The Major Issues and Difficulties Facing the European Union - Essay Example

The Major Issues and Difficulties Facing the European Union and Its Attempts to Effectively Fight Fraud Against Its Budget From the rise of modern civilization, Europe was the spot of many wars. These caused a great loss in terms of life and money. The top-level politicians of many countries in Europe realized that the solution would be uniting the countries in terms of trade, commerce, and other variables. The first step towards this was the setting up of European Coal and Steel Community (ECSC) with six countries as its members. The success of ECSC urged the member countries to go ahead in other variables. The European Parliament was formed. The member states realized that that this type of cooperation should exist in other fields like legal affairs, defense, currency etc. In 1992, the Treaty of Maastricht was signed which gave rise to the European Union (EU). A single market devoid of any boundaries was established where people could go from one country to another freely. The single currency concept came into being in 2002 with the introduction of Euro. The EU family is growing day by day and more countries are joining in. The European Parliament, the body governing the EU, takes care of all the activities of the member states. The member countries set up the parliament by giving their votes. The votes are directly proportional to an individual country’s size. The parliament consists of Commissioners of different countries led by a President. (History of European Union, n.d.) Issues facing the European Union With the enlargement of EU, more countries came into its fold. The challenge for the EU was to induct these countries into its set up. The problem faced by EU in this regard was that the Parliament was influenced by the bigger countries as they had the lion’s share of commissioners. The treaty of Nice underlined that the small countries will get to cast a minimum amount of votes while the big countries would cast the bigger share. This means that the bigger countries will influence all the decisions taken in the EU. (The treaty of nice, n.d.) Perhaps, the main issue facing the EU right now is the fraud against their budget. The symptoms are widespread now and the EU is facing severe problems in controlling the frauds against the budget. Despite the measures taken by the EU in controlling the frauds, various scams, and frauds surfaced which has led to the decrease in public trust on EU. OLAF was set up to look after the corruption against the budgetary frauds. (EU budget fraud, 16th January, 2010). With the introduction of new member countries in the EU fold the problem of the transition begins. To be included in the fold, the member countries has to fulfill some norms. The economic system should attain a minimum criteria and the legal system should undergo a complete overhaul. The legal system, which is looked after by the AFCO in EU needs a functional harmony between the local bodies and the parent body. Romania and the Czech Republic acquired the transition phase in many days. During this phase, the local people take the advantage of misgovernment and siphon away a lot of money. In this way EU has lost lots of money. The EU Budget The citizens of the member countries provide taxes from which a small amount of money of 1% is utilized in the EU budget. It is mainly spent for the development of the citizens. Greater emphasis is led to the countries, which are not so developed. A part of the budget is also spent on 3rd world countries of the world. The spending plan of the budget is decided by the Parliament. It needs authorizing from the council of members and must be supported by a law. The treaties between different countries define the amount of money, which will be available for the budget. The Commission looks after the implementation of the budget but the management is shared by the member states. The control of the budget is strict and the Financial Regulation, an act, is to be followed in the usage of budget funds. (The European Union Budget at a glance, n.d.) Auditing of EU Budget The EU follows a definite policy of auditing on its budget. The EU budget is examined by a group of internal auditors who look into the separate groups of DG. The internal auditors look into the subject of rightful spending and the proper management of the system. In every group, one member is assigned the post of “authorizing officer” who looks into the matter of competence. They have a specific set of standards to follow. The European Court of Auditors (ECA) manages the external auditing of the EU budget. It took shape in 1975 in Luxemburg. The body is formed by taking one individual from each member country. The members of the body then elect one person among them as President. In addition to these, the ECA staff consists of translators, auditors as well as administrators. The main function of the body is to see whether the income and expenditure of the EU budget is presented in a true and fair manner. The ECA on its part has the power to investigate any person connected to EU budget. (The European court of auditors, n.d.) Frauds against EU budget The frauds against EU budget have a long history right from the days when the Union came into being. The culmination point was reached in 1999 when the Santer Commission reconciled in the arousal of a sequence of scandals. Romano Prodi succeeded Jaques Santer as the president and right away set up OLAF- the new European Anti Fraud Office. The new office started working on tackling fraudulent practices that were hampering the EU budget. (EU budget fraud, 16th January, 2010). The frauds against the EU budget are mainly aimed to hamper the financial stability of the EU. The budgetary frauds in the EU mainly arise from: Custom Evasion Subsidy fraud Custom Evasion- Custom evasion is one of the most followed practices, which hurts the budget of EU. Custom is the legal import duty, which has to be paid to the government of the country where the goods are imported. These subsidies are evaded by individuals, resulting in huge financial loss of the state. Custom Evasion can be done by two ways- smuggling and providing wrong information to the government. Smuggling is the practice of taking goods over the borders without paying for it. These kinds of practices are followed for goods, which have a high import duty on them or in countries, which have a high tax rate. The most affected parts of the EU by smuggling are from Poland to Germany, Montenegro to Italy, Andorra, and the ports of Spain and Portugal. Smuggling does not affect the EU much but the recent trends in Transit frauds have made the lives of EU commission difficult. Manipulating the laws of transit of goods carries out transit frauds. The rule states that the goods imported from or exported to the 3rd world countries will not face any duty or tax if the EU is used as a transit corridor. A mere guarantee is required by the customhouses. Organized crime developed by importing goods from 3rd world countries in the name of “transit” and then destroying the guarantee papers. This results in the loss of millions of import duty every year. Another way of smuggling is providing wrong information to the customhouses. Smuggling comprises of providing wrong information about the weight and size, quality, country of origin and purpose of the imported goods to avoid being charged heavy duties. Subsidy Fraud- the EU offers subsidies to the farming sector. The prices of agricultural products in Europe are much higher than that of the prices in the 3rd world countries. This is due to high cost of labor and raw materials. The EU offers subsidies to the agricultural products to be exported to bring equivalence between the prices of the 3rd world countries and that of Europe. Fraudulent practices like that of the transit corridor fraud where the goods remain in the borders of EU after receiving subsidy have developed thus providing huge loss to the EU. (Durdevic, 2006; pp 4-17) Transition phase: Another problem the EU faces is while including new countries in its fold. The examples of Czech Republic and Romania can be sited in this regard. The Communist countries like the Czech Republic were taken into EU in 2004. Prior to its inclusion, there was a widespread notion that the corruption prevailing in the country will eat away the money. The Communist Government was opening up to privatization. It was obvious that the government would not crosscheck all the transactions and the privatization committee would handle most of them. This provided an opportunity for the economic criminals for money laundering, as the risk of detection was low. The new countries, which come into the fold of EU, receive about 3 billion Euros per year. The local people of the country siphoned most of the money. The financial aid was provided to the member countries to avoid the economic offences. (Quirke, March 2009) There was a similar thinking in the case of Romania, which was included in 2007. Like Czech Republic, Romania was also a communist country where corrupt practices were widespread. Top-level politicians appointed their close relatives to the post of power, which meant that the power was in the hands of a few people. The common people took to bribing the bureaucrats to gain better services. After the fall of Communism, the country looked to privatize most of the state owned organizations. This prompted a few people to control the affairs of the company by purchasing bulk shares. The purchasing of bulk shares was eased through bribing the corrupt officials managing the privatization process. Another area of corruption was the bank where individuals gathered a huge amount of loans by bribing the officials. There was a general conception that money provided to Romania would fall in the hands of economic conspirators. (Quirke, March 2009) The attempts to fight fraud The fraudulent practices have been harming the EU budget as it is draining the EU of its resources. Amazingly, the criminal practices originate from the abuse of EU rules and regulations like the use of transit system. The criminal groups are using the rules laid down by the EU for their own benefits. This is resulting in huge losses in terms of revenue generated. The income in terms of import duty has suffered. In addition, the subsidies given to the member countries are not well accounted for. Some sectors of the economy, like agriculture, are taking subsidies as well as making profits. The main propaganda of the EU is being hampered due to these malpractices. OLAF: Romano Prodi set up the OLAF- the new European Anti fraud office, in 1999. Prodi came into the commission to tackle the increase of frauds in the EU. He took the charge and promptly set up OLAF, which since then has been working relentlessly in the front of recognizing fraud. Presently, OLAF employs about 400 people who look into the matter of financial interest of the EU. OLAF has been given extensive powers to check and investigate any business in the EU. In addition to this, OLAF has ties with many countries all over the world, which gives it the power to do business checks in those countries as well. The function of OLAF comprises of coordinating the activities of all the customhouses in Europe. This is done with the help of the logistics team in Brussels with high-end technology processing real time data. Another major area of fraudulent practices is the counterfeiting of coins. This phenomenon was visible from the days of the advent of Euro as a currency. OLAF has been successfully dealing with these fake coins and in 2007, it caught almost 200,000 coins. The most popular coins for counterfeiting purpose are the two Euro coin. OLAF has been successful in decreasing the trend of malpractice in coin faking. (Fight against fraud, n.d.) New rules regarding better transparency and control: New rules have been brought in by the Commission to ensure lesser amount of malpractices among the member states. In the above paragraphs, the fraudulent practices regarding the criminal activities have been discussed. But, the surprising thing is to note that most of OLAF’s activities are dedicated to curb the malpractices by the member states regarding grants and subsidies. The malpractices by the member countries have resulted in the introduction of new rules and regulations by the Commission to ensure transparency. Most of the spending in the EU budget comprises of giving subsidies or grants to different sectors of the society, for example the farmers. This type of spending forms about 75% of the budget. The money is send to the member countries that then manage the funds at their discretion. The new guidelines state that, the beneficiaries of the grants are to be published and send to the commission. The names of the recipients will be published in the official website of the EU. Other parties who are involved in receiving grants or subsidies or adhere to any other activities of EU will follow the same procedure and disclose the beneficiary. The rights to information will be available to all and sundry and therefore every information regarding the spending activities will be made available in the official website. (European Union, nod., p.21). Accountability and Control: The separate auditing bodies of the state manage most of the money spent on the EU budget. Only 20% of the annual budget falls in the purview of the EU internal auditing system. The individual Government of member countries is responsible for the management of the remaining funds. Over the years, various discrepancies regarding the usage of the funds have been observed. Under the new system, the member states have to furnish the audited reports of the usage of funds. These reports will be submitted to the Commission and will be checked by ECA. A central database has been developed by the Commission, which will provide all the information regarding the frauds, usage of funds etc. This will provide the system with better transparency and control. The usage of modern standards relevant to present day accounting has also been introduced. (European Union,n.d., p.21) Policy for the new member countries: The countries were required to construct individual bodies to look into the economic crime and were ably supported by OLAF. OLAF provided the training and in some cases, the OLAF officials worked closely with the individual bodies. The legal system of the country made a change to incorporate hefty punishments for any offences made against the interest of the EU. OLAF improved communication between the higher political authorities like the Ministry of Finance and the Government to enable swift decisions. But EU’s policy of reviewing the internal status of the countries before granting them membership bore fruit. The government of these countries was specifically told to tackle fraudulent practices or to forget membership. A similar structure like that of Czech Republic was set up. The Governments acted promptly and eventually was granted membership. The independent bodies, which were set up in different countries to support OLAF, were called AFCOs (Anti fraud Coordination Service). These bodies look into every institution’s credibility in receiving grants. AFCOs were created to overcome the language barrier existing in different countries and they act as a support system to the OLAF. Besides this, there should be an agreement between the internal ministry and OLAF giving the body more freedom to work. The composition of the bodies consists of people from various disciplines, which help them to tackle fraud better. The Government of Bulgaria and Poland are working in tandem with AFCOs to fight fraud. In Poland, a multidisciplinary team called the GAFU has been created to assist OLAF. The AFCOs play a significant part in the success of OLAF. They have the right to investigate any organization independently. It has to be noted that the AFCOs are initiatives built by individual Governments to assist OLAF. (Sigma, 14th May, 2004) Conclusion From the day the EU was established, it has been successful in the development of trade and commerce in the region. The economic misbalance in the region has largely been nullified but still some of the Eastern countries need more attention. EU has been working toward its goals of developing the region and this fact was primarily established when EURO was the best performing currency during the economic downturn. The functions of EU over the years, has gone off smoothly until the fraudulent practices crept in. These practices have drained a lot of funds out of the EU budget. The EU has been working hard to check these practices. The system has gone through a complete overhaul in the recent years with the addition of more countries in its fold. It presents EU with new challenges and responsibilities. In response to the change, EU has brought in new rules and regulations, which will lead to more disclosure of the EU procedures. This will involve transparency. Invariably, the cases of fraudulent practice will go down. The moral police wing of the EU- the OLAF has been given more responsibility and power to curb the criminal practices. The introduction of AFCOs has helped to ease the transition phase of new member countries. Though the AFCOs have been successful in dealing with the situation, there are some grey concerns. Till date, AFCOs has not filed any irregularity in the activities of any country. The assessment of pre transition phase has still not been taken care of. The relevant ministries have not received any guidelines from AFCOs. These concerns remain in the function of AFCOs and OLAF is looking into the matter to eradicate as soon as possible. (Sigma, 14th May, 2004) It can be said in this regard that the changes will not be visible from day one. It will take time but at least EU has taken a step in the correct direction to fight the fraudulent practices. This step will ensure that the region will continue to grow in the years to come. References: 1. History of European Union, n.d., Delegation of European Union to China,EU in China. Available at: http://www.delchn.ec.europa.eu/eugu_basi1_hist1_con1.htm (Accessed on 16th January, 2010) 2. The treaty of Nice, n.d., The history of European Union, Historiasiglo20.org. Available at: http://www.historiasiglo20.org/europe/niza.htm (Accessed on 16th January, 2010) 3. EU budget fraud,(18th January,2010),politics.co.uk. Available at: http://www.politics.co.uk/briefings-guides/issue-briefs/foreign-policy/eu-budget-fraud-$366701.htm (Accessed on 16th January, 2010) 4. The European Union Budget at a glance, n.d., Financial Programming and Budget, European Commission. Available at: http://ec.europa.eu/budget/budget_glance/index_en.htm (Accessed on 16th January, 2010) 5. The European Court of Auditors, n.d., Institutions of the EU, Europa. Available at: http://europa.eu/institutions/inst/auditors/index_en.htm (Accessed on 18th January, 2010) 6. Durdevic.Z,n.d., Fraud adversely affecting the budget of the European union: the forms, methods and causes. Available at: http://docs.google.com/viewer?a=v&q=cache:wfHhImQ5sIgJ:hrcak.srce.hr/file/9188+fraud+against+EU+budget&hl=en&gl=in&pid=bl&srcid=ADGEEShyKTPdszyI7j84bTOeSnVhs2_R4xqKzTSSXX7fZPE9yxysudt5--UmT4lCMYOwBdgxpadZLb4TNDqKe617veF9zrCp4_bt5oPDDgHLxdiau_JQFwSiEIjb-Aey5aGSPttvrp5M&sig=AHIEtbQ6fF308L5rVNv5KWKszvIWlKKgog (Accessed on 18th January, 2010) 7. Fight against fraud, n.d., Overview, Europa. Available at: http://europa.eu/pol/fraud/index_en.htm (Accessed on 18th January, 2010) 8. European Commission, n.d., new funds better rules, Europa. Available at: http://ec.europa.eu/budget/library/publications/financial_pub/pack_rules_funds_en.pdf (Accessed on 18th January, 2010) Read More