Select Committee on European Communities Sixth Report




37.  This part of the Report summarises the evidence of the witnesses on the major issues which arose during the enquiry, which is published with this Report. It sets out the opinion of the Committee on each issue, based principally on that evidence, but also taking into account detailed material from the Commission and the European Parliament which is not published here, and other generally available documents.

38.  We have concentrated in this enquiry on the issue of how the necessary resources to finance Agenda 2000 should be raised. However, it became apparent from the outset that, as the Economic Secretary to the Treasury put it, "there are very important interactions between the expenditure side of the budget and the own resources (revenue) side on which I understand the Sub-Committee is focusing" (Q 119). Because we recognise that any final settlement will involve both sides of the equation, we have looked at them both.

39.  Our attention was also drawn to the absolute amount of EU expenditure. For the 7 years covered by Agenda 2000, the Commission proposals would involve total expenditure (at 1999 prices) of 719.4 billion euro - almost £500 billion, or £71.4 billion per year[29]. By way of comparison, UK public expenditure in 1998-99 will be approximately £330 billion (on a GDP of £780 billion). Mr Colom I Naval, the rapporteur on Agenda 2000 to the European Parliament Committee on Budgets, emphasised how small total EU expenditure was in relation to the total GNP of the Member States[30] (Q 82, slide 1, p45). So did Professor Begg, who told us that in 1998, EU expenditure represented 228 euro (£155) per head of total EU population[31], which he said was, for the United Kingdom, "about one-sixth of what we spend in the Health Service" (Q 34).

40.  We understand why Commissioner Liikanen suggested that, since total EU expenditure formed a relatively small part of national budgets, perhaps too much attention was paid to it:

    "It is very clear now that almost everybody wants to cut the Community budget down. I would say to a certain extent this is almost out of all proportion to the discussion; some details we talk about today cannot always be reflected in any rational economic terms" (Q 105).

However, Ms Rebecca Stokes[32] points out that the absolute size of the EU budget is "greater than that of the budgets of Member States such as Greece and Ireland". And, commenting on Commissioner Liikanen's view that the costs were "extremely small", the Economic Secretary said:

    "From our perspective we are looking at a total EU budget of some £60 billion. In terms of the United Kingdom's contribution after abatement one is looking at £8 billion this year (1 per cent of GNP). That is a substantial amount and equals four pence on the standard rate of income tax. We take that extremely seriously and that is why we and Parliament devote so much attention to scrutinising the budget" (Q 128).

41.  Although the sums involved in the EU budget are relatively small as against total public sector expenditure in most Member States, they are by no means negligible. We consider it essential that there be better national scrutiny of EU expenditure, and that this scrutiny be on a continuous rather than an occasional basis.

Adequacy of funding

42.  The own resources ceiling, which places an overall cap on the amount which the EU can spend, is expressed as a percentage of EU GNP. During the period of the present (1993-1999) financial perspective[33], this percentage was set to rise gradually to its present level of 1.27 per cent. The Commission has proposed[34] that this level should be retained for the next period (2000-2006), with the projected growth in expenditure being covered by the forecast growth in GNP.

43.  In our previous enquiry, The financial consequences of enlargement,[35] we concluded that "the annual rate of growth [in GNP] estimated by the Commission for 2000-2006 for the EU15 (2.5 per cent) is uncertain and that for the CEEC10[36] (4 per cent) highly uncertain". We pointed out then that the absolute amount raised through own resources would not be enough to cover the proposed expenditure if growth in the EU15 fell below an annual average of 2 per cent. In that case, we said, the Community would have to reduce spending on agreed policies or to increase its income by raising the own resources ceiling above the agreed level of 1.27 per cent of EU GNP.

44.  Returning to the issue in this enquiry, over a year later, we asked our witnesses how confident they were now that the ceiling would cover the desired expenditure. HM Treasury reminded us of the table submitted in evidence to the previous enquiry, showing the margins between the own resources ceiling and the Commission's projected expenditure on various assumptions about the economic growth rate in the EU, on which Table 2 is based.

Table 2:

Margins between the own resources ceiling and projected expenditure
Growth in existing Member States GNP of EU15+ 6Own Resources
1999-2006billion ecu Ceiling at 1.27%

billion ecu



per cent

of GNP

2.00 per cent

2.25 per cent

2.50 per cent

(Commission projection)

2.75 per cent

3.00 per cent






















Ecu figures are at constant 1997 prices.

Column 1:  assumed rate of GNP growth in the 15 existing Member States

Column 2:  total forecast GNP (billion ecu) of the 21 Member States (the EU15 and the six states with which accession negotiations have been opened) based on the different assumptions specified in column 1

Column 3:  the resulting value (billion ecu) for an own resources ceiling of 1.27 per cent for the 21 Member States

Column 4:  the "margin" (billion ecu) between the ceiling in column 3 and the Commission's projection of total payments from the Community budget in 2006;

Column 5:  the margin in column 4 as a percentage of total Community GNP (column 2).

45.  Mr McIntyre said that the Government had not modified its calculations (Q 2), and the Economic Secretary confirmed her belief that "provided we get stabilisation and reform of the CAP … we can fund enlargement within the ceiling of 1.27 per cent" (Q 124). Mr Colom I Naval was less confident, foreseeing the possibility that on certain assumptions the ceiling might prove to be too low (Q 85). Commissioner Liikanen considered that there would be a problem only if the growth rate of GNP for the EU15 as a whole fell below 1.5 per cent, "and you cannot be so pessimistic that you will have a lower level than that" (Q 106). The Economic Secretary thought that if the growth rate went down to as low as 1.5 per cent "it would become very tight on enlargement" (Q138). But she said that in that case "we will have to revise the financial perspective rather than the [own resources] ceiling. The European Union, like Member States' governments, must cut its coat according to its cloth. In this case the cloth is 1.27 per cent" (Q 137). We note that over the last 5 years the average rate of GDP growth across the European Union has been just over 2.5 per cent [37]. Although current forecasts show lower levels of growth, and although we recognise the difficulty of making accurate economic forecasts, we conclude that the headroom provided by the 1.27 per cent own resources ceiling should certainly be sufficient at present.

46.  We understood the Economic Secretary to imply (Q 130) that, if total expenditure were stabilised by 2006[38], the own resources ceiling of 1.27 per cent would be adequate indefinitely, even after the Agenda 2000 period. We doubt whether this is so: we anticipate that the own resources ceiling will need to be reconsidered at some time in the future[39]. When this becomes necessary will depend partly on actual rates of GNP growth and on the extent to which it is possible to reform the present spending programmes. It will also be affected by the costs and pace of enlargement beyond 2006. But, just as importantly, the need for reconsideration will depend on the functions which Member States may in future wish the EU to perform. We have some sympathy with Professor Begg's view that "we ought to decide first what we want the EU to be doing, and then make the budgetary arrangements which enable that to happen" (Q 36). However, because we do not expect major changes in the scope of EU activities to be an outcome of the forthcoming negotiations, we do not regard their possible effects as falling within the scope of this enquiry.

Why is there a problem?

47.  The own resources ceiling sets an overall limit to the amount of revenue which the Community can raise, and thus to total expenditure[40]. Within that ceiling there is at present an agreed framework covering all Community expenditure, known as the "financial perspective"[41], which sets an annual limit on each category of expenditure. The financial perspective thus provides the context for each annual budget. Once the level of expenditure for a given year has been agreed through the budget, the necessary funds are automatically made available through the own resources system. So, given an adequate own resources ceiling, if the financial perspective proposed by the Commission[42] were agreed as proposed and the funding system continued to operate as it does at present, there would not, by definition, be a problem in covering the expenditure foreseen in the Commission's proposals.

48.  The problem arises because some Member States consider that under the present system they are contributing too much to the EU in relation to the benefits which they receive. The most vociferous of these is Germany, where the new Government has argued strongly that it is not prepared to continue financing a disproportionate share of EU expenditure, but Austria, the Netherlands and Sweden have also formally asked for abatements. In the course of our enquiry, we have considered the extent of the existing imbalance, and the proposals which have been put forward to remedy the situation.

How unfair is the present system?

49.  There are a number of ways of comparing the position of Member States under the present system, which all give slightly different results, and which can therefore be used to support various arguments. Rankings according to various criteria are summarised in Table 3 (below), which is drawn from data provided by the Commission[43].

Table 3

Position of EU Member States by various criteria, 1997

(ranking in brackets)
Member State
Percentage share of EU GNP
GNP per capita at market prices as a percentage of EU average
GNP per capita at current market prices (purchasing power parities) as a percentage of EU average
Percentage share in financing of the EU budget
Percentage share of total EU expenditure received (Note 1)
Percentage share of EU operating expenditure in Member States received (Note 2)
Accounting budgetary balance as a percentage of GNP (Note 3)
Belgium3.1 (7)112.8 (6)115.3 (2)3.9 (7)5.0 (7)2.6 (10)0.50 (10)
Denmark1.9 (10)137.4 (2)112.5 (3)2.0 (10)2.0 (11)2.2 (11)0.05 (8)
Germany26.0 (1)118.6 (4)109.4 (5)28.2 (1)12.8 (3)14.2 (3)-0.60 (2)
Greece1.5 (11)53.3 (14)69.0 (15)1.6 (11)6.9 (6)7.7 (6)4.13 (13)
Spain6.6 (5)62.6 (13)77.7 (13)7.1 (5)14.1 (2)15.8 (2)1.28 (11)
France17.2 (2)109.9 (7)104.3 (7)17.5 (2)15.5 (1)17.1 (1)-0.06 (6)
Ireland0.8 (14)79.9 (12)82.4 (12)0.9 (14)4.2 (9)4.7 (8)4.84 (14)
Italy14.2 (4)92.2 (11)102.6 (8)11.5 (4)10.7 (4)11.9 (5)-0.01 (7)
Luxembourg0.2 (15)186.4 (1)176.2 (1)0.2 (15)1.1 (15)0.2 (15)4.89 (15)
Netherlands4.5 (6)108.1 (8)106.0 (6)6.4 (6)3.2 (10)3.5 (9)-0.71 (1)
Austria2.6 (9)118.8 (3)112.6 (4)2.8 (9)1.7 (12)1.9 (12)-0.40 (4)
Portugal1.2 (13)46.7 (15)69.6 (14)1.4 (12=)4.7 (8)5.3 (7)3.12 (12)
Finland1.4 (12)104.9 (9)96.4 (10)1.4 (12=)1.4 (14)1.5 (14)0.06 (9)
Sweden2.7 (8)114.2 (5)93.7 (11)3.1 (8)1.5 (13)1.7 (13)-0.59 (3)
UK16.1 (3)101.8 (10)100.3 (9)11.9 (3)8.9 (5)9.8 (6) (6)-0.16 (5)
Table 3a, page 7 Table 5, page 24 Table 5, page 24 Table 3a, page 7 Annex 8: Table 1f
Annex 8: Table 1d
Annex 8: Table 4

Source:  11666/98 COM(98) 560: Financing the European Union, passim (as shown below each column).


  1. Does not add to 100% because of expenditure outside the EU.
  2. "Operating expenditure" is defined as total EU expenditure less "administrative expenditure" (related to the location of EU institutions within a Member State).
  3. For definitions used by the Commission in calculating these figures, see op cit, Annex 3.

It is generally recognised that gross contributions to the EU budget are roughly proportional to the GNPs of the Member States. In its written evidence, HM Treasury presented a figure showing the gross contribution of each Member State as a percentage of its GNP, pointing out that contributions vary from 0.8 per cent to 1.5 per cent of GNP (Graph 1, p2) And it is generally accepted that this is "fair", although recently Spain, Greece and Portugal have argued that gross contributions should be progressive (that is, that countries which are more prosperous should contribute a higher proportion of GNP)[44]. Professor Begg's comparison (in his Figure 1 at p25) of the proportion of gross contributions from each Member State with the proportion of total EU GNP attributable to that Member State shows the United Kingdom as paying the least relative to GNP, but this apparently surprising result is explained by the fact (see p22) that he has taken the figure for the United Kingdom contribution after the rebate.

50.  The discrepancy which gives cause for more general concern is in net contributions (the difference between what a Member State pays in to the EU budget and what it receives from that budget). Here, the definition of "fair" is debatable. As Mr McIntyre told us, "in terms of Community texts or legal documents … there is no given definition of net contribution and prosperity which one can use as a general yardstick" (Q 7). The Economic Secretary said that at ECOFIN on 8 February 1999 the Chancellor of the Exchequer had emphasised the importance of fairness to consumers, to regions, to Member States, and to taxpayers. For Member States, the test of fairness he had suggested was "that net contributions [should] broadly reflect their ability to pay" (Q125).

51.  "Ability to pay" can be defined in various ways. Table 3 above shows rankings for the percentage share of GNP, and for per capita GNP first at market prices and then at purchasing power parity[45]. In its written evidence, HM Treasury presented a figure (Graph 3, p4) making two comparisons: the net contribution of each Member State (after the United Kingdom abatement) as a percentage of its GNP, and the net contribution as compared with its relative prosperity of each Member State within the EU15[46]. Professor Begg supplied a comparison of the share of financing coming from each Member State with the share of "operational expenditure"[47] going to that Member State (Figure 2 at p26). That also shows the United Kingdom, even after the rebate, as a net contributor, but less so than the other four Member States which have requested rebates (Germany—whose share of payments is double its share of receipts, Austria, the Netherlands and Sweden). "If equal burden sharing is the test", concludes Professor Begg, "these five Member States are the most hard done by" (p22).

52.  Whatever the exact ranking, we observe that there is no dispute over the proposition that the present system of contributions does not produce equitable results.

53.  However, we note that even if there were a direct relationship between the gross contribution of each Member State to the EU budget and its GNP[48], equity would never demand equality of net contributions. It is implicit in the concept of equity that the richer should pay more and the poorer less. Some aspects of EU policy, like the Cohesion Fund, are specifically designed to redistribute funds between Member States. Others, like the Structural Funds, are designed to provide funds for the poorer regions of the EU, and to the extent that these regions are concentrated in certain Member States this expenditure will also have a redistributive effect.

54.  Commenting on his Figure 2 (p26), Professor Begg brings out the implications of factors on both sides of the equation when he summarises the current position of the eleven Member States which are not seeking abatement:

    "Four Member States (Greece, Ireland, Portugal and Spain) are regarded as the targets of cohesion policy, so that their (substantial) net receipts from the EU budget are justifiable[49]" (p22).

Belgium and Luxembourg are substantial net recipients if administrative expenditure[50] is included; if it is not (as in his Figure 2) they are net contributors on a par with the United Kingdom.

"Finland, which has a per capita GNP marginally below that of the United Kingdom, is a modest net beneficiary from the EU budget, as is Denmark which is the most prosperous Member State after Luxembourg. For [Finland], it is a combination of a relatively low gross contribution and slightly above average receipts from the Structural Funds that explains the balance, whereas Denmark continues to benefit disproportionately from the CAP. Both France and Italy, the two remaining Member States, are modest net contributors: France because it receives much more from the CAP than its GNP 'share', and Italy because its share of gross contributions is well below its GNP share" (p22).

55.  In a report prepared for the European Parliament[51], Professor Klaus Gretschmann has suggested that

    "judging the benefit a country derives from EU membership by its net position as a contributor or recipient is simplistic. The advantages attaching to EU membership go far beyond its immediate monetary impact… Concentration on the net positions of contributors and recipients ignores the prosperity-enhancing effects of the single European market for the net-contributor states"[52].

56.  Others agree that a narrow approach based on juste retour (getting back from the EU in financial terms what you put in) is not appropriate[53]. As Mr Colom I Naval put it:

    "I do not think anybody applies for budgetary reasons to join the European Union. You apply because you think it is a federation or a union (as you like) of democracies and we share a market and we share according to the treaties we signed a common security and foreign policy… That gives a lot of benefits and that has nothing to do with the budget and is more important than any budgetary issue" (Q 89).

Commissioner Liikanen referred to the reconstruction of Europe as "something that is a common effort for all of us" (Q 111), and the Economic Secretary agreed that "membership of the European Union is immensely valuable to the United Kingdom as well as to other Member States" (Q 129).

57.  But agreeing that the juste retour approach may be too narrow does not necessarily imply accepting Professor Gretschmann's analysis. The Economic Secretary considers that there are problems with his methodology, which she outlined to us (Q 129). He suggests that the large increase in any one Member State's exports to other Member States should be taken as a proxy for the benefits it derives from membership: on that basis "the United Kingdom will do very well because we are a large trading nation". But his approach takes no account of increases in exports which might have happened independently of EU membership, nor of the corresponding increases in imports. Moreover, "there is a whole number of other assumptions, for example average tax yields, which are susceptible to very large margins of error". The Government would therefore "regard that report and its conclusions with a large degree of scepticism".

58.  We agree that more is at stake than can be shown in a simple league table of net contributions, and that more sophisticated comparisons will inevitably depend on heroic assumptions. Nevertheless, we note that, however great the benefits to be derived from membership, the financing of the EU on the present basis could continue only if all Member States were content. This is not the case.

59.  Remedies to the perceived imbalances can be sought either through changing the pattern of gross contributions ("the revenue side") or through changing the pattern of EU expenditure by adjusting programmes so as to change the amount spent overall, and/or its distribution as between individual Member States ("the expenditure side"). Although we have analysed remedies on the revenue side separately from those on the expenditure side, we consider that the immediate solution is likely to be a combination of both.

29   See Table 1 above. Back

30   Expected to be approximately 7,800 billion euro in 1999 (11666/98, Annex 8, Table 10). Back

31   Figures quoted by Professor Begg (p 21) from The Community Budget: the Facts in Figures, 1998 edition, SEC(98) 1100-EN. Back

32   In her paper How to Share the Burden of the EU Budget, published and submitted by the Economic Policy Forum, undated, page 2. Back

33   We return to the question of accountability at paragraph 75ff. Back

34   See paragraph 28. Back

35   HL Paper 41, 10th Report Session 1997-98, paragraph 12. Back

36   The ten Central and Eastern European countries which have applied for membership of the European Union. Back

37   OECD, Economic Outlook, December 1998. Back

38   See paragraph 99 ff. Back

39   Even if this does not turn out to be necessary quite as soon as we suggested in our previous Report, where we judged that there should be provision for a review before 2002: The financial consequences of enlargement, HL Paper 41, 10th Report Session 1997-98, paragraph 84. Back

40   See paragraph 27. Back

41   Determined by an inter-institutional agreement between the Council, the Commission and the European Parliament: see paragraph 28. Back

42   See paragraph 32. Back

43   11666/98 COM (98) 560, op cit, passim. Back

44   op cit, paragraph 1.3.4. Back

45   A calculation designed to compare real purchasing power. Back

46   Which shows that, as the Commission accepts, "even after the rebate the United Kingdom remains a larger net contributor to the EU budget than some Member States with higher capacity to pay" (11666/98, page ii). Back

47   That is, excluding "administrative expenditure" (expenditure related to the location of EU institutions in their territories). See paragraph 92 below for HM Treasury's case for including administrative expenditure in the calculation rather than excluding it. Back

48   We consider the case for this at paragraph 74 below. Back

49   "Ireland, however, has grown so spectacularly during the 1990s that the high level of net transfers it receives now seems unwarranted, although its GNP remains well below the more frequently quoted GDP." Back

50   Expenditure related to the location of EU institutions in their territories: see paragraph 92 for HM Treasury's case for including administrative expenditure in the calculation rather than excluding it. Back

51   Reform of the own resources system and net positions in the EU budget, European Parliament Directorate-General for Research, PE 228.586, October 1998. Back

52   op cit, pages 30 and 38. Back

53   Any more than it is, we would suggest, for taxpayers within individual countries. Back

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