The debate on the rebate: Should there be a general compensation mechanism in the EU resources system to solve the net position problem?

Table of Contents

Introduction

Methodology

Structure

1. The structure of the own resources system and the net position problem
1.1 Chronological development of the own resources system
1.2 The expenditure side of the budget
1.3 The net position problem

2. Two concepts of limiting the net balance
2.1 The equity safeguard mechanism by Padoa-Schioppa
2.2 The generalised budgetary compensation mechanism by Waigel

3. A special case: The UK-rebate
3.1 Historical Genesis
3.2 Financial consequences
3.3 Britain today: Still a rational for the rebate?
3.4 The UK rebate – basis for a general compensation mechanism?

4. Analysis of the compensation mechanisms
4.1 The calculation of the net positions – a difficult task
4.1.1 Problems on the revenue-side
4.1.2 Problems on the expenditure side
4.2 Benefits of an EU membership – beyond the budget
4.3 Juste retour versus European policies, principles and law
4.4 Applicability with regard to transparency
4.5 Costs of the Waigel mechanism
4.6 Enforceability of the compensation mechanism

5. Conclusion and Recommendations

Reference List

Annex

List of abbreviations

illustration not visible in this excerpt

List of tables and figures

illustration not visible in this excerpt

Introduction

In the conclusion of the European Council in December 2005, the Presidency mentions only in a single sentence what had filled covers of newspapers the days before: “The European Council reached agreement on the Financial Perspective 2007-2013 as set out in doc. 15915/05.”^[1] It was the second attempt after a former Council six month before, and also this time it needed tough negotiations and a number of revised proposals, until the quoted sentence could be printed.

The reason for this controversy can be summarized in an old German adage: “Beim Geld hört die Freundschaft auf.” Those who are partners in other situations begin to bargain over every Euro they have to spend for the EU budget, giving short-term national interests priority to long-term EU interests. In some way this is understandable, despite the fact that the Council should bring forward the European project – politicians are elected in the nation states and have to justify every Euro they leave in Brussels. Besides this, the term of “solidarity” has neither in Article I-2 of the “Treaty establishing a Constitution for Europe”^[2], nor in article 1 of the “Treaty on European Union”^[3] been concretised.

But nevertheless the difficulties surrounding the agreement on the Financial Perspective are symptoms of a serious problem: Countries which pay more into the budget than they get back, the so-called net contributors, feel to have unacceptable high costs in relation to the benefits they gain from their EU-Membership. The debate on “net positions” is one of the major reasons which lead to the low acceptance of the European Union in public: According to Eurobarometer, 62% of the population are worried “about the increasing costs for the Member States of building Europe.”^[4] Only the fear of a transfer of jobs to other Member States was mentioned more often (73%).

The question of net balance is not new. In the beginning of the 80s, Britain had an enormous negative balance. Due to its relatively small farming sector, the country benefited less than other countries from the Common Agricultural Policy. With her famous words “I want my money back!” the British Prime Minister Margaret Thatcher negotiated a rebate as part of the Fontainebleau accord. It was decided, that “two thirds of the ex-ante net payment would be returned to the UK, with the burden spread amongst the other Member States.”^[5]

Today all Member States (except Britain) agree that this kind of rebate should be abolished: On the one hand, Britain’s economy is one of the strongest in the EU, on the other hand the percentage of money that is spend for the Common Agricultural Policy has declined from 70 % in 1984^[6] to 42% in 2005.^[7]

Instead there have been several proposals for a general correction mechanism, which is open for all countries with a large negative net balance. In 1987, Padoa-Schioppa et al. suggested an “equity safeguard mechanism” to correct inequitable situations in the budget.^[8] In 1998, the German Minister of Finance Waigel proposed a “generalised budgetary compensation mechanism”. Subsequently Austria, the Netherlands and Sweden submitted identical proposals to the commission.^[9] Those proposals have a clear legal basis: The Conclusion of the Fontainebleau Council in 1984 provided that “any Member State sustaining a budgetary burden which is excessive in relation to its relative prosperity may benefit from a correction at the appropriate time.” Up to now, this provision was only used by Britain.

With the next round of the enlargement coming in January 2007 (Bulgaria and Romania), the average GNI per capita in the EU will decrease again. Both countries will be net recipients and a new challenge for the Union. There are different opinions about the consequences of the now decided Financial Perspective for the net contributors. While some argue, they will have to pay less in the future, others argue the converse. The discussion goes on, and the question about EU finances remains a “hot topic”.

The research question of this paper is, whether we should install a general compensation mechanism in the EU resources system to solve the net position problem. The relevance of this topic can be summarised in four major points:

1. The net contributors feel the gap between payments into the budget and receipts from it to be too big.
2. The high costs cause acceptance problems of the EU within the public.
3. The current rebate for the UK is an unfair unicum.
4. The Financial Perspective 2007-2013 seems not to solve any of these problems.

Methodology

The methodology used to answer the research question will consist of desk research. With regard to the topic, I will concentrate on a number of types of literature and use them for a content analysis: Primary Data in the form of legal acts, green and white papers as provided by the European Union. Between the political and the scientific area we find the big section of “grey literature”, as published by the Directory-General for Research of the European Parliament et al. Besides I will use secondary data from political and economic scientists who work in the field of EU finances. The topic implicates the use of statistical data, which will be used to clarify the current situation as well as the consequences of the analysed concepts.

Structure

To answer the research question, the thesis is divided into five chapters. The first part deals with the question: “What is the current structure of the own resources system and why do some states perceive this structure as a problem?” This chapter gives a detailed overview on the problem of “net positions”.

The second chapter answers the question “How can a correction mechanism solve the net position problem?” I will explain the two above mentioned concepts by Padoa-Schioppa and Waigel. This chapter is of an explanatory nature, while the analysis will be done in chapter four.

Chapter three is an excursus that deals with the ongoing debate on the UK-abatement. The question is, whether the UK-rebate could function as a role model for the new correction mechanism.

In chapter four I will analyse the concepts. The first question (chapter 4.1) is: “How realistic are the calculations of net positions?” This part deals with the various problems when it comes to a calculation of the correct numbers. Keywords are the Rotterdam and Round Gateway effect. The second question (chapter 4.2) is: “Is the benefit that a country gains from its EU membership only a matter of budget payments and receipts?” The third question (chapter 4.3)is: “Is the principle of juste retour in line with European law, the principle of solidarity and EU policies?” In chapter 4.4 we will answer the question, whether the mechanism is easy to apply. The financial feasible is reviewed in chapter 4.5. The last question I chapter 4.6 is “How likely is the political enforceability of the correction mechanism?” Here the positions of the member states are presented.

The conclusion will summarize the results of the thesis and give an answer to the main research question.

1. The structure of the own resources system and the net position problem

The aim of this chapter is to give an overview on the own resources system of the European Union and its development since 1970. I will explain the net position problem and give some data to understand the dimension of this problem.

1.1 Chronological development of the own resources system

In April 1970 it was decided to replace national contributions to the EU budget by a system of “own resources” (Luxembourg agreement). These own resources consisted of three sources: Levies on agricultural and sugar trade, customs duties on trade with third countries and a percentage of the proceeds of national value added tax (on the basis of a uniform VAT to take into account differences in the coverage of VAT). Levies and customs duties are called “traditional own resources”, because they arise directly from Community policy – the Common Agricultural Policy and the common commercial tariff. The VAT-source was introduced as it was obvious that levies and customs duties would not be sufficient to finance the EU.^[10]

Until 1984, the VAT-based contribution was subject to a maximum rate of 1%. As part of the Fontainebleau summit, the maximum VAT rate raised to 1,4%.^[11]

Only four years later, the limit of 1,4% was reached, which meant that the Fontainebleau reform had failed.^[12] In a new agreement (Delors I), a fourth resource, based on GNP, was created. This new source should ensure that the Community was able to operate throughout the period 1998-1992. The aim was to reduce the relative share of the VAT resource and increase revenue at the same time. The Commission had pointed out that “by its very nature as a consumption tax, the VAT resource produced a regressive effect, whereby the least prosperous Member States (with their relatively high level of consumption and low savings rate) tended to contribute more than their share of the Community GNP would warrant.”^[13] From the point of view of ‘equity’, this reform was a first step to abolish imbalances in the Member States’ financing of the budget: In contrary to VAT, the GNP base is a reliable indicator for the economic capacity (“wirtschaftliche Leistungsfähigkeit”).^[14] The GNP resource is calculated as a percentage of the GNP at market prices and has the function to balance the community budget in case that there is a difference between planned expenditure and the other available sources (“topping-up” resource).^[15] In return for this new source, the VAT base was capped at 55% of GNP in all Member States and the aggregate revenues were limited to 1,2% of the Community GNP.

A number of changes were made in 1992, known as Delors II. The maximum VAT rate was reduced to 1%, VAT base was capped at 50% of GNP in all Member States. The aggregate revenues increased to 1.37 % of the Community GNP.^[16]

The importance of each source in the total EU budget changed dramatically since the existence of the own resources system. The development during the last ten years plus 1987 is shown in figure 1.1.

[...]

^[1] Council of the European Union, Document 15914/05. Brussels, December 2005.

^[2] Official Journal of the European Union, C310, Volume 47, 16 December 2004

^[3] Official Journal of the European Union, C325, 24 December 2002

^[4] European Commission: Eurobarometer 63. September 2005. Page 130

^[5] Begg, Ian: Funding the European Union. Making Sense of the EU budget. London. 2005. Page 6

^[6] Coussens, Wouter: A fair solution to the UK rebate conundrum. In: Ideas Factory Europe, Idea 3. 2004. Page 10

^[7] ibid. Page 12

^[8] Padoa-Schioppa, Tommaso et al.: Efficiency, Stability and Equity. A Strategy for the Economic System of the European Community. Oxford 1987. Page 107

^[9] European Commission: Financing the European Union. Commission report on the operation of the own resources system. Brussels 2004. Annex 6

^[10] Brigid Laffan: The Finances of the European Union. Hampshire 1997. Page 41.

^[11] Artis, M. J.: The Economics of the European Union. Page 372

^[12] ibid. Page 374

^[13] Official Journal of the European Communities: Special Report No. 6/98 concerning the Court’s assessment of the system of resources based on VAT and GNP together with the Commission’s replies. (98/C 241/02) 31th July 1998. Page 62

^[14] European Commission: Die Finanzverfassung der Europäischen Union. Directorate-General for Research. Luxemburg 2002. Page 38.

^[15] Official Journal of the European Communities: Special Report No. 6/98 concerning the Court’s assessment of the system of resources based on VAT and GNP together with the Commission’s replies. (98/C 241/02) 31th July 1998. Page 60

^[16] Artis, M. J.: The Economics of the European Union. Page 372