Another splendid compromise forged in Brussels

Dec 17th 2005
From The Economist Global Agenda

Heads of state finally struck a deal on the European Union budget in the early hours of Saturday. Britain has agreed to give up a bit more of its contentious rebate; in return, the EU will review its spending, including the common agricultural policy. The final compromise owed much to proposals made by Germany's new chancellor

IT WAS hardly Europe at its finest. The European Union’s budget wrangle—which finally ended in the early hours of Saturday December 17th—came down to a haggle between Britain, Poland and France about a relatively small amount of money. The sum at issue was around €12 billion in 2007-2013 (the EU budget is set in seven-year cycles). This is the difference in the total size of the budget between what Britain first proposed and Poland, France and others wanted. In other words, 25 heads of government slogged through a marathon 18-hour negotiating session over a sum which, divided between their countries and spent over six years, would be small change in America (where federal government spending is around $2 trillion a year).

Yet the drama surrounding the deal was worthy of greater substance. Repeatedly during the long hours before the budget compromise was finally announced, the talks seemed destined to fall apart.

Before the summit, Britain had demanded the EU budget be kept to below €850 billion. Both Poland and France rejected that sum as too penny-pinching to allow for needed increases in regional spending, notably in the EU’s new member states. On Friday afternoon, Poland demanded overall spending be raised to around €865 billion. In the finest traditions of EU negotiations, the chances of a deal seemed to be vanishing in arguments about accounting definitions, contradictory numbers, and even the census figures for Budapest.

In the event, the final British compromise moved most of the way towards the demands for a bigger budget. Under the deal, the pie would grow to around €862 billion, €12 billion more than Britain had first wanted. Of that extra sum, Britain would cover €1.2 billion and Germany €2 billion, the largest share. But in total, Britain’s contribution to the EU would rise much more. Its prime minister, Tony Blair, had already offered to forgo €8 billion of his country’s contentious rebate, awarded to Margaret Thatcher’s government in the 1980s. At the summit, he offered to give up an extra €2.5 billion, meaning the rebate would fall by about €10.5 billion. This is most, but not quite all, of the estimated €14 billion cost of the EU’s eastward expansion. The extra “concessions” Britain offered at the summit came to €4 billion, or a third of the increase in the EU’s budget.

Before the negotiations, Britain’s foreign secretary, Jack Straw, gave a warning that a bad budget deal would be worse than no deal at all. Presenting his compromise, Mr Blair hailed it as fair and reasonable. The president of the European Commission, José Manuel Barroso, called it “a good thing…Europe is on the move.” But Mr Straw’s warning may be prescient.

The deal avoids an immediate bad outcome—yet another European embarrassment in a year full of them. After the popular rejection of the proposed EU constitution in France and the Netherlands, the acrimonious break-up of budget talks in June, and multiple setbacks to economic reform (symbolised by the German election result), most European leaders were anxious for any budget settlement.

Yet in the long term, the deal may not be so good. It concedes that there will be no real reform of the common agricultural policy (CAP) in the medium term, something Mr Blair had earlier said was a condition for offering up some of Britain’s rebate. The deal says that the European Commission will review all aspects of EU spending, including the CAP and Britain’s rebate. And the EU may, as the proposal puts it, “take decisions” on the review. But the agreement is ambiguous about when exactly any reforms may come into force. Under the deal, spending on agriculture—an industry that accounts for 3% of Europe’s economy but 40% of the EU budget—rises slightly as a share of the total.

It is the product of pure power politics. Mr Blair had offered to reform the rebate in exchange for a fundamental reform of the CAP. But, unable to persuade others of the case for an overhaul of farming (there had been a deal to reform the sector in 2002 and others refused to accept another one), he ended up cutting aid to poor member states in order not to reduce Britain’s rebate even more.

As a result, the budget agreement may have damaged some of the most important relationships within the EU. For the past decade, close ties between Britain and the new members in central and eastern Europe have been founded on Britain’s campaign for their membership. Yet Poland—even more than France—led the criticism of Britain’s pre-summit budget proposals. The new prime minister, Kazimierz Marcinkiewicz, threatened to veto them and dubbed them “fake”. They were also criticised by Mr Barroso, who attacked Mr Blair in unusually harsh terms, comparing him to Robin Hood’s adversary, the Sheriff of Nottingham.

Yet the concessions Mr Blair did make—which mean Britain’s contributions to the EU will be about €61 billion in 2007-2013, compared with about €50 billion if there had been no budget deal—provoke the ire of critics in Britain who complained that he had given much more, and got much less, than he had promised. Mr Blair is presumably calculating that his success in brokering a deal in tricky circumstances will help him to face down the outburst of criticism at home. The budget deal will also help Britain to portray its six-month presidency of the EU (which also oversaw the beginning of accession talks with Turkey) as a modest success.

But perhaps the most intriguing implications of the budget deal concern the role of Germany. The summit was the first attended by Angela Merkel, the new German chancellor, and showed the impact she may yet have in Europe. At previous summits, her predecessor, Gerhard Schröder, and Jacques Chirac, the French president, agreed on a joint position beforehand, and presented it to the rest. In 2002, for instance, they stitched up a common position on the CAP that everyone else accepted. This time, both countries rejected the original British proposals for budget reform. But, as German diplomats said, Ms Merkel was not following in Mr Schröder’s footsteps. The result was that the dynamics of the summit proved very different.

There was no Franco-German démarche. Instead, Ms Merkel held meetings with everyone in sight, in parallel with the official talks chaired by the British (an indication of how hard it has become for any one country to control the conduct of negotiations in an EU of 25). As one diplomat put it, not only did she play a constructive role herself but she got others to be more constructive, too. She cajoled the easterners into accepting a total budget slightly less than the €865 billion-870 billion they wanted. Like her Christian Democrat predecessor as chancellor, Helmut Kohl, she agreed that Germany would finance the lion’s share of the increase in the size of the EU budget. And in the end, the final compromise owed more to her proposals than to Britain’s original one.

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