"For 500 million Europeans in times of austerity"

...That was how EU Budget Commissioner Janusz Lewandowski presented his 2012 EU budget proposal, tabled today.

With such a heading it must include lots of belt tightening, better targeting and some relief for those European governments whose budget is already incredibly strained, right?

Unfortunately, not.

To the surprise of no one, the proposal includes increasing the budget by 4.9% (€6.2bn), around 2% more than average inflation in the EU. I don't know about you, but we wouldn't usually describe that as austerity.

Needles to say, given that all EU members are trying to cut spending, increase taxes and impose varying austerity levels onto taxpayers, we have a feeling that Lewandowski's proposal won't be met by cheers in many countries. Below we have a breakdown of what we estimate each country’s increased contributions to the EU budget will be under the proposal - based on the projected national share of contributions for 2011, as forecast by the Commission (it's a moving target since you're never be quite sure what the actual contributions are until the money is paid out.)

We're looking at a €769m (£680m) increase for the UK. This is dwarfed by the €1.2bn that is added to Germany's EU bill for next year under the proposal (quite apart from the €100bn+ in loan guarantees that the country's taxpayers are already liable for through the bail-out packages). The French, who are beginning to realise that they are now net contributors to the EU budget, are on the hook for an extra €1bn - not exactly pocket change. The Netherlands, whose Government is now asking uncomfortable questions about the EU's external aid (partly as a result of our recent report on the topic) are on the hook for another €309 million. For all the contributions see table below (click to enlarge - these figures are gross contribution, meaning that in reality some countries might actually get more cash back than what they pay in, for example Spain).

Comically the Commission's press release outlines the fact that "bills must be paid", alluding to the fact that the Commission has committed to various projects which still are running. This argument is weak. Although it's true that the EU budget can't run a deficit, meaning less room for manoeuvre compared to national budgets, there's no reason whatsoever why the Commisison, MEPs and member states can't come together to prioritise and re-shuffle, since funds are clearly getting tighter. Just as national governments are forced to prioritise. As we note in our response to the proposal, there's plenty of fat to cut in the EU budget, from the 50 or so EU quangos, to paying non-farmers not to farm, to recycling 'cohesion' funds between some of Europe's richest regions. And, seriously, does Europe really need projects like these...(click link for examples)

We're sorry, Mr. Lewandowski , this proposal is neither for "500 million Europeans" nor for "times of austerity". In fact, it's quite the opposite.

Message to the Commission: Denial won't reduce waste

You remember the non-existing Hungarian dog fitness centre which received €400,000 in EU subsidies? We highlighted the project at the top of our list of 50 examples of EU waste.

Well, from the Hungarian press we now learn that the Hungarian Development Agency - the national body responsible for the distribution of the EU's regional development funds - has asked the company Gyrotech Ltd (which, bizarrely enough is an IT company) to pay back the money it received in 2007 for the project to the European Regional Development Fund. The original grant was aimed at "improving the lifestyle and living standard of dogs."

Hungarian economic magazine HVG credits Open Europe for bringing the case to the attention of the international press.

If the money will in fact be paid back, this is good news and shows that it’s possible to fight EU waste. As a result of efforts to shed some light on these funds (by Open Europe and others), EU waste was detected and the money which was misused is now being reclaimed. Everyone happy?

Not the European Commission, it appears, which didn't quite seem to appreciate Open Europe's efforts to ensure that the EU budget constitutes good value for taxpayers' money and contributes to growth and jobs in Europe.

Note the differing responses:

The Hungarian National Development Agency – which admittedly should have been more prudent when giving grants to the project in the first place - investigated what went wrong and claimed back the money.

The European Commission:

“We don’t consider this to be credible research”. Our list, with the dog fitness centre at the top, was apparently “based on a loose collection of unverified secondary sources”, according to the Commission.

And, “It is regrettable that Open Europe did not even approach the commission to verify any of their so-called facts…it is very easy to pull out a few of the less orthodox projects from thousands funded by the EU and present them in a onedimensional manner for ridicule.”

The Commission does indeed look pretty ridiculous when it makes statements like this, and it turns out that the number one item on the list, the dog fitness centre in question, was a clear case of undisputable EU waste and that the project is now forced to refund the cash.

It’s not that hard to verify actually. The first-hand source (the Hungarian Regional Development Agency), detailing the grant, is right there in the footnotes of our report – all you have to do is to click on the link and voila!

The same goes for almost all the other projects we’ve highlighted, apart from a handful, such as the case of the two fishermen who received a €500,000 grant from the EU and the Swedish government to scrap their boat under a scheme to reduce over-fishing. It then used the grant to buy a new boat, under a separate set of rules, and carried on with their fishing business. In this case, the fishermen themselves were widely documented to have admitted that this was exactly what had happened.

Instead of going on its counterproductive rant, the Commission should thank anyone who tries to identify waste and who proposes reforms to stamp it out.

We’re not holding our breathes though.

Meanwhile, the Financial Times and the Bureau of Investigative Journalists have made European taxpayers and transparency campaigners a great service this weak by shedding some additional, and much needed light, on the EU's structural funds. See here, here, here, here, here, here, here, here, here, and here for example.

Some of the findings have included:

• Only 10% of the earmarked funds for 2007-2013 have actually been paid out to date, due to difficulties in many member states to find money for co-financing projects at a time of austerity in Europe (showing how poorly equipped the structural funds are to respond to changing economic circumstances in Europe, in turn undermining their ability to foster "convergence")
  

• €12mn of EU funds have been spent on a port which lays idle in Gran Canaria.

• More than €3mn of public funds – including an estimated €1.5m from EU structural funds – have been allocated to tobacco companies in Europe. The funds have gone to help equip cigarette factories and to fund training projects. Under the Framework Convention this is in breach of WHO guidelines on tobacco control. Paradoxically, the EU also spends more than €16mn a year on antismoking campaigns.

• Some big beneficiaries of the structural funds include McDonald's, which received funds to train staff in an affluent region of Sweden, in addition to IBM, Coca-Cola, and Japan Tobacco International. This is despite the fact that the funds are specifically meant to help small and medium sized companies, particularly in poorer regions.

• Structural funds have been allocated to companies relocating factories from west to east Europe, despite this contravening EU rules.

The Commission has resorted to its trade mark 'nothing-to-see-here' and 'it’s-all-only-a-misunderstanding' response. Indeed, denial remains the most predictable of the Commission's responses.

To be fair, the Commission has at least one sensible proposal for improving the targetting of the structural funds - linking more of the funds to actual performance and achieved targets (as outlined by Commissioner Hahn).

More stuff like this and fewer defensive rants, would serve to improve both the effectiveness of the funds as well as the image of the Commission itself.

In case you missed it...

In case you missed them, here are a few of Open Europe's appearances from this week - on three very topical issues:

On Tuesday, Open Europe discussed the problems with the EU's structural funds on BBC Radio 4's File on 4 programme. Listen to it here (worth a listen, particularly the part looking at the ongoing problems with fraudulent use of the funds).

On Wednesday, we debated the EU's External Action Service on Radio France Internationale, arguing that it's far from clear that the EU's diplomatic body adds value at the moment - and that the EU should be focussing on policy rather than institutions. Listen here (in French)

We also appeared on the BBC Radio 4's The World Tonight, discussing the future of the euro.

A familiar showdown

Negotiations over the size and shape of the EU budget post-2013 are just around the corner. Expect no surprises about what the main battlegrounds will be (clue: the CAP and the UK rebate).

UK Chancellor George Osborne has already sent a clear message to his colleagues in the EU.

"We are not going to give way on the rebate, and people had better know that at the beginning of the process, because they'll certainly discover it at the end", he said earlier in the week.

But despite Osbourne's comments, French Budget Minister Francois Baroin (picture) still tried to test the waters during a visit to London yesterday.

"I have made many efforts and put on the table several arguments. But I have understood that the Britons had no intention of changing their stance", he said, adding that during the talks he had also made clear that French President Nicolas Sarkozy's position on the Common Agricultural Policy "is not negotiable".

In other words, we're alooking at a tricky, but painfully familiar, starting position for the budget talks.

Baroin concluded, "at least [...] these talks have shown the determination of both our countries to defend the respective positions". (Hmm, good thing these talks took place then - for a while there we thought that the UK and France would decide not to defend their respective positions...)

But there is a simple solution to this potential deadlock: let's opt for a similar deal to that which Tony Blair struck in 2005, when he infamously gave away £9bn of the UK's rebate in return for vague promises of CAP reform, which amounted to absolutely nothing in the end.

But this time, let's reverse the terms: France and other member states agree to cut the CAP by, say, 50% and repatriate regional spending for member states with a GDP of 90% or more of the EU average (France could actually agree to the latter solution even outside discussions about the UK's rebate and CAP, since the country is now a net contributor).

In return, the UK would promise a "review" or "health check" of its rebate - alongside other member states' rebates - in 2018, with the view to possibly scrapping it altogether.

Unfair? Unreasonable?

Dear Dirk

Last week, we were told by journalists that Dirk Ahner, the Commission's Director-General for regional policy, had apparently sent a letter to the members of the European Parliament's Budgetary Control committee, criticising Open Europe's 50 examples of waste involving EU funds.

Despite the fact that the letter addressed our publication, and cited extensively from it, Mr. Ahner did not send a copy to Open Europe, and has failed to send us one after repeated requests both on the phone and by email.

In the end we managed to get the letter from other sources. You can read it here.

Here's an excerpt from the letter:

As I committed to do, I have asked my services to investigate their claims on the projects in question. However, it is essential to underline to the citizens you represent that, given the shared management system, the European Commission is not responsible for the selection of the projects... Most of the claims are true, in the sense that European money has co-financed the projects mentioned. However, Open Europe seems to take the view that anything related to tourism and culture is a waste of money, regardless of whether the projects create jobs and are part of an overall development strategy. Some statements are misleading or completely incorrect: just to take an example, the Commission will not pay a cent to the mentioned Slovakian bulletin-board tender (project 49).

Well, we don't take the view that anything "related to tourism and culture is a waste of money", but, as we set out here, the structure and nature of the EU budget often facilitate poor project selection, to a greater extent than national spending schemes do. We also wanted to illustrate how having a massive redistribution scheme involving some of the richest countries in the world sending money back and forth via Brussels (at a huge admin cost) is becoming increasingly hard to justify economically. In addition, we wanted to highlight one of the wider problems with the EU budget (the co-financed part in particular, i.e. the Structural Funds and the Rural Development Programme), namely the blurred line between the spending of public money and accountability.

Predictably, Mr. Ahner passes on the responsibility for the project selection to member states, as the Commission usually does (but then goes on to defend the projects, interestingly).

It is true that the managing authorities in the member states select projects - no one is disputing that - but the Commission runs the policy and does have a thing or two to say about the project selection as well - in addition to being one of the staunchest defenders of the Structural Funds. And some of the people on the ground won't let the Commission off the hook that easily. For example, responding to one item on our list - the ‘gender equal’ wood design centre in Sweden - one of the local officials involved in the project defensively wrote, "The gender-part of that project was just a small part, put there to please the EU officials."

So as a taxpayer, if I'm not happy with the way the Structural Funds are ran and spent, who should I approach? As we've said many times before, the Commission could do itself a massive favour by encouraging member states to scrap the Structural Funds in the most well-off member states - say, those with a GDP of 85-90% of average EU GDP or more - where the value-added of the EU funds, on the whole, is negligble at best. None of these issues were addressed by Mr. Ahner. Anyway, here's our open letter to Mr. Ahner:

Open letter to Dirk Ahner, Regional Policy Director-General, European

Dear Mr. Ahner,

We write to you in regards to a letter you sent to members of the European Parliament’s Committee on Budgetary Control (“Subject: OPEN EUROPE 'fraud and waste' list of projects”, REGIO B1/AM D(2009)). Since the correspondence with the MEPs was addressing material published by Open Europe, we thought it appropriate to respond and also to address some of the claims you make in the letter (see attached document).

First, it is regrettable that the Commission continues to single out Open Europe for criticism, and has not given us opportunity for the right of reply. You sent the letter to MEPs, without copying to Open Europe, and failed to respond to telephone calls as we sought to find a copy of the letter. Despite repeated requests over the phone and via email, your office has still not sent us a copy of the letter. In fact, Open Europe was not even acknowledged when we tried to get hold of the letter. Instead we have acquired the letter from other sources. Your refusal seems to be in violation of the European Ombudsman’s Code of Good Administrative Behaviour.

Of the 17 Regional Development Fund projects analysed, you seem to be saying that one of them is incorrect, in that EU funds were not in the end used for the purposes mentioned: the ‘Bulletin-board tender’, which Open Europe said was indeed being investigated by the Commission. You claim that the point about Lazarote hotels having illegally received EU funds is “incorrect”, but are only able to clarify that “the Spanish authorities removed the hotels from the ERDF programme. This means that the hotels will not receive any funding from the EU budget.” No evidence is provided to show that the hotels did not receive the money – only that they “will” not receive money in the future – so we remain unconvinced by your claim that this is incorrect.

For all the other projects, you either defend the use of funds, or simply state that the example is correct, such as the fact that the Chairman of Porsche received €2,500 in EU rural development funds for a small estate in Bavaria where he goes hunting in his free time. For one or two you quibble over the amounts spent.

It is most concerning that you have spent so much time piecing together this rebuttal, and sent it to members of the European Parliament with an instruction that they “underline to the citizens you represent that, given the shared management system, the European Commission is not responsible for the selection of the projects funded.” There is no acknowledgement of Open Europe’s wider point which is that the waste is ultimately down to the structure of the EU budget (as Open Europe has set out here, for instance: http://euobserver.com/7/28979 ) - and that the budget in general and the Structural Funds in particular are in need of fundamental reform.

Open Europe maintains that all are examples of the EU wasting money, and an illustration of how the EU budget is spent, which was the objective of our report. Your comments represent a different point of view about how public money should best be spent, which Open Europe is seeking to challenge.

We look forward to a more open dialogue with the European Commission on these issues in the future.

Yours sincerely,

Open Europe

The EU's budget is unmanageable

On EUobserver today, Open Europe spells out in some more detail what we consider to be wrong with the EU's budget and how it should be reformed. The piece is a response to Commissioner Siim Kallas' article on the same site a few days ago. We argue,

The fundamental problem of waste and mismanagement involving EU money lies primarily with the budget itself...Mismanagement and waste in the EU budget are two sides of the same coin. They both stem from the size, complexity and irrational nature of the EU budget. Both receive their thrust from the blurred line between spending and accountability, owing to the set-up of the EU's budget programmes. And both can be radically reduced by simplifying the budget, cutting down on the spending and by repatriating a large chunk of regional spending and the CAP to member states.

As we argue in the piece, for a start, reform of the EU budget should involve:

fully repatriating regional policy to the member states except those with a GDP of less than 90% the EU average (which would target the funds on the poorer member states where the money actually can have a real impact); repatriating all parts of the rural development programme which are not related to promoting the environment (as the environment is inherently a cross-border issue); and establishing a better link between performance and receipt of subsidies.

We also pick up on Commissioner Kallas' insight that: "One cannot reasonably expect an EU official from an office in the Commission's headquarters in Brussels to know what best fits the needs of a small town in the West Midlands - this is for the local authorities to say."

We fully agree. So why then are regional spending and rural development a matter for Brussels in the first place?

Making sense of the insensible

A paper floated by the Commission proposes to give the EU budget a more sensible focus - away from the current Byzantine arrangement in which subsidies are dished out to farmers and non-farmers alike and a range of ludicrous projects in richer member states, with no positive impact whatsoever on jobs and growth. EUobserver tells us that the Commission paper proposes to spend money "only on projects which really have an impact on research and technology, on greening the economy or on creating jobs." This, of course, sounds sensible.

The EU's regional spending programme (structural funds) is painfully inefficient at the moment. EUobserver gives an illustrative example of what kind of perverse incentives the EU's structural funds create: one Spanish official has apparently admitted that some regions in the older member states keep their economies below or just around 75 percent of the GDP average (the threshold for areas considered particularly deprived, and therefore eligible for additional funding) in order to qualify for the extra EU funds. Compare this with the aim of the structural funds, which is to have poorer regions catch up with richer ones.

In its papers, the Commission actually gives two decent proposals for making the funds better targetted:

First suggestion is to put in place a "sunset clause" to reduce support for member states which have failed to make good use of the money, or failed to move up the convergence latter.

A second suggestion is to link the regional aid to the length of EU membership, which could end the ridicoulos system whereby the EU's richest member states send money to Brussels, only to get some of it back (minus the huge adminsitrative cost involved in this recycling operation).

The most sensible way forward, of course, is to limit the structural funds to the newer member states, where they really can make a difference (if propoerly targetted and distributed) - as we long have argued.

These are some ideas that could make the EU budget a bit less irrational. Don't hold your breath though - any such ideas are likely to run into massive opposition from the likes of Spain and Greece. And today, MEPs voted in favour of a 10% increase in the budget, including setting aside more trade-distorting subsidies for dairy farmers.

In other words, an incoming Conservative government has some work to do.

There was a better way

The Economist's Charlemagne today claims that by opposing the incredible 60 percent rise of the British contribution to the EU budget, the Conservative Party is turning its back on "such ideas as promoting free trade, the pursuit of economic growth and the defence of Western values."

By doing so, Charlemagne risks perpetuating the myth that the only way of paying for the EU's new members to integrate was to increase an already bloated and misdirected EU budget.

Charlemagne summarises Tony Blair's 2005 budget deal as follows:

To cut a long story short, Mr Blair was snookered by the French, among others...The French very cleverly managed to force the British into a position where they had to choose between defending their rebate and cutting funds earmarked for the new member states from the ex-Communist block who had joined a year earlier.

The article goes on to argue that the Conservatives' hostility to the budget rise is "purely about British money going to Brussels" and that the increase was imperative for enlargement to be a success.

It says the Conservatives are dismissing one of "Britain’s greatest victories in more than 30 years of EU membership, securing valuable allies for the cause of Atlanticism and open markets and burying forever any thoughts of turning Europe into a federalist superstate."

Charlemagne concedes that Blair's budget deal was "not brilliant" as it was supposed to prompt a review and reform of EU agricultural spending which, surprise, surprise, has not so far materialised. It should also be noted that central and eastern European countries received a very poor deal when it came to their share of agricultural spending.

But the rest of Charlemagne's argument seems to rest on the notion that EU regional spending is a 'good' in itself. He writes that EU funds for new members "have a long record of improving infrastructure such as motorways, ports and railways for the general benefit of trade and growth."

If only it were so for the 50 percent of EU regional spending that is spent in the EU's 15 richest states. This money does nothing to boost trade and growth but is simply a money-go-round which helps keep countless EU (and UK) bureaucrats in work.

Of course, having invested so much political capital in enlargement, it is only right that the UK ensured that the EU takes its responsibilities to its new members seriously. What is not forgivable is that the UK failed to make others understand that enlargement fundamentally changed the 'rules of the game' and that the EU's budget should reflect that.

As we have argued in the past, the EU's regional policy needs fundamental reform. It simply does not make sense for the UK to send money to Brussels to only see it sent to countries of equivalent wealth to be spent on highly prescriptive and dubious projects. The EU's 'structural funds' should only be spent in countries that need it such as those whose GDP is 90 percent or below the EU average. The rest should be scrapped.

This is perhaps what Conservatives should consider arguing for. It would have many useful effects: Firstly, it would still allow money to be spent where it is needed most, thus fulfilling the UK's commitment to the policy of enlargement. Secondly, it would result in a net and gross decrease in the UK's EU budget contribution. And third, it would allow them the political victory of reclaiming powers from Brussels by returning regional policy to the UK.

Instead, it seems that Shadow Europe Minister Mark Francois is following the mantra of "try, try again" by saying he would offer a deal painfully similar to Blair's in 2005. The Telegraph reports that Francois is suggesting giving up more of the UK rebate, if the Conservatives "thought there was genuine reform available.”

Seeing as this worked so well in the past (not), why not play 'hard-ball' and actually refuse to agree the next budget at all, unless the new deal is palatable. This would force the EU to live on a budget paid out in 'provisional twelfths'. This is a bargaining chip which is only available every seven years. The Conservatives, if elected, will still have the energy and the room to manoeuvre in the next round of budget negotiations (due in 2011-12) and what better way to prove that they are serious about reforming the EU?