EU budget deal threatens to unravel

Date: 04/05/2000

Just 12 months after Union leaders reached agreement on a budget deal for the next seven years, they are under intense pressure to find billions of euro more for reconstruction in the Balkans and extra aid to farmers in the applicant countries, prompting speculation that the Agenda 2000 accord will have to be renegotiated. Simon Taylor reports

WHEN EU leaders emerged bleary-eyed from their budget-fixing session in Berlin in the early hours of 26 March last year, they believed that they had struck a deal which would see them through the next seven years.

But only a year later, they are already being asked to find billions more to fund reconstruction in the Balkans and provide support payments for farmers in enlargement countries.

The pressure on last year's budget deal in Berlin is prompting speculation in Brussels that the Agenda 2000 package might have to be torn up and a new Agenda 2003 negotiated. The next few weeks will give a strong indication of whether this will be necessary.

At a meeting of EU finance ministers next Monday (8 May), Budget Commissioner Michaele Schreyer will ask for permission to shift €300 million from the farm budget to pay for the cost of reconstruction in Kosovo next year. Several member states, including France and Italy, have already declared their opposition to this because of fears about its effect on agricultural spending.

The following week, Schreyer and External Relations Commissioner Chris Patten will unveil details of the Commission's plan to provide a massive 5.5-billion-euro aid package for the Balkans, with more than half being set aside for Serbia to be handed over if and when opposition forces despose President Slobodan Milosevic.

The problem of funding reconstruction in the Balkans is originally one of timing. Union leaders had just put the finishing touches to the budget package last March when the first NATO bombs landed on Kosovo. Governments had devised an imperfect but respectable compromise which focused on accommodating the demands of some net contributor countries for their share of the burden to be eased without touching the sacrosanct UK rebate. But as one Commission official put it: "Spending on external relations was almost totally neglected in Berlin."

The political and financial repercussions of the Kosovo campaign turned out to be far wider than many imagined at the outset of the airstrikes.

EU leaders decided that a major political programme was needed for all countries of the region to bring them closer to the Union and prevent more conflicts of the kind which have destabilised the area in the last decade. This will require a 5.5-billion-euro finance package for the region, but the Berlin summit only budgeted for €1.8 billion.

Although some of the extra money can be found through savings on other external aid projects, the remainder has to come from elsewhere - and the farm budget, which at more than €40 billion accounts for nearly half the EU's total spending, is the obvious target.

Despite the voices raised against Schreyer's proposals for the 2001 budget, the Commission is confident that there is sufficient political will to find the money for the Union to honour its political commitments to the Balkans.

Schreyer has pointed out that even after reallocating €300 million from the agriculture budget, overall spending on farming will rise by more than €3 billion next year. "With so much more on one side and then no more for the reconstruction of Kosovo and for peace policy at our front door, people would no longer understand the world or the EU," she said recently.

Commission officials point out that the €5.5 billion they are now calling for is close to the €4.5 billion which the Union pumped into the Balkans between 1991 and 1999.

Schreyer's hand in the battle to secure funding for the Balkans has been strengthened by the unexpected weakness of the euro against the US dollar. The euro's plunge means that the EU is making considerable savings on the export refunds it pays to close the gap between higher Union commodity prices and world market rates.

Despite criticisms of the timid approach to farm reform in Berlin, which delayed major elements such as changes to the milk regime, independent analysts believe that the deal could remain unchanged until the end of 2006.

A report on the EU's budget package by the Centre for European Policy Studies calls for negotiations on a new Agenda 2003, but acknowledges that the decision to put some of the reforms on hold will postpone problems until after 2006. "The problem of the CAP has simply been shifted to the next generation," it warns.

In fact, despite concern that the Agenda 2000 deal might have to be renegotiated, Commission officials are confident not only that the Union can work within the budgetary limits set in Berlin but also that it will even be able to return unspent funds to grateful member states. Schreyer has already given EU governments a windfall of €3.2 billion from the 1999 budget and officials believe this can be repeated over the next seven years thanks in part to the euro's weakness.

The other big question hanging over the Agenda 2000 deal is whether enlargement is affordable. While Union leaders have earmarked more than €60 billion over the next seven years to help applicant countries before and after they join the bloc, the money is designed to help tackle structural problems. The Berlin deal explicitly ruled out extending direct aids, which account for around 60% of all EU farm spending, to farmers in the new member states.

But the six applicant countries in the 'first-wave' group have all insisted that they should be entitled to these payments. "The possibility of excluding Poland from some of the CAP mechanisms is difficult to accept, since it would result in a distortion of conditions for competition and above all place the Polish farmers at an unequal position versus their fellow partners in the Union," said Polish Prime Minister Jerzy Buzek in a recent speech to the European Parliament.

Buzek suggested that up to a million Polish farmers should be eligible for the direct aids, and an analysis by the University of Göttingen estimates the costs of granting direct payments to farmers in the all applicant countries apart from Cyprus at €6-7 billion.

Although the Commission has not yet taken a clear position on whether farmers in the new member states would be eligible for the payments, agriculture chief Franz Fischler has already indicated a softening of the line. He has acknowledged that unless farmers receive some form of payments, they will have no incentive to stay within the EU's strict production limits, threatening new surpluses of grain, beef and milk, and envisages transition periods after which new member states would be entitled to the same level of support as existing countries.

But despite the fears in candidate countries about the lack of a clear line from the Union on the question of direct payments, Commission officials see the issue as something of a red herring.

They point out that predictions about the massive cost of granting direct payments to central and east European farmers are nothing more than estimates at this stage. The exact size of the bill would depend on how many farmers were eligible, the scale of production and any transition periods which were negotiated.

Put simply, if the price of enlargement is too high because of the cost of direct payments, the candidate countries have a straightforward choice between joining the EU and holding out for the money.

There is, however, one thing upon which everyone agrees: namely, that enlargement would be seriously delayed if Union governments had to renegotiate the budget. This is the real threat to the applicant countries' aspirations of becoming EU members in the next few years.

Despite the shortcomings of the Agenda 2000 deal, it therefore looks as if Union leaders will find a way to avoid losing sleep by embarking on a fresh round of budget negotiations for several years at least.

Major feature. Just 12 months after Union leaders reached agreement on a budget deal for the next seven years, they are under intense pressure to find billions of euro more for reconstruction in the Balkans and extra aid to farmers in the applicant countries, prompting speculation that the Agenda 2000 accord will have to be renegotiated.