Monday, 7 July 2008

Reforming Europe's budget

One of the issues set to dominate the EU policy agenda during the 2009-2014 EP is how to reform Europe's budget. I was closely involved last time round with the 2007-2013 EU budget through our work both on the Parliament's Temporary Committee that was set up to enable MEPs to agree its opinion on what the future EU budget should consist of and the Regional Development Committee which was discussing the detail of the Commission's proposals on European Structural Funding. So, I could pretty much see at first hand at least from the Parliament's side what was going on and what we needed to do to ensure Scotland's funding interests were protected – insofar as that can be achieved when not being an independent member state.

The process for every budget negotiation is more or less the same. Last time round the Commission brought forward its original proposals in 2004 for a new financial framework for funding the EU's policy activities over the seven year period 2007-2013. The key issues largely revolved around (a) the size of the budget, (b) spending priorities and (c) the system of revenue, i.e. how much each Member State wants to contribute to the budget. So, our starting position is always the Commission's proposal which, back in 2004, was for a budget set at 1.26% of the EU's Gross National Income (GNI) – equivalent to an overall total of 1025bn euro. Sounds a lot I know, but bear in mind that the UK budget is about 40% of UK Gross National Income!

The UK government's position was clear. Not only was the British rebate non negotiable, the UK wanted the EU budget cut to a maximum of 1% of the EU's GNI (as did France, the Netherlands, Germany, Austria and Germany), with spending on cohesion policy in the UK – and the other ‘old’ member states – more or less cut to zero. This implied no more EU funding for Scotland, and in particular for the Highlands and Islands. That in turn would involve major cuts over a wide range of key programmes that had supported vital economic development programmes in the Highlands and Islands including research and development, social inclusion, rural development, and cross-border programmes. To put this in perspective, from 2000 - 2006 Scotland had received £1.1bn in European funding – money that had been absolutely crucial in improving the economy of the north of Scotland. As far as London was concerned this should not continue. Needless to say London's position was supported by the previous Scottish Labour/Lib Dem Executive in Edinburgh who sat back, said nothing and did nothing to fight Scotland's corner and protect Scottish interests at stake.

The London government had assured Scotland (and the regions in England and Wales) by vague promises that any loss of EU structural funds would be made good by money from the UK government. Trouble was we were never given any delivery mechanism whereby this would be done! So it was another case of “trust us – we’re the British government”. Aye, right! But there was a second problem, and one that had to do with the then Executive in Edinburgh. Even if they had received additional money from the UK government to compensate for the loss of EU funds, could we be sure they’d spend it in the Highlands and Islands? After all, the block grant is at the disposal of the Scottish Government, and there was widespread concern that the Labour/Liberal coalition would have been much keener to spend any extra money it got in areas where its political support was highest – i.e. not in the Highlands and Islands! The point is that when a country receives monies under the EU structural funds it is obliged to spend that money in the designated region. In other words, EU economic development support monies are ring-fenced.

With Blair as Prime Minister, and with pressure on the UK to give up the generous budget rebate that dated back to 1984, the 2006-2013 budget round became embroiled in controversy. The UK position was that the rebate would only be put on the table if the French were prepared to put a root-and-branch reform of the CAP on the same negotiating table. For the former French President Chirac, this was a non-starter. And for the rest – well, they had just concluded a tortuous round of CAP-reform discussions (whereby CAP spending would be frozen in real terms 2007-2013) and there was no appetite to re-open that hornet’s nest. So the UK rebate stayed. The weakness of London's budgetary strategy – slash structural fund spending all over the place but let’s keep the British rebate – won the UK no friends, especially in Scotland. And that turned out to be crucial. A member state that advances a negotiating position that has no support at home stands a much lesser chance of carrying the day in Brussels. An important lesson as long as Scotland is dependent on the UK to represent its interests at EU level.With the support of many of the funding bodies and organisations back home we fought hard to ensure the continuation of EU funding for Scotland and I was glad when we were backed in this by the European Parliament.

After months of wrangling, EU leaders finally reached a deal at the European Council meeting in Brussels in December 2005 under the UK Presidency. I spent much of that evening sitting in my office in the Parliament waiting for something to happen so that I could then work out what the outcome meant for Scotland. It finally did in the early hours of the next morning. Once again the final stage of the budget negotiation was a shambles, with late night wranglings behind closed doors as financial sweeteners were dished out to all and sundry to ensure that every member state could return home claiming victory! This is no way to run a budget round, and that it succeeded at all was due in large measure to the negotiating tactics of the new German Chancellor, Angela Merkel, who showed real leadership of the EU while the UK was left isolated in both the EP and the Council.

The deal set an EU budget of 862.36bn euro (1.045% of EU GNI) for the period 2007-2013. Built into the agreement was a mandate for the Commission to undertake a "full and wide ranging" review covering all aspects of the EU budget – including all spending policies, the UK rebate and the way in which the budget was funded (currently three-quarters of which comes via direct national contributions) and which would report in 2008/09. In effect that report – which is eagerly awaited – will sound the starting gun for the post-2013 budget negotiations.

Although Scotland's funding was saved under the current budget round, this was not thanks to pressure from London. Instead it was due to pressure from some of the smaller Member States, such as Estonia, Latvia and Lithuania, who sought to retain EU regional economic support albeit at a reduced level. Each time the UK came forward with a new proposal to cut regional economic development support it was politely told to think again.

But even this victory could not mask the fact that the overall budget deal was a disappointment. The UK line – which essentially stated that the EU’s richer member states were seeking a significant reduction in their net contributions to the EU budget – was endorsed by the other net contributing countries. The result was a budget that sought major cuts in the EU's funding programmes – including structural funds, research and development, education, health, culture. This was not the result of any analysis regarding where efficiency savings could be made, or where monies could be used more effectively. Instead the spending cuts were largely indiscriminate and MEPs were quick to make the rather obvious point that this would leave the EU unable to implement many of the policies to which it was committed. This is not a trivial issue. The result can easily be an EU that loses credibility in those member states badly affected by spending cuts, and that can lead to a sense of dis-connection between EU citizens and the EU itself. In more extreme cases it can result in member state governments losing confidence in the EU and being less willing to adhere to EU rules over other matters. Sure we do not want an EU that ‘spends, spends, spends’. But nor do we want an EU that solely benefits the rich member states – and the rich areas within the rich member states – and ignores the rest.

It was in the light of these considerations that, on 18 January 2006, MEPs voted overwhelmingly to reject the budget deal. After deliberation, the Parliament managed to secure an extra 4 billion euro for the total budget, with 2 billion allocated for spending on research and development and competitiveness as well as life long learning – areas that are of benefit to Scotland. That closed what was an extraordinary and troubled budgetary negotiation.

In this blog I’ve tried to set out how the EU budget procedure works – or at least the politics of the process. It is clear that it is member states that are in the driving seat – particularly the richer, net contributing member states – and not the EU institutions as such. Sure the Parliament has some powers over the final shape of the budget, but to be honest it can really only affect the budget at the outer margins. One thing is clear – it is the member states that run the show. They are in complete charge of their destiny in this aspect of EU business, as in so many others. Only as an independent member state can Scotland begin to advance its interests and to ensure not only that the EU budget is ‘good for Scotland’, but more importantly that the EU budget reflects those priorities that Scotland wants to see championed at the EU level such as climate change, food security and energy policy.

In subsequent blogs I will return to this budget issue and ask what lessons can we learn from the experience of the discussions leading up to the 2007-2013 budget agreement as we approach the beginning of the discussions that will determine the shape of the post-2013 budget. Just what should we be wanting from the next EU budget? To be continued…

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