ARCHIVESHISTORIQUES
DELACOMMISSION
COLLECTION RELIEEDES
DOCUMENTS "COM"
COM(81)704
Vol.1981/0205

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«
COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(81 )704 final
Brussels .13th November 1981
MANDATE OF30MAY 1980
REPORT ONTHE APPLICATION OFTHE FINANCIAL
MECHANISM
r-
·■
COM (81)704 final

•r--'i
SUMMARY
I
TheFinancial Mechanism wassetupin1976afternegotiations during
whichboththeCommission andtheEuropean Council recognised thatproblems
ofbudgetary burdenmightariseinthefuture.TheFinancial Mechanism
wasdesigned toprevent"duringtheperiodofconvergence oftheeconomies
oftheMemberStates,thepossible development ofsituations unacceptable
foraMemberStateandincompatible withthesmoothworkingofthe
Community."
TheFinancial Mechanism provided thatincertain economic andbudgetary
\
circumstances ,which,thoughofgeneralapplication ,wereintended tofitthe
UnitedKingdom,aMemberStateshouldreceive apaymentdesigned tobea
partial compensation foradisproportionate budgetary burden.Themechanism
cameintooperation witheffectfrom1January 1976foraperiodofsevenyears
.notlaterthantheendofthesixthyear(1981)theCommission shallreport
totheCouncil ontheapplication oftheFinancial Mechanism andmakesuitable
proposalsifnecessary .
AtthetimeoftheAccession negotiations itwasclearthatforall
MemberStatestheOwnResources Decision of1970wouldnotcomefullyinto
operation until1978;andthatfor1978and1979Article 131oftheTreaty r
ofAccession provided forfurtherlimitations onthebudgetary contributions
ofthethreenewMemberStates.Itwastherefore notuntil1980thatthe
fulleffectoftheOwnResources Decision wouldbefeltbytheUnitedKingdom.
The^establishmentofthismechanism wasasignificant factorinresolving
theconcerns expressed bytheBritish government overthetermsofmembership .
Ashadbeenforeseen,themechanism didnotoperateinrespectofanyof
theyears1976/79becausethebudgetary contributions oftheUnitedKingdom
werelimited bythetermsoftheTreatyofAccession .Themechanism would,
however,haveoperated ineachoftheseyearsifthelimitations hadnotbeen
inexistence . ,
In1979itbecameapparent thattheUnitedKingdom wouldbecomethe
biggestnetcontributor totheBudgetin1980.Inlookingforsolutions the
Commission statedthat"thestarting pointforanexamination oftheaction

whichtheCommunity mighttakeinrespectoftheUnitedKingdom'sbudgetary
problemislogically theexisting Financial Mechanism".Italsoshowed
thatifcertaininternal restrictions wereremoved fromtheexisting mechanism
apaymentof520million ECUorroughly onethirdoftheUnitedKingdom's
forecast netcontribution couldbeexpected .
TheCouncilofForeignMinisters on29/30May1980decidedthatthere
wouldbenetpayments totheUnitedKingdominrespectof1980and1981and
thatthesepayments shouldbemadefromanamendedfinancial mechanism
andspecialsupplementary measures tobeproposed bytheCommission .
Thecorresponding amendments intheFinancial Mechanism agreedin1980
relatedonlytotheUnitedKingdom.Thesedidhotaffecttheeconomic
conditions foritsoperation butprovided thatiftheseconditions were
fulfilled thepaymenttotheUnitedKingdom wouldbegreaterthanunderthe
unamended mechanism .Thechangesapplyonlytotheyears1980and1981.
UnlesstheCouncil decidestoprolong thelifeoftheamendedversion,the
provisions oftheoriginal Financial Mechanism willapplyinrespectof1982.
Inrespectof1980theUnitedKingdomfulfilled alltheconditions of
theFinancial Mechanism exceptthatitsshareinfinancing theCommunity
Budgetwas8.5%greaterthanitsGDPshareandthusthefinancing share;
didnotexceeditsGDPsharebymorethan10%.Thiswasbecause theGDPshare
increased substantially asaresultofthesignificant riseofthepound
sterling in1980.Asimilarsituation islikelytooccurinrespectof1981.
For1982itisforecast thattheconditions willbemetofgrowthrate
(inrealterms)ofpercapita GDPandofa10%excessofbudgetshareoverGDP
share.Ontheotherhand,becauseofthestrength ofthepoundduringtheyears
1979-81 andinviewofthefactthatthe1982assessment isbasedontheaverage
ofthethreeyears1979,1980and1981,theUnitedKingdom maynotmeetthe
conditions ofanaverage GDPperheadbelow85%oftheCommunity average andfor
thisreasonthefinancial mechanism maynotoperatein1982.
Themainfactorthatunderlies thefailure ofthemechanism tooperate
asintendedistheincreaseduringtheperiod1979to1981oftheUnitedKingdom'
GDPshareexpressed inECU. Overthisperiodtherateofrealgrowth
intheUnitedKingdom remained onaveragesignificantly belowtheCommunity _
average.Atthesametime,thevalueofthepoundincreased relative to
theECUwhiletheUKhadanaboveaveragerateofinflation .

Report ontheAppHeatien efthe Mnaiieiat MeehsM6m
Introduction
1. Article 10ofRegulation No1172 /76setting upafinancial mechanism
provides that themechanism shall beapplicable for atrial period of
seven years from 1January 1976 and that ,nolater than the end ofthesixth
year (1981 ),,theCommission shall report tothe Council ontheapplication
ofthefinancial mechanism andmake suitable proposals ifnecessary .
i /. • ■ "
History ofsetting uptheMechanism
2. Although themechanism which finally emerged wasofgeneral
applicability ,thecircumstances which leduptoitsestablishment and
thefactors which were taken into account indetermining itsnature
were related toaspecifically British problem ,,
3. During thenegotiations leading uptotheenlargement ofthe
Community in1973 ,theUnited Kingdom Government had said that it
saw problems intheapplication ofthe Own Resources Decision of1970
which provided that theCommunity Budget should befinanced by
Member States through the "transfer ofcustoms duties ,agricultural ~
levies and (after atransitional period when contributions based on
Gross National Product would bepaid )byupto1%levied onacommon value
^added tax (VAT )base »TheUnited Kingdom foresaw that because ofits
trade andeconomic structures thepayments itwould have tomake
would bedisproportionately large .TheTreaty ofAccession provided
inArticles 129and130 fortheappropriate application tothenew
Member States oftherestriction onrate ofgrowth ofbudget shares
which already existed intheOwn Resources Decision and also for a
system ofgradual payments bythenewMember States uptothe end of ■
1977 .Article 131provided forfurther limitations forthetwoyears
1978 and1979 . Inthecourse ofnegotiations theCommunity made the
following statement ^: .' v
quoted inC0M(74)18G0

"Should unacceptable situations arise within thepresent Community or
anenlarged Community ,thevery survival oftheCommunity would demand
that theInstitutions find equitable solutions ."
4. TheGovernment which came topower intheUnited Kingdom inMarch 1974
decided tonegotiate oncertain oftheterms ofBritish membership ofthe
Community and tosubmit theresults toanational referendum . Oneof
theprincipal concerns wast^ebelief oftheBritish Government that the
budgetary problem would persist beyond 1979 .InJune theCouncil referred
thebudgetary question totheCommission with arequest to"draw upan
inventory oftheeconomic andfinancial situation intheCommunity since
enlargement aswell asasurvey offuture developments ".
5. The Commission had adifficult task .What itwas asked toexamine
in1974 was apotential problem which wasquite likely not toarise at
all until 1980 and which would certainly not reach its full proportions
until then because ofthe limitations onthebudgetary contributions of
the three newMember States referred toinparagraph 3.
6. TheCommission 'simplied task wastherefore one offorecasting from
a1973 /1974 data base right the waythrough to1980 thedevelopment
ofeach Member State 'sGNP,itsagricultural levies (which would require
forecasting thestructure ofagricultural trade and the level of
worId-versus -Community agricultural price differentials ),itscustoms
duties (requiring adetailed product -by-geographic area projection oftrade
flows taking into account theprogressive adoption bytheThree ofthe
Common External Tariff ),and itsVAT revenues (requiring anestimation
andpreparation ofthe taxable base for the VAT inadvance of
agreement onacommon base forthis tax).
7. TheCommission 'sanswer totheCouncil 'srequest wascontained
inadocument dated 25October 1974 entitled 'Inventory ofthe
Community 'sEconomic and Financial Situation since Enlargement and
Survey ofFuture Developments' (C0M(74)1800 final ).

3
8.sAnexamination ofthe relevant economic criteria ,inparticular
GDPper head ,showed that theUnited Kingdom was inarelatively
unfavourable economic situation .
9. The Commission illustrated that theUnited Kingdom 'sannual
rate ofincrease inGross Domestic Product inreal terms inthe
years 1966 to1974 had .onaverage been lower than the Community
average orindeed that ofanyother Member State .
10.Looking into the future ,theCommission thought that inthe
inflationary situation of1974 and following theupheavals resulting
from thesoaring price ofoil,economic forecasting wasexceptionally
hazardous . Itnevertheless suggested that there were some
prospects ofanaverage annual growth ofCommunity Gross Domestic Product
ofperhaps 4%.'During this period there would besignificant
differences between individual Member States and acontinuation of
thebelow average rate ofgrowth oftheUnited Kingdom 'sGDP -
see table below .

■4,
GDP RATE OFGROWTH INVOLUME
ASFORECAST *BYTHE COMMISSION IN 1974
(annual rates in%)
1975 Average 1973 /1978
Denmark 3.0 3.5 to4.5
West Germany 3.5 3.7
France 4.6 5.5
Ireland 3.0 5.0
Italy 2.0 5.3
Netherlands 3.6 3.5 to4
Belgium ;3·7 4.3
Luxembourg 3.6 3.5
United Kingdom 2.6 2.5 to3.5
Community 3.4 4 to4.5
Source :COM <74)1800 ,final ,I.A.Table I
Although theforecasts turned out asawhole tobeoveroptimistic the relative
position oftheUnited Kingdom hasremained unfavourable and itsrate of
growth has infact turned out tobelow .Theaverage rate ofgrowth for the
Community asawhole fortheyears 1973 /78was2.7% and the rate ofgrowth
for theUnited Kingdom was2.2% .
11.TheUnited Kingdom 'sGDPpercapita fortheyears 1973 /1974 wasabout
76% oftheCommunity average .Itwasnotexpected that this would rise
because theUnited Kingdom 'srate ofgrowth ofGDP inreal terms wasforecast
tobebe :lowtheaverage .Infact itturned out that theUnited Kingdom 'sGDP
per capita fortheyears 1973 /78was74.5% oftheCommunity average .
12.Asregards theburden ofthebudget ,theCommission decided that itwas
not sensible tomake forecasts ofthe situation asitwould bein1980 .It
limited itself tomaking asimulated estimate ofwhat thebudgetary contributions
ofthe Member States would have been in1973 and 1974 ifthe Own Resources
Decision of1970 hadbeen fully -inoperation ;and itcompared thesimulated
relative shares oftheMember States with their shares inCommunity GDP .The
results are shown inthe table below®

-5
Total budget Simulated Relative Share
contribution Relative share inCommunity
inmillion u.a . ""nbudget gross domestic product
%
1973 1974 1973 1974 1973 1974
Denmark 109 120 . 2.2 2.4 2.6 2.8
Germany (FR) 1514 1509 31.0 30.2 33.0 33.6
France 897 908 18.4 18.2 23.9 23.2
Ireland 32 30 0.7 0.6 .0.6 0.6
Italy.668 662 . 13.7 13.2 13.2 13.2
Netherlands , 425 - 389 8.7 7.8 5.8 6.0
BLEU - 264 278 5.4 5.6 4.5 4.7
United Kingdom 968 1099 19.9 22.0 16.4 15.9
4877 4995 100 100 100 100
(current market exchange rates )
source :COM (74)1800 final Table XIV p.29
•/ , '
The Commission concluded ,onthebasis ofinformation then available /and
allowing forcertain structural changes which should progressively take place ,that
itcould notexclude thepossibility that problems ofbudgetary burden might
arise inthe future .
_ The Council ofForeign Ministers meeting on11November 1974 failed to
reach any conclusions onthe Commission 'sdocument and itwas referred tothe
Paris Summit of9and 10December 1974 .Atthis meeting ,theEuropean Council
made thefollowing statement :-
'The Heads ofState orGovernment recall the statement made
during theaccession negotiations bytheCommunity totheeffect
that "ifunacceptable situations were toarise ,thevery life of
theCommunity would make itimperative for the institutions to
find equitable solutions".'
They confirm that thesystem ofownresources represents oneof
thefundamental elements oftheeconomic integration ofthe
Community .'
'They invite theinstitutions oftheCommunity (theCouncil and
theCommission )tosetupassoon aspossible acorrecting

mechanism ofageneral application which ,intheframework
ofthesystem ofown resources and inharmony with its
normal functioning ,based onobjective criteria andtaking
into consideration inparticular the suggestions made to
this effect bytheBritish Government ,could prevent
during theperiod ofconvergence oftheeconomies ofthe
Member States ,thepossible development ofsituations
unacceptable for aMember State and incompatible with
thesmooth working oftheCommunity.'
14.On30January 1975 theCommission presented adocument entitled The
Unacceptable Situation andtheCorrecting Mechanism ". AttheDublin
Summit on11March 1975 theEuropean Council agreed toamechanism which
was finally embodied inRegulation 1172 /76and became known asthe
'financial mechanism' .
15.Theestablishment ofthis mechanism was asignificant factor in
resolving the concerns expressed bytheBritish Government over the
terms ofmembership . ♦
Description oftheMechanism asadopted in1976
16.Asadopted in1976 themechanism provides that ifaMember State is
anetcontributor totheBudget ,itwill receive acompensation ifit
fulfils simultaneously thefollowing conditions :
'(a)itsper capita GNP isless than 85% oftheaverage per capita GNP
oftheCommunity measured asamoving average over thethree
preceding years ;
(b)itsgrowth rate ofper capita GNP inreal terms isless than 120%
oftheCommunity average measured asamoving average over the
three preceding years ;
Cc)itsshare infinancing theCommunity Budget exceeds itsGNPshare
bymore than 10% .
Where thebalance ofpayments ofaMember State ,calculated from amoving
average ofthethree years ofthepreceding financial year inprogress ,shows
asurplus ,theamounts tobetaken into consideration for the calculation
ofthe excess contribution should be :

*'payments by.theWs.afeerg-isteto'Shs -Sudgst©ftheCe;i,R;unifey-
inrespectofValueAddedTex; ~
theamountwhichthatMemberSeatswouldhavehadtopayonthe
basisoftheproportion ofitsGNPtothetotal6NPoftheMember
V
Statestofinancethepartofthebudgetnotcoveredbycustom^
dutiesandagricultural levies.
Anyexcesscontribution is.thendividedintoslices,,eachof5percentage points,,
whicharesubjecttoaprogressive rateofrefund-thefirst5pointsreceiving
norefund,thesecond50%andsoohupto30%excess,abovewhichtherefundis
100%. '
Themechanism cameintooperation ,witheffectfrom1January1976fora"trial
periodofsevenyears.SincepaymentsinrespectofyearNaretobemadein
yearN+1,thelastpayment,ifany,,forthetrialperiodto1982willbemade
in1983r
17.Itwasenvisaged thatconditions (a)–(c)wouldenablethemechanism to
applytotheUnitedKingdom bythetimethefulleffectoftheOwnResources
Decisionwasfeltin1980.
Adetailed explanationofthemechanism agreedin1975isgivenin
Appendix Atothisreport.'~'
Theapplication ofthemechanism in1976and1977
19.irv1976and1977,,thelimitations ontherateofgrowthofbudgetshares
ofallMemberStates,contained intheOwnResources Decision of1970and
appliedtothethreenewMemberStatesbyArticle 129and130oftheTreat"
Accession ,werestillinoperation .ItwillbeseenfromAppendixB(1)
thattheUnitedKingdomfulfilled theconditions ofthefinancial mecham .m-
at(a)5arid<b)ofparagraph 15„butthatitsShareinfinancing theCommunity
BudgetwaslossthanitsGNPsharebecauseofthelimitations referredto.
In1976theUnitedKingdomwas3netcontributor tothebudgetbutwasontheothe
handanetrecipient in1977becauseofhi§hreceipts duetonegative monetary
compensatory amounts .
' - ' - 1
?0o.NootherMemberStatefulfilled alltheconditions .
21.Itisverydifficult togiveprecisefigures,butit-isclearfromthe
.'highleveloftheUnitedKingdom'scustomsdutiesandagricultural leviesthat
itwouldhavefulfilledalltheconditions (including thatofbeinganet
(1)Appendix Bprovidesdataconcerning thefulfilment bytheUnitedKingdom
oftheconditions oftheFinancial Mechanism

contributor )ifthelimitations ofthe .OwnResources Oecision (asapplied by
Article 130oftheTreaty ofAccession )hadnotbeen inoperation .
The application ofthemechanism in1978 and1979
2?. in1978 and1979 thespecial limitations onthebudget contributions of
thethree newMember States (Article 131oftheTreaty ofAccession )were in
operation .
23;in1*978 theUnited Kingdom wasanetcontributor totheCommunity Budget and ,
fulfilled theconditions at(a)and <b)ofparagraph 15.Itdidnothowever
fulfil thecondition at(c)that itsbudget share should exceed itsGNPshare
by10% (Appendix B).
24,in1979 theUnited Kingdom asked forapplication ofthemechanism andthe
Commission ,onthebasis ofthefigures andexchange rates available atthe
time ofpreparation ofthepreliminary draft budget 1980 ,accepted that the
conditions were metandentered anamount of68million ECU .TheUnited Kingdom
wasduetobeanetcontributor totheCommunity budget andits ,situation asregards
theother criteria fortheapplication ofthemechanism wasforecast asfollows :
Percapita GNP : 72%oftheCommunity average
Rate ofgrowth (inreal terms )
ofpercapita GNP : 88%oftheCommunity average
Budget share : 17.4%
15.7%
11.2%
Moreover ,calculated from amoving average ,thebalance ofpayments forthe
United Kingdom wasforecast tobeindeficit fortheyears 1976 ,1977 and
1978 .This forecast 'turned out toberight .
However ,thepound sterling increased invalue against theECUin1979 and
bythetime thedraft budget 1980 wasadopted theUnited Kingdom 'sshare in
Community GNPhadconsequently increased to16.7% anditnolonger metthe
condition that itsbudget share would bemore than 10%above itsGNPshare .
SeeAppendix B.Theamount wastherefore withdrawn from thedraft budget ,,Per capita GNP
Rate ofgrowth (inreal terms )
ofper capita GNP
Budget share
GNP share
Excess ofbudget share over
GNP share

*50WeethepMeffiteepStatefulfilled aLttheeaBdlt^aiia ,
26. Iftheprovisions oftheTreatyof
Accession ,■limiting in1978and1979thebudgetcontributions ofthsthreenew
MemberStates,hadnotbeeninoperation theUnitedKingdom'sbudgetshare
wouldhavebeen19.4%in1978and21.1%in1979 =,Itwouldtherefore have
fulfilled easilythecortditionthaiitsbudgetshareshouldbemerethan10%
above "itsGNPshareandthemechanism wouldhaveoperated ,thisindicates
thatitwascorrecttohaveassumedin"3974thatthefullapplication ofthe
OwpResources Decision of1970wouldproduce asituation inwhichthefinancial
mechanism wouldoperate.(1)
The1980amendment ofthemechanism infavour*oftheUnitedKingdom
27„TheBritishGovernment reopeneddiscussions ofitsbudqetary problemin1978
inthelightoftheendingby1980ofthelimitations oftheTreaty -of
Accession ,,Thediscussions continued into1979andtheEuropean Councilof
21/22June1979atStrasbourg askedtheCommission tostudythesituation of
earhMemberStateinrespectoftheCommunity budgetfortheyears1979-80.
26-TheCommission produced threepapers(2)duringtheperiodleading •
uptotheEuropean CouncilinDublinon29/30November 1979The,reference
paperindicatedthat theUnitedKingdomwouldbecomethefcriggestnetcontributor
totheBudgetin1980withanetdeficit,oncertainhypotheses ,ofabout1550
million ECU.Document COM(790620-paragraph 1i,saidthat"thestartingpoint
foranexamination oftheactionwhich -the..Community mighttakeinrespectofthe
UK'sbudgetary problemis,logically theexistingfinancial ,mechanism' ?.It-
showedalso(paragraph 14)thattheexisting mechanism wouldproduce anet
payment -ofnomorethan250million ECUbutthatifcertainrestrictions were
removedthepaymentwouldbeincreased toabout520million ECUoronethird
oftheUnitedKinadomdeficit.
♦
TheDublinGuropeanCouncildidnotreachan&greeraent buttheconclusions
stated:"Itwasagreedthatthe.Commission 'sproposals concerning the .
adaptation oftheFinancial Fie.chsnism couldconstitute auseiulbasisfor
{1)Itisinteresting tonotethattheforecast 1979GMPshareof15,7%
(beforethefullrissinthevalueofthepoundsterling .Hasknown)was
closetothe1974simulation figureof1509%inparagraph 11andthatth
1979budgetshareof21„1%(aftereliminating theeffectsoftheTreaty'
Accession )wasclosetothesimulation figureof22«Q%
(2)COM(79)462(Reference Paper),COM(79)620andCOM(79)680

-10-
asolution whichwouldrespect Community achievement andsolidarity' *
it).. meetingoftheCouncilofForeign
Ministers on29/30May1980 .decidedthattherewouldbenet
payments totheUnitedKingdominrespectof1930and1981-mainlyfromthe
Community Budgetsof1981and1982-It was--envisaged thatthesepayments shouldbe
madefirstlyfromanadaptedfinancial mechanism,withthebalancebeingcovered ~
bythespecialsupplementary measurestobeproposed bytheCommission.„Sofaras.the
adaptedfinancial mechanism wasconcerned,thisdecisionoftheCouncil was
incorporated inRegulation No.2473/80whichamendedRegulation No.1172/76.
31.Thesubstantive changesagreedin1980relatedonlytotheUnitedKingdom
andwepe:
(i)Theabolition ofthetranchesystemofassessing thepaymentand"
replacingitbyasimplepaymentofthewholeoftheexcessiftheU.K's
contribution exceedsby10%theamountitwouldhavepaidunderaGDP
system.
(ii)Theremovalofthelimitation thatthepayment maynotexceed 3%ofthe
Budget., . . '
(iii)Theremovalofthebalanceofpayments rule.
Although somedoubtwasexpressed bytheUnitedKingdomaboutthethree
conditions (a),<b)and(c)inparagraph 1S7theywerenotchanged
becausetheCommission 'sviewwasthat"inpresentcircumstances ,
however,itisunlikely thattheywoulddisqualify theUnitedKingdomfrom
arepayment,atleastbeforetheenlargement oftheCommunity".(COM(79)
620,paragraph 16)»ThechangesfortheUnitedKingdomapply~tothe
financial years1980and1981»UnlesstheCouncil decidestoprolong the
lifeoftheamendedversion,theprovisions oftheoriginal financial
mechanism willapplyinrespectof1982.
32.Adetailedexplanation oftheamended(19S0)financial mechanism isgiven
inAppendix C. . <
Theapplication oftherevisedmechanis mtotheUi■•+edKingdominrespect ,of
1930,1981 andthesituation asregards 1982.
33„Inrespectof1980,theassessment made"bytheCommission atthetime
the1981preliminary draft"budgetwasprepared showedthattheUnitedKingdom
wouldqualifyundertherevisedfinancial mechanism ,Thiswasbecauseits
averagepercaoitaGDPwas74%oftheCommunity average (i.e.lessthan85%.)
anditsaveragegrowthret©'ofpercapita GDPwas60".-oftheCommunity averse

-11
H.@ .Us§than UQ% ).ALSQ*theUnited Klnectem'g §epghar>@ w§§f©r>ee§§t ss
17.82% anditsbudget share as20.94% ;onthis basis ,itsshare offinancing
theBudget would exceed itsshare under aGOPsystem by17.49% (i.e. more than
10%).Anentry wastherefore made inthe 1981 Budget ofthewhole ofthe17.49%
(469 million ECUs ).
34.However ,arecent reassessment ofthesituation (required under Article 7(2 )
ofRegulation 1172 /76)shows that theforecast excess of17.49% hasfallen
to8.53% .This ismainly because theUnited Kingdom 'sshare ofCommunity GDP s
in1980 isnowcalculated as18.92% asagainst ,theforecast of17.82% made in
early 1980 -anincrease of6.2% ;this rise isalmost entirely duetotheincrease
inthevalue ofthepound sterling against theECUandtherefore toanincrease in
thenumber ofECUrepresented bytheUnited Kingdom 'sGOPexpressed innational
money .Also ,theforecast budget share of20.94% which wasbased onthe1980 budget
turned outtobe20.53% *when thebudget (including thesecond supplementary
budget )wasexecuted .Thereassessment showed that theUnited Kingdom continued
tofulfil theother twoconditions (seeAppendix B).
35.Since theUnited Kingdom 'sshare offinancing theBudget isnolonger 10%
more than itsshare onthebasis ofGDPtheentitlement toapayment under the
financial mechanism nolonger exists andtheappropriations concerned must be
transferred from Chapter 41ofthe 1981 Budget toChapter 58relating to
supplementary measures .
36.jnrespect of1981 ,theCommission 'sassessment isthat theUnited Kingdom
will meet theconditions ofaverage GDPperhead (with 82%oftheCommunity
average )andgrowth rate (inreal terms )ofpercapita GDP (with 34%ofthe
Community average ).TheUK'sshare oftheBudget isforecast ,however ,as
only 6.3% higher than itsshare onaGDPbasis andtherefore nopayment has
been entered inthe'1982 preliminary draft budget .TheCommission will reassess
thesituation Jinearly 1982 when more up-to-date figures areavailable .
37.Itshould benoted that aparallel movement between aMember State 's6DPshare
anditsshare infinancing theBudget cannot .necessari lybeexpected .There
are anumber ofreasons forthis ,both economic and "budgetary ,ofwhich the
main one isthe fact that GOP shares are converted into ECU attheaverage
annual rate ofexchange ,whereas this isnotthecase forownresources and,
inparticular ,VATwhich isdirectly payable inECUcalculated from forecasts
'innational monies which areconverted into ECUattherate of1February of
thepreceding year .

-12-
38. Inrespect of1982 ,theCommission 'spresent assessment isthat
theconditions will bemet ofgrowth rate (inreal terms )ofper capita
GDP and ofa10%excess ofBudget share over GDP share ;but that the
average ofthethree years 1979 ,1980 and 1981 (onwhich the1982
assessment isbased )will give ashare ofGDPperhead onthebasis ofthe
average annual value oftheECUof .about 89% . Ifthis turns out tobe
correct ,nopayment would bepayable tothe UKinrespect of1982 under
either theoriginal ortheadapted mechanism .
39. The main factor that underlies the failure ofthe mechanism to
operate asintended isthe increase during theperiod 1979 to1981 ofthe
United Kingdom 'sGDP share expressed inECU .Over this period the rate
ofreal growth intheUnited Kingdom remained onaverage significantly below
theCommunity average .Atthesame time ,the value ofthepound increased
relative totheECUwhile theUKhad anabove average rate ofinflation .

APPENDIX A
Description oftheFinancialMechanism (Regulation No.1172/76)-
(ThiswasamendedbyRegulation No.2473/80-themainchangesaffectingonly
theUnitedKingdom-seeparagraph20ofthemaintext).
1.Onaresaonedapplication fromaMemberState,submittednotLaterthan
30June,theCommissionassessesthefactsofthesituationhavingestablished
thatthefollowingconditionsaremetsimultaneously :
(a)thepercapitagrossdomesticproduct(GNP)oftheMemberStateisless
than85%oftheaveragepercapitaGNPfortheCommunity (averagesofthe
figures'forthethreeyearsprecedingthefinancialyearinprogress,
calculatedatcurrentmarketexchangerates);
(b)thegrowthrateofthepercapitaGNPinrefaltermsoftheMemberState
.islessthan120%oftheaverageratefortheCommunity (averageofthe
figuresforthethreeprecedingyears);
(c)ThetotalpaymentsmadebytheMemberStatetotheCommunities' Budget
forthefinancialyearinprogress,netofanyfinancialcompensations
theMemberStatemayhavereceivedunderArticle131oftheActof*
Accession,exceedbymorethan10%theamountitwouldhavetopayifthe
partoftheBudgetcoveredbytheDecisionofApril1970,(i.e.bycustoms
duties,agricultural levies,VATresourcesorGNP-basedcontributions )were
financedbytheMemberStatesonthebasisoftheproportionoftheirGDP
tothetotalGNPoftheMemberStates.ThefiguresforGNPrelatetothe,
financialyearinprogressaridarethereforeestimates.
2.Theexcessreferredtoin(c)aboveisrefundedinthefollowingproportions :
Theportionfrom0%to5%nil
5,0001%to-10% 50%
10,0001%to15%60% .'
' "15,0001%to20% 70%
"20,0001%to25% 80%
"25,0001%to30% 90%
Above30% 100%
3.Thepaymentcalculatedasindicatedinpoint2maynotexceedthesmallerof
ofthefollowingtwoamounts:
(a)TheamountofthenegativebalancefortheMemberStateconcernedbetweenits
transfersoffundstotheCommunities' Budgetandthetransfersreceived
fromtheBudget(1).Thisbalanceisestablished withouttaking account
(1)IfthebalanceispositivefortheMemberStateconcerned,themechanism
becomesinapplicable .

ofthepayments made under thefinancial mechanism .Payments received
bytheMember State include payments made onitsbehalf byother Member
States asMCAs .
(b)Thepayments bytheMember State totheBudget forthe current financial
year after deduction ofcustoms duties andagricultural levies .
4.Where thebalance ofpayments ofaMember State ,calculated from amoving
average ofthethree years preceding thefinancial year inprogress ,shows a
surplus ,theamounts tobetaken into consideration inthecalculation ofthe
excess amount referred toin2(c)above shall respectively bereplaced by:
-Thepayments bytheMember State totheBudget oftheCommunities in
respect ofValue Added Tax .
-The amount which that State would have had topay onthe basis ofthe
proportion ofits ;GNP "tothetotal GNP oftheMember States tofinance the
part oftheBudget not covered bycustoms duties andagricultural levies .
5.The total amounts ofthepayments for agiven financial year shall not
exceed 3%ofthetotal expenditure chargeable tothat year .
6.Atthe request ofthe Member State concerned anadvance equal to75% of
theprovisional amount ofthepayment ispaid atthebeginning ofthefollowing
year .Onthebasis ofthe final data ,the Commission then calculates the
final amount ofthepayment .

β
οi
p.
8!
Fulfilment bytheUnitedKingdomoftheConditions oftheFinancial Mechanism
Year NetContributor
\Percapita6NP/6DP
aspercentage
ofaverageGrowthrateper
capita GNP/GDPás
%ofaverage;■ 1·' '
Budgetsharein;relationtoGNP/GDPshare >
Budgetshare
%GNP/GDPshare % Difference ·ι
.
S
1976 Yes 77 100 , 10.7 15.,7ν
-31„6*
197? No* 75 27 12.2' ; 15.4 -20.9*
1978 Yes ,74 74 15.4 157 ,«2.5*...
1979 Yes 72 88 17.5 16,7+5.0*
1980 Yes
\74 60 20o5 λ18.9"+8.5*
1981 Yes 82 34 21.2 20.2' +5.2*
1982 Yes 89* negative 22,3 19.3 +15.5
.i >
Ν ·
*Doesnotmeetthecondition .

APPENDIX C
Description oftheFinancial Mechanism asapplied totheUnited Kingdom forthe
years 1980 and1981 (Regulation No.2473 /80) '
1
1.Onareasoned application from aMember State ,submitted not later than
30June ,theCommission assesses .thefacts ofthesituation having established ^
that thefollowing conditions are met simultaneously :
(a)thepercapita gross domestic product (GDP)oftheMember State isless |
than85%oftheaverage percaptia GDPfortheCommunity (averages ofthe |
figures forthethree years preceding thefinancial year inprogress ,on j
thebasis oftheaverage annual value oftheECU); ]
(b)thegrowth rateofthepercapita GDPinrealterms oftheMember State is j
less than 120% ofthe average rate fortheCommunity (average ofthe figures
for thethree preceding years );
(c)The total payments inECUmade bytheMember State totheCommunitie *s
Budget forthefinancial year inprogress exceed bymore than 10%the j
amount itwould have topay ifthe part oftheBudget covered bythe \
Decision ofApril 1970 ,(i.e. bycustoms duties ,agricultural levies ,VAT $
resources orGNP-based contributions )were financed bytheMember States j
onthebasis oftheproportion oftheir GDP tothe total GDP oftheMember
States .The figures forGDP relate tothefinancial year inprogress and
are therefore estimates .
2.Theexcessreferred toin(c)aboveisrefunded infull. j
3.Thepayment calculated asindicated inpoint 2may notexceed the smaller of
thefollowing twoamounts :
(a)Theamount ofthenegative balance fortheMember State concerned between ji
itstransfers offunds totheCommunities' Budget and the ,transfers received ;
from theBudget (1).This balance isestablished without taking account ofthe]
il
.i
Member State include payments madeonitsbehalf byother Member States fj
asMCA s. :j
(b)Thepayments bytheMember State totheBudget forthecurrent financial year
after deduction ofcustoms duties andagricultural levies . '
I
4.Atthe request oftheMember State concerned ,anadvance equal to75%of
theprovisional sraount ofthepayment ispaid atthebeginning ofthefollowing :
year .Onthebasis ofthe final data ,theCommission then calculates the final ,
amount ofthepayment .
(1)Ifthebalance ispositive fortheMember State concerned ,themechanism j
becomes inapplicable .