health spending, education or to recapitalise banks, for example, areas where the fiscal shortfall in Greece is / has been the most critical. It can, however, be spent on roads. 

• Like the structural funds in general, it risks creating an opportunity cost by diverting limited public investment away from where it can have the greatest impact. 

• Reducing the co-financing rate gets us away from the structural funds actually being a fiscal burden – Greece can’t afford putting up the matching cash (the structural funds tend to be oddly pro-cyclical). However, the trade-off is that it eliminates any form conditionality attached to the money. Is this really the way forward? 

• It’s a bureaucratic nightmare to get to the actual cash – exactly what Greece doesn't need. 

This also illustrates why (almost) the entire EU budget is pretty much a running disaster, in desperate need of root-and-branch reform.

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.

Ten areas where the UK and Germany could agree on Europe

Ahead of last week's meeting between David Cameron and German Chancellor Angela Merkel, Open Europe's Director Mats Persson wrote on his Telegraph blog:

About now David Cameron will sit down with his German counterpart Angela Merkel, with the discussion likely to be dominated by Europe. The issues are complex, but come down to a simple trade-off: Cameron wants Merkel’s support on his vision for a reformed and flexible Europe. Merkel – fearing being left alone in a Mediterranean-dominated EU – wants to find ways to keep Britain on board. So is a new Anglo-German bargain at some point down the line possible? There are those in both the status quo and better off out camps who would answer categorically: “no way – It’s all or nothing for Britain”.

I strongly disagree. As Michael Meister, Deputy Parliamentary Chairman of Merkel's CDU party, told the BBC Today Programme this morning, “I think we are open to arguments…to move something back [to member states].” For example:

Strengthening national parliaments: Multi-billion euro bailouts have been seen the Bundestag getting more involved in EU affairs, as recently demonstrated by the Cypriot bailout. At the same time, Germany’s traditional support for the European Parliament – seen as pushing an unrepresentative agenda (including Eurobonds) – is starting to wane. Many Germans – including the country’s constitutional court – would fully echo David Cameron’s assertion that national parliaments “are, and will remain, the true source of real democratic legitimacy and accountability in the EU”.

Cutting the cost of EU bureaucracy: Germans are just as critical of excessive EU bureaucracy as the British. Following a story in Die Welt am Sonntag that 4,365 EU officials earned more than Angela Merkel, even Germany’s Europhile Foreign Minister Guido Westerwelle said that “The salary structure in Brussels is worth taking a critical look at”. Berlin has already backed Cameron’s demand for a pay cut for EU officials.

Ending recycling of EU regeneration cash: Westerwelle – alongside a host of German politicians and commentators – has strongly criticised the EU’s so-called “structural funds” for leading to “aberrations such as EU money going to day spas and romantic hotels.” Cutting down on these funds, for example by limiting them to only the genuinely poor regions in Europe, would save both the UK and Germany billions. (The German federal government would have to find a way of buying off the Easter Länder, but that’s fully possible).

Phasing out farm subsidies: As in the UK, there’s strong appetite for ending the EU’s totally irrational direct farm subsidies – the German Social Democrats recently came out in favour of spending more of this cash on research and development.

Cutting the EU budget: Merkel already backed Cameron over a historic cut to the EU’s long-term budget – despite many at the time saying this was “impossible”.

Less intrusive EU environmental law: Given its industrial base, Germany could find its economy even more hamstrung by burdensome EU green laws than the UK’s, especially as the country has given up completely on nuclear power. While the country broadly backs switching to renewable energy, it most definitely wants to maintain as much control as possible over its energy mix (overall targets rather than micromanaging EU green laws could be one compromise).

Devolving powers over fisheries: The UK and Germany have both been the driving forces behind current efforts to devolve powers over the EU’s fisheries policy to member states, having groups of countries deciding quotas rather that this being micromanaged in Brussels. These are very important and long overdue reforms.

Migrants’ access to benefits: Whilst both countries, rightly, remain supportive of EU free movement of workers, they also recognise the need for safeguards to make sure people come to work rather than claim benefits. As Germany’s Interior Minister Hans-Pieter Friedrich put it, “If people in Germany feel that their solidarity and openness is being abused and our welfare system is looted then there will be legitimate anger. The message for the EU Commission is clear: Brussels has to take stronger account of situation of the local population in its decision making process.”

Free trade: At times, Germany can slip into a protectionist mood, but generally, it’s very keen that the EU upholds a rule-based order that allows for free trade. The UK and Germany are currently blocking proposals for “reciprocity” to be included as a tenet of EU trade policy – which could seriously hurt both UK and German exports.

Single market safeguards: The UK and Germany have already agreed a “double majority” principle to apply to some banking rules, to make sure that the Eurozone doesn’t write the rules for the UK and other “outs”. Again, this was seen by some as “impossible” as it would give the UK “too much power” (but was agreed last December). Here, Berlin acknowledges that the UK is within its rights to ask for safeguards, given that it’s the Eurozone – and not the UK – that is changing the rules of the game.

There are other areas as well, for example the German constitutional court has ruled that social policy is an area of particular importance for a country “to democratically shape itself”, while former Bavarian President Edmund Stoiber has been specifically tasked with cutting EU red tape.

The UK government needs to invest a lot of political capital and be far more clever that it has been up until now. But don’t believe the pessimists; although it will be tough, a new Anglo-German bargain for a thoroughly reformed Europe is fully possible.

Nick Clegg’s opposition to renegotiation could risk the UK’s EU membership

Following Nick Clegg's Europe speech at Chatham House yesterday, we argued on the Spectator's Coffee House blog,

Nick Clegg this morning fell into the usual ‘all or nothing’ fallacy on Europe. He said: ‘As soon as we start talking about repatriation, we descend into the in-versus-out debate.’ But the Deputy Prime Minister is wrong: the in/out debate is already underway, and rather than seek to defend the unpopular status quo, Nick Clegg should back renegotiation as the best option for those who wish to put the UK’s membership on a stable democratic footing.

But instead of attempting to address the causes for the EU’s unpopularity, the inflated budget, democracy deficit and bureaucracy etc. Nick Clegg sought to channel the debate into his own in/out debate where the problems of ‘out’ justify doing nothing about the problems of ‘in’.

Clegg said that UK can either be a full member of the EU or outside, like Norway and Switzerland. He is right that Norway as a member of the EEA does indeed implement a large proportion of EU law over which it has little influence and that Switzerland does not have full access for its services industries. He also pointed out that with no EU deal ‘firms who currently pay no import tariffs on the goods they send to the continent would be faced with taxes of up to 22 per cent’.  It is actually more like 10 per cent but the point is the same. However, protesting that no one is suggesting joining the EEA or not having a free trade deal with the EU is missing the point. Nick Clegg is presenting a false choice.

There is not one standard EU membership. The UK is not in the Schengen travel area, others are. The UK has a different deal on EU crime and police law than Denmark, which is fully opted out. There are neutral states and those involved in EU defence, there is the euro, the list goes on. But for Clegg there are only two types.

‘There’s the core: where the Eurozone countries are now pulling together more closely… Then there is the ring around that… And the outer circle… The UK is in the inner circle – but the terrain is shifting. The core is tightening – to what degree we don’t yet know.’

Clegg believes we should remain ‘a strong UK, influential in Europe’, but does not define what he wants to influence or convincingly explain why we should be in anything beyond the single market and some absolutely vital cross-border measures. Clegg’s reasoning:

‘What kind of club gives you a full pass, with all the perks, but doesn’t expect you to pay the full membership fee or abide by all the rules?’

This is an odd justification for the EU’s Common Agricultural Policy, Common Fisheries Policy, social and employment regulation, wasteful regional policy and unnecessary loss of democratic control. Are these accepted as some bizarre self-imposed flagellation for daring to desire free trade? If so, why not just accept a rise in the EU budget and get on with it? It’s the ‘subscription’ fee after all.

So what should the UK aim for? In a recent paper we set out that for now the UK benefits from being in the EU’s customs union and single market for good and services but that all other areas should be decided on a case by case basis. Is this pick -and-mix EU possible? Yes. The EU, as Clegg acknowledges, is changing. The eurozone is renegotiating its membership terms, and the treaties will need to be revisited sooner or later. This will present the UK with the opportunity to reform its membership terms and put it on a stable democratic foundation in line with public opinion.

How to make Cameron's EU veto threat actually count

On the Telegraph blog, we argue,

Europe has just sailed up the agenda at the Tory party conference, with Theresa May suggesting curbs on EU immigration and David Cameron hinting at another EU veto. Speaking of the ongoing talks over the EU’s long-term budget (2014-2020), Cameron said: "If it comes to saying no to a deal that isn't right for Britain, I'll say no." 

The problem for Cameron is that unless anything changes, the EU budget talks will almost certainly generate a bad deal for Britain, both in terms of content and cash contribution. 

For various reasons, EU budget talks are always biased towards the status quo, as special interests – such as the farming lobby – block meaningful reform through individual member states’ vetoes. Therefore, on its current path, the UK will keep its rebate from the EU budget, but the EU’s odd spending priorities will remain. This means that around a third of the EU budget will continue to go towards subsidising landowners – irrespective of whether they’re engaged in any meaningful economic activity. 

Another large portion – the so-called structural funds – will continue to see cash pointlessly recycled between some of Europe’s richer regions and countries and spent on projects with little, no or negative impact (though another chunk goes to Europe’s genuinely poor regions). 

The EU’s new long term budget could account for roughly €130-140 billion a year – not a huge amount in the grand scheme of things – but with Europe facing a solvency, competitiveness and banking crisis all at once, this money could still make a big difference if targeted properly. It’s therefore absolutely maddening that the EU budget remains unreformed on its content. 

At the same time, even if the UK manages to get what it’s pushing for – an inflation-adjusted cash freeze (based on 2011 payment levels) – the UK’s net contribution will still increase, since more money will (rightly) go to newer member states which aren’t covered by the UK’s rebate. In turn, any actual increase – and it’s heading in that direction in the ongoing EU talks – will naturally mean an even larger net contribution for the UK. 

 Therefore, Cameron is a very unenviable situation: even if he gets what he wants in negotiations, UK taxpayers will still be forced to cough up more cash to pay for the EU (in net terms). Clearly, this could be politically damaging. 

So how can he get out of this? 

As I’ve argued before, he should instead use the veto to seek the repatriation of the structural funds for richer member states (with a GDP of 90 per cent or above the EU average). This would reduce the UK’s net contribution substantially – possibly by several billions over next budget framework. At the same time, the UK would remain committed to support Europe’s poorest, as all post-communist member states that joined in 2004 and 2007 would do better from the funds (for how to deal with Italy, Spain and Greece – the only countries in the EU actually losing out under this proposal – see here). 

UK regions and urban areas also need far better tailored and targeted cash than what is offered by EU funding. In addition, as this was originally a Labour policy, it has the potential to gain cross-party support at home.

Now, as ever in EU politics, this isn’t uncomplicated. If Cameron insists on the veto, it won’t necessarily stop the process. At worst, it could lead to an ad hoc deal decided on a year-by-year basis through Qualified Majority Voting. But most member states have a huge incentive to avoid this happening. It would be extremely messy and most of them would lose out substantially compared to a new deal. 

Therefore, targeting the structural funds for reform remains the best option for Cameron – by far. Beyond party politics, it’s the right policy to pursue, as it would benefit both the UK and Europe – and finally inject some common economic sense into the EU budget.

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.

 

Reforming the EU budget: could the reform-minded states ask for a better opportunity?

Today we published our long anticipated report breaking down the EU budget line by line and putting together our alternative that would reduce spending by almost 30% - saving European taxpayers around €41bn annually - while focusing the spending far more effectively on boosting the jobs and growth that both the UK and Europe desperately need.

In the press release accompanying the report, we argue that:

“Given the economic climate in Europe, the UK has a golden opportunity to push for fundamental reform of the EU budget. However, the Coalition is selling itself short in on-going talks over the EU’s long-term budget, given that its primary objectives of freezing spending and defending the rebate could be achieved simply by wielding its veto.” 

In particular, we recommend that the UK and other reform-minded states ought to prioritise and target one key area of the EU budget that it could generate the most benefit compared to the political capital needed to reform it. It could put forward a strong economic case and also threaten to veto the EU budget unless this reform goes ahead. Clearly, the potential for the cleanest policy option would be to devolve regional policy back to member states with a GDP of 90% or above the EU average. As we have pointed out repeatedly, such a move would generate huge gains for Britain (including a net saving of around £4bn over seven years) and the EU as a whole, while also boosting the EU’s jobs and growth agenda at a time when Europe needs it the most.

As Andrea Leadsom MP, co-chair of the APPG on EU reform. told the Times (which trailed the report): “It is ridiculous that we should be handing over money, that they administer, convert to euros, decide what to do with, then hand back”. The report was also trailed in the Mail.

Here are the report’s key points:

• Due to its inflexible design and poorly targeted spending schemes, the EU budget is particularly ill-suited to deliver the jobs and growth that Europe needs. However, the window of opportunity for radically reforming the EU budget is swiftly closing. Before the end of the year, national governments could potentially conclude talks over the shape and size of the EU’s next long-term budget, locking in the overall spending priorities for the period between 2014 and 2020.

• Despite the austerity facing Europe, the European Commission has proposed a 6.8% increase in EU spending for 2013, while cutting only six out of almost 41,000 EU jobs. For the next long-term EU budget post-2014, the Commission has proposed to increase the budget by yet another 5%, while only offering minor reforms on substance. 

• Based on a line-by-line analysis of the EU’s 2012 budget, Open Europe has set out an alternative budget that would reduce spending by almost 30% - saving European taxpayers around €41bn annually - while focusing the spending far more effectively on boosting jobs and growth. The UK would reduce its annual gross contribution to the EU budget by almost €5.7bn (£4.6) under such a scheme. Areas in the current budget where both savings and better targeted spending could be achieved include: 

1. Focusing the EU’s structural funds on less wealthy member states and stopping the recycling exercise whereby richer member states subsidise each other’s regional development policies would save just over €20bn.
2. Over one quarter of the EU budget is spent on subsidies to farmers and landowners, irrespective of whether they are engaged in any meaningful economic activity. Slimming down and re-focusing the CAP would bolster both rural job creation and the delivery of environmental benefits, while also achieving a saving of almost €24bn.
3. The cost of EU quangos to European taxpayers has increased by 33% in two years. Simply scrapping those that duplicate others’ work or add no value, would save €431m.
4. Scrapping the European Parliament’s additional seat in Strasbourg could save €180m. Last year, the Parliament issued tenders with a combined value of over €62.4m related to the maintenance of the Strasbourg seat – despite the building standing empty 317 days a year.
5. The cost of running the European Parliament has increased by 36% since 2005, and totals €1.7bn, while expenditure on MEPs’ salaries and allowances has increased by 77.5%, and cost €190m in 2012, excluding pensions and transitional allowances. This is largely due to reforms in 2009 which standardised MEPs' pay across all member states, which had been hugely divergent, and shifted the cost from member states to the EU budget. 
6. Also, since 2005, spending on Commission officials' pensions has increased by 48.6%, amounting to €1.3bn today, while expenditure on Commission staff salaries has risen by 17.9% and now totals €2.1bn, although this is down from a high of €2.2bn in 2010.
7. Since 2005, EU spending on ‘Education and Culture’ has risen by 61%, now standing at €1.54bn. The DG for Education and Culture employs 487 staff – more than the DG for Internal Market and Services.
8. Meanwhile, despite the importance of trade and the single market, only 2.6% of the EU budget is explicitly dedicated to facilitating these policies. Aside from the EU's six highly specialised joint undertakings, general R&D – the one area where the EU budget really can add value – only accounts for around 4.5% of EU spending in 2012. This amount should be radically increased.

• To mirror tough economic decisions in member states, there are also substantial savings to be had in a range of other areas, including administration, communications, justice & home affairs and foreign policy. 

• In the on-going negotiations over the next long-term budget, the UK is pushing for a budget freeze and seeking to defend its rebate. While this strategy has merits, it will also not achieve anything more than if the UK simply chose to veto the proposal for the next long-term budget, as in the absence of an agreement, the status quo would effectively prevail. The UK must set the bar higher and push for, at the very least, the devolution of the structural funds back to richer member states, which would be a win-win for the UK and Europe. If this is not forthcoming, the UK should be prepared to veto the budget. 

We hope that the report will stir things up in Whitehall in the on-going negotiations on both the EU’s next annual budget and the next long term, seven-year financial framework which will largely lock in EU spending until 2020. Though it won't be easy (yes, we know about every single perceived and real political obstacle to EU budget reform), the UK potentially has a number of allies if it plays its diplomatic cards right, ranging from the new member states (with the right pitch) who stand to gain substantially under the proposals, to Germany, where both government and opposition politicians have been increasingly critical (see here and here) about the current EU budget.

It's a matter of just doing it.

Quote of last week

“The EU can’t increase its budget, but has to use its resources better than it has done so far… We need to re-think of the use of EU funds. Calculating what share of each country’s contribution comes back in the form of European subsidies is no longer fit for purpose. This ultimately leads to aberrations such as EU subsidies going to day-spas or romantic hotels. We are all familiar with absurd examples of this type of subsidies in our own country. With European taxpayers’ money, we must achieve better efficiency quotas and demand better results.”

- German Foreign Minister Guido Westerwelle speaking in the Bundestag on Friday.

Hear hear! As we have flagged up repeatedly, because of its flawed design, the EU budget is particularly prone to mis-allocation of resources and poor project selection.

Seriously, for how much longer can Europe afford having such an economically irrational policy at the heart of its common project?

Incidentally, if you're around Brussels tomorrow, we're organising an event on this very question, i.e. on how the EU budget should be reformed.

Fact-checking the Commission's EU budget claims (it ain't pretty)

The European Commission has its own dedicated "myth buster" which aims to explain to the masses and media how terrific the EU budget is, and that all claims to the contrary are "euro myths". Despite making some fair points, overall the list is generally silly and counterproductive. For example, it claims that an EU subsidy to a dog fitness centre in Hungary (that never was built) is a "myth", as the money was since paid back.  However, it fails to acknowledge that the dog centre was only forced to pay back the EU subsidies once Open Europe and others brought the sorry episode to the attention of international media. The Commission was blissfully unaware at the time we highlighted the example, and showed little interest in investigating the case (even claiming that the finding wasn't "serious"). To then come back and present it as a "myth" is laughable (for exactly how laughable, see here).

It illustrates how the Commission likes to take the moral high ground on facts and figures, but often itself engages in spinning exercises that would make Malcolm Tucker proud.

Its presentation for its proposal for the 2013 EU budget, which includes a 6.8% increase in spending, is a case in point. In fact, it was so full of dodgy figures that we felt it was in need of a serious fact-check. So this morning we published one. Here goes (the full fact-check note is available here):

FACT CHECK: THE COMMISSION’S EU DRAFT BUDGET 

1. IS THE EU REALLY CUTTING STAFF?

The claim: “[The Commission is] cutting its staff by 1%, the first step towards the goal of a 5% reduction of staff in 5 years”.

The reality: The EU will only cut 6 jobs net out of 41,000 jobs in 2013 while the Commission will reduce its workforce by 0.5%.

2. IS EU ADMIN SPENDING ACTUALLY FROZEN?

The claim: “[The budget] also freezes the Commission's administrative budget at well below inflation level…The vast majority of people across the EU feel the daily pain of the crisis as their national, regional and local governments have to make cuts, therefore a ‘business as usual’ attitude from the EU institutions is simply not acceptable.”

The reality: Overall EU administration spending to increase by 3.2%.

3. DO THE OTHER EU INSTITUTIONS REALLY SAVE “WHEREVER POSSIBLE”?

The claim: “[The draft budget] includes a strong emphasis on savings and cost efficiency…pressure was exerted on every EU institution and agency to seek savings wherever possible. Most EU agencies will actually see a real cut in their annual budget.”

The reality: Apart from the Commission, many of the EU’s other institutions, committees, quangos and agencies have seen their budgets go up despite adding no discernible value or duplicating tasks, although it is welcome that many of the EU’s decentralised agencies have indeed had their budgets frozen or cut in absolute terms.

4. WILL THE INCREASED SPENDING REALLY PROMOTE JOBS AND GROWTH?

The claim: “€62.5 billion in payments are devoted to job friendly growth in Europe”.

The reality: As several studies have concluded, the EU’s jobs and growth programmes are inefficient and their overall impact is inconclusive, while too much money is still wasted on farm subsidies to landowners with no link to any meaningful economic activity.

5. DOES THE COMMISSION REALLY HAVE NO CHOICE BUT TO INCREASE SPENDING?

The claim: “The EU budget must meet its contractual obligations of current and previous years vis-à-vis the Member States and other recipients.”

The reality: Yes the Commission is legally obliged to make certain payments based on previous years’ commitments. However, both national governments and households also have to pay bills at the end of the month or year. The Commission must likewise learn how to prioritise and find savings if there is not enough money in the pot (the last two years have produced surpluses in the EU budget).

 So as austerity sweeps Europe, is this a serious budget proposal? You decide....

How real is Hollande's veto threat?

As has been widely reported, Francois Hollande - the socialist contender for the French Presidency - gave a major speech yesterday. Unsurprisingly, there were a few points thrown in that won't go down particularly well in Berlin or Frankfurt. Perhaps most interestingly, in reply to a journalist’s question on the EU fiscal treaty, Hollande answered,

“Ireland is about to have a referendum on the treaty, we are not sure what the result will be. We are all aware that Ireland is capable of saying no. So there will be some form of renegotiation. Will the treaty be modified? I hope so. Will another treaty be drafted? That’s part of negotiation. But the treaty in its current state will not be ratified by France”.

 So Hollande's veto-threat still stands. He also reiterated,

"[I am] not in favour of a constitutional golden rule. I’ve been saying it for months. So there will not be any changes to the French Constitution on this issue. However, if I am the next President, and the Parliament is in favour of this, there will be an organic law which will enable our budget to be rebalanced by 2017." 

In addition he tried to claim that the calls from ECB President Mario Draghi for a "growth pact" were in support of his own policy:

“The President of the ECB …has just said that the fiscal compact should be complemented by a growth pact. He even added that it would be useful to go back and prioritise education, research and big infrastructure. The ECB president will be useful to support growth through an interest rate policy. But he also adds support to… my announcement”

This is hardly how the matter was viewed in Berlin, where, in a veiled criticism of Hollande, Merkel said that "We need growth in the form of sustainable initiatives, not simply economic stimulus programmes that just increase government debt." This morning, Hollande also acknowledged on France Info that he didn't share the same "conception of growth" as Draghi, noting, "he calls for greater competitiveness, liberalisation and privatisation".

Yesterday, Hollande also laid out the content of his growth clause:

“The day after the second round, I will address a memorandum to all the European leaders and their governments on the renegotiation of the treaty. The letter will include four points. First, the creation of Eurobonds, not to mutualise debt, but to finance industrial infrastructure projects the size of which will be determined by the states. The second point will be to further liberalise the European Investment Bank’s financing opportunities, to enable a certain number of big projects already known to the bank to be financed. The third point will be the creation of a financial transactions tax, which will be determined by the states, and which will be set at a level to enable Europe to finance further development projects. Finally the fourth point will be to mobilise all the European structure fund leftovers, which are currently not being used, to finance States’ projects and help businesses." 

Of these four points, the creation of "eurobonds", which seems to build on the Commission's idea of 'project bonds' is by far the most interesting. The FTT proposal appears to be a rehash of Sarkozy's idea. It currently remains unclear whether Hollande would introduce it unilaterally, as Sarkozy is, when he encounters inevitable opposition from some EU member states. Nor is it clear at what rate he would set the tax, and which sectors he would target. Sarkozy's own version has been watered down since he made his pledge in December. Hollande's proposal for the use of unspent structural funds is hardly groundbreaking or exciting policy making. Nor does it necessarily help EU growth, as we have shown before.

The question now is whether Hollande will make agreement on these four policies a prerequisite for French ratification of the fiscal treaty. Of these four policies, eurobonds or 'project bonds' are supported by the Commission but could be difficult to get through national capitals, the FTT just won't happen at the EU-level while the two others are insufficiently interesting to warrant the renegotiation of a treaty (use of structural funds and EIB financing).  Our guess is that Hollande knows that his pledge to renegotiate the treaty comes at too great a political cost, and that he will settle for some mild language on these four areas in return for ratifying it.

Regardless, what France and Europe need now is to reassure the markets, and proceed with long-term reforms, rather than stillborn policies or palliatives to pre-existing problems.

Commission's efforts to reform EU budget actually make things worse

As you may be aware, the Commission last year tabled its proposal for how the EU's budget should look like over the next long-term budget period (set to run between 2014 and 2020). With the exception of some modestly positive elements - such as a "performance reserve" for regional funding (albeit very small) to provide incentives for regions to actually deliver results and a bit more cash on R&D - the Commission's proposal is in many ways making an already irrational, wasteful and unresponsive budget even worse.

For example, through the "greening" of the so-called Pillar I of the CAP (involving 7% of farmland to be set aside to provide ‘ecological focus areas’, a requirement to rotate crops and some other elements, more here), the Commission has opted for an almighty fudge that further undermines effective production while not delivering any significant green benefits in return. Also, despite one of the claimed objectives of the Commission's proposal being to "simplify" the budget, the exact opposite has happened. And remember, direct CAP subsidies under Pillar I are already rather bizarre things. As they're based on land ownership or historical entitlement, these are subsidies to a random group of people rather than directed at any specific outcome. This is of course what the Commission is trying to correct through the "greening" proposals, but, alas, it has failed miserably.

This was yesterday echoed by the EU's own Court of Auditors, which noted in an evaluation of the proposal,

"The Court considers that the legislative framework of this policy remains too complex. For example, six distinct layers of rules govern rural development expenditure. With respect to cross compliance, the Court considers that, in spite of the proposed reorganisation, the complexity of this policy continues to make it difficult for paying agencies and beneficiaries to administer.

In spite of the claim that it focuses on results, the policy remains fundamentally focussed on spending and controlling expenditure and therefore oriented more towards compliance than performance."

Pretty damning.

Another example of how the Commission's new proposal is making matters worse is the new 'intermediate' funding category proposed for distributing the EU's structural funds, for regions with a GDP between 75% and 90% of the EU average. Without reiterating all the flaws of the structural funds, this proposal would actually be a blow to focussing the funds on the genuinely poor regions, where they can have the largest comparative impact (see p. 17-18 here for a more detailed discussion). As the Swedish Europe Minister Birgitta Ohlsson has pointed out, this will mean that potentially more cash will go to the EU's richest countries, which will continue to send each other money via Brussels. "We're totally against introducing this category", Ohlsson has said. We certainly agree.

Incidentally, EU Budgetary Commissioner Janusz Lewandowski announced on Monday that there was a €1.49bn surplus left over from last year’s EU budget, which will be credited against member states’ planned contributions for next year’s budget. In other words, despite the "go for broke" nature of the EU budget (if you know of that board game - you need to spend your money as quickly as possible in order to win), member states still don't manage to fully spend all their allocated funds. And yet, next week, the Commission is expected to propose a 5% increase to the EU's 2013 budget. This links to the lack of absorption critera and performance controls in the EU budget, although its a long discussion that is worth saving for another entry.

What's clear is that there's something fundamentally wrong with the EU budget. Come to think of it, it's actually quite fascinating that this anomaly is allowed continue to exist at the heart of Europe.

PS. If you want to know how to make sense out of the CAP and the structural funds - making them help rather than hinder jobs, growth and the environment in Europe - check out our recent reports on the topic, here and here.

He started strong but ran out of steam...

As you're aware, "the EU" has a range of different Presidents - a frequent source of confusion for both citizens in Europe and partners from abroad. Socialist MEP Martin Schulz is one of them, being the President of the European Parliament. While Schultz has somewhat of a marmite personality, he does have some interesting to say - unlike many of his predecessors. Yesterday's interview with FAZ is a good example.

He starts off strongly:

“People do not agree with the EU in its present form… people feel that the idea has become a bureaucracy and they reject it…As a young man I've always fought for the United States of Europe. Today I know that this is not possible. We will not turn Germany and France into California and Florida.”

He continues even stronger:

“The EU must focus on the essentials and the leave the labelling of Hessian apple wine to the Hessians.”

Hear hear.

He also proposes a move towards a free trade area in the Mediterranean - which we also have argued for:

“In the 21st century the population of North Africa will exceed 300 million people who need infrastructure, education, hospitals and sustainable agriculture...Why do not we create an economic area in the Mediterranean? Instead, we'd rather bicker about what fertilizer for farmers to deploy.”

But from there he starts to go downhill, and fast and steep at that:

“The euro is one of the greatest icons [of an integrated Europe] which expresses the economic strength of the still richest continent through a common currency… .”

Right...

Continuing downhill he argues that thr EU budget ought to be spared the kind of austerity that member states are having to implement, saying:

“when it comes to growth, the [structural and cohesion funds] are the most successful project of the EU. There are certainly some highways built incorrectly, but the cohesion policy has recently led to enormous economic growth in Eastern Europe and before that in the South.”

It seems that Schulz must have mislaid his copy of our recent report on the effectiveness (or lack thereof) of the structural funds. He's right that the funds should be focussed on the EU's new memebr states, but totally wrong that the funds have categorically have had a positive impact in Europe's south - there's no conclusive evidence for that.

Schulz also includes a tongue in cheek defence of Chancellor Angela Merkel - showing that despite presiding over a rather dull institution, he can afford a joke or two:

“I must acknowledge [Merkel’s crisis management] without envy, it's a great achievement. It's like in football. The game lasts ninety minutes and the end Germany always wins, as they say in England, even if this is not true. In the European Council, it is usually 26 against one. In the end, however everyone agrees with Mrs. Merkel.”

The folly of EU structural funds illustrated

Here are a couple of illustrative examples of why the EU's structural funds so badly and desperately need reform. The list seemingly never runs dry.

First, the Sunday Telegraph had a feature on Madeira’s economy, claiming that grants from the EU structural funds – which require match funding from local governments or business – have contributed to the local Madeiran administration now owing over €6 billion, nearly double the per capita public debt of mainland Portugal. Much of the EU cash has been spent on infrastructure (not least via the Cohesion Fund, which is earmarked for that purpose) for which there is no demand. As German Chancellor Angela Merkel put it, "There are many beautiful tunnels and highways [in Madeira]. But this did not contribute to competitiveness."

Meanwhile, the European Commission and Swedish local authorities have earmarked nearly £10m to subsidise Facebook – a company currently valued at around $100bn (£63bn) – under plans to build giant server halls in Lulea in Northern Sweden. You'd be aware that Sweden is one of the richest countries in Europe.

Now, the European Commission always has two standard responses to examples like these:

• They've been taken out of context - and then gives a series of stats of how many jobs and how much growth the structural funds allegedly have created.

• It's up to the local authorities in member states to select the projects anyway, the Commission merely facilitates the cash.

But these examples are very much symptomatic of the wider problems and flaws inherent in the structural funds (SF). As we set out in our recent report on the topic:

1) Conflicting aims: are the structural funds meant to be channelled to areas where the absolute return of capital is the greatest or where they can foster the greatest convergence between poorer and richer regions (a key stated aim of the funds)? The €10mn in EU funds earmarked for Facebook - a thriving company - surely could have come from private capital. It's probably a decent investment. So in fact, the €10mn could have served to ‘crowd out’ private investment that otherwise could have take place in Lulea, while channelling funds away from poorer regions where they can have the most comparative impact. The result is the opposite of convergence.

2) Opportunity costs: Related to this, both the Facebook and the Madeira examples illustrate the huge opportunity costs that the SF involve - spending diverted from other, more
comparatively productive economic opportunities. In the Facebook case, the funds duplicate economic activities in relatively wealthy states that would have taken place anyway, and in the Madeira case, they're spent on outright damaging projects (i.e. needless infrastructure projects that run up debt).

3) Pro-cyclical and unresponsive to changing needs: The Madeira case shows that the SF tend to be pro-cyclical as they can be sucked into areas of the economy where unsustainable growth or serious leveraging is taking place, with few ways of making adjustments (this was also the case in Spain for example). Remember, the funds are negotiated on a seven year basis, and come with fixed spending criteria (with some discretion to alter spending on a yearly basis). Co-financing also makes the funds pro-cyclical. Not wanting to forgo the potential opportunities presented by taking up structural funding, governments and local authorities feel obliged to spend the money on co-financing, even if this means running up massive debts. Again, hello Madeira.

4) No link between performance and spending: the absence of strong conditionality
and performance criteria in the allocation of funds meant that Madeira continued to receive funding despite the absence of results from the billions in funding that it has received. This also means that the focus is on getting money out of the door rather than spending the cash wisely.

And this is even before we get into the irrational distribution patterns of the funds, the added administrative costs, the absence of absorption criteria, the problem with accountability (falling in between member states and the Commission) and the fact that the Commission's models for evaluating the funds are hopelessly inadequate.

Do read our report for the full picture.

This policy simply has to undergo root-and-branch reform, starting by limiting funding to the poorest countries only, where it can have the greatest comparative impact.

Spain v Commission: another round

The relationship between the European Commission and the Spanish government is clearly not all warm and fuzzy at the moment. After the discussion on deficit reduction targets, Spain has now also come under fire for its use of EU structural funds.

Spanish Agriculture Minister Miguel Arias Cañete (in the picture) recently told MPs that the plan for the construction of desalination plants across the country has turned out to be "a spectacular failure". He explained,

According to the plan, 51 plants were to be built. At the moment, 17 are in use and 15 are under construction. €1,664 million was invested, and we need an additional €762 million if we want all these 32 desalination plants to be operative.

Furthermore, Arias Cañete noted that the existing plants are only working at 16.45% of their maximum capacity. Although the project was launched by the previous Socialist government, it is now for the new centre-right cabinet led by Mariano Rajoy to sort out the situation and decide, among other things, if it is still worth starting work on the remaining 19 plants, as initially planned.

As you may expect, the bulk of funding for these plants came via the EU's structural funds, out of which Spain has done very well. And the European Commission is not happy. Here is what a spokeswoman for EU Environment Commissioner Janez Potočnik said in an e-mail quoted by El País,

A significant amount of European funds, around €1.5bn, has been invested in desalination plants across Spain over the past few years. We have taken note of the statement to the [Spanish] parliament that they are working at 16% of their capacity. This calls into question the effective use of European taxpayers' money.

The Commission also said that it now expects the Spanish government to "take the appropriate measures to achieve the best use of these infrastructures paid with EU funds", warning of "a big negative impact on the availability of European funds for Spain".

Incidentally, in our recent report on EU regional spending, we pointed out that while EU subsidies may have benefited individual regions during a limited period of time, they have been poorly targeted in Spain. When Spain needed to address its overheated economy and property bubble, EU structural and cohesion funds were channelled towards infrastructure projects, which were already subject to abundant private credit and over-investment at the time. Indeed, 28% of these funds are still set to go towards infrastructure projects in different forms during the current EU budget period (2007-2013).

Spain needs a lot of things, but more roads or non-operational desalination plants are not among them.

All of this goes to show that EU regional spending is in urgent need of a radical overhaul, which would far better serve Spanish and European economies. In case you missed it, we set out how such an overhaul should look in the report we published in January.

The expression "win-win" springs to mind.

Senior Labour MPs back devolving structural funds back to the UK

This is an interesting development. Amid everything else that's happening on the Europe-front, a bunch of Labour MPs today come out in force, backing the idea of devolving EU structural funds back to the UK. In a letter to the Guardian, 17 Labour MPs, including former Cabinet Ministers Bob Ainsworth and Jack Straw, urge the Coalition to adopt the policy first floated by Gordon Brown, to focus the structural funds exclusively on the poorer member states.

The letter reads:

In the context of the growing euro crisis, it is interesting to note that Gordon Brown – while he was chancellor of the exchequer – argued strongly for the repatriation of EU structural funds. Writing in the Times in 2003, he said: "When the economic and social, as well as the 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."

The article was written in support of a Treasury document called A Modern Regional Policy for the United Kingdom, published in March of that year. The paper argued that there was much time and money being wasted in processing contributions from countries such as Britain, only to send the contributions back in the form of structural funding.

Much easier and simpler, the then chancellor seemed to be saying, to let Britain keep the cash and get on with the job of using our own structural funds. The pressure group Open Europe has calculated that Britain would have been better off by something like £4.2bn if Brown's system had been adopted. What is more, some of the most deprived UK regions are currently short-changed by the structural funds, because EU allocations are based on inflexible, one-size-fits all criteria. For instance, the West Midlands has the lowest disposable income per capita in the UK, yet pays the EU £3.55 for every £1 it receives back in structural funding, according to Open Europe estimates. In contrast, if Labour's policy had been pursued, each region would have experienced a rise in the amount of subsidies they receive by around 45% compared with now. For example, Cornwall would have received an additional £207m over seven years.

Alan Johnson, also argued in 2003, that regional policy ought to be "resourced domestically in richer member states, like the UK, with the institutions and the financial strength to do it. This would end the unnecessary and inefficient recycling of funds between richer member states, like the UK, via Brussels ..."The Cameron government seems to have abandoned any attempt to change EU structural funding to concentrate on trying to freeze the EU budget – a strategy which has already failed. Perhaps this government could take a look at what was being argued for a few years ago – it could benefit us all.

John Cryer MP, Jack Straw MP, Katy Clark MP, Thomas Docherty MP, Dennis Skinner MP, Gisela Stuart MP, Andrew Smith MP, Mike Wood MP Robert Ainsworth MP, John McDonnell MP, Kelvin Hopkins MP, Jeremy Corbyn MP, Grahame Morris MP, Ian Lavery MP, Ian Davidson MP, Frank Field MP, Graham Stringer MP

One for the Coalition to ponder...

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.

So where does EU money come from?

Ahead of our impending paper looking at the effectiveness or otherwise of the EU’s structural funds (watch this space) we came across this timely comment from Hungarian PM Viktor Orban - who has been subject to some (ehum) controversy over recent weeks (he took a roasting in the European Parliament on Wednesday).

During an interview with German tabloid Bild, he was asked that given Hungary’s economic crisis, with the country trying to obtain a “safety net” from the EU and IMF, was it right that Hungarians enjoyed a 16% tax rate on their income while Germans had to contribute up to 47% of theirs - which is sort of a silly question.

When Orban pointed out that Hungary didn't owe Germany any money, the interviewer asked about the €2 billion Hungary receives from the EU’s structural funds every year. Orban’s answer:

“Correct, but this money does not come from German taxpayers, but from the EU. This money is available to us as a member of the EU.”

Hello Mr Orban. Where does "EU money" come from?

Here at Open Europe we argue that less wealthy member states such as Hungary should continue to receive EU structural and cohesion funds (though the funds need serious reform). But the money doesn't come from the EU’s magic plant, but from taxpayers - and around 1/5 of the EU's budget just so happens to be financed by German ones.

Incidentally, in our forthcoming paper, we'll present a solution that will make both Hungary and Germany fare better from the EU budget.

Just to whet your appetite.