EU Budget Conflict Germany Is Tired of Footing the European Bill

The conflict over the stability pact may have been fierce, but it's nothing compared to the approaching clash over the European Union budget. Germany is tired of being the EU paymaster. And with the 2007 - 2013 budget promising to suck billions more out of the country's budget, German leaders are up in arms.

The life of a chancellor is only rarely blessed with pleasant days. In fact, they're so rare that the German head of state is all the more pleased when they do come around.

Last Thursday was one of those rare days. Late that evening, German Chancellor Gerhard Schroeder met with Foreign Minister Joschka Fischer and Finance Minister Hans Eichel at the Hotel Amigo in the old section of downtown Brussels. The three men had gathered to announce the kind of triumph they have found increasingly elusive in domestic politics.

A short time earlier, the heads of state of the European Union's 24 member countries had, within the space of only 20 minutes, answered Germany's prayers by softening a key provision of the Maastricht Treaty. Whereas the principle "three means three" (as former German Finance Minister Theo Waigel used to say) applied in the past, a new formula for the stability pact -- meant to stabilize the euro by prohibiting euro-zone countries from accumulating debt more than 3 percent of their Gross National Product -- is now valid. Three percent can also mean four percent.

The amendment, viewed by experts at the Bundesbank (Germany's central bank) as a "decisive" weakening of the pact and as a "serious concern" by their counterparts at the European Central Bank, was tremendously good news for the chancellor. From now on, he no longer has to worry about warnings out of Brussels due to growing German debt. "Even the prime ministers of conservative governments" had congratulated him on the amendment of the pact, said Schroeder, patting himself on the back.

The chancellor was also able to claim another victory. The controversial "services directive" -- which allows service companies in any EU country to operate across the 25-member club -- is finally off the table, at least in its current form. At the insistence of Schroeder and French President Jacques Chirac, the legislation will be thoroughly revised in the coming weeks. The sending of cheap service workers from the new EU member states into better-off member countries, a sticking point for German and French trade unions in particular, is to become largely impossible in the new version. In light of these victories, the chancellor's high spirits were perfectly understandable: By achieving the loosening of the stability pact and the amendment of the services directive, Schroeder managed to put out two fires in the space of just one week.

This, though, is presumably the last time in a long while that the chancellor will be able to return home from Brussels in a good mood. His greatest challenge still lies ahead. And this time around, it seems unlikely that he'll be able to resolve his problems with a few eleventh-hour changes in the wording of proposed legislation.

On June 16-17, Europe's heads of state will come together for their next summit and to ratify the European budgetary framework for the coming years. What may sound like a routine yawner is really a meeting at which nothing less than the future of Europe will be decided -- and especially Germany's role in that future. On those two days in June, the assembled heads of states will decide how much each member state should pay to Brussels and how much it should receive in payments from Brussels, if anything.

The potential pitfalls are huge; the European Commission's proposals in this regard are completely unacceptable to the German government. According to the current draft of the legislation, which bears the relatively innocuous-sounding title "Financial Forecast for 2007 to 2013," the EU's budget will increase from about €100 billion this year to €158 billion in 2013. This increase would have serious consequences for Germany, which, as Europe's largest economy, pays by far the most into the common budget. Between now and 2013, Germany's contribution to the EU would almost double, to about €40 billion. Instead of the current 8 percent of its federal budget, Berlin would then be required to send more than 10 percent of its budget to Brussels.

Even before the actual negotiations have begun, the 25 countries that make up the EU are turning into a confusing mix of highly diverse and, more importantly, deeply divided factions. It's become a forum that pits the wealthy against the poor, the large against the small, and the new against the old member states. Trickery, deception, threats and complaints have become the order of the day. The most powerful weapons opponents within the EU have at their disposal are columns of numbers, but comparing these numbers, arrived at using different computation methods, is often like comparing apples and oranges.

But there is one thing on which everyone but Germany agrees: that Germany should also remain Europe's paymaster in the future. Berlin funds more than 20 percent of the EU budget with its contributions. This roughly corresponds to Germany's share of European economic output, and other member nations likewise pay their contributions in proportion to their economic capacity.

But it is not the gross payments that are decisive. Important, rather, is the extent to which individual member nations benefit from the money that's distributed within the EU. To determine which countries benefit the most from the EU and which countries pay more than their fair share, individual countries' contributions must be offset by the funds they receive in return.

For Germany, the bottom line is clear. Year after year, the Germans send significantly more money to Brussels than they receive back. In 2003, the difference amounted to €7.7 billion, making Germany the biggest net contributor by a long shot. Only the Netherlands and Sweden pay more on a per capita basis.

This highlights the absurdity of the European financial redistribution machine. Ireland, once Europe's poorhouse, has long since passed Germany in the prosperity rankings. It's currently in second place, while the Germans have dropped to a distant eleventh place. But this didn't prevent Brussels from subsidizing Ireland to the tune of €1.6 billion in 2003. While each German paid just under €100 into the EU's coffers, the Irish managed to collect €400 per capita. But no other country is gaining as much from Brussels as Luxembourg, the EU's richest country by far. Because of the many EU facilities in Luxembourg, the small Grand Duchy collects almost €2,000 net per capita, turning it from a net payer into a beneficiary.

Aside from Ireland, Luxembourg and the ten new EU members, the winners of the Europe redistribution machine are Greece (with a net gain of €3.4 billion), Portugal (€3.5 billion) and Spain (€8.7 billion).

By contrast, Germany ends up being the big loser in this game. Of the €22 billion that Berlin sends to Brussels, only about €14 billion end up back in Germany, in the form of subsidies for German farmers and for economically disadvantaged regions, such as the states of the former East Germany.

If the Brussels bureaucrats have their way, a great deal more money will be distributed in the future. According to an official statement issued to the member governments and the European Parliament, "the Commission proposes significantly increasing expenditures in certain political areas in the period from 2007 to 2013." This is followed, a few sentences later, by an unmistakable threat: "If the obligations are not funded with the necessary resources, this will most certainly lead to disillusionment among EU citizens."

The opulent Brussels budget plan has been interpreted in Berlin as a thinly veiled declaration of war. "I hope we can all agree that this cannot happen," the chancellor told the Bundestag (the lower house of Germany's parliament) in November 2003, when the first details of the Commission's budget plans were coming to light.

The tone quickly became sharper only one month later, in December 2003. In a joint letter to then Commission President Romano Prodi, six of Europe's net payers made it unmistakably clear that they would not accept an inflation of the EU budget. "In light of the painful cost-cutting efforts in the member states, our citizens would not understand why the EU budget should be exempt from this consolidation process," wrote the heads of state from Germany, France, Great Britain, the Netherlands, Austria and Sweden.

However, the six signatories to the letter only agree on a single issue: That the EU budget cannot be allowed to increase to 1.24 percent of the European gross domestic product, as announced by the Commission. Instead, they want to cap the budget at no more than one percent of the European GDP, which for Germany would still translate into an increase of more than €10 billion in its gross contributions by 2013. In all other respects, however, there are also substantial differences among the six net payers, with each benefiting or losing as a result of the EU's bizarre spending policies.

"Brussels has been milking Germany for more than four decades. This has got to stop," says one of the Berlin negotiators, who is convinced that Germany will remain steadfast in its position at the upcoming budget talks. Finance Minister Eichel is even concerned that Germany's growing contribution to the EU budget could become an economic risk. Eichel's advisors believe that if Germany's payments were in fact to increase to the levels Brussels is demanding, tax hikes would be unavoidable.

If the Commission prevails, Eichel will face an almost insurmountable challenge. Even after the softening of the pact, Eichel is still required to keep the German deficit ratio low; meanwhile, Brussels keeps demanding higher payments from Berlin. According to a summary of talking points issued by his ministry, "the burden resulting from this Commission proposal is clearly out of proportion with financial and political strength in Germany."

The negotiations are still at an early stage. On March 8, the office of the EU presidency, currently held by Luxembourg, put out an 18-page, confidential "non-paper" listing the various elements of the budget proposal in three categories: undisputed, disputed and not yet known. The results are not particularly encouraging -- almost all issues are in the disputed category. Even those areas listed as undisputed are in fact disputed, as the Germans were quick to point out.

The Spaniards, considered extremely tough negotiators, have, for example, managed to smuggle one transitional payment they are demanding into Luxembourg's "undisputed" column. Sources in Berlin say that such moves will not succeed, but it's likely to be a difficult battle. The Germans still shudder at the memory of the all-night negotiating marathon surrounding the last "Financial Forecast" at the EU special summit in Berlin in March 1999. To convince the Spaniards and the Portuguese to agree to a financial compromise, creative Eurocrats managed to quickly come up with an expensive, last-minute agricultural subsidy.

Even though Germany's negotiators from the chancellor's office, the Ministry of Finance and the Foreign Ministry have sworn to keep their payments at least halfway stable this time around, various upcoming elections mean that they won't be able to act as freely as they'd like.

British Prime Minister Tony Blair is likely to be up for re-election on May 5. So far, this has prevented the chancellor from addressing the so-called British "rebate" achieved by Blair predecessor, Margaret "I want my money back" Thatcher.

French President Jacques Chirac, however, sees no reason to show any consideration in this regard. Last Wednesday, during the Brussels summit, he questioned the British "rebate" -- a concession granted London in 1984 because there are fewer British farmers who can be benefit from EU agricultural subsidies than in other countries. Chirac stated, for the record, that this special rebate is "no longer justified today." In an interview with the BBC Blair's foreign secretary, Jack Straw, promptly said that Chirac's statement was incorrect, and that the reasons for the rebate still apply today, adding that his country would vehemently defend itself against any opposition to the rebate and, if necessary, would even use its veto to block any legislation to eliminate the policy.

The French will vote on the EU constitution on May 29. According to opinion polls, EU skeptics currently have the upper hand. Although Paris, thanks to its far higher-than-average share of EU agricultural subsidies, was able to reduce its net contribution to €1.9 billion, the issue is taboo for Schroeder. He sees French approval of the EU constitution as much more important. Furthermore, the Dutch will vote on the constitution on June 1, and Poland is expected to hold parliamentary elections on June 17 -- both dates that have also prevented German negotiators from placing too much emphasis on capping the country's EU contributions.

At the summit in Brussels, the chancellor at least managed to dampen the European Commission's hopes that the new stability pact provisions could prompt Germany to soften its tough position on the EU budget. Schroeder emphasized that the two issues will not be linked, adding that the German government will "insist on the one percent figure for the European budget."

To derive greater benefit from the Brussels redistribution process, Berlin is urging that more money be invested in research and development in the new budget period. In addition to being a popular issue among voters, this would be advantageous to Germany which, with its many research facilities, would benefit disproportionately from EU payments. The German government is also planning to promote a "general correction mechanism" to its benefit -- essentially a sort of rebate based on the British model and would save Germany up to a billion euros per year.

But in the end, Germany sees itself as an EU loser when it comes to getting money out of Brussels. While most of its neighboring countries easily manage to suck billions out of the EU's coffers, Germany, a major beer producer, only benefits from hops market regulations (aside from subsidies it receives for Eastern Germany). "But as far as any other program is concerned, we pay more than we get back," says an advisor to the chancellor.

Yet despite this unequal treatment, even the Germans do not fundamentally question Brussels' redistribution policies. Indeed, they represent the only way for Germany to at least recoup a portion of its dues. Indeed nobody dares touch the out-of-control Brussels subsidy machine. There is hardly any sector of the economy that receives no funding from Brussels. It begins with agriculture, which consumes almost half of the European budget, and ends with the reintroduction of the long-term unemployed into the labor market.

The EU spends on environmental protection, student exchange programs, protecting the German fishing industry and planting durum wheat in Portugal. It subsidizes the production of milk, beef, eggs, sugar, silk worms, wine, and -- despite waging a war against smoking and a lack of demand -- tobacco.

None of the member states, not even the Germans, question European structural policy which, at €30 billion, is the second-largest item in the EU budget. The structural fund became important in the 1980s, when three poorer countries, Spain, Portugal and Greece, joined the organization. The new members opened their markets to industrial products from the north, while Brussels generously subsidized the modernization of their crumbling infrastructures.

But now, two decades later, the effects of the billions in EU subsidies are controversial. All three countries have certainly made considerable economic strides in the meantime, but whether this can be attributed to the assistance from Brussels is more than questionable.

In the case of Greece, for example, the EU subsidies helped prop up a bloated bureaucracy and keep industries afloat that would otherwise be unable to compete. Although the Greeks received about €40 billion in EU subsidies in the space of a decade, the national debt climbed to 110 percent of GDP in the same period. In one embarrassing example of incompetence, Greek planners forgot to include tracks for rail freight in the construction of the bridge over the Gulf of Corinth, a project financed with EU money.

It's for these reasons that today the only fans of European redistribution policies are politicians who live far away from the old continent. At the EU-Latin America summit in Madrid three years ago, a cameraman happened to overhear a private conversation between the presidents of Brazil and Mexico. The two statesmen talked excitedly about growing affluence in Spain, Portugal and Greece, while complaining that nothing was happening at home in Latin America. The EU, said one of the men, had given these once-poor countries a net infusion of cash. "Actually, Germany was the one that paid," said the Brazilian.

"Exactly," his Mexican counterpart agreed, "Germany more than everyone else."

Translated from the German by Christopher Sultan