Select Committee on European Communities Sixth Report


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 Parliament.

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 principle.

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"[84]. 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 agricultural structures.

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)… The current EU15 would have 218.4 billion euro available for structural measures… The share proposed for the Cohesion Fund amounts to 21 billion euro"[85]. 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[86] to be charged against whatever amount was allocated for the next period; but he concluded that the position was still "wide open" (Q102).

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[87] that "the important point is to ensure that the cuts are fair".

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[88] 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[89]. The European Parliament has already expressed its concern about the prospect of expenditure cut-backs for Agenda 2000 by attempting to insert substantial reserves[90] 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.

Co-financing of agricultural expenditure

109.  T[91]hrough 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[92]. 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.

Concluding comment

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

85   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

86   Because of the slow take-up of funds under this heading. Back

87   ibid, paragraph 131. Back

88   ibid, paragraph 142. Back

89   For the role of the European Parliament, see paragraphs 28-29. Back

90   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

91   11666/98, paragraph 2.4.2. Back

92   Its redistributive effect for the five major net contributors is shown in the table at p6. Back

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