With very little fanfare, the European Commission this month published
detailed information about how European Union money is being spent.

Much of that information is as dry as dust, but some of it is political gunpowder, concerning billions of euros wrongly paid out or inadequately accounted for. This is explosive stuff that could lead to detonations during the course of the next 12 months. For those who care to look, the Commis-sion has provided a sneak preview of some controversies that will be played out later – with the member states, with the Commission’s external auditor, and with the European Parliament. In the midst of some very tense negotiations about the EU’s budget for 2013 and about longer term spending (the multiannual financial framework for 2014-20), this evidence about whether EU money is being spent wisely and well is politically extremely sensitive.

That may be why the Commission’s vast public relations machine stayed silent as the college of European commissioners approved “the report on management achievements in 2011”.  The title is misleading – perhaps deliberately so – for the report’s real significance is that it lists management failures and weaknesses. It is the mechanism by which the commissioners are held to account for what goes on in their departments. It synthesises the annual activity reports of all the different Commission departments and executive agencies.

As the Commission itself puts it, “by adopting this synthesis report, on the basis of the assurances and reser-vations made by its directors-general and heads of service in their annual activity reports, the Commission takes overall political responsibility for management of the EU budget”.
The annual activity reports and the synthesis report are a bureaucratic response to the infamous accusation from a committee of inquiry that brought down the European Commission of Jacques Santer in 1999: “It is becoming difficult to find anyone [in the Commisssion] who has even the slightest sense of responsibility.”

The heads of Commission departments, offices and executive agencies are held to account, through their annual activity reports, for their stewardship of human and financial resources.

Each report includes a statement of assurance from the director-general that “the resources assigned to the activities described in this report have been used for their intended purpose and in accordance with the principles of sound financial management, and that the control procedures put in place give the necessary guarantees concerning the legality and regularity of the underlying transactions”.

A link in the chain of authority between Commission officials and their political masters – the commissioners – is made because the annual activity reports confirm that the director-general has informed the relevant commissioner or commissioners of the main elements of the report, including any reservations that they are entering about their statement of assurance. The directors-general are supposed to flag up any issues that they think should be brought to the attention of the college of commissioners, to be considered at the political level. In practice, during the discussions between the individual departments and the central departments of the Commission (the secretariat-general, the budget department and the office of the Commission president) there are occasionally fierce disagreements about what caveats and reservations can be entered.

The central services try to discourage departmental heads from passing up – or shirking – responsibility for managing their departments and the EU money. But they also try to discourage directors-general from entering politically inconvenient reservations. The Commission’s external auditor has criticised annual activity reports for not including more reservations and entering more warnings.

Fact File

Commission departments and executive agencies with reservations:

Directorates-General:
Agriculture and Rural Development (AGRI)
Budget (BUDG)
Climate Action (CLIMA)
Employment, Social Affairs and Equal Opportunities (EMPL)
Energy (ENER)
Enterprise and Industry (ENTR)
Health and Consumers (SANCO)
Home Affairs (HOME)
Information Society and Media (INFSO)
Maritime Affairs and Fisheries (MARE)
Mobility and Transport (MOVE)
Regional Policy (REGIO)

Executive Agencies:
Education, Audiovisual and Culture Executive Agency (EACEA)
Research Executive Agency (REA)

Lessons from the reports

So what can we learn from the synthesis report and the accompanying
annual activity reports of 40 departments and offices and seven executive agencies? (They are to be found on the website of the Commission’s secretariat-general, under the rubric “The European Commission at work”.)
Lesson one is that the Commission knows already that at the end of this year the European Court of Auditors (ECA) will once again withhold its assurance about the legality and regularity of the transactions underlying the EU’s spending. Indeed, there is a risk that the narrative of steady improvement will come to a halt or be put into reverse.

In a pre-emptive strike, the Commission puts some of that down
to changes in the ECA’s methodology for calculating error rates. The Commission fears that although it has brought down the rates of errors in recent years (overall estimated by the auditors at between 2% and 5% for the 2010 spending, compared to above 7% in 2006), the new methodology will bring unflattering comment.

But the Commission’s problems are not confined to the methodology of its auditors. The directors-general flag up a host of problems, many of them intractable.

In 27 specific instances, directors-general of 14 Commission departments and directors of two executive agencies were compelled to enter reservations to their statements of assurance. Up to €3.6 billion in payments made by the Commission last year might have been claimed or accounted for improperly. This is a six-fold increase from the spending in 2010, where payments of €600 million were thought to have been made in error.

By far the highest incidence was reported by the department for regional policy, affecting payments of between €632m and €1.427bn. The department for agriculture and rural development comes second, estimating that payments of €297m are affected, followed by the departments for the budget (€169m) and for employment, social affairs and inclusion (€59m).

The Commission interrupted payments to 91 programmes with a total budget of €2.6bn during 2011. The college of commissioners also imposed suspensions – a step up from interruptions, which can be ordered by directors-general – in four cases, one concerning funding in the Italian region of Calabria and three concerning funding from the European Social Fund in the Baleares (Spain), Calabria (Italy) and Provence-Alpes-Côte d’Azur (France).

Common errors

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From the 27 specific reservations, patterns emerge. The most obvious is a familiar story: in the case of three of the four departments with the highest amounts affected by errors, most of the money is spent through shared management with national administrations. (The fourth department, budget, is a special case – involving a member state, Belgium, thought to have mistakenly transferred €169m in customs revenue to the EU.)

The ECA has long been arguing that the rules on regional aid and agriculture and on shared management spending in general – used to administer around 80% of the EU budget – need to be simplified. There have been repeated efforts to get member states’ administrations to improve their management and controls – most recently in the protracted negotiations between member states and the European Parliament on changing the EU’s financial regulation.

Research problems

Another pattern is that six of the 27 specific reservations made in the 2011 reports concern the Seventh Framework Programme for Research and Technological Development (FP7). Here, too, the Commission is hoping for improvements following the introduction early last year of simplified rules for research funding.

The Commission argues in its synthesis report that the proposals it has made for the next multiannual financial framework should help reduce the rates of error.

However, the level of spending for that MFF has not yet been fixed. The Commission is aware that weaknesses in the use of EU money will not help its case for a more generous MFF. National governments arguing for tighter spending will be able to point to waste and error. Countering the arguments for growth stimulus through cohesion policy and regional aid, they will cast doubt on the ability of some national administrations to account correctly for EU money. Against the Commission’s argument that the EU must create an innovation economy, they will question the administration of EU research grants.

The Commission should be able to argue that the activity reports are part of an improved framework of controls and accountability – that identifying the weaknesses is a first step to remedying them. The point is valid – but there is no guarantee in the febrile atmosphere of the budget negotiations that this argument will win the day.