Future financing of the EU
Robert Skidelsky
Hansard | Monday, March 22, 1993

May I start by congratulating the noble Lord, Lord Grenfell and his Select Committee for their Report on the Future Financing of the EU.
It is a fiendishly complicated subject, which the Report has reduced to exemplary clarity. However, the Commitee's hope that greater transparency can be achieved under the present system -that in its own words we should know 'what we are paying -and what we are paying for' –strikes me as being somewhat Utopian.
I doubt whether one person in a hundred understands the fiscal operations of his own government. The idea that the accounts of the European Union might become an open book is a pipedream.
It would certainly be a nightmare to all those who live off the honey pot. The recent mass resignation of the Commssioners was a very belated recognition that fraud and corruption are endemic in the way the Commission uses the funds member states place at its disposal.This is always a danger when any group of people are given control over other people's money. In national administration we take enormous care to ensure that politicians and officials are accountable to the taxpayer. Eight hundred years of our constitutional history can be read as a struggle to achieve such accountability. The officials of the European Union to whom we entrust £8bn. a year, or 4p. in the £, of our taxpayers money,are in practice, largely unaccountable to anyone for how that money is spent.
Most of the Report’s conclusions and recommendations are sensible, and will not give rise to political controversy. I would like to draw attention to two. In para.45, he Committee endorses the government's view that, by the year 2006, the Union's expenditure should be stabilized, at its present level of 85 b. euros. Contrary to the Commission’s own view, it concludes that with an 'own resources' ceiling of 1.27 per cent of the Union’s total GNP, this will give it an adequate margin to spend on enlargement, depending on the growth assumption used. It points out rightly that this margin would be greater if the Common Agricultural Policy were reformed, and the cohesion and structural funds more accurately targeted.
Secondly, the Committee states in para. 83 that 'we do not see a directly collected own resource as a viable option at present, in either political or practical terms'. To give the European Union its own independent tax base is to cross the line between a confederation and a federation, and we are pleased that the Committee resisted this step, despite, I think, some prodding from the noble lord, Lord Desai and the noble Baroness, Lady Sharp.
However, neither of these conclusions addresses the root problem of lack of accountability. In the long run, we do face a choice, I think, between two alternatives: eliminating the so-called 'democratic deficit' at the Union level or handing back a large part of the Union budget to the member states. Since we in this party, and I believe most people in this country, do not want a federal Europe, we logically support the policy of budgetary repatriation.
The Report is considerably less robust when it comes to the question of Britain's rebate, negotiated by the hon. Baroness, Lady Thatcher, at Fontainbleau in 1984.This rebate was made necessary by the fact that Britain's net contribution to the Community's budget -the difference between its gross contribution and receipts - was greatly in excess of its relative prosperity.
The present financing crisis has arisen because four other countries, Germany,Austria, Sweden, and the Netherlands, also believe they are paying too much relative to the benefits they receive, and have formally asked for rebates. Germany, in particular, had indicated that it no longer wants to be Europe’s milch cow. In the words of one of the witnesses, Professor Begg, this will this request, if granted, will ‘blow such a hole through the budget that the whole thing would collapse’.
My Lords, the general principles in this matter are reasonably clear, indeed relatively uncontentious: each member state should contribute according to ability, and receive according to need. So the richer states should be net contributors, and the poorer ones net recipients.
However, there are two main problems in translating these principles into practice. First, it is very hard to agree a formula for contributions which is generally accepted as 'fair'.
For example, the Report asks: should contributions should be proportional to GNP or to GNP per capita? If one were devising a proportional tax system within a single state, the obvious measure of ability to pay would be the size of an individual's income; and by analogy, money raised from member states should be a share of that state's national income per head. On this basis Britain's gross contribution to the Budget would not be third largest but about 10th largest. Although there are different ways of measuring per capita GNP, they do not affect the rankings by much, though they are at the source of the conundrum about whether Italy is more prosperous than Britain. As my noble friend Lord Boardman argued in Appendix I to the Report (p.29, para.37) this formula would make rebating unnecessary. Unfortunately, this is not how it's done, and nobody seems in favour of such a change.
The other problem, as the Treasury Memorandum to the Committee pointed out is that ‘there is no clear relationship between receipts and prosperity’. (Appendix I, p.3, para.10) Net recipients are not necessarily the poorest. For example, France, the seventh most prosperous economy receives exactly as much as it contributes, whereas Britain the 10th most prosperous is a net contributor, even with the rebate. This is because 50 per cent of the EU's transfers go not towards helping the poor but subsidising the wealthy -in this case France's farmers- through the operation of the CAP,from which Britain’s relatively efficient farmers receive disproportionately little. In other words, the total pattern of net transfers, fixed by the Union’s history, is haphazard and irrational.
The Report argues, in effect, that Britain's rebate should be traded for a reform of the CAP, which would also help the other large net contributors. (para.28) The idea is that price support for Europe's farmers should be run down; and their replacement subsidies should also be run down Britain's gross contribution would then be reduced, and its net contribution cut.
In this connection, I regret very much that the Report has given currency to the horrible word ‘degressivity’. We now have an unholy trinity of progressivity, regressivity, and degressivity. My computer showed good judgment by underlying each one in red, telling me that it did not recognise them. What is the opposite of degressivity? Gressivity I suppose. All the Report was saying was that income support for farmers should be tapered off – a sound phrase expressing a sound idea.
But how likely is it to happen? The Treasury Memorandum argued cogently that, desirable though reform of the CAP was in the general interest of the EUconsumer 'there is no medium-term prospect either of reform leading to a dramatic reduction in CAP expenditure or of the UK's share of that expenditure increasing substantially'. (Appendix I, p.7, para.43). This being so, we should go on vetoing any reduction in our rebate unless and until we have a proposition on the table to make our net contribution equitable without the rebate. I wish the Report had stated this in as many words.
In its Agenda 2000, the Commission has its own proposals for what it calls ‘a general corrective mechanism’ for dealing with the financing problem. In each of its possible correction schemes, designed to accommodate Germany and other excessive net payers, Britain would lose between 2 billion and 3 billion euros. The Economic Secretary rightly said that ‘such a solution would be grossly unjust’.
It would be quite possible, though, to design a rational corrective mechanism. One possible approach would be based on the principle that the pattern of payments and spending should aim to achieve zero net budget balances for all member states, except for the structural funds and overseas aid. The structural funds would then be the chosen instruments for net transfers between member states. This would mean that some key members, such as France, Luxembourg, Belgium and Denmark would have to pay a fair share for the first time. They would not like it. Neither would Ireland. That is why it is not even being considered.
This makes it all the more surprising that the Report should apparently be willing to forego the solidity of the rebate for what is little more than a blast of hot air.
So the financing crisis will not be solved -certainly not by the time of the summit in Berlin in two days time. The Select Committee's Report has not suggested a solution. But it has made an admirable contribution to the elucidation of the problem, and for that I am sure this House will want to express its appreciation and thanks.
I was disturbed to read the view of Mr. Colo I Naval, Rapporteur of the Committee on Budgets of the European Parliament. In his evidence of 26 January,Mr. Naval stated (on p.39, para..80) that, the abolition of Article 200 of the Treaty of Rome in the Maastricht Treaty means that 'legally there are no more national contributions, not even the possibility of them', and indeed that 'any debates on national contributions...endanger the construction of the political union in Europe'.
Too often in the past we have woken up to find that the some vital component of national independence, which we believed we still possessed, has been stealthily removed by the legal draughtsmen. Perhaps the noble lord, Lord Grenfell, would care to comment on that witness's legal opinion, which was not challenged by the Committee when he appeared before them.
I also have considerable sympathy for the Report's recommendation that 'conideration shold be given to basing the proportion of revenue raised from each member state on GNP per capita rather than on total GNP'.