Who wants to pay for enlargement?

Who wants to pay for enlargement?

The right answer is nobody. All EU politicians
claim to be in favour of enlargement, but they also say in unison
that somebody else should pay for it. The current net beneficiaries
argue that they cannot be asked to accept less because it would be
unfair to finance enlargement by cutting transfers to the poor. The
current net contributors argue that their populations will simply
not accept any increase in the present levels of their transfers to
the EU budget.

Staking out these positions is standard practice
before negotiations on budgetary issues. It is by now widely
accepted that enlargement constitutes a positive sum game: all
participants will gain in the end. But the distribution of the
budgetary costs constitutes a strictly zero sum game: if one
country pays less, other countries have to pay more. This ugly zero
sum game is now being played out and constitutes basically the last
hurdle before the green light for enlargement can be given. How
high is this hurdle? In other words, how much will enlargement
cost?

The correct answer to this question is:
Enlargement will cost whatever member countries agree to pay
because all member countries have to agree on the budget. What this
question really means is: What would it cost if the new members
from Central and Eastern Europe were treated in the same way as are
the present member states? This question is relatively easy to
answer as there are by now numerous estimates of the cost of
extending to the new member states the two EU policies that
determine 80% of EU expenditures: the Common Agricultural Policy
(CAP) and the Structural Funds (SF).

• CAP. A number of recent studies converge on
  figures around 10 billion euro annually for the 8 advanced
  candidates from Central and Eastern Europe that are likely to join
  in 2004.
• SF. Some confusion has been created by studies
  that have not taken current policies as the basis. The Berlin
  Council decided that the candidate countries could at most absorb
  payments from the SF amounting to 4% of their GDP. If one deducts
  their own contributions to the EU budget from this figure, the net
  transfers to the new member states under current rules would thus
  be only about 3% of their GDP. As their combined GDP is less than
  300 billion euro, this implies that net SF transfers to the new
  members will be below 10 billion euro p.a.

There seems to be little dispute about the
Structural Funds. The ceiling of 4% of GDP has been more or less
accepted by the candidates, which realise that more would be
difficult for them to absorb and to co-finance. The only tough
negotiations that are outstanding at this point concern
agriculture.

So, what is the problem in agriculture? As the
new Policy Brief by Johan Swinnen shows, there is essentially one
sticking point: direct payments to CEEC farmers.

Direct payments to farmers were also called
‘compensatory payments’, because they were introduced to
‘compensate’ EU farmers for the price cuts implemented in
connection with the last round of reform of the CAP. Present EU
countries argue that there is no justification to pay farmers in
the CEECs compensation because these farmers will see their prices
increase, not fall, after accession. The CEECs retort that it would
constitute a serious distortion of competition if their farmers,
who are already poor and less efficient, had to compete with EU-15
farmers without being on a level playing field in terms of
financial support received from the EU. This argument will probably
carry the day: it would be unthinkable in any other economic
activity to contemplate a situation where one part of the EU
receives massive subsidies and the other nothing.

How much will direct payments to CEEC farmers
cost? For the entire group of CEEC-8, 6 billion euro p.a. is
probably the best estimate at present. Is this a large or a s mall
number? The right answer is both:

• 6 billion euro is very large, indeed representing one-half, of
  the value-added of agriculture in the CEEC-8, which is around 12
  billion euro.
• Yet 6 billion euro is peanuts (less than one-tenth of one
  percent) when compared to the EU GDP of around 8,000 billion euro,
  and only a bag of peanuts (around 6%) if compared to the EU budget
  of close to 100 billion euro.

The fact that direct payments would be so
important for CEECs (i.e. mostly Polish) farmers implies that they
will fight very hard to get them. But for the EU budget this might
constitute the straw that breaks the camel’s back. As shown by
Johan Swinnen, there seems to be only one way out of this
conundrum: reducing direct payments for everybody over time (called
degressivity in the jargon of the experts). Given that direct
payments to EU-15 farmers amount to about 25 billion euro, one
needs a reduction of only 20% of the basis on which direct payments
are calculated. This would be sufficient to keep spending on direct
payments to farmers constant while treating the CEEC-8 and the
EU-15 equally. This is just another consequence of the difference
in economic size: only a small cut by the EU-15 is needed to make
room for transfers to the new members, which would be very
substantial for the CEEC-8.

The otherwise sterile fight about how has to pay
for enlargement could thus finally have one positive consequence:
it could lead to a reduction in spending on agriculture, which is
much needed anyway.

For more CEPS analyses see the

CEPS website.