Should Britain be getting its £2bn rebate from the EU?

[Racer1]

Apologies if this subject has been covered before. I couldn’t find anything in a quick search.

I’m curious. The link below talks about the £2bn rebate Britain gets from its financial contribution to the EU. The reason it gets this is because it is one of the largest contributor to the kitty, but does not get much of the money spent on its own interests.

France is now demanding that this rebate is scrapped, but Britain is obviously unwilling to give it up.

http://politics.guardian.co.uk/eu/st...816971,00.html

From the article…

A government spokesman insisted today that the rebate was still fully justified. Without it, he said, Britain would be by far the biggest contributor to the EU budget despite being way down the league table of nations best placed to pay.

If that is true, how did it come to be and how can it be justified?

There are two discussions here...

1. Seeing as the article mentions that it would take an agreement by all states, including Britain, to scrap the rebate. Is it even possible for it to happen, as Britain is never going to agree to it?

2. Should Britain be getting this rebate?

It seems perfectly fair to me, why should one country pay more than the others towards something that is not in its interest, but I suspect I may not know the whole story?

Please note I am not Euro–bashing here. I am genuinely interested and willing to be corrected if I am missing something.

Thanks!

[hawthorne]

Racer1
1. Seeing as the article mentions that it would take an agreement by all states, including Britain, to scrap the rebate. Is it even possible for it to happen, as Britain is never going to agree to it?

I haven't read your link yet, but my guess is that Britain would agree to scrap the rebate if there is thoroughgoing reform of the Common Agricultural policy. It's a huge part of the EU budget, it's unsustainable if new members join and it grossly distorts world agricultural markets.

[SuaSponte]

Originally posted by Racer1
I’m curious. The link below talks about the £2bn rebate Britain gets from its financial contribution to the EU. The reason it gets this is because it is one of the largest contributor to the kitty, but does not get much of the money spent on its own interests.

France is now demanding that this rebate is scrapped, but Britain is obviously unwilling to give it up.

If that is true, how did it come to be and how can it be justified?

There are two discussions here...

1. Seeing as the article mentions that it would take an agreement by all states, including Britain, to scrap the rebate. Is it even possible for it to happen, as Britain is never going to agree to it?

2. Should Britain be getting this rebate?

The key to this is that Britain started getting the rebate under the same system - if any of the EU members had vetoed the rebate, Britain wouldn't have gotten it in the first place.
IMO, so long as the voting system that was used to put the rebate in place is the same as the one needed to end it, it's fair. France had its chance to veto it before it started, and chose not to.

In any event, this really isn't an issue of fairness. By agreement amongst the governments that make up the EU, Britain contributes X amount. By another agreement amongst those governments, Britain gets some of it back.
So long as none of the governments were drunk or on cold medicines when they agreed, it's fair.

Sua

[clairobscur]

Actually, the larger contributor isn't the UK, but Germany. There's no particular reason for the UK to accept to pay more (or to have a lesser rebate) except that it will certainly be included in a more general negociation including the common agricultural policy (subventions to agriculture, France being a major beneficiary), the structural funds (funds used in less develloped regions...a lot of them will be diverted toward eastern Europe after 2004). By the way, Germany seems to have agreed with France on the issue of the UK rebate (germany is pissed off at paying so much and receiving so few). Such a general negociation is absolutely necessary with the approaching enlargment to ten new countries.


And by the way, there's no particular reason why the UK (or any other country for that matter) should get back as much as it contributes. This rebate originated when Thatcher made a big deal about paying more than the UK receive (her famous "I want my money back"), and other countries eventually agreed to her demand. But honestly, I see no obvious reason why this rebate should be supressed.

And the PM should better agree if he wants France to even remotely consider a reduction of the subventions to agriculture.

It is said that he's been pissed off by the franco-german agreement about the funding of the enlarged EU which was prepared recently, *before* the general meeting of the EU members on this very topic. Britain doesn't really like that France and Germany decide things alone and come with an already agreed upon deal without asking a british participation, something which is understandable. There seem to be some pretended minor diplomatic crisis between London and Paris, on the european issue, currently.

By the way, the fact that Germany and France are developping closer ties over the intenational issues caused by the US certainly plays a part in the general Franco-British diplomatic climate, too...

[Sparc]

Everything Sua and Clair said... But then…

Hawthorne

I haven't read your link yet, but my guess is that Britain would agree to scrap the rebate if there is thoroughgoing reform of the Common Agricultural policy. It's a huge part of the EU budget, it's unsustainable if new members join and it grossly distorts world agricultural markets.

?¿?

First of all it’s not directly about CAP, it’s about balance of contributions to GDP and effective wealth. Second of all; what the fuck is all that babble about ‘distorting world agricultural markets?’ Every goddamned country in the Western world has agricultural and rural subsidy systems.

Mostly they run through rebates and reinsurances built into the fiscal system. It is essential in order to keep farming alive in a post-industrial free market economy, and there are some advanced and essential reasons out of a macroeconomic perspective (see below). Since we don’t have a heterogeneous fiscal system we can’t run it that way. Great! Go ahead and kick us for having the most transparent re-subsidization system in the world. Methinks you listen to too much trade war propaganda there.

For that matter CAP might be huge part of the EU budget (it accounts for approx. 45% of expenditure), but the EU budget is 1.1% of total GDP.

Moreover it seems to elude most all and everyone that CAP is an integral part of currency management and insurance against asymmetric shock in the economy in a heterogeneous fiscal union.

Sparc

[Sparc]

Everything Sua and Clair said... But then…

Hawthorne

I haven't read your link yet, but my guess is that Britain would agree to scrap the rebate if there is thoroughgoing reform of the Common Agricultural policy. It's a huge part of the EU budget, it's unsustainable if new members join and it grossly distorts world agricultural markets.

?¿?

First of all it’s not directly about CAP, it’s about balance of contributions to GDP and effective wealth. Second of all; what the fuck is all that babble about ‘distorting world agricultural markets?’ Every goddamned country in the Western world has agricultural and rural subsidy systems.

Mostly they run through rebates and reinsurances built into the fiscal system. It is essential in order to keep farming alive in a post-industrial free market economy, and there are some advanced and essential reasons out of a macroeconomic perspective (see below). Since we don’t have a heterogeneous fiscal system we can’t run it that way. Great! Go ahead and kick us for having the most transparent re-subsidization system in the world. Methinks you listen to too much trade war propaganda there.

For that matter CAP might be huge part of the EU budget (it accounts for approx. 45% of expenditure), but the EU budget is 1.1% of total GDP.

Moreover it seems to elude most all and everyone that CAP is an integral part of currency management and insurance against asymmetric shock in the economy in a heterogeneous fiscal union.

Sparc

[hawthorne]

Feel free to explain, Sparc. I appreciate that most EU countries cannot have independent monetary policies and all have considerable limits on what sort of fiscal policy they can run. And yes, a shock in part of the EU would be rather difficult to deal with. But I don't understand how giving a lot of money to people who aren't very good at farming helps either prevent shocks or lessen their impact.

Sparc
Every goddamned country in the Western world has agricultural and rural subsidy systems.

Certainly the US and Japan have big ones. But that doesn't mean that it's a good idea. I simply don't buy this:

It is essential in order to keep farming alive in a post-industrial free market economy

nor do I think that farming would disappear in Europe without subsidy. There'd be less of it, and they might well make different products, but there'd be farming.

[Racer1]

Ah, I think I see...

So in very simple terms, Britain may decide to give up its rebate and therefore put more in than it receives, in order to get a greater say in certain/all matters? (i.e. The CAP)

Do you think the increased influence would be worth the monetary loss?

If so, I guess one of the greatest stumbling blocks would be convincing the UK public that it is in their interests. Especially with the UK media's often dim view of Europe.

If not, it sounds like Blair can't be forced to budge anyway!

[Sparc]

Hawthorne

Feel free to explain, Sparc. I appreciate that most EU countries cannot have independent monetary policies and all have considerable limits on what sort of fiscal policy they can run. And yes, a shock in part of the EU would be rather difficult to deal with. But I don't understand how giving a lot of money to people who aren't very good at farming helps either prevent shocks or lessen their impact.

I shall be more than happy to. I laid out the details of the regulatory means within the Euro Zone in this post some months ago. In there you shall find both an explanation as well as links to some macroeconomic papers on the matter. Throughout the rest of the same thread I provide comparison to the US (the only other economy that even closely resembles the EU).

Mainly the point is that there are three main traditional ways to carry out monetary policy across an economy that will, due to size and volume, go through asymmetric evolution within the same business cycle. These are:

1. Fiscal Policy as Regulatory Means
2. Redistribution and Insurance Through A Federal Fiscal System
3. Migration as A Reactive Regulatory Effect

As I outline in the linked post the EU is week in the fiscal regulatory power and migratory responses to recession or downwards oriented business cycles is poor due to structural, political cultural issues. To not mention the sheer population density which makes moving lots of people around somewhat impractical. Hence we have to focus more power on one of the three means to regulate that we do have, namely Redistribution – I explain this in even more detail in this post in the same thread. For the sake of clarity I should point to flowbark’s expanded classification of monetary policy tools that we are using for the argument in that thread.

flowbark - in this post

As for moderating regional economic fluctuations, there are various mechanisms that can operate between regions.

A. Between countries, the economically depressed country can devalue its currency, either by decree in a fixed exchange rate regime or automatically in a floating regime. […]

B. Within the depressed region, monetary policy can be used only if the region controls its own currency, like the US and the UK, but unlike the Netherlands (part of the Euro-pact) or Texas.

C. Within the depressed region, fiscal policy can be used. […]

D. A supra-regional body can redistribute resources among its minions. […]

E. Migration […]

Sorry to just point you to old threads, but this is a rather vast and complex topic that I do not feel inclined to lay out the basics of all over again. Let me now get back to what you said about farming.

Hawthorne

But I don't understand how giving a lot of money to people who aren't very good at farming helps either prevent shocks or lessen their impact.

Obviously you have a measurement on who is good and bad at farming? I think that you will find that both the US and the EU is shock full of some of the most efficient and quality oriented farmers you’ll find on the globe. The problem isn’t quality and efficiency – we have that. It’s about margin and margin tolerance, and supply and demand.

First off, farming in the US and the EU (as in Japan for that matter) is relatively expensive, when compared to for instance South America and Australia. It has partly to do with cost of land and such things.

Further it also has to do with quality to price expectation. This is most evident if you compare the developed world to the third world, while the average developed world household will not want to spend a higher percentage of wallet for food (lower actually), they expect more relatively speaking - a dynamic that aggravates the gap between the developed world and the third world for that matter.

Then we have supply and demand dynamics. It is a conscious policy in all countries to try to motivate overproduction of foodstuffs. The reasons are obvious, namely:

1. National stability and security
2. Price regulation in order to satisfy above said dynamics and keep the economy cool (see also below)
3. Create export opportunities
4. Protect the economy from becoming dependant on imports from producing economies with lower production costs - which has to do with 1. since this is an area where for security and independence reasons foreign dependability is not desirable

All of this is great news, except when you are a farmer (save the export part). Why? Well it erodes the margin in all areas except the high volume and yield areas of farming - such as wheat production, beef production and so on. Hence the dynamics of the market tends to drive farmers into those fields. Which is bad for two reasons, it will destroy the pillar of agricultural economics by aggravating the oversupply of certain goods. Second of all it will decrease the availability of low yield and volume produce that we still need in order to have a complete and self-sufficient agricultural production.

Hence it is in the interest of the economy to let agricultural producers survive despite the fact that they have a relatively low margin in some areas. This has to be equalized by other means than the self-regulatory dynamics of the market, because we are talking about too few producers for the macroeconomic effects in other larger industries to work.

Add to that the effects of asymmetric shocks in the economy and the natural fluctuations in agriculture due to impacts from climate effects and other non-predictable production dynamics.

What do you have? A need to equalize and stabilize that supercedes the individual interests of farmers, who would, if nothing was done either shift production, or go out of business, which as I have shown would create many problems we must avoid.

Hawthorne

Certainly the US and Japan have big ones. But that doesn't mean that it's a good idea. I simply don't buy this:

nor do I think that farming would disappear in Europe without subsidy. There'd be less of it, and they might well make different products, but there'd be farming.

As for if it’s a good idea or not I can only say that in the lack of better ideas….

As for the last part that is so basically flawed from a macroeconomic perspective that it beggars. What, thinks Hawthorne, would happen when the supply of certain essential foodstuffs declined as farmers went out of business (see above)? According to the dynamics of supply and demand the prices would go up.

Rising food costs would set of a chain reaction of increasing prices, which in turn would create demand for higher income amongst the vast majority middle to low salary takers. The result is inflation – which in turn impacts production through dwindling profitability. Low margin, medium volume producers (like farmers) are impacted early in inflation cycles, forcing them to once again raise the prices ahead of the rest of the market. You have managed to create a vicious circle that you will be hard pressed to come out of and hence you’re stuck in long-term depression – not what your average economy strives for.

These dynamics were understood clearly during the Great Depression and FDR’s spending policy showed that it is one of the rare areas where Keynesian anti-inflationary measures are unquestionably efficient. Note that I am very anti-Keynesian in general, but like anyone with a modicum of understanding of macroeconomics I have to admit that as far as agriculture goes it is irrefutable that it works.

As far as I know Australia isn’t that much different, although it is certainly a whole other deal to keep a small and homogenous economy like yours in stable order in these respects. More than anything economic evolution will be far more symmetric than in the EU or the US.

Sparc

[Go alien]

What, thinks Hawthorne, would happen when the supply of certain essential foodstuffs declined as farmers went out of business (see above)? According to the dynamics of supply and demand the prices would go up.

and

Rising food costs would set of a chain reaction of increasing prices, which in turn would create demand for higher income amongst the vast majority middle to low salary takers. The result is inflation – which in turn impacts production through dwindling profitability. Low margin, medium volume producers (like farmers) are impacted early in inflation cycles, forcing them to once again raise the prices ahead of the rest of the market.

Sparc I think you are forgetting other options. The EU could either subsidise farming (again) to encourage more farmers back to the land and to keep prices down or remove existing restrictions on cheap imports . Either would prevent the scenario you posit. Subsidies keep more people in the EU happy, cheap imports keep fewer people in the EU happy - with farmers excluded from the "kept happy" group.

So I think that as long as farmers have a strong voice in the EU, subsidies in some form or other will remain in place.

[hawthorne]

Thanks for the detailed response Sparc. I'll read and get back to you.

Just a quick response to this:

What, thinks Hawthorne, would happen when the supply of certain essential foodstuffs declined as farmers went out of business (see above)? According to the dynamics of supply and demand the prices would go up.

Some prices would go up, some down. As farm output declined the cost of resources to industries which compete for those inputs would decline, and those industries would expand and their prices would fall. Whilst their may be macroeconomic problems during transition, trade policy - and agricultural policy in general remains a micro problem. It's not always easy to look at a change in a particular part of the economy and trace through to economy-wide results. Partial equibilbrium disturbances do not have clear general equilibrium effects. You need a model - like GTAP - to get what's going on in other sectors and trace through the macro and external linkages.

I'll get back to this thread when I've read.

[tracer]

Er ... when y'all say that this rebate amounts to "2 billion pounds" ...

... is that an American Billion (a thousand million) or a British Billion (a million million)?

[The Clawman]

It's the American billion. To be honest, I don't think I've ever heard anyone over here actually use billion to mean anything other than a thousand million. The old British definition seems to have become obsolete.

[Hemlock]

A better question would be "Why is the UK up to its ears in this stuff in the first place?"

The CAP is a ripoff, forcing UK (and Dutch, Scandinavian) consumers and taxpayers to subsidize inefficient farmers in France (plus Italy, Spain, Portugual - and Greece, presumably). It screws third world countries like crazy by depriving them of the ability to compete with food producers in these areas.

Brits could have cheaper food and lower taxes without the CAP. Why do they put up with it?

The rebate is a slight compensation, won back in the days when the UK had a Prime Minister who stood up for the national interest.

The US and Japan subsidize their farmers, too. But there's no reason for the UK to subsidize French (etc) farmers.

Pull out of this rubbish. Anyone remember the corn laws debates in the 19C?????

[Go alien]

Originally posted by Hemlock
Anyone remember the corn laws debates in the 19C?????

If anybody does personally remember those debates, I'm sure a lot of us would like to hear from him/her.

[Gary Kumquat]

Originally posted by Hemlock
A better question would be "Why is the UK up to its ears in this stuff in the first place?"

Good question.

[tracer]

Originally posted by The Clawman
It's the American billion. To be honest, I don't think I've ever heard anyone over here actually use billion to mean anything other than a thousand million. The old British definition seems to have become obsolete.

They coulda disambiguated it by calling it a "2 milliard pound rebate."

(Of course, I also find it doubly ironic that Americans refer to the foot-pound-mile-gallon system of units as "the British system", when the Brits no longer use it, and that the Brits confuse the matter even worse by having a unit of currency called the "pound.")

[hawthorne]

I've read the threads linked to by Sparc. It's a very good discussion (although I doubt the EU could yet survive a collapse of one of its regions). The discussion hasn't changed my view on the CAP though.

I don't see the CAP as having insurance features. It's not a buffer stock. It's not really counter-cyclical. It's a package of bloody enormous subsidies.

Sparc
Obviously you have a measurement on who is good and bad at farming? I think that you will find that both the US and the EU is shock full of some of the most efficient and quality oriented farmers you’ll find on the globe.

Yes, I do have a measure of who's good and bad at farming. In the absence of externalities and the presence of competition the people who are good at farming are those who can make a buck without a subsidy. Now I'm not saying that Europeans aren't talented at farming. It just isn't their comparative advantage in general. And if farmers are worried about the vagaries of climate and world prices, let them hedge.

The problem isn’t quality and efficiency – we have that. It’s about margin and margin tolerance, and supply and demand.

First off, farming in the US and the EU (as in Japan for that matter) is relatively expensive, when compared to for instance South America and Australia. It has partly to do with cost of land and such things.

Given the price of their inputs they can't make a buck. (Land prices are so high partly because the subsidies are capitalised.) They are not efficient in any economic sense. Inputs used in agriculture could be used better elsewhere and the proceeds used to buy agricultural products elsewhere. This could include a food security stockpile purchased on the open market, if desired. You say Australia's not much different and you're right in a way. Farmers rattle on about how "efficient" our wet rice industry is, but they don't pay a serious price for the water and water infrastructure they use.

Reform will come, and is gradually coming through the reduction of "red box" measures and their conversion to amber and green box schemes. As I said in my first post in this thread [it didn't start as a hijack], the expansion of the EU under Nice makes the CAP unsustainable. Even the French know this, and that is why they are trying to talk about Britain's handbag rebate: they want to get something in return for the political pain - and very real economic upheaval - they are going to experience and they certainly need to look like they're getting something.

The CAP remains a rort paid for by non-agricultural industries, consumers and third world poor. It's protectionism backed by the muscle of people who know that their main crop is government handouts.