EU’s financial watchdog warns of growing budget risks

There are growing risks to the EU budget due to a record amount of debt, Russia’s war against Ukraine and high inflation, according to the annual report of the EU’s financial watchdog.

The report warns that the EU will need to find new funding models to pay for upcoming commitments, such as enlargement, and potentially new competences relating to the EU’s security and defence needs.

The president of the European Court of Auditors (ECA), Tony Murphy, said auditors were giving a “clean opinion” on the reliability of EU expenditure in 2023, with the overall picture showing that EU revenue was “free from material error”.

However, there has been an increase in the level of error in the spending of EU funds by member states.

According to Mr Murphy, Ireland’s representative on the Court of Auditors, the error level had increased to 5.6% in 2023, compared to 4.2% in 2022.

Most errors were in the spending by member states of cohesion funds, the revenue stream which historically goes towards poorer parts of the EU. Auditors found the level of error in cohesion funding had reached 9.3%, compared to 6.4% in 2022, a figure which Mr Murphy described as “concerning”.

“The most common error types continue to be those linked to ineligible projects, costs and public procurement,” said Mr Murphy.

The annual audit comes in the middle of the EU’s seven-year budget cycle, known as the Multiannual Financial Framework (MFF), which runs from 2021 to 2027.

Mr Murphy said spikes in error often occur during MFF closure periods, where the pressure to spend EU funds intensifies, straining administrative resources and increasing the risk of error.

Auditors regard an error as an amount of money that should not have been paid out from the EU budget, because the money was not used in accordance with the relevant EU legislation.

According to Mr Murphy, Ireland contributed around €3.5 billion to the EU budget and received some €2.4 billion, meaning the state continues to be a net contributor.

The bulk of the Irish contribution is based on Gross National Income (GNI) and amounted to €2.3 billion.

Customs duties collected in Ireland on goods coming from outside the EU amounted to €445 million, while VAT-based contributions were €371 million – both part of Ireland’s overall contribution.

Of the €2.4 billion Ireland received in 2022, some €1.5 billion was distributed under the natural resources and environment bracket.

Of this, just under €1.2 billion went in direct payments to farmers and €280 million went to the European Agricultural Fund for Rural Development.

Mr Murphy said the need for national capitals to absorb funds from over €700 billion in loans and grants from the Covid recovery fund at the same time as Cohesion funds had possibly contributed to the error rate.

The ECA has warned in the past that financial support for member states to emerge from the pandemic, known as the Recovery and Resilience Fund (RRF), is not subject to sufficiently strict controls.

Mr Murphy said: “Compliance with EU and national rules is not a condition for payment under the RRF. Our work in cohesion has revealed serious weaknesses in terms of non-compliance with these rules, with a major spike in the error rate over the past three years.

“Considering that these projects are similar to those financed under the RRF and often controlled by the same national bodies, in our view, there is a risk that similar type errors exist for RRF expenditure.

“However, under the RRF, compliance with EU and national rules are not systematically checked.”

The report found that the EU’s spending programme to help countries emerge from the Covid crisis, as well as support for Ukraine, has significantly added to the bloc’s overall debt, which increased by over €100 billion in 2023 to €458.5 billion.

Part of the Covid recovery fund was raised through EU borrowing, and in 2023 the interest on the loan amounted to €700 million.

The EU budget is funded through national contributions, monies raised through customs duties on goods entering the EU, VAT contributions and fines levied through the European Court of Justice.

Efforts by member states to agree so-called “own resources”, which would provide new revenue streams, have made only modest progress.

Despite this, the enlargement of the union in the coming years is expected to cost billions in extra funding, while the recent report by Mario Draghi, the former ECB president, into boosting competitiveness and completing the green transition called for hundreds of billions in investment in the coming decade.

“We keep saying we’re at this crossroads, where we have these new big-ticket items like enlargement, like Ukraine, like security and defence,” said Mr Murphy.

“Where is the money going to come from?”

The EU budget’s “exposure” to Ukraine more than doubled in 2023 to almost €34 billion.

Auditors found that the Ukraine facility of up to €33 billion in loans for the next three years “entails considerable risks for the EU budget”.

The report also found that high inflation in 2022 and 2023 could mean the EU budget losing around 13pc of its purchasing power by the end of 2025.

Meanwhile, auditors have said the UK paid off €8.4 billion of its outstanding Brexit liabilities, leaving some €15.5 billion outstanding.