(5) What the EU is for?

BBC Debate: The European Union - In or Out? 03/04/2014


Agriculture, regions, budget: conflicts over who gets what

The single market is a positive-sum game. Because it enhances productivity in the economy, there is benefit for most people, whether they take it in the form of consuming more or working less. But alongside the majority who gain, there will be some who lose, or at least fear they will lose, from the opening of markets to new competition; and these may demand compensation for agreeing to participate in the new arrangements. Such compensation usually has implications for the Union budget and looks like a zero-sum game, which can lead to conflict between those who pay and those who receive, even if the package of compensation and competition, taken together, benefits both parties. The first major example was the inclusion of agriculture in the EEC’s common market.


The opening of the Community’s market to trade in manufactures was, when the EEC was founded, a relatively simple matter of eliminating tariffs and quotas by stages. But tariff and quota disarmament was only a small part of the problem of creating an agricultural common market. All European countries managed their agricultural markets with complex devices such as subsidies and price supports to ensure adequate incomes for farmers and security of food supplies. So a common market for agriculture would have to be a complicated managed market for the Community, to replace those of the member states. It would have been simpler to confine the common market to industry. But the French feared the prospect of German industrial competition and, having a competitive agricultural sector, insisted that the Community market be opened to agriculture too.

The result was the common agricultural policy, with prices of the main products supported at levels decided by the Council of agriculture ministers, through variable levies on imports from outside the Community and purchase of surplus production into storage at the support level. Farmers’ incomes were bolstered by high prices paid by the consumer, together with subsidies from the Community’s taxpayers to finance the surpluses that the high prices evoked. While this was tenable in the Community’s early years, once the UK became a member new tensions arose. The British model of free trade had meant that prices had been much lower, so membership of the common agricultural policy (CAP) meant a triple blow of higher prices for food, high levels of British contributions to the budget, because of import levies on foodstuffs, and low receipts from the budget, because of the small size of its agricultural sector.

This state of affairs was to trigger a five-year battle after Mrs. Thatcher became Prime Minister in 1979, blocking much other Community business as her method of what she called ‘getting our money back’. Matters came to a head in 1984, when the accumulation of stocks such as ‘butter mountains’ and ‘wine lakes’ had cost so much that the Community needed to raise the ceiling for its revenue from taxation; and this required unanimous agreement by the member states. So a deal was done with agreement on a higher ceiling for tax resources allocated to the Community and an annual rebate for Britain at around two-thirds of its net contribution. At the same time a step was taken to reform the CAP, but only a modest step, because attention had been focused on the questions of the rebate and the tax resources.

Stages of reform

The CAP lumbered on, accumulating further costly surpluses, until 1988 when the money ran out again. This time the financial interests of member states prevailed. With the division of the Council into functional formations, the decisions of the Council of agriculture ministers on prices of farm products had determined the level of the bulk of Community expenditure, over which the Council of finance ministers had little say. Since the resulting bill had to be paid out of the Community’s tax resources, the agriculture ministers were in effect deciding on the rate of tax paid by the citizens to the Community. Financial control had to be established and the European Council agreed in 1988 on a package of measures, proposed by Delors, which introduced a ‘financial perspective’ setting limits for the main headings of the Community’s expenditure during the five years 1988–92. The growth of spending on agriculture was restricted to less than three-quarters of the rate of growth of the total. While this took some of the heat out of the conflict over money, a serious reform of the CAP was still required. By 1992 the Commissioner responsible for agriculture was Ray MacSharry, a former Irish minister. He grasped the nettle and, out maneuvering the opposing interests, secured a cut of 15 per cent in the support price for beef and nearly one-third for cereals. The current levels of expenditure were not reduced, because farmers were compensated with income supports, including ‘set-aside’ payments for leaving cultivated land to lie fallow. But the measures removed the expansionary dynamic from the CAP and prepared the ground for further reform.

The cost of the CAP remained a heavy burden for the Community, with half the budget going to support a sector that employs less than 5 per cent of the working population, much of it for a small minority of the bigger and richer farmers. By the end of the 1990s, moreover, the twin pressures of enlargement to the East and negotiations in the newly established World Trade Organization (WTO) were forcing the EU into a more structural reform process. New member states, with their large agricultural sectors, were set to drive up costs very significantly, while the need to secure agreement in WTO trade liberalization negotiations was placing increasing pressure on reductions in levels of agricultural support. Consequently, the Union agreed substantial cuts for some products in 1999, as part of wider budgetary negotiations, as well as introducing the notion of a multifunctional CAP, i.e. one that extends into the social and environmental dimensions that surround farming. This recasting of the CAP as a ‘rural’ policy-confirmed by the 2008 ‘health check’-was an important step in helping to unblock the reforms that some states, notably France, had put on hold.

This became much more apparent at the ‘Mid-Term Review’ of the 1999 agreement in 2003, with what had initially been considered a simple review of the changes producing reforms as important as those of MacSharry a decade previously. Again the amount of price support was cut, but the main revolution was the shift to direct support for farmers. Until then, the CAP had used price support mechanisms to pay farmers, thus providing a strong incentive to over-produce: hence the wine lakes and butter mountains of the 1980s. The new Single Farm Payment (SFP) Security and Cooperation in Europe introduced in 2006 separates (or ‘decouples’ in the jargon) payment from production: instead farmers are paid to look after their land, regardless of whether they choose to farm it or not.

The breaking of the old model of price support was perhaps inevitable in the face of the pressures that the CAP had faced over the previous 40 years. The combination of enlargement, WTO negotiations, rising environmental concerns, and public health scares ultimately proved too powerful to resist. What is still not clear is how the CAP will develop in the medium term: the new member states are natural supporters of a substantial CAP that pays their farmers well, while the notion of a more multifunctional approach to rural development has become a much more dominant discourse within the institutions. Either way, it would appear that the CAP is set to experience yet more change.

Cohesion and structural funds

The ‘cohesion policy’, the other big item of expenditure in the Union’s budget, has been a happier experience than the CAP. It stems from fears in member states with weaker economies that they would lose in free competition within the Union. When the customs union, the single market, and the single currency were established, funds were provided to assist their economic development so that they would cooperate in these new ventures and become prosperous partners: hence the word ‘cohesion’.

The first such provision was for the Social Fund, included at Italy’s request in the Treaty of Rome. Italy’s economy was the weakest among the six founding states and Italians feared they would suffer from the liberalization of trade. They wanted a fund to help their workforce to adapt; and their demand was met, though on quite a small scale.

The motive for establishing the European Regional Development Fund (ERDF) was somewhat different. By the time of British accession in 1973, Britain’s economic performance had fallen behind those of the six founder states; and there was the prospect of the big net contribution for the CAP. Britain had its share and more of regions with economic difficulties, but other member states had theirs too. Edward Heath’s government, which had negotiated British accession, had the sound idea that a fund for regional assistance would both respond to a general interest and be of particular value to Britain, not only assisting its regional development but also reducing its net contribution to the Community budget. While the initial impact of the fund was weak, it has developed into the main source of financing for cohesion.

The third of what became known as the ‘structural funds’, in order to underline that their aim was not just to redistribute money but rather to improve economic performance in the weaker parts of the Union’s economy, is the European Agricultural Fund for Rural Development (formerly the ‘Guidance Section’ of the European Agricultural Guidance and Guarantee Fund (EAGGF)), which helps farmers carry out structural change. But the three structural funds, though at first small, grew steadily and were available to respond to the demand for a major expansion in the 1980s when the Community was enlarged to the south.

Enlargement and structural funds

When Spain, Portugal and Greece joined the Community, their average incomes were far below those of the other member states save Ireland, which before its phenomenal growth in the 1990s was at a similar level. These four countries, led by Spain, demanded a major increase in the structural funds, and their ability to block agreement on the passage of the single market legislation meant the Single Act contained an article on ‘economic and social cohesion’; Delors proposed that the budget for the structural funds be doubled in the financial perspective for 1988–92; and this was accepted by the European Council.

A similar problem emerged when it was decided to embark on Emu, with the same four states seeking a similar expansion of the structural funds. This time Delors secured an increase of two-fifths in the allocation for the period 1993–9; and the Maastricht Treaty provided for the establishment of the Cohesion Fund, to support projects in the fields of the environment and transport infrastructure. By 2000 the budget for the funds was €32 billion.

The four states for which the expansion of the structural funds was originally designed have performed for the most part well, the current Euro zone crisis notwithstanding. Spain has been very successful, though less outstandingly so than Ireland; Portugal had to check its initially rapid growth with a stabilization programme. The Greek case has been much more complex, with the finance available through the funds being counteracted by more structural macroeconomic problems. While it is not possible to say how much of this generally good result can be attributed to the structural funds, the contributions of 2–4 per cent of GDP certainly eased the path.

Although the objectives of the structural funds had been focused on help for regions where development was ‘lagging behind’, it has always been a feature of cohesion policy that all member states get something back out of the budget. Partly this is a reflection of the diversity of the states, but it is also driven by the unanimity required to conclude budgetary planning negotiations. This posed a particular problem with the enlargement to the East, since under the policy that prevailed in the late 1990s, new member states stood to receive very large amounts of funding, while existing member states stood to lose out.

Structural funds and objectives

Since the early 1970s, the Union has developed its regional policies around a set of funds and objectives. These were reformed in 1999 and again in 2006.

The structural funds now comprise:

• The European Regional Development Fund (ERDF)-deals with regional development and economic change;

• The European Social Fund (ESF)-concerned with re-training workers;

• Cohesion Fund-aimed at poorer member states, this fund develops projects in the environment and infrastructure.

For the 2007–13 planning period, spending has been focused on three key objectives:

• Convergence (areas with GDP per head less than 75 per cent of the EU average)-roughly €45 billion per year is spent helping regions with a population of 154 million;

• Regional Competitiveness & Employment (helping areas to make structural adjustments to meet new economic situations and to adjust labour forces)-€9 billion per year goes to regions with a population of 314 million;

• European Territorial Cooperation (developing cross-border links between member states)-over €1billion per year to help regions with 182 million people living in them.

The response to this was, as with the CAP, to engage in some fairly drastic reforms. The growth in funding for cohesion was capped in the financial perspective agreed at Berlin in 1999, since richer member states were not prepared to foot the bill, while simultaneously it was decided that most of the existing funding should be ring-fenced for existing members, regardless of new members’ objective needs. Coupled with the Commission’s pronouncement that transfers to any member state would be capped to the equivalent of 4 per cent of GDP, on the grounds that this was the most any country would usefully absorb, when enlargement did come in 2004 its impacts on the budget were relatively attenuated. Despite average incomes in new member states being typically half to two-thirds the EU average, they receive only one-third of cohesion funding. While this proportion is more than the one fifth of the EU’s population that they represent, it is still less than would seem to be necessary to help them move reasonably fast towards comparable standards of economic development. The negotiations for the 2014–20 period are likely to result in a larger share of funding going to these poorer states, albeit with everyone still getting something to take home.

Thus while the cohesion policy has, unlike the CAP, been relatively harmonious, it is important to recognize the limitations that member states have placed on maximizing its benefit for the Union as a whole. This posture has also increasingly affected the budget as a whole.

The budget

With agriculture and cohesion now accounting for about 40 per cent each of EU expenditure, the two together, with their powerfully redistributive effects, account for the bulk of spending. The cost of administration in the Union’s institutions comes to less than 6 per cent of the total, and the remainder goes to finance a range of internal and external policies. A major item of redistribution outside the budget is the rebate to reduce the British net contribution, which amounted in 2010 to €3.5 billion and is paid direct to Britain by the other member states.

The total expenditure in the budget for 2012 was €147.2 billion, or 1.12 per cent of Union GNP. This has to remain below 1.24 per cent of GNP unless that ceiling is increased by a decision ratified by all the member states; and the financial perspective for the years 2007–13 keeps spending below 1 per cent of GNP in each year.

‘Own resources’

Unlike international organizations that depend on contributions from their member states, the EU’s revenue from taxes is a legal requirement under the treaty, subject, like other treaty obligations, to the authority of the Court of Justice. This is to prevent member states from holding the Union to ransom by withholding contributions. The consequences of such behaviour are demonstrated by the financial state of the United Nations, weakened for many years by the refusal of Congress to sanction payment of the due US contribution-ironically enough, since the failure of American states to pay their due contributions in the 1780s under the Articles of Confederation was a powerful argument in favour of the US federal constitution. The same argument influenced the EC’s founding fathers to make the payment of tax revenue to the Community a legal obligation. The EU has no physical means of enforcement should a member state not hand over the money. But the rule of law has been of sufficient value to the member states to be respected by them.

Initially the EEC’s tax revenue, called in the treaty ‘own resources’ to underline the point that they belong to the Community not the states, comprised the takings from customs duties and agricultural import levies. But these were not enough to pay for the CAP, and the Community was allocated a share of value-added tax at a rate of 1 per cent of the value of the goods and services on which VAT is levied. A major objection to these indirect taxes was that they bear hard on the poorer states and citizens, making them pay a higher proportion of incomes than the richer. So in 1988 a fourth resource was introduced, in the form of a small percentage of the gross national product of each member state. This is roughly proportional to incomes and by 2012 accounted for almost three-quarters of the EU’s revenue. But the total outcome of the revenue system is still regressive.

Net contributions

As mentioned above, it was Mrs. Thatcher who first coined the phrase ‘our money back’, although the British had, since their accession in 1973, been constantly seeking redress for what they could claim to be an ‘unacceptable situation’ resulting from a financial regulation adopted just before they joined.

Previously, the fact that some member states got more out of the budget than others was taken simply as part of the package of membership. In particular, the Germans, who had willingly accepted for many years their role as the largest net contributor, did so because they recognized that the benefits of membership could not be measured simply by a bank balance: the country gained not only in deeply desired international acceptance and security, but also, more prosaically, in giving German exporters access to large new markets.

Nonetheless, since the 1980s, and particularly since the mid-1990s, member states have become much more aware of the financial costs of membership. This was driven in part by Mrs. Thatcher and her energetic campaign, but also by the development of Community and Union policies. The large growth of cohesion spending further reinforced the north–south divide between net contributors and recipients, while the growth in importance of the fourth resource effectively renationalized budgetary receipts. In addition, existing member states were concerned about the budgetary implications of enlargement.

Social policy, environmental policy

The EU has been given some of its powers, such as those to establish the single market, because its size offers advantages that are beyond the reach of the individual member states. Other powers are designed to prevent member states from damaging each other. The environment is one field in which powers have been given to that end, with general agreement that it is desirable. Another is social policy, where there has been sharp disagreement as to how far EU intervention is required.

Social policy

The term ‘social policy’ has a narrower meaning in EU parlance than it generally has in Britain. It does not refer to the range of policies, including health, housing, and social services, with which the welfare state is concerned. The pattern of such services differs from country to country, reflecting their political and social cultures; and it is widely accepted that the cross-border effects of the differences are not sufficient to justify intervention by the Union. In the Treaty and EU jargon, however, social policy concerns matters relating to employment, where there are also wide variations from country to country. But since to the European institutions, the conditions of employment touch more closely on the single market, there has been pressure to harmonize member states’ policies in order to prevent employees in states with higher standards suffering as a result of competition from those with lower standards.

The first such example was the article on equal pay in the Treaty of Rome. France was ahead of other founder states in having legislated that women be paid equally with men for equal work. In order to keep sectors that employed a high proportion of women competitive, France demanded that its partners introduce equal pay too. With the general movement towards gender equality, this was to become one of the most popular European laws. By the time of the Amsterdam Treaty, there was ready agreement to extend the principle from equal pay to equal opportunities and equal treatment in all matters relating to employment.

The Single European Act extended the scope of social policy in two directions: providing for legislation on health and safety at work and for the encouragement of dialogue between representatives of management and labour at European level. While Mrs. Thatcher had fought hard against the influence of ‘corporatist’ relationships in Britain, she doubtless reckoned that such dialogue at European level would not be of much consequence; and the case against undercutting standards of health and safety was generally agreed. So although Community social policy was to become one of Thatcher’s bêtes noires, she accepted these provisions of the Single Act as part of the package that included the single market programme.

In 1989 Delors, who saw higher standards of social legislation as being, for workers, a necessary counterpart to the single market, proposed a Social Charter that was approved by all but one in the European Council. Thatcher dissented. Although she accepted some of its provisions, such as free movement for workers and the right to join (or not) a trade union, she contested others, such as a right for workers to participate in companies’ decision-taking, as well as maximum working hours-which, much to the British government’s disgust, were subsequently enacted by a qualified majority vote under the treaty article on health and safety at work. Major followed her example when he secured Britain’s opt-out from the provisions on social policy in the Maastricht Treaty, which therefore appeared in a protocol that applied to all the other member states. It was only after Labour’s election victory in 1997 that there was unanimous agreement to convert the protocol into a social chapter in the Amsterdam Treaty; and it was accompanied by a new chapter aimed at achieving ‘a high level of employment and of social protection’. But Britain has continued to promote the cause of flexible labour markets, an objective that was taken up in the 2000 Lisbon Agenda and its successor, the 2010 ‘Europe 2020’, which brought together social policy with employment policy in a combination that was much more oriented to the use of economic growth to provide for social well-being.

Flexibility or regulation in labour markets

Britain has emphasized deregulation and flexibility in its approach to the EU, on the grounds that it will make the European economy more competitive and increase employment. While labour markets are not the only sector of the economy in which deregulation is advocated, they are seen as among the most important.

While this British approach has been called ‘Anglo-Saxon’ because of similarities with American economic philosophy, an alternative became known as the ‘Rhineland’ approach, with Germany the leading example. There the emphasis in labour markets limits the damage from climate change to traditions of solidarity, such as the acceptance of responsibility in the private sector for the high standards of technical training. The results have included the outstanding economic success of the post-war decades and the continuing strength of German exports. But although the burden of integrating the eastern Länder into the German economy is one cause of the less successful performance in the 1990s, Germany is also criticized for reluctance to introduce more flexibility into the labour market and to reform industrial and financial organization and the tax system, in response to current developments in the global economy.

The Rhine also flows through the Netherlands; and the Dutch too have a highly consensual economic and political system. Faced with critical economic problems in the 1980s, they began a process of reform which led to what is called the ‘Polder model’, introducing market-oriented reforms into what remains a consensual system; and they achieved lower unemployment, higher efficiency, and a good all-round economic performance. Scandinavians have much in common with this approach.

Employment policy

The Amsterdam Treaty introduced a new section on employment in response to concern about the high level of unemployment in the EU. Its main purpose is to encourage cooperation among the member states with respect to their employment policies.

The member states provide annual reports on their employment policies to the Council and Commission, which draw up a report for the European Council. Guidelines are then issued to the states to be taken into account in their employment policies; and the Council can make recommendations to governments. The Council, in co-decision with the Parliament, may decide to spend money from the budget to encourage exchanges of information and best practices, provide comparative analysis and advice, promote innovative approaches, and fund pilot projects.

This has raised the profile of employment policy in the Union but it remains to be seen how much effect it has on governments’ policies.

The French, while stressing social protection, rely more on government leadership and regulation; and they too, despite criticism that they were slow to reform, performed well through the 1990s on most measures save their high rate of unemployment. But unemployment has remained particularly high among young people; and the economy became gradually less successful. So President Nicolas Sarkozy began to lighten the regulatory burden.

It is often forgotten that the British, for more than three decades after World War Two, had an economy that was highly regulated by both collective bargaining and government intervention. It was in reaction against this that the reforms of the Thatcher period moved Britain sharply towards the Anglo-Saxon model. While the intention of Blair’s ‘third way’ was to prevent such oscillation by occupying a centre ground in between, much of the emphasis on economic flexibility and his government’s enterprise-friendly orientation derived from his predecessors’ reforms, as well as from an older British tradition of economic liberalism.

The improved British economic performance since the 1990s has helped to give credibility to the Anglo-Saxon approach, as has the dynamism of the Irish economy. But most important was the sustained success of the American economy, with its low unemployment and high growth, from which the conclusion could be drawn that flexibility suits the current stage of technological development.

While the degree of laissez-faire in the American approach to social policy is resisted, a certain consensus may be emerging in the EU that methods such as bench-marking and peer pressure are more suitable than social legislation for reducing unemployment, as well as for some measures to create a dynamic and competitive economy. While there is still a strong constituency within several large member states for an interventionist approach to such questions, the rise of globalization, the need to maintain competitiveness, and, more recently, the Euro zone crisis have moved the debate within the Union toward towards the British viewpoint.



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