Counting the cost of enlargement

Date: 05/09/1996

THIS autumn, the EU will begin the daunting task of trying to reconcile two apparently irreconcilable goals.

It must devise a strategy to meet the political imperative of enlarging the Union eastwards, without placing extra financial or other unpalatable burdens on its existing members when the EU's current multiannual funding arrangements expire at the end of 1999.

To achieve this target, it will need both to cut back some EU expenditure currently going to existing member states and introduce somewhat different funding arrangements for the new partners. Alongside the debate over actual entry dates and transition periods, particular attention will focus on agricultural, regional and social policies which currently account for more than 80&percent; of Union expenditure.

The cost of the next round of enlargement is just one of a number of elements which will coalesce over the next two years and determine the shape of a wider budgetary debate across the Union.

The Maastricht Treaty reform negotiations, due to be completed next year, will reveal the extent of the Union's future ambitions and the costs involved. Within 18 months, a clearer indication will emerge of the breadth and pace of the next round of enlargement negotiations. A further ingredient in the budgetary stew will be the outcome of the British general election and, many hope, clarification of the UK's relationship with the Union.

Binding all three together will be the discipline of a single currency, which will make its presence felt both before and after its introduction.

The early parameters have already been drawn. Largely at Dutch insistence, last December's Madrid EU summit asked the European Commission to submit a detailed analysis of the impact of enlargement on the Union's finances as soon as possible after the end of the Intergovernmental Conference.

That assessment will only appear next autumn, but indications of the Commission's approach are already beginning to emerge.

It is determined to avoid the alarmist predictions which would result from simply extrapolating the cost of existing policies to a certain number of new EU members.

More surprising perhaps is the working premise that the policies of a Union of more than the existing 15 members can be financed within the budget ceiling laid down at the Edinburgh summit in December 1992. This stipulated that the financial resources available to the EU should not be greater than 1.27&percent; of the Union's Gross Domestic Product.

In an era of financial stringency as single currency contenders struggle to meet the entry requirements for EMU, neither governments nor a distinctly quizzical public would readily endorse enlargement if it was felt this would open the door to a financial black hole.

Criticism may emerge if the Commission fails completely to consider the alternative scenario: that the arrival of a number of poorer countries may actually add to the Union's annual bill and require existing member states to dig deeper into their pockets.

The immediate political risks of hinting at extra costs are obvious, given that the debate on future financing will almost certainly take place at the same time as governments are trying to secure public and parliamentary approval for the revised Maastricht Treaty.

Evidence suggests there is considerable room for manoeuvre within the existing budgetary ceiling. A backlog of more than 20 billion ecu in unspent regional and social funds has already built up. In addition, member states are poised to receive a rebate of just over 9 billion ecu unspent from a 1995 budget which, like its successors, was pitched well below possible maximum levels.

Under current forecasts, the Union will still have a 10 billion ecu budgetary margin of manoeuvre in 1999.

But several key variables in the enlargement equation must first become clearer before any strongly defensible estimates can emerge: the number of new members; their membership dates; the scale of pre-accession aid; and the length of different policy transition periods.

Despite suggestions from German Chancellor Helmut Kohl that the first wave of possibly six new members could join around the year 2000, the view emerging within the Commission is that 2002 is a more likely date.

For some applicants, this may appear too slow. But for others it is too fast.

At a recent European People's Party (EPP) brain-storming session in Helsinki, support emerged for a more cautious timetable to take account of the need for internal EU changes as well as the ability of new members to meet their Union obligations.

“We must have a long-term vision in which to place internal and external challenges for the EU. When the Commission comes forward with its suggestions for enlargement later next year, they should set 31 December 2004 as the target date for their resolution,” argues British Conservative MEP James Elles, who also favours keeping the 1.27&percent; GDP budget limit.

The key questions, however, revolve around the extension of core EU policies to the new members.

There is widespread acceptance that the Common Agricultural Policy (CAP) cannot be applied in its entirety to the new entrants. To introduce Union-style guaranteed prices for farmers from early days of membership would inevitably impose intolerable inflationary strains on the eastern economies.

Similarly, few believe that the new members could absorb the level of EU-financed per capita regional and social expenditure enjoyed by some of the Union's less developed economies.

But the budgetary burden will need to be shared if EU costs are to be kept under control.

While Union support for the four cohesion countries (Greece, Portugal, Spain and Ireland) is likely to be largely unaffected, some regional and social expenditure may need to be diverted from the remaining 11 to the new members. A first indication that cutbacks may be in the offing came with the decision of finance ministers in July to trim 1 billion ecu from 1997 structural spending.

The costs involved will also be determined by the amount of pre-accession aid allocated to the new members and the extent to which this will be met from the EU budget or by bilateral or even private finance.

The duration of the next multiannual budget forecasts is equally uncertain, although early indications are that it could run from 2000 to 2005 or even 2006.

The first exercise - dubbed 'Delors I' after the then Commission President Jacques Delors - lasted from 1988 to 1992 and increased the potential size of the budget from 45.3 billion ecu to 63 billion ecu at current prices over the five years.

The second, which runs until the end of 1999, was more ambitious and raised the own resources ceiling from 1.2&percent; to 1.27&percent; of GDP. Over the seven years, this was designed to increase possible expenditure from 72 billion ecu to 89 billion ecu.

The next round of financial negotiations will be further complicated by Germany's determination to review the way the EU budget is financed. As the country's Finance Minister Theo Waigel increasingly reminds his partners, the days when Bonn would unquestioningly pay the lion's share of the cost of new EU policies are now over.

As the strongest advocate of enlargement, the debate on the costs involved is particularly dear to Germany. The Netherlands, which claims to be the largest per capita net payer, is also keen to raise the issue, although its contributions to the EU budget are inflated by the duties it collects for the Union on goods passing through Rotterdam.

Commission President Jacques Santer has already recognised that the issue of national contributions cannot be avoided and has indicated that the new budgetary package might include proposals for a new cost-sharing formula.

That debate will inevitably reopen the controversy over the annual budget rebate which the British negotiated with the Union in 1984, which was extended in 1992 but must be reviewed again in 1999.

Given the current climate in the UK, any hint that its rebate might be scrapped would fan the Eurosceptic flames to new heights.

Even outside the UK, a careful balancing act will be required to avoid igniting a fire which could engulf member states across the Union.