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The Brits protest too much: Time to start talking about a corrective mechanism

By Dick Leonard. Source: European Voice, 2 December 2004

At last week's meeting of the Ecofin Council of Economic and Finance Ministers, the first shots were fired in the battle to set the EU's spending limits for the period 2007-2013. Much the heaviest salvo came from Britain's Chancellor of the Exchequer, Gordon Brown.

He argued with great force, and not a little bluster, that the ceiling of expenditure should be set at one per cent of Gross National Income (gni) of the Union, compared to 1.24 per cent as proposed by the Commission and the existing level (never reached) of 1.27 per cent. He went on to insist that there was no question of re-negotiating the rebate which Britain has enjoyed since 1984, and that the case for it was as strong as ever.

Brown received a much more encouraging response to his first argument than to his second. In addition to the five countries (France, Germany, the Netherlands, Sweden and Austria), whose leaders joined Tony Blair in writing a letter to Romano Prodi backing a limit of one per cent, both Italy and Denmark made sympathetic noises, while Finland and Cyprus appeared open-minded.

On his plea to retain the British rebate unamended, Brown was greeted with a deafening silence. No vote was taken, but if it had it would surely have been 24-1.

Instead, the ministers concentrated on giving their first reactions to the Commission proposal, tabled in July, of a generalised corrective mechanism (GCM), to compensate not only the United Kingdom, but other member states deemed to be carrying more than their 'fair share' of the burden.

The proposal is that any member state whose net contribution would exceed 0.35 per cent of its gni should have its excess payments refunded at a rate of 66 per cent. The total refund volume would be limited to a maximum of 7.5 billion euros a year.

This limitation would effectively mean that the total cost of such a GCM would be little more than that of continuing the unique British rebate. In effect, the British share would be what was left after other rebated states had been compensated – perhaps half of what it could expect to receive under the present arrangements.

The Commission advances a strong case that circumstances have changed substantially since 1984, when the terms of the British rebate were agreed at the Fontainebleau summit. At that time, Britain was the poorest of the six member states which were then net contributors, with a gni only 90.6 per cent of the EU average.

By 2003, the situation had been transformed with the British gni rising to 111.2 per cent of the EU average (measured in terms of purchasing power parities), making her the second most prosperous of the then 15 member states, after Luxembourg.

The table shows the Commission estimates of what the average yearly contributions of the ten leading net contributors would be during the period of 2007-2013, under its proposals, which include provision for a gradual phasing out of the British rebate. These show that, in per capita terms, Britain would come equal third with Sweden, behind the Netherlands and Germany, but would still pay substantially more than France and Italy, countries which British officials have categorised as roughly equal economies, and which have been notable under-payers in the past.

In the discussion at the Ecofin meeting, not all the 25 member states expressed an opinion on the proposed GCM. Nine countries – the Netherlands, Austria, Sweden, Belgium, Greece, Italy, Ireland, Slovakia and Slovenia came down in favour of the Commission proposal, though reserving their position on the details.

Eight others – Denmark, Spain, Finland, Portugal, Poland, Hungary, Lithuania, Portugal and Cyprus - were critical, but also made it clear that they were opposed to continuing the British rebate.

This was only a preliminary discussion, and it is likely that many member states will shift their position as the debate develops. Both the Commission and the Council hopes that agreement will be reached by the end of the Luxembourg presidency next June. This is partly because the chair is then taken over by Britain, the country least well placed to propose a compromise solution.

The final deadline, therefore, is likely to be during the Austrian presidency in the first half of 2006, which will end only six months before the 2007-2013 spending period begins.

In the meantime, the British look like being stuck with a completely unrealistic negotiating position. On the one hand, Gordon Brown and other British ministers constantly boast of the success of their economic policies, and the statistics bear out that during the past seven years Britain has out-performed the EU average on nearly every economic indicator. On the other, they deny the natural consequence of this – that Britain has succeeded in catching up or over-taking almost all of its continental rivals.

In these circumstances, it makes no sense for British ministers to deny the evidence of what has happened. A far smarter move would be to accept in principle the case for a GCM, but to negotiate hard on the details to ensure that the UK got as large a slice of the cake as possible.

Two ways of achieving this would be to reduce the threshold of 0.35% of gni, to 0.3 or even 0.25, or to remove or increase the proposed ceiling of 7.5 billion euros. If Britain does not change its tactics soon, it will face the almost certain probability of having to make a humiliating climb-down at the 11th hour or face universal condemnation for the failure to agree on the financial perspectives for the next seven-year period.

Who would pay the most?

Average Percentage shares of national gni, 2007-2013

Net contributors

Without rebate With British rebate With GCM

Netherlands

0.55 0.56 0.50

Germany

0.52 0.54 0.49

Sweden

0.47 0.50 0.46

United Kingdom

0.62 0.25 0.46

Austria

0.37 0.38 0.41

Italy

0.29 0.41 0.36

Cyprus

0.28 0.37 0.34

France

0.27 0.37 0.34

Denmark

0.20 0.31 0.26

Finland

0.14 0.25 0.20

Source: European Commission