The EU: The British rebate


Britain joined the EEC in 1973 and, after a token renegotiation by Harold Wilson in 1974/75, membership was affirmed by the YES vote in the 1975 referendum.


It wasn’t long before Britain was complaining that the financial rules of the club it had joined were unfair to it – that it was paying too much in and getting too little back – and demanding that the difference be reimbursed.  The demand for a rebate was first made by James Callaghan before he left office in 1979, when the transitional arrangements for Britain’s financial contribution were about to expire, and it was pursued to a successful conclusion by Margaret Thatcher.  After 1979, Britain never paid what it signed up to pay, and other states – including states much poorer than Britain – have had to make up the difference. 


Budget contributions

Contributions to the European budget, then and now, come from three sources.  The first is from custom duties and agricultural levies on imports into the European community, collected by member states on behalf of the community.  The second is a proportion of the VAT revenue from each member state.  The third is an amount based on each member's Gross National Income (GNI).  These elements have varied in relative importance over time.  Today, the last is the largest, making up about 60% of the total.  The proportion from duties and levies has fallen over time as tariff rates have fallen and is now under 20% of the total.


The money contributed to the European community is spent by the community in member states in the form of farm subsidies under the CAP and regional and social payments.  But, of course, community spending in each member state doesn’t match each state’s contribution to the community budget, just as public spending in a region within a state doesn’t match the taxes raised in that region.  Inevitably, some states are net contributors and some net recipients.


Net contributor

That Britain was going to be a net contributor was inevitable from the outset under the rules of the EEC.


First, since Britain traded with states outside the EEC to a greater extent than other EEC states, it collected and paid to the EEC, as part of its budget contribution, a disproportionate share of the EEC’s customs duties and agricultural levies.  This factor has declined over the years as tariffs on goods coming into the European community has declined.


Second, it was a founding principle of the EEC that it be self-sufficient in staple foods at reasonable and stable prices to the consumer (see Articles 32 to 38 of the Treaty of Rome) and therefore agricultural subsidies were going to make up a substantial proportion of the EEC’s budget – over 70% in 1980, but just over 40% now.  Inevitably therefore, since Britain always had the smallest agricultural section of any state in the EEC in relative terms, community spending in Britain was going to be disproportionately low.


My money back

None of this was a secret when Britain joined the EEC.  It was entirely predictable in advance that it was going to be a net contributor to the EEC budget.  Nevertheless, Britain began to agitate for a reduction in its net contribution before the transitional arrangements about its contribution expired in 1979.


After lengthy arguments at successive meetings of the European Council with Thatcher demanding “my money back”, an ad hoc arrangement was agreed at the Luxembourg meeting in April 1980 whereby Britain was given a rebate for 1980-82 covering a substantial portion of its net contribution.  This was subsequently extended to cover 1983.


Then, at the Fontainebleau Council meeting in June 1984, a new arrangement was set up, under which around two thirds of Britain’s net contribution was reimbursed at the end of each year.  This arrangement was made for Britain and Britain alone, and other states, including states much poorer than Britain, have had to make up the resulting shortfall in revenue.


Threat to withhold

Thatcher got her way at Fontainebleau by threatening to withhold Britain’s contributions to the EEC budget altogether.  As Nigel Lawson, who was her Chancellor at the time, told the House of Lords Select Committee on the European Union on 24 September 2004:


“ … it would never have happened if we had not made it clear that if we did not get satisfaction, we would withhold our contributions. I think it is widely known that we had a draft bill printed to give us the legal authority to withhold our contributions. It was never published, but it was printed. It was discreetly made known to those who we negotiated with that this is what would happen if we did not get satisfaction.  Almost certainly the European Court would have eventually decided that this was illegal and it would be struck out, but that would have lasted a long time and would have been quite an effective measure in the context of these negotiations. Without that threat to withhold our contributions, to the extent of having the law officers produce a bill, we would not have got it.”


Sharing the pain

This rebate of two-thirds of Britain’s net contribution that Thatcher bludgeoned the other member states into accepting in June 1984 has continued ever since.  However, the proportions paid in by other states in order to make up the revenue shortfall arising from the British rebate has changed over time.


At the outset, it was agreed that Germany, which was then and is now the biggest net contributor, would pay only two thirds of the share merited by the relative size of its economy.  This was modified in 1999 so that Germany plus Austria, the Netherlands and Sweden all now pay only a quarter of their share, since they are all substantial net contributors.  As a result, Italy and France together pay more than half of the cost of the UK rebate.  As things stand, the ten new, and relatively poor, members will also have to contribute their share.


Blair says NO

At the European Council meeting in Brussels on 16-17 June 2005, Blair refused to countenance any modification to the rebate for the budget period from 2007 to 2013 without a reduction in CAP spending – though an element of flexibility seems to have crept in since.


The story peddled relentlessly by the British press is that President Chirac has made an issue of the British rebate, because he is in dire straits domestically after losing the referendum on the EU constitution.  One wouldn’t guess that it was inevitably going to be an issue in the discussions on the budget for 2007 to 2013, because there is a proposal from the European Commission on the table for a general mechanism for reducing high net contributions. 


The mechanism was devised because states other than Britain, notably Germany, Austria, the Netherlands and Sweden, have been complaining about size of their net contribution, which is why they pay only a quarter of their proper share of the British rebate.  This Generalised Corrective Mechanism (GCM) proposed by the Commission has the support of all net contributors, apart from Britain.


After the Council meeting, the British Government made great efforts to give the impression that it wasn’t on its own in refusing to agree the budget for 2007 to 2013.  The Netherlands and Sweden, amongst others, were mentioned as standing with Britain.  Noticeably, none of the new states from Eastern Europe, whom Britain regards as being within its sphere of influence, was mentioned as being on its side.


Budget size

Reporting in Britain of the discussions on the budget at the Council meeting was dominated by Blair’s heroic defence of our rebate.  But the size of the budget was also a major issue between member states.


As long ago as December 2003, a group of six member states – Britain, France, Germany, the Netherlands, Austria and Sweden – wrote formally to the Commission expressing the view that EU expenditure for 2007-2013 should be limited to 1% of EU GNI (compared with 45% on average by national governments in the EU).  These states are all net contributors, and their motivation in trying to set a 1% limit was obviously to limit their own financial contributions.  However, the Commission proposed a budget ceiling of 1.14% of EU GNI.


At the Council meeting, Jean-Claude Juncker, the EU President, began by proposing 1.06%.  In so far as Britain had allies in rejecting the final budget proposals by the Presidency, it was more to do with opposition to the overall size of the budget than with support for the retention of the British rebate unmodified.  In fact, on the principle that the British rebate should stay until CAP spending is reduced or eliminated, Britain is on its own – not least because CAP spending was agreed in October 2002 for the period up to 2013 by amongst others Blair himself.


Juncker blames Blair

Juncker was obviously very pissed off with Blair’s behaviour over the budget at the Council meeting.  In a press statement afterwards, he explained that the Council “had been very close to a deal”, and that “differences were minimal, which is to say that some delegations did not have the political will to succeed”.  He added:


“Those who, just before concluding, were calling for a full review of Europe’s budgetary structures, were well aware that it was impossible for the 25 countries to agree on a complete restructuring, disregarding all the agreements we reached in the past. Those calling for such a solution were seeking failure.”


Who could he possibly have in mind?


He added that the number of delegations who were prepared to find a compromise “was substantially more numerous than those of the countries who refused to commit themselves to such an effort” and he praised the new Member States who were willing to make concessions on budgetary engagements which had already been guaranteed to them, in order to rescue a deal.


Reporting on the Council meeting to the European Parliament on 22 June 2005, Juncker was blunt about what caused the failure to reach a budget deal: it was due to the UK's opposition to the freezing of its rebate unless France agreed to cuts in farm subsidies.  He said:


“We were not able to do it because Britain was not ready to sufficiently adjust the British cheque so that we would have room to manoeuvre in the budget.”

He also countered the Blair mantra that it was absurd for the EU to spend a far higher proportion of its budget on agricultural subsidies than on research and innovation.  “People talk all sorts of rubbish”, he said. “You have to compare like with like”, pointing out that, since research is primarily funded on a national basis, while agriculture is wholly financed from the EU budget, a more accurate comparison would be between the 524 billion euro that will be spent on research at national and EU level between 2007 and 2013 at current rates, and the 305 billion euro expenditure in agriculture at EU level for the same period.


French CAP

The British political establishment, and the British press, likes to portray the CAP as an outmoded system, which France insists be retained in order to protect its inefficient farmers, even though it causes starvation in Africa.  In fact, the CAP is important to the vast majority of EU states, and Britain is in a small minority in wishing to abandon it.


For example, Britain’s near neighbour and close friend across the Irish Sea is not on Britain’s side on this one.  Here is an extract from Prime Minister Ahern’s report to Dail Eireann on 21 June 2004 about the European Council meeting:

On the CAP, the Presidency’s proposal would have ensured that the funding was sufficient to cover both the commitments made to our farmers under the October 2002 agreement and also the costs of the extension of the CAP to Bulgaria and Romania on their accession. In the discussions on CAP funding at the Council, I emphasised that the October 2002 agreement on CAP funding by the European Council was a milestone. It had resulted in a fundamental overhaul of the CAP and paved the way for a decline in the CAP’s share of the overall EU budget. Our farmers accepted the deal on the basis that it had been agreed by the European Council and provided certainty for the years up to 2013.

“Efforts to reopen the deal called the credibility of agreements reached at the European Council into question. Efforts to link the CAP to other issues, such as budget rebates, did not take into account the very far-reaching and significant reforms already made to the CAP. Subsidies have been decoupled from production and the CAP’s share of the overall EU budget has significantly reduced over time. The European model of agriculture makes an important contribution economically, socially and environmentally to European society. I regret that many of those, who are perfectly free to take a different view on the future of the CAP than the one I take also feel free simply to ignore the facts.


His Foreign Minister, Dermot Ahern said:


“In respect of the CAP, we made the case that a deal is a deal. Even if the issue was about steel workers in another part of the EU, we must accept that if an agreement is made to which all the member states sign up after much pain, as did the United Kingdom in the guise of Prime Minister Tony Blair, in respect of a period up to 2013, and if we try to get the ordinary people on side - in this case the farmers - we cannot turn around and break that agreement. People say there is a democratic deficit in the EU. This would be an example where people could say that after only two years we are going back on a decision. Is it any wonder there might be a perception of cynicism among the electorate in terms of the decisions we make? That is why we stated, on a matter of principle, that as far as we were concerned the CAP arrangement is sacrosanct.”


The British media have yet to inform the British public that Blair’s crusade to modify the CAP will have Irish resistance to contend with.


New states

Blair cannot hope to get support from the new members from Eastern Europe either for the destruction of the CAP, since it is important to them too because they have relatively large agricultural sectors.


These states were forced to accept a shoddy financial deal when they joined, particularly on agriculture.  For example, for direct payments to farmers, there is a ten-year transition period and it will be 2013 before farmers in the new states get the same support as those in existing states.  So, for ten years, the farmers in the new states will, in general, be at a competitive disadvantage compared to their richer colleagues in the existing states.


The new states are not about to volunteer to have this inadequate agricultural support decimated for Britain’s sake.  Certainly, there was no sign at the Brussels meeting that Blair had persuaded them to shoot themselves in the foot.


Starving the world’s poor?

Prior to the Brussels Council meeting in October 2002, Chirac and Schroeder made an agreement on CAP funding up to 2013, much to Blair’s annoyance.  But Blair didn’t block that deal in the Council itself, which means that he is in a weak position in demanding a revision of it now.  That he didn’t do so must have been because he didn’t want a row with France and Germany at a time when he and Bush were desperate for their support in the upcoming invasion of Iraq.


But there was a ferocious personal row between Blair and Chirac outside the meeting, in which Blair said to Chirac:


How can you defend the Common Agricultural Policy and then claim to be a supporter of aid to Africa?  Failing to reform the CAP means being responsible for the starvation of the world's poor.” (See Guardian, 15 June 2005, here)


This is a rather crude expression of the mantra that subsidised agricultural production in the developed world drives farmers in the developing world out of business.  In so far as it is true, it is a consequence of the West’s imposition of the neo-liberal free trade dogma on the developing world, the better to exploit it.


The solution is to allow developing countries to determine what they import, to allow them to erect trade barriers of whatever kind they like, whenever they like.  It is not inconceivable that they would want to import food from Europe, or elsewhere, on occasions, but that should be up to them.  They should be allowed to determine when it is appropriate and no doubt they would take into account the need to sustain their own agriculture and, in particular, keep themselves as self-sufficient as possible in staple food.  That’s what the European community did successfully with the CAP.



Since this was written, the Agriculture Committee of the European Parliament has given Margaret Beckett, the UK agriculture minister, a rough ride, when she appeared before it on 12 July 2005 (see Financial Times report of 14 July 2005).  She was repeatedly asked by Committee members to detail British plans to reform the CAP, but failed to do so, prompting some MEPs to walk out.


However, she did concede that Britain didn’t expect any changes in CAP to come into force until 2014, that is, after next budget period 2007-2013 (for which a budget has yet to be agreed).  It looks as if realism has overtaken bluster in the British attitude to CAP reform.


One of the complaints about the CAP is that large farmers get too much subsidy, and small farmers don’t get enough.  It has been revealed by former EU Agriculture Commissioner, Franz Fischler, that Blair’s enthusiasm for CAP reform doesn’t extend to doing something about this.  Two years ago, he vetoed a reform that would have put a limit of 300,000 Euros on CAP payments to individual landowners (see, for example, Daily Telegraph report here).



Labour & Trade Union Review

August 2005