Select Committee on European Scrutiny Twentieth Report


COM(02) 102

Commission Communication: Information Note: Common Financial
Framework 2004-2006 for the Accession Negotiations.

Legal base:
Document originated:30 January 2002
Forwarded to the Council: 31 January 2002
Deposited in Parliament: 31 January 2002
Department:Foreign and Commonwealth Office
Basis of consideration: EM of 18 February 2002
Previous Committee Report: None
Discussed in Council: Foreign Ministers' Informal Meeting on 8-9 February 2002 and ECOFIN on 12 February 2002
Committee's assessment:Politically important
Committee's decision:For debate in European Standing Committee B (together with the Commission's Strategy Paper on enlargement and Reports on progress by individual candidate countries)


  5.1  According to the EU's 'road map' on enlargement, the chapter on Financial and Budgetary Provisions and two others with important budgetary elements — Regional Policy covering structural and cohesion funds and Agriculture — are due to be negotiated during the Spanish Presidency (January to June 2002). The Commission has prepared this framework document, on the financing of enlargement between 2004 and 2006, as an Information Note in order to allow the Council to assess the financial implications of these chapters early in the Presidency. After discussions in Council, it is intended to form the basis for the Commission's proposals for the Common Positions on the three chapters.

  5.2  The Note takes as its basis the agreement reached at the Berlin European Council in 1999 on the financing of enlargement up to 2006. Its proposals respect the ceilings for overall annual expenditure agreed at that Council. A table annexed to the Note shows at a glance that the commitment and payment appropriations proposed are for lower totals than those agreed in Berlin.

  5.3  Because of the complex nature of the underlying calculations for agriculture, the Commission has issued an accompanying agriculture issues paper containing more detailed calculations[7]. It has also provided the Council with a classified negotiating paper on structural policy which will not be made available to the public.

  5.4  The Berlin agreement envisaged an enlargement of six in 2002. The working assumption in this Commission document is of an enlargement of ten countries in 2004. It therefore takes as its point of departure 2004, rather than 2002 and proposes a package which it believes "responds to the legitimate expectations and needs of the candidate countries".

  5.5  For some categories of expenditure, the Commission proposes that the resources needed to finance ten instead of six new Member States can be found by not taking as a point of departure the amounts envisaged for the six between 2004 and 2006, but instead to set them closer to the levels originally foreseen for the first three years of accession of those candidates. For other categories, the Commission has provided new estimates based on the latest data. For instance, for market-related expenditure under the Common Agricultural Policy (CAP), the calculations are based on updated forecasts.

  5.6  The proposals also include spending additional to that envisaged in Berlin in a number of areas, including the Structural and Cohesion Funds, and the extension of agriculture direct payments to the new Member States, on a phased-in basis.

  5.7  In his Explanatory Memorandum of 18 February, the Minister for Europe (Mr Peter Hain) summarises the key points of the Common Financial Framework proposed as follows:

    " — Agriculture

    "CAP market policy / direct payments

    "The Commission proposes a phasing-in of agricultural direct payments to the new Member States at a rate of 25% of the level of direct payments available to current Member States in 2004, increasing to 30% in 2005 and 35% in 2006. During the first three years, new Member States may opt for a simplified direct payments procedure based on a flat per hectare payment, irrespective of what is produced on the land, providing the land is for agricultural use. The Commission proposes to continue the phasing-in of direct payments from 2007, in line with the existing scheme, in such a way as to ensure that in 2013 the new Member States reach the support level generally then applicable across the EU. The Commission document says that this would be achieved by expressing entitlements in percentage terms rather than absolute amounts, and by indicating that the transitional regime 'does not prejudge any changes in the nature of the regime.' The Commission estimates that this would cost £1173 million in 2005 and £1418 million in 2006[8]. There would be no cost to the budget for 2004, as reimbursements of direct payments are made a year in arrears.

    "Rural Development Policy

    "The Commission also proposes to increase the Berlin rural development figures for the first three years of enlargement both to allow for ten new Member States and to provide additional amounts to cover further rural development expenditure to support restructuring of the agriculture sectors in the new Member States. The Commission estimates that the adjusted costs for rural development policy would amount to £1532 million in 2004, £1674 million in 2005, and £1781 million in 2006.

    " — Regional Policy

    "The Paper proposes to increase the Berlin figures for Structural and Cohesion Funds (SCF) for the first three years of enlargement both to allow for ten new Member States and to allow for a faster phasing-in of structural expenditure to compensate for a later enlargement than foreseen at Berlin. The Commission proposals would also increase the proportion of SCF allocated to the Cohesion Fund to one third of the total available, on the grounds that this would be more suited to the candidates' needs and absorption capacity. According to the proposals, the expenditure in the new Member States would reach around 2.5% of GDP (or £137 in per capita terms) in 2006.

    " — Internal Policies

    "Nuclear Safety

    "The Commission proposals would allocate funds under the Phare programme for decommissioning of nuclear power plants in Slovakia (£60 million in total) and Lithuania (£245 million in total) until 2006.

    "Institution Building

    "The Commission proposes additional spending on institution building (i.e. strengthening administrative capacity) until 2006. This would cover projects that fall outside the scope of the Structural and Cohesion Funds, such as border controls or the internal market, and would cost £200 million in 2004, £120 million in 2005, and £60 million in 2006.

    "Northern Cyprus

    "The Commission proposes that, as Berlin did not fully take into account the northern part of Cyprus, and in the context of a political settlement, followed by accession of a reunited island, there should be expenditure of £39 million in 2004, £67 million in 2005, and £100 million in 2006 for Northern Cyprus, to be distributed between agriculture, structural support and internal policies.

    " — Budgetary Compensation

    "The Commission proposes transitional arrangements under which new Member States would receive refunds to offset any deterioration in their net budgetary position compared to the situation in the year before accession".

  5.8  To expand a little on this summary, it may be worth noting that the Commission comments that:

  • "  in the Berlin framework, the assumptions underlying the calculations for 2002-2006 did not cater for direct payments in favour of the farmers in the new Member States. In their position papers, however, all Candidate Countries demand to be fully integrated into this aspect of the Common Agricultural Policy upon accession. The Commission considers that immediate full integration into the system of direct payments would not give the right incentives to farmers in the new Member States to engage in, or continue, the necessary restructuring. On the other hand, the new Member States should obtain an assurance about the moment when they will be fully integrated into the CAP, whatever its nature may be". It is for this reason that the Commission proposes two steps leading up to the full application of direct payments;

  • it would increase the EU co-financing rate for rural development measures up to 80%, the maximum level for structural programmes in Objective 1 regions in the Member States which benefit from Cohesion Funds;

  • average aid per capita for structural expenditure in the four Cohesion States is £231, which represents 1.6% of their total GDP. The Commission says that the candidates are acquiring substantial experience in the development and implementation of environmental and infrastructure projects under the ISPA pre-accession instrument and that increased expenditure in favour of the Cohesion Fund would continue to satisfy the high investment needs of the new Member States in these two sectors;

  • the adjustments proposed for nuclear safety and the transition facility for certain institution building actions would ensure their continuation when they will no longer be covered by the pre-accession strategy but will also not be eligible under existing programmes and structural funds actions;

  • the financial elements proposed for Northern Cyprus can be integrated into the negotiations at a later stage in the context of a political settlement in time for the conclusion of the Accession Treaty; and that

  • whilst the own resources decision is expected to be fully applied by the new Member States from the first year of accession, at each previous enlargement all new Member States have benefited from transitional arrangements for budgetary compensation. It provides examples of two ways in which a new Member State could suffer a deterioration in its net budgetary position at this time:

      —   full contributions to the budget have to be paid immediately, while payments for differentiated appropriations will lag the corresponding commitments. Even taking account of continuing payments after accession from pre-accession funds, this could lead to a deterioration;

      —   reimbursements from the EU budget for expenditure on direct payments is only made the year after payment by Member States to farmers.

  5.9  So as to ensure that no new Member State finds itself in a worse position than in the year before enlargement, the Commission proposes allowing for a margin for commitments of £816 million in 2004, £800 million in 2005 and £814 million in 2006. It provides details of arrangements made for earlier enlargements with, for instance, Greece being granted a 5-year diminishing reduction (70% to 10%) in its payments on the VAT resource, Spain and Portugal obtaining a similar reduction and Austria, Finland and Sweden receiving decreasing 4-year lump sum payments from the general budget.

  5.10  As the sum will depend on the final outcome of the negotiations on the other chapters, the Commission says that it will propose an appropriate amount for budgetary compensation payments only when negotiations have been concluded.

The Government's view

  5.11  The Minister comments as follows:

    "The Government welcomes the fact that the Commission has presented proposals on financing enlargement, and notes that they mark the beginning of a crucial stage in the negotiations. The Government also welcomes the Commission's conclusion that an enlargement of up to ten new Member States can be managed within the sums provided for at Berlin. The Government reiterates the importance of keeping to the financial agreement reached at Berlin and to the timeframe for enlargement agreed at the Gothenburg and Laeken European Councils: ending negotiations this year with those candidates that are ready, so that they can participate in the 2004 European Parliament elections as Member States. The objective should be that, in the medium term, all Member States in an enlarged EU should participate on an equal footing.

    "The Government regards investment in rural development as the most effective way to help new Member States restructure their agriculture sectors, improve productivity and undertake diversification of the rural economy. It therefore welcomes the Commission's emphasis on rural development measures. It notes the arguments provided in the Commission's issues paper about the damaging effects of high direct payments in the new Member States.

    "The Government welcomes the emphasis that the overall financing package places on the Structural and Cohesion Funds, to help tackle the new Member States' restructuring and developmental needs. The sums provided for the Structural and Cohesion Funds will need to respect the agreement at Berlin, the needs and the absorption capacity of the new Member States. The Government welcomes the Commission's proposal to tilt the balance of structural expenditure more towards the Cohesion Fund which, given its concentration on infrastructure and its simpler management procedures, should be better suited to the new Member States.

    "The Government agrees with the Commission on the importance of continuing to build administrative capacity in the candidate countries after their accession. It therefore welcomes, in principle, the Commission's proposal to allocate further funds for institution building. The Government also supports continued support for the decommissioning of non-upgradeable nuclear power plants. All additional funds will need to be fully explained and justified.

    "In relation to Cyprus, the Helsinki European Council stated that a settlement to the Cyprus problem would facilitate Cyprus' accession to the EU, but that it was not a pre-condition. The Commission's proposals on post-accession funding for Northern Cyprus, in the context of a political settlement, are a positive step. The Government supports the Commission's objective of finding ways to help Northern Cyprus.

    "The Government considers that addressing the possibility of budgetary compensation to the new Member States is premature at this stage of the enlargement negotiations. This possibility should be assessed, on a case-by-case basis, once the likely contributions and receipts of the new Member States in relation to the Community budget are more apparent. This should be the case after progress in the negotiations on the main budgetary related chapters, in particular relating to the CAP and structural policies.

    "The Government looks forward to further discussion of the proposals and the assumptions and principles which underpin them".

  5.12  Addressing the financial implications of the document, the Minister notes that the Berlin European Council in 1999 agreed the Financial Perspective and Enlargement Financial Framework covering the EU budget from 2000-2006. The Financial Perspective was then incorporated into a legally binding inter-institutional agreement (IIA) between the European Council, the Commission and the European Parliament. In this Framework Paper, the Commission proposes enlargement expenditure of £40,200 million between 2004 and 2006, compared with the £42,600 set aside for these years at Berlin.

  5.13  On the timetable, the Minister says simply that the Commission presented its document on 30 January and that it was discussed at the Foreign Ministers' Informal meeting at Caceres on 8-9 February and at ECOFIN on 12 February.

Press coverage

  5.14  The press has reported that, at the 12 February ECOFIN Council, Germany, UK, Austria, the Netherlands and Sweden opposed direct aid payments to farmers in new Member States, arguing that no such expenditure was foreseen in 1999 in Berlin, that the proposals would have the effect of cementing direct payments until 2013 and that the cost would be too high. They are said to believe that the payment of direct aid would hamper the much-needed process of agricultural restructuring in the Central and Eastern European Countries (CEECs). Ireland, Greece, Denmark, Belgium, Luxembourg, Finland and Portugal are said to have supported the proposals. France is reported to be opposed to the Commission paper as being too generous and costly.

  5.15  On 31 January, the Spanish Prime Minister, José Maria Aznar, is reported to have said, referring to the introduction of direct aid to agriculture in candidate countries, that "Agenda 2000 does not say that direct aid may be continued after 2006/2007, but it does not say the contrary either"[9]. On 2 February, the Spanish Foreign Minister, Josep Piqué, is quoted as saying that there must not be any "intrusion" between the drawing up of the negotiating Common Position on agricultural policy and the mid-term review of agricultural policy that is due to begin in June[10].

  5.16  The Commission is reported to have come to the conclusion that it would have been politically impossible to exclude the candidate countries completely from direct payments. The Director General for Enlargement and chief EU negotiator, Eneko Landaburu, is quoted in the 15 February issue of the weekly Agra Europe as having said that the Commission had decided on a proposal which had a "real chance" of being accepted by the candidates. To have offered anything less would have been an "affront" to the candidates.

  5.17  At the same time, the candidate countries are reported to have protested vigorously at the percentages proposed in the Commission paper and the rates at which they would rise. Their agricultural ministers are reported to have told the European Parliament's Agriculture and Rural Development Committee on 18 February that the starting rate of 25% was too low and that the transition period was too long. However, some were said to have admitted that they appreciated the Commission's proposals on rural development support and the 80% co-financing of support for semi-subsistence farming, as well as the simplified system for direct aids. The Polish Agricultural Minister and deputy Prime Minister and the Commissioner, Franz Fischler, were reported to have appealed for calm, while, in the same issue of Agra Europe the French Farm Minister, Jean Glavany, was said to have told the candidates to "stop ogling" at the CAP budget.

  5.18  Agra Europe suggests that:

    "the EU is seen as being tactically weakened by the fact that its own farm and spending programmes (under Agenda 2000) extend only as far as December 2006, and that insistence on a ten-year phase-in period would appear to represent a pre-judgement of the outcome of the renewed negotiations on CAP reform which will be needed from 2005 onwards".

  5.19  Agra Europe also reports that the French Minister for European Affairs, Pierre Moscovici, said in Warsaw on 12 February that any attempt to agree fundamental changes to the CAP in advance of enlargement would inevitably delay the admission of new Member States beyond the 2004 deadline. Italy is reported to have moved away from the CAP reform camp.


  5.20  Not surprisingly, this document has already attracted considerable political interest. We consider that it should be debated in European Standing Committee B, together with the Commission's Strategy Paper on Enlargement and the Regular Reports on Progress, already recommended for debate[11].

  5.21  In his Explanatory Memorandum of 18 February, the Minister does not reveal the Government's position on the proposals on direct payments to farmers. He simply says that the Government "notes the arguments provided in the Commission's issues paper about the damaging effects of high direct payments in the new Member States". We expect him to submit an Explanatory Memorandum on the agricultural issues paper and to make a fuller comment in it on the issue of direct payments.

  5.22  In Madrid in November, the most senior official at the Foreign Ministry, Carlos Basterreche, told us that the Common Agricultural Policy (CAP) and the Structural Funds would eventually have to be reformed, but that if this were done before enlargement, maintaining the present timing of enlargement would be out of the question. He said that there was general consensus on this point. The Spanish made it clear to us that they did not expect proposals on reforming the CAP to be brought forward before the mid-term review in June, at the end of their Presidency.

  5.23  Members may wish to raise with the Minister issues such as:

  • the overall costs of enlargement and whether he can confirm that the press reports on the ECOFIN Council of 12 February are accurate;

  • whether, in the Government's view, the paper does respond, as the Commission believes, to the legitimate expectations and needs of the candidate countries;

  • the potential impact of the enlargement negotiations on reform of the Common Agricultural Policy (both the extent and timing), as well as on the specific issue of direct payments to farmers. Commenting on the Commission's Work Programme[12], the Minister says that the Government considers it essential to pursue CAP reform and enlargement "in parallel". Does the Government believe that the CAP will need to be reformed in order to meet the expectations of the candidate countries, whilst respecting the financial perspectives agreed at the Berlin European Council?

  • does the Minister consider that the EU is tactically weakened by the fact that its own programmes under Agenda 2000 extend only as far as 2006, as suggested by Agra Europe?

  • whether the proposals regarding Structural and Cohesion Funds are too generous, and whether the Minister expects the proposals to be accepted by the existing Member States;

  • at what stage he expects it will be possible to assess possible budgetary compensation and if he can confirm that the UK is not opposed in principle to this proposal;

  • whether, whilst recognising the Commission's acknowledgement that building administrative capacity will require a "long-term effort which has to be continued after accession", he regards the proposals for further assistance in this area as adequate to ensure that the new Member States achieve an acceptable level by 2004;

  • whether the Government is satisfied with the take-up of pre-accession support. (The Poles told the press in November that Poland had missed a PHARE deadline to provide matching funding and had definitely lost over 8 million euros, and possibly 12 million.) Do some candidates have real problems with administrative capacity or with providing matching funds? What more should be done to help them?

  • will Parliament be given an opportunity to scrutinise any substantial revision of these proposals before they form the basis of the negotiating Common Positions?

7  (23214) 5638/02; deposited on 26 February at our request. Explanatory Memorandum not yet received. Back

8  These are estimates at 1999 prices. Back

9  Bulletin Quotidien Europe No. 8141 of 1 February 2002. Back

10  Bulletin Quotidien Europe No. 8142 of 2 February 2002. Back

11  (22959) 14117/01; see HC 152-xv (2001-02), paragraph 5 (30 January 2002). Back

12  (23073) 15373/01; see paragraph 19 of this Report. Back

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