1. This memorandum is chiefly concerned with the consequences for the applicant countries of the current proposals for EU enlargement. The evidence is based on recent research by the author at the University of Birmingham and previous work conducted under a three-year project on eastward enlargement by the European Programme at the Royal Institute of International Affairs.

  2. Successive British governments have stated their enthusiasm for eastward enlargement of the EU, and recent policy statements have advocated an open and inclusive approach to all 10 central and east European (CEE) applicants. However, the UK now needs to give more substance to the claim that the enlargement process is inclusive. Support for enlargement is very mixed across the EU-15, and commitment is faltering in some member states very early on in the process. Furthermore, current policies risk widening the political and economic gaps between the applicants. This memorandum covers two key areas: first, enlargement and the Community budget; and secondly, free movement of people and CEE border controls.

THE COMMUNITY BUDGET PROPOSALS AND ENLARGEMENT

  3. A swift solution to the challenges posed by new accessions is needed if fiscal concerns are not to cause a deliberate slowing of the enlargement process. In "Agenda 2000" (published in July 1997), the European Commission tried to square the circle of competing net contributor and recipient interests (both sets of interests are present in some member states) by proposing that the next financial perspective of 2000-06 keep the 1999 budget ceiling of 1.27 per cent of EU GNP, but use the absolute increase provided by economic growth for more funds to the CEE applicants. There would be an absolute increase in CAP money to the existing EU-15, only a slight reduction in their structural funds receipts, and considerably more funds to CEE, although on nothing like the scale provided to poor members of the EU-15.

  4. Under the Commission's growth assumptions, the total EU budget for 2000-06 would be 745.5 billion ECU, of which the 10 CEE applicants would receive 74.8 billion ECU; this allocation for CEE is just over 10 per cent of the budget and a thousandth (0.127 per cent) of EU GDP. Even by 2006, the 10 applicants together will only account for 16 per cent of the EU budget and the five backmarkers will account for 2.6 per cent. These are small amounts to allocate for such a great historical step and to so many countries, but they are still controversial among member states.

  5. The new acceding members will not in the initial years get the same levels of support as the old member states. This discrepancy in levels of support suggests that, once the new members join, they will have strong interest in arguing for higher transfers and equality of treatment in the criteria for allocating funds. Budget negotiations in future years could be more difficult than the current round. Although countries like Poland and Spain have opposing viewpoints at present, once Poland joins the EU, they will have a common interest in arguing for further transfers.

  6. Table 1 sets out the Commission's proposed allocations to the 10 applicants. The Commission uses the working assumption that the five countries it recommends for starting negotiations will actually join in 2002. Between 2002 and 2006, the acceding countries would receive 53.8 billion ECU, consisting of 38 billion ECU from the structural funds and 15.8 billion ECU from the CAP and other agricultural support. In the pre-accession phase, the five front-runners would get 3.6 billion ECU for 2000-01 from Phare, the structural funds and agricultural support. Overall, they would receive 57.4 billion ECU.

TABLE 1
The Agenda 2000 budget proposals for the CEE-10, 2000-2006 (1997 prices) billion ECU
	2000	2001	2002	2003	2004	2005	2006	Total
(1) Five front-runners1
Pre-accession aid
Agriculture	0.3	0.3	—	—	—	—	—	0.6
Phare	0.9	0.9	—	—	—	—	—	1.8
Structural operations	0.6	0.6	—	—	—	—	—	1.2
Transfers after accession2
Structural funds	—	—	3.6	5.6	7.6	9.6	11.6	38.0
Agricultural	—	—	1.5	1.9	2.4	2.9	3.3	12.0
Other internal policies	—	—	0.7	0.7	0.8	0.8	0.8	3.8
Total first 5	1.8	1.8	5.8	8.2	10.8	13.3	15.7	57.4
(2) Five backmarkers3
Pre-accession aid
Agriculture	0.2	0.2	0.5	0.5	0.5	0.5	0.5	2.9
Phare	0.6	0.6	1.5	1.5	1.5	1.5	1.5	8.7
Structural operations	0.4	0.4	1.0	1.0	1.0	1.0	1.0	5.8
Total second 5	1.2	1.2	3.0	3.0	3.0	3.0	3.0	17.4
Total CEE-10	3.0	3.0	8.8	11.2	13.8	16.3	18.7	74.8
1 Czech Republic, Estonia, Hungary, Poland and Slovenia. 2 Agenda 2000 makes a "technical working assumption" that five CEE countries plus Cyprus join in 2002. 3 Bulgaria, Latvia, Lithuania, Romania and Slovakia Source: Grabbe and Hughes (1998).

  7. For all the applicants, the Commission proposes total expenditure over the period 2000-06 of 21 billion ECU on pre-accession aid, comprising 10.5 billion ECU from Phare, 7 billion ECU from the structural funds, and 3.5 billion ECU of support for agricultural reform. Over the proposed seven-year period, the five front-runners will get over 900 ECU per head (130 ECU per head each year) while the five backmarkers will get under 410 ECU per head (58 ECU per head each year). Thus, the front five will get twice as much as the lagging five, although even the amount received by the front-runners is under half that of the 400 ECU per head per year received in Greece and Portugal in 1999. This is partly due to the Commission's assuming that there will be transitional periods, but it is also because Agenda 2000 proposes moving from per head comparisons to introducing a ceiling on structural funds receipts of 4 per cent of GNP.

  8. The five who would remain outside the EU would receive 17.4 billion ECU, which is 23 per cent of the budget allocation to the CEE-10, while the five front-runners would get 77 per cent. The five backmarkers will benefit from an additional "catch-up fund", but they will still receive substantially less than the new member states, threatening to widen the gap between the two groups. To combat this problem, the Commission proposed transferring all the pre-accession funds to the lagging five once the front-runners have become members; however, Robin Cook has argued in the General Affairs Council against an automatic redistribution of the funds on the entry of other applicants (Agence Europe Bulletin 7330, 26-27 October 1998).

  9. The Agenda 2000 proposals represent the minimum that the applicants are likely to receive under the next Community budget, as member state budget debates and the outcome of the Vienna European Council have demonstrated. Indeed, recent suggestions to freeze the budget in real terms would remove the extra funds provided by growth in EU GDP that provide the allocations to the applicants.

  10. There are two issues in British government policy which the Foreign Affairs Committee might wish to examine in taking oral evidence:

—  The British rebate. By insisting on maintaining the budget abatement, the UK is in the awkward position of advocating greater transfers to CEE, but paying a lesser proportion of them than other member states. If the correction mechanism were to remain unchanged, the UK would pay only one-third of what it would otherwise pay for eastward enlargement (CEC 1998). If the British government is to persuade its more reluctant partners to support the enlargement process, it will have to demonstrate willingness to bear a larger share of the burden of financing it.

—  Principles of solidarity and cohesion. Agenda 2000 proposed a neat compromise between the competing interests of net contributors, current recipients and CEE needs, but at the cost of EU principles of solidarity and cohesion. While the 4 per cent of GNP ceiling allows the Commission to reduce substantially the costs of extending the structural funds (see Grabbe and Hughes 1998) and deals with the argument that the CEE countries face absorption problems with higher amounts, it moves away from the principle of equality of treatment. The poorer applicant countries will receive less per head than richer countries.

  11. Moreover, the GNP ceiling would have the perverse effects of providing more assistance to the higher-income CEE countries, and increasing transfers to them as they become richer. There is a strong argument that the CEE countries' greatest need for transfers is in the early years, when they face the worst economic problems and have the most constraints on national budgets. The proposals sacrifice a key EU aim of promoting convergence and catch-up in levels of economic development by poorer countries. Gaps between the applicants could widen as the front-runners become eligible for much higher levels of EU funding than those left outside.

  12. The Foreign Secretary recently stated to the Foreign Affairs Committee that "we are already making very generous support to the reforms that are necessary for these countries to enter." (Select Committee on Foreign Affairs Minutes of Evidence, Examination of Witnesses, 2 June 1998, Question 97). The generosity of the EU's support is open to question, in light of the figures given above. It is also important to note that the reforms needed to enter the EU are not necessarily the same as these countries' objective needs for development and transition. The Accession Partnerships list a number of priorities that are clearly needed for transition as well as accession, and EU conditionality can provide an important impetus to stalled reforms. Nevertheless, the CEE countries that are furthest away from accession face difficult dilemmas in deciding between competing priorities for limited financial and administrative resources; in particular, the cost and impact of taking on EU social policy and agricultural policy could conflict with other development goals.

  13. Moreover, EU aid under the Phare programme is now directed specifically at accession requirements and the direct costs of taking on EU legislation, not at overall development needs. Although these two aims—accession and transition—overlap in important ways, they are not synonymous. Some EU policy models may be inappropriate for countries in transition, given that they were developed for economically advanced countries with sophisticated regulatory and administrative structures, and that many will be very costly for CEE to implement. In addition, there may be more immediate priorities than specific and detailed EU requirements. Therefore it is important that EU policy-makers consider carefully the timing and sequencing of their demands on the applicants, and that national parliaments scrutinise rigorously the impact of EU policies on CEE.

INCLUSIVENESS OF THE ENLARGEMENT PROCESS

  14. The UK needs to give substance to its rhetorical commitment to inclusiveness in the enlargement process. An area where the UK could play a particularly important role is in confronting the exaggerated claims made in some of the countries on the EU's eastern border about the risks of migration. There is pressure from Austria and (to a lesser extent) Germany to restrict CEE citizens' ability to work in the EU for many years after accession because of fears of migratory flows of cheap labour from eastern Europe. Debate about potential migration in these countries has been dominated by unfounded claims, while academic surveys and estimations suggest that allowing free movement of labour on accession is unlikely to provoke large migratory flows (see Richter 1998). The outcome of previous EU enlargements was relatively limited migration, despite wide disparities in employment and income between the poorer Mediterranean states when they acceded and richer northern Europe.

  15. Relative political stability in CEE, steady economic growth among the front-runners and foreign direct investment are already discouraging any large-scale movement of unskilled workers, while CEE unemployment generally remains below the EU average. Future East-West migration is not expected to cause problems for EU labour markets, even where unemployment is high, and would be beneficial for some EU economies (see Bauer and Zimmerman 1997). By the time of accession, new CEE members will by definition have been judged to have met the Copenhagen conditions of stable democracy, a functioning market economy and the capacity to cope with competitive pressure in the Single Market, conditions which remove the main incentives to migrate. Indeed, the consequence of liberalising labour markets is more likely to be "brain drain" of the highly skilled to western Europe than any large-scale movement of low-skilled or unskilled workers.

  16. This is a fundamental issue of equal treatment in the enlargement process, given the EU's commitment to offer full membership to CEE, not partial or second-class membership. One of the key benefits of EU membership is the ability of all citizens to travel freely and work in other member states, and free movement of labour is one of the four freedoms of the Single Market; thus a long-standing restriction for CEE would mean less than full participation in it.

  17. A related issue is movement of people and goods across CEE in advance of accession. The EU has in recent months been putting pressure on the front-runner countries in negotiations to tighten border controls with their neighbours which are also applicants, and to require visas of nationals of the CEE countries still outside negotiations. Such policies risk exacerbating regional tensions about minorities, for example between Hungary and Romania, and inhibiting bilateral co-operation initiatives. Making it more difficult to conduct intra-CEE trade and cross-border investment will also be detrimental to economic integration in the region. And discrimination against the countries furthest away from membership in visa policy, both from the EU and now from the other CEE countries as well, has given rise to discouraging perceptions in Bulgaria and Romania of progressive exclusion from the enlargement process.

  18. The pressure to tighten intra-CEE borders now is premature, given that the first accessions might not take place for a number of years. Clearly there will have to be reinforced border controls once the front-runner applicant countries join the Schengen area and hence become the EU's external frontier. However, the EU should seek to delay for as long as possible any measures that create divisions between the applicants, given their negative consequences for regional stability. Otherwise pressure over short-term issues will jeopardise the EU's long-term interests in regional integration and improving bilateral relations over minorities in CEE.

CONCLUSIONS

  19. The potential for the enlargement process to be seriously disrupted by disagreements between member states over budgetary, policy and institutional reforms remains high. Reforms are likely to reduce transfers to current EU recipients only gradually, and the CEE applicants will see only a very slow increase in the funds they receive, despite their very different stage of economic development. A thousandth of EU GDP seems a very small price to pay for stabilising the region on the EU's eastern border and turning a former threat into substantial market opportunities. Even this allocation is controversial, yet the conclusion has to be that the EU is attempting to achieve a major historical step with remarkably low expenditure.

  20. The UK has smaller positive and negative interests in enlargement than other large member states, and at present it does not have strong lobbies that seek to slow the process or place limitations on the accession conditions. Hence the UK is in a good position to take a wider and longer term view of the beneficial implications of enlargement for the future of Europe. To realise these benefits, British policy needs to be more active in seeking to push the process along, so that disagreements about the short-term consequences do not become a barrier to enlargement.

  21. It is important that the EU does not cause bilateral relations in the region to deteriorate and gaps between the candidates to widen. Current EU policies risk exacerbating regional tensions, and forcing the applicants apart both politically and economically. The British government could substantiate its claims that enlargement should be inclusive in two ways: first, by actively supporting measures to include Bulgaria and Romania and seeking to increase the aid allocated to the countries still outside negotiations as the front-runners join; secondly, by opposing measures that discriminate between the applicants (particularly in visa policy) and that raise barriers between the citizens of central and eastern Europe in advance of accession. The EU as a whole must ensure that the accession process does not draw new dividing lines in Europe.

REFERENCES

  Bauer, Thomas and Klaus F Zimmerman (1997), "Integrating the East: the labor market effects of immigration', in Europe's Economy Looks East: Implications for Germany and the European Union, ed. Stanley W Black, Cambridge: Cambridge University Press, pp. 269-314.

  Commission of the European Communities (1998), Financing the European Union: Commission Report on the Operation of the Own Resources System, Brussels: OOPEC.

  Grabbe, Heather and Hughes, Kirsty (1998), Enlarging the EU Eastwards, Chatham House Paper, London: The Royal Institute of International Affairs.

  Richter, Sandor (1998), EU Eastern Enlargement: Challenge and Opportunity. Vienna: WIIW. Research Report No. 249, July.

December 1998