Page last updated at 17:22 GMT, Tuesday, 11 November 2008

Q&A: EU budget woes

The EU's accounts for 2007 give a "fair presentation" of the EU's financial position, but there are still too many errors in most areas of spending, the bloc's independent auditors say.

The Court of Auditors says the regional funding to promote economic and social cohesion across the EU - generally called "structural" funding - is the most prone to error.

How do the 2007 accounts compare with previous years?

For the first time in 14 years the auditors' opinion on the European Commission's accounts is "unqualified" - in other words, they deem the figures to be reliable. Yet they highlight some serious errors in the underlying transactions.

Olive pickers in Greece (file pic)
The EU auditors say budget controls in agriculture are inadequate

"For most spending areas the Court cannot provide a clean opinion," the Commission says.

The estimated error rates in some spending, such as the EU's administration, have dropped. But that is not enough to affect the overall picture, because the biggest spending areas - cohesion policies and agriculture and natural resources - still have unacceptable error rates.

In 2007 the EU's budget totalled 114bn euros (93bn; $145bn) - up from 106bn in 2006.

The cohesion funds - for development projects in the EU's poorer regions - represented 42bn euros in 2007, or 36% of the total. At least 11% of that spending was irregular, the auditors say.

Too many spending errors were also found in agriculture and rural development, which accounted for 51bn euros, according to the report released on Monday.

By "errors" do the auditors actually mean "fraud"?

No - they stress that "errors" means any non-compliance with the rules for receiving EU funds. The most common errors highlighted are: inadequate documentation, overestimated payment claims and violations of the reimbursement conditions for EU programmes. For each programme there are detailed criteria about who can be paid, which activities can be reimbursed and for which period.

The auditors argue that fraud is a special case, dealt with by the EU's anti-fraud office, Olaf. Suspected frauds affected 0.16% of Commission payments in the 2000-2007 period, Olaf says - equivalent to 290m euros. In 2008 the auditors have alerted Olaf nine times about suspected fraud cases, the Court's president Vitor Caldeira says.

But according to the pro-reform, anti-federal think-tank Open Europe, the EU's Common Agricultural Policy and cohesion funds are so complex that they are "highly prone to fraud and mismanagement".

"There has hardly been any improvement in terms of the actual amount of taxpayers' money that is being wasted on fraud," Open Europe's research director Mats Persson said.

Who is to blame for the misspent funds?

The Commission points out that for about 80% of the budget the national governments and the Commission share responsibility for implementation. That means the national authorities are often responsible for checking that funds for particular projects are spent correctly.

One commission source says it's rather like a game of football where the players commit the fouls but the ref gets the blame

The auditors recommend that member states improve their on-the-spot-checks, while cautioning that the level of "tolerable risk" needs to be determined. Boosting supervision of the hundreds of EU-funded projects is expensive, and the costs need to be weighed against the benefits, the auditors say.

The British Conservatives want the Commission to "name and shame" countries that fail to certify EU-funded projects properly.

In the 2007-2013 funding period, member states have to give a certificate of compliance - issued by a national audit body - for projects before requesting EU cohesion funds.

According to the Conservative budgetary control spokesman, James Elles MEP, so far only five countries - including the UK - have introduced such a self-certification system.

Is the money paid out in error recovered later?

Not always. But that does not necessarily mean the money has been wasted. A project may have been successfully completed and the financial return from it may cover the funding error. Sometimes the benefit can be measured in terms of new jobs created.

When the Commission believes a member state has failed to account properly for EU funds it can impose a "correction" on that state - it is a demand to reimburse the Commission. In the structural funds this year the Commission recovered 843m euros in corrections. Another 1.5bn euros is expected to be recovered by March 2009.

The total of undue payments recovered by the Commission in 2007 was 1.5bn euros, while in 2006 it was just over 2bn euros.

But many of the mechanisms for recovering misspent funds are inadequate, the auditors say. In some cases, especially agriculture, it is taxpayers who carry the burden of paying for "corrections" - rather than the beneficiaries of EU funding.

The Commission says the audit "highlighted a serious lack of information on the impact of corrective actions (recoveries).

"The Commission does not yet have complete and/or fully reliable information on the consequences for beneficiaries of EU spending, the EU budget and national budgets."

What is the EU doing to reduce spending errors?

In February this year the Commission adopted an "action plan" to reduce errors in the area of structural funds. It involves helping member states to do a better job of checking projects' suitability for EU funding before submitting payment claims. It also involves tougher action to suspend payments or impose corrections on member states. The auditors have not yet measured the impact of the action plan.

The auditors insist that at least 98% of payments in each area of the budget must be error-free to get a green light. They say that in agriculture, direct payments to farmers have now met that target.

In 2005 the Commission switched to accrual accounting - a system similar to that of private firms. It means the accounts of each EU body must be signed off by that body's accounting officer before the accounts as a whole can be signed off.

The Commission can now expect a tough series of hearings in the European Parliament before MEPs take a final vote on the 2007 budget - called the 2007 "discharge" - in April 2009.

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