LEADING ARTICLE:The pounds 2bn question

The European Union is in a financial mess. Yesterday, the EU's spending watchdog, the grandly titled European Court of Auditors, made that much plain. Eurocrats don't know where 4 per cent of their budget - pounds 2bn - has gone. Their best guess is that it has disappeared in a mix of fraud, waste, mismanagement and bad housekeeping.

This is an appalling admission. At a time when most countries are struggling to hold down public spending to meet the demands of the Maastricht treaty, such profligacy damages the EU's reputation and is manna to the union's many ill-wishers.

So who is to blame? Has Brussels, as the Europhobes would have us believe, become a place where fraudsters thrive unchecked and where the roads are choked with criminals driving removal vans stuffed with stolen EU office furniture?

Not quite. Yesterday's report shows that there is a serious failure to monitor spending. The fact that much EU spending takes the form of subsidies also makes it particularly vulnerable to fraud and waste. The Common Agricultural Policy, which takes about half of the EU's pounds 56bn budget, is, as is well known, widely abused. Likewise, the EU's other big programme, grants to poor areas and countries, is tailor-made for waste. Many projects are ill-drafted, badly administered and incompetently implemented. They discredit a central EU policy: the effort to reduce the gap between rich and poor.

But responsibility for most of the failure lies at a national level. The problem is that the 15 member countries, which administer 80 per cent of the budget, don't bother too much about what happens to it. It's someone else's money as far as they are concerned. They don't seek out evidence of fraud, partly because they may find themselves obliged to repay the sums lost even if these amounts cannot be recouped from the fraudsters. In many countries it is not even a criminal offence to defraud the EU budget. And there is no justification in the supposedly fraud-free richer northern countries pointing an accusing finger at their southern counterparts. Slapdash accounting and dodgy dealing is identified throughout the community by yesterday's report.

The situation is beginning to improve. The EU has set up a tougher anti- fraud unit. There is a telephone number for informers. The very fact of yesterday's report - and the attention it has received - shows that abuse is taken more seriously than in the past. Monitoring should become more rigorous in the future as more countries join Britain as a net contributor to the EU and so worry more about their own money going down the drain.

But the continuing inadequacies of the EU situation are thrown into relief when compared with events this week in the United States. There, the government has been, however briefly, shut down in the battle over spending restrictions. Such drastic action is not to be recommended, but it shows how much tougher controls are in the US than in the EU, where money will continue to flow in (and out) regardless even of yesterday's damning report.

It is time that member states got serious about the problem. But until they stamp out malpractice on their own doorsteps, they are wasting their breath railing against bloated Brussels.