INTRODUCTION

  43.    This part of the Report summarises the evidence of the witnesses on the major issues which arose during the enquiry. Our witnesses included representatives of the governments of the major net contributor to the EU15 (Germany); and one large country, Poland, and one small, Estonia, from the applicants, both of which were among the countries suggested to be in the "the first wave" (see paragraph 27) above. We are well aware of the diversity of the CEEC10 and we do not generalise from evidence particular to one of them.

WHAT WILL MEMBER STATES PAY FOR ENLARGEMENT?

  44.    Community funds for enlargement could be generated in three ways. First, they could come from economic growth increasing the amount raised by the 1.27 per cent ceiling of EU GNP for the Community's own resources. Second, they could come from raising that ceiling in percentage terms. Third, they could come from savings made by reform of Community policies, particularly the Common Agricultural Policy and the policies for economic and social cohesion. The scope provided by each of these sources of Community funding for enlargement is considered in turn.

Growth rates

  45.    Agenda 2000 estimates the growth rates of the EU15 as 2.5 per cent a year and of the CEEC10 as 4 per cent a year over the period 2000-2006. The Economic Secretary to the Treasury, Mrs Liddell thought that the Commission's estimates for growth rates were "perhaps overstated rather than understated" (Q 79). The Head of the Polish Government's European Integration Office, Mrs Hübner, pointed out that the Polish economy achieved a growth rate of around six per cent in 1996; growth was expected to reach 5 per cent in 1997 and to exceed 4 per cent for the years to come (Q 45). The Estonian government forecast growth in the domestic economy of 5.5 per cent in 1997 and 5 per cent for 1998 (Q 99). The State Secretary of the Federal German Foreign Office, Dr von Ploetz, told us that the German "wise men" had forecast percentage growth in their GNP of 2.4 for 1997 and 2.8 for 1998. He also pointed to the expected positive effects of the growth of trade and production links between Germany and Poland as well as of the decisions to be taken in May 1998 on the membership of EMU (Q 121). Commissioner Liikanen[12] reminded us that over the last ten years the Community had had a growth rate of 2.4 per cent a year. So 2.5 per cent did not seem "terribly optimistic". The growth rates of the CEEC10 would have little impact on contributions to the Community Budget until after 2006 (Q 165).

  46.    Mrs Liddell told us of some Treasury analysis of the sensitivity of the availability of EU funds to growth rates over the period 2000-2006. The Treasury letter containing this analysis, which we received after hearing her oral evidence, made the point that if the annual growth rate in the EU15 were 2.25 per cent rather than the 2.5 per cent estimated by the Commission, the margin between the own resources ceiling and the total payments from the Budget would fall from 0.05 per cent of GNP (ecu 4.8 billion) to 0.03 per cent (ecu 2.9 billion). The letter also showed that on a more pessimistic assumption of annual growth in the EU15 of only 2.0 per cent a margin of 0.01 per cent (ecu 1 billion) would remain (p 35).

The own resources ceiling of 1.27 per cent of EU GNP

  47.    Our witnesses from the governments of Germany and of the United Kingdom were eager to display their reluctance to contemplate any increase in the 1.27 per cent of EU GNP ceiling on the own resources which fund the Community Budget. Mrs Liddell said that the Government wanted to ensure that the ceiling on the Community Budget's own resources was held at its present level "right through the period of enlargement" (Q 63). She made the point that the more the United Kingdom paid by way of net contribution to the Community the less would be available to spend on domestic policies (Q 67). Dr von Ploetz gave a more oblique answer. He said that for his government the basic point of departure was "not money" but "What are the alternatives?" One was to leave the applicants at the eastern borders of the Union to become disillusioned and impatient leading to eruptions and instabilities. He recalled that the "hot crisis management " in former Yugoslavia had cost Germany 17 billion marks. He saw a crisis-preventing political approach "called enlargement" as a bargain. That was why Germany, as far as money was concerned, was "not extremely worried" but would "look into the bill...and be a reluctant payer, as everybody is." (Q 117).

Reform of Community policies: (i), (ii) and (iii)

(i): Structural Funds and the Cohesion Fund

  48.    Commissioner Liikanen foresaw difficulties in persuading the Southern countries that the 0.46 per cent of EU GNP currently available for structural policies under the present financial perspective should, for the period 2000-2006, be reduced to 0.32 per cent by 2006. He acknowledged that some other countries, including the United Kingdom and France, would also face some reduction in receipts from the Structural Funds. Southern Spain and eastern Germany would improve their position if the eligibility rule of not more than 75 per cent of EU average per capita GDP were applied strictly and certain additions were made for high levels of unemployment (QQ 168-171). Mrs Liddell did not explicitly accept that reform of the Structural Funds would necessarily involve a reduction in the resources received by the United Kingdom from these funds-she referred only to "the possibility" of a reduction (QQ 65-66).

  49.    The Chairman of the European Parliament's Committee on Budgets, Mr Samland, thought that the Cohesion Fund should be phased out from 1999 onwards (Q 15). He also told us that there was strong opposition to this point of view particularly in Portugal and Spain, where the Fund's inception was seen as a political prize won by the then Spanish Prime Minister at the time of Spain's accession (QQ 17,19). Dr von Ploetz reminded us that the Cohesion Fund was time-limited: although the Commission had suggested in Agenda 2000 that the Fund should continue, with a review of eligibility rules in 2003, if there was no agreement on the Fund's extension it would lapse at the end of 1999 (Q 142).

(ii): the Common Agricultural Policy (CAP)

  50.    Our witnesses had no expectation of any early agreement on the reform of the CAP. Mr Samland said that in his view before the German elections in September 1998 there was no CAP reform which it would accept (Q 11). Dr von Ploetz, while not denying the strong resistance within Germany to any reduction in payments to farmers, took a more diplomatic stance by pointing out that there was, as yet, no definite German government position on these issues (Q 119).

  51.    Although our witnesses recognised that agreement on reform of the CAP would not be reached early or easily there was a consensus that there was a powerful case for significant reform even if enlargement were not in prospect. Enlargement made the case even stronger. Commissioner Liikanen pointed out the disruptive effects which would follow the application of the present CAP to Poland: agricultural income would go up by 47 per cent "overnight", and investment would move from services and industry to agriculture where, given the strict quota system for production, the price of land would be forced up: "it would fully collapse the structure there" (Q 165).

  52.    Commissioner Liikanen was confident that CAP reform would continue. He said that the 1992 [McSharry] reforms had already made a fundamental change because they made a major adaptation towards a market-orientated agriculture. He was hopeful that regimes for cereals and beef could be agreed. He saw the most difficult issue as determining the level of compensation payments which had to balance the future of agriculture-a major issue for many countries-with the avoidance of over-compensation (Q 188). He defended the Agenda 2000 position that the applicant countries should receive aid for structural agricultural reform and diversification of rural employment but that their farmers should not receive compensation payments made to farmers in the EU15 in the period up to 2006. He argued that to do this would be unnecessary and even dangerous because it would work against the introduction of the needed structural changes. However, he recognised that in the longer run there would be a demand for one agricultural policy that applied throughout the Union (QQ 190-196).

  53.    Mrs Hübner acknowledged that Polish agriculture would be the most "special" issue in the negotiations. She said that although 25 per cent of the population showed in the statistics as being engaged in agriculture many had other sources of income which meant that they could get out of agriculture relatively easily. Many Polish farmers were elderly people on very small farms which produced nothing for the market. She emphasised that the people who would influence the negotiations were not in favour of Poland joining an unreformed CAP: they wanted the CAP reformed as soon as possible. She was confident that reform would come about "not for the sake of Poland...but for the internal needs of the EU" (Q 39). She said the Polish government was already pursuing the policy recommended in Agenda 2000 of supporting rural development and the agricultural infrastructure so as to allow the decrease of employment in the agriculture sector without increasing unemployment overall. She expected the continuing pressures from within the EU and from the WTO negotiations to create a situation which would be acceptable to both the EU and Poland (QQ 40-41).

(iii): The Community Budget: net contributions and rebates

  54.    Mrs Liddell said that the United Kingdom rebate was "written in stone and we will insist that it remains written in stone" (Q 69). Other witnesses took a different view. Dr von Ploetz told us that it was part of the German coalition government agreement that there should be "fair burden sharing" under the new financial perspective. The German government accepted that it would continue to be the biggest net contributor but it wanted other prosperous countries to be making a similar contribution. He went on to attack the idea of the juste retour which he said did not exist and should not exist: "the simple taxpayer cannot refuse to pay taxes only because he does not get back what he paid in" (Q 126). Commissioner Liikanen had a more detached perspective. He saw the British rebate arrangement as underlying the problems with the national net budgetary contributions in Germany, the Netherlands, Sweden and Austria. The British should visit Bonn and the Netherlands to hear the remarks made there on the British rebate which were "very elaborate and their questions extremely justified" (Q 188). He expected countries to want "a generalised correction system" but the Commission had proposed not opening the rebate discussion until after enlargement when it would be unavoidable (Q 150). He claimed that the German net contribution which in past years had been about 60 per cent of the net transfers was declining. It would be about 55 per cent in 1997 and by 2006 would be down to between 40 and 45 per cent (Q 179).

THE EMU EFFECT

  55.    Dr Ploetz regarded EMU as likely to have a positive effect in that it would remove "a certain attentisme of potential investors" in participating countries (Q 121). He also saw the euro as assisting the development of the full potential of the Single Market which had already boosted trade among the EU countries enormously. He said that the euro was already having an effect long before its final adoption: low rates of inflation and low interest rates were being achieved pointing to "a new culture of stability which was largely attributable to the Maastricht Treaty" (p 41). The Chairman of the European Parliament's Committee on Foreign Affairs, Security and Defence Policy, Mr Spencer, took a more agnostic view of the EMU effect. He saw EMU as "the wild card" in the enlargement process. He thought it impossible to know how enlargement and EMU would interrelate because "it depends on the success or otherwise of EMU...and the impact of that on the financial room for manoeuvre" (Q 263).