Last May the European Commission proposed the so called CAP “health check” which is a mid-term review before the 2013 planned reform. The CAP has been trough different reforms but it continues to be one of the most expensive EU common policies, it imposes substantial costs on developing countries as well on EU consumers and taxpayers. It should be recalled that CAP cost 55 billion euros in 2007.
The EU Member States do not have the same vision on how CAP should be reformed. France has been defending the principle of direct aid granted to farmers. France and Germany are totally against the idea of cutting farm subsidies. The UK and the Netherlands do not want to keep the market regulation instruments, as defended by France and supported by Italy and Spain. France and Germany have been arguing that CAP is needed to keep food price stability in the EU as well as to protect farmers through the import tariff system. The UK government as well as Sweden, Denmark, the Netherlands and the Czech Republic, proposed to abolish tariffs and all other measures that keep EU agricultural prices above world market levels and to end the direct payments that farmers receive irrespective of their production. In fact, Mr. Darling has called for a "phasing out all elements of the CAP that are designed to keep EU prices above world market levels (such measures cost EU consumers 43 billion in 2006), an end to direct payments for EU farmers (which cost EU taxpayers 34 billion in 2006).”
According to OECD 2007 reports phasing out policies that distort markets could save EU consumers €37 billion annually as well as it could reduce EU agricultural spending by 80%, or €42 billion. Moreover, according to the Irish Times, Dalia Grybauskaite, EU Budget Commissioner, has said "In reality our CAP today is a more protectionist policy than a market-oriented policy and, because of this, we pay, all of us, all consumers, two to three times more for food than we would pay without this policy.”
The Agriculture Council has been discussing the proposed measures since June. Since then EU Agriculture Commissioner Mariann Fischer Boel, French Agriculture Minister Michel Barnier have been carried out series of trilateral meetings with each agricultural minister in order to find compromise solutions on the Common Agricultural Policy “health check.” Although there were conflicting national interests the French presidency was able to force a compromise deal.
On 20 November, the Council reached by a qualified majority vote a political agreement on the CAP ‘health-check'. In fact, France supported by Germany and Italy have agreed to water down the Commission’s proposals. They were the big winners whereas the UK was not able to fully endorse to the final agreement. It should be recalled that Tony Blair gave up £7bn of the UK rebate in return for reform of the CAP and there is no serious reform on the way.
An opportunity to reform the CAP was missed. In fact, it seems that the agreement on the CAP “health check” will lead to further complexity and to distortions of competition.
The Commission has pointed out that in order to strengthen the EU efforts in the field of climate change, renewable energy, water management and biodiversity additional funding is needed. The Commission believes that “the best way of meeting them is through Rural Development policy.” Modulation provides a mean to ensure the transfer of subsidy funds from Pillar 1 of the CAP (guarantee expenditure and single farm payments) to Pillar 2 (rural development and agri-environmental schemes). One of the key elements of the proposals is to further enhance the amount of funding for Rural Development under the 2nd pillar of the CAP, rather than the 1st Pillar. The Commission has therefore proposed to increase the transfer of direct payments to the Rural Development budget. Some Member States are concerned that the rural development support will be at expenses of market supports and subsidies. Presently, all direct aid payments of more than €5,000 are reduced by 5% and the money is transferred into the Rural Development budget. The European Commission has proposed that 8% of all EU farm payments to be devoted to rural development. However, France, Italy and Germany, could not agree therefore the percentage was reduced to a compromise figure of 5%. Hence, all farms receiving €5,000 must transfer 5% of EU aid into rural development projects by 2012, in addition to the 5% that is already compulsory. The present 5% modulation rate will be increase by 7% in 2009, 8% by 2010, 9% by 2011 and 10% by 2012. Therefore, under the agreement reached by the EU agricultural ministers aid for rural development will rise to 10% of the farm subsidies and not the 13% that the European Commission has proposed.
The UK is the only EU Member State which already applies a voluntary modulation system. The UK is allowed to modulate direct payments to farmers at a rate over and above that of the compulsory EU-wide modulation scheme and the money collected is spent on rural development initiatives. The rate of voluntary modulation was set at 12% for 2007, rising to 13% for 2008, and 14% for the years 2009-2012. Whereas presently English farmers pay 19% the farmers from other Member States pay 5% and from 2012 English farmers will continue to pay 19% while others will pay 10%. Any increase in EU modulation must be offset by corresponding cut in national voluntary modulation in the UK. The UK already has the highest modulation in the EU therefore it was expected that more compulsory modulation would be agreed to bring other Member States in line. Nevertheless, under the agreement reached by the Member States solely five percent will move from direct payment to rural development.
The Commission wanted to make further cuts for bigger farms. The Commission has proposed for amounts between €100 000 and €200 000 a further 3% would be modulated (from 2010), a further 6% should be applied for amounts between €200 000 and €300 000, and amounts above €300 000 would face an additional 9% of modulation. The EU Member States agreed on a progressive modulation of 4 % to be added from 2009 onwards, for amounts above EUR 300 000. Hence, farmers who receive more than €300,000 a year will see 4% of their subsidies transferred into the rural development budget by 2012.
English farmers will not pay additional modulation as they will pay 19% which is more than the EU modulation of 14% for big farmers.
The Commission has identified 4 “new challenges” that should be addressed under Rural Development using the new funds from further modulation which are mitigating climate change, renewable energies, water management and halting the loss of biodiversity. In addition to the new challenges identified in the Commission proposal, the Agricultural Council has agreed that the funding obtained in this way may also be used by Member States to reinforce programmes in the fields of innovation and the adaptation of the milk sector.
The Commission has proposed to further decoupling meaning reducing the link between how much farmers produce and how much financial support they receive from the CAP. Whereas the UK favour direct aid to be completely decoupled from production several EU Member States such as France, Germany and Romania, are not convinced by the Commission proposals on decoupling as they believe it will not promote production. Therefore some payments will continue to be linked to production.
The remaining coupled payments will now be decoupled and moved into the Single Payment Scheme, with the exception of suckler cow, goat and sheep premia, where Member States may maintain current levels of coupled support. From January 2010 aid for arable crops, durum wheat, olive oil and hops will be decoupled. From 2012 it will take place the decoupling of aid for beef and veal, rice, nuts, seed, protein plants, starch potato cultivation, the processing of dried fodder, potato starch, hemp and flax.
Presently, Member States may retain by sector 10 percent of their national budget ceilings for direct payments for use for environmental measures or improving the quality and marketing of products in a given sector. The EU Member States have agreed to turn this possibility more flexible. Member States will have greater flexibility in deciding which fragile agricultural sectors should receive special aid as well as in how they should spread their direct payments to farmers. This would lead to backdoor subsidies.
The EU Member States will be able to use up to 10 % of their national ceilings to grant support to farmers for certain types of agriculture which are significant in terms of the protection or improvement of the environment, to improve the quality of agricultural products or their marketing however the money will no longer have to be used in the same sector. The Member States will no longer have to spend the money in the same sector as it may be also used to help farmers producing milk, beef, goat and sheep meat and rice in disadvantaged regions or vulnerable types of farming. It may also be used to support risk management measures. The Commission has also proposed, after being pressured by France, that these funds might be used as a contribution to crop insurance premiums and mutual funds for animal disease compensation.
Under the so called Article 68 new arrangements Member States would be allowed to spend whole of the 10% of the national ceiling on measures with additional agri-environmental benefits. Animal welfare is a new area which can be dealt under Article 68 measures. Moreover, coupled payments under Article 68 will amount to 3.5% of the national Single Payment Scheme ceiling. Measures aiming at helping dairy, beef or sheep farmers in economically or environmentally vulnerable areas, or economically vulnerable types of farming and crop insurance premiums or mutual funds for animal and plant diseases are limited to 3.5% of SPS payments. Hence, Member States may until 2014 grant state aids to the dairy sector, subject to the 3.5% of the ceiling. Member States are allowed to fund measures under article 68 from 2009 if they have funds in their national reserve.
Jim Begg, Dairy UK Director-General, has said “We are also concerned that the measures under article 68 will allow Member States to effectively re-introduce coupled support for the dairy sector which could distort the competitive environment.” According to the National Farmers Union (NFU) such measures are bureaucratic and entail “taking off some and giving back to others.”
Under the agreement, Member States which apply the Single Payment Scheme will be allowed either to use currently unused money from their national envelope funds to finance measures under Article 68 or to use for Rural Development measures. Hillary Been has said "I share the disappointment of the UK dairy sector at the competitive distortions resulting from today's deal. And given the large amount of money already being spent on farm payments, I could not support the use of unspent funds which should come back to member states."
One of the most controversial issues was the phasing out of milk quotas before they are totally scrapped in 2015. The French Agriculture Minister Michel Barnier has said before the agreement was reached that he would "not allow the milk quotas to be scrapped without accompanying measures, precautions being taken.” The Council has agreed an increase of 1 % for the milk quotas per year in 2009, 2010, 2011, 2012, and for the marketing year 2013/2014, to prepare for their expired in 2015. Italy was granted a special derogation therefore it will be allowed for a single quota increase of 5% in 2009. Germany as well as France would be allowed to spend a higher proportion of rural development funds on their dairy farmers.
The Commission has also proposed to replace the present intervention systems under which farmers are able to sell stock into EU reserves if they cannot get a decent price for their produce on the market into a “genuine safety net.” The UK has been demanding the end of all market instruments whereas France does not want to give up market interventions. France has won significant concessions, in particular retaining the intervention system for bread-making wheat as well as for durum wheat and rice.
Intervention will be abolished for pig meat and set at zero for barley and sorghum. Intervention for durum wheat, rice will be maintained as a market management instrument but with the thresholds set at zero. However, intervention for bread-making wheat will take place during the intervention period 1 November to 31 May at the level of the intervention price 101,31 per tonne, for a maximum quantity of 3 million tonnes, and purchase by tender beyond that. In the milk sector, intervention will be maintained with the maximum quantities being set at 30 000 tonnes for butter and 109 000 tonnes for skimmed milk powder.
The Commission proposals are expected to be formally adopted by the Council by the end of the year and coming into force in 2009.
According to Hilary Benn “This is a mixed result. On the big items of reform this is a step forward, but I regret what has been conceded in order to secure a deal which will lead to some new distortions in the short term.” However, according to Neil Parish "Britain sent five ministers to this meeting, yet when the crucial negotiations were ongoing earlier this year, not a single British minister was present. Britain has been the empty chair in the room when it came to farm reform, and part of the blame for the timidity of the Health Check falls to our government.”
In the mean time, the Commission announced on 11 December that it will recover € 528.5 million of CAP expenditure unduly spent by Member States. The Commission has decided to claim the money back because of inadequate control procedures and non-compliance with EU rules on agricultural expenditure. Funds will be recovered from several Member States including the UK. The UK will be charged with £74.5 million for not keeping payment deadlines.
It is important to mention that the European Court of Auditors has recently adopted a report on cross-compliance. Cross compliance is now an important element of the CAP under which payments may be reduced if the beneficiaries have not respected certain environment, food safety, animal and plant health and animal welfare rules. In 2008, the Court of Auditors carried out an audit of the cross-compliance policy at the Commission and in seven Member States. The Court considers that the cross compliance rules are poorly managed and enforced. The Court has stressed that data that Member States sent to the Commission is not reliable and overestimates the monitoring of farmers rates and the farmers’ compliance rates. Moreover, according to the Court “The Commission’s system for monitoring these data is incomplete and suffers in particular from the absence of performance indicators and baseline levels.” Hence, the Court has concluded that cross-compliance “it is not effective as currently managed by the Commission and implemented by the Member States. “
It should be mentioned that the Agriculture Council met on 28 November to debate a paper drawn up by the French presidency on the future of CAP policy after 2013.
France being the biggest beneficiary of CAP obviously does not want to see a reduction on farm subsidies. France has been arguing that CAP is needed to keep food price stability in the EU as well as to protect farmers through the import tariff system. France wants to keep the CAP original principles which are “the community preference,” and “market stabilization” and “Farm income protection.” France was expecting to achieve a joint commitment on the CAP’s long-term objectives before talks on its budget for the post 2013 period.
According to a French Presidency press release an overwhelming majority of Member States supported the Presidency’s conclusions on the future of the Common Agricultural Policy after 2013, at the Agriculture Council, whereas just 3 Member States were opposed. The French EU Presidency did not succeed in defining the consensual bases between the 27 EU member states on the CAP future. Britain, Latvia and Sweden have refused to support the French paper. France has been endeavouring to set out concrete objectives for the Common Agriculture Policy before the review of the EU’s financial perspectives for the 2014-2020. Tony Blair gave up £7bn of the UK rebate in return for reform of the CAP and there is no serious reform on the way. There is no solid commitment that CAP will be properly reformed. France is fighting hard to ensure the continuation of large EU subsidies for farmers. It should be mentioned that the UK´s contributions to the EU budget are expected to be in 2008/2009 £2bn and £6.5bn in 2010/2011.