Lean and mean, but not very popular

Dec 7th 2005
From The Economist Global Agenda

Britain has proposed cuts to the European Union budget in an effort to save the rebate it has enjoyed since the mid-1980s. But deep rifts over farm policy and competition will make it hard for Tony Blair, Britain's prime minister and current EU president, to resolve the row over who pays what at a summit next week

THESE days, farmers account for only about 5% of the population of Europe. Yet they manage to cause an astonishing amount of trouble. Few can boast of dismantling a McDonald’s and dumping the rubble in front of the town hall, as José Bové, a French farmer, famously did in 1999. But as a group, those who work the land have nearly succeeded in derailing the World Trade Organisation’s latest round of negotiations. These have all but ground to a halt over the European Union’s refusal to consider deeper cuts to its lavish farm subsidies. And as the EU heads into an important summit next week, Tony Blair, Britain's prime minister, will try to keep Europe's farmers from taking the Union’s budget to pieces as well.

Mr Blair has the uncomfortable job of trying to get EU leaders to agree on a budget for 2007-2013. Britain currently holds the EU presidency, which rotates among the member states every six months, and it is Mr Blair’s job to propose something that everyone can live with at the upcoming summit, on December 15th-16th. Unfortunately, he is himself one of the main obstacles to a deal.

Negotiations over the budget came off the rails at a summit in June, thanks largely to a row over Britain’s rebate, which was secured in 1984 by Margaret Thatcher, Britain's then prime minister. At the time, Britain was one of the poorest countries in western Europe, but made outsized contributions to the budget because it had relatively few farmers (who have long received the biggest slice of EU spending). Now, however, Britain is wealthier, and a smaller share of the EU’s budget goes on the common agricultural policy (CAP). Furthermore, the Union’s recent eastward expansion has been relatively beneficial to the British, who are not competing with the new members for development funds; as a result, Britain will go from one of the largest net contributors to one of the smallest if the rebate’s growth is not checked. The budget proposed at the June meeting by the EU’s then president, Luxembourg’s Jean-Claude Juncker, would have frozen the rebate—which currently returns about two-thirds of the difference between Britain's contributions and its receipts—with the goal of eventually phasing it out.

Mr Blair’s government balked at this. Almost half of EU spending still goes on the CAP, and another large percentage is accounted for by transfers to poor regions, which also puts Britain at a disadvantage. Mr Blair insisted that there could be no substantial change to the rebate unless the CAP was also reformed, ie, cut back. Big beneficiaries such as France reacted angrily, pointing out that Britain had agreed to a deal on the CAP in 2003, and that further restructuring should be off the table until after that agreement runs out in 2013.

In the six months since then, the French have demonstrated just how serious they, and other big agricultural producers, are about protecting their farmers. Jacques Chirac, the French president, has led moves to block Peter Mandelson, the EU trade commissioner, from offering deeper concessions on farm policy in the Doha round of WTO negotiations, even though failure to do so may well mean that the round fizzles.

Mr Blair has sought to avoid a head-on clash over the CAP in his latest proposal for the EU budget, which was unveiled on Monday December 5th. Instead, he proposes to increase Britain’s net contribution by a total of €8 billion ($9.4 billion) over the six-year budget period, either through a lump-sum payment or a reduction of the rebate. In exchange, he wants to see the overall budget cut. His plan trims about €24 billion off the €871 billion figure proposed by Mr Juncker, largely through cuts in rural-development aid and assistance to the EU’s new members in central and eastern Europe.

But though the proposal avoids direct confrontation on the CAP, the issue still looms large. Britain wants to keep the bulk of its rebate as compensation for the EU keeping the CAP. And Mr Blair’s plan calls for a review of all EU revenue and spending in 2008, when Britain will presumably once again go after the CAP with a carving knife.

Even before the details of the British proposal had been made public, José Manuel Barroso, the president of the European Commission, the EU’s executive, called the plan “very worrying, especially for new member states”; later, he went further, branding it “unacceptable”. Guy Verhofstadt, the Belgian prime minister, was equally blunt: “I don't intend to approve a budget that the representatives of the people, the European Parliament, will certainly reject,” he told a meeting of his party on Sunday.

After the official announcement, which came late on Monday afternoon, other EU governments reacted with similar dismay. Peer Steinbrück, the German finance minister, expressed scepticism that the proposal could form the basis of an agreement. It quickly became clear that most member states were unenthusiastic about the budget cuts—though a few countries, such as Sweden and the Netherlands, welcomed the idea—and downright hostile to Britain's rebate.

Mr Blair's government has indicated that there is some room for negotiation, but that domestic political considerations make it difficult to offer the deeper cuts in the rebate that other countries are demanding. Since the EU budget must be ratified by all 25 member states, Mr Blair will have to fight hard to get his proposal, or something like it, passed.

He will begin his campaign on Thursday and Friday of this week, when he is scheduled to meet the leaders of Portugal, Finland, Slovenia, Sweden, the Netherlands, Ireland, Greece and Spain. He has already spoken with Mr Chirac, who is demanding that Britain make a bigger contribution to the costs of EU enlargement. Other countries will undoubtedly echo this sentiment, particularly the central European newcomers, who will pay the greatest price for British concessions on the rebate: under Mr Blair’s plan, they stand to lose €14 billion, or 8.5%, of future aid. Mr Blair is expected to try to secure their approval by lowering the level of matching grants they must supply to qualify for EU structural funds.

Even if he gets their blessing, however, he must contend with general resentment of Britain's longstanding exceptionalism. It is not just the rebate, or Britain’s hostility to farm subsidies, that annoys other countries; since Mrs Thatcher’s time, Britain has championed free trade and deep economic reforms to Europe’s markets that would make them more like the “Anglo-Saxon” model, which is much derided by politicians in continental Europe.

EU enlargement has made those tensions worse by bringing in even more competition from central and east European companies that are less shackled by regulation, and pay lower wages, than their counterparts to the west. The rejection of the proposed EU constitution by French and Dutch voters this year was the culmination of long-simmering discomfort with the goals of ever-closer—and ever-larger—union. Mr Blair’s budget proposal does little to resolve these fundamental issues, though the cuts in aid might temporarily assuage voters’ anxiety over the eastward expansion. As for Europe’s farmers, they would dearly love to see the British leader brought down a peg or two. Next week, through their national leaders, they will have a chance to do just that.

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