EU ministers enter enlargement debate

By Nick Antonovics

MALMO, Sweden (Reuters): European Union finance ministers on Saturday waded into the debate on the bloc's coming enlargement by airing their concerns about the economic impact.

The short-term impact of the debate could be renewed tensions over the pace of regional tax harmonization and a wrangle over the future structure of the European Central Bank. Further out it could raise a question mark over the current timetable for the expansion.

Although overshadowed by public bluster on interest rates and growth ahead of next week's meetings of the International Monetary Fund and Group of Seven in Washington, the ministers used a meeting with their counterparts from the 13 EU candidate countries to lay down the law about Europe's biggest political project since the launch of the euro.

While avoiding shattering the consensus that some candidates could join the EU by 2004-2005, the ministers gave a glimpse of the stick they could wield if carrot tactics don't produce the reforms they want to see in the prospective entrants.

"Finance ministers have to play a central role (in the process)," German Finance Minister Hans Eichel told reporters.

"We want enlargement and don't want to impose additional criteria (on the candidates) but the existing criteria have to be fulfilled. That could have possible consequences for the timetable," he added.

"Enlargement is Europe's biggest project ... it is politically important but must also be economically reasonable," echoed French Finance Minister Laurent Fabius.

Guenter Verheugen, the EU's enlargement chief, insisted the 2004 entry date was "very, very realistic" but said it was not cast in stone and was conditional on the candidates acts.

The intervention in a process driven until now by foreign ministers comes at a critical juncture, just as all sides are preparing to talk money: how to extend the EU's costly farm and regional aid policies to countries which together account for only six percent of EU gross domestic product (GDP).

Some EU countries had wanted to use Malmo to discuss what enlargement could mean for the bloc's 95 billion euros (US$85.66 billion) a year budget, but this political hot potato was put to one side for now, partly out of fear of offending their invited guests, diplomats said.

More significantly for the EU in the short term, Italian Treasury Minister Vincenzo Visco said enlargement required existing EU members to take a hard look at what they have achieved in the sensitive area of tax harmonization.

"The economic problems linked to enlargement are very relevant," Visco told reporters, noting Estonia did not currently impose any corporate tax.

"The Italians and others are worried about a new 'Dublin Docks'," one senior EU treasury official said, referring to Estonia. He noted also the threat that different excise duties could have on trade in tobacco and alcohol.

The Irish capital's enterprise zone is held responsible by some continental countries for triggering a "race to the bottom" in business tax rates in the 1990s which have bled government coffers.

EU governments now have a group trying to curb "harmful" competition for revenues, but the jury is still out as to whether it will produce results as progress is linked to other issues, such as a controversial EU savings tax. The group, headed by Dawn Primarolo, a British deputy treasury minister, is due to next report to EU finance ministers on June 5.

Diplomats at Malmo said that Germany and other countries would like to see more legislation in the area of tax rates before enlargement, something which would force candidates to adjust their own tax systems as, under EU rules, they will be obliged to respect existing EU laws upon entry to the bloc.

But any such moves would be controversial for the traditional opponents of EU tax harmonization, Ireland, Britain and Spain. Fabius said ministers had "an interesting exchange of views" on the issue.

Spain is blocking EU efforts to tax energy by increasing EU- wide minimum excise duty rates applied to fuels (actual rates are higher in all countries).

But there was talk at Malmo of a possible deal-in-the-making under which Madrid would agree to a watered-down proposal in return for promises on energy liberalization.

One senior official said Spain is anxious to secure access to Russian gas to reduce dependence on Algerian supplies, but this would require France to further liberalize its gas market, something Paris has so far refused. Under EU decision-making rules, a coalition could theoretically force France's hand.

Visco, Eichel and other ministers said enlargement also required the EU to think hard about the future structure of the European Central Bank's interest rate setting Governing Council.

EU leaders last December inserted a clause in the bloc's Nice treaty that would enable changes to the way members of the governing council vote should eventual euro entry by candidates threaten to disrupt smooth decision-making on interest rates.

Central bankers at Malmo argued that because it would not be until at least 2007 -- two to three years after EU entry -- that candidates would start entering EMU the issue was not pressing and that opening the debate too soon could damage the ECB.

"Any proposal for change could affect the ECB given that it is a young institution," Bundesbank President Ernst Welteke said.

"If you try and define a solution now it might have an impact on the present functioning of the Governing Council," said Dutch Central Bank Governor Nout Wellink.

But Eichel said decisions had to be taken before enlargement and central bankers revealed they were already thinking about the issue, even if only informally for now.

"I expect us not to wait too long before starting a discussion on this but its absolutely not an urgent issue for the ECB," Wellink said.