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A Pernicious but Unnecessary Budgetary Spat between the UK and the EU

Phedon Nicolaides, 27 October 2014

The Guardian, 2014

The Guardian, 2014

The landmark climate agreement achieved at last week’s European Council has been overshadowed by new row between Britain and the European Union. About ten days ago, the Commission sent to all Member States a note informing them that it had re-calculated their contributions to the EU budget. The VAT and GNI bases which are used to determine what each Member State pays were adjusted. As a result of this adjustment, Member States were requested to make an one-off payment by 1 December 2014. The UK in particular was asked to pay EUR 2.1 billion. For sure this is not a negligible amount of money and understandably the British Prime Minister, David Cameron, was not pleased at all.

At a press conference in Brussels after the end of the European Council, Mr Cameron, visibly angry, thumped the lectern in the press room, refused to hand the money to the EU and called for an emergency meeting of finance ministers. He was especially upset by the fact that the Commission asked for its account to be credited within four weeks; i.e. by 1 December. Apparently, the Dutch Prime Minister, Mark Rutte, was reported to be sympathetic to Mr Cameron’s view and threatened legal action against the Commission. The whole episode, with pictures of a furious Prime Minister in Brussels, was played up in the British press, most of which is eurosceptic, and was seized by the anti-European elements in the Conservative Party to put more pressure on Mr Cameron to exit the EU.

A number of questions arise out of this sorry episode. First, why did the Commission make those adjustments? Second, was it in the Commission’s competence to make those adjustments? Third, were the Commission’s adjustments correct? Fourth, must Member States pay? Fifth, why were Member States asked to pay such large amounts of money in such short notice [1 December]?

The explanatory note* that the Commission sent to Member States has been leaked, available here. It makes clear that the adjustments were made as a result of revision of statistics and statistical definitions. The raw numbers used by Eurostat are submitted by Member States which collect the underlying data in the first place.

Therefore, the answers to the questions posed above are that, first, the Commission is required to make the adjustments simply because the revised statistics determine what each Member State has to contribute to the EU budget. Second, it was certainly within its competence. Third, it is not possible to know whether the adjustments are technically correct. On this point, any Member State can legitimately express doubt and demand further explanation and verification of the correctness of the Commission’s calculations. Fourth, Member States have no choice but to pay. In fact, as indicated in the Commission note, some “lucky” Member States will receive money back. This shows that the adjustments were technical and objective. Fifth, the short notice was a coincidence. The relevant regulation [Regulation 1150/2000] refers to the deadline of 1 December of the year in which adjustments have to be made. The Commission did not impose a deadline of a month. It was simply that the calculations were made in October and, therefore, the payments by Member States had to be effected by the deadline defined in that regulation.

We can now consider two broader questions about the fairness and the timing of the adjustment. First, as regards fairness, the statistical revision was partly a technical exercise [wider statistical base that captures more economic activities some of which are informal or not main stream] and partly an ex post response to the unexpected growth or slow-down of the various national economies. As the British economy had grown faster than expected, it was called to pay more. There is nothing unfair or sinister about this. In absolute terms, the UK appeared to foot the largest bill. But in proportion to its GDP [EUR 1899 billion], the amount of EUR 2.125 billion is just 0.001 of its GDP. The Netherlands that faced the second largest call of EUR 0.643 billion, also bears the same proportion in relation to its GDP of EUR 603 billion, i.e. 0.001. By contrast, Cyprus with a GDP of a mere EUR 16.5 billion was called to pay only EUR 42.4 million, but that was equivalent to 0.003 of its GDP – three times a large as that of the UK or the Netherlands. These number show that the UK did not face an exceptional burden in relation to other Member States. But in fact, these numbers on their own are rather meaningless because they do not take into account what was paid and received in the relevant time period by each Member State.

The relevant time period was 2002-2013. This is truly puzzling. Why did the Commission wait so many years to do the technical adjustment. The longer it waited, the larger the bill that would be presented to the Member States, and the stronger the reaction from Member States. Perhaps the Commission thought it was a mere technical exercise. It should have known better, though. Money is always a contentious issue in Brussels. Perhaps the Commission had to wait until it received the correct and definitive data from the national statistical offices. The reason for the long delay was a missing in the heated exchanges of last week. Mr José Manuel Barroso, the outgoing President of the European Commission, did not give any explanation in his reply to Mr Cameron. Hopefully, a fuller explanation will be given in the future.

Regardless of the reason for the delay in the adjustments, the Commission, which is normally politically very astute, miscalculated badly. Had it waited a mere month longer, the next deadline would have been the 1st of December of the following year. That would have given Member States plenty of time to make the payments.

It was a political error that could have been avoided. It has harmed unnecessarily UK-EU relations. The historians of the future will also question the wisdom of the British Prime Minister’s outburst. He has made it more difficult for himself to persuade the British electorate that it is worth staying in the EU. His lectern thumping in Brussels will haunt him.

*Information note for Member States on VAT and GNI balances.

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