Cameron set to win a cut in the EU budget - but there's a catch

Even if European leaders agree to a €34.4bn cut in the EU budget, the UK will almost certainly pay more.

David Cameron went into the EU budget negotiations insisting on "at worst a freeze, at best a cut" (Labour and rebel Tories had demanded that he go further and insist on a cut) and after a long night of talks, it looks as if he's secured the "best". For the first time in its history, the EU is set to agree to a cut in its next seven-year budget. Earlier this morning, EU president Herman Van Rompuy tabled proposals that would see the union's spending limit for 2014-20 reduced from €942.8bn to €908.4bn - a  €34.4bn cut and a saving of £400m-a-year for British taxpayers. 

If approved - EU leaders have just taken a two-hour break from the onerous negotiations - a cut would be a triumph for Cameron. He will have defied those who claimed that his promise of an in/out referendum on Britain's EU membership would leave him unable to achieve a successful outcome.

The catch, however, is that regardless of whether the EU agrees to a real-terms cut in its budget, the UK's net contribution will almost certainly increase. This is largely due to a reduction in the British rebate agreed by Tony Blair in 2005 to meet the cost of EU enlargement (a cause the UK had championed) but a cut in the EU budget will look less impressive to voters if it turns out that we'll still be paying more. Tory MP Mark Pritchard, one of those supported a real-terms cut when the Commons voted last October, tweeted this morning: "It will be a historic, but 'bitter-sweet' outcome, if the PM negotiates a real terms cut in the EU budget but sees the UK contribution rise".

In addition, the overall budget will still need to be approved by the EU parliament and German Social Democrat Martin Schulz, the president of the parliament, has been making sceptical noises this morning. He is threatening to veto the proposed deal on the grounds that it would create a structural deficit. "The [budget] in the form currently being proposed, however, would turn what is already a legally highly questionable trend into a structural deficit," he told EU leaders. 

Worst of all, while spending on the bloated Common Agricultural Policy (a slush fund for assorted land-owning dukes, earls and princes) will be €1bn higher than under the previous proposal, spending on transport, telecommunications and energy projects, all vital pro-growth areas, will be €11bn lower. 

Yet given how few expected him to be in a position to announce any kind of cut, Cameron will rightly feel that the summit has been a success for him. Having once refused to contemplate a reduction in spending, EU leaders now make Cameron-esque noises about the need for restraint at a time when EU member states are enduring austerity. The draft conclusion states: "As fiscal discipline is reinforced in Europe, it is essential that the future Multiannual Financial Framework [the seven-year budget] reflects the consolidation efforts being made by member states to bring deficit and debt onto a more sustainable path. The value of each euro spent must be carefully examined." Arch-eurosceptic Douglas Carswell has offered the PM "three hearty cheers" this morning and so will many others in his party. 

David Cameron arrives at the EU Headquarters on February 7, 2013 in Brussels. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Leader: The unresolved Eurozone crisis

The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving.

The eurozone crisis was never resolved. It was merely conveniently forgotten. The vote for Brexit, the terrible war in Syria and Donald Trump’s election as US president all distracted from the single currency’s woes. Yet its contradictions endure, a permanent threat to continental European stability and the future cohesion of the European Union.

The resignation of the Italian prime minister Matteo Renzi, following defeat in a constitutional referendum on 4 December, was the moment at which some believed that Europe would be overwhelmed. Among the champions of the No campaign were the anti-euro Five Star Movement (which has led in some recent opinion polls) and the separatist Lega Nord. Opponents of the EU, such as Nigel Farage, hailed the result as a rejection of the single currency.

An Italian exit, if not unthinkable, is far from inevitable, however. The No campaign comprised not only Eurosceptics but pro-Europeans such as the former prime minister Mario Monti and members of Mr Renzi’s liberal-centrist Democratic Party. Few voters treated the referendum as a judgement on the monetary union.

To achieve withdrawal from the euro, the populist Five Star Movement would need first to form a government (no easy task under Italy’s complex multiparty system), then amend the constitution to allow a public vote on Italy’s membership of the currency. Opinion polls continue to show a majority opposed to the return of the lira.

But Europe faces far more immediate dangers. Italy’s fragile banking system has been imperilled by the referendum result and the accompanying fall in investor confidence. In the absence of state aid, the Banca Monte dei Paschi di Siena, the world’s oldest bank, could soon face ruin. Italy’s national debt stands at 132 per cent of GDP, severely limiting its firepower, and its financial sector has amassed $360bn of bad loans. The risk is of a new financial crisis that spreads across the eurozone.

EU leaders’ record to date does not encourage optimism. Seven years after the Greek crisis began, the German government is continuing to advocate the failed path of austerity. On 4 December, Germany’s finance minister, Wolfgang Schäuble, declared that Greece must choose between unpopular “structural reforms” (a euphemism for austerity) or withdrawal from the euro. He insisted that debt relief “would not help” the immiserated country.

Yet the argument that austerity is unsustainable is now heard far beyond the Syriza government. The International Monetary Fund is among those that have demanded “unconditional” debt relief. Under the current bailout terms, Greece’s interest payments on its debt (roughly €330bn) will continually rise, consuming 60 per cent of its budget by 2060. The IMF has rightly proposed an extended repayment period and a fixed interest rate of 1.5 per cent. Faced with German intransigence, it is refusing to provide further funding.

Ever since the European Central Bank president, Mario Draghi, declared in 2012 that he was prepared to do “whatever it takes” to preserve the single currency, EU member states have relied on monetary policy to contain the crisis. This complacent approach could unravel. From the euro’s inception, economists have warned of the dangers of a monetary union that is unmatched by fiscal and political union. The UK, partly for these reasons, wisely rejected membership, but other states have been condemned to stagnation. As Felix Martin writes on page 15, “Italy today is worse off than it was not just in 2007, but in 1997. National output per head has stagnated for 20 years – an astonishing . . . statistic.”

Germany’s refusal to support demand (having benefited from a fixed exchange rate) undermined the principles of European solidarity and shared prosperity. German unemployment has fallen to 4.1 per cent, the lowest level since 1981, but joblessness is at 23.4 per cent in Greece, 19 per cent in Spain and 11.6 per cent in Italy. The youngest have suffered most. Youth unemployment is 46.5 per cent in Greece, 42.6 per cent in Spain and 36.4 per cent in Italy. No social model should tolerate such waste.

“If the euro fails, then Europe fails,” the German chancellor, Angela Merkel, has often asserted. Yet it does not follow that Europe will succeed if the euro survives. The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving. In these circumstances, the surprise has been not voters’ intemperance, but their patience.

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump