§ Mr. Foulkesasked the Chancellor of the Exchequer what effect a change in the exchange rate between the £ sterling and the European currency unit has on financial transactions between the United Kingdom and the EEC.
§ Mr. Ian Stewart[pursuant to his reply, 11 March 1985, c. 61]: The effect of exchange rate fluctuations on EC financial transactions is complex. VAT payments are initially established in ecu. A fall in the value of sterling relative to the ecu after the exchange rates used for budgetary transactions have been set results in additional sterling payments being required during the budgetary year to make up the required ecu payment. However, the definitivee VAT obligation is assessed on the basis of the value of the United Kingdom VAT base in sterling terms, so all other things being equal the United Kingdom could expect to receive a refund the following August of any over-payments made in the preceding budgetary year.
Agricultural levies are set in ecu terms. The sterling receipts received and paid over to the Community therefore vary with the exchange rate. Customs duties are normally expressed in percentage terms of the sterling value of the import.
Receipts from the Community budget which are expressed as a percentage of United Kingdom expenditure are paid in sterling. However, at the commitment stage the Commission makes budgetary provision in ecus; changes in the exchange rates between the date of commitment and the date of payment therefore affect the size of the sterling payment. The major payment denominated in ecu terms in recent years has been the agreed United Kingdom refunds. The amount of sterling received has depended on the exchange rate on the date that payment of the refund was authorised.
While agricultural receipts are denominated in sterling terms the levels of price support are determined by sterling's "green rate" against the ecu. If the green rate diverges significantly from the market rate both agricultural receipts and levy payments are affected. The position is further complicated by the imposition of positive or negative Monetary Compensatory Amounts.
These effects are difficult to quantify, and, as in the case of green rates for agricultural expenditure, may affect some sectors more than others. But over the long run there is no reason why exchange rate changes should have a particularly distorting effect upon financial transactions with the European Community as opposed to other parts of the world.