£1.7 Billion EU Bill Shows We Need Radical Reform

The EU’s announcement that it expects an additional £1.7 billion from the UK is both reasonable on a pan-European level, but unreasonable in the context of the UK. Crucially, it acts as a poignant reminder as to why the UK must be firm in renegotiating its position within Europe and why Britain’s contribution to the EU budget must be part of such a renegotiation.

In the context of the Eurozone, fiscal transfers between members of the same currency are an acceptable norm in order to act as a stabiliser for the operation of a floating currency. Both in the UK (via the Barnett formula) and the US (through fiscal federalism), sizeable transfers take place from wealthier states to those that aren’t doing so well and would otherwise have the option of devaluing their currency.

This can take place either through an explicit calculation, such as the Barnett formula, or taxes that are naturally redistributive, such as VAT and stamp duty, that are naturally paid predominantly by regions that have higher levels of purchasing activity. Such is the norm with the UK and it is a generally accepted principle.

What is different in the context of the UK within the Eurozone is that it is not a part of the monetary union, nor has it expressed any desire to join the monetary union in the foreseeable future. In this sense, we need to place the argument over the increase in the UK’s contribution to the budget in the wider context.

Yes, this rise is wrong, but the real question should be: why is the UK contributing to the budget in the first place when it is not a member of the Eurozone? The budget funds little, if anything, that the UK couldn’t finance independently and by the EU’s own admission, the budget exists primarily as part of the “cohesion policy of the EU” which “reduces the disparities in the levels of development between regions and Member States in the EU.”

In other words, it is a form of fiscal federalism that operates with the same intention of ‘smoothing out’ the disparities between a large and divergent range of states as occurs in the United State of America via Federal government spending.

This is an especially poignant issue at a time the Euro has been devalued against Sterling to give it a competitive edge in export markets and potentially boost its burgeoning trade surplus even further whilst the UK continues to operate a large trade deficit- in no small part owing to a lack of demand from Europe. The reality is that the UK is already being punished against Europe for its stronger economic performance against the European laggards by way of having a stronger exchange rate.

If Britain were growing its economy and attracting inward investment operating so successfully within the Eurozone, there would be a case to say that some of the fruits of its success should be shared across the wider union in an effort to level out the imbalances caused by operating a single currency.

As it stands, however, the UK is already essentially ‘taxed’ against the Eurozone when its economy outperforms that of the Eurozone by way of exchange rate appreciation against the Euro which (in theory) increases the demand for substitutable goods from Euro states.

David Cameron should seize this opportunity to frame the headlines into an argument for substantive reform. To avoid doing so is to risk being caught on the hop again in the future.