At the end of June, the Commission presented a Communication with a draft financial package for the accession negotiations with Montenegro for debate in the Council. This is the first step in concluding Chapter 33 on financial and budgetary provisions in the accession negotiations. It will allow the Council to debate these financial issues alongside work on the other remaining chapters, and on this basis the Commission will subsequently present to the Council a draft common position for negotiations on financial and budgetary provisions.
The package presented in the Communication assumes that Montenegro joins the EU on 1 January 2028 when the new MFF is planned to begin. This is a technical assumption, and the Communication makes clear that accession will happen only when Montenegro has fulfilled the conditions for membership and when its accession treaty is ratified by all parties. If Montenegro joins at a later date during the MFF period, the dates for phasing in payments will be adjusted accordingly.
The Commission’s package is based on the new MFF structure in its 2028-2034 MFF proposal and assumes that all Member States including accession countries will prepare a National and Regional Partnership (NRP) Plan. It thus can be seen as a template for the financial packages that might be offered to other candidate countries, not least Ukraine.
The Commission makes clear (in its accompanying Questions and Answers) that “This financial package is without prejudice to potential financial packages for other candidates at a later time”. Very specifically, the Communication notes with respect to the financial allocation for the minimum ring-fenced amount for CAP spending that “The present methodology is without prejudice to the conditions set with respect to the CAP for potential future financial packages for other candidate countries, in particular for Ukraine”.
Despite these caveats, the way that the Commission proposes to treat Montenegro is both of interest in itself but also for the way it has interpreted the NRP Plan financing rules in the context of a candidate country. While every candidate country, and specifically Ukraine, will have sui generis issues which mean that there can be modifications to the approach used by the Commission to calculate the financial package to be offered to Montenegro, the logic behind this approach is likely to remain valid. Given the concerns frequently raised about the implications of Ukrainian accession for the CAP budget in particular, there is thus a particular interest to examine what the Commission has proposed for Montenegro.
This post first sets out the general criteria taken account of by the Commission in proposing a financial package for a candidate country. These criteria explicitly continue the principles adopted in previous accessions.
It then recalls how the pre-allocated amounts for Member State NRP Plans are calculated in the Commission’s MFF proposal and highlights the difficulties there would be in applying this approach directly to candidate countries. It describes the basis for the Commission approach and describes the amounts proposed for Montenegro on this basis.
In the conclusions, I comment on the possible implications for Ukrainian accession, keeping in mind the Commission’s caveat that the Montenegro package is without prejudice to potential financial packages for other candidates at a later time.
General criteria in designing the financial package for accession countries
The Communication sets out several principles that guide the approach to calculating the financial package for a candidate country. The figures are based on the Commission’s proposal for the next MFF, and the final amounts will depend on the outcome of the negotiations on the MFF and its underlying regulations.
- Referring back to Article 174 TFEU, it should take account of the need to reduce disparities between levels of development linked among others to GDP per capita.
- It takes account of the absorption capacity of the candidate country.
- It aims to ensure consistent support levels for all potential new Member States.
- The financial package is without prejudice to potential financial packages for other candidates at a later time.
- CAP income support payments are phased in over a transition period of ten years.
- It takes account of the support levels for candidate countries under Global Europe
- It observes the principle agreed in the previous enlargements that no new Member State should find itself in a worse net budgetary position in the first years of accession compared with its situation in the year before accession as a beneficiary of pre-accession funds. If necessary, temporary budget support will be provided if such a situation might arise.
- There will be no impact on the pre-allocated envelopes for the NRP Plans for existing Member States.
The new budget rules of the game
In its MFF proposal, the Commission has reduced the number of MFF headings and created a single fund for pre-allocated envelopes in Heading 1 (‘Economic, social and territorial cohesion, agriculture, rural and maritime prosperity and security of the internal policies’) to be implemented on the basis of a National and Regional Partnership Plan for each Member State (NRP Plan).
This changes the basis for calculating the amounts that Member States are pre-allocated from the EU budget. It has particular implications for CAP funding, because there is no longer a pre-allocated CAP budget. Instead, the amounts that are pre-allocated to Member States for their NRP Plans are determined by a formula that is set out in Annex 1 of the NRP Regulation (I discussed this formula and its limitations in a previous post).
This allocation formula has four key parameters. None of them are related to agriculture, agricultural area or any other variable that might be related to the CAP (with one minor exception, see below). The amounts allocated to Member States are determined by (a) their relative population, (b) the relative population at risk of poverty or social exclusion in rural areas, (c) the Member State’s relative gross national income (GNI) per capita, measured in purchasing power standard, and (d) the extent of a regional prosperity gap measured as the share of the Member State population living in NUTS3 regions with a GNI per capita below 75% of the EU average, again measured in purchasing power standard.
The allocation formula in Annex 1 does include a minor adjustment arising from a Member State’s current experience of direct payments under the CAP. For countries with a lower relative income per capita compared to the EU as a whole, this gap can be amplified by an agricultural prosperity gap which is positive where its average direct payments per hectare are below 90% (0.9) of the average EU direct payments per hectare in 2027.
I have previously argued that this is an unnecessary addition to the formula and makes no economic or budgetary sense when applied to future budgets. The formula is also stated incorrectly in Annex 1 as it wrongly includes a percentage sign after 0.9 if we assume that the intention is to make a comparison with 90% of the EU average level. An important point is that this agricultural prosperity gap is irrelevant when it comes to accession countries. They will not have implemented CAP direct payments in 2027 so the agricultural prosperity gap will not apply to them. We can thus exclude it from further consideration when it comes to calculating what Ukraine or any other accession country would be entitled to receive under the Annex 1 allocation formula.
Importantly, there is a safety net and maximum cap of -20% and +5% respectively applied for each existing Member State relative to its allocation share in the 2021-2027 total of all relevant pre-allocated funds under shared management, based on the initial 2020 allocation of pre-allocated funds before transfers. These upper and lower limits are applied in successive iterations of the formula until all pre-allocated amounts to individual Member States respect these limits.
When the NRP Plan amount allocated to each Member State is determined by the formula, it is then up to the Member State to decide how much of that to allocate to the CAP. This choice is restricted by the obligation to allocate at least a minimum ring-fenced amount to the CAP. But this CAP ring-fenced amount has no bearing on the size of the overall NRP amount a country will receive. Countries are at liberty to add to this amount from their overall NRP budget if they wish, but this will not have any impact on the size of the CAP budget available to it or to other Member States.
Under the Commission proposal, the NRP allocation and the CAP budget allocation are now two separate and independent decisions. The NRP allocation is made by the Council following the logic set out in Annex 1 of the NRP Regulation and is not at all impacted by the size or importance of agriculture in a country’s economy. The CAP budget allocation is made by the Member State. This logic will also apply to accession countries.
The financial package for Montenegro
In line with the practice of previous enlargement rounds, the financial package for Montenegro covers the pre-allocated national financial envelope on the one hand, and the increase in ceilings of the MFF Headings without pre-allocated financial envelopes on the other hand.
A difficulty in applying the allocation formula for the NRP Plan funding as set out in Annex 1 is that there is no baseline funding against which to apply the safety net and maximum ceiling limits. The candidate countries receive pre-accession assistance, but they have not been fully integrated into the 2021-2027 MFF.
Instead, the Commission has calculated separate financial ceilings for each of three elements in the pre-allocated national financial envelope. These elements are an envelope for structural funds, an envelope for the ring-fenced amount for the CAP, and an envelope for the ring-fenced amount for home affairs. In addition, provision is made for an overall increase in the MFF budget to cover non-allocated amounts in Heading 1 (such as the EU Facility) while there will also be a need to increase the MFF allocations for Heading 2 (competitiveness, prosperity and security) to avoid any negative impact on funding for existing Member States, to reinforce Heading 3 (Global Europe), and to increase Heading 4 (Administration) to cover the anticipated need for additional staffing.
What is interesting is how the Commission has calculated the separate financial envelopes for each of the three elements in the pre-allocated national financial envelope.
For the structural funds element, dedicated to economic, social and territorial objectives, including fisheries and rural communities (in the Communication referred to as the unallocated element of NRP Plan funding), the Commission proposes to apply the Annex 1 formula, including the maximum cap and safety net of +5% and -20%, respectively, compared to the 2021 – 2027 envelope of the pre-accession aid for the country. The Commission notes that the current amount provided to Montenegro under the 2021-2027 MFF is above €1 billion, including support provided in the form of loans. It proposes a financial envelope of €1.085 billion over the MFF period on this basis. This will be partially financed by a transfer of resources earmarked in the coming MFF under the Global Europe heading as pre-accession support for Montenegro.
For the minimum ring-fenced CAP financial envelope, there are two features that are important. One is the ultimate size of the envelope, and the other is the fact that, in line with previous enlargements, it will be phased in over a ten-year transition period.
From the figures in the Communication, one can deduce that the implicit total financial envelope on which the annual figures are based during the transition period is €71.5 million (based on the fact that the amount paid in the first year of the transition of €28.6 million is 40% of the final figure). This final figure is intended to reflect the support level applicable in the EU-27. As Montenegro has an agricultural area of 248,280 ha, this amounts to an average payment for CAP income support interventions of €288/ha when fully phased in. Montenegro can add to this amount from its unallocated amount within the NRP Fund as is also the case for existing Member States.
This envelope will be phased in with the following schedule of increments:
1st year after accession: 40%
2nd year after accession: 44%
3rd year after accession: 48%
4th year after accession: 52%
Thereafter in 8% increments to reach the support level applicable in the EU-27.
This schedule of payments is intended to mimic the approach adopted in previous enlargements, where phasing in only affected CAP Pillar 1 payments but not CAP Pillar 2 payments. The schedule presented here follows the same schedule of increments as applied for enlargements as of 2004 (25%, 30%, 35%, 40% and in 10% increments thereafter) applied to Pillar 1, assuming a breakdown of CAP payments with 80% allocated to Pillar 1 and the remaining 20% to Pillar 2. The schedule here presented correspond to the outcome of this approach, e.g. 40% for the first year equal to the full 20% for Pillar 2 + 25% of 80% allocated to Pillar 1. With phasing in and assuming Montenegro were a Member State from 1 January 2028, the total required funding for the full programming period for CAP income support is €277 million.
For Home Affairs, the financial package strikes a balance between absorption capacity and high needs related to ensuring effective border control. The reference amounts for Home affairs funds are calculated on the basis of the methodology set out in Annex 1 to the NRPP Regulation. However, given that Montenegro’s capacity to implement and absorb funds in this area remains constrained, funds will be made available in a flat profile of 70% of full allocation during the MFF 2028-2034. The Communication argues that this approach strikes the appropriate balance between the practical limitations of implementation on the one hand, and the need to protect the EU’s external border and strengthen internal security from day one of accession on the other. On this basis, additional annual funding of €84.5 million over the MFF period will be required.
Finally, the calculation of amounts increasing the capacity of headings and programmes without specific country allocation for the acceding country (rest of Heading 1 outside of the NRP Plan as well as Headings 2 and 3) applies a key based on a combination of 50% population and 50% GDP relative to an enlarged EU. This is the same methodology as the one used for the fifth enlargement in 2004, and in all successive enlargement rounds.
In total, the Commission is proposing that the accession of Montenegro will require an adjustment of around €3.2 billion added to the next MFF period, taking account of the phasing in of much of the CAP amount. The proposed MFF Regulation (Article 11) provides that the 2028-2034 MFF will be adjusted to take account of the expenditure requirements resulting from such accession to the Union (this is a standard provision in the MFF Regulation, see for example Article 16 in the 2021-2027 MFF Regulation 2020/2093). As noted under the guiding principles, this ensures that enlargement will not negatively affect the pre-allocated amounts to existing Member States, although there is an indirect effect in that all existing Member States contribute to the net additional cost of paying for the financial package (as this will be marginal additional expenditure, it will be funded out of the GNI resource and the GNI allocation key will apply).
Conclusions
I noted in the introduction to this post that one of the reasons to closely examine the Commission’s proposal for the financial package for Montenegro is to help us to better understand how the accession of Ukraine might be treated. The Commission insists that its proposal for Montenegro is without prejudice to future financial packages for other candidate countries. And indeed, there will always be sui generis elements, as in the reduction of the Home affairs envelope for Montenegro by 30% due to concerns that it lacks the capacity to absorb greater amounts. But another guideline is that there should be consistency in the financial packages proposed for all potential new Member States. In that perspective, there are important implications for the often-heated debate about how Ukrainian membership might influence the budget available for the CAP.
Few observers have understood that the Commission’s MFF proposal has completely upended the debate about the impact of further enlargement for the CAP budget. We still see the Brussels bubble worry that Ukraine, for example, could not be absorbed into the Union without a fundamental rethink of the way the CAP is financed. A recent example is the report of the European Scientific Advisory Board on Climate Change on agricultural adaptation and mitigation published in March this year (chosen at random, not to pick on this body) which stated: “This expansion [to include Ukraine] would have profound implications for EU agricultural policy, particularly the CAP budget, as more land and producers would need to be accommodated within existing subsidy frameworks” (p. 66).
This is no longer correct, simply because there is no longer a ‘CAP budget’ which would have to be stretched to include Ukraine. As explained above in the section on the new budget rules, countries now receive a single pre-allocated amount for their NRP Plan, based on the Annex 1 formula. They then decide how much of that to allocate to the CAP, within a constraint that a minimum amount must be ring-fenced for CAP expenditure. A country may decide to allocate more of its unallocated NRP Plan allocation to the CAP, but this will have no impact on the CAP budget available for other Member States.
But, it might be objected, if a future financial package for Ukraine is based on the Montenegrin model, then the overall size of its NRP Plan allocation will be based, in part, on an estimate of what its potential CAP receipts might be “to reach the applicable CAP support level in the EU-27”.
Under the Montenegrin approach, the calculation of the CAP element is simply a step in calculating the overall financial envelope proposed for a candidate country including the financial allocation for its NRP Plan. Calculating the size of this envelope for Ukraine will undoubtedly need to take account of different elements than for other candidate countries, not least the need for funding to help in post-war recovery from the destruction caused by the Russian aggression. Given the size of Ukraine, one might imagine that other elements will also be considered in the accession negotiations around the budgetary package for Ukraine.
Whatever the outcome, the proposed MFF Regulation confirms that accession requires that the agreed MFF budget is revised to take account of the expenditure requirements resulting from such accession to the Union. This ensures there is no negative impact on funds already pre-allocated to existing Member States.
Because Ukraine and all other candidate countries will be net beneficiaries from the EU budget once they become members, this will indirectly put pressure on the overall size of the MFF in future budget negotiations. But there will be no direct impact on the CAP budget in existing Member States as a CAP budget in the MFF will no longer exist.
This post was written by Alan Matthews.
Photo credit: Wheat field in Ukraine, Wikipedia Commons and used under a CC BY-SA 4.0 license.
