The budget debates for 2000-

The budget procedures for the years 2000-06 were undoubtedly smoothed by the existence of the new Interinstitutional Agreement (IIA). A series of challenges had to be faced, in particular in the fi eld of external actions. The new fl exibility instrument allowed for a fi nancial response, which would not otherwise have been possible.

The limitations of the ceilings set by the European Council already became clear in 1999, with the impact on the budget of the confl ict beginning in Kosovo at that time. Very quickly the Commission was forced to present two proposals (in November 1999 and May 2000) for the revision of the heading 4 ceiling to accommodate the fi nancing of a multi-annual

programme of assistance for the Balkans region. These proposals, which were supported by Parliament, met with Council opposition. For the 2000 and 2001 budgets, the solution found in each case was to apply the new fl exibility instrument, the decision coming at the end of the budget- ary procedure after diffi cult discussions on the necessary redeployment of expenditure on the other programmes covered by the heading.

In the budgetary procedures for 2002 and 2003 the Commission once again proposed using this instrument to fi nance under heading 2 a pro- gramme for the conversion of fi shing vessels which, following the fail- ure to renew the agreement with Morocco, could no longer operate in Moroccan waters.

The fl exibility instrument was mobilised in each subsequent year of the fi nancial framework. Part of the support for reconstruction in Iraq was fi nanced through fl exibility in 2004, 2005 and 2006. Rehabilita- tion and reconstruction needs in the countries affected by the Tsunami were funded in 2005 and 2006. Also under heading 4 in 2006 compensa- tion for the ACP sugar producers affected by the reform of the common market organisation for sugar, as well as part of the CFSP budget, was fi nanced through fl exibility.

Outside of heading 4, in 2005, some of the fi nancing for the PEACE II programme (1) (subheading 2a) and part of the budget for the decentralised

agencies (heading 3) came from mobilisation of the fl exibility instrument.

3.2. Enlargement of the European Union

1) Determining the general budgetary framework

The overall Berlin framework envisaged annual amounts for 2002 to 2006, taking account of an enlargement in 2002 with a fi rst group of six new Member States (2). A second group, lagging in progress, was not

expected to join before 2007.

(1_{) The EU Programme for Peace and Reconciliation in Northern Ireland and the Border}

Region of Ireland.

(2_{) Cyprus, the Czech Republic, Hungary, Poland, Estonia and Slovenia, also known as the}

88 EUROPEAN UNION PUBLIC FINANCE

The Helsinki European Council in December 1999 abolished the dis- tinction between the two groups of accession countries, which opened up the possibility of more than six countries acceding during the period 2000-06.

While the assumption, made in Berlin, that the fi rst round of enlargement would take place in 2002 was a justifi ed precaution from the budgetary point of view, it turned out not to be realistic. Consequently, the acces- sion date was moved back and the Laeken European Council of 14 and 15 December 2001 decided that 10 candidate countries (1) could be ready

to join the EU in 2004. Negotiations with the remaining two (Bulgaria and Romania) would be opened on all chapters in 2002.

The delay created additional room under the ceilings because of the phasing-in of expenditure related to structural actions. Since the fi rst accessions would take place later than 2002, the amounts scheduled in principle for enlargement in 2002 and 2003 were not available (2). Nev-

ertheless, the annual amounts reserved for the period 2004-06, initially intended to cover the needs related to the third, fourth and fi fth year of the accession of six new Member States, would now be available for the fi rst three years of the accession of 10 new Member States.

On the other hand, the Berlin sub-ceiling for agriculture did not include any amounts for direct payments to farmers in the new Member States. In their position papers, however, all candidate countries demanded to be fully integrated into this aspect of the common agricultural policy upon accession. The Berlin ceiling did not provide for any transitional budget- ary arrangements either, although such arrangements had been part of all accession agreements in the past.

As planned in Laeken, the Commission presented at the beginning of 2002 its global approach for the draft common positions in the fi elds of agriculture, regional policy and the budget(3). The Communication

introduced the necessary adjustment of the Berlin scenario to take into

(1_{) The Luxembourg group plus Latvia, Lithuania, Malta and Slovakia became from then}

on the ‘Laeken group’.

(2_{) The annuality of the fi nancial perspective ceilings did not allow transfer to later years.}

(3_{) Communication from the Commission – Information note – Common Financial Frame-}

account the later accession date and the increased number of acceding countries. It also presented the following new elements:

Given that immediate introduction of 100 % direct payments would —

have served to freeze existing structures and to hamper modernisation in agriculture, it was proposed to phase in direct aids over a period of 10 years, thus going well beyond the 2000-06 fi nancial framework. Thus, the new Member States obtained assurance about the moment when they would be fully integrated into the CAP.

Certain measures were proposed to make the transition to the EU —

rural development policy better adapted to the needs of the new Mem- ber States, such as increasing the EU co-fi nancing rate up to 80 % for the rural development measures fi nanced by the EAGGF Guarantee Section.

In order to fi nd a middle ground between the limits on absorption —

capacity and a faster profi le than envisaged in Berlin for the fi rst three years after accession, it was proposed that the phasing-in for struct- ural actions be increased, with Cohesion Fund expenditure boosted to 33 % of total structural actions, compared to 18 % for the other benefi ciary Member States.

Additional allocations would be made for nuclear safety, to support —

the effort to decommission nuclear plants, and for institution build- ing, to enhance the building up of adequate administrative structures and administrative capacity.

Transitional budgetary arrangements were proposed based on the —

principle that no new Member State should fi nd itself in a net budget- ary position vis-à-vis the EU budget which was worse than the year before enlargement.

2) Agreement on the EU common position

The Commission Communication was accepted as a general basis for dis- cussion and most delegations found the overall approach to be balanced and realistic. There was general agreement that budgetary compensation, if any were to be granted, should be fully fi nanced below the Berlin ceil- ings.

90 EUROPEAN UNION PUBLIC FINANCE

In October 2002 (1), the Commission declared that, in line with the con-

clusions from the 2002 Regular Reports, the 10 countries of the Laeken group fulfi lled the Copenhagen criteria and would be ready for member- ship from the beginning of 2004.

The Brussels European Council on 24-25 October endorsed these Com- mission fi ndings and recommendations and took the fi nal decisions with respect to the EU negotiating position. EU leaders agreed in Brussels on the following:

Direct agricultural payments were to be introduced following a 10-year —

phasing-in schedule, expressed as a percentage of the level of such pay- ments in the Union (2).

A ceiling for heading 1a (common agricultural policy) for the EU-25 —

covering the entire period up to 2013 was established on the basis of the 2006 ceiling, increased by 1 % per year in nominal terms. The overall expenditure for market-related expenditure and direct pay- ments for each year in the period 2007-13 was to be kept below this ceiling.

For reasons of absorption capacity, the total allocation for structural —

operations was reduced from EUR 25.5 billion to EUR 23 billion. The own resources

— acquis was to apply to the new Member States as

from accession.

Temporary budgetary compensation, offsetting any deterioration —

of the ex ante estimated net budgetary position of the new Member States in comparison with their situation in the year before accession, would be offered in the form of lump-sum, temporary payments on the expenditure side of the EU budget. The compensations had to remain within the annual margins left under the Berlin ceilings for enlargement.

(1_{) ‘Towards the enlarged Union — Strategy paper and report of the European Commission}

on the progress towards accession by each of the candidate countries’, COM(2002) 700 fi nal.

(2_{) Twenty fi ve per cent of the full EU rate in 2004, 30 % in 2005, 35 % in 2006, 40 % in}

2007. Thereafter, in 10 % increments so as to ensure that the new Member States reach in 2013 the support level then applicable.

After the Brussels Council the EU was now ready to negotiate the fi nal terms of the accession with the candidate countries.

3) Agreement with the candidate countries in Copenhagen

After seven weeks of negotiations, on 13 December 2002, Heads of State or Government from the EU and 10 candidate countries reached agree- ment on the terms for enlarging the EU. Following the decision of the Copenhagen Summit, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia would join the EU on 1 May 2004.

The Copenhagen agreement acknowledged the fi nancial needs of new Member States, since they were all expected to enjoy the status of net benefi ciary with regard to the EU budget from the very beginning, while respecting the ceilings established in the fi nancial framework for enlarge- ment.

Under the terms of the fi nal agreement, the following elements had been added compared to the EU common position determined in Brussels:

a lump-sum cash-fl ow facility in the year 2004 to help all countries —

improve their net budgetary position during the fi rst year and to fur- ther reduce the risk of any country seeing its net position worsen in the fi rst year of enlargement (1);

an extra package consisting of the Schengen facility, an increase in —

the rural development allocation and an increase in the transitional nuclear safety package;

the cost of agricultural market measures had been recalculated to —

include the cost associated with some further concessions in this fi eld.

All these measures, while increasing the expenditure, also automatically reduced the temporary budgetary compensation, which was calculated as the difference between each new Member State’s estimated receipts from and payments to the EU budget (in comparison with the situation in the (1_{) This was justifi ed by the fact that direct agricultural payments related to the year 2004}

92 EUROPEAN UNION PUBLIC FINANCE

year before accession). To offset this mechanism, a further allocation was made available as additional budgetary compensation for the disadvan- taged countries.

Finally, budgetary compensation was further increased for certain Member States, offset by an equivalent reduction of their cohesion expenditure.

4) The adjustment of the fi nancial framework

As provided for by the 1999 Interinstitutional Agreement, the European Parliament and Council needed to adjust the fi nancial framework to take account of the expenditure requirements resulting from enlargement. Fol- lowing the proposals put forward by the Commission in February 2003 (1),

the budgetary authority agreed on 19 May 2003 on the adjustment of the fi nancial framework in order to reconcile the EU-15 fi nancial framework for the period 2004-06, at 1999 prices, with the situation of an enlarged Union of 25 members (2).

The crucial modifi cation was mainly technical and consisted in trans- —

ferring appropriations for the 10 new Member States which had been earmarked in heading 8 (enlargement) to the regular headings. Con- sequently, for agriculture, structural operations, internal policies and administration (headings 1, 2, 3 and 5), the annual ceilings for commitments were raised in total by EUR 9 927 million for 2004, EUR 12 640 million for 2005 and EUR 14 901 million for 2006. As for pre-accession aid (heading 7, renamed ‘pre-accession strategy’), —

the ceiling remained unchanged but it was set to cover also appro- priations for pre-accession assistance concerning Turkey (previously included in heading 4). For Bulgaria and Romania the amounts ear- marked for pre-accession instruments (Phare, Sapard and ISPA) were increased for the remaining years of the period by 20 %, 30 % and 40 % respectively compared to the average of the preceding years. A new heading 8 (compensation) was introduced, including the —

amounts envisaged for the so-called ‘temporary budgetary compen- (1_{) Proposal for a Decision of the European Parliament and the Council on the adjustment}

of the fi nancial perspective for enlargement, COM(2003) 70.

(2_{) Decision 2003/429/EC of the European Parliament and of the Council of 19 May 2003 on}

sation’ and ‘special lump-sum cash-fl ow facility’ in favour of the 10 acceding countries. The amounts were EUR 1 273 million in 2004, EUR 1 173 million in 2005 and EUR 940 million in 2006.

A provision was included in the adjusted fi nancial framework whereby, —

in the event of a political settlement leading to the reunifi cation of the island of Cyprus, supplementary amounts would be automatically added to each of the headings concerned. The budgetary implications resulting from the implementation of such a political settlement were estimated for the period at EUR 273 million at 1999 prices.

Compared to the situation envisaged in the Interinstitutional Agreement, the overall ceiling for commitment appropriations, at 1999 prices, was reduced by EUR 410 million for 2004, EUR 387 million for 2005 and EUR 939 million for 2006. In accordance with the Copenhagen Euro- pean Council conclusions, the corresponding overall ceiling in payments (EU-25) for the years 2004-06 remained unchanged compared to the cor- responding ceiling set out in Annex I of the Interinstitutional Agreement. The own resources ceiling for EU-25 remained unchanged in percentage terms and was established at 1.24 % of GNI-25.

Once the adjustment of the fi nancial framework for enlargement was made in 1999 prices, it was necessary to establish the fi nancial frame- work in 2004 prices, in line with the changes in gross national income (GNI) and prices. This adjustment was calculated by applying the same defl ators used in the exercise of the technical adjustment of the fi nancial framework for EU-15 at 2004 prices (1).

Furthermore, following the joint decision of the European Parliament and Council on the adjustment of the fi nancial framework for enlarge- ment, both arms of the budgetary authority agreed to revise the fi nancial framework, increasing the annual ceilings for commitments in heading 3 (internal policies) by EUR 50 million for 2004, EUR 190 million for 2005 and EUR 240 million for 2006.

The resulting fi nancial framework for an enlarged European Union with 25 members, at 1999 prices, is presented in Table 5.2.

94 EUROPEAN UNION PUBLIC FINANCE

The corresponding fi nancial framework resulting from the technical adjustment for 2004, in line with movements in gross national income and prices, is presented in Table 5.3.

5) The accession of Bulgaria and Romania

After the long and diffi cult negotiations on the budgetary aspects of the accession of the 10 new Member States, it was clear from the outset that the budgetary negotiation with Bulgaria and Romania would be very much predetermined by the outcome of the 2004 accession.

On the one hand, it would be hard to imagine that the 25 Member States (including the 10 that had recently acceded) would be willing to offer a different (i.e. more generous) package to Bulgaria and Romania. On the other hand, it would be inconceivable that both candidate countries, being less affl uent than the 10 new Member States in terms of GDP per capita, would settle for anything less. In view of these particular circum- stances, the negotiations on the budgetary package went quite smoothly and the fi nal agreement was almost identical to the Commission proposal (which was in line with the outcome of the accession of the 10).

The main lines of the budgetary package for Bulgaria and Romania were: phasing-in of direct agricultural payments over a 10-year period; —

phasing-in of structural actions over a three-year period; —

a three-year lump-sum cash-fl ow facility, which included the Schengen —

facility;

no temporary budgetary compensation, since it was clear that neither —

Bulgaria nor Romania were at risk of seeing their budgetary situation vis-à-vis the EU budget deteriorate after accession in comparison with the situation in 2006.

Finally, there was no need for an adjustment of the fi nancial framework since the accession negotiations coincided with the negotiations on the new fi nancial framework and all the amounts scheduled for both new Member States were already incorporated.

TABLE 5.2

Financial framework (EU-25) adjusted for enlargement

(million EUR at 1999 prices) Commitment

appropriations 2000 2001 2002 2003 2004 2005 2006