Union prepares to adopt a pragmatic line on budget

Date: 03/07/1997

THE European Commission will break with precedent later this month by not pressing national governments to increase their payments to the annual Union budget.

For the first time in a decade, the Commission believes that the EU can shoulder the cost of its many policies within the financial ceilings laid down almost seven years ago - even with the challenge of enlargement.

When Commission President Jacques Santer announces his 'Agenda 2000' package to the European Parliament on 16 July, the pragmatic budgetary approach will be a key part of the wider strategy to increase the Union's membership and overhaul its main policies.

The premise that the Union can - and must - live within its existing financial means for the foreseeable future is in direct contrast to the large budget hikes introduced by the two previous multi-annual financial exercises.

Under the first so-called Delors package, named after the former European Commission president, it was decided that the percentage of the Union's gross national product which could be used to finance EU policies should rise from 1&percent; to 1.2&percent;. This significant increase was designed to boost regional and social spending as the Union embarked on its wide-ranging single market project.

Four years later, ambitions were even higher as Delors argued for an increase in the ceiling from 1.2&percent; to 1.37&percent; to help prepare the Union for economic and monetary union. Not surprisingly, member states scaled down his plans. Even so, they agreed at the Edinburgh summit in December 1992 to raise the limit to 1.27&percent; (a level the EU is still far from reaching) by 1999.

“With hindsight, the Edinburgh decision was really quite generous to the Union,” confessed one senior Commission official.

A number of other major pressures have convinced the Commission that the EU must stick to the revenue status quo as it puts together its income and expenditure forecasts for the 2000-2006 period.

One of the most powerful is the imminence of the single currency and the reluctance of governments to transfer more national funds to the Union.

Another is the very practical consideration that keeping to existing levels would avoid the need for the final budgetary package to be ratified by national parliaments, a process fraught with difficulty in the current political climate.

Carefully balancing the conflicting pressures of finite income with increasing expenditure demands is a major political challenge for Santer and his colleagues. The complex exercise - coordinated by the Commission president's chef de cabinet Jim Cloos and the Secretary-General designate Carlo Trojan - has been surrounded with unusual secrecy.

“It will be no small feat to take on board a number of countries whose combined population is considerable and all of whom are poorer than the poorest existing member. How we do that within existing budgetary constraints is the main question,” said one senior official.

As the Union contemplates that challenge, it will have to establish the nature and volume of pre-accession and post-accession aid for the potential new members.

The question of whether the pre-membership aid is administered solely out of the EU's external relations expenditure or will involve some of its various structural funds must be settled by the Commission within the next fortnight.

The difficult exercise of cutting the Union's coat to fit the cloth will lead to changes in the four structural funds for regional, social, agricultural and fisheries expenditure. The new guiding themes will be greater simplification of procedures, better concentration of resources and, possibly, more decentralisation of day-to-day administration to member states.

Concentration is expected to mean that, in future, 40&percent; of the Union's population will be eligible for aid as opposed to just over 50&percent; now. The number of objectives of EU structural policy will also be honed down to three.

The first category will include regions whose economic performance is at least 75&percent; below the Union average; the second will concentrate on areas of industrial decline and urban deprivation and will include measures for rural and fishing communities; and the third will focus on developing training and employability.

The Union will also have to determine how to phase out funds to areas which have benefited from EU aid to improve their economic performance and now no longer meet the eligibility criteria, while at the same time phasing in finance to new needy regions.

To improve overall budgetary efficiency, the Commission is expected to recommend that a percentage of the finance earmarked for specific programmes and projects should be held back and only released if it is fully satisfied that the existing funds are being properly spent.

To achieve still better value for money, the possibility is being explored of switching funds from regions which fail to make full use of EU aid to others which will.

The 1.27&percent; GNP ceiling is not the only parameter of the Union's finances which will run from this budgetary package into the next.

The Commission is preparing to recommend that the share of the overall budget which goes to the four structural funds (equivalent this year to 0.46&percent; of the 1.22&percent; GNP ceiling) should remain unchanged. Similarly, the method for setting maximum agricultural spending is likely to be rolled over after 1999.

Although a 1.27&percent; limit will be placed on Union expenditure up to 2006, the decision will not mean a freeze on spending. As its GNP grows, so too does the potential size of the EU budget, now standing at just under 90 billion ecu.

Annual gross national product growth of 2.5&percent; between now and 2006 would produce an extra 20 billion ecu for the Union by the end of the seven-year period - a figure which would be boosted by the budgetary contributions of new member states and any moves to make up the slack which exists between the current 1.22&percent; level of expenditure and the 1.27&percent; maximum rate.

As the Union prepares to embark on this politically sensitive budgetary debate, there will inevitably be attempts by Germany and the Netherlands to try and reduce their net contributions to the EU's coffers. But these, along with any challenge to the UK's annual budget rebate, are almost certain to fail since changes require unanimity.

It is still unclear what the fate of the cohesion fund will be. Established in 1992 with a 15-billion-ecu budget to the end of 1999, it is designed to help Spain, Portugal, Greece and Ireland prepare for a single currency. The central issue facing member states is whether this finance should be withdrawn from any of the four if, and when, they qualify for the euro.

The new financial package and its implementation will also have to be negotiated with the European Parliament.

MEPs accepted the last budgetary agreement between EU governments because it included a large increase in non-agricultural spending. Given the absence of any such increase this time round, the Parliament may use its approval as a lever to strengthen its budgetary influence in other areas.

Few people are prepared to speculate on when the financial negotiations might end. The Commission would like them to be wrapped up at the Luxembourg summit in December, allowing more detailed financial regulations to be endorsed six months later when EU leaders meet in Cardiff, and for a decision on the regions eligible for aid to be taken in December 1998.

This scenario would leave the Commission and national governments the whole of 1999 to work out the details of their various regional development programmes so that these could come into effect at the same time as the new budgetary guidelines.

Whether that timetable can be maintained is unclear. The last time the Union agreed to increase its budget, in 1992, the proposals were tabled in March, a decision was taken in mid-December and it came into effect two weeks later.

“Now we are talking about things two and a half years before they are due to come into effect. The absence of that time pressure may mean that the timetable could well slip,” warned one senior official.