Documents considered by the Committee on 8th December 2010 - European Scrutiny Committee Contents

2 Financial management




COM(10) 185




+ ADDs 1-2

COM(10) 261




+ ADD 1

COM(10) 260

Commission Report on the functioning of the Inter-Institutional Agreement on budgetary discipline and sound financial management

Commission Communication: More or less controls? Striking the right balance between the administrative costs of control and the risk of error

Draft Regulation on the Financial Regulation applicable to the general budget of the European Union (recast)

Legal base(a) and (b) —

(c) Article 322(1) TFEU; co-decision; QMV

DepartmentHM Treasury
Basis of considerationMinister's letter of 27 November 2010
Previous Committee ReportHC 428-ii (2010-11), chapter 1 (15 September 2010)
To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionFor debate in European Committee B after receipt of further information (decision reported 15 September 2010)


2.1 The Inter-Institutional Agreement on budgetary discipline and sound financial management provides for many aspects of the planning, preparation, execution and control of the EU Budget. The agreement is between the Council, the European Parliament and the Commission — it has no legal base but is politically binding. It is an important tool of budgetary discipline and includes a multiannual Financial Framework. The Financial Framework is intended to ensure that, in the medium term, EU expenditure develops in an orderly manner and within the limits of own resources. It contributes to budgetary discipline by setting ceilings on the amount of funds available to the EU Budget in broad policy areas for each year it covers.

2.2 The current Inter-Institutional Agreement was agreed in May 2006 and its Financial Framework spans spending over 2007-2013.[6] This Financial Framework is structured around six broad policy areas or 'headings' — sustainable growth, preservation and management of natural resources, citizenship, freedom, security and justice, the EU as a global player, administration and compensations. The current agreement is being replaced presently as part of the implementation of the Lisbon Treaty.[7]

2.3 Errors inevitably arise when EU money is spent. These are typically involuntary, not fraudulent, errors in spending — for example, misinterpretation of eligibility criteria when using EU funds. But preventing and detecting errors requires controls, which cost money. The concept of a tolerable risk of error captures the idea that reducing the error rate beyond a certain point requires an increase in the cost of controls which outweighs the benefit from the resulting financial corrections (spending returned to the budget).

2.4 In December 2008 the Commission suggested in a Communication an approach to tolerable risk and illustrated the efficient control costs for two EU funds. The Commission hoped the Communication would stimulate further debate and provide a basis for institutional agreement on the way forward in analysing the tolerable risk of error. When the previous Committee considered the Communication, in February 2009, it heard that the Government welcomed it as a basis for further discussion on the issue of tolerable risk of error. However, it also heard some cautionary remarks from the Government. It commented that, for all these caveats, this Communication was, as the Government acknowledged, a basis for further discussion of the issue of tolerable risk of error.[8]

2.5 Formation, implementation and audit of the EU General Budget are governed by the Financial Regulation, Council Regulation (EC, Euratom) No 1605/2002, and rules in the Implementing Regulation, Commission Regulation No 2342/2002. The Financial Regulation is subject to a triennial (or, if necessary, earlier) revision.

2.6 In April and May 2010 the Commission presented these three documents. Its Report, document (a), on the functioning of the Inter-Institutional Agreement focused on three areas — implementation procedures related to the Financial Framework, inter-institutional collaboration and sound financial management of EU funds. The Commission Communication, document (b), and two accompanying Staff Working Documents developed its ideas on the concept of tolerable risk of error. The document is in five parts — background and objective of the present Communication, why decide a tolerable risk of error, how tolerable risk of error levels could be decided, Commission proposals and a conclusion. In document (c) the Commission presented its proposal for the triennial revision of the Financial Regulation. It was accompanied by a Staff Working Document showing what the Commission intends as consequential amendment of its Implementing Regulation.

2.7 When we considered these documents, in September 2010, we recommended that, given both the even greater importance of budgetary discipline at the present time and their relevance to the debate now underway on the Financial Framework for the period 2014-2020, they should be debated in European Committee. However we added that this debate should not take place until the Government was able to provide us with a readout of the preliminary reactions in the Council's Budget Committee to the Commission's proposals for the Financial Regulation, document (c), including the matter of tolerable risk of error levels, document (b).[9]

The Minister's letter

2.8 The Economic Secretary to the Treasury (Justine Greening) first comments that:

  • the UK has been a consistent supporter of sound financial management in the EU, including leading the way towards greater transparency by, for example, publishing a consolidated statement of EU funds in the UK;
  • as many households and governments are taking difficult steps to balance their budgets, effective financial management to ensure that EU funds are being used in the right way on high value-added projects is more important than ever;
  • in this light, the fact that the European Court of Auditors has been unable to sign off on the EU accounts for over 16 years is clearly unacceptable;
  • the fact that the bulk of errors detected represent such things as small overpayments to farmers and payments for expenditure which do not meet strict eligibility rules, is of little consolation as it does not inspire confidence amongst the general public that the EU is spending taxpayer money wisely; and
  • therefore, the Government is looking for new ways of improving financial management, including through greater responsibility being taken by Member States to improve the management of EU funds at national level.

2.9 Against this backgound the Minister reports that:

  • the Council's Budget Committee met on several occasions in September and October 2010 to discuss aspects of the Commission's proposals for the Financial Regulation, document (c);
  • part of these discussions included the Commission's proposal for tolerable risk of error levels, however the Commission Communication, document (b), was mainly discussed outside of negotiations on the Financial Regulation;
  • under the guidance of the Belgian Presidency, the Commission presented twelve themed papers on its proposal for the Financial Regulation, which focused on budgetary principles, the Commission's proposal to introduce tolerable risk of error levels, shared management of the budget and methods of implementation, methods of implementation other than shared management, powers and duties of the Authorising Officer, implementation of the budget (the rules for commitments, payments and recoveries), procedure, grants, financial instruments, EU trust funds, building policy and public-private partnerships;
  • this offered Member States an initial opportunity to discuss certain aspects of the Commission's proposal; and
  • as the Budget Committee will return to the Commission's proposal in early 2011 for line-by-line study, Member States' preliminary reactions generally focused on probing the Commission on certain aspects of their proposal and highlighting areas of significant concern.

2.10 The Minister continues that:

  • of particular concern to Member States is the Commission's proposal on the control and audit obligations of Member States under shared management — the Commission suggests aligning the certification and assurance process for Structural and Cohesion Funds with the model for agriculture;
  • essentially, the Commission's rationale for aligning control and audit obligations under shared management is that rates of error are significantly lower in agriculture than Structural and Cohesion Funds, although the European Court of Auditors' Report for 2009 shows a significant reduction in the error rate under the Structural and Cohesion Funds;
  • however, the current system of shared management for Structural and Cohesion Funds between the Managing Authority, Certifying Authority and Audit Authority was only introduced in 2007;
  • Member States have indicated that the current system should lead to an improvement in financial control, given time, and are unsure as to how the model for agriculture will be applied to multi-annual Structural Fund programmes;
  • in addition, Member States are concerned that the Commission proposes shifting away from the current system without a detailed review of whether the changes introduced in 2007 have improved financial control;
  • the Government shares all of these concerns;
  • on the proposal to allocate EU funds to financial instruments managed by International Financial Institutions (IFIs), such as the European Investment Bank, the UK and other Member States expressed concern about the potential implications for the budget and the apparent proliferation of these funds without any oversight on their total number from the Council;
  • for example, if IFIs are not required to de-commit unused EU funding allocated for a specific project, the EU funds may stay in the account of the IFI awaiting a suitable project, at a cost to the EU;
  • Member States, including the UK, expressed concern that the Commission changed the procedure for the recovery of fines without informing the Budgetary Authority (the Council and the European Parliament);
  • previously, fines imposed by the Commission for competition infringements were held in basic bank accounts while the decisions imposing them were subject of a potential European Court of Justice ruling;
  • as these provisional amounts now represent a huge sum, approximately €8.9 billion (£7.7 billion), the Commission decided to create a fund managed by its Economic and Finance Directorate-General to invest in sovereign bonds; and
  • the Commission maintains that this is a Commission decision, the legal base already exists and that the amendment to the Financial Regulation would provide greater flexibility with regards the rate of interest.

2.11 The Minister says that Member States welcomed the Communication on tolerable risk of error, document (b). She continues that:

  • Member States were, however, generally of the view that it is too soon to implement such a concept for EU budget financial management;
  • in particular, they recalled the need for further simplification of existing legislation and improved programme management in order to reduce the current error levels;
  • there was agreement that the concept for determining the appropriate risk levels needs further refinement;
  • so the Commission was encouraged to continue its work on this issue, to look into more detailed methods for identifying the tolerable risk of error by assessing the costs and benefits of controls and to further reflect on the appropriate level of aggregation across Member States by policy area, fund, programme or mode of budget implementation; and
  • it was agreed that a complete overview of the level of error in all policy areas is required before it would be possible to enter into political discussions on the tolerable risk of error with all parties concerned.


2.12 We are grateful to the Minister for this full account of the Budget Committee's initial view of these proposals, which will enable the debate we have recommended to now take place.

6   See  Back

7   (31401) 7183/10: see HC 5-xiv (2009-10), chapter 6 (17 March 2010). Back

8   (30320) 17592/08 +ADD 1: see HC 19-viii (2008-09), chapter 8 (25 February 2009) and HC 19-xxvii (2008-09), chapter 33 (14 October 2009).


9   See headnote. Back

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