31 December 2003

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Enlargement may lead to further EU quarrels over budgets

Europe will bridge its final post- World War II divisions when 10 mostly Eastern European countries join the European Union on 1 May. But that doesn't necessarily mean the battles are over.
"We are building Europe," European Commission President Romano Prodi said in a recent televised interview. "It will be a long process."
The entry of Malta and its fellow acceding countries, which will swell the EU to 25 countries with 450 million consumers, will worsen disputes over subsidies, the euro currency and the EU's military ambitions, according to Philippe de Buck, secretary general of the European employers federation.
Strains left over from 2003, such as the split over the war in Iraq, German and French violation of budget-deficit limits and the collapse of talks over the EU's first-ever constitution, probably will distract German Chancellor Gerhard Schroeder, French President Jacques Chirac and other EU leaders from reviving the economy after the weakest growth in a decade.
December's breakdown of the constitutional talks is "an enormous setback," de Buck said in a 15 December interview. "I'm afraid that the whole discussion in 2004 will be focused on institutional issues. We would like to have a focus on economic and social issues."
Germany and France, the EU's postwar architects, will face new deficit-cut pressure from smaller countries. Britain and Germany are leading a six-nation drive to slash aid to poorer EU countries. Spain and Poland are demanding greater powers over legislation. Several months of bargaining loom over a successor to Prodi, whose term ends in November.
Divisions over Iraq
The US invasion of Iraq provided a glimpse of the divisions in an EU that will stretch from the Atlantic to the Russian border. Britain, Spain, Italy and the eight eastern newcomers sided with US President George W. Bush. France, Germany and Belgium opposed the war, splitting the North Atlantic Treaty Organisation and the United Nations security council as well as the EU.
New fissures are emerging over finances, at the national and EU levels. When Germany, instigator of the euro region's limits on budget deficits, broke the rules in 2003, it simply set them aside -- and steamrolled objections by the Netherlands, Finland and Austria.
Chirac, who failed to stop the deficit caps when Germany proposed them in the 1990s, joined Schroeder in cutting taxes to offset the economic slowdown. Both countries' deficits may outstrip the limit of three percent of gross domestic product through 2005.
`The Sinners'
Former German Finance Minister Theo Waigel, the author of the 1996 "stability pact" curbs on public borrowing, called the rulebreaking "a big mistake. It was bad that Germany and France spearheaded the movement of the sinners," he said.
The economy, meanwhile, continues to lag the US Growth in the 12 EU nations that make up the combined $8.7 trillion euro region slid to an estimated 0.4 percent in 2003. Europe has outpaced the US once in the past 10 years, and is likely to trail again in 2004 and 2005, the commission forecasts.
Poland, Hungary, Slovakia and the Czech Republic, the four largest countries joining the EU next year, will have the fastest economic growth in four years as EU aid and a Western European recovery boost investment and output, said executives at companies investing there.
Their $460 billion combined economy, accounting for more than 80 percent of the 10 future members' gross domestic product, will grow at least 3.5 percent, compared with 3 percent in 2003, the European Commission said.
Money transfers
Flagging growth and eight percent unemployment in the current EU member states exacerbate strains over the EU's EUR100 billion-euro subsidy programs, originally designed to transfer money from the wealthier and more industrial north to the poorer and more agricultural south and east.
In an echo of Margaret Thatcher's calls of "I want my money back" for Britain in the 1980s, six national leaders including UK Prime Minister Tony Blair are demanding a freeze on EU spending at no more than 1 percent of the 25 nations' combined GDP for the next decade from 1.24 percent now.
Britain paid EUR2.9 billion more into the EU purse than it got back in 2002, making it the bloc's second-biggest source of financing after Germany, with EUR5 billion, according to the European Commission. While Germany's bill has fallen from EUR10.4 billion since 1996, Britain's has soared from EUR500 million.
Schroeder, who accuses Spain and Poland of torpedoing the constitutional talks, is threatening to cut subsidies for both of them. Spain gets the most out of the EU, netting EUR9 billion. Poland, with economic output per head at 40 percent of the EU average and more dairy cows than the current 15 EU countries combined, will also be a net aid recipient.
Veto power
With each of the 25 countries holding veto power over EU policies in areas such as taxes, spending, immigration and defence, legislation on everything from food safety and labour regulations to border controls and weapons procurement is forged by shifting alliances.
Britain, for example, supported Germany in gutting a proposed takeover law of provisions that would have banned "poison pills" in exchange for German aid in shredding pension rights for temporary workers. Germany feared the takeover code would expose companies such as Volkswagen AG, Europe's biggest carmaker, to hostile bids by foreign rivals.
Europe still trails the US in mergers and acquisitions. In the euro's first five years, some 22,000 European companies worth $3.9 trillion were bought out, lagging the US figure of 37,000 deals valued at $5.7 trillion.
Crossick said Spain can't budge before elections due by March, in which Prime Minister Jose Maria Aznar is campaigning for his handpicked successor, Mariano Rajoy. The job of restarting the constitutional talks falls to Irish Prime Minister Bertie Ahern, who takes over the six-month EU presidency from Italy's Silvio Berlusconi tomorrow.
Next year is also an election year in the EU, raising a further hurdle to getting things done. The EU parliament, which holds sway over most business legislation, holds elections in June.
Prodi's commission leaves office in November. Presidential candidates, according to politicians and the European media, include Luxembourg Prime Minister Jean-Claude Juncker, Austrian Chancellor Wolfgang Schuessel, former Belgian Prime Minister Jean-Luc Dehaene and former Finnish Prime Minister Paavo Lipponen.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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