OF THE EU: WHO PAYS AND HOW?
remedies on the expenditure side
97. The main options being considered on the
expenditure side of the equation are the stabilisation of expenditure
and the co-financing of agricultural expenditure.
98. The Economic Secretary explained what the
United Kingdom understood by "stabilisation" in this
context: "We do not propose a freeze on European Union expenditure.
We propose stabilisation by 2006 at the present level of about
85 billion euro
We envisage that in the intervening period
there would need to be an upward path of expenditure, not least
to deal with the problem
of compensating farmers for reduced
price support within the CAP. Therefore, it would go up and then
come down. But we and the majority of Member States regard stabilisation
by 2006 as essential to provide
the room to finance enlargement"
(Q 124). The Economic Secretary said that this would "be
the most effective way of limiting net contributions to the EU
budget and thus would help other Member States who are large net
contributors" (Q 119).
99. But there are also arguments against stabilisation
of expenditure. In particular, it has been suggested that stabilisation
would make CAP reform impossible; that it would limit structural
operations; and that it would not be acceptable to the European
100. Commissioner Fischler has stated publicly
that stabilising expenditure would make CAP reform impossible.
And Commissioner Liikanen warned us: "Let us not get into
a trap and say zero growth budget for seven years, because that
excludes CAP reform" (Q 102). If the Commission were right,
we think that it would be most unfortunate to lose the prize of
fundamental CAP reform by holding down financing as a matter of
101. The Government has been a strong supporter
of fundamental CAP reform, as have we: in our previous Report
we said that "EC agriculture must reorientate to compete
in world markets without protection", and expressed disappointment
that the Agenda 2000 proposals offered no "clear, timetabled
strategy for the removal of price support, quotas or compensation
payments related to production".
CAP reform is crucial both because of the need for the Community
to demonstrate that it is meeting its existing obligations within
the World Trade Organisation and to position itself for the next
round of negotiations, and because of the cost of extending the
existing support mechanisms to new Member States with different
102. In her evidence to our present enquiry,
the Economic Secretary addressed the desirability of CAP reform
from the point of view of shifting the burden away from consumers,
telling us that one of the criteria of fairness put forward by
the Chancellor of the Exchequer was "fairness to consumers,
which we see as being delivered primarily through the reform of
the CAP, because that will reduce food prices very significantly,
not just for British families but right across the European Union"
(Q 125). She explained (Q 121) that the Commission's proposals
(which involve reducing price support levels, while increasing
expenditure on direct support to farmers in existing Member States)
"envisage an increase [in total agricultural support expenditure]
of about 2 billion euro by 2006. Even more problematically, they
envisage that support to farmers' incomes would be permanent and
continue for farmers in the existing Member States even after
enlargement", and the estimates are based on the assumption
(which the Government considers to be "wholly unwarranted")
that new Member States could be excluded from the system. The
Government considers these proposals unacceptable as they stand:
agricultural payments "need to come down over time in order
to avoid a permanent increase in the CAP burden on taxpayers".
103. The United Kingdom is not alone in believing
that stabilisation of EU expenditure is compatible with CAP reform.
The circle can be squared if "degressivity" forms part
of the reform package (that is, if compensation to farmers comes
down over time). We therefore conclude that stabilisation of
expenditure does not rule out CAP reform, if Member States can
come to terms with the implications for their own farmers.
As Professor Begg put it: "To me it is unambiguous that you
could engage in a battle to reform the CAP without reforming the
budget if you were prepared to take the political consequences.
So the answer has to do with political will rather than with financing"
(Q 68). The question is whether Member States collectively have
that political will. At the time when we were taking evidence,
the political will for CAP reform was reported to be emerging,
with more Member States prepared to discuss the need for farm
price reductions and direct aid cuts. We welcome this as a necessary
step towards finding a means of reducing the imbalance in net
contributions by stabilising expenditure.
104. The other main area of expenditure from
which reductions could be sought is structural operations. The
Commission proposal is that "the budget for structural operations,
as a proportion of GNP, be maintained at the 1999 level of 0.46
per cent, that is 287 billion euro (1999 prices)
EU15 would have 218.4 billion euro available for structural measures
The share proposed for the Cohesion Fund amounts to 21 billion
We understand that these amounts are still under negotiation.
Commissioner Liikanen told us that "the eight countries that
are net contributors and some others have been supporting a position
where we should cut it down to 200" billion euro (Q 102).
The Economic Secretary to the Treasury said that the Government
was indeed looking for an overall ceiling of about 200 billion
euro during the seven-year period, which she described as "an
affordable total in terms of the overall goal of stabilisation"
(Q 133). Commissioner Liikanen did not consider that figure to
be realistic, because there would be a large backlog of payments
from the present period
to be charged against whatever amount was allocated for the next
period; but he concluded that the position was still "wide
105. The allocation of structural and cohesion
funding as between Member States is also important. The Economic
Secretary said that the Chancellor's criterion here was "fairness
to regions, because to build cohesion and solidarity across the
European Union we need to continue to provide quite substantial
funding from the EU budget for the most disadvantaged regions"
(Q 125), to ensure that "the benefits of EU membership are
not simply concentrated in the best off regions in the best off
countries" (Q 133). We continue to believe that cuts in
the structural funding received by existing Member States are
inevitable, and to emphasise our previous conclusion
that "the important point is to ensure that the cuts are
106. As for the Cohesion Fund, the Government
argues that "a significant purpose [of this funding] is to
enable countries to achieve convergence with the Maastricht criteria
and thus qualify for entry into the single currency. It flows
from that that Member States who have joined the single currency
should no longer receive support from the Cohesion Fund"
(Q 130). This too echoes our previous conclusion
that continued cohesion funding cannot be justified for those
Member States which have met the convergence criteria. However,
we believe that it is crucial for the Cohesion Fund to continue
in some form as an important instrument for helping new Member
States to achieve economic convergence.
107. Stabilisation of expenditure would need
to be agreed not only by the Council of Ministers, but also by
the European Parliament.
The European Parliament has already expressed its concern about
the prospect of expenditure cut-backs for Agenda 2000 by attempting
to insert substantial reserves
into the 1999 budget, with a view to establishing a higher baseline
for the new financial perspective. In the course of the final
negotiations, this proposal was dropped, but the Council and the
European Parliament agreed a statement providing for decisions
to be made on elements of flexibility in the use of funds in the
context of negotiations on the new inter-institutional agreement.
However, as the Economic Secretary reminded us, the European Parliament
"for many years has largely espoused the cause of budgetary
discipline"(Q 135). If the Council were to agree to the
stabilisation of expenditure, we would hope that, because of the
importance which it attaches to enlargement, the European Parliament
would not risk jeopardising the entire Agenda 2000 package by
refusing to accept it. But in that case we would expect to see
hard negotiations over the role given to the European Parliament
in the new inter-institutional agreement.
108. It is not surprising that the proposal
for stabilisation of expenditure has met with a mixed reception.
We understand the reasons for the positions of the various parties.
We recognise that stabilisation would result in total EU expenditure
being below the level proposed by the Commission, and that
it would not provide a complete solution to the problems of inequitable
net contributions. However, we see no reason to believe that stabilisation
would render impossible either the reforms to the CAP or the process
of enlargement. We conclude that the arguments in favour of stabilisation
are, on balance, weightier than the opposing views held by the
Commission and by certain net recipient Member States, and that
they should be acted upon.
of agricultural expenditure
the EU budget, which it refers to a "correction on the expenditure
side". This approach (more commonly known as co-financing
of agricultural expenditure) would mean that the EU would reimburse
to Member States only part of their direct payments to farmers;
the Commission explores the implications of a reduction to 75
per cent, leaving the remaining 25 per cent of the cost to be
funded by Member States themselves. The Economic Secretary emphasised
that co-financing "is not in any sense an alternative to
reform of the CAP" (Q 144). Its purpose would be both to
reduce overall EU expenditure, and to contribute towards reducing
the inequity in net contributions.
And, suggests English Nature in a letter from Dr Derek Langslow,
its Chief Executive (p64), having to bear part of the costs directly
would "help concentrate the minds of EU finance and agriculture
ministers in every Member State on imperative further reform
post Agenda 2000" to make the CAP compatible with WTO obligations
and environmentally sustainable.
110. Co-financing might be even more likely to
win support from other Member States if it was left to national
governments to decide whether to make up the balance no longer
paid by the EU. However, the Economic Secretary said that allowing
Member States to decide different levels of support for their
own farmers would "completely undermine the concept of a
single market in agricultural goods" (Q 121). We consider
that co-financing should be contemplated only if the level of
support agreed by the Council was adhered to by each Member State;
giving discretion to Member States would be a retrograde step.
111. The exact effect of co-financing would depend
on how the savings were used. It has been suggested that making
them available to finance other EU programmes would help to counter
the possible deleterious effects of the stabilisation of expenditure.
But the United Kingdom is among those Member States whose support
for co-financing is conditional on the savings being used to reduce
total EU expenditure rather than being spent in other parts of
the budget (p6): only thus will it "assist some of the larger
net contributors, notably Germany" (Q 121). We agree.
112. We should be concerned if the need for
fundamental CAP reform were to be disguised by achievement of
co-financing, but we were reassured that the two are not seen
as alternatives. On that basis, and provided that the savings
were used to help stabilise total EU expenditure, we support the
principle of co-financing as an adjunct to fundamental CAP reform.
113. The Economic Secretary reminded us that:
"If one goes back to the motivation for
the creation of the European Economic Community, one has in mind
the end of war
on the continent of Europe. One can scarcely
put a monetary value on that or suggest that it is worth more
to one country than another" (Q 129).
That is the backdrop against which the negotiations
at the Berlin European Council will be conducted. Although
we naturally support the Government in its objective of getting
the best possible deal for the United Kingdom within an overall
agreed package, we believe that Europe is a concept which to most
goes beyond mere deal-making. We trust that the Government will
bear this in mind at the European Council.
114. The Committee considers that the future
financing of the European Union is an important issue to which
the attention of the House should be drawn, and makes this Report
to the House for debate.
84 CAP Reform in Agenda 2000 - The transition to
competition: measures for rural development and the rural environment,
HL Paper 84, 18th Report Session 1997-98, paragraphs 95 and 64. Back
See our previous Report, The reform of the Structural Funds
and the Cohesion Fund, HL Paper 138, 30th Report Session 1997-98,
paragraphs 22-25. Back
Because of the slow take-up of funds under this heading. Back
ibid, paragraph 131. Back
ibid, paragraph 142. Back
For the role of the European Parliament, see paragraphs 28-29. Back
3.75 billion euro in payments, and 1.54 billion euro in commitments:
letter of 27 November from the Economic Secretary to the Treasury
to Lord Tordoff. Back
11666/98, paragraph 2.4.2. Back
Its redistributive effect for the five major net contributors
is shown in the table at p6. Back