EU summit: solidarity or suicide?

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Constitution to be shelved

Implications for Cyprus

EU leaders formally start on Thursday what will be the most important European Council summit in recent times. Whether it will turn out to the ‘solidarity summit’ of the optimists of the ‘suicidial summit’ of the pessimists will depend crucially on attitudes towards the EU budget (the financial perspectives 2007-13).

The need to come to an agreement on the already contentious budget is now higher than ever, given the crisis precipitated by the rejection of the EU constitution by founding members France and the Netherlands (see below).

If no budget deal is reached during the current Luxembourg Presidency, it will not be revisited until after the UK Presidency ends in December 2005. For technical reasons, this means that some of the money could never be absorbed. EU leaders will start with an informal dinner on Wednesday night.

The Battle of Waterloo

The overall debate is between the Commission, which wants expenditure to reach 1.24% of GDP, and the six largest net contributors, which now appear to be pushing for 1.05%.

But the main battle is between Britain and France. Britain, with income per head now at 119% of the EU average, enjoys the unpopular special “Thatcher” rebate of around EUR 4.6 bln per year dating back to 1984. On the other side, France, with income per head of 111%, eats up one-quarter of farm subsidies from a Common Agricultural Policy (CAP) which itself swallows 40% of the total EU budget.

Britain wants total expenditure on CAP to fall, partly in order to reduce EU exports subsidies and help developing countries compete on world markets.

Some compromise may be in the air, however. In the past few days Britain has toned down its initial maximalist position. It is now prepared to accept an adjustment of the rebate, as long as this is tied to reform of the CAP.

Some reform of CAP was already agreed in 2003: subsidies are gradually shifting from a system that encourages over-production to one that supports farmers? incomes. Thus, Britain should not need much in order to make it look to voters as though it has won something.

However, anything on CAP will still need some compromise from France, because the CAP budget was fixed in 2002 up to 2013, after what was seen by Britain as a backstabbing deal between France and Germany.

Whether a weakened French President Jacques Chirac, who has his eye on presidential elections in 2006, is prepared to compromise is anyone’s guess.

The eastern frontier

Spain, which has received 25% of the total EU budget since 1992, will be another problem. With incomes per head now at 98% of the EU average, thanks not least to generous EU subsidies, structural funds should now in theory shift to areas such as Poland, where incomes are only 47% of the EU25. However, Spain is still arguing for a longer phase-out.

And since the budget has to be passed unanimously by all 25 member states, the east Europeans are unlikely to settle for the Scrooge-like deal they got up to 2006, especially as they were promised a bigger cut from 2007.

Those who want this to be a “solidarity summit” see it as a key test of one of the EU’s founding principles, namely solidarity among nations. In the interests of peace and solidarity, richer countries (led by Germany) have always diverted money to poorer countries. If this principle breaks down, they fear the EU will break down with it.

Constitution will be shelved

One area on which a consensus seems to be forming is on the Constitution that started the crisis in the first place. The phrase doing the rounds is “period of reflection”: or as a sceptic might say, “we haven’t a clue what to do and we need more time to think of a Plan B”.

Although the Commission and some member states including Cyprus have formally said that the ratification process should continue, the sudden rise in opposition to the Constitution even in the most pro-EU states such as Luxembourg, means that no one will want to risk another rejection by a founding member.

Plan B options for the constitution include: present it again in a year’s time to France and Germany along with various guarantees (sound familiar?); start again from scratch, which would take forever; or “cherry-pick” the really constitutional aspects that would have given us a role for national parliaments, a single foreign minister, legal status for the EU, a longer presidency term and a better definition of division of powers. However, some doubt whether consensus could be found again even on these aspects.

Let us hope at least that this period will also include some “mea culpa” from national governments, Cyprus included, for doing little to educate its voters about how the EU really works and everything to make voters think that the Commission only ever proposes unpopular laws.

Expect reform and enlargement to be stalled

Assuming that it does not turn out to be a “suicidal summit”, where leaders are unable to agree on anything, the most significant long-term outcome of the Constitution rejection will be on economic reform and enlargment.

Although many voters in France and the Netherlands were casting a protest vote against their own governments, EU leaders have noticed that the key issues thrown up in the debates–fear of enlargement, fear (particularly in France) of further liberalisation, fear for national identity–have important implications across the EU.

The debates are now being interpreted as three messages to the EU elites: enlargement happened too fast and without consultation; economic integration via liberalisation has gone far enough; and the (widely misunderstood) powers of Brussels have reached their limit.

Leaders will therefore trade very carefully over further liberalisation and enlargment and would do well to have an honest internal debate about immigration.

Implications for Cyprus

Cyprus will lose out in two ways from stalled reform and enlargement. First, it means that two key directives that would have helped this service economy prosper will be delayed. These are the “Bolkestein directive” and the financial services directive, that would have opened up the huge EU market to Cypriot professionals.

Second, stalled enlargement, or worse still, a ‘dis-invite’ to Turkey, will take away Turkey’s only real incentive to play ball on Cyprus.

As Cypriots have realised for some time, a Turkey outside the EU is much more of a threat to the island than a Turkey on its way in.

But with only a tiny voice at the EU table, there is little we can do to fight the will of bigger members.

Fiona Mullen