EU leaders gather for almighty budget battle that could tear Brussels apart

22 November 2012, Guardian

As David Cameron flies in to do battle over the EU’s seven-year €1tn budget deal, we attempt to separate myth from fact.

In the otherwise ugly EU quarter in Brussels, something of a building boom is going on. There’s the €300m (£241m)-plus being spent to convert an art deco pile into a palace fit for a European president. In a nearby park another €100m makeover is creating the European parliament’s version of the continent’s postwar history. That’s after the parliament splashed out another €20m just down the street to create a multimedia tribute to itself last year, the Parliamentarium visitors’ centre.

Austerity Europe? Not at the European Union’s Brussels HQ. While budgets, public spending, and civil service staffing levels are being slashed from Portugal to Poland, Greece to Great Britain, to be one of the 56,000 EU eurocrats is to escape most of the pain felt in almost every country in the union.

Officially, they work a 37½-hour week and take Friday afternoons off, though many complain those conditions are theoretical and they in fact work inordinately long hours. Their children are educated for free at high-quality private schools – a big new one has just opened near the Belgian monarchy’s summer residence in a leafier part of Brussels. They retire at 63 on generous pensions and dozens a year are granted early retirement on full pensions. According to UK government calculations, 214 of the most senior eurocrats get paid more than David Cameron’s £178,000 a year. Staff not living in their native country – almost all – receive a 16% top-up on their salary for being expatriates.

Despite their insulation inside the Brussels bubble from the economic storm battering Europe, the eurocrats are revolting. There was a small strike a couple of weeks ago and several hundred staff staged a lunchtime protest outside the European commission on Wednesday complaining about the impact of proposed cuts on people “who provide the necessary human resources for achieving the union’s tasks”.

It comes as EU leaders gather for an almighty battle that could tear Brussels apart – the ritual showdown over the EU’s €1tn budget.

Cameron arrives in Brussels on Thursday morning for a summit to settle the next seven-year budget waving his veto, taking up a position more radical than Margaret Thatcher in her hand-bagging heyday, leading a populist Brussels-bashing charge intended for his restive backbenchers and Daily Mail readers. No one has the remotest idea when and how it will end.

The perks and privileges of the eurocrats – particularly if they are threatening to strike – present Cameron with the easiest of targets. New, scaled-back budget figures drafted for the seven years between 2014-20 total €973bn, including a ceiling of €62.6bn for administration, or roughly €9bn a year, entailing a €500m cut in administration spending.

The commission quietly warned Herman Van Rompuy, the EU council president in charge of the summit, to table only a minimal cut to its proposed administration bill, half a billion over seven years. “The commission is saying don’t go further,” said a senior EU official.

Last summer, the UK and seven other governments asked the commission to come up with models for a streamlined administration based on €5bn, €10bn and €15bn cuts. “Most member states are responding to current economic and fiscal circumstances with efficiency measures or reforms affecting terms and conditions of their national civil servants. The staff of the European institutions should share the burden,” their letter said. The commission simply ignored it.

The fight over the pay and perks of an EU civil service that in its entirety is about the same size as the civil service of the city of Paris will be bitter, but mainly symbolic, given that administration takes up less than 7% of the overall EU budget.

The real money, where the allegations of mismanagement, fraud, and also where the real benefits of the EU budget are, is all elsewhere, chiefly in the areas of agriculture and so-called cohesion funds. These make up the tens of billions directed to infrastructure development, public investment, and co-financing of thousands of projects in the poorer parts of the union.

The annual EU budget is currently about €130bn, with €129.4bn being disbursed in payments last year, according to the European Court of Auditors in its mixed verdict on EU spending earlier this month.

The infamous CAP or Common Agricultural Policy, hated by the British but entrenched by the French as the key lever in EU spending long before the UK joined what became the union 40 years ago, is by far the biggest item in the budget, comprising just over one third of spending last year, or €49.3bn.

That sum, however, is a historical low, a far cry from butter mountain and wine lake scandals of 25 years ago when French farmers and others got plump on 70% of EU spending directed at production rather than nowadays on direct support to farmers based on arable land holdings.

The CAP, in turn, engenders the equally infamous British rebate, worth €3.6bn last year because, ever since Margaret Thatcher “handbagged” Helmut Kohl and François Mitterrand in 1984, the UK refund has been calibrated to the level of farm spending from which Britain is deemed to benefit less.

The reason the CAP is so big is that it is the sole area where EU spending supplants national expenditure by and large – uniquely the only area of expenditure that is truly European.

“It’s the only federal policy of spending,” Janusz Lewandowski, the budget commissioner said. “Some 77% of spending on farming in Europe comes from the EU budget.”

The CAP’s smaller cousin, rural development spending, is the area of the budget most vulnerable to abuse, according to the auditors who failed again this month, for the 18th year in a row, to give the budget a clean bill of health, finding an overall “error rate” of 3.9%. That means that almost €5bn was mismanaged, embezzled, used improperly, or was otherwise “mistaken” last year.

That 3.9% error rate doubled to 7.7% when it came to the €12.4bn spent on rural development.

For example, a fruit farmer in Lombardy put in a claim for more than €220,000 to fund a new two-storey building for storing and processing fruit “with a terrace for drying fruit”. The project was checked and he got the money. He built himself a new house.

“The court found that the building had predominantly the characteristics of a private residence and not of an agricultural building,” the auditors found.

In other instances that were checked, there were claims for 150 sheep from a farmer who had no sheep. And repeated duplication of claims on land, or two or more parties claiming and receiving subsidies for the same bit of farmland, or non-farming scrub and forest being claimed as arable land.

Of 160 “transactions” on rural development checked by the auditors, 93 were found to be dodgy or “affected by errors”.

While Brussels and the European commission routinely get the blame for these kind of malpractices, however, it is usually national rather than European authorities that have failed or have even been complicit in the scams.

While tens of billions are shelled out to farmers every year, it is national authorities who disburse the funds and then claim it back from Brussels. And it is national inspectors who are responsible for monitoring how the money is spent. In the case of the nice new house in Lombardy, built at the expense of the EU taxpayer, the Italian authority checked and approved the project.

“Most projects are picked and managed by member states themselves,” argues one commission official. “It is at their level that mistakes are made.”

The auditors found that Britain ranked sixth of 27 in the list of offenders.

The other big area both of spending and of disproportionate abuse concerns cohesion funds, taking up 27% or almost €35bn of the budget last year and going mainly, though not only, to the poorer countries of eastern Europe. It is an example of what the EU budget has always been – an exercise in social democratic redistribution of money from the wealthy net contributors to the budget (currently nine of 27) to the more needy who get more back than they pay in.

The court checked 180 transactions from the cohesion funds and found that three out of five were faulty, with an overall error rate of 6%, meaning that more than €2bn may have been squandered, mismanaged, or fiddled.

The criteria are being tightened. Officials in Brussels admit that for a long time the money has been sprayed around indiscriminately, but insist that is changing. “We would ask two questions when we got an application – was the form filled in correctly? Was it sent in on time?” says one.

Apart from the two big items of farm subsidies and cohesion funds, the remainder of the budget goes on development aid (the EU is the world’s biggest donor), on immigration and security, on the eurocrats and administration, and on the EU’s foreign policy and its fledgling global diplomatic service headed by Britain’s Lady Ashton.

Amid the arguments raging this week over what should be cut or increased, — at bottom a dispute between net contributors and net beneficiaries — the commission points out that the budget has gone up at a much smaller rate than national EU budgets in the past decade. It counters the auditors’ criticism by arguing that the verdict means 96% of spending was properly managed.

The commission is constantly on the defensive, feeling the need to issue a “Myth Buster” leaflet in 23 languages to try to highlight the benefits of EU spending. It points to the example of building and supplying medical centres in Guatemala. The project failed the auditors’ standards, but 61 of the 65 objectives were met and 130,000 people are estimated to have benefited.

The commission also demands refunds when it decides money has been misspent. Most checks are carried out by the member states: the commission then audits the national auditors, including, sometimes, spot checks on individual projects. In 2011, it carried out more than 500 such checks, and demanded more than £2bn back of which £1.8bn has already been collected.

It can be frustratingly difficult to establish exactly what the EU’s money is spent on in any one year, especially if it is more recent. Many programmes or projects are advertised according to their multiyear budgets, there is an inevitable time lag between each stage of awarding money, spending it and assessing how well it was spent, and the main “beneficiaries” website which enables anybody to search out how money was spent gives project titles in their original language only and no links to details of what the money was actually spent on.

Search that website for “golf”, for example, to discover that the European taxpayer doled out €381,000 in grants to a long list of mostly sports and other hobby clubs in several member states in 2011, including tennis, climbing, bridge, petanque, a hotel and golf resort in Ireland and what looks like a restaurant in Belgium. There is no explanation as to why these payments were warranted.

The EU staged a seven-year PR campaign in the province of Andalucia in southern Spain. A search to find out how much this cost unexpectedly showed a long list of grants to unions including football associations in countries such as Spain, France and the UK (and, curiously, the BBC) – again with no indication as to why these highly-paid representatives needed public support.

Such spending makes it easy for critics to find laughable or shocking examples of ridiculous EU-funded projects. The Eurosceptic thinktank Open Europe, for example, publishes an annual list of the most wasteful schemes. Past examples include money for Austrian farmers to feel greater emotional connection with their land, and funding for a ski slope on a flat and unusually warm island off the coast of Denmark.

Set against the mockery is a growing body of evidence which doesn’t try to justify every individual decision, or mistake, but to make a wider argument about the value of the European project and joined-up European spending.

A website set up by the European spending watchdog Bankwatch and two environmental charities, WWF and Friends of the Earth Europe, Wellspent.eu, hosts a map and list of projects they consider to be “benchmark” schemes for well-judged, well-managed spending.

In 2011, for example, the commission granted just over €90m for an ongoing expansion of the metro network in the Bulgarian capital, Sofia. The project is credited with reducing noise and traffic accidents by nearly 20% and a cut in “noxious gases”. If the figures quoted are correct, the total €440m cost should be outweighed by the value of such benefits in 13 years.

Keti Medarova-Bergstrom, senior policy analyst at the Institute for European Environmental Policy, makes a more general case: that there are many areas where the EU gets more by spending its money jointly, the so-called multiplier effect. Food safety, aviation and strategic railways are cited as examples. She even makes a case for preserving (or by extension even enhancing) the 6% administration budget, arguing that cutting the commission’s staff would make it harder not easier to improve the quality of spending on projects. “Appropriate EU action can be cost-saving for member states, rather than cost-increasing,” she argues. “Therefore, possible administrative ‘costs’ should be seen as ‘investment’ in improving the implementation and result-orientation of future spending.”

A more specific argument about the value to richer EU countries of transfers of money to the needier nations is made in a report commissioned by the Polish government by the Institute for Structural Research thinktank. This calculated that every euro spent in cohesion funds to help Poland, Hungary, the Czech Republic and Slovakia, returned more than 60 cents to richer countries in benefits such as sales and contracts.

These arguments are the backdrop to a report from the UK’s Department for Business, which estimated the overall value to the UK of being in the single market was £30bn-£90bn a year, five to 15 times the “cost” of being in the EU in 2011. Open Europe, by contrast, maintains there is “no conclusive evidence” that European spending creates jobs and growth, and that in some cases it has done harm. The report cites research, including a study by the Spanish Savings Banks Foundation, asserting that there had been no noticeable rise in GDP per person or productivity in Spain as a result of the billions of euros of economic aid it has received since it joined in 1986; another OECD report found only “patchy” evidence of success.

In the midst of the single currency crisis, critics note that the worst affected countries – Greece, Spain, Italy and Ireland – have been some of the highest recipients of EU aid over the decades, suggesting this has been part of the problem rather than the solution: too much EU money swamping industries such as Spanish construction, contributing to their boom and bust. Similar reservations are now voiced about the massive transfers to eastern Europe where often the “absorption capacity” of the target countries is much lower than the funds available, leading to corruption and waste.

Then there is the problem of the lack of coherence arising from conflicting policy aims and spending which can often be in contradiction with other stated aims –subsidising tobacco farmers while seeking to curb smoking, for example, or running ambitious programmes to combat climate change while funding an airport construction bonanza in Poland.

For example, 2011 was one of the heaviest-cost years of a seven-year programme to spend more than €400m on airports in Poland, despite the fact that flying is one of the most polluting activities by humans and Polish evidence that apart from a handful of the busiest airports most end up losing money and costing local governments heavily. At least two of the projects, Modlin, north of Warsaw, and Lublin, in the south-east, have also attracted deep opposition from environment groups because they affect Natura 2000 sites – designated by the EU itself for special protection of the most threatened habitats and species.

“We have a basic paradox: the EU finance investment in the Natura 2000 sites, which were set up by the EU and [are] sustained by the EU,” says Patrycja Romaniuk, Bankwatch’s EU funds co-ordinator in Poland.

The paradoxes abound. The EU budget is a complex web of exasperating, transnational pluses and minuses, decent intentions and half-baked, madcap ideas.

Under the pressure of the EU’s worst ever crisis, the union is changing radically and the budget will be no exception to this rule. This week’s summit threatens to be extremely bad-tempered, an exhibition of Europe at its worst. But it will set the parameters for the changes in how the EU spends our money.