EU can’t be a cash cow for ever

Date: 18/07/02

All EU politicians claim to be in favour of enlargement, but member states are dragging their feet over who should pay for it. Daniel Gros argues that a reduction in direct payments for farmers is the only long-term solution.

WHO wants to pay for enlargement? The answer is nobody. All EU politicians claim to be for enlargement, but they also say in unison that somebody else should foot the bill.

The current net beneficiaries argue that they cannot be asked to accept less because it would be unfair to finance expansion of the Union by cutting transfers to the poor. The net contributors argue that their populations will simply not accept any increase in their transfers to the EU budget.

Staking out these positions is normal practice before negotiations on budgetary issues. It is by now widely accepted that enlargement constitutes a positive sum game - all participants will gain in the end.

But the distribution of the budgetary costs constitutes a strictly zero sum game; if one country pays less, other countries have to pay more. This is now being played out and constitutes basically the last hurdle before the green light for enlargement can be given. How high is this hurdle? In other words, how much will enlargement cost?

The correct answer to this question is that enlargement will cost whatever member countries agree to pay because all member countries have to agree on the budget.

But what is really meant by this type of question is: what would it cost if one were to treat the new members from Central and Eastern Europe in the same way as present member states?

This question is relatively easy to answer as numerous estimates exist of the cost of extending to the new member states the two EU policies that determine 80 of EU expenditure: the Common Agricultural Policy (CAP) and the Structural Funds (SF).

CAP: A number of recent studies converge on figures around €10 billion annually for the eight advanced candidates from Central and Eastern Europe that are likely to join in 2004.

SF: Some confusion has been created by studies which have not taken current policies as the basis. The Berlin Council decided that the limit to the absorption capacity of SF should be 4 of GDP.

If one deducts the contributions to the EU budget from this figure the net transfers the new member states can hope for under current rules would thus be only about 3 of their GDP.

As their combined GDP is less than €300 billion, this implies that the transfers under the SF (net of contributions to the EU budget) the new members could expect under current rules should be somewhat below €10 billion a year.

There seems to be little dispute about the structural funds. The ceiling of 4 of GDP has been more or less accepted by the candidates, which realise that more would be difficult for them to absorb and to co-finance. The only tough negotiations that are outstanding at this point concern agriculture.

So, what is the problem in agriculture? As is by now well known, there is essentially one sticking point: direct payments to Central and Eastern European Countries' (CEEC) farmers.

Direct payments to farmers were also called 'compensatory payments', because they were introduced to compensate EU farmers for the price cuts implemented when the CAP was reformed last.

Present EU countries argue that there is no justification to pay farmers in the CEEC compensation because these farmers will see their prices increase, not fall, after accession.

The CEEC retort that it would constitute a serious distortion of competition if their farmers, already poor and less efficient, had to compete with EU-15 farmers without being on a level playing field in terms of financial support from the EU.

This argument will probably carry the day: it would be unthinkable in any other economic activity to contemplate a situation where one part of the EU receives massive subsidies and the other nothing.

How much will direct payments to CEEC farmers cost? For the entire group of CEEC-8, €6 billion a year is probably the best estimate at present. Is this a large or small figure? The right answer is both.

It is a very large sum if compared to the €12 billion total value of agriculture in the CEEC-8.

There is no other industry that gets subsidies worth 50 of its value. But €6 billion is peanuts (less than one tenth of 1) if compared to the EU GDP of around €8,000 billion, and only a bag of peanuts compared to the EU budget of close to €100 billion.

The fact that direct payments would be so important for CEEC (i.e. mostly Polish) farmers implies that they will fight very hard to get them.

But for the EU budget this might constitute the straw that breaks the camel's back.

This is why the Commission proposed that direct payments to farmers in the new member countries should be phased in very slowly, starting with only one quarter of the amount spent currently on EU-15 farmers. But once enlargement has taken place it will become increasingly difficult to maintain such an East-West split in the conditions for farmers.

There is only one way out of this conundrum: reducing direct payments for everybody (called degressivity in the jargon of the experts). Given that direct payments to EU-15 farmers amount to about €25 billion one needs only a reduction of 20 of the basis on which direct payments are calculated.

This would be sufficient to keep spending on direct payments to farmers constant while treating the CEEC-8 and the EU-15 equally.

This is just another consequence of the difference in economic size: only a small cut by the EU-15 is needed to make room for transfers to the new members, which would be very substantial for the CEEC-8. The otherwise sterile fight about how to pay for enlargement could thus finally have one positive consequence: it could lead to a reduction in spending on agriculture that is much needed anyway.

The recent reform proposals from Commissioner Franz Fischler have to be seen also from this point of view.

If the French resist changes in the CAP they will have to find somebody to pay for enlargement.

• Daniel Gros is the director of the Centre for European Policy Studies in Brussels. (www.ceps.be).

Major feature. All EU politicians claim to be in favour of enlargement, but Member States are dragging their feet over who should pay for it. Author argues that a reduction in direct payments for farmers is the only long-term solution.