A d v ic e Pa p er (09 -12b)

S E P T E M BE R 2 0 0 9

building on a response to the European and External Relations Committee of the Scottish Parliament
REFORM OF THE EUROPEAN UNION BUDGET:

Summary

Scotland can influence the EU Budget review only to a limited extent.While it will consult with the Scottish
Government and other devolved administrations, the UK Government will ultimately decide the UK position on the EU Budget review.

The Scottish Parliament could usefully and pro-actively take advantage of the new subsidiarity provisions
provided in the LisbonTreaty and could engage with Scotlands MEPs to track developments in budgetary discussions in the European Parliament.

The debate on the size and priorities of the next EU financial perspective is well advanced. Climate change
and energy, competitiveness, research and innovation, the Common Agricultural Policy and Structural Funds and cohesion have all emerged as key issues that must be addressed by the next EU Budget.

Future EU expenditure should be targeted on areas where such expenditure will

bring benefits that would be unachievable by Member States acting alone, bringing added value through coordinated action; address a common problem across Member States; or assist economically disadvantaged Member States.

Scotlands long term economic interests lie in an increased focus on energy and competitiveness. Scotlands
potential in renewable energy means it has much to contribute to, and gain from, increased activity and spending at EU level.

Scottish universities compete to attract research investment and stimulate business competitiveness and
innovation.Appropriate policies at European level could play an important role in stimulating innovation. They include strengthening support for the European Research Council, sustained support for key technology areas where Europe has world-leading strengths in technology and business, and review of state-aid rules to permit a much greater use of public procurement as a tool to stimulate technology-based growth.

A reduction of CAP funding under Pillar 1 would have a major impact on Scotlands farms and it is vital
that this is well understood at Scottish, UK and EU level and that the industry is prepared to deal with an inevitable diminution of funding.

Thought must also be given to the role of agricultural funding in regional policy as the concept of territorial
cohesion becomes entrenched for the first time in the LisbonTreaty. Under current CAP Pillar 2 funding for rural development, Scotland has at present the lowest EU funding per hectare in Europe.

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Introduction
1 The Royal Society of Edinburgh (RSE), Scotlands National Academy, recently responded to the Scottish Parliaments European and External Relations Committee (EERC) on the second phase of its inquiry into reform of the future EU Budget and the implications for Scotland1.This paper builds upon that response, discussing identical issues but in more detail. The RSE has distinguished Fellows in the areas of public finance, economics, European policy and affairs, research and innovation. It has also published major inquiries such as the Future of Scotlands Hills and Islands 2(2008) and the Future of the Scottish Fishing Industry 3 (2004) which are relevant to the debate on the future EU Budget. In considering how we could maximise the benefit of our contribution to the Committee, we sought to identify and articulate the high level issues in relation to the future policy priorities of the EU Budget as well as the challenges and opportunities that exist for Scotland.We also comment on the current constitutional circumstances, particularly the extent to which Scottish actors can influence the debate. We would be pleased to discuss the issues raised further. proposals for future spending priorities.The RSE supports this approach. It is important that EU spending brings benefits that would otherwise be unachievable by Member States acting alone.The economically inefficient process whereby Member States contribute to the EU just for those funds to be reallocated back for a purpose for which they would have been expended in the first place should be rejected. 4 The debate about the size and priorities for the next EU financial perspective is already well advanced. In June 2008 the European Commission closed its public consultation on reforming the EU Budget and the results were published in November 2008, with recommendations expected from the new Commission later this year. Most Member States agreed that climate change and energy, competitiveness, research and innovation along with the Common Agricultural Policy (CAP), and Structural Funds and cohesion, represented the spending priorities for the EU Budget. We suggest that future EU Budget allocation priorities should be considered in light of the following criteria:

To what extent can Scotland influence the review of the EU Budget?

2 While the review of the EU Budget will undoubtedly present Scotland with both challenges and opportunities, the extent to which Scottish actors can influence the debate is circumscribed. Under current constitutional arrangements the Scottish Government can only influence EU Budget policy indirectly through the UK Government. Under the Memorandum of Understanding signed in 1999 all consultation between the Scottish and UK Governments is confidential, therefore the Scottish Parliament is constrained in respect of the information it can elicit from the Scottish Government with regard to the EU Budget.The Scottish Parliament, however, could usefully be pro-active in taking advantage of the new subsidiarity provisions in the Lisbon Treaty and Protocol number 26 on Services of General Interest, and could engage with Scotlands MEPs to track budgetary discussions in the European Parliament. The phrase European added value is one that has become a mantra in the Commission to guide

that a centralised EU approach will add value through coordinated or joint action. In some cases this might relate to addressing issues which will increase market opportunities between Member States but will commonly relate to increasing the competitiveness of the EU in the global economy. It should also relate to addressing common problems that require concerted action. Climate change should have the highest priority in this regard. that there is an agreed need to assist economically disadvantaged Member States principally recognised to be those in Central and Eastern Europe.This funding should be concentrated on structural, technical or other needs which will allow the disadvantaged Member State to operate within the wider EU and global market, thus providing positive advantages to the contributing Member States.

Future Policy Priorities of the EU Budget

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1 Reform of the European Union Budget: a response to the European and External Relations Committee of the Scottish Parliament RSE Advice Paper 09-12a (September 2009) http://www.royalsoced.org.uk/govt_responses/2009/09-12a.pdf 2 http://www.rse.org.uk/enquiries/hill_and_island_areas/index.htm 3 http://www.rse.org.uk/enquiries/scottishfisheries/index.htm

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Implications for Scotland
7 The forthcoming EU Budget debate in Scotland should not be dominated by EU money in. We must take a progressive view of Scotlands economy and identify opportunities whereby Scotland can benefit from prospective EU policies that enhance its long term economic opportunities, establishing the presence of Scottish economic actors in key growth networks across the EU at an early stage. For reasons of comparative advantage, Scotlands long term economic interests lie in championing an EU Budget that focuses on competitiveness, entrepreneurship, energy and environmental sustainability. Importantly, this aligns with the UK Governments view of where EU action should be directed which, given both the role of the UK in representing Scotland in Europe and the weight of the UKs voice in EU negotiations, should ensure that these issues are placed at the heart of discussions on EU Budget review. However, the UK Government made clear in its response to the Commission4 that it will seek a shift away from agricultural support in the future EU Budget.This will have implications for Scotland which was formerly a significant recipient of CAP funds. 12 Scotlands domestic ambitions to realise its potential capacity in renewable energy are set out in the Scottish Governments Renewables Action Plan. The Climate Change (Scotland) Act 2009 sets the framework for a very challenging emissions reduction trajectory. 13 If Scotlands potential and aspirations are to be realised they must be linked in to wider UK and European energy markets. It should therefore engage with the discussions about a possible European energy transmission and supply network, an intelligent network that would draw on generating capacity wherever it occurs so as to minimise emissions and cost and maximise energy security. Maximising linkages with policies and processes in concert with UK and EU bodies should bring technological benefits to Scotland, stimulate enterprise and deliver social and environmental gains. It is from this standpoint that Scotland should support UK efforts to prioritise energy policy in the EU Budget.

Competitiveness, Research and Innovation Scottish universities

14 Scotlands universities are a major international competitive strength.The quality of their work in teaching and research, coupled with increasingly effective knowledge transfer activities, are a key component of building a cutting-edge knowledge based economy. Such an environment is vital for stimulating innovation, research-intensive business and the creation of spin-out and start-up companies. 15 However, in order for our universities to remain a vital national asset it is crucial that they remain at the forefront of international excellence within the competitive global environment and this can only be achieved if investment in Scottish university research is comparable to the rest of the UK. Currently it is not clear how Scotland might match the resources coming to English universities through top-up fees and the EERC should ensure that full consideration is given to how EU research funding might aid in bridging that gap.

10 The opportunities and challenges for Scotland in each of these policy areas are set out below. However, there has to be recognition of the budgetary constraints within the EU in trying to fund new priorities. The extraordinary domestic fiscal imbalances that every Member State has to deal with for the foreseeable future will undoubtedly add to the pressure from net contributing countries to curtail EU spending by capping the overall size of the EU Budget.

Climate Change and Energy

11 Climate Change and Energy are clearly increasingly important issues that urgently require coordinated EU action.With up to 25% of Europes offshore wind and tidal resources and 10% of its wave energy resource Scotland has the potential to both significantly contribute to and benefit from increased focus, and spending, on these areas, at EU level. It is vital therefore that policy makers at Scottish, UK and EU levels understand the substantial contribution that Scotland can make to the development and supply of energy from renewable sources and cleaner technologies, and that co-ordinated funding for research, demonstration and deployment is targeted on Scotland.

European research effort

16 Whilst it should remain the case that the predominant bulk of public funding of the European research effort will be carried out through national and regional research support agencies, the EU can add value by ensuring desired degrees of mutual transparency and co-ordination across the boundaries of the Member States. In this respect there is a pressing need to reconsider the Framework Programmes and efforts should be increased to realise the full potential of the recently created European Research Council (ERC).

4 http://ec.europa.eu/budget/reform/library/contributions/pgs/20080619_PGS_89.pdf

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17 Although the Framework Programmes have enhanced research mobility and cooperation across Europe, they have had limited success in their avowed intent to maximise the excellence and impact of European research, largely we believe because they are conceptually flawed.They have tried to pick winners in selecting research believed to have the capacity to promote economic and social advances, rather than either funding creative research on the basis of excellence alone, or by developing mechanisms that stimulate industry to draw on the research base. The ERC, by contrast , is proving to be a great success.Although it is still at a relatively small scale, it shows signs of galvanising the European research effort by providing support for high-quality, long-term, curiosity-driven research, based on scientific rather than political judgements and devoid of the principle of juste retour.Without inhibiting the independence and creativity of researchers, research groups and networks, it has established conditions favourable to avoiding needless and unfruitful duplication of research effort in different Member States, and at last is a recognition that in a globalised economy, peerless research excellence is one of the basic prerequisites for powerful technological innovation.There should be a decisive shift of funding within the Framework Programme towards the ERC. has world-leading research, and where there are companies able to take innovations to market. They should be based around initiatives such as the European Technology Platforms, and not on misconceived initiatives such as the European Institute of Technology (EIT), which promises to repeat the mistakes of the past.

The Common Agricultural Policy

21 It is important to distinguish between the Common Agricultural Policy (CAP) and the general principle of financial support for agriculture, especially in less favoured or peripheral areas. The principle of support for agriculture does not necessarily depend on maintenance of the CAP in its present or modified form. 22 The CAP, long regarded as the centrepiece of Community policy, is already being reformed, albeit slowly and with some reluctance from beneficiary countries. It was a major attraction for the new Member States who viewed it as a quid pro quo for some of the sacrifices incurred by the exposure inherent in membership.Their economic situation would suffer were they not able to access it fully. As such, any proposed changes from a Scottish perspective would therefore require to be negotiated alongside the other Member States and, equally importantly, with the other countries and regions of the UK. 23 The RSEs own inquiry into the Future of Scotlands Hills and Islands was initiated because of concern about the future viability of agriculture in the light of changes to the CAP.The UK Government had proposed ending direct support for agriculture under Pillar 1 when the CAP is reviewed after 2013. No attempt was made, however, to assess the effect that such a change would have on agriculture in the constituent countries and regions of the UK. Given the distinctive nature of Scottish agriculture we regard this as an unacceptable failure in policy formulation that must not be repeated in future. 24 If the continuation of direct support under Pillar 1 is to be acceptable to the European taxpayer, there has to be greater clarity in what it is delivering.We regard the management of Scotlands rural landscape and biodiversity, issues relating to climate change, maintenance of food security and the preservation of viable rural communities as providing a strong case for maintaining livestock-based agriculture in the Hills and Islands.There may not be agreement on the relative importance of these various factors, but taken together we think that they justify a general scheme of direct support.

Innovation
18 In the last decade, there has been a dramatic improvement in the efficiency and drive of the Scottish universities in connecting with business. They have used their technical excellence as a major attractor for research intensive inward investment, have created an increasing number of spin-out and start-up companies and attracted much international talent to Scotland. 19 In our view however, it will be difficult to make much further progress without developing something that has long been absent in Scotland: a much stronger pull from business that elsewhere is the dominant mechanism for economic exploitation of the research base.This is a central strategic issue that must be addressed and in this respect we welcome the Scottish Governments recent strategic framework for innovation5. It recognises that Scotland is part of the wider economic system, encompassing the UK and Europe, and that Europe is increasingly a significant influence on innovation policy. 20 It is for these reasons that Scotland should support moves to prioritise innovation in the EU budget. However, it is vital that effective innovation policies are supported.These should focus on giving sustained support to emergent technology areas where there are large global markets, where Europe (and Scotland) 4

5 Innovation for Scotland; the Scottish Government's framework for innovation (June 2009)

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25 We consider that more fundamental change is required to the financing of agriculture if the above objectives are to be achieved. In its Report the RSE recommended that a new, more integrated and wide-ranging EU policy instrument could be developed from the current elements of Pillar 1 and Pillar 2.With an inevitable diminution of funding within Europe as a whole, however, it becomes clear that the UK Government must be prepared to renegotiate the basis of Pillar 2 funding post-2013 where Scotland has at present the lowest EU funding per hectare in Europe.We believe that this would best serve the long-term interests of Scotlands rural areas and communities, as well as safeguarding its natural and cultural heritage, and contributing significantly to climate change mitigation and adaptation.We also believe that it would fulfil the broader aspirations of European policy initiatives across the domains of agriculture, environment and rural development. 26 Any attempt to reopen the issue of financing for agriculture would appear to be bound up with the UKs general position in relation to the EU Budget and in particular the rebate. In order to achieve reform, and in particular a strengthened rural policy, the UK may have to be prepared to sacrifice at least part of the rebate that was negotiated in compensation for the limited funds it receives via the CAP. We do not expect the UK Government to welcome such a suggestion, but we believe that over time the rebate will become increasingly difficult to defend as the relative size of the agriculture budget declines and that, rather than see it simply eroded, it would be important to ensure that some benefit is obtained in exchange. funds are additional for the UK as a whole and not for the nations and regions within it.As such, nominal increases or decreases in Structural Funding allocations to Scotland make no difference to the Scottish budget. It merely means that a section of the Scottish block grant is deemed to be European and so subject to European spending rules. 29 For much too long the EU debate in Scotland has been driven by Structural Funds, and while there have been notable successes from the application of Structural Funds in Scotland this has not been the result of funds per se, but rather of the regional economic development programmes that have been put in place under the guise of the Structural Funds. 30 The argument about cohesion policy should not therefore focus on whether Scotland gains money from the Structural Funds but on the merits of the cohesion policy as a whole and the territorial dimension of EU spending in general. In recent years, the commitment to regional policy has been reinforced in the EU with the concept of territorial cohesion to match existing commitments to economic and social cohesion. It is entrenched for the first time in the Lisbon Treaty.As a peripheral part of the EU, Scotland does have an interest in this concept and we would urge the Committee to support it in the face of scepticism expressed in various quarters. It implies that the spatial dimension should be considered in all the main spending programmes and not be confined to the Structural Funds.

State Aid
31 If Member States and/or regions are to be given more responsibility and autonomy to spend EU funds then there must be greater consideration given to the issue of state aid. European state aid rules are often cited by national or regional authorities as a reason for not giving subsidies. However, in reality it would appear that the availability of national resources, and on occasion political will, often have the greatest influence over whether or not state aid is approved. Our understanding is that European rules do allow substantial scope for subsidisation and therefore this is an area that needs to be examined further if Scotland is to benefit from the shift in spending priorities.

Structural Funds and Cohesion

27 The main instruments of cohesion policy are the Structural Funds.The objectives are economic (to overcome market imperfections in investment allocation); social (to compensate losers in the single market); and political (to secure support for Europe in peripheral regions). Control of the policy has long been contested among the Commission, Member State governments and the regions. 28 At the last review, the UK Government supported the repatriation of regional policy, with European funding for the post-2004 member states only. Scottish opinion was generally hostile to this, fearing that Scotland, as a beneficiary, would lose out.The reality is, however, that Scotland derives no direct benefit from the Structural Funds. Under the Treasurys interpretation of the principle of additionality, the

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32 A particular area where clarification of the extent to which state aid rules, and indeed World Trade Organisation (WTO) rules, inhibit support for innovation is in the use of public procurement. Whereas WTO rules forbid discrimination against foreign goods, this does not apply to pre-competitive government procurement. A powerful example of the efficacy of procurement is the US Small Business Research Program (SBIR), which is, in effect, the worlds largest venture capital fund. It expends about $100 billion per annum from the federal procurement budget in placing contracts for research-based products and services, and has been a major driver in the success and dynamism of US technology industries. It is crucial that state aid rules are clarified and/or amended to permit such powerful processes of technological growth to be used in Member States or across the Union as a whole. It is a process from which Scotland could benefit, given the strength of its under-exploited science and technology base.

Additional Information and References

In responding to this consultation the Society would like to draw attention to the following Royal Society of Edinburgh responses which are relevant to this subject:

The Royal Society of Edinburgh's Inquiry into the Future of the Scottish Fishing Industry (2004) The Royal Society of Edinburghs submission to the House of Commons Science and Technology Committees Inquiry into the international policies and activities of the Research Councils (April 2007) The Royal Society of Edinburghs submission to the European Commissions Green Paper, The European Research Area: New Perspectives (August 2007) The Royal Society of Edinburghs Inquiry into the Future of Scotlands Hills and Islands (September 2008) The Royal Society of Edinburghs submission to the Commission on Scottish Devolution, Review of the Experience of Devolution in Scotland (September 2008) The Royal Society of Edinburghs submission to the Commission on Scottish Devolution, The Future of Scottish Devolution within the Union (February 2009)

Any enquiries about this submission and others should be addressed to the RSEs Consultations Officer, Ms Susan Bishop (evidenceadvice@royalsoced.org.uk). Responses are published on the RSE website (www.royalsoced.org.uk).
Advice paper (Royal Society of Edinburgh) ISSN 2040-2694

The Royal Society of Edinburgh (RSE) is Scotlands National Academy. It is an independent body with a multidisciplinary fellowship of men and women of international standing which makes it uniquely placed to offer informed, independent comment on matters of national interest. The Royal Society of Edinburgh, Scotland's National Academy, is Scottish Charity No. SC000470
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