Friday, June 17, 2005

The UK rebate

The European Union is a body which now consists of 25 nation members. To be a part of it, a nation makes a financial contribution, which equates to around 1% of its GDP, calculated according to a formula, to the central organisation of the EU, which then distributes this money according to its budget.

In the dim and distant past, Margaret Thatcher negotiated that a proportion of the UK contribution would be refunded. Over the last few weeks, increasing levels of resentment have been expressed about this by every nation in the EU except the UK - because the rebate is effectively funded by all of these nations. The UK is no longer the poor nation of Europe - so why should the UK be entitled to £3 billion of this contribution back?

A short blog post can't do justice to the complexity of the issues, but let's try and point a few things out.

Firstly, 40% of the budget of the EU funds what is known as the Common Agricultural Policy (CAP). This is a system of subsidies for farmers, that also suffers from widespread corruption (even in the UK), and distorts the "common market" and world trade in general. For example, there are farmers in West Africa who are unable to sell their milk at market, because European milk is being dumped on the market place at prices lower than the farmers can afford to charge, subsidised by the CAP. This system is unfair on a world scale. France and other Mediterranean countries in particular are keen to hold onto this, because these are subsidies that support their large agricultural communities. The UK and other countries less dependent upon agriculture are keen to see reform - particularly when they are aware of the impact that it is having on the developing world.

It is possible to work out the net contribution made by the different countries in the EU - that is, once you have allowed for the UK's rebate and the subsidies that are paid back to countries by the CAP. On this basis, in net terms, even with the rebate, the UK is the second largest contributor to the EU; only Germany gives more. If it weren't for the UK's rebate, it would have given tens of billions of pounds more to the EU than France in the last decade.

Secondly, the more federal parts of the EU (particularly France and Germany) continue to want to make it into more and more of a bureaucratic monster, consuming ever vaster amounts of money, and achieving ever less ("bureaucracy-poo" - the unproductive waste that is produced by a large bureaucracy when it is fed money - the larger the bureaucracy, the greater the proportion of poo relative to useful output). But there are a significant number of nations in the EU that are starting to realise that the more federal, "old Europe" nations are actually the ones that are in recession. The more "market-oriented" economies are the ones that are seeing economic growth and progress. These "market-oriented" countries can see that by increasing funding to the EU, and continuing to transfer money from economically successful areas to economically failing areas, they are firstly inhibiting their own economic progress and secondly they are discouraging the unreformed areas from doing anything to make things better. So the solution isn't more money for the EU, it's reform.

This is a battle that has been fought, and continues to be fought, in the area of civil aviation. There are still private companies that are suffering because state airlines, subsidised with European money, don't have to compete. And aviation is a relatively reformed area!

In the area of funding, the EU still operates on a veto system - in other words, any one of the 25 countries can block an agreement. The UK is saying that it won't give up its rebate unless the budget is reformed. France and some other countries are saying that they won't reform the budget. So we have deadlock.

So what do you think? Should the budget be reformed? Or should the UK just give up this £3 billion bargaining chip?