The E.U. says it must cut back subsidies before it cuts in new eastern members

By JAMES L.GRAFF /BRUSSELS

f any unemployed Sheffield steelworkers are considering emulating their silver screen counterparts in The Full Monty in order to make ends meet, the good news from Brussels is that help could be at hand. And they won't have to bare all to get it. Last week the European Commission unveiled its reform blueprint for the European Union's Common Agricultural Policy (CAP) and for its program of regional subsidies--the so-called structural funds. South Yorkshire is likely to join other depressed regions as beneficiaries of the Commission's plan to concentrate a greater share of regional aid to areas of high unemployment caused by industrial decline. Says Gavin Hine, manager of the Sheffield Chamber of Commerce and Industry: "It will help us shift our great labor pool from dirt-and-grime manufacturing into cleaner, more modern work environments."

But with the $255 billion budget for overall regional aid in the years 2000-2006 falling short of current levels, and money also needed to help the next wave of E.U. entrants from central Europe, Sheffield's windfall spells a shortfall for other established aid recipients including East Berlin, Corsica, the Scottish Highlands and Northern Ireland. Cries of pain can thus be expected along with possibly stiff opposition to the Commission's plan, which will require unanimous approval from member states. "It's going to be difficult to secure agreement at the political level," acknowledged E.U. Commission President Jacques Santer. "I have no illusions."

Nor should anyone harbor the opposite illusion that reform--either of the CAP or the structural funds--can be avoided or postponed. Between them they consume 80% of the E.U. budget, leaving little or no scope for other initiatives. At present just over half of the E.U. population is eligible for regional aid (the Commission would like to trim that figure to 40% or below) and even the richest countries are receiving handouts, including Luxembourg, where a third of the population receives some form of E.U. aid despite per capita GDP that is 168% of the E.U. average.

With E.U. enlargement looming--the Czech Republic, Estonia, Hungary, Poland and Slovenia all start formal accession talks at the end of this month--and with national budgets under severe pressure to meet EMU debt criteria, funds must be found even as the willingness to provide them declines. Accordingly Santer has ordained that the Commission must prepare for enlargement by capping total E.U. expenditures at 1.27% of its members' total GDP. The new proposals would cut back spending on existing programs to 1.13% by the year 2006, freeing an estimated $73 billion to pay for the subsidies that will go to new members.

That will not sit well with the poorer E.U. countries like Greece and Portugal which have been significant beneficiaries of regional aid down the years and who will now face stiffer competition for regional funds from the new entrants. Complicating the equation is the likelihood that the structural funds will also be called upon to deal with any regional recessions after EMU has begun. Once in EMU, members will no longer be able to manipulate interest or exchange rates to stimulate growth and create jobs. The budgetary criteria for membership will also restrict the ability of national governments to increase spending or cut taxes during economic downturns. Transfers of funds from Brussels to regions in need will be the obvious fix, but it is far from clear that the reformed structural funds will be large enough--or flexible enough--to cope.

If regional aid reform looms as a problem, reform of the E.U.'s controversial CAP threatens to be a nightmare, yet is even more crucial to the E.U.'s fiscal future. While Agriculture Commissioner Franz Fischler was announcing his CAP reforms last week, tens of thousands of Spanish farmers were marching in Madrid to protest what they see as unfair allocation of national olive oil quotas by Brussels. Such demonstrations will undoubtedly become commonplace in the future as the Commission shifts further towards subsidizing farm incomes, not through price supports (which tend to encourage overproduction as farmers seek to maximize earnings) but through direct payments.

Last week Fischler called for a 20% cut in guaranteed minimum prices for cereals by 2001, and a 16% cut for milk and 30% for beef by 2003. Farmers everywhere quaked despite promises of direct income supports, and the head of the German Farmers' Organization, Helmut Born, suggested in an interview with the Suddeutsche Zeitung that the measures could contribute to the closure of up to half of Germany's 500,000 farms in the next 10 years.

But there was more to Fischler's proposals than an effort to wean European farmers off price subsidies. The Commission recognizes that the existing subsidy program faces ever tougher hurdles at the World Trade Organization. Income supports, on the other hand, can be justified, as Fischler says, "because we demand more of our agriculture than, for instance, the Canadians do"--namely to conserve the character of the beloved European countryside. But farmers remain skittish about that fundamental switch. "Farmers want their income to come from the market," says Michael Treacy, European director of the Irish Farmers' Association. "If they get it from the treasury, they naturally worry about long-term commitment."

Even before they undergo further massaging by governments and lobbyists, the E.U. reforms amount to at best a gentle push toward the market realities that agriculture is a global business and that benighted regions have to do more themselves to turn things around. Brussels thus wants on the one hand to affirm the plucky entrepreneurship of The Full Monty crew, while on the other hand, it wants to be sure its citizens can make it and still keep their clothes on.