The misgovernment of Europe

Posted by Tim Congdon in News Archive | 0 comments

Full economic and political integration of their continent – culminating in a federal  ‘United  States  of  Europe’  –  has  been  a  dream  of  many  European politicians and opinion-formers since the early 1950s. Much has changed in Europe over the last 60 years, reflecting the integrationist process under the European  Steel  and  Coal  Community  from  1952,  the  European  Economic Community  from  1957,  and  the  European  Union  from  1993.  Many  of  the changes have been for the better, including the achievement of industrial free trade  and  free,  non-discriminatory,  cross-border  payments  within  the  EU. However, the EU member nations have  been reluctant to hand over fiscal powers (i.e., the powers to tax, above all) to central EU institutions. The EU is quite unlike the United States of  America, which from its inception had a federal  government  with  fiscal  powers.  The  powers  were  used  largely  to finance military expenditure against the USA’s main enemy at the time, which was the United Kingdom of Great Britain! Because the EU institutions, particularly the European Commission, have been thwarted on the fiscal front, they have tried to make ‘European government’ a reality by expanding a body of European ‘law’. The Commission has therefore secured the passage into law  of  thousands  of  ‘directives’  and  ‘regulations’,  by  a  process  which  is massively interventionist, but also undemocratic. The result has been a heavy burden of regulation which has checked economic growth across the EU. The EU institutions are also inefficient and wasteful, partly because they are not subject to proper democratic scrutiny. The accompanying analysis is chapter 5 in the 2013 edition of my publication, How much does the European Union cost Britain?, for the UK Independence Party.

The costs of waste, fraud and corruption

The title of this chapter is not a joke. Membership of the EU is acknowledged to lead to outright waste in several important areas of public policy, while its institutions are routinely described as ‘riddled with fraud and corruption’.1  A visitor from Mars might wonder why any country – let alone 28 of them – would want to belong to a supranational structure about which such phrases could be written. But the European political elite wants the still quasi-sovereign nation states of Europe to transfer yet more ‘competences’ to this set of institutions.2

Four sections follow on waste, two covering the Common Fisheries Policy, the next on the Common Agricultural Policy and the fourth on the effects of EU directives on water standards. Other forms of EU-related waste could be examined and the treatment is far from exhaustive, but space is limited.The following section focuses on one just one example of fraud, where the evidence is clear-cut and the cost to the UK beyond dispute. Of course it is inherent in the subject-matter that a discussion of fraud cannot have access to all the facts, as the parties at fault will try to conceal them. However, dissatisfaction with the EU’s internal accounting is widespread and of long-standing.   The British government’s White Paper (Cmnd. 8405) on European Finances 2012 is sub-titled Statement on the 2012 EU Budget and measures to counter fraud and financial mismanagement. The truth is that the distribution of regional development and agricultural money in several EU member states involves fraud of an almost systematic kind.4 Finally, a few paragraphs discuss the corruption – particularly the corruption of the European political class – that has accompanied integration under EU auspices.

Background to the Common Fisheries Policy

The Common Fisheries Policy did not exist until the UK sought EEC membership in the early 1970s. As was explained in chapter 1 of this study, the EEC member governments knew of British eagerness at the time ‘to join the Common Market’. These governments, particularly the French, used their strong bargaining position to encroach on the UK’s fortunate position, in fishing terms, of being an island nation. Everyone knew that the UK’s home waters had some of the world’s most abundant fish resources. (Aneurin Bevan, a Labour Party politician best known as the founder of the National Health Service, had quipped memorably in May 1945 that, ‘This island is made mainly of coal and surrounded by fish.’) Equal access to the UK’s fishing grounds was therefore proposed as a condition of EEC entry by the UK’s new trading ‘partners’.5  After a ten-year derogation in which the UK fishing industry continued much as before, the EEC applied the Common Fisheries Policy to the UK.

The  global  fishing  industry  suffers  seriously  from  a  much-analysed  difficulty  in  economic organization known as ‘the tragedy of the commons’.6 A resource – paradigmatically a piece of land in common ownership – has great value to the individual people who may use it and benefit from it. However,  the  resource  is  finite  and  each  individual’s  right  of  exploitation  is  unlimited.  Each individual therefore has an incentive to take as much of the common resource as possible, but that leads to over-exploitation and degradation. If the degradation goes too far, the resource in common ownership may be destroyed. The Nobel laureate in economics, Elinor Ostrom, surveyed such situations in her 1990 book on Governing the Commons.7 Several of her examples showed that, if left to themselves, local people realized that they faced the organizational dilemmas implied by the tragedy of the commons. In their own long-run economic interests and without prompting from outside, they put in place arrangements to restrict over-exploitation.

Unfortunately, the CFP is designed and overseen by the European Commission in Brussels. The Commission is a remote supranational bureaucracy and its officials have little direct contact with everyday business reality. They have no personal economic interest in the success or failure of any of Europe’s multiplicity of small fishing communities. It ought not therefore to be a surprise that the EU’s centralized control over fishing has been a disaster, both economically and in terms of environmental impact. The CFP sets quotas for how much of each species can be caught in a certain area. Each country is given a quota based upon the total available (Total Allowable Catch, TAC) and their  traditional  share,  expressed  as  a  percentage.  TACs  are  fixed  annually  by  the  Council  of Ministers. After quotas are fixed by the Council of Ministers, each EU member state is responsible for policing its own quota. Different countries allocate their quota among fishermen, with enforcement methods varying between them.

Two costs: loss of fishing rights and waste of discarded fish

The problem has been that actual catches may exceed the maximum catch specified in the TACs. If the fishermen land all the actual catch they are breaking the law and so are subject to fines. Understandably, their response has been to discard the excess fish. The discards have now become substantial relative to maximum catches  permitted under the TACs. By far the most productive ‘fishing area’ for the EU – to which all EU member states in principle have ‘equal access’, although only as determined by a bureaucratic formula – is the so-called ‘Atlantic north-east’. (This means in practice the North Sea, and the areas of the Atlantic within the British, Irish, Icelandic and Norwegian 200-mile limits, plus the areas within the 200-mile limits off the Atlantic coasts of Denmark, France, Spain and Portugal.)   In 2010 the EU catch in the Atlantic north-east was over 3.7 million tonnes, which was more than 70% of the EU’s total catch of almost 5.0 million tonnes.8 According to a 2012 release on the Fish2fork website, an estimated 1.3 million tonnes of fish from the Atlantic north-east are discarded every year, with up to 900,000 tonnes in the North Sea alone, including many cod.9Fishing catches in the EU

The precise value of this 1.3 million tonnes is not easy to calculate, because the prices of the various fish species fluctuate, as does the species composition of the discard. But, as mackerel and herring are usually the principal species, we can concentrate on them. Their prices weakened in late 2012 and are somewhat beneath recent peaks, with mackerel going for about £800 a tonne and herring for over £400 a tonne.10  (Cod is more valuable, at £2,000 – £3,500 a tonne.) If we take the average value as £750 a tonne (which looks sensible), the annual value of fish discards comes out as about £1 billion.

The estimate of £1 billion a year of pure waste applies to the EU as a whole. If Britain had never joined the EEC, if Britain had behaved like Norway and decided to keep control of its fishing grounds, how much of this waste would be attributable to fishing in UK waters? Given that 900,000 tonnes of the discard occurs in the North Sea, of which the UK would have half (more or less) if it had not joined the EEC, and that a big chunk of the remaining discard must happen in the rich coastal waters off Scotland, discard in what might have been ‘UK waters’ must be about 600,000 tonnes. It follows that the value of the annual waste in British territorial waters, due to fish discard, is about £450 million (i.e., 600,000 tonnes multiplied by £750 a tonne). This loss can be blamed on the CFP and the UK’s membership of the EU, since means would surely have been found of preventing it if the UK were again in control of its own fishing grounds. The squandering of nature’s bounty has been going on for many years. The capital value of the waste is enormous, and probably lies between £5 billion and £10 billion, depending on the assumptions made.11

Note that this is not a measure of the full cost of the CFP to the UK. The undoubted result of joining the EEC/UK was that the UK lost control of its territorial waters. Fishing boats from other European nations have been allowed to fish in waters that would otherwise have been open exclusively to the British fleet. Roughly speaking, what might have been ‘UK territorial waters’ account – in terms of potential catch – for about half of the EU’s sea fishing resource.12  But the quota system has been applied to limit the UK share of EU output to about 12% of the total.13   An estimate of the resulting loss to the UK depends to some extent on how fishing rights would have been allocated in the UK if we had retained full control of the territorial waters. (UK-born people might have quit fishing for more salubrious occupations, even if we had not joined the EEC/EU. Who knows?)14

However, a reasonable surmise is that the UK industry might be double its present size if we had stayed outside the EU. If the resources (the capital cost of the fleet, the cost of the fishermen’s labour and so on) involved in the activity would be a third less productive in the nearest alternative use, the cost of the CFP to the UK might be over £300 million a year at present fish prices.15 This cost is due to the CFP as such. It arises because the CFP has caused the UK’s fishing fleet and catch to be smaller than it would be if the UK had stayed, like Norway, fully independent and outside the EEC/EU. Again, the capital cost of this loss must run into the billions. (The chart above relates to 2010 and shows the % shares of EU member states in the total EU sea catch. The UK has the best fishing grounds of any country, but its share is under 12½%. The combined share of Poland, Latvia, Lithuania and Estonia – which became EU members only in 2004 – is similar to the UK’s. A tough line in EU bargaining could easily have stopped this outcome. The UK government has been craven and incompetent in CFP negotiations for over 40 years, and overall its behaviour towards the fishing industry has to be described as shameful.)

Whatever the sensitivities of the British and the citizens of other EU member states about these matters, one point cannot be controversial. The discarding of dead fish on an industrial scale is outrageous. (And, for once, the phrase ‘on an industrial scale’ is not hyperbole.) It is a shocking indictment of the European Commission that such immense waste can be directly attributed to one of its areas of policy responsibility. Under the terms of the Lisbon Treaty the EU has an exclusive competence for conservation of fishing, whereas the management of fisheries is a competence shared with the member states. Jeremy Paxman of the BBC’s Newsnight programme has commented, ‘if discards are conservation, I’m a Mad Hatter’. A number of the UK’s ‘celebrity chefs’ have protested vigorously about the iniquities of the CFP, with Hugh Fearnley-Whittingstall organizing a FishFight website and a television programme of the same name. In June 2012 the Council of Ministers reacted to this pressure by agreeing that discards must stop. In May 2013 the agreement was made more definite, with the ban on discards to be phased in from 2015. Once discards have been outlawed, quotas will be based on scientific advice on the ‘maximum sustainable yield’ and implementation will be  facilitated  by  new  monitoring  technologies.  (Boats  will  have  to  install  cameras,  weighing equipment that can be tracked from shore and so on.) A small margin for discards will continue to be allowed.

It has to be said that, for all the problems, cuts in sea catches over the last few years have improved the sustainability of Europe’s fisheries. According to the June 2013 European Market Observatory for Fisheries and Aquaculture Products, ‘Although 39% of assessed fish stcoks in EU waters of the north-east Atlantic are still overfished, this is down from 47% one year before and 95% in 2005.’16 In fact, cod – which is one of the most valuable species – is currently abundant in the North Sea, despite scientific concern about its sustainability in European waters. The EU has reduced the UK’s cod quotas in the last two years, as a penalty deduction for previous over-fishing (relative to quota), even though cod is certainly not in short supply. As one fisherman said to a House of Commons committee in December 2011, ‘I am happy with individual quotas, but not with quotas being set by scientific assessment if the scientific assessment is not 100%. You will agree with me…that it is ridiculous to have a situation where we are virtually knee deep in cod, but fishermen cannot catch them.’17

Set-aside and ‘rural development policy’

Discussion of the resource misallocation due to the Common Agricultural Policy took up a large part of the third chapter. However, EU policy towards the farm sector has another deleterious effect. It not only causes Europe’s farmers to use scarce land and other inputs inefficiently and without regard to market demands; it also to some extent pays Europe’s farmers for doing nothing at all or according to a formula linked to past production. In other words, payments are made that have no relation to current or future production, and therefore cannot be responsive to the latest market indications of under- or over-supply.Payments for producing nothing

The rot started in the late 1980s, when awareness of the over-production sponsored by the CAP became general. In 1992 so-called ‘set-aside’ became compulsory. Arable farmers had to take 15% of their land out of production, in order to halt the growth of the EU’s ‘grain mountain’. (The 15% was later reduced to 10%.) In 2005 payments to farmers were made for ‘set-aside entitlements’, meaning the area of land that had historically been taken out of production. More recently, rising Asian prosperity has increased food prices, including the price of grain, and set-aside arrangements have been abolished. However, the EU continues, via various ‘income support’ schemes, to pay farmers for past patterns of land use and even to compensate them when they are not producing food at all. These are usually justified on the grounds that they help the environment or rural development. The fact remains that they are, in effect, payments for doing nothing whatsoever. Seen objectively, they are waste pure and simple. Farming in response to market demand, which was of course the norm in British agriculture before EU accession in 1973, has been replaced by the farming of grants, subsidies and concessionary loans, mostly by means of form filling.

When allowance is made for the rules and regulations that restrict farm productivity (such as those that limit or prohibit certain seeds, pesticides, rodenticides and so on), the loss of production must run into hundreds of millions of pounds a year, perhaps even into the billions. Given that the second chapter covered the costs of regulation, the focus here must be the costs of set-aside and its sequel, the ‘second pillar’ of the CAP, which is also known as ‘the rural development policy’. Payments under the second pillar are biased towards the small farms, on the grounds that large farms are more likely to pursue highly modern and intensive farming methods. But large firms are also those that are the most efficient and productive.18  By common consent, the UK could produce much more food than  it currently does, and would do so if its farmers had greater freedom in land usage and were subject to market forces. No one knows exactly how much more productive UK farming might be in a very different unsubsidized and lightly-regulated context, but a rise of a fifth to a quarter might be feasible. Gross value added in UK agriculture in 2010 was £7.4 billion.19 The cost of lost farm output, due to payments for not producing, burdensome and unnecessary regulation and so on, might be £1½ billion to £2 billion a year, not enormous compared with the damage to most of the economy from EU regulation, but still worth mentioning. (£2 billion is about 1/8th of one per cent of GDP.)List of EU directives relevant to the UK water industry

EU directives and the water industry

In early 2012 the UK was in a strange position. It is a nation blessed by abundant rainfall with a long history of high-quality and low-cost tap water for the great majority of households, while over the previous decade investment in water supply had been higher than in any previous 10-year period. But large parts of the UK were forecast to be subject to a hose-pipe ban in the summer months.20 The ban was expected, because reservoirs and other water catchment facilities were thought liable to run dry, and water had to be conserved. How had this come to pass?

Central to any answer must be the effect of EU environmental directives on the UK water industry. Superficially, the purpose of these directives has been benign. As they have mandated that the whole of the EU must move to higher levels of air and water quality, they can be portrayed as attempts to make the world a better place. However, the benefits of higher air and water quality, and of better environmental standards more generally, can be bought only at a cost. Ideally, a balance should be maintained between cost and benefit, and policy should respect the recognised principles of social cost/benefit accountancy.21  Many well-informed observers feel that the benefits of environmental improvement have been bought at too high a price. The history of the European Commission’s endeavours to enhance the EEC/EU’s environment goes back to the mid-1970s, with the 1976 Bathing Waters Directive. As Table 5.1 shows, several directives have subsequently been passed. Indeed, the 2000 Water Framework Directive has often been seen as a new departure in the rigour of the EU’s environmental prescriptions. One discussion of the resulting policy issues referred to the 2000 Water Framework Directive and ‘its daughter directives’.22

The UK government has been more active than that of most other member states in seeking a proper reckoning of the costs and benefits of these exercises. In 1999 the Department of the Environment, Transport and the Regions considered the potential costs to the UK of the imminent Water Framework Directive, and arrived at a figure of between £3.2 billion and £11.2 billion at current prices (i.e., the prices of 1999) over the period to 2040, assuming full implementation by 2010.23  Since then prices have risen by about a third, while – as Table 5.1 brings home – additional directives have come into effect. Precise quantification needs another in-depth study, but we are evidently talking – in terms of 2012 prices – of a cost that lies somewhere between £5 billion and £20 billion, perhaps more. Of course this cost is incurred over a period of a few decades. All the same, the bulk of the cost lies in the early years of implementing the directives, which results in the greatest pressure on the nation’s resources at that stage. It is not silly to be thinking in terms of extra costs of at least £500 million a year for the UK to meet the assortment of EU environmental impositions.

A major counter-argument is that this expenditure has important benefits, in terms of cleaner and less polluted  water,  the  return  of  fish  to  rivers,  the  hygienic  advantages  of  swimming  off  beaches unaffected by sewage, and so on. However, the UK’s water industry had been investing in the various forms of environmental improvement for decades before the EU directives came into force and indeed before the UK joined the EEC. Even the Commission has accepted that the UK is ‘fairly advanced in the field of water monitoring and administrative systems compared to many member states’.24  Any worthwhile appraisal must weigh the extent of improvement against the costs involved. In a 2007 official answer in the House of Lords to a question from Lord Pearson of Rannoch, a UK government minister said that over the previous decade compliance with the Water Framework Directive and ‘its daughter directives’ had necessitated investment of £65 billion. By contrast, only £14 billion of investment had been available for the water industry’s infrastructure.25

On the face of it, the UK water industry has been characterized by over-investment, even extreme over-investment, in attempts to ameliorate water quality, and under-investment in infrastructure to maintain and expand supply to its customers. The misguided investment pattern can be attributed, almost  entirely,  to the UK’s  obligation  to comply  with EU directives.  The under-investment  in infrastructure in turn explains the paradox faced in early 2012. In the previous 15 years over £100 billion had been invested by the water industry. But the industry’s storage capacity had not changed, as too much of the investment had been to meet EU water purification targets. That was how, in an island notorious for its rainy weather, millions of households were forecast to be subject to a hose- pipe ban. In a recent analysis Sir Ian Byatt, the director general for water services at Ofwat (the UK water regulator) in the 1990s,  was blunt. ‘We should switch the emphasis from the volume of investment to its quality, to better returns from assets, to better management of networks, to the trading of water and abstraction rights and to the regulatory monitoring of outcomes rather than of projects.’26  The first line of his executive summary read, ‘The drive to attain ever-increasing water and environmental quality at ever-increasing cost must come to an end’.

So we have here another area of public policy where costly mistakes have been made over an extended period because of the UK’s membership of the EU. The drive to purify UK water has been taken to extremes. It has had an unnecessarily high cost and, in that sense, it has involved a great deal of waste. The discussion here makes no pretence at being definitive, but the level of waste per year must run into the hundreds of millions, perhaps into the billions, and the capitalized value of the waste must be £5 billion or more. (A smaller figure would make little sense, given the investment totals involved and the virtual unanimity of informed commentary on the misdirection of investment.)

Corruption, fraud and irregularity

This and the next section are concerned with ‘fraud’, ‘corruption’ and ‘irregularity’ in the EU, and the effect of this fraud, corruption and irregularity on the cost of EU membership to the UK. But the distinctions in this area are a little fuzzy, while the whole subject is vast. A few years ago Carolyn Warner, an American academic with a Harvard doctorate and now professor of political science at Arizona State University, published a scholarly yet still devastating book on what might be termed the EU’s ‘corporate governance’.27   The book was called The Best System Money Can Buy, but the implicit sarcasm was made clear with the sub-title Corruption in the European Union. The titles of the chapters  included  ‘Corruption  dynamics  in  the  European  Union’,  ‘“Corruption  is  our  friend”: exporting graft in infrastructure, arms and oil’, ‘The corruption of campaign and party financing’ and ‘The pathologies of an international organization’. Obviously, something is wrong.

Numerous allegations have been made of large-scale and endemic fraud in EU institutions. In early 1999 the allegations reached such a crescendo that the Commission, headed by Jacques Santer of Luxembourg, was obliged to appoint a Committee of Independent Experts on its own workings. Its report was produced on 15th  March, and presented to the Commission and Parliament. Nearly all members of the Commission were cleared, more or less, of doing anything improper. But Edith Cresson – Commissioner for Research, Science and Technology and a former French prime minister – was  not. The  verdict  was that  she  ‘failed  to  act  in  response  to  known,  serious  and  continuing irregularities over several years’ and, in particular, she was guilty of not reporting failures in a youth training programme from which vast sums went missing. The independent experts concluded, more generally, that inside the Commission, ‘It was becoming increasingly difficult to find anyone who had the slightest sense of responsibility’.28  Given the damning tone of the report, the entire Commission felt obliged to resign.

The Santer Commission episode might have been expected to be followed by an improvement in record-keeping, and the clarification of reporting lines, responsibilities and so on, but this appears not to have been the case. As the ultimate paymaster of European integration, the German taxpayer has to be concerned. According to a 2007 report in Der Speigel, fraud committed in Brussels was running at one million euros per day. At that time 400 investigative procedures against EU officials were pending.  The  Commission  claimed  that  corruption  was  no  more  widespread  in  Brussels  than anywhere else, but the budget expert for the German CDU in the European Parliament, Inge Grassle, described this view as ‘laughable’. The figure of one million euros a day of loss through fraud may sound bad enough, but the true figure – both then and now – is probably much higher.29

So the EU is ‘riddled with fraud’, as the standard cliché claims. How does that affect the cost of EU membership to the UK, which is the central interest of this study? A simple and straightforward calculation will not emerge, because by its intrinsic nature fraud is opaque or concealed. The Cmnd. 8405 White Paper on European Union Finances 2012 did contain a table on the EU’s financial ‘irregularities’ and their ‘estimated impacts’ in terms of millions of euros at stake, the main points of which  are  reproduced  in  Table  5.2.  For  the  record,  in  2010  there  were  over  10,000  cases  of irregularity in the spending of EU money and about €1,800 million was in jeopardy. A marked increase in financial control problems took place in the two years to 2010, since in 2008 there were under 6,600 cases of irregularity and less than €800 million was at stake. But, as noted above, because the UK’s direct fiscal costs come to much the same thing as our payments to finance the EU Budget, the UK share of this €1,800 million (which might be about €250 million) should not be interpreted as the additional cost of EU fraud to us. (Remember that direct fiscal costs were covered in chapter 1. To add €250 million for the cost of fraud would be double-counting. We have paid the money and that is that. Citizens in the recipient countries ought to be dismayed that the money they receive from the EU is being grotesquely misdirected, but it is not our problem.) Nevertheless, a striking recent example of semi-fraud, actual or potential, deserves mention. As it happens, the sums involved are not part of the UK’s direct fiscal costs and adding them to the overall cost of EU membership does not risk double- counting.Number of EU irregularities and estimated financial impacts

In the 1960s the UK embarked on a massive programme of university expansion, following the Robbins Report of 1963. One objective was to increase the skill levels of the British workforce, since recent academic research had found strong returns on investment in higher education. Plainly, the post-Robbins expansion was intended to benefit the British specifically and to improve the UK’s international economic competitiveness. By common consent the UK’s universities have long constituted, and still do so today, the best higher education system in Europe.

However, because of the UK’s membership of the EU and the resulting pressures for the equalization of access to every member states’ institutions, British universities have increasingly to invite entry on the same basis to students from all over the EU. British universities are not meant to discriminate in favour of British students. Further, since 2006 students from around the EU have been eligible for low-cost loans, to cover tuition fees, from the British state. But will the UK get the money back? UK- based graduates have loan repayments automatically deducted from income under the PAYE arrangements. But no such method can be applied to graduates from British universities who return to, say, Portugal or Slovenia. According to a story in The Daily Mail for 10th August 2012, ‘42% of EU students [who had graduated from UK universities]…are liable for repayments, but are failing to keep up’. On 12th  May 2013 The Daily Mail carried another story amplifying the message. In its words, ‘Overseas students who have returned home after graduating from British universities have failed to pay back their tuition fee loans, costing UK taxpayers more than £50 million. With amounts owed by many European graduates spiralling, the Student Loan Company has taken the drastic step of calling in private investigators to find the missing money.’30

In effect, by reneging on their debts, students from the rest of the EU obtain a free education at the expense of the British taxpayer. The Robbins expansion of our universities is therefore benefiting foreigners, not us. As the former Conservative Cabinet minister, Peter Lilley MP, observed, ‘we will need to do something to stop subsidizing the EU by providing their brightest and best with free education’.31 The eventual loss to the UK is difficult to conjecture. Unsurprisingly, students from the EU countries with the worst recessions, namely Greece and Cyprus, are proving the most awkward. EU students’ outstanding debt to the UK’s Student Loans Company has climbed to just over £117 million in the last five years. Students from Cyprus have borrowed £24 million, but paid back only £15.5 million.32  The amount eventually written off may be in the tens of millions if proper controls are soon introduced or in the low hundreds of millions if nothing is done for several years. We have here  an  obvious  case  of  pure  loss  to  the  UK  taxpayer  because  of  fraud  arising  from  our  EU membership

Costs of corruption

The British have traditionally made a great song and dance about their history, and the specialness of their  institutions  (the  home  of  parliamentary  democracy,  the  rule  of  law,  the  separation  of  the executive from the judiciary, the flexibility of the common law, the bicameral parliament in which one house is for revising legislation, habeas corpus, trial by jury, and so on). Unfortunately, to the extent that we still make a great song and dance about the marvel of our constitutional arrangements, we are becoming ridiculous. The fact is that many of our key traditional constitutional arrangements are null and void; the reality is that, as in other EU member states, the dominant source of new legislation is not the democratically-elected House of Commons, but an alien bureaucracy in a foreign land. Elected politicians from our own country have often to kowtow to unelected functionaries from several  foreign  countries,  where  these  functionaries  act  with  the  authority  of  the  EU  and  its institutions.

The enormity of the betrayal must raise questions about the motivations of the politicians involved, as well of course of their civil service advisers and associates. No one is claiming that heads of state, senior ministers and top officials have received direct bribes from EU institutions to persuade them that they should surrender powers to the EU. Nevertheless, corruption has been at work. In politics a distinction can be drawn between ‘hard’ and ‘soft corruption’, just as in diplomacy there is one between ‘hard’ and ‘soft power’. Hard corruption is the payment of specific sums for an identifiable improper action, usually in its immediate aftermath. Soft corruption is the hinting that unspecified favours will be granted, perhaps at a distant date in the future, for an action just far enough from the border-line of political propriety. Whereas hard corruption deals in money, soft corruption deals in jobs and honours.

The EU abounds in soft corruption. Bluntly, there is no doubt that the British political class has been turned by the jobs and honours on offer. The Labour Party’s manifesto in the 1983 general election included withdrawal from the EEC. Neil Kinnock, an MP since 1970, was prepared to fight the 1983 election on that manifesto. However, after becoming leader in October 1983, Labour’s opposition to European unification was diluted and eventually abandoned. After losing the 1992 general election Kinnock became a European Commissioner and stayed in Brussels for nine years. His wife, Glenys, was a Member of the European Parliament from 1994 to 2009. In 2009 she was made a life peer and for a few months she served as Minister of State for Europe. On 14th  June 2010 The Daily Mail carried a story on how Neil and Glenys Kinnock had ‘received more than £10m. in pay, allowances and pension entitlements during their time working at the European Union in Brussels’. According to the story, ‘the couple’s lavish lifestyle’ was ‘funded from the public purse’.33

The growth of soft corruption is related to the rise of the so-called ‘career politician’. A career politician might be defined as someone who wishes to be engaged on a full-time basis in political advocacy from which he or she intends to make a living. The intention to make a living from politics does not rule out the possibility that the individual concerned may, at some stage, have entertained strong political beliefs of a selfless and idealistic kind. But the winnings from a political career tend to go towards people who approve of and participate in the current drift of public policy. Whatever someone’s original views, the case for joining the latest bandwagon is also the case to pay school fees and afford a large mortgage. As the EU has grown, it has proliferated jobs of all sorts. All too often the bandwagon for European integration has been financially rewarding for those who have joined it.

Indeed, people who have already jumped abroad the EU bandwagon do their best to make others jump aboard too. The 1992 Maastricht Treaty contained provisions for the deliberate encouragement of so- called ‘political parties at European level’, meaning structures that would include individuals from a number  of  member  states  and  band  them  together  to  support  the  cause  of  greater  European integration. The 1997 Amsterdam Treaty and the 2001 Nice Treaty went further, introducing mechanisms whereby these ‘pan-European political parties’ (PEPPs) could be subsidized via the European Parliament. Those MEPs that decided to join a PEPP would receive increased expenses, while their party could set up a think-tank with state funding on the German model.34  A number of PEPPs now exist under the European Parliament’s umbrella, with all three of the UK’s so-called ‘main  political  parties’  belonging  to  one.35   (A  PEPP  is  a  brass-plate  political  entity,  the  only substantive function of which is to channel European Parliament money to MEPs. They have no meaningful identity in the political life of any EU member state. Ironically, modern Europe has a large number of separatist or autonomy-seeking parties in its member states – such as the Lega Nord, the Scottish National Party and the Convergencia Democratica de Catalunya – that are extremely meaningful in their national political debates.)

In 2008 the funding for pan-European political parties was €10.6 million. The last few years have been exceptionally difficult ones for most European economies, with many national governments having to slash expenditure by over 5% and in some cases by more than 10%. However, PEPPs are part of the EU bandwagon and, within Europhile circles, the budget for PEPPs is seen as a priority in the larger cause of ‘European construction’. (Let me reiterate that we in Britain must not be ‘holier than thou’ about this matter.  The UK MEPs representing the Conservative, Labour, Liberal Democrat and Green parties have all taken the money associated with a PEPP affiliation.) So by 2012 the funding for pan-European political parties had increased to €31.0 million and the budget allocation for 2013 was a further advance to €34.2 million!36  In five years the cost had jumped by over 200%. Europe’s economies had undergone the worst economic downturn since the 1930s, a veritable ‘Great Recession’, but expenditure for the purpose of greater interaction between EU politicos, for freebies, jaunts, jollies and the like, had carried on booming.

In short, the emergence of a European political elite in the last 50 years has been accompanied by serious corruption. The growth of corruption validates the insights of the Virginia School of Political Economy, or ‘the economics of politics’, first developed by James Buchanan and Gordon Tullock in the 1960s and 1970s. Buchanan and Tullock’s central point was that the tools of economic analysis could be applied to topics such as politics, bureaucracy, law, constitutions and so on, as well as to economists’ more familiar concerns like the determination of the prices and quantities of goods and services. In other words, political decision-taking can be studied as if politicians resemble the average mortal, and are often greedy and selfish.

Before Buchanan and Tullock’s work an implicit assumption of most policy debates was that government existed to serve the public interest. With the government focused on the public interest, the purpose of political action was taken to be Benthamite, to achieve the greatest good of the greatest number. This chapter has shown that within the EU many decisions are taken with a view to the aggrandizement – including the financial aggrandizement – of political cliques. Politics is about the greatest good of oneself and one’s chums. The idea of pan-European political parties is an egregious example. It was conceived by the supranational EU bureaucracy so that politicians would align themselves with like-minded Europeans in other countries and hence approve further integration. The bandwagon had to be kept rolling, regardless of the costs and waste involved.

The best system money can buy?

Dysfunctional structures of government have encouraged cynicism and selfishness in the European political elite, and the result has been widespread and large-scale waste, fraud and corruption. As Carolyn Warner remarked in the penultimate chapter of her 2007 book on contemporary Europe,

…the institutions of the EU have a limited role in reducing corruption in member states. Compounding the EU’s feeble influence within the states are the new opportunities for creative funding and outright graft that the EU provides….[T]he EU is a thick tangle of negotiated rules and regulations, most of which govern economic transactions. In an elaborate process, states and others promulgate these European Union rules and regulations, which they then leave to the states and their national and subnational government agencies to implement and enforce. State interests may lie in deliberately tolerating fraud in certain economic sectors, and behaviours that were thought to be culture or state specific may be universalized through the new institutional context.37

How much does all the misgovernment cost the UK? It needs to be remembered that chapter 1 dealt with the direct fiscal costs of UK membership and chapter 3 with the costs of regulation. Although many of the developments discussed in the current chapter are deplorable, we must avoid double- counting. The water industry is an interesting borderline case. The loss from over-investment in water purification could be viewed as a cost of regulation or as an example of waste, and there is nothing sacrosanct about the allocation of topics to particular chapters adopted here. At any rate, the fish discard is clearly waste, indeed – as we have said – waste on an industrial scale. That justified including the Common Fisheries Policy in the present chapter. Although the fishing industry is small, the CFP undoubtedly makes the UK several hundreds of millions of pounds a year worse-off than it would have been if, like Norway, it had stayed out of the EU and kept control of its territorial waters. Similarly, payments to farmers for producing nothing are also waste. They may be modest in the larger scheme of EU extravagance, but they should not be overlooked.

Britain could also lose out from its apparent subsidization of foreign EU students at its universities, and the corruption that marks the extravagant expansion of the EU’s bureaucracy and associated political hanging-on. Although the costs of the EU to the UK from waste, fraud and corruption are small relative to its GDP, they are costs. Precise quantification is elusive, but another 3/8% of GDP looks more valid than saying that there are no costs at all.38


1 See the alarming accounts in Marta Andreasen Brussels Laid Bare (Yelverton, Devon: St. Edward’s Press, 2009) and David Craig The Great European Rip-off (London: Random House, 2009). The EU’s Budget is subject to a quality test (‘a declaration of assurance’) by the European Court of Auditors. The EU’s annual accounts have not been certified in this sense by the external auditor since 1994. In its annual report on the implementation of the 2009 EU Budget, the Court of Auditors found that the two biggest areas of the EU budget, agriculture and regional spending, had not been signed off on and remained ‘materially affected by error.’
2 On 7th June 2012 Angela Merkel, the German chancellor, said on the ARD German television channel ahead of the next summit of EU leaders on 28th June, ‘We need political union first and foremost. Step by step we must from now on give up more competences to Europe, and allow Europe more powers of control…I don’t believe that there will be one single summit that will decide on a big bang. But what we have been doing for some time, and on which a working plan will certainly be presented in June, is to say we need more Europe’. Merkel was undoubtedly ‘in the driving seat’ at the summit itself.
3 The British government has on more than one occasion asked for the full repatriation of spending of regional development money, saying that it would save a few hundred millions of pounds of administrative costs. The subject was also discussed in chapter 1.
4 But note that this is not an extra cost to the UK, over and above that already discussed. The money is already included in the direct fiscal cost to us, which was discussed in the first chapter.
5 The story of the UK’s virtual abandonment to other European nations of its control of a major national resource is told on pp. 152 – 55 of Christopher Booker and Richard North The Great Deception: a Secret History of the European Union (London: Continuum, 2003). Norway was also an applicant for EU entry at the time, but – when the fisheries minister realized the implications of the equal access provision for Norway’s industry – he resigned in protest. When the Norwegian people were asked in a referendum in late 1972 for their view on EEC membership, they voted against by 52.7% to 47.3%.
6 The seminal article is Garrett Hardin ‘The tragedy of the commons’, Science, vol. 162, 13th December 1968, pp. 1243 – 8. For a discussion of the larger issues raised by this problem in social organization, the fifth chapter of Roger Scruton’s recent book on Green Philosophy is excellent. (Roger Scruton Green Philosophy [London: Atlantic Books, 2012], pp. 137 – 82.
7 Elinor Ostrom Managing the Commons: the Evolution of Institutions for Common Action (Cambridge: Cambridge University Press, 1990).
8 In the 2012 edition of this publication the source was Facts and Figures on the Common Fisheries Policy (Brussels: European Commission, 2012 edition), p. 20. No 2013 edition of Facts and Figures on the Common Fisheries Policy was available at the time of writing (August 2013). The source for the figures was the fisheries section of the European Commission’s Eurostat website, as at 21st August 2013.
9 ‘Campaigners hail deal to ban discards across Europe’, Fish2fork website (www.fish2fork.com), 13th June, 2012. The estimate of 1.3 million tonnes seems originally to have made by the United Nation’s Food and Agricultural Organization, but the author has not been able to verify the exact source.
10 ‘Scottish fishermen landed catches worth more than £500 million last year – a 10-year high – according to provisional figures posted by the Scottish Government. The figures show a 15 per cent increase in the value of landings valued at £435 million in 2010. Price per tonne landed for herring rose from £280 in 2010 to £450 last year, and mackerel from £839 a tonne to £1,118.’ Business section of Scottish Daily Record website (www.business7.co.uk), Value of Scottish fishing landings at 10-year high, by Scott McCulloch, 17th April 2012.
11 The net present value of £500 billion over 20 years discounted at 7% is £5.3 billion or discounted at 3% £7.4 billion. As far as I am aware, this is the first comprehensive estimate of the cost of fish discards to the UK, although the subject has received extensive media coverage in other respects. Let me emphasize that, as noted in the text, much depends on fish prices and species composition.
12 Fishing is split between sea fishing (‘pelagic’ and ‘demersal’) and aquaculture. (Pelagic fish are found near the surface and include herring and mackerel; demersal are ‘bottom-feeders’, and include cod and haddock.) The CFP applies almost entirely to sea fishing. It should be noticed that aquaculture – mostly fish farming in inshore or inland waters – is also a huge industry, with UK output of over £500 million. The UK has the EU’s second largest aquaculture production and is by far the largest producer of farmed salmon. For the most part the aquaculture industry is outside the ambit of the CFP. The great majority of the UK’s salmon is farmed in Scotland, where production soared from 28,500 tonnes in 1989 to almost 170,000 in 2003, but has subsequently gone sideways.
13 Facts and Figures of the CFP, p. 21.
14 Parts of Scotland (Argyll, and the Highlands and Islands) have seen a boom in aquaculture in the last 20 years, with the resulting farmed output meeting a significant part of UK demand and also being exported to the rest of the EU. (See footnote 12.) The resources used in aquaculture can be regarded, to some degree, as having been ‘freed up’ by the UK’s loss of sea fishing quotas. The author would like to emphasize that he nevertheless deplores the handing-over of fishing rights in UK territorial waters to foreigners.
15 Roughly speaking, the value of the UK’s sea fish catch is about £1 billion a year, with much depending on prices, species composition and so on. If it were twice the size, obviously output would be higher by another £1 billion, but that would mean less production of other goods and services. Assuming that the same resources were one third less productive in other branches of production, the loss to the UK because of the CFP – in terms of a smaller fishing fleet and catch than would be outside the EU – comes to £330 million a year. This estimate is rough and ready, but gives a sense of magnitudes. Another difficulty is to allow for the possible reduction in the size of the UK’s fish processing sector because we have a lower catch by our own fleet. But, since the UK fish processing sector can buy from other EU fisheries, it is not clear to the author that any allowance should be made for this point. Trade in fish between EU member states is a very high proportion of output.
16 European Market Observatory for Fisheries and Aquaculture Products (Brussels: European Commission), June 2013 issue, p. 12.
17 Evidence of Paul Joy, chairman of the Hastings’ Fishermen’s Protection Society, to the House of Commons’ Enviornment, Food and Rural Affairs Committee, 8th December 2011.
18 Sean Rickard ‘Liberating farming from the CAP’ (London: Institute of Economic Affairs), Discussion paper no. 37 (February 2012). See, particularly, p. 14.
19 The gross value of UK farm output is much higher, at over £20 billion. But much of this goes to pay for inputs from other sectors of the economy, and gross value added is much smaller. Gross value added at market prices in fact soared from under £5.0 billion in 2007 to £7.4 billion in 2010, largely because of the impact of t he sterling devaluation in 2008 and early 2009 on farm profitability. Annual Abstract of Statistics (London: The Stationery Office), 2011 fourth quarter, Table 24.1. (Gross value added differs from net by the value of the depreciation of farm equipment.) Note that household expenditure on food is over £70 billion. Food manufacturing and distribution are much larger than farming.
20 In the event the reputation of the water industry was rescued by the British weather! The spring of 2012 was one of the wettest on record.
21 Ian Little and James Mirrlees Manual of Industrial Project Analysis for Developing Countries (Paris: OECD, 1969) is the key reference here.
22 Deloitte Consulting Support to Fitness Check Water Quality (Project for European Commission – General Directorate Environment), 14th June 2011.
23 Water Quality Division, Department of the Environment, Transport and the Regions Regulatory Impact Assessment of the Water Framework Directive (DETR: London, 1999).
24 Giorgos Kallis and David Butler ‘The EU water framework directive: measures and implications’, Water Policy (London: World Water Council), no. 3, 2001, pp. 125 – 42
25 Christopher Booker ‘£65 billion of water budget poured down the drain’, The Sunday Telegraph, 29th July 2007. In the 20 years to 1997 the investment required to conform to EU directives is said to have totalled £48 billion.
26 Ian Byatt Water: Supply, Price, Scarcity and Regulation (London: Institute of Economic Affairs, August 2012), Current Controversies Paper no. 37, p. 6. The saga has been followed by Christopher Booker in his Sunday Telegraph column. In December 2011 the Department of the Environment, Food and Rural Affairs produced a White Paper on Water for Life, ostensibly to help in the public discussion of water management. As Booker acidly commented, ‘not once…is there any mention of a need to build new reservoirs’. (Chr Booker ‘Keeping us short of water is now government –and EU – policy’, The Sunday Telegraph 13th May 2012.) UK officialdom apparently believes that global warming may affect UK rainfall and hence that attempts to combat global warming are vital to prevent what it terms ‘water stress’. A quick check on the UK’s Met Office website at the time of writing (summer 2012) found the following statement. ‘The UK annual average rainfall has increased by a relatively small amount – around 2% – when comparing 1981–2010 with 1971–2000. This is a similar increase to that from 1961–1990 to 1971–2000.’ There is no evidence whatsoever that such ‘global warming’ as has occurred in the last 30 or 40 years has reduced the UK’s rainfall.
27 Carolyn M. Warner The Best System Money Can Buy (Ithaca and London: Cornell University Press, 2007).
28 The source is Nils Ringer ‘The Santer Commission resignation crisis’, University of Pittsburgh research papers (February 2003), cited in the Wikipedia entry on the Santer Commission.
29 The material in this paragraph has appeared in several Eurosceptic blogs and it is not clear to me which is the original source. An article in Der Spiegel of 28th July 2007 may be the beginning of the story.
30 ‘Student loans company calls in private eyes to track down EU students who owe £50m.’, The Daily Mail¸ 12th May 2013.
31 Laura Clark ‘Half of EU students failing to repay loans’ The Daily Mail, 10th August 2012.
32 The source for the figures is The Daily Mail story of 12th May 2013.
33 Simon McGee ‘Revealed: How the Kinnocks have enjoyed an astonishing £10m. ride on the EU gravy train’.
34 The state funding of think tanks is an established feature of the German political system.
35 In 2011 the UK Independence Party had an active internal debate on whether its MEP group should join a PEPP. The party membership voted by a majority of two to one against UKIP’s MEPs becoming affiliated to a PEPP.
36 European Parliament website, as at mid-August 2013. ‘The Budget of the European Parliament’, line-by-line analysis for 2013, Chapter 4-0.
37 Warner Best System, p. 159.
38 The number may be ad hoc, but that is better than nothing. The treatment in this chapter has been far from exhaustive. For example, the EU’s emission trading scheme turns out – to use that so-often-repeated phrase again – to ‘have been riddled with fraud’. To quote from a story in The Guardian (23rd January, 2011), ‘Hopes that a key tool in the fight against climate change can be brought back into full operation on Wednesday were fading as national governments struggled to beef up security after a huge carbon fraud was uncovered in Europe’s pioneering emissions trading scheme (ETS). The European Commission stepped in to ban “spot” trading in carbon on any local exchanges last Wednesday after a £28m cyber-attack on the Czech, Austrian and other national markets and was hoping to lift the restriction this week, but there are growing fears that new security will not be in place on time in all locations. Market experts are now calling for victims of carbon trading fraud to be compensated by the European Union to prevent the latest in a series of scandals turning traders off the ETS, which was meant to provide a blueprint for national carbon reduction schemes to be introduced in America and further afield.’ Similarly, nothing has been about the effect of the Working Time Directive on the hours worked by junior doctors and the waste attributable to their longer training period. Numerous other examples of EU-related misgovernment and consequent waste, often a by-product of fraud, could be cited.
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