The EU’s annual budget is roughly €140 billion (£110 billion), representing just over 1% of the total combined gross national income of the 28 member states. Understandably, the EU and its institutions keep a close eye on how this money is spent, and work hard to ensure that fraud is avoided. In this piece, I describe the governance framework which oversees this spending, and shed some light on its operation.
How is EU money spent?
The EU budget is spent according to the priorities agreed on by member state representatives in the Council and the elected politicians in the European Parliament. In most cases they decide together on the laws behind these common policies.
One of the major tasks of the European Commission is then implementing these priorities. As such, it acts very much like any national civil service, with departments (directorates-general – DGs) covering transport, agriculture, social policy and so on. Commission staff are in close contact with civil servants in the respective national ministries of the 28 member states to discuss how best to design policy, how to cost it, and then how to actually make it happen on the ground.
Most of the EU budget is spent across the regions of the EU member states. European policies are designed in such as way as to ensure that regional and local authorities in the member states, such as town councils, are as active as possible in spending the money on their own projects.
Who is responsible for ensuring money is well spent?
There is a clear division of labour between the Commission and the member states. National governments are jointly responsible, with the Commission, for ensuring that there are control mechanisms in place at the national level to provide oversight while money is being spent, and not simply once it has been spent. Together they should ensure that money is used properly – which means correctly, fairly, wisely.
The European Court of Auditors (ECA), established in 1977, assesses the soundness of the financial management systems in place in those public bodies spending the EU budget. The ECA performs different types of checks: financial audits (“Do the sums add up?”), compliance audit (“Is the spending legal?”) and performance audit (“Did the spending provide value for money?”). It has decades of professional experience in auditing, employs specialists with extensive experience in the private sector, and is active in shaping the rules and practices of audit internationally.
How does the ECA do its work?
The ECA employs around 1,000 people (of which only half are auditors), and so it cannot check every transaction. Instead, based on their examination of accounts, and sometimes following site visits and interviews with financial managers, they determine the likelihood of error in spending. They perform checks on a random sample of transactions and follow the spending all the way through the financial management system over time.
The ECA’s auditors encourage national audit offices to cooperate and help them in their work. This is sophisticated business, even using GPS and satellite mapping in areas such agricultural and regional policy. Auditors today are not just number-crunching accountants, but come from a wide range of disciplines including psychology, social science, and even veterinary medicine.
In a sense, the approach taken by the ECA is unique: it is asked to come up with a likely percentage rate of error for every policy area financed by the EU budget. This is something that none of the 28 member states actually do themselves, yet it was a demand – some say of the British and Dutch – introduced after the Maastricht Treaty in the mid-1990s. Such in-depth audit effectively means that the EU attempts to provide a higher level of financial accountability for its budget than the member states for their own national budgets.
So in the end, is money spent well, and if not, why?
When you look up close at ECA reports you see quite a lot of error in expenditure across many policy areas, usually ranging from 3% to 7% – though this fluctuates year on year. However, this error does not necessarily mean fraud; rather, it usually means that the admittedly complex rules were not followed.
Thus, administrative error implies the civil servant at the town council who filled in the form wrong, the finance officer in a regional authority who put an item in the incorrect column of the budget, or the project leader at the municipality who misunderstood the rules, for example, on public procurement or concerning the eligibility of different project costs. Many errors can be easily explained. In most cases there is no intention to spend money inappropriately. In such cases, the European Commission seeks to recover the funds concerned.
But what about all the fraud?
Sure, some attempts to defraud the system may creep in at both the European and the national level, and in those cases action is taken. According to the Commission’s estimates, only 0.2% of annual spending may be affected by fraud. To tackle this, the EU established a fully-fledged anti-fraud office (OLAF) in 1999. This independent body looks into individual cases where there are suspicions of misspending. Following investigations, its efforts have led to millions of euros of public money being recouped, and sometimes to prison sentences.
At present, OLAF does not have a legal mandate to pursue criminal investigations but relies on the national authorities to do so. There is, however, growing support for the creation of a European Public Prosecutor’s Office, an independent authority that could investigate directly and prosecute fraudulent activity involving the EU budget.
Conclusion: democratic oversight by parliament(s)
Newspapers pay attention to ECA reports detailing how the EU budget is spent, and they tend to take particular interest in its annual report to the European Parliament (published each November). The findings really relate to how the 28 member states have spent funds under the European Commission’s supervision.
If the Parliament is dissatisfied with the information provided, or upset by what the reports find, then it can instruct the Commission to take corrective measures and postpone or even refuse to give discharge. This means that it can refuse to ‘release’ the Commission from its responsibility to manage EU funds.
The findings are also examined at the national level, and in this country the job is done by the Public Accounts Committee in the House of Commons. The select committee is made up of 15 MPs, currently a mix of Conservative, Labour, Lib Dem and SNP members.
The ECA examines a whole range of spending areas throughout the year, with ‘special reports’ addressing how particular EU policies and programmes have actually performed. Its conclusions and recommendations provide vital information for policy-makers, politicians, citizens and the media. They are delivered to the European Parliament and examined by its specialist Committee on Budgetary Control, as well as to other spending committees.
Thus at each level, both in Brussels and in the member states, there are directly elected individuals engaged in the formal oversight and scrutiny of EU spending. There is a well-established and effective control mechanism in place. Conclusions from audits and investigations are drawn, and where necessary, action is taken, in order to protect the taxpayer’s interests.
Dr. Paul Stephenson is Assistant Professor in the Department of Political Science at Maastricht University in the Netherlands, co-convenor of EUFINACCO, an interdisciplinary research network on financial accountability in the EU.
The views expressed in this explainer are those of the authors and not necessarily those of the UK in a Changing Europe initiative.