Open Europe Blog

Cameron has promised to invoke the spirit
of Thatcher over the EU budget

As EU leaders were agreeing the final details of the EU’s new energy and climate change policies on Thursday evening, the FT‘s Alex Barker dropped the bombshell that the UK had been asked by the Commission to pay an extra £1.7bn surcharge into this year’s EU budget. It was clear Cameron had not been expecting this and he angrily accused the Commission of a stitch-up, and refused to pay by the December 1 deadline.

By now, several explanation pieces have been published but there is still some confusion so here is one more try from us to clarify the situation:

Where did the demand come from?

There are effectively two things going on here, lumped together: the standard, annual revision of national contributions to the EU budget, and a one-off recalibration of the way in which national statistics authorities measure the size of their economies, going back several years. It is the combination of the two that have created a “perfect storm” for the UK:

1) Annual adjustment: Every year the EU member states and Commission work out respective national contributions to the following year’s EU budget, once the actual economic data for the year in question is available. Member states’ contributions can be revised upwards or downwards based on the performance of their economies. EU rules state that:

“The Commission shall inform the Member States of these adjustments in time for them to enter them in the account… on the first working day of December of the same year.”

As David Cameron has rightly pointed out, these revisions are usually minor and therefore uncontroversial.

2) Changing the way the size of the economy is measured: Eurostat – the EU’s statistical body – recently reviewed the way in which member states auditing the way in which EU member states assess the size of their economies, concluding that under agreed EU rules (ESA95), several countries haven’t estimated their economies properly dating all the way back to 2002 (1995 in the case of Greece). In 2012, Eurostat instructed member states’ authorities to re-assess the figures – and to do so before 2014 . The ONS published its revised figures in May 2014, which among other re-valued the size and contribution of the UK’s charity sector, which meant that overall. the UK economy was larger than previously thought, and had therefore been underpaying towards the EU.

The large UK bill is therefore primarily due to the one-off revision applied retroactively over 12 years, though effectively rolled in with the far less controversial annual adjustment. This is where a lot of the confusion comes from.

Who knew what when – and who is at fault?

This is what the debate has now shifted to, and there is a fair amount of blame to go around; no one really had their political radar switched on.

The European Commission: People within DG Budget (the Commission’s budget department) were briefing media on Thursday and well into Friday that the changes was due to the introduction of ESA10 – basically drugs and prostitution, something which left most people perplexed, and helped to fuel confusion and outrage.

It was also clear that the politics of the hefty bill would be lethal. Of course, Commission officials can claim the robot defense that “we are only following the rules”, but the Commission has always been a hybrid between an executive and a bureaucracy – so it should have handled this with far more care (the December 1 deadline was an over-kill), although some of this can be forgiven given that we’re between two Commissions.

The UK government: The exact figures were presented on Friday a week and half ago, a week before the EU summit. But it’s been clear since May this year that the UK economy was larger than expected following the ONS’ revisions – indeed, the UK government itself triumphantly pointed this out. It’s also been clear for some time that other key countries were going to revise their figures. So while no one knew the full picture until 1 ½ week ago, different parts of the Government, including the Treasury, knew earlier a higher bill would be coming, albeit not the exact size. Perhaps the Government hoped this could have been snuck through somehow.

David Cameron: Probably hadn’t been briefed until just before the EU summit but chose to adopt a very tough position, leaving himself limited room for manoeuvre. Some say this is a manufactured row to distract from other pressing EU issues like the European Arrest Warrant and EU free movement – a convenient row in which Cameron can ‘stand up to Brussels’ and claim some sort of success. We very much doubt it however,

What are Cameron’s options?

Cameron has effectively promised not to pay by 1 December and not to pay a bill “anywhere near” the £1.7bn mark – he restated that position yesterday in the Commons. So it’ll be hard for him to climb down. At the same time, the annual adjustment is supposed to be automatic – not subject to a separate vote – and the new calculations have already effectively been signed off by the ONS, so Cameron’s practical options are limited:

Rally a coalition to block the change: As a result of the extra €9.528bn that the EU will get due to the revisions, it is cutting the budget by €9.948bn – a net cut of €420m, and the Commission has tabled a draft amending budget to implement these changes. This budget will be subject to a vote among member states and as we set out here, the UK and other net losers have a blocking minority. However, rejecting the amending budget would mean the UK actually paying more (€3.6bn as opposed to €2.1bn), but the flipside would be that almost every member state would pay more too – rather than a €1bn rebate for France and a €779m one for Germany, they would face bills of €562bn and €1.4bn respectively – this could give the UK some leverage, although it could also backfire.

Seek revision of figures: Cameron has said he will launch an “exhaustive” review into the methodology that was used, effectively challenging the basis for the calculations. The figures aren’t exactly transparent – and maybe this process will expose something they can run with and muster political support around. It’s complicated by the fact that the ONS itself signed off on the underlying figures.  

Unilaterally revise the figures: The UK could check if the ONS went further then it needed to in revising past economic performance under ESA95, and if so, revise its figures again.

Go to court: It is not clear whether the UK would have any grounds for taking the Commission to the ECJ but one potential avenue would be to challenge the retroactive aspect of the bill as well as its unprecedented nature. Either way, it could bog down the process and buy Cameron some much needed breathing space in which to work on alternatives.
Refuse to pay: That could well trigger a crisis However, and the worst-case scenario is that the UK will face potential fines and infraction (see here for the figures).

Veto unrelated EU measures: It has been suggested that the UK could play hardball by vetoing other EU measures such as changes needed for the Eurozone to integrate further- but there are no such measures imminent over which the UK has a veto.

Ultimately, because the money is not needed for the 2014 budget per se, the issue could be kicked into the long grass, allowing for a face-saving compromise to be agreed. Speaking in the Commons yesterday Cameron sounded pretty confident that something can be done. We hope he’s right.

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