# EUR-Lex - 52012DC0680 - EN

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# 52012DC0680

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS EU Relations with the Principality of Andorra, the Principality of Monaco and the Republic of San Marino Options for Closer Integration with the EU /* COM/2012/0680 final */**

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TABLE OF CONTENTS

COMMUNICATION FROM THE COMMISSION TO THE
EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE
AND THE COMMITTEE OF THE REGIONS

EU Relations with the Principality of
Andorra, the Principality of Monaco and the Republic of San Marino

1........... INTRODUCTION........................................................................................................ 4

1.1........ EU Relations with Andorra, Monaco
and San Marino at a Crossroads............................ 4

1.2........ The Specific Situations of the Small-Sized
Countries........................................................ 5

2........... THE EU’S FRAGMENTED RELATIONS
WITH THE SMALL-SIZED COUNTRIES 6

2.1........ Common Features.......................................................................................................... 6

2.1.1..... Monetary Agreements.................................................................................................... 6

2.1.2..... Agreements on Savings Taxation..................................................................................... 7

2.1.3..... Anti-Fraud and Tax Information Exchange...................................................................... 7

2.2........ Andorra......................................................................................................................... 7

2.2.1..... Customs Union............................................................................................................... 7

2.2.2..... Schengen........................................................................................................................ 8

2.2.3..... Bilateral Relations with Neighbours................................................................................. 8

2.2.4..... Andorra’s European Policy............................................................................................. 8

2.3........ Monaco......................................................................................................................... 8

2.3.1..... Part of the EU Customs Territory.................................................................................... 8

2.3.2..... Schengen........................................................................................................................ 9

2.3.3..... Bilateral Relations with Neighbour................................................................................... 9

2.3.4..... Monaco’s European Policy............................................................................................. 9

2.4........ San Marino.................................................................................................................... 9

2.4.1..... Customs Union............................................................................................................... 9

2.4.2..... Schengen...................................................................................................................... 10

2.4.3..... Bilateral Relations with Neighbour................................................................................. 10

2.4.4..... San Marino’s European Policy...................................................................................... 10

3........... OBSTACLES TO INTERNAL MARKET
ACCESS.................................................. 10

3.1........ Free Movement of Persons........................................................................................... 10

3.2........ Free Movement of Services and
Freedom of Establishment for Companies.................... 12

3.3........ Free Movement of Goods............................................................................................. 12

4........... UPHOLDING AND PROMOTING THE EU’S
INTERESTS.................................... 13

4.1........ Greater economic and employment
opportunities for EU citizens and companies............ 13

4.2........ Mutual Benefits through a Level Playing
Field................................................................ 14

4.3........ Cooperation in Support of Shared Objectives............................................................... 14

5........... POSSIBLE OPTIONS FOR CLOSER
INTEGRATION............................................ 15

5.1........ Option One: Status Quo............................................................................................... 15

5.2........ Option Two: Sectoral Approach................................................................................... 15

5.3........ Option Three: Framework Association
Agreement........................................................ 16

5.4........ Option Four: Participation in the
European Economic Area............................................ 17

5.5........ Option Five: Membership of the EU.............................................................................. 17

6........... CONCLUSIONS........................................................................................................ 18

6.1........ Horizontal and Institutional Issues.................................................................................. 18

6.2........ Recommendations........................................................................................................ 18

COMMUNICATION FROM THE COMMISSION TO
THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

EU Relations with the Principality of
Andorra, the Principality of Monaco and the Republic of San Marino

Options for Closer Integration with
the EU

1.           INTRODUCTION

1.1.        EU
relations with Andorra, Monaco and San Marino at a crossroads

Western Europe comprises a number of
independent States of small territorial extension which are not members of the
EU: the Principality of Andorra, the Republic of San Marino, the Principality
of Monaco, the Principality of Liechtenstein and the Vatican City State[1]. The EU maintains relations
with all of them as required by Article 8 TEU[2].

Relations differ in terms of extent and
institutional framework of relations. For instance, Liechtenstein is a member
of the European Free Trade Association (EFTA) and closely linked to the EU
through the Agreement on the European Economic Area (EEA), which gives it
access to the EU's internal market. It also joined the Schengen area in
December 2011. In contrast, EU relations with Andorra, Monaco and San Marino (hereafter,
“small-sized countries”) are governed by a number of agreements, covering
selective areas of the EU acquis and policies.

In December 2010, the Council concluded
that EU relations with these three states were “extensive but fragmented”[3], as there are still obstacles
to an unimpeded movement of persons, goods and services into and out of the EU.
This has led to a number of practical difficulties for EU citizens and
companies, as well as citizens and companies of the small-sized countries.
Therefore, the Council called for an “analysis of the possibilities and
modalities of their possible progressive integration into the internal market”.

The Council adopted an initial report in
June 2011 under the Hungarian Presidency. It invited the European External
Action Service and the Commission to deepen their analysis, including exploring
“a possible new institutional framework for relations, taking into
account the importance of a coherent approach for all three countries”[4].

All three small-sized countries have
expressed the wish to enhance their relations with the EU, notwithstanding
some differences of emphasis in terms of extent and scope. Andorra has
expressed openness to consider various options short of EU accession, while
voicing a certain preference for a Framework Association Agreement. Monaco has
also expressed interest to further discuss options for its closer integration
into the internal market. Finally, San Marino has expressed openness to
consider a wide range of options for enhanced European integration, ranging
from EEA membership to a multilateral or bilateral Framework Association
Agreement with the EU. All three countries wish to safeguard their specificities
and identities in their relations with the EU.

In light of the continued interest
expressed by the small-sized countries[5]
in closer integration with the EU, this Communication reviews the EU’s
relations with Andorra, Monaco and San Marino and makes some recommendations on
how such integration could be achieved. With this Communication, the Commission
is seeking views on these recommendations, on the basis of which it will decide
on the next steps in this process.

1.2.        The
specific situations of the small-sized countries

Andorra, Monaco and San Marino have a
number of similarities. They are independent states of small territorial
size and population, and all have an EU Member State or States as their only
neighbours[6],
with which they have very close relations based on shared history and political
and cultural affinities. Financial services and tourism (often in combination
with retail services) are the bedrock of their economies, although there are
some signs of economic diversification. They are all parliamentary democracies
and members of the United Nations (UN), the Council of Europe, and the
Organisation for Security and Cooperation in Europe (OSCE).

However, there are also significant
geographical and demographic differences between them.

–
Andorra is the largest country by territory (468
km2) and population (around 78,100). It is far from the nearest big city and
connected to neighbouring Spain and France by only two main roads.

–
Monaco shares a border with France and has a
population of around 36,300. Its territory covers 1.95 km2, making it the
second smallest state in the world after the Vatican City State.

–
San Marino is situated on a mountain-top and is
an enclave within Italy. It covers 61.2 km2, with a population of around
32,300.

Other differences include their official
languages and their constitutional, legal and political systems.

–
Andorra is a co-Principality, with the President
of France and the Bishop of Urgell (Spain) as co-Princes.

–
Monaco is a constitutional monarchy and is
closely integrated with France, based on numerous bilateral treaties.

–
San Marino is a Republic and has a close
relationship with Italy.

2.           THE
EU’S FRAGMENTED RELATIONS WITH THE SMALL-SIZED COUNTRIES

2.1.        Common
Features

On the whole, the EU entertains very
good relations with the small-sized countries. The EU is by far their
largest trading and investment partner. The small-sized countries have no
official high-level political dialogue with the EU, but their diplomatic missions
are accredited to the EU at Ambassador level and senior members of their
governments occasionally travel to Brussels for meetings with their EU
counterparts[7].
However, no EU Delegation is accredited to any of the small-sized countries[8]. The EU is represented in each
country by one of its Member States[9].

Concerning the legal framework with
these countries, bilateral trade in goods between the EU and the three
small-sized countries is governed by customs union agreements: Monaco has such
an agreement with France and is part of the customs territory of the EU;
whereas San Marino and Andorra both have a customs union agreement with the EU.
Furthermore, the EU has monetary agreements and savings taxation agreements in
place with all three small-sized countries. In addition, the Commission has
proposed to negotiate Anti-Fraud and Tax Information Exchange Agreements with
them[10].

2.1.1.     Monetary
Agreements

The EU now has Monetary Agreements[11] in place with each of
the small-sized countries,
which allow them to use the euro as legal tender and mint euro coins up to a
specified maximum value. In exchange, the small-sized countries have committed
to incorporate gradually relevant EU acquis[12] into their internal legislation,
covering: euro banknotes and coins; banking and financial law; prevention of
money laundering; fraud and counterfeiting; and the sharing of statistical
information. The small-sized countries have accepted the exclusive competence of the Court of Justice of the EU for the settlement of
any disputes between the parties in relation to the agreements.

2.1.2.     Agreements
on Savings Taxation

The EU has Agreements on Savings
Taxation[13]
with the three small-sized countries, which provide for measures equivalent to
those laid down in Directive 2003/48/EC on taxation of savings income in the
form of interest payments[14].
Within this framework, savings income in the form of interest payments made in
these States to beneficial owners who are individuals identified as residents
of a Member State of the EU have to be subject to a withholding tax levied by
paying agents established on their territory, whose revenue is mostly
transferred to the Member States of residence of the individual concerned.

Consultations held in 2009 with the
competent authorities of Andorra, Monaco and San Marino confirmed the
countries’ availability to amend their Agreements with the EU in line
with the outcome of the Savings directive review. Once an authorisation to
negotiate is adopted by the Council, formal negotiations to update the
Agreements will be initiated.

2.1.3.     Anti-Fraud
and Tax Information Exchange

Following a recommendation from the
Commission, the Council authorised the Commission to negotiate Anti-Fraud
and Tax Information Exchange Agreements with Andorra, Monaco and San Marino[15], on the basis of the
experience gained in the framework of similar negotiations with Liechtenstein,
taking into account international developments in this area. The Commission is
envisaging two-pillar agreements, including not only anti-fraud measures but
also comprehensive administrative tax cooperation.

2.2.        Andorra

2.2.1.     Customs union

The EU has concluded an Agreement with Andorra establishing
a customs union[16]
for industrial goods. The Agreement provides that Andorran agricultural products entering the EU are free
from import duties; whereas Andorra is entitled to levy import duties on
imports of agricultural products from the EU. The Agreement works well and in
2011 a Protocol was concluded extending it to customs security measures.

In addition, a Cooperation
Agreement[17]
provides a framework for cooperation in a number of areas, notably regional
policy in the Pyrenees. In 1997 the EU and Andorra concluded
a Veterinary Protocol with the aim of maintaining the traditional flow
of live animal trade and animal products while guaranteeing compliance with EU
standards[18].
Accordingly, Andorra has taken over the acquis concerning general food
law and hygiene and framework legislation for animal disease control.

2.2.2.     Schengen

Andorra is not part of the Schengen area. Border
controls are carried out at the borders between Andorra and its neighbours
France and Spain. However, it coordinates its visa requirements with the
Schengen area and accepts Schengen visas. According to a pragmatic approach taken
by the Schengen member states, at the external borders of the EU Andorran
nationals are allowed to undergo passport controls at the counters for citizens
of the EU and EFTA Member States.

2.2.3.     Bilateral
Relations with Neighbours

Andorra maintains privileged relations with
France and Spain, as well as with Portugal, through agreements in
several areas such as the free movement of persons, education and justice and
home affairs.

2.2.4.     Andorra’s
European policy

Andorra has shown a strong interest in,
and commitment to, enhancing its integration with the EU.

In 2010, the Andorran government produced a
non-paper announcing its desire for increased cooperation. In 2011, Andorra
submitted a memorandum to the EU, detailing the areas in which it perceived
obstacles to accessing the internal market. In June 2012, Andorra adopted a
revised law to open up further its economy to investment.

Andorra seeks
deeper relations with the EU by negotiating a new
agreement that takes into account that Andorra is geographically located within
the EU, as well as the specificities of Andorra, the possibility to apply
transitional periods in certain areas, including the free movement of persons,
as well as Andorran participation in EU programmes and agencies.

2.3.        Monaco

2.3.1.     Part of the EU customs
territory

Monaco has a customs agreement with France;
as a consequence, Monaco is part of the EU customs territory[19].

In addition, Monaco
and the EU have concluded an Agreement on the application of certain
Community acts on the territory of the Principality of Monaco[20]. Its purpose is to facilitate
the sale of Monégasque medicines for human and veterinary use, cosmetic
products and medical devices on the EU market. The Agreement provides for the
application of the relevant acquis in this area to the territory of
Monaco.

2.3.2.     Schengen

Monaco is not a Contracting Party to the
Schengen Convention. However, by virtue of two bilateral agreements with France[21], its territory is within the
external borders of the Schengen area; consequently, EU and Monaco nationals
can travel freely without a visa throughout the whole of the Schengen area,
including Monaco. The agreements provide for the necessary security safeguards
and the establishment of controls at Monaco’s external borders, which are
carried out by the French authorities at the authorised
external border crossing points Monaco-Heliport and Monaco-Port.
In addition, Monégasque residence permits are equivalent to Schengen visas.

2.3.3.     Bilateral Relations with
Neighbour

Monaco has a number of economic agreements
with France, which have, in certain cases, the effect that Monaco adopts
and applies the same rules as the EU Member States. For example, when France
adopts internal legislation transposing EU directives in certain areas covered
by bilateral Agreements with Monaco, the Principality directly applies the
French legislation in these areas. However, this does not give Monaco automatic
access to the EU’s internal market in these areas in the absence of an
agreement with the EU. Moreover, there are no mechanisms for the EU to monitor
implementation or pursue any infringement.

2.3.4.     Monaco’s
European policy

Monaco has expressed an interest in
obtaining greater access to the EU internal market in specific areas,
including as regards the free movement of persons and goods.

In 2012, Monaco submitted a memorandum to
the EU on this topic, detailing the areas in which it perceived obstacles to
accessing the internal market.

Monaco is open to discuss further the
possibility of concluding a comprehensive agreement with the EU on access to
the internal market. Any agreement would need to take
into account Monaco’s close relationship with France and its political and
geographical specificities.

2.4.        San
Marino

2.4.1.     Customs union

The EU and San
Marino have concluded a Cooperation and Customs Union Agreement[22], which establishes a customs
union covering all chapters of the Harmonised System, i.e. including
agricultural products[23].
This Agreement further provides for non-discrimination as regards conditions of
employment and cooperation in various fields such as environmental protection,
tourism and culture.

2.4.2.     Schengen

San Marino is not part of the Schengen area,
but there are no border controls between Italy and San Marino. San
Marino is not associated to the implementation of other elements of the
Schengen acquis, such as police and judicial cooperation.

2.4.3.     Bilateral Relations with
Neighbour

San Marino has concluded several bilateral
agreements with Italy, including one on the free movement of persons[24] allowing San Marino nationals
to work and reside in Italy.

2.4.4.     San
Marino’s European policy

San Marino has shown a strong interest
in, and commitment to, enhancing its integration with the EU[25].

In 2011, San Marino submitted a memorandum
to the EU, detailing the areas in which it perceived obstacles to accessing the
internal market.

San Marino has expressed openness to
consider various options for closer integration into the EU. San Marino seeks deeper relations with the EU by
negotiating a new agreement that takes into account that San Marino is
geographically located within the EU, as well as the country's specificities.

3.           OBSTACLES
TO INTERNAL MARKET ACCESS

Citizens and companies of all three
small-sized countries have limited access to the EU’s internal market
(see the accompanying Staff Working Paper for details). The most problematic
areas are the free movement of persons and services, and the freedom of
establishment. Goods originating in the small-sized countries also encounter
obstacles regarding the free movement of goods in so far as EU standards and
regulations may prevent these goods from being sold on the EU market. EU
citizens and businesses would also benefit from greater integration with the
small-sized countries. For example, EU citizens currently require a permit to
work and/or reside in the small-sized countries.

3.1.        Free
Movement of Persons

The small-sized States have relations of
close proximity with their neighbours. Historically, there have been flows of
persons and goods from and through their territory. Yet, despite having free
movement of persons agreements with neighbouring countries, the small-sized
countries have no equivalent agreement with the EU providing for the free
movement of their nationals in the EU. This often presents an obstacle to their
citizens taking up employment or study opportunities, starting a business or
investing.

For stays over three months, a residence
permit is required. This is granted on the basis of strict criteria, such as
the availability of sufficient economic means and accommodation. Currently, the
conditions for obtaining a permit vary, depending on the Member State and type
of employment[26].
The complexity of procedures for a residence permit is seen as an obstacle to
employment in EU Member States. It is difficult to obtain from business a prior
declaration of employment, which is necessary in order to apply for a stay
permit. The agreements with Andorra and San Marino provide as regards rights of
workers only for non-discrimination with respect to the conditions of
employment[27].

In addition to the requirements for
residence and work permits, the small-sized countries have raised a number of additional
problems in the area of free movement of persons, in particular the lack of the
following rights which are granted to citizens of the EU[28]:

·
The right to stay in the EU after the end of
economic activity;

·
The right of residence and pursuit of an
economic activity for family members;

·
Free movement of persons for the purposes of education
and research[29];

·
Opportunities to access EU programmes, including
research funding and student exchanges[30];

·
Social security coordination[31] and the mutual recognition of
professional qualifications[32].

3.2.        Free
Movement of Services and Freedom of Establishment for Companies

The small-sized countries face significant
obstacles in the area of the free movement of services and of
establishment. These freedoms are not provided for in any of the agreements
concluded with the EU. In particular, the companies established in the
small-sized countries do not have the right to provide directly services in the
Union.

There are no restrictions on the creation
of a subsidiary in a EU Member State by companies from the small-sized
countries which wants to conduct a business activity or to invest in the Union.
But the establishment in the Union of a branch may be the subject of
restrictions. Indeed, there is no right of establishment for third country
legal persons (as for natural persons).

Once established as a subsidiary in
one Member State, the entity in question is free to provide services in all
other Member States in conformity with EU and national law, without
discrimination[33].
However, in the case of companies based in the small-sized countries,
establishment in the EU may increase their costs due to the need for an
economic presence and associated administrative procedures. A presence in the
EU may also be necessary to meet the requirements of EU legislation on consumer
protection (for instance, after-sales customer service based in the EU). These
constraints may particularly discourage small and micro-enterprises from carrying
out business in the EU[34].

3.3.        Free
Movement of Goods

Bilateral trade in goods between the EU and
the three small-sized countries is facilitated by customs union agreements:
Monaco has a custom agreement with France and is part of the customs territory
of the EU, whereas San Marino and Andorra both have customs union agreements
with the EU. Nevertheless, the small-sized countries face market access
obstacles in the form of technical barriers to trade. In order to be placed on
the EU market, goods from these countries must meet the EU’s internal market standards
and rules, such as those on product safety and consumer protection.

Companies based in the small-sized
countries may face obstacles to selling their goods in the EU, even if the small-sized
country of primary establishment has unilaterally taken over the relevant EU acquis
- the conclusion of an agreement with the EU is in most cases still necessary,
notably to confirm that the legislation and its implementation meet EU
standards. What is more, even where a small-sized country has an agreement with
the EU, it needs to be updated to keep pace with the evolution of EU
legislation.

Given that Andorra and San Marino are third
countries, standard customs procedures, including a declaration, apply.
These formalities may occasionally cause delays.

4.           UPHOLDING
AND PROMOTING THE EU’S INTERESTS

The previous section outlined the
difficulties encountered by citizens and companies of the three small-sized
countries in accessing the EU's internal market. While in many respects the
interests of these countries and the EU coincide and both sides stand to gain
from mutual co-operation, there are, however, some areas where the EU
encounters problems that need to be addressed in the relationship.

4.1.        Greater
economic and employment opportunities for EU
citizens and companies

The European
Council recently highlighted the “heightened tensions” that are slowing down
economic recovery across Europe, including the sovereign debt crisis, financial
sector weakness and persistent low growth[35].
In response, it adopted a “Compact for Growth and Jobs”, encompassing
action to be taken by the Member States and the EU with the aim of re-launching
growth, investment and employment. In particular, the Compact stresses the need
to mobilise all levers, instruments and policies to that end at “every level of
governance” in the EU[36].
The October 2012 European Council called for swift, determined and
result-oriented action to ensure the full and rapid implementation of the
Compact[37].

With a combined
population of around 150 000 and high average GDP-per-capita levels, the
small-sized countries make a substantial contribution to the economy in
their respective regions and beyond. For example, Andorra is a major shopping
and tourist destination in the Pyrenees, attracting around 8 million visitors a
year; similarly, San Marino is a popular tourist destination in Italy, with
over 2 million visitors a year. Monaco is a major provider of employment in its
region, with 45,000 cross-border workers commuting there on a daily basis from
neighbouring France and nearby Italy.

However, EU citizens wishing to work in
these countries as employees or establish themselves as self-employed independents
continue to face significant barriers, mainly in the form of work and residence
permit requirements. Moreover, the small-sized countries have restrictions on
inward investment. EU citizens and companies would stand to benefit from a
lifting of these restrictions.

All three countries have major financial
services industries and are a source of investment into the EU: taken together,
Andorra, Monaco and San Marino are seat to over 50 banks, managing over 100
billion euros in client assets. Moreover, they have increasingly sought to diversify
their economies and foster high value-added industries[38]. However, the obstacles these
countries face in accessing the EU internal market indicate that they hold unfulfilled
potential as motors of growth, investment, innovation and employment from
which the EU could benefit.

Breaking down barriers to trade and economic activity between the EU and the small-sized
countries could contribute, among other activities, to attaining the objectives
of the Europe 2020 Strategy[39]
and the Compact for Growth and Jobs in neighbouring regions of the EU. This
would also be consistent with the EU’s trade policy, as set out by the
Commission’s 2010 Communication on Trade, Growth and World Affairs. Moreover,
there is significant evidence that the extension of the internal market enhances
economic growth for all its participants. Lifting obstacles to EU trade
with the small-sized countries could further contribute to boosting economic growth
in the internal market.

4.2.        Mutual
benefits through a level playing field

The backbone of the EU's internal market
are common rules and standards and a thorough policy on enforcement and
governance. In principle, both the EU and the small-sized countries should
benefit from the extension of the EU’s internal market acquis to them as
this would ensure a level playing field for both businesses and persons. The EU
has an interest in encouraging neighbouring states to adopt a legal framework
compatible with that of the EU. In this connection, the importance of the correct
transposition and enforcement of the acquis as a pre-requisite for
the good functioning of the internal market cannot be underestimated. A common
legal framework would facilitate the addressing of shared challenges, ranging
from consumer protection to environmental concerns.

4.3.        Cooperation
in support of shared objectives

There is potential to enhance cooperation
with the small-sized countries in support of a wide range of shared objectives
in the political, economic, environmental and cultural domains (see the accompanying
Staff Working Paper for details). In the area of regional policy, the EU-Andorra Cooperation Agreement has
facilitated cooperation between Spain, France and
Andorra in the context of the EU Regional Policy’s Operational Programme of cross-border
cooperation in the Pyrenees[40].
There is potential to deepen this cooperation, which could lead to benefits for
people living throughout the region.

Both sides have much to gain through cooperation
on matters of mutual concern, such as transparency and exchange of
information in the area of taxation and the fight against crime, including
tax fraud[41],
tax evasion and money-laundering. It is important to protect the licit economy
against criminal infiltration and corruption and therefore take vigorous action
to develop an efficient system to trace, freeze and confiscate criminal assets.
Law enforcement and judicial cooperation facilitating asset
confiscation will hamper criminal activities and deter it by showing that
crime does not pay.

In the field of environmental protection,
closer cooperation between the EU and the small-sized countries could yield
tangible benefits. For example, Monaco has taken international initiatives to
preserve maritime ecosystems and biodiversity, and is active on other maritime
issues of interest to the EU. It would be worth exploring whether there is
scope for more regular consultations in this area.

Regarding foreign and security policy,
there is no agreement with the small-sized countries on their alignment to EU
positions and declarations, but they do align of their own accord on a
case-by-case basis. Furthermore, there are contacts between several EU
Delegations to international organisations and the small-sized countries. At
the UN in New York, the EU Delegation meets with the small-sized countries, which
are part of the "Friends of the EU" group, on a monthly basis.
Cooperation in this area could be developed further. The small-sized countries
sent a positive signal in this regard by voting in favour of the EU’s proposed
UN General Assembly Resolution on enhanced observer status at the UN in 2010.
An agreement with the small-sized countries could provide for more systematic
cooperation and exchange of information in major international organisations.
The Andorran Chairmanship of the Committee of Ministers of the Council of
Europe (9 November 2012-16 May 2013) may provide an early opportunity to
explore ways to enhance cooperation between the EU and the small-sized
countries on upholding and strengthening democracy and human rights in Europe.

5.           POSSIBLE
OPTIONS FOR CLOSER INTEGRATION

As shown by the above considerations, it is
both possible and desirable to aim for a higher degree of integration of the
small-sized countries into the internal market.

Closer integration would ensure the greatest
possible freedom of movement of citizens and businesses between the
small-sized countries and the EU, in particular through a clearer and safer
legal environment. In turn, this would help reinforce the appropriate
foundations for economic growth and employment creation in parts of the EU
as well as for the small-sized countries. This applies especially in EU neighbouring
regions, where the small-sized countries already offer employment to thousands
of EU citizens, including cross-border workers. This dynamic could be boosted
further through greater access to the internal market. Furthermore, this
approach would support the economic diversification of these countries and foster
abandonment of banking secrecy and tax haven status. This would engender greatly
increased tax revenues to EU Member State treasuries and strengthen the legal
framework against illicit financial activities.

In any event, the EU should take account of
the specificities of the small-sized countries in developing its policy.
These countries are all located in the heart of Europe, maintain close
relations of proximity with the EU, and have very close ties with their
neighbours. From the EU's perspective, it is therefore appropriate to examine
ways to integrate them more closely into the internal market. This section
evaluates the options available to the EU to achieve these aims, ranging from
the least to the most ambitious.

5.1.        Option
One: Status quo

This option would continue the current
approach, without the conclusion of any new agreements related to the internal
market. The result of this approach would be that the small-sized countries’
access to the internal market would continue to be very limited. Consequently,
the choice of this option might have repercussions for their overall relations
with the EU. Their willingness to negotiate new agreements in areas of interest
to the EU might be negatively affected. The existing agreements do not avoid
the creation for them of an administrative burden incommensurate with its
benefits for the EU, but would perpetuate legal uncertainty for citizens and
economic operators in several areas.

5.2.        Option
Two: Sectoral Approach

This option would consist of negotiating Sectoral
Agreements for access to parts of the internal market, such as in the area
of free movement of persons or services. To achieve full integration of the
small-sized countries, separate agreements could be concluded with each country
on different policy areas, such as:

·
Free movement of persons;

·
Freedom of establishment and Free movement of
services; (or possibly persons and services together)

·
Customs Union and Free movement of goods;

·
Flanking measures, horizontal policies and other
areas of cooperation.

These agreements would need to be
complemented by provisions on shared values and institutions to underpin the
relationship and ensure the smooth functioning of the agreements.

This approach would therefore require
negotiation and conclusion of up to 18 separate agreements with the three
countries (three for each policy area). This approach might allow the tailoring
of the provisions of the agreements to each country’s specific needs and could
offer some flexibility. In particular, a staged approach would allow for the
small-sized countries’ progressive integration into mutually-agreed pillars of
the internal market.

However, the drawbacks of this
approach are several. First, it is not in the EU's interest to negotiate and
conclude such a large number of agreements, as the negotiating effort required
would be multiplied in comparison with a single agreement. Second, an approach
based on sectoral agreements to meet the most pressing concerns of the
small-sized countries would not provide comprehensive solutions to the problems
they face and would be poorly adapted to address challenges that might arise in
the future. Moreover, if each small-sized country opted for market access in
different policy areas, it would result in different arrangements for each
country, leading to an incoherent web of unconnected agreements that would be
difficult to manage. The EU’s experience in its relations with other major
partners has demonstrated that the disadvantages of the sectoral approach
include unmanageable complexity and legal uncertainty[42].

5.3.        Option
Three: Framework Association Agreement

A Framework Association Agreement could
offer the small-sized countries a high degree of integration, including partial
or full access to the EU’s internal market, its flanking measures and
horizontal policies. It could also provide for participation in other areas of
EU activity. The Association Agreement would set out the underlying values,
principles and institutional foundations of the relationship. The Agreement could
be a single multilateral agreement between the EU and the three small-sized
countries, possibly following the European Economic Area (EEA) model.
The conclusion of a bilateral treaty with each small-sized country would
theoretically be possible but not desirable due to the added complexity and tendency
for unnecessary differentiation, as mentioned in sub-section 5.2. above. This
option would offer the additional advantage to the three small-sized countries
of regulating their mutual relations.

It would be necessary to draw up an
appropriate institutional framework for this option. If feasible, a
solution that built on the credibility and efficiency of existing structures
would be preferable. Special governance arrangements could be defined, which
might include, for example, mechanisms for the consultation of the small-sized
countries on proposals for EU legislation that were of particular relevance for
them (“decision-shaping”) as well as their participation as observers in EU
programmes and agencies. In any case, for a Framework Association Agreement to
be viable, a satisfactory solution would have to be found to ensure that the
relevant parts of the acquis are made applicable in those countries,
that the acquis is actually implemented and enforced by the small-sized
countries or authorities entrusted by them with that task, and that the
application of the acquis is monitored and, as the case may be, enforced
vis-à-vis those countries [43].
Overall, if a suitable institutional framework can be worked out, this is a viable
option that should be explored further.

5.4.        Option
Four: Participation in the European Economic Area

This option would provide for full
integration into the internal market on the same basis as the current non-EU countries
of the European Economic Area (EEA). It has several advantages,
including the straightforwardness and reliability of using an existing and
proven treaty and institutional framework. However, given that the European
Economic Area Agreement was concluded between two pre-existing trade and
economic areas (the EU and EFTA), it would in principle be necessary for the
small-sized countries first to become a member of either one in order to join
the EEA[44].

Membership of the EU is considered below,
which leaves accession via EFTA. The EU would need to discuss with the existing
members Iceland, Liechtenstein, Norway and Switzerland, the possibility of
enlarging EFTA to the small-sized countries. This option would have the added
advantage of boosting the EFTA-EEA membership, which would dwindle to only two
countries (Norway and Liechtenstein) if Iceland were to join the EU. The
enlargement of the EEA would involve re-negotiating the EEA Agreement, not
least to provide for an adaptation of the EEA- EFTA institutions. The precise
legal construction would need to be examined in more detail if this option were
retained. Overall, this is a viable option that should be explored
further.

5.5.        Option
Five: Membership of the EU

This option would give the small-sized
countries the most comprehensive access to the EU's internal market, programmes
and activities. Although no small-sized country has yet applied for membership,
they could do so under Art. 49 TEU: any European state that respects the EU’s
values and is committed to promoting them may apply to become a member of the
EU.

The renewed consensus on enlargement
requires to take into account the EU's integration capacity and to ensure the
effective functioning of its institutions and development of its policies. A
possible membership application would face two major difficulties: first, the
EU institutions are currently not adapted to the accession of such small-sized
countries. In order to ensure adequate democratic representation of all
citizens and the functioning of the institutions even after the accession of
countries with populations of only a fraction of the smallest current Member
States, important changes to the European Treaties and the institutional setup
of the EU would be required. Such changes are unlikely to be agreed within a
short timeframe and would require important negotiations within the EU. Second,
the limited administrative capacity of the small-sized countries will have a significant
impact on their ability to implement the EU acquis and to fulfil all
obligations as EU Member States.

6.           CONCLUSIONS

6.1.        Horizontal
and institutional issues

In the event of full integration, in order
to ensure the homogeneity of the internal market and legal certainty for
economic operators and citizens, any agreement with the small-sized countries
would need to address four horizontal issues related to: (i) the dynamic
adaptation of the agreement to the evolving acquis; (ii) the homogeneous
interpretation of the agreements; (iii) independent surveillance and judicial
enforcement; (iv) and dispute settlement. In this respect, the EU could draw on
the successful experience of the EEA Agreement in this respect. However, any
agreement should take into account the specificities and particular
identities of the small-sized countries, in line with the Declaration on
Article 8 TEU. To safeguard these principles, it may be necessary to offer the
small-sized countries transitional periods and/or safeguard clauses.

6.2.        Recommendations

The options presented in this
Communication, if any were to be pursued further by the EU, would need to be
discussed in detail with the governments of Andorra, Monaco and San Marino, in
full respect of their sovereignty and independence.

In principle, options three to five would
address the key problems faced by the small-sized countries. Option one (status
quo) would provide no solution and is therefore not a favoured option. The EU’s
experience of the sectoral approach has conclusively demonstrated its
drawbacks. For this reason, and as it would provide only partial solutions, option
two is not the preferred option, but it is not ruled out entirely at this
stage. Option five remains a long-term possibility but is not retained here. The
small-sized countries have not submitted an application for EU membership, and
future accession would not provide any solutions in the short-to-medium term.

In contrast, options three (Framework
Association Agreement) and four (participation in the EEA) have the
potential to safeguard the right balance of flexibility and comprehensiveness
to address the small-sized countries’ concerns while meeting the requirements
of the EU. These options are therefore the preferred ones, although they merit
further reflection and examination, including on their possible implementation.
If it were to prove impossible to move forward with these, then other options,
in particular option two, could be given further consideration.

- *
*

[1]               EU relations with the Vatican City State and the
Principality of Liechtenstein are not addressed in this Communication.

[2]               Article 8 TEU states that the EU “shall develop a special
relationship with neighbouring countries, aiming to establish an area of
prosperity and good neighbourliness, founded on the values of the Union and
characterised by close and peaceful relations based on cooperation”. According
to Declaration No.3 on Article 8 of the Treaty on European Union, “the Union
will take into account the particular situation of small-sized countries which
maintain specific relations of proximity with it."

[3]               Council Conclusions on EU Relations with EFTA countries
of 14 December 2010.

[4]               “EU relations with the Principality of Andorra, the
Republic of San Marino and the Principality of Monaco” – Report from the
Presidency to the Council, 14 June 2011, Council document 11466/11, point 14.

[5]               The analysis set out in this
Communication is based on informal exchanges of views with all three small-sized
countries at working level.

[6]               Although Monaco has a port on the Mediterranean sea.

[7]               For instance, the Foreign Ministers of Andorra and
San Marino visited Brussels in, respectively, January 2012 and July 2012.

[8]               By way of comparison, the EU Delegation in Bern is
accredited to neighbouring Liechtenstein.

[9]               In Andorra and Monaco, this is on a six-monthly
rotating basis. Italy, as the only EU Member State to have an embassy in San
Marino, represents the EU there.

[10]             Commission Communication on “Concrete ways to reinforce
the fight against tax fraud and tax evasion including in relation to third
countries”, COM(2012)351 final, Brussels, 27 June 2012.

[11]             Monetary Agreement between the European Union and the
Principality of Andorra (OJ C 369, 17.12.2011, p. 1); Monetary Agreement
between the European Union and the Principality of Monaco (OJ C 310,
13.10.2012, p. 1); Monetary Agreement between the European Union and the
Republic of San Marino (OJ C 121, 26.4.2012, p. 5).

[12]             As set out in the Annex to each
Agreement.

[13]             Agreement between the European Community and the
Principality of Andorra providing for measures equivalent to those laid down in
Council Directive 2003/48/EC on taxation of savings income in the form of
interest payments (OJ L 359, 4.12.2004, p. 33); Agreement between the European
Community and the Principality of Monaco providing for measures equivalent to
those laid down in Council Directive 2003/48/EC (OJ L 19, 21.1.2005, p. 55);
Agreement between the European Community and the Republic of San Marino
providing for measures equivalent to those laid down in Council Directive
2003/48/EC on taxation of savings income in the form of interest payments.
Memorandum of Understanding (OJ L 381, 28.12.2004, p. 33).

[14]             OJ L 157, 26.6.2003, p.38

[15]             Economic and Financial Affairs Council of 19 January
2010 (Council document 5400/10)

[16]             Agreement in the form of an
Exchange of Letters between the European Economic Community and the
Principality of Andorra of 28 June 1990 (OJ L374, 31.12.1990, p. 16); the
agreement entered into force on
1 January 1991.

[17]             Cooperation Agreement between
the European Community and the Principality of Andorra (OJ L 135, 28.5.2005, p.
14).

[18]             Protocol on veterinary matters supplementary to the
agreement in the form of an exchange of letters between the European Economic
Community and the Principality of Andorra, OJ L 148, 6.6.1997, p.16

[19]             Art. 3(2) of Council Regulation
(EEC) No 2913/92 of
12 October 1992 establishing the Community Customs Code (OJ L302, 19.10.1992,
p.1).

[20]             Agreement between the European
Community and the Principality of Monaco on the application of certain
Community acts on the territory of the Principality of Monaco (OJ L 332,
19.12.2003, p. 42).

[21]             Two agreements in the form of exchanges of letters
between Monaco and France, signed the 15 December 1997, adapted the section of
the Convention on Good Neighbourly Relations of 18 May 1963 on the entry, stay
and establishment of foreigners in Monaco to the provisions of the Convention
on the Implementation of the Schengen Agreement.

[22]             Agreement on Cooperation and Customs Union between the European Economic Community and the Republic of San
Marino (OJ L84, 28.3.2002, p. 43). This agreement was signed on 16 December 1991,
but only entered into force on 1 April 2002; it was supplemented in March 2010
by an Omnibus Decision adopted by the EC-San Marino Joint Committee, covering
customs measures, and veterinary and phytosanitary matters (OJ L156, 23.6.2010,
p. 13).

[23]             Chapters 1-24 of the Harmonised
System.

[24]             Bilateral Agreement on Amity and Good Neighbourhood of
31 March 1939 (law of 6 June 1939, no.1320 (1)).

[25]             There is a lively internal
debate within San Marino on EU membership. In 2010 a referendum initiative was
launched on whether the government should submit an application for membership of
the EU. The San Marino Constitutional Court has recently ruled that the referendum
is admissible but it is not yet clear when it will take place.

[26]             Immigration is a competence shared between the EU and its
Member States. Admission of third-country nationals is decided at national
level whereas some rights and conditions are harmonised at EU level.

[27]             Article 5 of the Cooperation Agreement with Andorra,
and Article 20 of the Cooperation and Customs Union Agreement with San Marino.

[28]             Unless specified otherwise, provided by Directive
2004/38/EC of the European Parliament and of the Council of 29 April 2004 on
the right of citizens of the Union and their family members to move and reside
freely within the territory of the Member States (OJ L158, 30.4.2004, p. 77).

[29]             Under the conditions referred
to in Article 7, Directive 2004/38/EC.

[30]             Article 18 TFEU.

[31]             Within the EU, the relevant legislation is Regulation
883/2004 on the Coordination of Social Security Systems. The social security
systems of the three countries are not coordinated with the security systems of
the Member States; however, as the case may be, nationals of the three states
can benefit from the coordination between the legislation of Member States
(Regulation (EU) No 1231/2010 of the European Parliament an of the Council of
24 November 2010 extending Regulation (EC) No 883/2004 and Regulation (EC) No
987/2009 to nationals of third countries who are not already covered by these
Regulations solely on the ground of their nationality (OJ L344, 29.12.2010, p.
1 ).

[32]             Within the EU, Directive 2005/36/EC of the European
Parliament and of the Council of 7 September 2005 on the recognition of professional
qualifications (OJ L255, 30.9.2005, p. 22) confers on persons having acquired
their professional qualifications in a Member State the right, under the
conditions laid down in the Directive, to have access to the same profession
and pursue it in another Member State with the same rights as nationals.

[33]             Although, as for EU nationals and companies, depending
on the kind of service this may be subject to certain safeguards, such as pro
forma registration with a professional body.

[34]             As regards natural persons,
nationals of the small-sized countries need a permit to reside and work (be it
as a worker or a self-employed person) in an EU Member State (see section on
free movement of persons). In practice, immigration law may therefore
constitute a barrier to the provision of services by companies or persons established
in the small-sized countries.

[35]             European Council Conclusions, Brussels, 29 June 2012,
EUCO 76/12.

[36]             Tax policy also figures prominently in the
Compact: “Rapid agreement must be reached on the negotiating directives for
savings taxation agreements with third countries”. The latter includes the
small-sized countries.

[37]             European Council Conclusions, Brussels, 19 October
2012, EUCO 156/12.

[38]             For example, San Marino and Monaco are both producers
of cosmetics; and Andorra and Monaco are home to dental implant manufacturers.

[39]             Communication from the Commission: “Europe 2020 - A
strategy for smart, sustainable and inclusive growth”, Brussels, 03.03.2010,
COM(2010) 2020 final.

[40]             2007-2013 budget: EUR 168 Million.

[41]             Commission Communication on “Concrete ways to reinforce
the fight against tax fraud and tax evasion including in relation to third
countries”, COM(2012)351 final, Brussels, 27 June 2012.

[42]             Council conclusions of December 2010 on the EU’s relations
with EFTA countries.

[43]             The important role of monitoring and enforcement of the
acquis in those countries could be assumed by the Commission and the Court of
Justice of the European Union; the EEA EFTA institutions (EFTA Surveillance
Authority and EFTA Court); or an equivalent supra-national authority. The
options would need to be discussed and the preferred option agreed with the
small-sized countries.

[44]             Article 128 of the EEA
Agreement.