EU Referendum


EU politics: an unintended consequence of globalisation


24/10/2014



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One can only smile at the "shock-horror" headlines, even in the likes of the Guardian, after Britain had been told it must pay an extra €2.1bn (£1.7bn) into the EU budget by the end of next month because the UK economy "is doing better relative to other European economies".

According to the Guardian, British and European Commission officials confirmed that the Treasury had been told last week that budget contribution calculations based on gross national income (GNI) adjustments carried out by Eurostat, the EU statistics agency, had exposed a huge discrepancy between what Britain had been asked to contribute and what it should be paying, because of the UK's recovery.

The "bombshell", first reported by the Financial Times, was dropped into the middle of a European Council meeting in Brussels where Cameron and 27 other leaders were "mired in tough negotiations over climate-change policy and attempts to agree big reductions in greenhouse gas emissions by 2030".

In response, a Downing Street source says: "It's not acceptable to just change the fees for previous years and demand them back at a moment's notice. The European Commission was not expecting this money and does not need this money and we will work with other countries similarly affected to do all we can to challenge this".

Such is the apparent suddenness of this demand, though, that Kirkup in the Telegraph speculates that the "colleagues" are perhaps EU trying to push Britain towards leaving. Even the noble Guardian - lover of all things "European" - is somewhat nonplussed, telling us that the "infuriating" reason for this sudden hike is "because Eurostat has reviewed the figures and believes the UK economy has performed better in recent years than was previously believed".

This, it would appear, is what passes for journalism these days, with the idea that some anonymous official in the EU's statistical department woke up one day and decided – presumably just for the fun of it – to review all the GNI figures.

In fact – as the grown-ups here have come to expect – it is a little more complicated than that, and it will come as no surprise to learn that the initiator is not even the EU. This starts, not with Eurostat but with the United Nations and its System of National Accounts, a process of producing standardised accounts for every nation in the world, which has been in place since 1953.

What happened here is that, in 2008, the United Nations issued a revised standard, representing – as the introduction declares - an update, mandated by the United Nations Statistical Commission in 2003, of the System of National Accounts, 1993.

The timeline starts in 1993, with the review carried out under the responsibility of five organisations, led by the UN, including the International Monetary Fund, the OECD, the World Bank and … the European Union. It was published in 2009.

The new UN standard then put the EU out of line with the global system so, in December 2010, the Commission issued a legislative proposals (COM(2010) 774 final) aimed at the European System of Accounts (ESA) back into line.

A proposed regulation was agreed by William Hague at the Council of Ministers in Luxembourg on the 22 April 2013, following a single reading by the European Parliament on 13 March. It became Regulation (EU) No 549/2013 of 21 May 2013 on the European system of national and regional accounts in the European Union, a mere 727 pages long - known as the ESA 2010 regulation.

For those who cared to read the European Parliament position, it clearly warned that: "The Commission should use aggregates of national and regional accounts for Union administrative purposes and, in particular, budgetary calculations". 

But then Eurostat pitched in with a press briefing, which should have made things clear. National accounts, it said, "have a deeper role. They are at the source of many of the indicators that constitute the quantitative backbone of European economic governance. Gross Domestic Product (GDP), more precisely Gross National Income, is at the heart of the calculation of the EU budget".

The European Union, we were also told, "will fully move to ESA 2010 in September 2014, when the data transmission programme included in ESA 2010 Regulation enters into application. The national accounts data will then be compiled all around Europe based on the new methodology".

Interestingly, the change to the criteria was flagged up by the Financial Times, but not until 23 April 2014 – nearly a year later, without revealing the source. In our post, a few days later, though, we did track down the origin, noting that the FT was remarking that the picture on the UK economy (then improving) was to get even better in September when the UK "adopts the new international standards for national income accounting". Then, just to complete the picture, the change was also flagged up by the UK's ONS in May 2104.

Already, however, Eurostat – now with a legislative mandate to produce a new system – had come up with a 655-page document in July 2013, describing the full methodology on the ESA 2010 standard. And, with the September 2014 implementation deadline passed, is now in a position to issue revised GNI figures prepared by the EU member states, on which the latest EU contributions have been based.

The irony now is almost too much to bear. When the UK joined the EEC ins 1973, it was felt it that it was paying an excessive budgetary contribution – excessive because the UK was undergoing financial crises and its GNP was depressed.

It was then proposed that the contributions should be linked to GDP – which latterly became GNI – but this was not implemented until 1988 as the Own Resources Decision (ORD) 1988, putting into effect the 1984 agreement with Margaret Thatcher at Fountainebleau, after she had settled Britain's rebate.

With Britain's annual contribution to the EU now linked to GNI – and calculated a year in arrears - it was inevitable that, with the GNI increasing under the new, UN-mandated system of accounting, Britain's contribution was going to increase.

It is thus all very well for Mr Cameron to huff and puff about refusing to pay a "completely unacceptable" bill. But the original system was agreed by Margaret Thatcher, with amendments approved by Tony Blair's government and Gordon Brown in 2007. And the new system of accounting was agreed by Mr Cameron's own government last year.

Thus, with the ESA 2010 standard now applying, Mr Cameron should not have been in the least surprised by the £1.7bn additional bill. This is the man who is in favour of continued membership of the EU, so all he had to do was read the 727-page regulations and the 655-page explanatory document and he would have known exactly where the UK stood.

Having agreed the new regulation, Mr Cameron has no excuses. On behalf of all of us, he is legally obliged to pay the bill. But the biggest irony of all is that no-one ever set out to increase the UK's bill. This is simply an unintended consequence of globalisation. Once the UN has changed the system, the EU had no choice but to conform. Presumably, Mr Farage is now going to demand we leave the UN.

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