COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT - The European Union and Iraq - A Framework for Engagement

I. Introduction

This Communication responds to the 16-17 October 2003 European Council's request for a strategy for the European Union's relations with Iraq and contributes to the EU Strategic Partnership with the Mediterranean and Middle East. It aims to provide a basis for discussions with the incoming sovereign Iraqi government and broader Iraqi society. It seeks to convey to the Iraqi people, who have suffered from years of successive wars, sanctions and brutal authoritarian rule, the European Union's desire to see the emergence of a secure, stable and prosperous Iraq, at peace with its neighbours and integrated into the international community.

The Communication is being adopted against the background of acute insecurity since the 2003 war, which continues to afflict the Iraqi population in their day-to-day lives and hamper progress in the country's political, economic and social recovery. Nevertheless, the appointment of a new Iraqi Interim Government and the adoption of UN Security Council Resolution 1546 on 8 June 2004 confirming the full transfer of responsibility and authority to Iraqis as of 30 June 2004 and reinforcing the central role of the United Nations offers an opportunity for the EU to support Iraqi efforts to bring a new direction to their country.

The Communication analyses the EU's fundamental interest in seeking greater engagement with Iraq and sets out medium-term objectives for the development of EU-Iraq relations. It argues that the European Union should offer a framework which allows for progressively closer EU-Iraq relations, at a pace determined by progress in the political transition and the security climate. In the light of the evolution of the situation on the ground, the EU should be ready to review its approach.

II. The European Union and Iraq

Under Saddam Hussein's 24-year regime, the EU had no political or contractual relations with Iraq and its role was limited to implementing United Nations Security Council (UNSC) sanctions. The EU has, however, been an important actor in the humanitarian field. From 1992 onwards, the European Community (EC) was the largest single donor of humanitarian assistance to Iraq after the United Nations (UN). EU-Iraq trade relations were also significant, particularly with respect to energy.

In addition to the involvement of a number of EU Member States in providing security in Iraq, the EU's efforts since the war in 2003 have focused on providing humanitarian relief and political and financial support to launch the reconstruction process. In early 2003, the EC set aside EUR100 million for the European Community Humanitarian Office (ECHO) to provide humanitarian aid to Iraq; EU Member States pledged more than EUR731 million. Following adoption of UNSC Resolution 1483 on 22 May 2003, the EU lifted its sanctions against Iraq.

The Madrid donors conference held on 23-24 October 2003 launched the multilateral effort to assist Iraq's reconstruction. At the conference the EU as a whole pledged over EUR1.25 billion, including the EC contribution. The conference also welcomed the UN and World Bank's intention to establish a multi donor trust fund for Iraq - the International Reconstruction Fund Facility for Iraq.

Since October 2003, EU assistance for Iraq has widened in scope. While the humanitarian needs of the population are declining, resources for reconstruction are supplementing humanitarian work to rehabilitate core public services, and expanding to include the provision of employment, poverty reduction and the strengthening of Iraq's institutions and administration. EC assistance has also been directed to supporting the UN role in the political process and the development of Iraqi civil society and democratic institutions. Since 2003 the EU has provided assistance amounting to EUR305 million from the EC budget to Iraq [1].

[1] EUR100 million was committed for humanitarian activities in 2003, EUR200 million pledged for reconstruction in 2003-04 and an additional EUR2 million provided in 2003 for mine action. ECHO has reduced its initial estimates for Iraq in 2004 to EUR3 million. However, additional funds can be mobilised for new emergency humanitarian needs. See http://europa.eu.int/comm/world/iraqsit/reconstruct/index.htm for further details of the sources and destination of EC assistance for Iraq in 2003-2004

EU interest in a secure, stable, democratic and prosperous Iraq

The EU has substantial interests in working with Iraq to re-build its political and legal institutions, reform its economy and revitalise civil society. These include:

* A fundamental interest in a successful political transition to establish a stable, pluralistic democracy, underpinned by a constitution which guarantees respect for the rule of law, human rights and fundamental freedoms. This will offer hope to the people of Iraq and help to ensure Iraq's territorial integrity and internal security.

* An equal interest in helping to promote economic growth and diversification, reduce poverty and unemployment and improved living standards for the Iraqi population. A functioning, competitive and diversified market economy, the reconstruction of Iraq's infrastructure, particularly the inter-connection of Iraq's transport network with the pan-European transport corridors, and Iraq's economic integration into its region will help improve the distribution of wealth in the country, reduce Iraq's susceptibility to external shocks and develop the potential for mutually beneficial EU-Iraq trade and investment, human and cultural ties. Stability and greater prosperity should also facilitate the voluntary return of Iraqi refugees in Europe, strengthening social and professional ties between EU countries and Iraq.

* A further interest in Iraq's potential contribution to security and stability in the region. The end of Saddam Hussein's regime creates an opportunity for overcoming regional tensions. An Iraq at peace with its neighbours and its region will also contribute to the realisation of the objectives set out in the European Security Strategy. Turkey, an EU candidate country, also stands to gain from the emergence of a stable and democratic Iraq.

* A strong interest in the establishment of a fair, transparent and non-discriminatory legal framework in Iraq. Predictability and legal certainty are preconditions for the very substantive investments required in the country, not least in the energy sector. Given Iraq's significant contribution to the Union's security of energy supply and the potential for the EU and Iraq to mutually benefit from increased Iraqi production of oil and natural gas, a level playing field for investment and regulatory convergence in the energy sector is of strong interest to both the EU and Iraq.

III. Objectives for the Development of EU-Iraq Relations

The stability and prosperity of Iraq will require not only the support of the EU, but also the combined efforts of the international community and, above all, of the Iraqis themselves. The EU should therefore engage with the new Iraqi administration and Iraqi society to discuss the role they see the EU playing in Iraq and develop its presence and engagement with Iraq progressively as the transition process evolves. The aim should be to lay the foundations for broad-based and mutually beneficial relations over the medium-term. In its dialogue with Iraq, the EU could propose to focus its strategy towards Iraq on the following medium-term objectives:

- The development of a secure, stable and democratic Iraq, with a parliament and a government, elected on the basis of a constitution that guarantees respect for human rights and fundamental freedoms of the Iraqi population as a whole.

- The establishment of an open, stable, sustainable and diversified market economy and society as a basis for human security, economic growth, employment generation and poverty reduction, with resources used to promote equitable economic and social development.

- Iraq's economic and political integration into its region and the open international system.

A secure, stable and democratic Iraq

There is now an opportunity for Iraq to set aside its history of authoritarian control and to build stable democratic institutions that guarantee the rights of all Iraqis, including women and ethnic, religious and tribal minorities. The resolution of issues such as the role of religion in the state, an effective and democratically controlled security sector and the organisation of relations between provincial and central administrations will be central to the success of the political process. Equally, the establishment of democratic institutions will require a process of national reconciliation and consensus building.

As confirmed by UNSCR 1546, the UN will draw on its considerable experience in Iraq before the war and and on the work begun by UN Special Envoy Sergio De Mello before the tragic attack on UN headquarters in Baghdad last year and continued by Special Envoy Lakhdar Brahimi, to play a key role in helping the Iraqis to move through their political transition The EU should therefore continue to support the UN in playing this leading role and ensure that its actions to assist Iraq are well coordinated with that organisation.

Given the EU's own successful experience in supporting processes of transition from authoritarian systems of government to systems based on democracy, as well as EU Member States diverse experience with federalism and decentralisation, the EU could:

- Welcome UNSC Resolution 1546 confirming the sovereign status of the Iraqi interim government from 30 June 2004 and support its implementation.

- Enter into dialogue with the incoming Iraqi authorities to demonstrate EU support for the political and constitutional processes.

- Prioritise EU assistance for elections, good governance, the development of Iraqi civil society and the protection and promotion of human rights.

- Consider expanding its assistance to include measures to support security, in particular to implement the rule of law, justice and security sector reform.

An open, sustainable and diversified Iraqi market economy

Until 2003 the Iraqi economy was characterised by extensive government intervention, both directly through state owned enterprises (SOEs) and indirectly through heavy regulation, price restrictions and subsidies. The government-dominated oil sector has been the most important engine of the economy and, in the short-term, will need to expand rapidly to finance reconstruction. Over the medium-term, however, Iraq faces a triple economic transition to an economy based on peaceful development, a functioning market economy and more diversified and sustainable sources of domestic income.

Poverty and unemployment are widespread in Iraq, creating political and social tension. Measures to mitigate the social effects of the reforms that are required to raise living standards over the medium-term are essential, particularly in relation to price liberalisation, SOE restructuring and public services. In the short-term, the creation of effective social safety nets, efforts to increase employment using local skills for reconstruction projects [2] and rectify regional imbalances in the distribution of resources will all be necessary. In the medium-term, the question of a constitutional framework for the distribution of Iraqi oil revenues needs to be addressed.

[2] E.g the rehabilitation of electricity and other essential infrastructure.

Resolving the issue of Iraq's external debt obligations, currently estimated at $120 [3] billion, is a pre-condition for Iraq's return to financial viability and sustained economic and social recovery and the content of an eventual Paris Club agreement is likely to have a broad impact on all aspects of economic activity in Iraq. The Paris Club group of creditor nations have committed themselves to work towards a solution in the course of 2004 but comparable treatment will be needed from non-Paris club official creditors and private lenders. Reducing Iraq's financial overhang also requires steps to address the status of the claims granted by the UN Compensation Commission after the first Gulf war, and those that are still pending.

[3] Excluding claims granted by the UN Compensation Commission.

The EU has a substantial record of working with the transition economies as well as expertise from its own experience of combining social cohesion with building strong market institutions, liberalisation and integration. It also has a large internal market ready to receive flows of Iraqi goods and services. In this context, the EU could:

- Promote resolution of Iraq's external debt by developing a common view and recommendations on economic policy conditionality.

- Continue EC assistance to build the capacity of Iraqi administrative and economic institutions in transition issues, in particular the creation of a functioning customs administration which would allow for the Generalised System of Preferences (GSP) to be applied.

- Help Iraq develop judicial capabilities and regulatory and legal frameworks to encourage economic activity and international investment, including in the energy sector, and deter corruption, organised crime and criminality.

- Emphasise the need to address issues related to unemployment and poverty, help to put in place effective safety nets and address regional imbalances in the distribution of resources.

- Stress that Iraq's significant mineral wealth should be used to support these goals, to diversify Iraq's economy, generate employment, build the necessary physical, institutional and human capital and reduce income disparities.

An Iraq at peace with its neighbours and integrated into the international community

Iraq's transformation offers an opportunity to address the legitimate security concerns of the different actors in the region and to ensure that the emergence of a new political order in Iraq is perceived positively by neighbouring states. It also gives scope for Iraq, the Gulf Cooperation Council (GCC) and Iran to foster a community of views on how the region should tackle common economic challenges. In addition, progress in the transition process should pave the way for Iraq to assume a greater role in international political and economic affairs and increase its participation in international fora.

The decision of Iraq's neighbours to organise a common forum - the Neighbours' Meetings - after the 2003 war, to discuss Iraq's situation demonstrates a shared recognition of the opportunity for increased intra-regional cooperation. Over the long-term, the progressive establishment of a regional politico-economic cooperative framework, reducing tensions and moving gradually to involve security cooperation, could provide a mechanism for improving stability in the broader region and tackling the legacy of unresolved regional disputes.

Through its close relations with Iraq's neighbours, its own history of post-conflict reconciliation, as well as its efforts to promote regional integration, the EU has acquired a breadth of contacts, experience and expertise that could benefit Iraq and the broader region. In line with the principles set out in the EU Strategic Partnership with the Mediterranean and the Middle East and the support the EU has already given for Iraq's application for observer status at the World Trade Organisation (WTO), the EU could:

- Use its influence and existing dialogues with the countries of the region, particularly Iraq's neighbours, to encourage constructive engagement with Iraq and increased intra-regional cooperation.

- Invite Iraq to participate in the EU Strategic Partnership for the Mediterranean and the Middle East.

- Consider Iraq's future membership of the WTO in a positive light, once the necessary conditions are met in line with the EU position on applications from other countries, including in the region and encourage its participation in other international fora

IV. A Framework for Progressive Engagement

The realisation of the objectives set out in Section III will depend on the degree to which they are shared by a future Iraqi government and the evolution of the security and political situation in Iraq. The following proposals for action are therefore options, structured to reflect the three distinct phases anticipated by UNSCR 1546, and to be developed further in consultation with the future Iraqi government.

It will also be especially important to ensure that, in implementing actions, the EU Member States, the European Commission and High Representative work together, and in full coordination with the United Nations, both on the ground and in international fora. Close coordination with the World Bank, the IMF and other international financial institutions will also be essential.

Phase I - Immediate Actions

On 30 June 2004, the Iraqi interim government will assume sovereignty and the Coalition Provisional Authority will be dissolved. In addition to the on-going provision of assistance for reconstruction, in the period leading up to elections for a Transitional National Assembly, the EU could consider the following initiatives:

EU support for elections: Elections for a Transitional National Assembly which will form a new government and draft a new constitution, a referendum to approve a new constitution and general elections are all due to take place before 31 December 2005. The EU should be prepared to play a significant role in the preparation of elections in Iraq, if a request is made by the interim government or the UN. The EU will also need to assess whether further efforts are needed, and whether conditions on the ground particularly security, are such as to make deployment of an EU Election Observation Missions advisable.

Informal political dialogue: The EU should aim to engage with the sovereign Iraqi interim government as early as possible. If security conditions permit, a political dialogue meeting in Troika format at ministerial level could be held in Baghdad or in the margins of the UN General Assembly in September 2004. Ad hoc meetings at senior officials level could also take place.

EU Missions could play an important role in preparing these contacts, and in canvassing the views of the Iraqi authorities. Building on the financial support for human rights, civil society development, voter education and the constitutional process being provided, EU Missions could also be asked to launch informal dialogue with broader Iraqi civil society, including NGOs, religious groupings, trade unions, and nascent political parties.

Rule of law and civil administration. Efficient institutions and effective rule of law are of paramount importance to realise and sustain a secure environment in Iraq. The EU has experience in other regions of the world of supporting institutional capacity-building in the justice and security sectors and has also experience in areas critical to post-conflict stabilisation such as training, monitoring and mentoring of police. In this context, and if deemed necessary, the European Commission and the EU Member States could reflect on whether the mechanisms offered by the EU's civilian crisis management capabilities might be employed in Iraq, alongside EC instruments.

Encourage positive engagement on the part of Iraq's neighbours. The EU should support the Neighbour's Meetings and any resulting cooperation initiatives and invite Iraq to participate in the implementation of the EU Strategic Partnership with the Mediterranean and the Middle East. In addition, the EU could discuss the future of Iraq regularly with Iran, Syria, Turkey, Jordan and the GCC countries. EU Missions in these countries could be invited to ensure continuity. The EU could offer to extend this support to include concrete confidence-building measures for Iraq and its neighbours, for example in border management and customs administration.

A coordinated view on debt and related economic policy conditionality. While a final decision on the terms of such an arrangement is for the creditor countries themselves, several EU Member States are involved in the current Paris Club negotiations on the rescheduling/forgiveness of Iraq's debt. Since the likely use of the new Paris Club "Evian" approach, developed for intermediate income countries, will have implications for the EU's future relations with Iraq, efforts could be made to coordinate views on the appropriate economic conditionality to be attached to an agreement. A regular dialogue between the European Commission, IMF, World Bank and European Investment Bank could also help coordinate views and activities on this issue.

GSP trade preferences. Iraq is a beneficiary of the European Community Generalised System of Preferences (GSP) but the system has not been applied in practice since the first Gulf War due to sanctions and subsequent conflict. As soon as conditions allow, the European Commission should work together with the Iraqi administration to set up the administrative cooperation system which is a requirement for the system to operate.

On-going implementation of humanitarian and reconstruction assistance. The EC assistance strategy in 2003/04 focuses on monitoring the situation in Iraq, responding to new emergency humanitarian needs as they arise, providing rapid additional resources for Iraq's reconstruction, with a particular emphasis on creating employment, and supporting the development of a multilateral framework under the auspices of the United Nations and the International Financial Institutions. As a consequence, the EUR200 million pledged from the EC budget at the Madrid Conference for Iraq's reconstruction in 2003-04 has been transferred to UN agencies and the International Reconstruction Fund Facility for Iraq and disbursement should accelerate in this phase.

EC office: The opening of a full European Commission delegation in Iraq depends on the security situation and on the availability of Community resources. However, as a first step, the Commission is establishing an office covering Iraq in the premises of its delegation in Amman to help prepare political representation and ensure local coordination of reconstruction assistance with EU Member States. The office will also provide for liaison with the United Nations Assistance Mission for Iraq and the International Reconstruction Fund Facility for Iraq. When conditions permit, this office could move to Baghdad.

Phase II - Post Elections

The elections for a Transitional National Assembly should lead to the formation of a Provisional Government and see an intensification of work to draft a new constitution, to be ratified by referendum later in 2005. This phase will therefore open the way for further cooperation and dialogue with Iraq in a number of fields. In addition to activities launched in Phase I, initiatives could include the following:

EU contribution to rehabilitation and reconstruction. The European Commission has proposed a further EUR200 million EU contribution to Iraq's reconstruction in 2005 [4] and expects that a similar amount could be required in 2006, subject to budgetary constraints and the ability to spend committed funds during 2005. The majority of funds will continue to be directed to the International Reconstruction Fund Facility for Iraq, however a portion could be reserved for the direct provision of technical assistance programmes and capacity building support.

[4] EUR190 million on budget line 19 08 07 - 'Aid for the rehabilitation and reconstruction of Iraq' and EUR10 million earmarked on budget line 19 04 03 - 'Development and consolidation of democracy and the rule of law - respect for human rights and fundamental freedoms'.

Such programmes could support institution-building in a number of sectors, depending on Iraqi interests. In the political and security sphere, in full coordination with the UN, the EU could provide advice for the constitutional process as well as further assistance for democratisation, civilian law enforcement, the rule of law and the justice sector and human rights. Focal sectors in the social and economic field could include: policy formulation and good governance, including fiscal and monetary issues, the development of national statistics; the creation of a functioning trade, customs and investment regime; energy and transport; environmental remediation and protection; the promotion of the private sector, small and medium sized enterprise development and a non-discriminatory public procurement system.

In addition to reconstruction assistance, the use of other instruments could be envisaged from this phase onwards to help alleviate external financing needs resulting from the transition, and to support reform. This would be subject to progress on external debt relief and Iraq's agreement on a comprehensive macro-economic programme supported by the IMF.

Formal political dialogue. The EU could propose to agree an EU-Iraq Joint Political Declaration in order to institutionalise political dialogue. This might encompass discussion of human rights, regional stability, the fight against terrorism and non-proliferation. The European Parliament and EU Member State parliaments could also be encouraged to pursue contacts with the Transitional National Assembly.

Joint working groups in sectors of mutual interest. EU/Iraq working groups could be set up to discuss cooperation in areas such as economic, statistics and trade issues, energy (including electricity), transport, technical regulations and standards, information society, human rights and rule of law, migration and counter-terrorism. An informal EU/Iraq energy dialogue could be rapidly established and the EU could support Iraq's participation in other regional energy and transport fora. Bilateral dialogue could lead to future regional dialogues.

Phase III - Medium Term

The appointment of a democratically elected government and the adoption by Iraq of a new constitution and elections for an executive and legislature should allow for the EU to normalise relations with Iraq. In this phase, the EU could take the following additional steps:

Negotiations for a bilateral agreement. A bilateral agreement between the EU and Iraq would reflect the mutual interest in developing a partnership and support Iraq's political, economic and social reforms. A trade and cooperation agreement, similar to those in place with other countries east of Jordan would be an appropriate first step. A more wide-ranging agreement could be considered subsequently.

Assistance for economic diversification and poverty reduction. As Iraq's own sources of revenue increase, in particular through higher oil production levels, its requirements for external donor assistance should decline. The EU could target EC assistance on technical and capacity building programmes, and promoting economic diversification and poverty reduction/livelihoods.

Creation of a regional framework. The EU could explore ways in which the Barcelona Process experience in promoting cooperation in sectors such as energy, transport, environment, science and technology, education, dialogue of cultures and support for civil society, might contributing to enriching regional cooperation between Iraq and its neighbours. The EU could also consider ways in which Iraq can be associated with the EU's dialogue with other partners in the region, particularly with those East of Jordan.

Sustained assistance for the rule of law, democratisation and human rights. The process of democratisation in Iraq will not end with general elections. The EU should therefore continue to prioritise assistance over the medium-term which helps increase the capacity of the Iraqi government and civil society to strengthen democracy, ensure respect for human rights, including the rights of women and minorities, the rule of law, combat corruption and promote transparency, accountability and good governance.

European Investment Bank lending. As the focus of external assistance shifts away from grant contributions, European Investment Bank (EIB) loans could help bridge the period between grants and private sector involvement following resolution of Iraq's external debt, starting with capital-intensive projects such as infrastructure. A mandate for the EIB to lend to Iraq could be considered in the context of the new Financial Perspectives, possibly as part of a regional mandate to include countries east of Jordan.

European Commission delegation. The opening of a delegation in Baghdad could be considered.

V. Conclusion

This Communication sets out initial reflections on how the EU might advance its relations with Iraq, based on a policy of progressive engagement which lays the foundation for a more substantial and sustained relationship in the medium-term. Its recommendations will need to be kept under constant review and adapted to the circumstances as the situation evolves on the ground. The Council of Ministers is invited to consider these recommendations with a view to the European Council sending a clear signal concerning the EU's commitment to strengthening its relations with Iraq in the framework of UNSCR 1546 and to help lay the foundations for a secure, stable, democratic and prosperous Iraq, at peace with its neighbours and its region, and a full and active member of the international community.

Annex I Summary of Proposals

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