Legal base	—
Document originated	29 October 2009
Deposited in Parliament	6 November 2009
Department	HM Treasury
Basis of consideration	EM of 24 November 2009
Previous Committee Report	None
To be discussed in Council	Not known
Committee's assessment	Politically important
Committee's decision	Cleared

Background

22.1 Croatia applied formally for EU membership in 2003 and became a candidate in 2004. Accession negotiations between the EU and Croatia started in 2006. So far Croatia has opened 28 out of 35 chapters and provisionally closed twelve. However, there are still uncertainties and risks over the timeline of the negotiations and accession date. In November 2008 the Commission said in its Communication Enlargement strategy and main challenges 2008-2009 that it would, subject to Croatia maintaining overall progress in its preparations, present an accession financial package during 2009.[69]

The document

22.2 Taking account of Croatia's overall progress towards accession, the Commission presents this Communication to propose for debate the main elements of a financial package for Croatia upon accession. The Commission also assesses the financial impact of Croatia's accession on the EU budget in the areas of agriculture and rural development, regional policy and coordination of structural instruments and financial and budgetary provisions. The Communication:

• is based on the working hypothesis that Croatia will be able to conclude negotiations by mid-2010 and accede in January 2012;
• covers the years 2012-2013, in line with the current Financial Framework, for the period 2007-2013; and
• bases the proposals on the same principles and methodology applied to the financial packages developed for the 12 Member States which have joined the EU since 2004 — including a ten-year phasing-in schedule for agricultural direct payments and a two-year phasing-in of expenditure for cohesion policy, rural development and the European Fisheries Fund.

22.3 The outline for a financial package, which the Commission presents, considers first, Heading 1: Sustainable growth. For Sub-Heading 1a, Competitiveness for growth and employment, the main elements of which are the Seventh Research Framework Programme (57%), Lifelong Learning and Erasmus Mundus (9%), and the Trans-European Energy and Transport Networks (8.2%). There are no specific country envelopes under existing actions and programmes,[70] but an increase in the sub-heading would be required to ensure no negative effect on existing funding for present Member States. The Commission suggests an additional funding of €187.20 million (£167.32 million) would be required in the first two years of Croatia's accession.

22.4 For Sub-Heading 1b, Cohesion for growth and employment, which covers structural funds (81%) and the cohesion fund (19%), the Commission suggests that a progressive two-year phasing-in of structural actions expenditure will apply at the rate of 60% in 2012 and 80% in 2013, with full phasing-in achieved by 2014. Applying the current allocation criteria to Croatia would imply capping of total structural and cohesion funds at 3.524% of GDP. Applying the same rate of phasing-in as in the 2004 enlargement, results in capping at 2.1% of GDP in 2012 and 2.8% of GDP in 2013. In line with the 2004 enlargement, a degree of flexibility for the implementing conditions could be considered under chapter 22 (regional policy and coordination of structural instruments). On the basis of latest available GDP and growth projections total structural and cohesion funding would amount to €2,205.10 million (£1,970.90 million) in the first two years of membership. If Croatia's structural and cohesion allocations were to be fully phased in by 2013 this would amount to €1,612 million (£1,440.8 million) and would represent an increase to the sub-heading of 3% of overall Community expenditure in this area.

22.5 Under Heading 2: Preservation and management of natural resources, which includes market related expenditure and direct payments (73%), rural development (24%), the European Fisheries Fund (1%) and the environmental programme Life+ (0.6%), the Commission first discusses market-related expenditure, estimating:

• on the basis of the most recent agricultural market forecasts, a financial envelope during the first two years of Croatian membership amounting to €45.00 million (£40.22 million); and
• funding for application of fisheries market measures and animal and plant health measures under the heading is estimated at €3 million (£2.68 million) per annum.

Thus additional market measures to take into account Croatia's accession would amount to €18.00 million (£16.10 million) in 2012 and €33.00 million (£29.50 million) in 2013.

22.6 On direct payments under this heading the Commission says that the EU has set out a schedule to introduce these over a period of ten years:

• first year of accession — 25%;
• second year of accession — 30%;
• third year of accession — 35%;
• fourth year of accession — 40%; and
• thereafter in 10% increments to reach the level of support applicable to the EU15.[71]

The Commission estimates the financial cost of direct payments in the first two years of Croatia's membership would amount to €93.30 million (£83.39 million). No expense would be incurred in 2012, as reimbursements from the budget for expenditure by Member States on direct payments in any given year is made from the budget of the following year. If, hypothetically in 2013, 100% direct payments were to be made available this would amount to €373.00 million (£333.38 million). Together with market-related expenditure this would represent an increase of 0.83% of overall Community expenditure under the Financial Framework sub-ceiling of Heading 2 in this area. The amounts foreseen for Croatia for market-related expenditure and direct payments would need to be added to the sub-ceiling of the financial framework as well as Heading 2 overall.

22.7 On rural development policy the Commission shows an envelope for rural development in two parts:

• the Guarantee origin, which is calculated on the basis of utilised area and agricultural employment in comparison to the EU12[72] and of acceding Member State size; and
• the Guidance origin, for which the same percentage of total capped cohesion envelope was applied as to Bulgaria and Romania.

The Commission foresees a gradual two-year phasing-in for Croatia at the rate of 60% in 2012 and 80% in 2013, with full phasing-in achieved by 2014. This would result in a total two-year envelope of €483.10 million (£431.80 million). If rural development measures were to be fully phased in by 2013, this would amount to €352.00 million (£314.60 million) and Croatia's allocations would represent an increase of 2.8% of overall Community expenditure in this area.

22.8 For the European Fisheries Fund the Commission suggests the same percentage share, 1.64%, of total capped cohesion envelope as with Romania and Bulgaria. A gradual two-year phasing-in is foreseen at the rate of 60% in 2012 and 80% in 2013, with full phasing-in achieved by 2014. The Commission concludes that the total two-year envelope would come to €42.90 million (£38.34 million). If European Fisheries Fund allocations were to be fully phased in by 2013, it would amount to €31.00 million (£27.70 million) and Croatia's allocations would represent an increase of 4.5% of overall Community expenditure in this area.

22.9 As for other Common Fisheries Policy support the Commission estimates that an increase of €3.00 million (£2.68 million) per annum would be needed for control and enforcement of the Common Fisheries Policy and data collection under the so-called second instrument supporting the policy (Regulation EC 861/2006). Finally under this heading the Commission notes that there are no pre-determined country specific envelopes for the LIFE+ programme, but an overall increase would be needed to ensure that there is no negative effect on the existing EU27. Additional funding of €5.00 million (£4.47 million) in the first two years of accession is suggested as necessary for this increase.

22.10 The Commission next discusses Heading 3: Citizenship, freedom, security, and justice, which includes measures for solidarity and management of migration flows (31%), funding of decentralised agencies (17%) and the Youth in Action programme (8%). For Sub-Heading 3a Freedom, security and justice the Commission notes that there are no pre-determined country specific envelopes, but an overall increase would be needed to ensure that there is no negative effect on the existing EU27 — for the first two years of Croatia's membership additional funding of €8.40 million (£7.50 million) would be needed, that is €4.00 million (£ 3.57 million) for 2012 and €4.40 million (£3.90 million) for 2013. In addition, country specific allocation would need to be foreseen for instruments under the sub-heading:

• the European Fund for the integration of third-country nationals — €825.00 million (£737.30 million) for 2007-2013, of which €768.00 million (£686.40 million) is for distribution among Member States on the basis of criteria expressing the number of legally staying third country nationals. The Commission estimates that Croatia's accession would result in a national envelope of €1.30 million (£1.16 million) in 2013;
• the European Refugee Fund — €628.00 million (£561.30 million) for 2008-2013 of which €629.00 million (£562.20 million) is for distribution among the Member States on the basis of criteria relating to the number of asylum seekers and integrating persons benefiting from international protection. The Commission estimates that Croatia's accession would result in a national envelope of €1.00 million (£0.89 million) in 2013; and
• the Return Fund — €676.00 million (£604.40 million) for 2008-2013 of which €629.00 million (£562.20 million) is for distribution among the Member States on the basis of criteria expressing the number of third country nationals subject or having been subject to return measures. The Commission estimates that Croatia's accession would result in a national envelope of €1.00 million (£0.89 million) in 2013. [73]

22.11 The Commission also suggests that the Schengen Facility under this sub-heading would require funds amounting to €120.00 million (£107.25 million) in the first two years of accession, €60.00 million (£53.68 million) in each year. But no funds are foreseen for Croatia in 2012 and 2013 under the External Borders Fund.

22.12 For sub-Heading 3b Citizenship the Commission notes that an overall increase in the current spending areas without country specific envelopes would be needed to ensure there is no negative effect on the EU27. For the first two years of membership it estimates that an additional funding of €8.90 million (£7.95 million) would be needed, with €4.40 million (£3.93 million) in 2012 and €4.50 million (£4.00 million) in 2013. Under this sub-heading the Commission also suggests that additional funds should be allocated for Croatia in support of transitional institution building measures after accession. In total it envisages €29.00 million (£25.92 million).

22.13 As for Heading 4: EU as a global partner the Commission says that no increase would be necessary to general community expenditure and that from accession Croatia would no longer be eligible for the Instrument for Pre-Accession funding under this heading. Turning to Heading 5: Administration the Commission says that additional administrative expenditure would be necessary due to Croatia's accession, notably with respect to increased interpretation and translation needs, the costs of which are expected to amount to €122.00 million (£109.00 million) for the first two years of accession.

22.14 Finally on the individual headings, the Commission says of Heading 6: Compensation that Croatia must not find itself in a net budgetary position in the first years of accession that is worse than its net budgetary position prior to accession. It does not deem any budgetary compensation to be necessary. But it suggests that, to mitigate the impact of full membership and the lag between commitment appropriations and actual payments being made, a special temporary cash-flow facility, in line with previous accessions, would allocate Croatia €170.90 million (£152.75 million) in 2012 and €32.40 million (£28.96 million) in 2013.

22.15 The Commission notes that:

• the financial impact of its proposals comes to €1,561.00 million (£1,395.00 million) in 2012 and €2,007.00 million (£1793.85 million) in 2013;
• that is 1.06% and 1.32% of total EU27 commitments for 2012 and 2013 respectively;
• Croatia would be expected to contribute to the budget through own resources and these contributions are estimated at around €609.00 million (£544.32 million) in 2012 and €647.00 million (£578.28 million) in 2013; and
• if, for example, all expenditure for Croatia were already fully phased-in by 2013 the annual cost to the EU budget would come to about €2,600.00 million (£2,323.88 million), which is about 1.7% of total EU expenditure foreseen in 2013.

The Commission annexes to the Communication a table, which we also annex, showing its proposed financial package for Croatia.

22.16 The Commission also notes that:

• an adjustment of the Financial Framework for 2007-2013 would be required to accommodate the results of the accession negotiations and Croatia's accession; and
• there is a mechanism in the current Inter-institutional Agreement[74] budgetary discipline and sound financial management for the European Parliament and the Council, acting on a proposal from the Commission, to adjust the Financial Framework to take account of the expenditure requirements resulting from the outcome of the accession negotiations.

The Government's view

22.17 The Economic Secretary to the Treasury (Ian Pearson) comments that:

• the Communication has no policy implications for the UK;
• it is based on a number of assumptions to provide an illustrative example and is non-binding; and
• the final package will be agreed later in the year [we take this to mean in 2010].

As for the financial implications the Minister says that:

• the additional expenditure required by Croatia's accession would be incorporated into the annual EU budgets in the relevant years;
• the UK makes a contribution to the budget as a whole, not to individual elements within it;
• although the Communication gives indicative figures for increases in the budget to accommodate Croatia's accession, it is not possible to judge with certainty at this stage the precise amounts involved and therefore the amount of any increase to the UK contribution to the EU budget; and
• as a guide, the UK's share of total own resources payments in 2010 will be 14.1% pre-abatement and 10.9% post-abatement.

Conclusion

22.18 We draw this Communication to the attention of the House as it gives an indication of the likely costs to the EU budget in the early years if Croatia were to accede to the Membership.

22.19 We have no questions to raise on the document and clear it. But we remind the Government of its general commitment to ensure Croatia fully meets the conditionality test, particularly in relation to the sort of governance issues which continue to bedevil Bulgaria and Romania's membership of the EU, before it is allowed to accede. Consequently we would not expect to see a final financial package for Croatia proposed by the Commission until Croatia's compliance with conditionality prior to accession is assured.

Annex: Financial package for Croatia (€ millions, current prices)

	2012	1213	Total
Commitment appropriations
1. Sustainable growth	1,005.6	1,386.7	2,392.3
1a. Competitiveness for growth and employment	89.7	97.5	187.2
1b. Cohesion for growth and employment	915.9	1,289.2	2,205.1
2. Preservation and management of natural resources	242.8	438.5	681.3
Of which market related expenditure and direct payments	18.0	126.3	144.3
3. Citizenship, freedom, security and justice	97.4	72.2	169.6
3a. Freedom, security and justice	64.0	67.7	131.7
3b. Citizenship	33.4	4.5	37.9
4. EU as global partner	—	—	—
5. Administration	45.0	77.0	122.0
6. Compensations	170.4	32.4	202.8
Total commitment appropriations (Croatia)	1,561.2	2,006.8	3,568.0
Total commitment appropriations EU27	147,210.0	151,976.0
Additional Croatia related expenditure as share of EU27	1.06%	1.32%
Payment appropriations*	985.1	1,001.4	1,986.5

* Based on above categories of expenditure and the same methodology as applied in the fifth enlargement, adjusted to current rules.

70   Except for nuclear decommissioning funds for Lithuania, Slovakia, and Bulgaria. Back

71   Belgium, France, Germany, Italy, Luxembourg, the Netherlands, Denmark, Ireland, the United Kingdom, Greece, Portugal, Spain, Austria, Finland and Sweden. Back

72   Belgium, France, Germany, Italy, Luxembourg, Netherlands, Denmark, Ireland, United Kingdom, Greece, Portugal and Spain. Back

73   The legal bases for the European Fund for the Integration of Third-country Nationals, the European Refugee Fund and the Return Fund foresee no expenditure in the first year of accession for those countries joining the EU in the period 2007-2013. Back

74   See OJ No. C 139, 14.06.06, p.1. Back