Speech by the Economic Secretary to the Treasury.
[Check against delivery]
It’s a pleasure to be here this evening and it’s always nice to see a few familiar faces.
Although I think it’s fair to say that today’s event is a little more complicated than I originally thought it would be.
The week before a Budget is not usually the best time for a Treasury Minister to be out delivering lectures on what the Government is doing.
If last year is anything to go by, we’re usually holed up in Westminster; pouring over submissions; and weighing up rather difficult decisions.
In fact, that’s largely how the last month has been.
So this is something of a welcome reprieve.
Yet that doesn’t distract from the fact that now really isn’t the time for discussing domestic policy.
Which is why I’ve had to think quite hard about what I what I want to talk about today.
Initially, I thought I should review some of the Government’s ongoing initiatives.
For example, our strategy for updating Whitehall’s accountancy frameworks.
But just by mentioning this as a possibility, I can see that some of you are already starting to nod off.
Which is why, in the end, I thought better of it.
Instead, I’ve decided to deliver my own Budget speech, 8 days before the Chancellor.
Unfortunately, I’m afraid I won’t be giving anything away.
For today I want to talk about my own experiences in negotiating the EU Budget.
The difficulties I’ve faced when trying to reach an agreed position.
And how I’ve found working with Minister’s from across the European Union.
Because there’s sometimes a perception that venturing across the Channel is quite a fun and carefree pastime.
I often read about Ministers ‘going off to Brussels’, and I think ‘if only you knew’.
I’m afraid it’s nothing like a relaxed jaunt around mainland Europe… taking in a few sites… and seeing a few old friends.
It’s more of a test of endurance.
Where you rarely venture outside your conference chamber.
And sleep becomes something of a luxury.
I’m sure this hasn’t always been the case.
But things have certainly moved on since the early days of the economic union.
Which is where I’d like to start, by giving a very brief history lesson.
The Second World War clearly demonstrated the costs of a divided Europe.
No one wanted to see a repeat performance.
And in the wake of all this turmoil, what people needed was to know that this could never happen again.
Closer economic and social ties seemed a very good starting point.
And so it proved.
In 1950 the first seeds of a united Europe were sown… as the formation of the European Coal and Steel Community drew the continent closer together.
By 1957, the Treaty of Rome had been signed.
This created the European Economic Community (EEC), allowing Belgium, France, Germany, Italy, Luxembourg and the Netherlands access to a ‘Common Market’…
…One without the tariffs, subsidies and other protectionist measures that may seem politically attractive, but make no economic sense.
And in the 60 years that followed, things have really gathered momentum.
The EU has grown at an astonishing pace.
It’s now a far more complex organisation, with greater policy powers, and a lot more countries to boot.
From the original 6, we now have close to 30 Member States.
Where the focus is firmly on free trade and the free movement of labour and capital - something I’m sure you all understand the value of.
But with greater economic cohesion comes the need for more standardised European policy.
This is inevitable, but how you go about it is the subject of huge debate.
Which is why we have the EU Budget, that has also evolved over time.
In the 1980s for instance, the whole budgetary process pretty much ground to a halt.
Well, the main reason was that the annual negotiations lacked structure.
No basic parameters were set… which meant, in theory at least, there were an infinite number of possible budget solutions and permutations.
And, increasingly, Member States were so far apart in terms of an agreed position that reaching a resolution became impossible.
It was clear, therefore, that the process for settling annual expenditure had to change.
Which is why the EU adopted a completely new EU Budget Framework, covering consecutive seven-year periods.
I’m afraid this is where it gets a little more complicated, so bear with me.
I won’t bore you with the detail, but essentially, every seven years, Member States have to agree on the maximum amount of money that can possibly be spent on each pre-defined policy area.
And by policy area I mean quite broad categories like security, citizenship, or agriculture.
Broad enough at least to leave significant room for manoeuvre when it comes to the more itemised annual Budget discussions.
This sounds simple enough, as these are only high level European discussions after all.
They don’t involve you actually committing any money to anything.
You’re just setting the boundaries for later years.
But the thing is, every member of the Council has to sign-off every separate policy area within the seven-year framework.
With over 80 of them to sort out, all needing unanimous agreement, this can take anything up to a year-and-a-half…
And some things do tend to dominate these discussions - if only due to their size and the difficult way they’re managed.
The CAP and Structural Funds alone represent almost three quarters of the entire Budget.
And then you have broad themes like improving EU competitiveness - which swallows up another 10%…
…external spending on things like foreign aid - which is about half that amount again…
…as well as more general administration costs - that have a worrying habit of increasing with each consecutive year.
Yet that’s not the end of the story.
Far from it in fact.
Once you’ve agreed the seven year limits, you then have to concentrate on how this translates to the annual Budgets.
The framework may have set the highest amount that can be spent in any given year - in any specific area- but these are just the basic principles.
Now you have to negotiate within these limits on every item of expenditure.
To make matters even more complicated, this is agreed on a Qualified Majority basis - which makes pinning down the details rather challenging.
And last year was no exception.
[Current economic position and Budget success]
Now the point I’d like to make here is that when, back in 2005, the last seven year Financial Perspective was agreed, Europe was in a rather different economic position.
We had growth, investment, employment, prosperity.
People were living under the impression that this would never change.
And the seven year framework had a similar air of optimism that doesn’t really reflect the situation we now find ourselves in.
The global financial crisis of 2008 hit the EU incredibly hard, and Member States are still feeling its impact today.
Banks had to be bailed out, countries had to be bailed out too, and even the IMF got involved.
Yes, Europe had its own rules that were meant to provide a buffer in such circumstances.
But these were not always adhered to.
The Stability and Growth Pact, for example, was meant to keep Member States’ finances in check.
Like the EU Budget, it was meant to show prudence, caution, restraint… and ensure that Member States had something to fall back on should something unfortunate arise.
And like the EU Budget, it hasn’t always worked as it should have done.
The Stability and Growth pact has sanctions in place for any Member States who fail to play by the rules.
In theory, they should have to keep deficits below 3% of GDP, and debt levels below 60%.
The idea was always that if you failed to keep your end of the bargain - if you let things slip - then you could face fines as well as other sanctions.
But in over a decade of monetary union, quite a few Member States ran unsustainable fiscal policies… and nobody ever forced them to tighten their belts.
Sanctions were never used.
Not even once.
Which meant that when it came to dealing with the financial crisis, we were all a little out of shape.
And this is a valuable lesson that needs to be learnt…
…That responsible finances are vital to preserving the strength of the EU.
This is the message we took to last year’s EU Budget talks.
Where we wanted to break the usual pattern of these negotiations.
With Parliament always asking for more.
Council advocating for slightly less.
And the result being somewhere in the middle.
In this respect, we were quite successful.
I remember clearly when the Commission first proposed an EU Budget increase of 5.8%.
This seemed rather out of kilter with the austerity measures we -and other Member States - were taking forward back home.
But not to be outdone, the European Parliament called then for a 6% rise.
Needless to say, both positions were miles away from where we’d placed ourselves… and, fortunately, many other countries agreed.
What we wanted to see was more of a focus on where the EU can add value.
Asking questions like, when it comes to intervention, what are we trying to achieve?
And is spending money really the best way to go about it?
But, at all times, it’s worth remembering the many other policy tools that the EU has at its fingertips.
Things like regulation - which I understand comes with its own costs - but if applied correctly can be of great benefit.
There are also initiatives, such as the European Investment Bank, which could be used more widely to achieve some of Council’s ambitions.
In a sense, this all about good financial management.
As someone with a background in audit, I know all too well the importance of sound book-keeping.
That every pound - or Euro - spent needs to be scrutinised.
That if something represents poor value for money, then we need to look again at our approach.
And when times are hard, when spending comes at a premium, then we simply can’t afford to carry on with business as ususal.
Which is why, last year, we pushed so hard for a Budget freeze for 2011.
We certainly weren’t alone in our thinking.
But the majority of members opted for an overall increaseof 2.9%.
This led to the Prime Minister and 12 other EU leaders making a public statement that they wouldn’t accept any increase beyond that level.
Which is not the usual way things are done in Europe… but it worked… so maybe there’s a lesson to be learnt there too?
This broke the usual dynamic ahead of brokering a final deal.
And made sure that 2.9% was where we settled.
Yet no sooner had one year’s negotiations finished, then next year’s positioning began.
Now it’s no secret that we intend to remain tough when it comes to EU spending.
Only last December we agreed a joint letter on the EU Budget size with Germany, France, Finland and the Netherlands…
Calling on Europe to step up its efforts…
…to limit growth in the next two Budgets…
…and from that point onwards ensure that any increases are, at most, in line with inflation.
In this respect, we’ve managed to take a firm stance, and to do so jointly with other similarly minded countries.
As there’s always strength in numbers.
And the EU - with its intricate network of alliances - is no exception to this rule.
[Importance of relationships]
Like in any organisation, you’ve got to build relationships.
And these are far more complex than any soap opera I’ve ever seen.
Where at times it can seem like everyone has competing objectives.
Or a point to prove.
Knowing who your friends are becomes vitally important.
It’s these relationships that make or break deals.
Build trust, or generate suspicion.
And either give you the confidence to push for your priorities. Or make you sit back and watch as events unfold.
There are undoubtedly bigger players in the game, but there is not a set dynamic in EU negotiations.
And it’s important that we don’t oversimplify the situation.
Let’s be clear, there’s a lot more to Europe then the UK, Germany and France.
Everyone, from Lithuania to Cyprus, plays their part.
Although it’s certainly the case that new Member States face an obvious dilemma.
Where they have huge potential.
Vast quantities of untapped resources.
And who rightly deserve to be a part of the economic union.
But when it comes to building allegiances, they face a difficult decision.
Would they be better off teaming up with their neighbours?
Taking a safety in numbers approach?
Or, alternatively, just going it alone?
Because a popular misconception is that the newer members - the Accession 8, and those who followed in their footsteps - are some sort of collective.
This couldn’t be further from the truth.
These countries have a strong sense of identity.
And distinct sensitivities.
They certainly don’t want to be lumped together.
And when it comes to the EU Budget, they’re just as likely to have differences of opinion as we are.
The whole dynamic is very complicated.
Where I’m sure many of you are familiar with the complicated nature of office politics, well Europe is not too dissimilar.
It’s also the case that the relationship the EU has with the rest of the world has an important bearing on Budget discussions.
Where there’s a real need for Europe to be seen as a success.
A source of investment, employment and growth in its own right.
Which is why, the general feeling across the Union is that Europe needs to show a degree of strength after a period of weakness.
And, in the case of the European Budget, this couldn’t be more apparent.
Where the perception is that the bigger the Budget, the better the EU is doing.
Which politically is understandable.
But economically is a little dangerous.
There’s a difficult balance to strike.
In fact, if there’s one message I want to leave you with it’s that the whole EU Budget process is incredibly complicated.
It’s something of a rubix cube of a conundrum.
Where you’ve got to try and align the national, European, political and economic interests to deliver the right result.
And once you’ve successfully negotiated each of these obstacles…
…Once you have a completely signed-off Budget…
…You then have to repeat the game all over again.
And look ahead to next year’s discussions.
So I hope that my little speech has made the process a bit clearer - or at least as clear as it can be.
That on the one hand, you can see why we’re calling on our neighbours to show restraint.
To rein in European spending.
And work together to consolidate Europe’s financial position.
And on the other, why this can be difficult given the nature of the European game.
That everyone wants to see the EU succeed.
But that we sometimes differ in opinion when it comes to how to achieve this.
At times this can be quite testing.
But, as a Government, we’ve made good progress in Europe since coming to office.
And I’m sure this will continue.
So now that I’ve spoken for almost half an hour, I’d be interested to hear your thoughts on the matter.
What you feel should be Europe’s priorities going forward.
And what you believe is the right way to approach these complicated issues.