Select Committee on European Communities Report


71.  THE FINANCIAL CONSEQUENCES OF ENLARGEMENT (10TH REPORT, SESSION 1997-98)

Memorandum from HM Treasury

  1.  The Government welcomes the Committee's report and the contribution it makes to the debate on the financial consequences of enlargement of the European Union. The United Kingdom Presidency will take forward the process of enlargement, notably by opening the European Conference on 12 March 1998, launching the Accession Process on 30 March 1998 and beginning accession negotiations with Cyprus, the Czech Republic, Estonia, Hungary, Poland and Slovenia on 31 March. The Government will take the recommendations of the Committee into account during these negotiations. The Committee's report has some valuable strategic and political insights for a long term perspective across a broad range of issues.

  2.  The Government welcomes the Committee's endorsement of the principles of enlargement (paras 7, 8, 10). European Union member states agreed to initiate accession negotiations with Poland, Slovenia, Hungary, Estonia, the Czech Republic and Cyprus at the Luxembourg European Council, as the Committee hoped (para 22.) However, the Government also recognises that enlargement must remain an all inclusive process (para 24). The Luxembourg European Council agreed to reinforce the pre-accession strategy and to conduct regular reviews of progress to guarantee that each applicant will enter negotiations as soon as they are ready.

  3.  The Government accepts the need to take uncomfortable decisions on the Agenda 2000 communication (para 9). As the report suggests, domestic public finance considerations will mean that member states will be reluctant to achieve enlargement at any cost (para 11). However, there is a widespread understanding that enlargement is both intrinsically desirable and economically beneficial. The Government believes that policy reform and strict budget discipline will be essential in providing the efficient and affordable accession of new members and in seeking to secure the success of the transition.

  4.  The Government notes the Committee's concern as to the uncertainty surrounding the Commission's growth estimates (para 12). The Government will press for a margin significantly above the 0.05 per cent of GNP proposed by the Commission, not least in order to allow for any shortfall in growth.

  5.  The Committee recommended a review of the Own Resources ceiling in 2002 out of concern that the suggested margin between total payments and the own resources ceiling was so small that the ability to fund enlargement was at risk (paras 14, 84). The Government believes a review could be seen as a chance for some member states to reopen the current future financing negotiations and to place upward pressure on budgets unrelated to enlargement. In the Government's view it will be possible to deliver savings in current EU spending sufficient to finance much of the enlargement process and this must be done. A review would also reduce the pressure for Community policy reform as difficult decisions could be put off until a later date.

  6.  The Government welcomes the Committee's conclusions on policy reform (para 15). To be successful and affordable, enlargement will require an early, radical reform of the Common Agricultural Policy and reform of the Structural and Cohesion Fund. The Government fully recognises the scale of the enlargement undertaking and is eager to secure appropriate reform before the first applicant is set to join. These are not decisions that can be put off until 2002. The Commission's proposals for the reform of the CAP make a welcome step towards this goal, although in some areas, the Government considers them insufficiently radical. The Government also agrees that implementation of the Common Agricultural Policy in the 10 Central and Eastern European Countries will be a key issue for the accession negotiation (para 88).

  7.  The Government understands the Committee's concerns as to the cost of implementing the acquis in applicant countries (para 16). International financial institutions will be able to offer valuable help and the applicants themselves recognise the need to achieve progress.

  8.  The Government acknowledges that the pace of enlargement depends on the actions of the applicants and the EU (paras 17, 25). However, it is committed to work towards early enlargement as soon as the European Union and the applicants are ready. The Government shares the Committee's belief in the need for a strong institutional framework in the new member states (para 20).

  9.  The Government is prepared to look at any proposals which may bring the net budgetry contribution of member states better into line with their ability to pay (para 18). That means that it cannot countenance any change which is prejudicial to the UK's existing abatement. Despite that abatement, the UK's per capita net contribution to the EU is the fifth largest even though it is only the eleventh most prosperous member state.

  10.  The Government believes that existing Member States, including the UK, will have to accept reductions—in some cases substantial ones—in their Structural and Cohesion Fund allocations if the Funds are to remain affordable and durable after enlargement (para 19). But the regime after 1999 should be fair: the Government will not accept proposals which lead to a disproportionate cut in UK receipts compared with richer Member States.

  11.  The Government agrees that the status of the Cohesion Fund after 1999 needs to be clarified (para 86). It continues to believe that there is a strong argument for discontinuing or phasing out Cohesion Fund transfers to Member States which join the single currency, in accordance with the UK's understanding when the Fund was established. If the Cohesion Fund does continue after 1999, the Government would wish to see strict application both of the per capita GNP eligibility criterion, and of the conditionality related to government deficit performance which is applied to the Fund.

  12.  The Government agrees that there is a need to consider the effects of EU enlargement in a way that takes proper account of the effects of NATO enlargement (para 21). In practice there is no lack of co-ordination over these two processes: co-ordination takes place within and between the Government departments with an interest and responsibility, including the Ministry of Defence, Foreign and Commonwealth Office and HM Treasury.

  13.  The Government also believes that it is important to be clear about the effects of NATO enlargement on the new member states. Accession to NATO as such is not expected to require major expenditure by these states, as their contributions to NATO's common budgets will be small in size relative to their national budgets. The new member states will need to incur significant expenditure modernising their national armed forces, but this task would need to be undertaken whether or not the new member states were in NATO. Given the strength and credibility of the collective security provided by NATO, the principal consequence of enlargement should therefore be to reduce the defence burden on new member states, compared to the alternative of not belonging to NATO.

  14.  The Government supports the provisions within the Treaty of Amsterdam for institutional reform in advance of the next enlargement of the Union (para 23).

2 February 1998


 
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