Santer claims Union budget overhaul is politically unrealistic

Date: 01/10/1998

By Tim Jones

THE European Commission will warn EU governments next week that getting agreement on a fundamental overhaul of the Union's 85-billion-ecu budget would be politically impossible.

In a report on the Union's controversial system for raising the cash needed to fund its policies due to be published next Wednesday (7 October), the Commission defends the existing system as the most equitable option the 15 member states would be willing to agree to, and urges governments to stick with it.

Commission President Jacques Santer plans to present the report to EU finance ministers on 12 October. Officials say he hopes that by spelling out the politically explosive consequences of change to the new German government, he can kill this issue and clear the way for an early deal on the Agenda 2000 package of spending reforms.

The report's conclusions will come as a blow to the quartet of EU member states (Germany, the Netherlands, Sweden and Austria) which has asked to have contributions capped at 0.3% of national income.

Instead, the report suggests more realistic but still tricky solutions to the problem. These include the possibility of giving national governments back 25% of the 20 billion ecu currently spent by the EU on direct subsidies to farmers.

The overall budget, which is due to top 105 billion ecu by the end of the review period in 2006, would be reduced accordingly and national administrations could choose how much they wanted to pay their farmers.

Since Germany accounts for one-fifth of the Union's total beef herd, this would cut Bonn's net contribution by 700 million ecu, but it would add 500 million ecu to Spanish and French bills.

The idea has already sparked a furious reaction from Spain. "We will not accept nationalisation of direct aid payments at all," said Javier Elorza, Madrid's ambassador to the EU. "It doesn't matter if it's 100%, 25% or even 5%, the answer is a flat 'no'. It would change the whole treaty and distort competition."

The Commission's paper sets out other options for reducing contributions from the four paymaster governments.

The first looks at former German Chancellor Helmut Kohl's proposal for the wholesale extension of the deal given to the UK at the 1984 Fontainebleau summit to all 'overburdened' countries.

This 'correction mechanism' compensates the UK for being one of the Union's largest net contributors even though it ranks well down the EU's wealth league table. As a result, since the mid-Eighties, London has benefited from annual budget rebates averaging 3 billion ecu.

In its report, the Commission acknowledges that extending the Fontainebleau formula would slash German yearly contributions by as much as 4 billion ecu. But it argues that this would be politically unacceptable since the total cost of applying the formula to everybody who was entitled to it would be more than 12 billion ecu.

The report recommends leaving the British rebate untouched, but restates the view, set out in Agenda 2000, that it should be reviewed once the EU has admitted new members, taking into account the "relative prosperity" of the UK.

The Commission report is equally sceptical about Spanish proposals for the creation of a new 'resource' for the budget.

Under the existing system, the revenue which governments are obliged to raise for the Union, known as 'own resources', comes from customs duties and levies on imported goods and farm produce, a notional value added tax payment and a lump sum based on the value of gross national product.

Under Madrid's proposal, these lump sum payments would rise in accordance with a country's income per head. The report points out that this would significantly increase net contributions from Luxembourg, Denmark, Belgium, Austria, Germany and the Netherlands, which they would regard as a totally unacceptable.