Managing the impact of changes in the value of the euro on EU funds: departments managing EU funds
The Stationery Office, Feb 18, 2011 - Business & Economics - 36 pages
The National Audit Office believes more could be done to manage the risk of a reduction in the value of EU funds to the UK in the event of a depreciation in the euro. The UK Government receives around £5 billion from the European Union each year to fund EU programmes in the UK. However, the relative value of the pound and the euro varies significantly, with the exchange rate fluctuating by up to 14 per cent in a single month. A 14 per cent change can lead to an increase or decrease of £700 million in the sterling value of funds provided by the EU if the exchange rate holds at that level. The use of forward contracts (a form of hedging where the department and a commercial bank agree an exchange rate in advance) has helped reduce the potential funds exposed to a fall in value from £8.5 billion to £2.4 billion in 2009-10. However wider use of hedging could reduce still further the amount of taxpayer funds at risk. Each department managing EU funds works in isolation on developing its policy. Such an arrangement is not cost effective. These departments would benefit from more detailed guidance from HM Treasury in this area, and from developing more pooled expertise to reduce duplication of effort. Government bodies require considerable expertise and support to ensure the most appropriate and cost-effective hedging arrangements are put in place.
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funding from the EU
14 per cent 2.4 billion 2009 the Agency 698 million allows departments Annually Managed Expenditure assessed Audit Office analysis Bank of England commercial banks commercial markets commercial provider convert euros cost effective currency gains currency option current arrangements Department for Communities Department for Environment departments managing EU budget euro transactions Exchange Equalisation Account exchange management policy exchange rate gains exchange rate losses exchange rate movements exchange rate risk expertise Figure financial instruments Food and Rural foreign exchange management foreign exchange risks funds at risk gain certainty gains and losses hedge funding hedging arrangements hedging requirement HM Treasury approval identify impact of exchange long-term programmes managing EU funds Managing Public Money National Audit Office offset Pensions perverse incentive Private hedge protect reduce reimbursement risk management Rural Development Programme Rural Payments Agency scheme rate Single Payment Scheme spending commitments UK contribution under-spend unspent funds value for money value of taxpayers volatility whilst