Cause and Effect in European Politics and Law

Europe Stands in a Junction with its 2014-2020 Budget

euinside, December 21, 2011

One of the main actors in the heated debates on EU's 7-year budgets is Britain. The country is a net contributor to the budget and has some very clear priorities that it wants to be financed with the common money. This is why it was indeed a very good choice to invite a representative from the British Embassy at the conference in Sofia "EU's Financial Framework 2014-2020: in Times of a Crisis". The conference took place in the end of November and was organised by the Polish embassy in Bulgaria and the Centre for Economic Development, a local think-tank, and with the support of the European Commission Representation. The British embassy's representative was Wayne Diamond, Economic and Energy Advisor. Before him at the conference spoke Marcin Kwasowski from the Polish Ministry of Foreign Affairs, and introductory remarks made the ambassador of Poland, H.E. Leszek Hensel and Mrs. Bisserka Benisheva from the Bulgarian Ministry of Foreign Affairs.

Full transcript of Mr Diamond's statement:

Adelina Marini: I suggest … Actually, in this group of similarly thinking countries there is a special country – you can probably guess which one. I am glad, that at today’s conference we have a representative of this country, the United Kingdom, which has always voiced a rather – to my opinion, although some of you might not agree – progressive vision about the budget: to invest in the future, in innovation, in research, science and education. Therefore, I would like really to thank very much Mr Wayne Diamond, who will speak exactly about this: the Multiannual Financial Framework and the added value. An issue that we should really be conscious of – added value. If you please, Mr Diamond!

Wayne Diamond: Yes, I would like to thank to the organisers for inviting me here today and for giving me this opportunity to speak. I would also like to apologise on behalf of Catherine Barber, our chargé d’affaires, who was meant to be speaking here today. Unfortunately, Catherine has been caught away over engagements, so I stepped in in the last minute. I should also say I am probably not the embassy’s expert on the EU budget. Our expert Yoanna Bachovska is sitting here in the audience and really Yoanna should be speaking here and not me but that is what comes with the seniority, I am afraid.

I also wanted to say, referring to previous presentations – it has been excellent so far! – I think I would like to say that UK is also a friend of cohesion for reasons I will come across later. I see no contradiction whatsoever in talking about restraint, fiscal restraint in terms of the Multiannual Financial Framework and cohesion funding. It is simply a question of prioritisation - what you want to spend your money on. And I am also going to say that this concept of added value for the EU is difficult to define. But I think that there are some areas where EU does not add value and the Common Agricultural Policy (CAP) is one of them. Cohesion funding however can make a much stronger case. So, if we are talking about the added-value approach then I would say that I am a friend of cohesion in that sense.

Our previous speakers have made a number of comments about UK’s abatement and position on the financial transaction tax (FTT). I am not going to address this now as I will probably get questions on this later, so I do say that we have perfectly reasonable arguments on our behalf about why the abatement is still necessary and how, frankly, a financial transaction tax, that is not a global tax, will not benefit the EU – it will simply shift trading elsewhere.

Anyway, on with my speech as I was going to prepare it. I think – as with our other speakers today – I think it is very important to remind ourselves about the context in which we are discussing EU’s finances. European economy is undergoing massive strains right now. We have four years of economic growth to be wiped out across the EU as a whole. Countries are struggling with high and in many cases rising sovereign debt, creditors and investors have lost confidence in European economy, in many countries the unemployment has raised to double digits, national government are making painful and unpopular decisions as they try to get their domestic budgets under control.

On the positive side – and I think that UK has a very positive engagement in Europe – on the positive side we have to think about the assets that EU has in terms of an educated and skillful workforce, as world’s largest consumer market, as a proud record of invention and innovation. But we do face many challenges. We need stronger ambition and serious reform to unleash the enterprise and to open our markets and to promote the innovation. And to develop the low carbon economy, because we see the low carbon economy as somewhere where Europe can take a lead in innovation and in future growth. If we do not make such efforts, we will face a future low productivity, high unemployment, lost investment and relative decline on the global stage. Whilst we are struggling here, in Europe, China does not seem to be struggling so much.

I say all this to explain why the UK takes what appears to be an uncompromising position on the need for fiscal restraint in the next Multiannual Financial Framework and why we need to promote a serious rethink on how we spend our money. EU budget must focus on the areas that add value.

First of all, if we want to start talking about the actual size of the EU budget itself, the UK’s position – I mean as it has been outlined by the previous speakers – is that the annual growth in payments in the next MFF must be no higher than the inflation year on year and it should be based on a starting point of actual spending in 2013. Not projected spending, not what we have allocated to individual countries but actual spending. And that is the considerable difference between us, too. This may sound conservative but let us remember that most of our national governments have cut the domestic expenditure in real terms.

The October European Council last year concluded that the framework should reflect the consolidation efforts being made by the Member States. We take this very seriously. The time the Member States are cutting their budgets is no time for EU to be expanding it. The question is, if we are not going to expand the budget, how we prioritise within the budget. And here we agree that - the Commission spoke on this – EU’s added value is very important. For too long we have continued to spend money on the areas where we have traditionally spent money, without thinking about whether these areas actually contribute to the economic development of Europe and the economic growth.

The concept of EU added value is not an easily countervailable term. This year I saw a UK parliamentary report from, I think, the House of Lords that described this as “a subjective and lenient political quantity”, although not meaningless. I think this is probably true. Still it is a helpful concept if it is as in focusing on spending in what areas and spending efficiently. We agree that the Commission intention to tie the MFF closely to Europe 2020 goals is a good idea, to have a goal-oriented spending with clearly measurable outcomes. This keeps us on focus.

So, before you ask me, what does UK consider to be adding the most value? In short: research and development, cross-border infrastructural projects and the development of the low-carbon economy. We also support a share of the budget to go to Cohesion funding, to the poorest Member States although arguably, the best justification for Cohesion funding is solidarity and not a purely economic calculation. We consider the CAP – the Common Agricultural Policy – as very low added value, particularly when the majority of the expenditure is on the Pillar 1 – direct payments to farmers – rather than in Pillar 2 as investing in rural economy.

So, let me just get into each of these areas we consider to add value. First of all, the UK government believes that growth and competitiveness - if both are underpinned by research and innovation - these are the priority areas. There was a feeling held in UK that … for example, the British Chamber of Commerce said that they opted to spend about 50% of its budget on research and innovation and so in growth of competitiveness. Well, UK does not go this far and I think this share of the budget should increase significantly – I think it is about 10% at the moment and that is really not enough. It is clearly to us an area of added value and builds upon the strengths Europe has in terms of our educated and creative population.

We support the alignment of the research and innovation funding with the Europe 2020 strategy – that is about, you know, setting targets about the expenditure. There are some reforms that can be done to achieve better value for money, such as simplifying the application processes for grants and reducing bureaucracy and tendering processes and, you know, less burdens for auditing requirements. But you know, these are not significant issues.

But on the launch of large-scale research projects the EU has undertaken such as GALILEO which is Europe’s own GPS system, we have experience with considerable delays, cost overruns and management difficulties. We support European Commission’s proposal for management improvement in these projects. What we do not support is to move this sort of projects off the budget which is quite a popular activity at the moment in the Commission to move large items of expenditure out of the MFF. We think that Member States, including the UK, still are required to pay for this expenditure and it is better just to be clear about it.

On cross-border infrastructure projects we think that these can show an added value such as the Transeuropean Network for Transport and Energy (T-TEN). These were seen to be a good example to gain in development, particularly here in Bulgaria. Funding on these projects should be focused where there are clear market failures so, integrating regional energy markets is a tremendously good idea and will promote the economic growth, as well. We believe that the greater use of the EIB funding and higher contributions from the private sector in this kind of projects is also desirable.

Another sector that EU budget has potentially high added value is the role of the EU as a global player, although money in this area could be spent more efficiently and have more impact. In this heading, it should be prioritised to focus on global poverty reduction and on climate change issues. But also on building stability and security, specifically in the European neighbourhood and in the fragile states. We welcome the piece of announcement that the European Neighbourhood Policy should be reformed. The European Neighbourhood Policy does provide us this ambitious vision about economic integration into the European single market – a tremendous benefit to our neighbours, especially those undergoing political changes at the moment. But I think we need a clear commitment on the rewards of joining the EU single market that will only be granted to neighbours which have implemented far-reaching democratic and political reforms. It has to be an incentive for reform; it should not be something we grant so easily.

We also say something about the Structural and Cohesion funding which I hope will underline the point that UK is a friend of cohesion funding. We believe that at present it is not meeting the potential to add value and there is wasteful recycling of funds between Member States, especially those Member States with a capacity to finance their own regional policy. The Structural and Cohesion funds should focus on stimulating economic development in Member States, where income per capita falls below the EU average and where [other] EU spending cannot significantly add value. This means that more money should go to Bulgaria and to the Central European countries at the expense of flows to richer Member States. We are not in favour of introducing new transition regions. We simply do not believe it is a good use of Cohesion funding to top-up slightly less poor regions of Germany or UK.

As far as the Common Agricultural Policy (CAP) is concerned, we want to see agriculture becoming competitive without relies on subsidies. We want to see a competitive farming and a sustainable EU agricultural sector. We believe that most of the current CAP hampers the achievement in this sector. The OECD predicts that over a decade from 2010 to 2019 the EU agricultural productivity will only rise by 10%. For an entire decade, this - to us - is not good enough. The reasons for the poor performance in the EU agricultural sector, many of them stand for the existing aspects of CAP – for example, the separation of farmers from markets and from consumers and this sort of perverse incentives we give to little farmers to overproduce or to underproduce – sort of substantial barriers to agriculture, as well. That is why we believe that CAP is not achieving added value. And now we have a later speaker, Dr. Hardt and I really look forward to seeing his presentation on how CAP adds value - I suspect it to be a short one. The UK calls on for reduction in the CAP budget. The value for money of the remaining CAP expenditure must increase with a higher share of CAP being spent on environmental issues for example, on Pillar 2.

The last, but not meaning least – climate change expenditure must be a priority area to help facilitate EU’s transition to low-carbon economy. There is a considerable scope to increase the proportion of money that the EU spends on this and to mainstream climate change funding across the budget. For example, we could require that all investment over a certain financial threshold has to undergo a climate assessment, a climate impact test - I am looking for a better word. In the UK, a couple of years ago we have produced the Stern report. I am not particularly familiar with this, but this is a report for the Treasury that talked about the economic impact of climate change on the UK in the future and the costs to UK in terms of economic growth of adaptation to climate change. And frankly, from an economic point of view, it makes much more sense to prevent climate change happening than to join the remedy of the impacts of the climate change, once it has occurred. So, from my perspective, investment in climate change and in transition to low-carbon economy is about growth, is about innovation.

I hope that this gives you an outline as to where the UK sees the added value of the EU budget. I would also like to say that many EU level actions to support growth and competitiveness do not require significant EU spending. The British Prime Minister recently published a pamphlet entitled “Let’s choose growth”. In my view, this pamphlet should be as popular in Bulgaria as Gladstone’s pamphlet on the Balkan wars. This pamphlet proposes that some actions should be taken to unlock Europe’s potential. I would like to briefly highlight the four priority areas as they were identified in this pamphlet.

First of all, we must deliver the full and untapped potential of the single market – this is the largest consumer market in the world, it is Europe’s greatest economic achievement - not the euro but the single market. It is far from finished – services now account to 4/5 of the economy and yet there is much to be done to open up the services market. We must try to build a truly digital single market and complete the internal energy market.

The second priority must be to connect the European and the global markets. It is no greater prize in world trade than the conclusion of the Doha trade round. The EU must do all it can to facilitate the deal. We know the sticking points, agriculture is one of them but – like I said – there is no greater prize to EU growth and to global growth than completing the Doha trade round. We should also be looking at concluding bilateral deals with India, Canada, Japan, MERCOSUR and ASEAN nations, as well.

And the third priority should be about supporting business and unleashing enterprise. What is needed is a change in the mindset and in culture and a new approach to regulation, essentially the regulation which builds upon this. We should also extend significantly what we want to achieve with the support of the Commission. This should be the target to reduce the overall burden of the regulation over the life of this Commission. I think that regulation is what saves you money rather than costs you money.

And, finally, innovation. A strong and competitive EU economy must be build upon creativity, on new ways of working and the ability to capitalise on new markets and on new opportunities such as those of low-emission technologies. More fully integrated European venture capital market capable of supporting on innovative products would be a big help. And again, none of these four objectives is one that requires a lot of money; they just require doing things differently.

Europe stands in a junction but forward we see three different paths. There is the path of the least resistance which is built upon the policies of the past and reinforcing our relative economic decline. Or, there is a new direction for Europe – one that leads toward stronger growth and prosperity. I believe that the added value is about the taking of the second path – it is about focusing on budget responsibility, on growth and competitiveness. Thank you!

Adelina Marini: As usual, when UK enters the discussion, it gets very interesting. In overall, the debate focuses exactly on this: we do not want to expand the budget, as many countries already enter a mode of cuts. It will probably be not too pessimistic for me to say that more will join. On the other side, we want to preserve the investments in economic convergence, which may become even more necessary because of the crisis when some regions could grow even poorer. At the same time, we want to invest in areas that bring added value – those are the expectations of a considerable number of countries. Consequently, we come to the question how to do this all with the same amount of money or, to use the popular phrase “how to have more Europe with less money”.

There comes one of the European Commission’s ideas that is yet to be discussed and is already being debated very intensively, to look for other sources of financing for the EU budget. The UK clearly said, to remove all doubts “we do not want a tax on the financial transactions if it is not introduced globally”. By the way, Bulgaria is against this tax with the same argument. So, it remains to look for alternative revenues. (to be continued)