Thinking About Europe Part 2 ...

In the second part of this analysis I want to look at contributions to the EU. You’ll all know about this as it’s the thing Nigel Farage keeps banging on about but I thing he’s missing a trick when he just says “the UK is paying £20m a day”.

That number is true enough but what I really started to get worked up about was how it’s calculated. Any of you know that?

Thought not.

Well here goes. This isn’t as tough a ride as you might envisage so stay with me and then see what you think.

The EU budget contribution is calculated by adding three things together.

Gross National Income – this is the biggest slice and it’s a bit of a weird calculation (you’ve all heard of GNP right – well it’s not that). GNI is all the stuff that’s in GDP but then you deduct debt interest payments and a few other bits and pieces. That means that the more you owe the lower it goes; if you are Greece or Spain this takes you down to the basement. Before I move on, one thing that IS in there are exports – the EU charges companies for being successful in exporting outside of the EU. GNI makes up around 65% of the levy.

Import Duties – the EU is pretty anti imports. Because it applies social policies to protect wages and benefits it is inefficient. It knows and accepts this as a price worth paying for social cohesion. It therefore erects a barrier around itself by taxing imports. So the more goods you bring in from outside the EU, the more you pay. Import Taxes make up around 14% of the levy.

VAT – we all pay VAT on just about everything we buy. Interestingly if you buy something from outside the EU (where there is no VAT) the EU charges it anyway. The EU then takes part of the VAT revenues countries receive through VAT Returns. Simply, the more vibrant an economy and the more trade it does internally, with other EU countries and outside of Europe, the more it pays. VAT makes up about 16% of the levy.

Other – the EU also makes money from it’s deposits (interest), fines to member states for late payments and payments from non-EU organisations like the EFTA members. Others makes up the remaining 5%

See it wasn’t so complicated. Every member state makes contributions based on these numbers.

Once it’s collected that money it then spends it.  When you take off the bits and pieces there are three main ways in which it is spent.

Administration – this is Nigel Farage’s other baby. The EU currently spends 6% of the budget running itself. There are a lot of them and this chews up about €50 billion but, in the scheme of things 6% isn’t that bad – it’s better than the UK government manages.

Common Agricultural Policy – traditionally the biggest spending item. Basically this is a payment made to farmers so they don’t have to modernize their methods to keep up with the rest of the world. It allows medieval systems of family inheritance of land to continue across much of Europe. It amounts to 47% of the budget but, to be fair it is reducing (much to the disgust of the French).

Regional Support – this is the one that’s going up. The EU already spends 30% of its budget on investment programmes in the member states and this will increase (as CAP comes down) to around 36%. This fund is designed to promote infrastructure projects and to level out the disparities between member states.

So, when you add up all the bits for the levy and then take off all the money countries get back through the revenue items you end up with Nigel Farage’s £20m a day as the UK net Contribution. And remember this is after a specially negotiated rebate of almost 40% to take account of our ‘internationalism’ in financial markets.

In 2011 we were the second biggest net contributor at €7.255billion (we paid €13.8b in and got €6.5b back mostly through the CAP), only beaten by the Germans who put in €10.994billion. There is quite a significant difference between us however. Germany has held the purse strings to the regional development funds for a number of years and the infrastructure projects undertaken invariably involve German companies and (more importantly) German support funding. If you’ve been to Athens recently you will probably have ridden on the German engineered and build tram system which ended up with the Greeks €40million in debt to the Germans even after they’d paid for everything.

The dice are loaded, by the way the contributions are calculated, against countries whose business is international. Remember you get taxed for importing but you also get taxed for exporting outside the EU. Countries like Poland, Greece, Hungary and Portugal who have virtually no trade beyond the boundaries of the EU pay very little and then become prime beneficiaries for the CAP and regional support budgets. Poland received €11billion in net receipts from the EU in 2011, Greece €4.6billion.

The regional funds are also loaded against us. Europe is divided by how poor the regions are (an arbitrary EU measure and as the UK is one region we are categorized as very prosperous) and the ‘poor’ countries can access the Regional Support funds for their projects by contributing 5% themselves. For the UK to access the fund our contribution level is 50%.

Then let’s talk about the Common Agricultural Policy. This mechanism is used to protect Europe’s farmers from outside competition. What it has actually done is kept European farmers inefficient. In 2011 the UK contributed (net of all rebates to UK farmers) €8.7billion to European farmers who then compete on supplying the UK market with their products. WE buy Irish pork because it receives massive subsidies from the EU and our own pork farmers can’t compete – and we pay for that!

In the UK we import a lot of food from outside the EU as we have a broader international taste than many EU countries. All that food is taxed and it was estimated that in 2011 each UK household paid £324 more for its food bill than it would if we were outside the EU.

So those are the numbers. I have said nothing about administration, I think all of us know that’s completely out of control. One fact though. In 2011 236 eurocrats at the EU Commission, 59 in the EU Parliament and 43 in the EU Council earned more than David Cameron. Says it all on that one I think.

The EU has carefully constructed its budgets and the way it returns the money to the member states with two constructs at its heart.

First, it is important to invest in infrastructure to ensure that all of Europe has the same chance of competing and by doing so engineering wealth transfer from the rich to the poor nations.

Second, countries will be penalized for trading outside of the EU, whether importing or exporting; the EU seeks to internalize the market so that prices and economies can be regularized.

Basically, the EU plan is that in (say) 50 years everybody in the EU will earn about the same and enjoy the same standard of living. Nice as that theory might be it does mean the EU is seeking the ‘average’ and the middle ground is always the worst place to stand.

Whilst many bang on about EU bureaucracy the real concern for me is the social strategy that suggests we turn our backs on the rest of the world (because they’ve got it wrong?), realize that ‘free trade’ is the enemy and hunker down in our little club and be average.

Britain has never aspired to be average. The mind numbing work of the EU Parliament moves inexorably to swallow all of us and encourage us to accept its wealth distribution strategies.

I told you the numbers would be hard, but we’re through them now. Next chapter will be about what we might do if we left!