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Hendrik Wagenaar, Associate Director of the Crick Centre and Professor of the University of Sheffield’s Department of Town and Regional Planning comments on the EU ’Surcharge’.
Understanding the EU ’Surcharge’: the Benefits of Federalism
By Professor Hendrik Wagenaar, 1 November 2014, posted on The Crick Centre
The recent increase in Britain’s contribution to the European Union budget has led to much criticism of the imposition of a dramatic ’surcharge’.
David Cameron is angry. And so is his Dutch counterpart Mark Rutte. Recently both national leaders were confronted with a considerable additional contribution to the EU budget. The reason for this is a better than expected performance of the British and Dutch economies over the past decade. That doesn’t mean that their economies were actually doing so well, but a recalculation of economic performance, accepted as an improvement in national accounting by all member states, resulted in a higher relative performance.
There are lots of imponderables, such as the alleged ’suddenness’ of the request, the complexity of EU national contribution calculations, and the exact period of retroactive recalculation (estimates range from the past 4-20 years). The press is confused and uses the language of ’spending’ and ’surcharges’ and publishes alarming graphs of UK contributions (Conveniently omitting the numbers on the annual rebates that the UK receives, although, granted, even with the rebate the UK is a net contributor.). Let alone a numerical estimate of the many economic benefits that accrue to the UK because of its membership of the EU. The EU is something that costs you.
Federalism in Carinthia, Austria
If we try to see through the smoke and mirrors, what is at stake? I will illustrate this with the story of Carinthia, a small picturesque province of green mountains and emerald lakes in the south-west corner of the federal state of Austria. On October 11, 2008 the governor of Carinthia, the notorious politician Jörg Haider, leader of the right-wing populist FPÖ, crashed with his car on a street in Köttmannsdorf outside Klagenfurt, the provincial capital. He had a blood alcohol level of 1.8 mg/l, more then three times the legal limit. He died on the scene. (The crash site has since then been turned into an impromptu shrine to the memory of Haider, with candles, fresh flowers and handwritten notes from admirers from all over Europe.)
Haider left behind a monumental financial mess. Central in the mess was the Hypo-Alpe-Adria Bank. Haider had used the bank as a financial clearinghouse for all sorts of dubious transactions, wholly obfuscating the distinction between private and public money. In return he guaranteed the aggressive expansion of the bank into the former Yugoslavian republics. When the whole edifice came crashing down after his death, in the wake of the banking crisis, it turned out that the province had underwritten ¤9b in loans, most of them of junk status. To put that in perspective, the annual budget of Carinthia is ¤1b. Compared to this, Greece is a paragon of budgetary restraint.
Such an elephantine debt must surely have led to draconic austerity measures. Carinthia’s 550,000 citizens must suffered huge unemployment and welfare cuts and the food banks and homeless shelters must have been overflowing. Hospitals must have closed and tuition fees have gone through the roof. In fact, nothing of the sort took place. The generous Austrian welfare and health care system remained in place, university education is still free, and the citizens of Carinthia still drink their Aperol Spritz at the shores of the idyllic Wörther See, once Haider’s playground. How is this possible?
Why Federalism Works
Carinthia has been spared the fate of Greece, the UK or the Netherlands because it is part of a federal state. One of the benefits of a federal state is the automatic redistributive system of federal budgeting. Simply put, rich states or regions subsidize poorer states or regions. And, usually, that system is automatic and largely invisible, which means that regions and citizens don’t notice it and thus don’t complain about the carefree spending of their wayward neighbours.
It is not wholly without problems. In the US Democratic states are often net contributors to the federal budget and Republican states net beneficiaries, while the rich province of Bavaria gripes that its budget surplus is paying for the leftists politics of Berlin. But macro-economically federal redistribution buffers regional economic fluctuations.
In principle, as the case of Carinthia shows, a region can move from the status of contributor to that of beneficiary. After the size of its self-inflicted public finance debacle became clear, the federal state took over the debt and kept transferring its annual contribution to Klagenfurt. This benefits the whole country, not just the citizens of Carinthia. Just imagine what it would have meant for Austria’s credit ratings when Carinthia had defaulted on its debt.
Towards a Federal EU
The EU is not a federal state. Its political integration is laboured, half-hearted and reluctant, and federalism is a dirty word in most member states. That is one of the reasons for its persistent financial and economic problems. As a result its budgetary system of redistribution is clumsy and opaque. Yet, its underlying logic is federal, as I described above.
Instead of having "apoplectic" fits, banging the lectern, and issuing empty threats to refuse payment (The Dutch have accepted the unavoidable and decided to pay up in the mean time), it would have been be more helpful to explain the above mechanism of federal budgeting to the public. But that would require a measured and evenhanded stance towards the EU and Britain’s position in it. And, as we all know, that is at the moment far outside the cognitive capacities of the British political class.
