House of Lords - European Communities

Select Committee on European Communities Tenth Report

PART 3 BACKGROUND

26. This Part of the Report recalls the European Council's commitment to enlargement. Next, it sets out some statistics which illustrate the magnitude of the proposed enlargement. It then summarises briefly the main elements of the Community's financial perspective proposed by the Commission for the period 2000-2006. It goes on to outline the Commission's view of how the costs of assisting the applicant countries prepare for accession and the costs of applying Community policies to new Member States can be found within this financial perspective.

COMMITMENT TO ENLARGEMENT: THE COPENHAGEN CRITERIA

27. In June 1993 the Copenhagen European Council responded to the post-Communist political situation by offering the prospect of membership of the Union to those former communist bloc countries which had concluded Europe Agreements with the European Communities. The Council adopted the following criteria for membership:

"membership requires that the candidate country:

has achieved stability of institutions guaranteeing democracy, the rule of law, human rights, and respect for and protection of minorities,

the existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the Union, and

[has] the ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union."

It was on the basis of the Copenhagen criteria that the Commission, at the Council's request, considered each of the applicant countries[1] and reported its avis in Agenda 2000 on readiness for membership. The Commission concluded that five of the ten applicant Central and Eastern European countries (CEECs) already met the political criteria and were sufficiently likely to meet the economic criteria in the medium term for it to recommend that the Council should authorise opening with each of them, at the beginning of 1998, bilateral negotiations on accession. The five recommended by the Commission to be in the "first wave" of applicants were the Czech Republic, Estonia, Hungary, Poland and Slovenia. Negotiations with the other five applicant CEECs (Bulgaria, Latvia, Lithuania, Romania and Slovakia) could be opened as each came to meet the criteria to a similar extent.

ENLARGEMENT STATISTICS

28. Using figures[2] for 1995, if enlargement brought in to the existing Union of fifteen Member States, (the EU15), all ten of the applicant countries of Central and Eastern Europe, (the CEEC10), the Union's population would grow from 371.6 million to 476.9 million; and the area of the Union would expand from 3.236 million km² to 4.314 million km²: both population and area would expand by roughly one third. In terms of GDP per capita and of the proportion of the workforce employed in agriculture the differences between the EU15 and the CEEC10 are dramatic: if the EU15 GDP per capita (at purchasing power standards) in 1995 was 100, the CEEC10 was just over 30; and the percentage of employment in agriculture was 5.3 in the EU15 and 22.5 in the CEEC10. In other words, the Union would grow by over 100 million people whose standard of living in 1995 was little over one third of that of the existing EU population.

29. The aggregated statistics in the preceding paragraph conceal significant differences between the countries of the CEEC10. The GDP per capita at purchasing power standards ranged from 59 per cent of the EU15 average in Slovenia through 31 per cent in Poland to 18 per cent in Latvia. The percentage of employment in agriculture ranged from 34.4 in Romania through 26.6 in Poland to 6.3 in the Czech Republic.

FINANCIAL PERSPECTIVES: 1993-1999 AND 2000-2006

30. Agenda 2000 estimates the growth rates of the EU15 as 2.5 per cent a year and of the CEEC10 as 4 per cent a year over the period 2000-2006. The financial calculations in Agenda 2000 are based on the assumption that the "first wave" of applicants accede to the Union in 2002. Costs arising from enlargement would fall into two main categories: those occurring in the pre-accession phase from assistance to applicants in preparing for accession; and those arising after accession from extending Community assistance policies to the new Member States.

31. The present financial perspective, covering the period 1993-1999, was agreed at the Edinburgh European Council in December 1992. The Council there set a gently rising ceiling on the "own resources"[3] of the Community Budget reaching 1.27 per cent of Community GNP by 1999. In earlier years the ceiling would be slightly lower, rising gradually from 1.20 per cent of Community GNP in 1993. During the period up to 1999 the structural and cohesion policies of the Community would dispose of an increasing proportion of the Budget, rising from about 26 per cent in 1993 to about 35 per cent by 1999. Over the same period the proportion devoted to the Common Agricultural Policy would decline slightly from about 55 per cent in 1993 to about 47 per cent by 1999, although it would remain the largest element of the Budget.

32. In the financial perspective suggested in Agenda 2000 the own resources ceiling would remain unchanged from 1999 throughout the next period ending in 2006. In other words, there would be no overall increase in the 1.27 per cent of EU GNP available for the total Budget. Enlargement would be paid for within that ceiling in two ways: by growth of the economies of the Member States and by some reductions in the amounts of the Budget devoted to the Common Agricultural Policy and the EU15's structural operations-the Community policies which absorb between them about 80 per cent of the Budget. In rough terms, about two thirds of the additional costs to the Union of enlargement would come from growth and one third from changes to these two major policies. Moreover, actual payments from the Budget would not reach the own resources ceiling: payments, as a proportion of the EU15 GNP would decline from 1.25 per cent in 1999 through 1.24 per cent in 2000 and 2001 to 1.22 per cent in the years 2002-2006. There would, therefore, always be a margin below the 1.27 per cent ceiling. The Commission express the opinion in Agenda 2000 that this margin would most likely be more than sufficient to cover requirements should economic growth turn out lower than forecast.

Structural operations

33. "Structural operations" is the generic description for the activities of the Community undertaken as part of its policies for economic and social cohesion or, using the language of the Treaty, for "reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions, including rural areas"[4]. The principal financial instruments for implementing these policies are the Structural Funds and the Cohesion Fund. Our recent report[5] on these Funds considered in some detail their economic and political purposes, their effectiveness and scope. In that report we made recommendations, among other matters, for a radical reform to reduce bureaucracy and delay, and for a substantial reduction, achieved by geographical concentration, in the proportion of the EU population living in areas eligible for funding.

34. Agenda 2000 proposes that the percentage of the population of the EU15 covered by Objectives 1 and 2 of the Structural Funds should be reduced from 51 per cent to 35-40 per cent. Regions eligible for Objective 1[6] funds would be those where the per capita GDP average was below 75 per cent of the EU average. Strict interpretation of this threshold would lead to some regions losing their present eligibility: funding would be phased out over a period.

35. Objective 2 is currently intended for adapting declining industrial areas and Objective 5(b) for developing the structure of vulnerable rural areas. Under Agenda 2000, Objective 2 would be devoted to areas, which could be rural or urban or dependent on the fishing industry, undergoing economic change in industry or services. It would replace the old Objectives 2 and 5(b), but eligibility would be more precisely and narrowly targeted. Regions no longer eligible would enjoy limited financial support for a transitional period.

36. Agenda 2000 suggests that the Cohesion Fund should be maintained in its present form after 1999: countries whose per capita GNP was less than 90 per cent of the EU average would be eligible subject to compliance with the Stability and Growth Pact for those taking part in the third phase of EMU. It is suggested that a review of eligibility under the per capita GNP criterion should be carried out half way through the period 2000-2006. The total amount available for all the Fund's beneficiaries should be some ecu 3 billion a year.

37. The following table shows the suggested expenditure on structural operations for the 2000-2006 period. The figures[7] cover the Structural Funds and the Cohesion Fund in Member States and pre-accession aid for the applicant countries.

EXPENDITURE ON STRUCTURAL OPERATIONS

1997 prices ecu[8] billion

1999 2000 2001 2002 2003 2004 2005 2006

EU15
Structural
Funds 31.4 31.3 32.1 31.3 30.3 29.2 28.2 27.3

EU15 Cohesion Fund 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9

New Member States 0.0 0.0 3.6 5.6 7.6 9.6 11.6

Pre-accession aid 1.0 1.0 1.0 1.0 1.0 1.0 1.0

TOTAL 34.3 35.2 36.0 38.8 39.8 40.7 41.7 42.8

This table illustrates that expenditure on structural operations rises for the EU15 until 2001 after which it declines for them but by less than the amount going for the first time to the new Member States. The total EU transfers from the Structural Funds and the Cohesion Fund annually to any Member State (new or old) shall not, under the Commission's proposals set out in Agenda 2000, exceed 4 per cent of the GDP of that country.

38. For the EU15 the Commission suggest in Agenda 2000 a reform of agricultural policy which would bring Community prices closer to world market prices. The costs of market intervention measures and export refunds should fall by about ecu 3.7 billion by 2006. There would be new direct compensatory aid of about ecu 7.7 billion by that date. Existing accompanying measures for agri-environment, afforestation and early retirement would continue. Agricultural expenditure for the applicant countries would comprise pre-accession aid of ecu 500 million a year for development: the Commission suggests that this aid should be provided for marketing, food quality control, local economic diversification and the improvement of local infrastructures.

39. The Phare programme[9] would be continued under the financial perspective 2000-2006 and would provide funds of ecu 1.5 billion a year at 1997 prices. In 1999 under the present financial perspective 1.3 billion at 1997 prices will be available for this programme. Phare will remain the Community's main instrument for assisting the applicant countries prepare themselves for accession. On the basis of revised guidelines already adopted by the Commission, Phare will focus on the two key priorities of institution building and the financing of investment projects. The resources of the programme will be split between these two priorities 30 per cent for institutions and 70 per cent for investment.

40. In addition to the funding from the Phare programme pre-accession aid of ecu 1 billion a year would be available from 2000-2006. This aid is intended primarily to help bring the applicant countries' infrastructures up to Community standards, particularly in the transport and environment fields. The assistance would be available at a constant rate of ecu 1 billion a year: initially it would be used by all the applicant countries but after accession of some new Member States the 1 billion would be available to those countries who had not yet reached accession.

41. The following table[10] sets out the total proposed expenditure of pre-accession aid to the CEEC10.

EXPENDITURE ON PRE-ACCESSION AID

1997 prices ecu billion

1999 2000 2001 2002 2003 2004 2005 2006

Agricultural development 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Structural aid[11] 1.0 1.0 1.0 1.0 1.0 1.0 1.0

Phare 1.3 1.5 1.5 1.5 1.5 1.5 1.5 1.5

Total Pre-Accession Aid 1.3 3.0 3.0 3.0 3.0 3.0 3.0 3.0

42. The following table sets out an overview of the financial framework proposed by the Commission for 2000-2006.

FINANCIAL FRAMEWORK 2000-2006

1997 prices ecu billion

1999 2000 2001 2002 2003 2004 2005 2006

Agriculture (guideline) 43.3 44.1 45.0 46.1 47.0 48.0 49.0 50.0

Structural operations 36.1 35.2 36.0 38.8 39.8 40.7 41.7 42.8

Internal policies 6.1 6.1 6.4 7.3 7.5 7.7 7.9 8.1

External action 6.6 6.6 6.8 7.0 7.1 7.3 7.5 7.6

Admin-
istration 4.5 4.5 4.6 5.1 5.2 5.3 5.4 5.5

Reserves 1.2 1.0 1.0 0.8 0.5 0.5 0.5 0.5

Appro-
priations for commitments TOTAL 97.8 97.5 99.8 105.1 107.1 109.5 112.0 114.5

Appro-
priations for payments
TOTAL 92.5 94.1 96.6 101.1 103.9 106.5 108.9 111.4

Appro-
priations for payments as percentage of GNP 1.25 1.24 1.24 1.22 1.22 1.22 1.22 1.22

Margin % 0.02 0.03 0.03 0.05 0.05 0.05 0.05 0.05

Own resources ceiling % 1.27 1.27 1.27 1.27 1.27 1.27 1.27 1.27