Commission fears cutbacks if EU budget tied to prices

Date: 03/12/1998

By Simon Taylor and Tim Jones

THE European Commission is warning that a seven-year EU budget freeze would lead to deep cuts in regional aid and jeopardise its delicately balanced agricultural reform package.

In its first response to German-led calls for EU spending to increase only in line with inflation between 2000 and 2006, the Commission has even suggested that Union institutions would have to cut staff numbers by 2%.

The warning comes amid clear signs that a majority of EU finance ministers favour 'stabilisation' of the annual budget at its present level of 85 billion ecu and will provide the Spanish and Portuguese governments with fresh ammunition in their battle for bigger increases in spending.

The demand for a real-terms budget freeze is part of a campaign by Germany and the Netherlands for a reduction in their huge net contributions to the Union budget.

Eight finance ministers this week endorsed a report drawn up by the Austrian presidency which calls for a 40-billion-ecu cap on annual farm spending and suggests fixing the 2000-06 structural funds budget at 200 billion ecu.

This is 86 billion ecu less than the sum proposed by the Commission in its Agenda 2000 reform package designed to ready the Union for admitting new central and east European members early next century.

Commission staff calculate that the real-terms freeze championed by Germany and the Netherlands and supported by France, Austria, Finland, Sweden, the UK and Denmark would mean a 15% cut in regional aid in 2000. The impact of a freeze on agricultural reform would also be profound. "If you pegged the budget at 40 billion ecu, you would have to review CAP reform and change its content or timetable," said a senior Commission official.

Under the budget freeze plan, there would be 10 billion ecu less cash available for the farm budget by 2006 than proposed in Agenda 2000. As a result, key elements of the reform package, such as the 2 billion ecu allocated to cushion changes to the dairy sector, might be dropped. This could unravel Agriculture Commissioner Franz Fischler's ambitious CAP reform plans. Free-marketers such as the UK, Sweden and Denmark would not sign up to the other elements of the package without movement on the dairy regime, which they see as penalising their efficient, export-orientated industries.

Farmers' leaders fear that a budget freeze would lead to cuts in support prices without full compensation or reductions in aid to rural areas, while any countries which joined the Union before 2006 could be deprived of a 'fair' share of agricultural funds.

Supporters of budget 'stabilisation' claim that their approach would benefit applicant states and point out that they have ring-fenced 59 billion ecu to prepare countries for membership. "There is a separate budget line for enlargement and it is deliberately kept out of our proposal," said Dick Benschop, Dutch secretary of state for foreign affairs.

At a Franco-German summit in Potsdam earlier this week, French President Jacques Chirac supported the budget stabilisation scheme and the principle that the system used to calculate member states' contributions to the Union's budget should take greater account of national income.

However, Chirac rejected German Chancellor Gerhard Schröder's demand for a large chunk of EU farm subsidies to be paid out of national coffers or for a 'correction mechanism' to pay budget rebates to overburdened governments.

The Germans and the Dutch are adamant that any deal should include at least one of these radical options. "Of the three main options, stabilisation of expenditure, co-financing of agriculture and the correction mechanism, everyone is fully aware that if Germany and the Netherlands are to meet their objectives, at least two of the three of these options must be included," said Benschop.

European Commission responds to German-led calls for EU spending to increase only in line with inflation between 2000-2006.