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Michaele Schreyer

Member of the European Commission with responsibility for the budget

Money matters in Europe - how our citizens benefit

European Research Institute

Birmingham, 10 October 2002

Ladies and Gentlemen,

European politics is a process. A process of change in which the policies of Europe's States and peoples are brought closer together.

It is a dynamic process. And has been, right from the start. It began with the Schuman Plan and the idea of using economic co-operation and common institutions to turn old enemies into good neighbours and to secure peace.

And that is still the basis for European politics today, although the economic community has long since grown into a political one, based on the common values of democracy, the rule of law, respect for human rights and the protection of minorities.

A Community of six founder States has evolved into a Union of fifteen States and a population of 375 million people. We are now about to embrace ten more States with a further 75 million people. And other countries are already gearing up to join.

This shows the attraction of the European Union and its inherent unifying force.

The tasks of the Community are varied. They include ensuring sustainable economic development, protecting the environment, promoting equal opportunities for men and women and encouraging solidarity among its members.

To carry out these tasks, the Community institutions have a variety of policy instruments at their disposal: the passing of laws, the setting of common goals and a Community budget the European budget.

This year's EU budget comes to EUR 95 billion. Since 1999 the EU budget has of course been in euros. So my speech as Budget Commissioner is somewhat uncomfortable for you in Britain, as the exchange rate is not so easy.

The UK's central government current expenditure totals about £350 billion in the financial year 2001-2, equivalent to about EUR 560 billion. So the EU budget for the fifteen Member States is less than 20 per cent of the UK's central government budget.

The purpose of the EU budget funds is to create European added value, and to promote economic convergence in a spirit of solidarity. So the budget has an allocational function directing money where it can be used to pursue European goals and also a redistributive function, providing a structure for regional cohesion. It is not designed to steer the economy in Keynes's sense.

A Keynesian policy of deficit spending is out of the question: the European budget cannot be financed from debt and quite rightly so.

A large variety of expenditure programmes exist. The EU budget finances research on new ways of testing for BSE, research on global climate change. Farmers are paid premiums for sheep and cattle rearing. Local authorities are given help for industrial zones. Support is provided for the distribution of European films. Students receive grants to study in other EU countries. Subsidies are available for NGOs working with the human victims of trafficking. Food and tents are handed out in crisis-hit regions. And the accession countries are given a helping hand to build up their judicial system or customs administration. Spending from the EU budget covers a wide spectrum.

But even so, the EU budget accounts for little more than 1% of the economic output of the fifteen Member States this is Europe's ratio of expenditure to GDP.

Just under half of this EU quota goes towards the common agricultural policy. This sounds very high, but, in the early years, 80% of the budget was spent on agriculture.

What comes to the UK from this budget? Just under 10% of European agricultural spending comes to the United Kingdom around EUR 4 billion in 2001 (that means about £ 2.5 billion). Most of this amount was paid out for crops. About EUR 1 billion was spent on support for the beef market, and EUR 370 million on sheep and goats.

The United Kingdom receives more than the EU average here: British farmers benefit from 25% of all EU expenditure on sheep and goats and a disproportionate amount of spending on the beef market too. BSE still has an impact on the figures here. Since the BSE crisis began in 1996, the British and other businesses affected have received about EUR 5 billion in assistance from the EU budget.

The Commission has now proposed a reform of agricultural policy. Subsidies should no longer be tied to the production of certain agricultural products, but to acreage, to environmental protection, stewardship of the countryside and quality assurance.

In economic terms this marks a radical change: on the one hand, farmers will receive public monies for providing public goods protecting the environment, looking after the countryside. On the other, they will no longer be gearing their production to subsidies but responding to market signals. This is an important step for curbing overproduction. These reforms can also yield substantial savings.

Whether or not they are adopted depends entirely on the agriculture ministers of the Member States. The European Parliament has no joint decision-making powers on agricultural laws or agricultural spending. I believe this is an anachronism and I hope the Convention on the future of Europe takes a clear line here and proposes that Parliament be given full budgetary rights.

Now let's look at the redistributive function of the budget. The main instruments for helping regions with economic weaknesses within the Member States are the Structural Funds, which are designed to reduce economic disparities in relation to the average. Assistance does not go as lump-sum payments straight into the budgets of regional governments, but is tied to European goals: improving employment prospects, stepping up environmental protection, promoting equal opportunities.

The West Midlands Objective 2 programme, for instance, contains an important Social Fund element (144 M€ of Structural Funds support). Here in Birmingham these funds are being used to support

  • Creating a Diverse and Dynamic Business Base

  • Creating a Learning and Skilful Region

  • Creating Conditions for Growth

  • Regenerating Communities.

On a wider scale the EU budget brings about significant net transfers to the so-called "cohesion countries" Greece, Portugal, Spain and Ireland. Ireland in particular is a shining example of an economy that has caught up with or even outstripped its peers with the help of EU funds.

The redistributive effect is shown in the figures: in 2001 net transfers from the EU budget to Greece amounted to 3.5% of its GDP. The comparable figure for Ireland was 1.1%.

Moreover, last year the United Kingdom was also a net beneficiary of the EU budget, if we compare the funds it received with the payments it made to that share of the EU budget paid out to beneficiaries in the Member States. But I have to say that this net balance of EUR 700 million came about because last year the UK rebate or "correction" reached a particularly high level over EUR 7 billion - that is nearly £ 4;4 billion. Normally the UK is among the net contributors, although in relative terms it ranks behind the four biggest per capita net contributors Luxembourg, Germany, the Netherlands and Sweden.

I haven't time here to demonstrate the value of each and every spending programme, but the Erasmus programme undoubtedly really creates European added value for the students and teachers who have taken part and also for Europe, as exchanges are fundamental to the European ideal. You may have seen the newly released film "The Spanish Inn". It follows the full and hectic lives of a group of Erasmus students in Barcelona, with many provocative insights into national and regional cultures. It is a positive argument for the programme.

We have gone a step further now. The Commission recently proposed setting up a new programme "Erasmus World", to provide financial assistance for students from non-EU countries so that they can be helped to obtain a European University qualification in "EU Masters Courses". Erasmus World should enable over 2,000 third-country students to receive a scholarship of this kind.

The budget plays an important role in the EU's foreign policy too. I hope you took the opportunity to hear my colleague Chris Patten when he spoke at this Institute. I think he illustrated how dynamically EU politics is developing. Over 20% of budget expenditure on foreign policy has had to be reallocated in the last three years to meet needs that were not provided for in the original financial planning.

One example is spending on reconstruction in Kosovo, where the EU promised to bear half of the rebuilding costs. The Reconstruction Agency responsible for managing the funds was very quick to take measures on the ground restoring energy supplies and rebuilding homes. Another example is Serbia. Even before the 2000 elections, democratic forces in Serbia were being supported through the "Energy for Democracy" programme. The country now receives financial assistance to consolidate democracy.

In Afghanistan the EU has pledged a total of EUR 1 billion from the EU budget to help Afghans rebuild their infrastructure and build a society where human rights are respected.

Neither of these items of expenditure was foreseen when the financial planning for the EU budget was laid down in 1999.

This shows that the demands on the EU budget change. It is a dynamic process. And we - the Institutions of Europe - are able to meet these new challenges - and quickly.

The cost of the joint police operation in Bosnia, which the EU will take over from next year, will also be financed in part from the EU budget. This is another example that the common foreign and security policy is taking shape.

Mutual support between Member States is also becoming more visible. When disastrous floods hit Germany, Austria and the Czech Republic this summer, it prompted a general rallying-round - in financial terms too. We are now in the process of setting up a Solidarity Fund for serious natural disasters, which will be able to call on up to EUR 1 billion not just for the present Member States, but also for the twelve countries currently negotiating to join. With this fund European solidarity will take on a recognisable face for the European citizens.

So much for the programmes. Now I turn to the question: who manages the budget and how do we guard against fraud?

The main areas of budget expenditure agriculture and the Structural Funds are managed by the Member States administrations. Together they account for 80% of the total EU budget.

It is Government agencies in the Member States that process farmers' applications, select projects and pay out funds to beneficiaries. So in fact this money of the EU budget does not even come to the Brussels treasury.

The Member States are also responsible for controls.

Why do we have this shared management? Because in general the principle of subsidiarity also applies to administration and because otherwise the Commission would have to have a much bigger administrative apparatus.

The Commission's departments manage what we call "direct expenditure", i.e. funds for administration and research, part of the resources for youth programmes or foreign policy aid programmes. In this last field they enlist the help of many NGOs.

A thorough overhaul of the Commission's whole financial management system is currently under way. This is one of the key strands of the administrative reforms under the overall charge of my honourable colleague and Commission Vice-President Neil Kinnock. The cornerstone of the reform of financial management is a clear division of responsibilities. Departments responsible for managing funds are now charged with handling those monies correctly. The central Financial Control department will therefore be abolished, so it will be impossible to pass the buck for the proper use of EU funds to another department.

Decentralisation serves to anchor the departmental responsibility for managing funds. Decentralised audit units have been set up in all departments, and a new internal audit service has the power to check that control systems are operational.

This describes the internal audit control. Our external auditor is the European Court of Auditors - an independent institution, which audits the expenditure and revenues and the accounts. I mention it because we have been hearing lately a lot of untruths and a great deal of nonsense on accounting for the EU budget.

It was reported that the Commission didn't keep accounting "books". What nonsense! Every transaction is of course recorded in the accounts. 1.4 million entries a year are stored in chronological order in electronic ledgers. The general accounts respect the double entry principle.

Articles have stated that the accounts for the EU budget hadn't been audited for years. That's untrue. The Court of Auditors always checks the accounts. That is one of its main functions. And, what's more, the annual financial statements are sent not only to the Court of Auditors, but also to the European Parliament and the Council, which means that they are checked by the fifteen Member States.

It has also been claimed that there was virtually uncontrolled access to the system and that entries could be made without supporting documents. Fact is that only duly authorised officials can issue payment orders and then only for their own budget lines. The accounting department then executes payment orders. All transactions of payments to a beneficiary or financial intermediate are documented in the Commission's accounts and the banking system.

The most outrageous piece of reporting is the comparison with Enron. Even newspapers claiming to specialize in economic affairs published such accusations, even though (i) no fraud of this type is possible under the EU's budget system by virtue of its structure and (ii) it would not make any sense. In the case of ENRON, the figures in the balance sheet had been massaged. Receivables due in the future were added to the current year's result in order to mislead shareholders about the company's real financial situation. Anything like this is simply not possible under a revenue and expenditure accounting system, since only budget cash movements are booked.

It is contradictory, then, on the one hand to criticize the Commission for not having a commercial accrual accounting system while on the other hand comparing it with ENRON.

Secondly, comparing the EU budget accounts with ENRON implies that in actual fact there was no budget surplus of 15 billion Euro last year, in other words that this surplus was a fiction. The underlying suggestion is that neither the Court of Auditors nor Parliament noticed this and worse still that the 15 finance ministers would not have spotted the fraud! Anyone who knows how carefully the Court of Auditors but also the 15 national capitals scrutinize the EU budget accounts will realize how absurd this allegation is. It is simply absurd to claim that the budget surplus is no more than notional, but that Gordon Brown hadn't spotted this.

Maybe it is worth asking the question why anybody can make any allegation against Brussels and why the credibility of so-called witnesses is never examined.

Of course, dynamism and the need for change also apply to bookkeeping. As an information system, public accounting has expanded its goals considerably. It has gradually developed from what was originally a simple record of the transactions involved in implementing the budget into a more dynamic and all-embracing concept, which also sets out the economic, financial and capital-based aspects of these transactions.

The Commission is therefore switching from a simple set of budget accounts to integrated accrual-based accounting as required by the new EU law, the Financial Regulation. The United Kingdom government was the first Member State to start the transition to integrated accrual accounting in 1993, a process completed in principle last year, but still not fully operational.

The underlying information technology for the EU accounts must also be adjusted. It is being adjusted to the future activity-based budgeting; it is being adjusted to the new rules on the presentation of accounts and it must be adjusted in line with the administrative reform, i.e. the devolution of financial liability.

However, safeguarding against fraud is not only a question of having a secure accounting system. The fight against fraud requires prevention, control and criminal prosecution. The establishment of the European Anti-Fraud Office (OLAF) in 1999 has provided a powerful instrument.

OLAF has the responsibility and right to conduct investigations internally, i.e. within the European Institutions, and externally, in full independence, if there is any suspicion of fraud. OLAF also provides a platform of services and thus an important added-value for the Member States. It organizes close and regular co-operation between the competent authorities of the Member States, in order to co-ordinate their activities in the fight against fraud and economic crime. Member States can also rely on the specialised knowledge and multidisciplinary technical know-how of OLAF.

Finally, OLAF elaborates the initiatives to strengthen the relevant anti-fraud legislation.

One major focus of OLAF's activities is the detection of customs fraud. EU and the member States lose more than hundreds of millions Euro of customs duties and tax revenue every year from the smuggling of cigarettes. The Commission and ten Member States have therefore decided to bring a case in the United States against the manufacturers, who are suspected of collusion in cigarette smuggling. This course is unusual. However, given the extent of this smuggling, everybody wonders about the source. It is not enough to clamp down on the smuggling channels and leave the source untouched. I regret that the United Kingdom is not participating in this lawsuit, even though this form of international crime considerably affects it.

International crime and fraud affecting the finances of Europe profit from the existence of the single market. And they are also helped by the fact that we have seventeen different criminal-law systems. This situation protects the fraudsters and not the Community budget.

The Commission has therefore decided to propose setting up a European Public Prosecutor for the protection of the Communities' financial interests. We don't want to create a major new institution and we don't want to create a European criminal code. Instead, the European Public Prosecutor should operate on a decentralised basis, with "delegated" European Public Prosecutors appointed in the individual Member States conducting investigations under national law and preferring charges before the national courts if there is evidence of fraud affecting the finances of Europe.

The Commission has drawn up a green paper on this subject which has triggered a lively and fruitful debate. The United Kingdom's position on this proposal is unfavourable, as is that of some other Member States. However, we have received a good deal of support from persons working in this field such as prosecutors, judges and customs investigators and from NGO´s like Transparency International.

I hope that the Convention on the future of Europe will deal with our project and accept it. It cannot be tolerated that only the perpetrators of fraud think European while the Member States continue to refuse the creation of a European instrument to protect the European budget.

Ladies and gentlemen

The EU is on the eve of its largest enlargement. Yesterday the European Commission recommended that the negotiations on the accession to the European Union should be concluded by the end of this year with the candidate countries. This means that by 2004

Cyprus, Malta, the Czech Republic, Hungary, Estonia, Latvia, Lithuania, Poland, Slovakia and Slovenia could be members of the Union.

For six of these countries these negotiations started in 1998; for the other four in 2000. All now have stable democratic systems. They have market economies and they will be able to take on the obligations of membership. That means that they will have for example, the same environmental laws as the UK, the same competition rules, the same customs duties, and that they will adjust their agricultural sector to European rules.

At present, the candidate countries receive pre-accession aid to prepare them for taking over Community law. On accession, these countries will then benefit from the European funds. The maximum financial framework for these new Member States has already been determined. It was laid down in Agenda 2000, the financial plan adopted by the Heads of State and Government already in 1999. Although at that time only six new Member States were expected to join the Union in 2002, the Commission has nevertheless put forward a proposal for a financial framework for enlargement, which remains within the financial plan.

As regards the actual proposals, the Commission has acted in accordance with the following guidelines:

A new balance must be found between the financial interests of the current Member States and the financial interests of the new Member States, i.e. between givers and receivers.

The second guideline was that, although all have to contribute to the budget from the first day of accession, none of the new Member States should be worse off in relation to the EU budget than they were before enlargement.

The Council is still busy discussing the framework proposed by the Commission. A common position must be established at the end of October for negotiations with the candidate countries. That is not easy.

What is the cost of enlargement to the current Member States? Under the Commission proposal, the current Member States would have to pay far less than 0.1% of their GNP for enlargement in 2006. Because of the UK rebate, the additional cost to the United Kingdom would be even less.

I think these figures show that everyone will benefit from the enlargement of the European Union. Stability and security in Europe can hardly be obtained better than by enlargement.

The dynamism of European development will continue. And it will continue to have an impact on the European budget. Let us see what proposals the Convention on the Future of Europe will adopt for the budget.

A proposal to strengthen the European Parliament's budgetary powers should be made. In the Commission's opinion, these also cover Parliament's powers on the revenue side in respect of the financing of the European budget. At present, 14% of the European budget is financed by customs duties, revenue, which flows directly to the European Union. However, the biggest share consists of payments from the Member States. There is no direct link between the taxpayer and the European budget. Nor does the European Parliament have any responsibility over revenue.

I believe that responsibility for revenue and responsibility for expenditure should go hand in hand. The European Union is a community of States and peoples. This too should be reflected in the financing of the European budget. But to put it quite plainly, it is not a question of opening up new sources of finance but of restructuring finances in a manner commensurate with European development.

I also eagerly await the outcome of the Convention's deliberations on the tasks it sees for European justice and home affairs policy, some of which will be met by public funds. Should Europe view the protection of its external frontiers as a common task and provide Community finance? What direction will the common foreign and security policy take? What proposals will be made for a European defence policy? The answers to these questions will also be of relevance to the European budget.

Ladies and gentlemen

Europe's path will continue to be dynamic. The old continent has given way to a dynamic model. The European Union has proved that a successful common approach can be constructed on democratic and constitutional values, whereby sovereign States join together voluntarily and peacefully to pursue common policies together. It is a unique model, which bodes well for the future. We can all be proud of it.

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