Unpacking the EU's financial oversight: an inside look with Dr. Laima Liucija Andrikiene

In October, the European Court of Auditors (ECA) published its annual report, presenting the results of its annual financial and compliance audit concerning the EU budget and EU development funds for the financial year 2023. The Baltic Times Magazine is tackling the EU's financial minefield using insights from Lithuania's delegated Member of the European Court of Auditors, Dr. Laima Liucija Andrikiene.

You are a co-author of this report, one responsible for one chapter of this report “Neighbourhood and the world”, i.e. 7.9 percent of EU budget expenditure or 15.2 billion euros. Is that correct?

Indeed, Chapter 9 “Neighbourhood and the world” of the report was my responsibility. I would like to remind you that I have been a Member of the European Court of Auditors since November 16, 2022. All 27 members are divided into five chambers, and I belong to the one – Chamber III – focusing on “External Relations, Security and Justice.” In addition to my work in this chamber, I am also a Member of the Audit Quality Control Committee. Under this role, I am responsible for reviewing and ensuring audit quality of special audit reports, reviews and opinions on newly rafted EU legislation carried out by Chamber II, “Investments for Growth, Cohesion and Inclusion.”  So, I am delighted to navigate the numbers with you and reveal the EU’s financial pitfalls. 

What was the EU budget in 2023 in numbers?

In 2023, EU budget revenues totaled 248.4 billion euros. The largest part of the EU budget income is 39.3 percent, or 97.7 billion euros, and consists of member states’ contributions, which are paid by the member states proportionally according to the gross national income (GNP) of the countries. Other sources of budget revenue are value-added tax-based contributions collected by member states (9.1 percent or 22.5 billion euros), customs duties (8.9 percent or 22.1 billion euros), and unrecycled plastic packaging waste-eligible contributions (2.9 percent or 7.2 billion euros). 

EU budget revenues also included funds borrowed to finance the non-refundable financial support allocated to member states under the NextGenerationEU instrument (NGEU), and they accounted for 27.2 percent or 67.6 billion euros of EU budget revenue. 

How much did Lithuania receive from the EU budget in 2023? 

Excluding RRF funds, in 2023 Lithuania received 2.28 billion euros from the EU budget, which was about 12 percent of the Lithuanian state budget, and Lithuania’s contributions to the EU budget amounted to 746 million euros, meaning that Lithuania received three times more than it paid. When the 542 million euros received from the Recovery and Resilience Facility (RRF) are included, this ratio becomes even more favourable, increasing to 3.8 times. 

What was the EU budget expenditure in 2023? And according to the expenditure categories, what were the major allocations for? 

In 2023, EU budget expenditures amounted to 191.2 billion euros, and according to spending categories, most funds were allocated into cohesion, natural resources, and the environment. The amount can be divided as follows: 

1. Single market, innovation, and digital economy (25.3 billion euros or 13.2 percent);

2. Cohesion, resilience, and values (73.3 billion euros or 38.4 percent); 

3. Natural resources and environment (59.5 billion euros or 31.1 percent);

4. Migration and border management (2.7 billion euros or 1.4 percent); 

5. Security and defense (1.4 billion euros or 0.7 percent); 

6. Neighbourhood and the world (15.2 billion euros or 7.9 percent); 

7. European public administration (12.3 billion euros or 6.4 percent). 

What did the ECA auditors check, and what did they find?

Let’s dive deeper into EU financial oversight. The EU’s long-term budget entails both the Multi-Annual Financial Framework (MFF) and NGEU. Within NGEU funding, the RRF represents a distinct approach, which is why we offer separate assessments of the regularity of 2023’s spending – one for traditional EU budget spending and another for RRF. For the MFF, our findings indicate a continuing rise in the error rate for EU budget spending, now at 5.6 percent, an increase from 4.2 percent in 2022. This indicates a substantial rise in undetected errors, prompting us to maintain an adverse opinion for the fifth consecutive year. As concerns RRF, due to some milestones and targets we examined did not comply with the payment or eligibility conditions, and weaknesses in member states’ control systems we issued a qualified opinion on RRF expenditure in 2023. On the positive side, we gave a clean opinion on the reliability of the EU 2023 accounts, as we have done every year since 2007. We also issued a positive opinion on the legality and regularity of revenue transactions for 2023. 

What does this 5.6 percent error rate mean?

We estimate that 8.2 billion euros should not have been paid out from the EU budget because, in our opinion, these funds were not used in compliance with the EU legislation or specific national rules. Among the typical errors are payments to ineligible beneficiaries or projects, payments for the purchase of services or goods, or investments, made after incorrect application of public procurement rules. 

We highlight that the significant increase in the estimated level of error is mainly due to the errors detected in cohesion expenditure, which reached 9.3 percent (6.4 percent in 2022). The Court of Auditors believes that pressure on national administrations to allocate funds across competing EU programs may hinder their ability to secure adequate financing for cohesion projects. 

What can you say about the EU budget and financial management?

In 2023, payments under RRF and NGEU supplementary programs were lower than expected. The European Commission argues that the implementation of the RRF has been adversely affected by several factors, such as high inflation, increased energy prices, problems in global supply chains, labor shortages, and insufficient administrative capacity. Outstanding commitments from the EU budget and NGEU grant funding reached a record 543 billion euros. This is an increase of 90.2 billion euros compared to 2022 – 452.8 billion euros. Outstanding commitments are the sum of liabilities incurred but not yet paid, which will have to be paid in subsequent years unless the commitments are canceled. Outstanding commitments mainly relate to the EU budget and transfers (263.6 billion euros) and NGEU grant funding (238.6 billion euros). 

What is the EU debt and what are the problems it causes?

In 2023, the amount of funds borrowed by the EU increased by more than 30 percent, i.e. nominal value increased to more than 458.5 billion euros (110.5 billion euros per year). The EU has become one of the largest issuers of debt securities in Europe. At the end of 2023, the EU had 268.4 billion euros of outstanding EU bonds to finance NGEU loans, grants and other NGEU-funded programs.

By implementing the NGEU, the EU can borrow an additional amount of 443.6 billion euros by the end of 2026. Consequently, NGEU borrowing may more than double by 2026, with most of the repayments deferred to future generations, the full amount to be returned no later than 2058.

How many of the European Commission’s payments to EU member states under RRF did not meet the eligibility conditions?

In 2023, the European Commission made 23 grant payments to 17 member states. In all, 16 of the 452 indicators we checked did not meet the payment and eligibility conditions. It concerns seven payments in seven member states. Six of these payments were impacted by material errors, leading us to issue a qualified opinion on RRF expenditure. 

What is the situation regarding the implementation of RRF in Lithuania?

In the case of Lithuania, we reviewed the achievement of eight indicators and found no deficiencies. However, we identified weaknesses in the systems that collect data on end-users, contractors, subcontractors, and beneficial owners. Last May, the European Commission made the first payment to Lithuania from the RRF – 542.3 million euros for the achievement of 31 indicators. However, the 26 million euros in support was temporarily suspended due to two outstanding indicators related to tax reform. 

Based on the actions taken during the six months, the Commission concluded that one indicator was satisfactorily fulfilled and the second only partially fulfilled. Accordingly, the RRF payment was reduced by 8.7 million euros. Lithuania appealed to the EU General Court, requesting to reassess whether the Commission’s decision complies with the RRF regulation. Lithuania considers that the indicator related to the abolition of tax benefits is fully implemented, and the national RRF plan did not specifically indicate which tax benefits should be abolished. Another argument against the Commission’s decision is that the payment suspension methodology was approved long after the parties had agreed with the Commission on their obligations, which raises doubts about the proportionality of its application, compliance with the provisions of the RRF regulation and the principles of legality, and whether the Commission properly implements the regulation given powers. 

Were any fraudulent activities found?

The Court of Auditors, being the EU’s external auditor, does not have the authority to investigate suspected cases of fraud. Therefore, our estimated EU budget error rate is not a measure of fraud. In the vast majority of error cases, we do not suspect any signs of fraud. If we suspect that we have encountered illegal activity, we report it to the European Anti-Fraud Office (OLAF) and to the European Public Prosecutor’s Office (EPPO). We reported 20 cases of suspected fraud to OLAF in 2023. OLAF has already opened four investigations. At the same time, we reported 17 of these cases to the European Public Prosecutor’s Office, which opened nine investigations. 

Can you tell, please, a little more about the European Court of Auditors?

The European Court of Auditors is the independent external auditor of the European Union. Approximately 950 auditors, lawyers, translators, and other employees, all citizens of EU member states, work at our headquarters in Luxembourg. As part of its responsibilities, the European Court of Auditors conducts annual audits on the EU budget’s revenue and expenditure. It provides an opinion on the reliability of the annual financial statements and assesses the compliance of revenue and expenditure with EU rules and regulations.