EU Referendum

EU budget: the story so far


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When the news broke of the "shock" demand that Britain should pay €2.2bn (£1.7bn) into the EU coffers by the end of next month, the media was all at sea as to the reasons. The likes of the Guardian had it that it was: "because the UK economy is doing better relative to other European economies". Yet this is not closer to the truth than many of the other theories that have since sprung up.

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", apparently 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, or so the story went, a Downing Street source said: "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 was the apparent suddenness of this demand, though, that Kirkup in the Telegraph was speculating that the "colleagues" were perhaps EU trying to push Britain towards leaving. Even the noble Guardian - lover of all things "European" - remained 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".

The following day had the Independent tell us that George Osborne had "left David Cameron in the dark" about the EU's "unexpected" demand. The Chancellor, we were told, had known about the bill since the beginning of the week, yet the prime minister had only been told on Thursday, just as he had been on his way to Brussels for the European Council.

Danny Alexander, the Chief Secretary to the Treasury, is said to have known about the bill before Mr Cameron was informed, which has left the prime minister venting his anger from a podium in the press suite in the Brussels Council building, declaring: "This is completely unacceptable. It is an unacceptable way for this organisation to work – to suddenly present a bill like this for such a vast sum of money with so little time to pay it".

Thus, days after Mr Cameron's supposed "ambush", the collected political/media establishment are still having trouble coming to terms with what precisely has happened, and why. So lacking is the comprehension that the Daily Telegraph leader yesterday was accusing the Commission of acting on a "whim", while another pundit was arguing that the timing was politically motivated.

Shining like a beacon through the morass, however, are the comments from Angela Merkel during the European Council. According to the Telegraph, she told David Cameron that: "This did not come out of the blue", adding that she could "understand" that it was difficult to come up with money but "this should have been expected".

Remarkably, diplomats are recorded as described Merkel's intervention as "cold-blooded and ruthless" but this is hardly the case. The German Chancellor was only stating the obvious – and very far removed from the Telegraph's earlier 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. It should have been expected.

In fact the process which has delivered this result 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. Far from coming out of the blue, the timeline for the events of last week start in 1993, when the last standard was published, a process which automatically triggers a review which inexorably leads to the next published standard.

If this seems complicated, it isn't really – it is a process of continuous review, carried out by many international and national organisations, the bureaucratic equivalent of painting the Forth Bridge. As soon as you have finished, you start all over again.

In this case, the review triggered by the 1993 standard was carried out under the responsibility of five organisations: the UN as the lead organisation, plus the International Monetary Fund, the OECD, the World Bank and … the European Union. It took 15 years, numerous meetings and many consultation sessions, before the work complete.

Thus, it was not until 2008 that the United Nations was able to issue its revised standard, setting out the new international rules for how nations should calculate their gross national products (and their GNIs). This represented - as the introduction to the standard declared - "an update, mandated by the United Nations Statistical Commission in 2003, of the System of National Accounts 1993".

The new standard was formally published in 2009, which 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 bringing its own system - the European System of Accounts (ESA), last amended in 1995 - back into line.

The proposed regulation took over two years going through the process, but was agreed by William Hague at the Council of Ministers in Luxembourg on 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, its short title was the "ESA 2010 regulation".

For those who cared to read the European Parliament position document, it clearly warned that: "The Commission uses: "aggregates of national and regional accounts for Union administrative purposes and, in particular, budgetary calculations". Thus, anyone paid to watch such things (such as Treasury officials) should have known that there was a potential for impacting on UK contributions to the EU.

Then, in January 2014, Eurostat pitched in with a press briefing, explaining the impact of the changes - pointing out that the US - which had introduced the international standard a year earlier - had experienced  a 3.5 percent "boost" in its GNP - entirely due to the new method of accounting.

Making things abundantly clear, the press release also noted: 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". It warned: "The national accounts data will then be compiled all around Europe based on the new methodology".

That most certainly should have rung alarm bells. Every year on 1 December, the Commission revises its estimates of member state liabilities for their annual contributions to the EU budget. And what was coming through was that the UK would be showing a rise in GNI higher than the European average.

Interestingly, the change to the criteria was flagged up by the Financial Times, but not until 23 April 2014 – nearly a year after the EU regulation had come into force. It did not reveal the UN source though. 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".

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Then, just to add to the picture, the change was also flagged up by the UK's ONS in May 2014, and also by the Economist magazine in the August. This time, the UK's relative position was shown, with an increment of about 4.5 percent in its GNP. As other EU member states were not increasing by the same amount, it should then have been obvious to Treasury officials that the UK's contributions to Brussels were going to increase by a substantial amount.

If there had been any doubt, Eurostat – now with a legislative mandate to produce a new system – had in any case come up with a 655-page document in July 2013, describing the full methodology on the ESA 2010 standard. And it was this methodology that was to be applied by ONS, which calculated the figures and passed them to Brussels.

Currently, with the September 2014 implementation deadline passed, Eurostat has checked and approved the revised GNI figures prepared by the EU member states, and passed them on to Brussels. And it is on these figures that latest EU contributions have been based for the 1 December review - one of which Mrs Merkel was apparently aware, but was apparently unknown to Mr Cameron.

The irony now is almost too much to bear. When the UK joined the EEC in 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. But that was putting into effect the 1984 agreement with Margaret Thatcher at Fountainebleau, after she had settled Britain's rebate. At the heart of Mr Cameron's travails, therefore, is Mrs Thatcher's famous "handbag" victory, reducing Britain's contributions. Perhaps it should have come with a heath warning: "what goes down can go up".

With Britain's annual contribution to the EU now linked to GNI as a result of Mrs Thatcher's endeavours, this made it 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 he has no grounds to do so. The original system was agreed by Margaret Thatcher. Amendments were approved by Tony Blair's government and Gordon Brown in 2007, making them equally responsible, and the new system of accounting was agreed by Mr Cameron's own government last year.

Thus, Mrs Merkel was absolutely right. Mr Cameron should not have been in the least surprised by the £1.7bn additional bill. This is nothing to do with the improvement in the British economy - it simply reflects a change in the accounting procedure, which has been on the stocks for two decades, the effects of which were predictable five years ago.

Although one is concerned for the poor benighted taxpayer, therefore, there can be no sympathy for Mr Cameron. This is the man who is in favour of continued membership of the EU: all he had to do was read the 727-page regulations which his government approved, or the 655-page explanatory document produced by Eurostat. He would then have known exactly where the UK stood.

With his government having agreed the new regulation, bringing in the changes to the way the GNI was calculated - and the consequences of those changes having been flagged up - Mr Cameron has no excuses.

Alexander Graf Lambsdorff, the German MEP who has been speaking to the BBC is absolutely right: "everybody has to pay their dues". Whether we like it or not, his government is legally obliged to pay the bill, as it conforms with the system he personally endorses and which his government has approved.

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 the routine processes of globalisation that are going on all the time - unseen and largely unrecognised. But once the UN had changed the system, the EU had no choice but to conform - leading to the current situation.

Presumably, Mr Farage is now going to demand that we leave the UN - one of the many villains of the story. But at the heart of Mr Cameron's discomfort, it seems to me, is a failure of communication.  He should have been told well in advance what was going to happen.

And there lies a final irony - he was in Brussels trying to convince the "colleagues" to buy into his climate change fantasy, which is set to cost the UK £1.3 trillion by 2050. Against that, a mere £1.7bn seems small change.