European Union funds require successful management with fluctuating exchange rates
Summary
With the risk of a decline in the euro, the National Audit Office (NAO) believes that more could be done to manage European Union (EU) funds supplied to the UK.
'Managing the Impact of Changes in the Value of the Euro on EU Funds’ (HC 759) highlights that while the EU’s funds to the UK are denominated in euros, UK departments must supply recipients with payment in pounds. If the exchange rate alters and the euro decreases in value, this could cause loss for departments in situations where a figure has already been agreed in pounds before payment from the EU.
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% in a single month. A 14% 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.
Key findings from the investigation include:
- Departments decide individually whether to bring about greater certainty by hedging using commercial banks
- The Departments for Work and Pensions (DWP), and Communities and Local Government (DCLG) have not protected against potential calls on the UK exchequer
- Forward contracts can be costly without accurate information and should be handled with commercial sensitivity
- Hedging when undertaken correctly can help to reduce the funds at risk from exchange rate instability.
The NAO recommends that DWP and DCLG:
- review their foreign exchange management policies and in particular their decision to tolerate the risk of such losses;
- undertake a cost-benefit analysis of the different hedging arrangements available to them; and
- engage with the Department for Environment, Food and Rural Affairs, and the Rural Payments Agency to learn from their experience and expertise.
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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