A trilateral meeting of Presidents was held on May 6 which broke this deadlock (see my 15 May post for details). The first trilogue meeting took place on May 13 but dealt largely with procedural issues. Since then, the trilogue discussions have continued with a number of additional meetings scheduled, most recently on Monday 10 June.

That meeting failed to reach agreement although a number of the participants have tried to talk up the momentum (see the Irish Presidency press release as well as Budget Commissioner Lewanowski’s press release) following the meeting. Further technical meetings between the groups to clarify the Presidency’s latest offer are taking place next week, with a further trilogue scheduled for Tuesday evening next. This is the last scheduled opportunity to reach a political agreement on the MFF regulation under the Irish Presidency, as the final General Affairs Council of the Presidency takes place on 25 June (at a pinch, if enough progress is made next Tuesday there could still just be time for a further meeting to conclude a deal).

The Commission Press Service released on 11 June a very useful summary of the issues at stake in the MFF trilogue negotiations. Further background information is available on the Council’s MFF website. The revised list of expenditure ceilings by programme following the European Council February 2013 conclusions as circulated by the Commission can be found here.

The trilogue process

Formally, the trilogue discussions seek to agree on the text of the MFF Regulation and the Inter-Institutional Agreement on budgetary discipline and sound financial management of the MFF. Immediately after the delayed opening of the trilogue process on 13 May, the Presidency circulated a note for the General Affairs Council on 21 May setting out the state of play and summarising the Council’s position on the issues at stake. In this note, it sought clarification of the political guidance for its stance in the negotiations on the four issues of a review clause, budget flexibility, own resources and unity of budget.

The Council’s position at its 21 May meeting as summarised in the subsequent press release noted that:

…delegations were ready to examine a legally binding obligation on the Commission to present a review in 2017, provided that the unanimity requirement for the Council vote on the MFF regulation was respected and pre-allocated envelopes were preserved. On own resources, delegations showed readiness to consider a declaration setting out a political roadmap for work on the future. As far as the unity of the budget is concerned, delegations expressed some openness to having a Commission document annexed to the annual draft budget setting out all expenditures covered by the EU budget. Concerning flexibility, many delegations could consider further discussing the possibility to the carry-over from one year to another of unused margins under the payments ceilings and a frontloading of certain expenditures, such as for the new youth employment initiative.

The Parliament’s Budget Committee meeting on 16 May was not too happy with the Econfin Council’s decision on 14 May to approve part payment of the Commission’s draft amending budget for 2013. It reiterated the Parliament’s view that the issue of the additional funds needed to pay outstanding bills of €11.2 billion must be resolved before concluding the MFF negotiations. However, it supported the continued involvement of the Parliament in the trilogue process.

The Budget Committee chair, Alain Lamassoure, noted that the Parliament had every intention of re-opening discussion of the actual figures in the European Council’s MFF conclusions. This suggestion was rapidly shot down by Eamon Gilmore, for the Irish Presidency, following the GAC meeting on 21 May when he argued that it was too late now for the Parliament to be introducing new elements into the talks.

The Parliament’s negotiating team issued a press release just prior to last Monday’s trilogue session noting that “Based on the most recent texts provided by the Council, MEPs fail to see how an agreement could be reached in this evening’s tripartite meeting with the Irish Presidency and the Commission”.

Subsequently, Alain Lamassoure gave a press conference on the following day (view live) in which he accepted the Irish Presidency view that there was some momentum in the talks but described the pace as more like a tortoise than a rabbit, and he reiterated some of the Parliament’s bottom lines. Nonetheless, he sounded more like someone in negotiating mode than someone who was ready to pull the plug on these talks at this stage.

Commission President Barroso added his support yesterday to the Parliament’s demands especially regarding flexibility when he addressed the Parliament on the run-up to the European Council summit on 27-28 June.

Today, a European Parliament group leaders’ press release expressed their disappointment at the Council’s reluctance to compromise. The statement recalled that

without a convincing guarantee from the Council to agree on budgeting the full additional amount of €11.2 billion requested by the European Commission in its Draft Amending Budget no.2 to enable payment of the Union’s bills for the current year,

without true flexibility for commitments and payments across headings and across years to allow the use of the full amounts foreseen for 2014 to 2020,

without an obligatory revision clause making it possible to reassess the budgetary needs during the MFF period and adjust them, if necessary, allowing the newly elected European Parliament to play its role, and

without a clear understanding on a viable way and timetable for the setting up of a true system of own resources for the European Union,

the necessary majority in Parliament to consent to the next MFF will not be achieved.

Although there are still siren voices which argue that the EU would be better off without an MFF agreement at this stage and calling for new talks after a new Commission and Parliament is elected in October of next year, the longer the delay, the more problems emerge. The latest concerns the adoption of the EU’s budget for 2014 which should be the first year of the new MFF.

The Commission is obliged by the EU’s treaty to submit a draft budget for the following year by 1 July, but has not yet done so. The problem is whether the 2014 budget should reflect the proposed MFF figures in the European Council conclusions, any revised political agreement between the Council and the Parliament, or be based on a continuation of 2013 ceilings if there is a failure to agree the MFF. The Commission appears reluctant to take sides before the Council and the Parliament have resolved their differences.

After next Tuesday we may know which of these options becomes the default one.

Photo credit TRG International

These changes were outlined and discussed in the presentation by Francesco Mantino (INEA, Italy) on the EU’s new rural development policy after 2013 given as part of the session on the state of the CAP reform negotiations at the annual conference of the Italian Association of Agricultural and Applied Economics in Parma.

Mantino’s presentation focuses on four elements:
• The main changes in the regulations concerning rural development (and cohesion) policies
• The state of the art in the trilogue negotiations
• The financial and institutional factors influencing the design of future rural development programmes
• Some preliminary discussion of policy strategies in some selected EU countries (France, Spain and Italy) and factors likely to influence success or failure.

I reproduce below three of his slides which describe the state of play in the trilogue negotiations on programming issues, criteria for targeting support and other specific issues, respectively.

Mantino concludes that every reform of rural development policy raises transactions costs of policy use (information, coordination and learning costs) but that there are some potential opportunities in the new regulation to reduce these transactions costs, for example, through more simplified payment rules and through allowing the reorganisation of delivery structures. His main concern is whether the national resources to co-finance policy measures will be sufficiently available in the current climate of austerity in all EU countries.

Update 16 June 2013: The full paper accompanying this presentation can be downloaded here.

There were four presentations in the session, including an overview of the state of play in the negotiations by Giovanni Anania; a review of the CAP greening proposals by Jean-Christophe Bureau; an examination of the proposed changes in the rural development regulation by Francesco Mantino; and a discussion of how co-decision is influencing the outcome of these negotiations by myself.

Because the presentations might be of more general interest, with the permission of the presenters I plan to link to them over the next few days. This post links to the presentations of Giovanni Anania and Jean-Christophe Bureau.

Giovanni Anania’s (University of Calabria) presentation here in his well-known technicolour style is in two parts. The first part consists of the actual presentation (time was short, so the number of slides which could be covered was limited). The key point in this first part of the presentation is a useful comparison between the positions of the Council and the Parliament on the issues under negotiation in the trilogue process.

Anania concludes that both arms of the legislature share the same vision of a significantly more conservative and ‘farmer-friendly’ CAP post-2013 than that in the Commission’s proposal. While differences exist on relevant points, he concludes that the Council and the EP are not significantly apart on the most important elements of the reform package. Nonetheless, he is sceptical that sufficient time remains to conclude a political agreement before the final Council meeting of the Irish Presidency on June 24-25.

The remaining slides in the presentation provide useful summaries in bullet-point form of many of the key elements in the negotiations comparing the original Commission proposal, the Council position and the Parliament mandate.

Jean-Christophe Bureau’s (AgroParisTech and INRA) presentation here asks how much greening will the ‘greening’ of direct payments actually bring? Bureau accepts that conditioning 30% of Pillar 1 payments to a green payment is much less cost efficient than targeted agri-environment measures, but he argues that the Commission’s proposals still represented a genuine willingness to green the CAP. His presentation shows that the Council and Parliament amendments are leading to a considerable weakening of the Commission’s greening proposals such that the answer to the question whether greening is for real must be a resounding ‘No’.

I will upload the other presentations in this session in the next few days.

Photo credit Parma Duomo by Visit Italy

One of the issues on the CAP reform agenda discussed at the last Agricultural Council meeting was whether the proposed young farmers’ payment in Pillar 1 should be a voluntary option for member states or not. The Council is arguing for a voluntary payment. Both the Commission and Parliament argue, on the contrary, that the payment should be mandatory.

Making this a mandatory payment could imply a three- to four-fold increase in CAP expenditure on young farmers. One might assume that such a substantial increase in expenditure would be justified by well-founded evidence of substantial gains in either generational renewal or farm productivity.

In fact, in proposing a general top-up of direct payments for young farmers in Pillar 1 the Commission ignores the advice of its own evaluations of assistance to young farmers. Despite the high profile campaign by CEJA, the European Council of Young Farmers, this payment is the wrong instrument addressing the wrong problem.

Assistance to young farmers both for setting-up costs and initial investments will continue to be available as a Pillar 2 measure. There is no good evidence that providing additional income support for a limited period of time in Pillar 1 is an effective use of funds either to promote generational renewal or to improve farm productivity. Indeed, the motivation, in line with other elements of the Ciolos reform, is to improve the legitimacy of direct payments by linking them to an objective with which most people would agree.

At this stage in the CAP reform discussions, the only way to minimise the waste of public resources is to make the scheme optional and to hope that few member states will make use of it. Thus my appeal to the Parliament is to accept the Council’s position on this issue and to work to improve the age structure of agriculture by focusing on the real constraints to generational renewal.

Current support for young farmers

Since the mid-1980s, EU assistance has been available to young farmers in the form of special aid payments for their first installation as farmers as well as enhanced support for investments for farm improvements.

In current rural development programmes (RDPs), Measure 112 (Setting up of young farmers) has the objectives of facilitating young farmers’ initial establishment and the structural adjustment of their holdings after initial setting up. Beneficiaries have to be less than 40 years of age, set up for the first time as head of an agricultural holding; possess adequate occupational skills and competence; and submit a business plan for the development of their farming activity.

Support may be given in the form of a single premium (which can be paid in up to five instalments) up to a maximum of €40,000, or in the form of an interest rate subsidy, the capitalised value of which may not exceed €40,000. If both forms of support are offered, the maximum could not exceed €55,000 in the early years of this programming period, but the combined ceiling was raised to €70,000 following the CAP Health Check in 2009.

According to this ENRD fact sheet, the measure is programmed in 24 member states (excluding Malta, Netherlands and Slovakia) and in 70 rural development programmes (RDPs) during the current 2007-13 programming period. Around €5 billion in public expenditure (of which €2.9 billion in EAFRD support) was set aside for this measure, which was expected to assist 188,400 beneficiaries.

The synthesis of the RDP mid-term reviews found that fourteen countries offer new entrants to farming a capital grant/single premium. For at least half of these, the premium is not linked to investment. At least five countries offered new entrants both a single premium and an interest rate subsidy – with a combined value of €50,000 – €55,000 per applicant reflecting the maximum that was permitted prior to the CAP Health Check agreement. In addition to the single premium/interest rate subsidy, approximately two thirds of the countries covered offer applicants additional investment support. Some countries provide a higher rate of support if the applicant is female or farms are in a less favoured area.

The mid-term synthesis calculated that the average support per young farmer was around €28,000, well below the maximum level of support allowed. This conclusion has been seized upon by both sides in the current debate. Opponents of the Commission proposal highlight that member states have not been using the existing instruments to assist young farmers to the full, so why add another one? Proponents, with scant regard for the principle of subsidiarity, argue that it is precisely the unwillingness of some member states to prioritise this measure which justifies making it mandatory, so forcing them to spend money on an issue which they obviously do not want to do.

The Commission’s 2011 proposal and amendments

The Commission’s proposals for young farmers in its 2011 draft CAP regulations covered four instruments:

• Business start-up aid for young farmers in Pillar 2
• Higher support rates for young farmers for investments in Pillar 2
• Priority access for new entrants to the national reserve of payment entitlements in Pillar 1
• Top-up direct payment in Pillar 1

Business start-up aid

This instrument (included in Article 20 of the draft rural development regulation) continues the installation aid in the current RD programme. However, the aid would be simplified. It would only be provided as a flat rate payment (thus eliminating the provision for an interest subsidy as an alternative or in addition). This flat-rate payment would be paid in at least two instalments over a period of maximum five years, and the instalments may be degressive. The payment of the last instalment would be made conditional upon the correct implementation of the business plan. The maximum amount of support is retained at €70,000 (albeit this is now all paid as a single premium). Member states shall define the amount of support they provide taking into account the socio-economic situation of the programme area. Both the Council and Parliament have supported this text.

Higher support rates for young farmers for capital investments

In addition, under Article 18 of the draft rural development regulation, the maximum support rates for investment in physical assets can be increased for young farmers. Again, this is a continuation of the similar measure in the current programme. The Council has added an amendment which would allow support to be granted to young farmers to comply with Union standards applying to agricultural production, including occupational safety. Such support may be provided for a maximum of 24 months from the date of setting up. The Parliament has called for investment support for all farmers in order to comply with newly introduced EU standards in the fields of the environment, health, animal welfare and occupational safety.

Priority access to the national reserve for young farmers

When allocating payment entitlements under the single payment scheme, member states have the possibility to assist new entrants (most of whom are likely to be young farmers) by giving them priority access to the national reserve. Young farmers who inherit their farm may also inherit the entitlements (although a retiring farmer could have sold them previously to raise capital for a pension). So this measure benefits young farmers inheriting or buying/renting land without entitlements.

While a majority of member states do use the national reserve for newcomers, there are a few that do not (DK, NL, SE, MT, DE, UK). Young farmers in member states applying the simplified SAPS benefit from a more favourable treatment as they can claim direct support any year provided that they have at their disposal eligible land.

The Commission draft regulation would require member states to use the national reserve to allocate payment entitlements, as a matter of priority, to young farmers who commence their agricultural activity. The European Parliament would extend this priority to all new entrants and not just young farmers. But the Council, as for the top-up payment, wants to leave this as a voluntary option for those member states that want to make use of it.

Top-up payment

The most controversial element in the Commission’s proposal was to include, in addition to the business start-up aid in Pillar 2, a top-up direct payment for young farmers in Pillar 1.

Amount of aid: The Commission proposed a top-up payment equal to 25% of the average value of the payment entitlements held by the young farmer multiplied by the number of entitlements activated, subject to a ceiling on the number of entitlements which could be taken into account. The Commission proposed a maximum ceiling of 25 entitlements or the average size of farm in a member state if this was greater than 25 hectares. The Commission proposal was ambiguous whether the top-up would be calculated with reference only to the basic payment or to other payment entitlements as well, but the Council amendments underline that it should be related to the basic payment only. While the Council has accepted this Commission text, the Parliament has proposed to increase the maximum number of eligible hectares for the top-up aid to 100.

Eligibility for aid: A rather extraordinary feature of the Commission’s proposal was that absolutely no obligations are put on young farmers other than that they should be under 40 years of age. At least in the Pillar 2 scheme, young farmers seeking support are required to show that they possess adequate educational and occupational skills to farm and they must present and complete a business plan to be eligible for this aid.

The Parliament and Council have made half-hearted attempts to restore some measure of sanity in this regard. The Parliament’s amendment would allow member states to determine additional objective and non-discriminatory criteria that young farmers are to fulfil as regards, in particular, appropriate skills, experience and/or training requirements. The Council amendment would permit member states to define similar criteria for young farmers as those set out for the Pillar 2 business start-up aid. But in both cases, it is left up to member states whether or not they want to impose these criteria.

Mandatory or not: Under the Commission’s proposal, it would be mandatory for member states to grant an annual payment to young farmers who are entitled to a payment under the basic payment scheme. The financial provision proposed was that ‘Member States shall use a percentage of the annual national ceiling set out in Annex II which shall not be higher than 2%.’

The Council position would make a young farmer’s top-up an optional element for member states with again the provision that a maximum amount of 2% of a member state’s direct payments ceiling could be used for this purpose.

The Parliament, however, supports the Commission that the top-up should be mandatory and would require 2% of the annual national ceiling to be used for this purpose, with any unused balance going to increase the value of entitlements in the national reserve (note the inconsistency of this latter provision with the idea that entitlements should have a uniform value within a country or region).

My view on this issue is that the Council is right and the Parliament is wrong. Providing a top-up payment to young farmers in Pillar 1, particularly where no obligations are placed on the recipient to possess the requisite farming skills or to pursue a business plan, is simply a waste of public money. To understand why, we need to examine the real constraints to generational renewal in EU farming and the past experience with installation aid for young farmers.

Why are there difficulties in attracting young farmers?

There is no question that Europe’s farmers are ageing and that the proportion of younger farmers has been falling. This is due to a number of factors, among which are:

- High start-up costs in agriculture. Farming requires control over a significant amount of land and capital, so it is not surprising that by far the most common way for young farmers to enter farming is through inheriting these assets. For those aspiring to enter farming without the expectation of an inheritance, entry may have to be postponed until significant resources have been accumulated to acquire the necessary farm assets. And with rising land prices (in real terms) in many EU countries, this bar to entry has also been rising.

- Farmers, like the rest of the population, are living longer. But unlike the rest of the population, a farmer’s place of residence is also his or her place of work. Many older farmers choose to remain in agriculture because they like the lifestyle and have an attachment to a home which may have been in the family for many generations. This is often coupled with a lack of affordable and suitable housing in rural areas for farmers who may want to retire. The consequence is that successors must wait longer to take over the farm. And in some member states, rural areas have become more attractive for elderly people who retire or start a part-time farming activity in agriculture.

- There are many financial incentives for farmers to remain farming, and few to encourage them to leave. This has been exacerbated by the policy of decoupled direct payments since 2005. Under the previous CAP regimes, a farmer would have had to produce in order to receive support. Now, under the Single Payment Scheme, all that is required of a farmer is to comply with cross-compliance conditions which are relatively undemanding. This has allowed many farmers approaching the age of retirement to rationalise their farming activity to a minimum whilst still maintaining their single payment.

- Inadequate pension provision was long identified as a barrier to farmer retirement, because it made it more difficult to retire without liquidating the farm assets to supplement pension income. The rules for pension eligibility can have a significant impact on farm workforce age structures, whereas early retirement schemes have had relatively little effect (Copus et al 2006). But more generous pension arrangements for farmers may also have perverse effects. In Ireland, for example, all farmers are now part of the contributory old age pension system which means they are entitled to a state pension regardless of means or other income. So a farmer over the age of 66 can live in their own home, receive a single farm payment and the state pension – the relevant question to ask is not why they don’t retire but why would you retire?

- In general, the system of agricultural policy support makes it more difficult for new entrants to farming. Higher subsidy payments and output prices lower the farm exit rates in European countries (Breustadt and Glauben 2007). CAP support pushes up land prices and thus adds to the time required for new entrants who are not inheriting to put together the necessary capital. It gives an incentive to older farmers to hold on to their land in order to receive the single farm payment. And, in many countries, new entrants have no right to receive payment entitlements through the national reserve if they do not obtain them through inheritance.

Implications for demographic policy in farming

Reflecting on the ways the cards are stacked against new entrants, it becomes clear that the problem is not mainly a shortage of willing entrants (as argued by Jesús Redigor in this European Parliament paper) but rather the lack of sufficient exits. If farming were really a declining industry, one would see land prices/rents falling in real terms. But real land prices/rents are rising, demonstrating that young farmers and new entrants are competing against current farmers wanting to expand for access to the limited amount of land which becomes available.

This is not to deny that there are good reasons why young people might not seek a career in agriculture. Agricultural employment is falling. Labour income in farming lags well behind incomes in non-agricultural sectors. Poor farm structures in many EU countries mean that the continued viability of many existing farm holdings is doubtful. Poor living conditions in many rural areas may also militate against young people choosing farming as a career. And, for those who are not in a position to inherit, there are high entry barriers.

But while many young people growing up on farms might decide a farming career is not for them, the evidence shows that where reasonable income prospects exist, there is no shortage of potential young entrants. In Ireland, for example, the number of students listing agricultural science as their first choice university course has jumped by 120% over the past five years. To repeat, the generational renewal problem in EU agriculture is the shortage of exits and not a lack of potential new entrants.

This diagnosis carries crucial implications for the design of policies to improve the age structure of farming. The problem is not to provide incentives for more young people to enter farming, but to tackle the obstacles which mean that older farmers are reluctant to exit.

The ineffectiveness of installation aid paid to young farmers under Pillar 2 rural development schemes in encouraging more rapid generational renewal has been documented in numerous ex post evaluations. This conclusion by Carbone and Subioli (2008) who reviewed the effectiveness of this aid in Italy is typical:

These examples confirm that the size of the payment provided by the EU measure for young farmers offers an ineffective incentive to attract young people into the sector, and it is also insufficient to finance an increase in the competitiveness of the existing holdings through the familiar turnover within the farm. In other words, would the holdings be profitable, the turnover would happen anyway, on the contrary, non profitable holdings are doomed to remain such: a payment of few thousand Euros cannot promote a generational turnover (even if it takes place within the family) assuring the survival of the holdings in the long period.

Generational renewal or an investment programme for new entrants?

If the top-up payment in Pillar 1 is unlikely to encourage generational renewal, then perhaps it might be justified because it would encourage additional investment by young farmers. The preamble to the Commission’s draft direct payments regulation noted that “an income support to young farmers commencing their agricultural activities should be established in order to facilitate the initial establishment of young farmers and the structural adjustment of their holdings after the initial setting up (italics added).”

The argument is that young new entrants to farming often find it difficult to raise the capital needed to acquire and develop their new business. Providing support in the critical early stages will make it easier for new entrants to access business development capital. This is precisely the justification for business start-up aid in Pillar 2. Yet evaluations of this scheme in RDPs have been luke-warm at best.

An early ex-post evaluation of installation aid measures published in 2003 summarised the impact of setting up aid for young farmers in most member states. In most EU countries, the available funds had been spread across a large number of beneficiaries and, therefore, resulted in relatively low payments per beneficiary. The report concluded that whilst this met the political objective of being seen to provide support, it lessened the actual impact. The report emphasised that this support needed to be targeted in order to assist those that needed it most and to increase its effectiveness.

More recently, a review of EU rural development instruments commissioned by DG Agriculture and Rural Development classified the effectiveness of installation aid as moderate. It noted that there is debate as to whether help of this specific type (aids based upon age/competence of the recipient) provides something that the market would not, particularly for successors who should be able to use inherited assets to attract loans against a sound business plan.

Business start-up aid can help to overcome the financial barriers that young farmers face in accessing capital, but whether it does this successfully or not depends on the scheme design. Start-up aid needs to be linked to a business plan. As under the UK Fresh Start scheme, aid is likely to be more effective where it is linked to mentoring and monitoring. In order words, assistance to young farmers needs to be managed; providing an additional income subsidy with no reporting obligations or target outcomes is simply a waste of public money.

Given that a business start-up scheme is provided in Pillar 2, why should the Commission want to introduce alongside this a scheme with similar objectives but with much less monitoring in Pillar 1?. The Commission’s impact assessment of the proposed young farmer top-up payment throws no light on this. Most of the relevant section was devoted to analysing the budgetary implications of different payment models. There was no attempt to identify or quantify the projected economic or social gains of the measure. The most likely reason is that such gains do not exist.

More effective measure to assist young farmers

It might be argued that using Pillar 1 funds to support young farmers is at least a better use of these funds than leaving them as part of the basic payment where even the minimal benefits of concentrating funds on younger farmers would disappear. Should we not welcome the young farmer top-up in Pillar 1 because it implies the use of Pillar 1 funding for a Pillar 2-type scheme?

This is an example of a second-best argument, that we should defend the introduction of an ineffective scheme because it helps to address the wasteful use of resources caused by an even worse scheme. Untargeted direct payments cannot be justified as part of farm policy (as the Americans have concluded in their Farm Bill debate). Trying to improve their legitimacy, whether by linking them to environmental objectives or young farmers, is simply the wrong direction to go. And it ignores the earlier argument that the Pillar 1 measure is far inferior to the Pillar 2 scheme in terms of its design and targeting.

Encouraging more younger farmers into EU agriculture is an important policy objective. To succeed in this, we need measures which build on a correct policy diagnosis of the demographic problem. I argue that this requires much more attention to addressing barriers to exit from farming than barriers to entry.

The traditional response to this problem has been to introduce early retirement schemes. But, by and large, these were little used by member states and it was hard to show their effectiveness in those member states that did use them. The early retirement measure has been dropped from the Commission’s proposed rural development regulation, although some vestiges remain in the small farmer scheme where it is proposed that those small farmers who permanently transfer their entire holding and the corresponding payment entitlements to another farmer would receive an annual payment equal to 120% of their small farmer payment until 2020.

The poor experience with early retirement schemes highlights the complexity of farm succession and transfer issues, particularly in agricultural sectors characterised by family farms where most new entry occurs through inheritance.

Tackling farm exits requires reviewing incentives for land mobility and tenancy laws, taxation and social welfare arrangements and encouraging earlier succession within farming families through joint ventures, share farming, partnerships or contract operations. It also requires removing the distortions caused by current agricultural policies. Addressing these issues requires more attention to young farmers, not less. But throwing money at the problem, as illustrated by the top-up payment, is simply a substitute for more appropriate action. This should be clear even to young farmers themselves.

Photo credit: West Midlands Area of Young Farmers Clubs

The proposal is reminiscent of EU rules preventing the sale of crooked cucumbers (repealed in 2009). Apart from the substantive issues around the merits or otherwise of the proposal itself, the issue throws light on the working of the EU’s comitology system as well as raising questions about the balance between maintaining uniform conditions of competition within the EU while also respecting the principle of subsidiarity.

The proposal is found in a draft Commission implementing regulation amending an earlier implementing regulation on the marketing of olive oil in the Community. Part of the background to this regulation is the evidence of extensive fraud in the marketing of olive oil – olive oil is reputed to be the most adulterated agricultural product in the EU (see this interview with Tom Mueller in the New Yorker based on his book Extra Virginity: The Sublime and Scandalous World of Olive Oil).

In its amending regulation, the Commission wants to further tighten up the regulations on the labelling of olive oil and improve controls and compliance but it also wants to extend the scope of the marketing regulations to olive oil provided in restaurants and bars. The alleged purpose of this latter amendment is “to ensure the quality and authenticity of oils sold to the final consumer” in these establishments.

Background to the decision

The proposal first saw the light of day in the Commission’s action plan for the olive oil sector published in 2012 where it was suggested to ‘encourage Member States to require the use in the hotel and catering industries of packages that cannot be re-used.’ The action plan was produced in response to falling margins and operating income over the past ten years in the olive oil sector due to increased production costs, low sale prices and stagnating labour productivity, resulting in low incomes for many olive growers.

The action plan emphasised that a more balanced market could be achieved, among other means, by measures to enhance the public image of European olive oil and to improve consumer protection and information.

It is worth quoting extracts from the preamble to the amending implementing regulation (where paragraph 2 is the one that has sparked the current controversy):

Whereas:
(1) Commission Implementing Regulation (EU) No 29/2012 of 13 January 2012 on marketing standards for olive oil lays down specific standards for retail-stage marketing of olive oils and olive-residue oils. It is necessary to lay down additional standards and to improve effective compliance control with these standards in order to better protect and inform the consumer.
(2) In order to ensure the quality and authenticity of oils sold to the final consumer in hotels, restaurants and pubs and bars, it is appropriate to include the availability of bottled oil in establishments in this sector within the scope of Implementing Regulation (EU) No 29/2012. These establishments should also be obliged to use oil bottles equipped with an opening system which cannot be resealed after the first time it is opened, together with a protection system preventing them from being reused once the contents indicated on the label have been finished.
(3) Several scientific studies have demonstrated that light and heat have a negative impact on the evolution of the quality of olive oils. Any particular storage conditions should therefore be clearly indicated on the label to ensure that the consumer is well-informed on the best conditions for preservation.
(4) In order to help the consumer to select products, it is crucial that the mandatory particulars indicated on the label are easily readable. It is therefore necessary to establish rules on legibility, particularly regarding the size of the printed characters, the consistency of the various blocks of text and the concentration of mandatory information in the same field of vision. To ensure that labels are easily readable, the characters should be between two and four millimetres high depending on the volume of the container.
(5) In order to enable the consumer to be sure that the product is fresh, the optional marking of the harvest year should only appear on the label when 100 % of the contents within the packaging comes from that harvest….

In fact, since the Agricultural Council adopted the action plan in June 2012, olive oil prices in the EU have shown a steady improvement (reader’s warning: this is definitely an example of correlation and not causation given that the recommendations in the action plan have not yet taken effect). The trend in EU prices for extra virgin olive oil are shown in the figure, with the red line for Spain (which is the most important producer) being the most important. Spanish extra virgin olive oil prices now lie at €2.84/kg, showing 60 per cent growth on year-ago prices and regaining the level of September 2006.

Source: International Olive Council

Requiring olive oil served at restaurant tables to be served in tamper-proof bottles seems an excessive reaction to the problems of olive oil adulteration. There is of course the possibility that the olive oil has been adulterated by a cheaper vegetable oil, but restaurant owners more than most have an incentive to maintain the quality. And olive oil available on the table or in dipping bowls is a condiment rather than something that the customer has explicitly purchased.

Other objections have also been raised (as listed in UKIP MEP Roger Helman’s post on the topic) – it will increase food waste, require additional amounts of packaging, discourage artisanal production and favour the use of less healthy fat alternatives. In the light of these seemingly well-founded objections, how has the decision been made?

The comitology procedure

The proposed decision is an example of the exercise by the Commission of its delegated powers under the single CMO regulation. Since the entry into force of the Lisbon Treaty, the operation of this comitology system has been overhauled. Implementing regulations for the CAP are governed by the examination procedure (set out in Regulation (EU) No 182/2011 of the European Parliament and of the Council) laying down the rules and general principles concerning mechanisms for control by member states of the Commission’s exercise of implementing powers).

The examination procedure requires that draft Commission implementing regulations are considered by a management committee composed of representatives of the member states. The committee takes decisions by qualified majority voting. Where it delivers a positive opinion, the Commission adopts the implementing act. Where it delivers a negative opinion, the Commission has the options to either submit an amended act or to refer the matter to an appeal committee ‘which should meet at the appropriate level’ but again composed of member state representatives.

In the case where the management committee offers no opinion (because there is neither a qualified majority in favour nor against), the Commission may adopt the implementing act, except under some specified conditions. These conditions cover some specific legislative areas such as taxation or health and safety, or where the basic act provides that the implementing act falls when no opinion is delivered, or where a simple majority of the component members of the committee opposes it. That is, a simple majority of member states against the implementing act would prevent it from entering into force.

In addition, both the Council and Parliament have a right of scrutiny to object if either feels that an implementing act “exceeds the implementing powers provided for in the basic act.” However, the Commission is only required to respond to the criticism but not necessarily to withdraw the act, and the right of scrutiny only extends to the formal powers of the Commission and not to the substance of the implementing act itself.

Commission can proceed

In the case of the amendment to the implementing regulation on the marketing of olive oil, the management committee could not express an opinion in an indicative vote at its February meeting (the voting was 161 votes in favour, 131 votes against and 53 abstentions) and with a majority of member states in favour. The regulation was tabled again at the May management committee meeting but the summary report of that meeting is not yet available. However, one assumes from the press reports that the original ‘no opinion’ vote was confirmed. Thus, the Commission is now free to go ahead and adopt the amending regulation.

Eyebrows have been raised in the UK because it was among those countries that abstained despite its well-known disdain for micro-management by Brussels. This vote was explained by a Ministry official on the grounds that, although the UK opposed the extension of marketing rules to restaurants, it was in favour of the other elements of the regulation covering labelling and compliance. There has also been criticism that the UK (and other member states) are represented on the management committee by officials and thus that decisions of this kind are taken by technocrats, although one assumes that these officials are following political instructions from their home ministries.

This decision seems to have been made as a way to help olive oil producers hit by rising operating costs and falling profits in recent years, even if the market situation has now turned for the better since that decision was made. The very slight risk of the adulteration of olive oil in bars and restaurants does not seem to justify the draconian solution adopted by the Commission.

Photo credit: Roger Helmer

We are not yet at the same point with the CAP reform dossier (see this recent update to the Irish Parliament by Simon Coveney, the Irish Minister representing the Council in the trilogue negotiations and this view from Mairead McGuinness, one of the shadow rapporteurs in the European Parliament). Both the Irish Presidency and the Agriculture Commissioner continue to make bullish pronouncements (as indeed they must) that an overall CAP package also acceptable to the European Parliament negotiators will be agreed at the next Agricultural Council in June. But is this more hope than reality?

The MFF issue

Before turning to the outstanding issues in the CAP negotiations we need to keep in mind that these negotiations are taking place in the context of the unresolved debate on the structure and funding of the EU’s long-term budget for 2014-2020. The Parliament had previously insisted that the two issues were inextricably linked, and that it would refuse to vote on CAP reform until the MFF budget agreement had been concluded.

However, it now seems that the Parliament’s CAP negotiators will be willing to reach a political agreement on CAP reform independent of the MFF outcome. It is now accepted that the consent process with the Parliament on the MFF will not change the CAP budget figures agreed in the European Council’s proposal last February. The Parliament’s negotiators are still trying to secure the release of the individual member state allocations for Pillar 2 rural development funding agreed as part of the European Council package, but even the continued suppression of these figures is not likely to be a stumbling block to a political agreement on the CAP regulations themselves.

However, progress on the MFF regulations may still influence the timing of the Parliament’s formal first reading vote on the reformed CAP if it decides to delay a vote on the new CAP regulations until after an MFF agreement. Here, the Ecofin Council agreement on the 2013 budget on Tuesday is important as it seems to postpone the likelihood of an MFF deal until after the end of October.

The 2013 budget

In a previous post, I discussed the four substantive questions remaining in the MFF negotiations. In addition, the Parliament has insisted as a threshold condition that additional unpaid liabilities from the 2012 and 2013 budgets should not be carried over to become a charge on the available funds in the 2014-2020 period.

I also highlighted that the trilogue negotiations had stalled because the Ecofin Council had refused to commit to approving the Commission’s draft 2013 amending budget which requested an additional €11.2 billion in payment appropriations to avoid this happening. An agreement between the three Presidents (Council, Parliament and Commission) in December 2012 when the 2013 budget was approved made provision for this amending budget.

The Parliament agreed on 6 May to restart the MFF trilogue negotiations following a meeting between the three partners in which the Council Presidency proposed to address the outstanding 2013 liabilities in two stages. It proposed to table a proposal for a first tranche for an amount of €7.3 billion, and to work with member states on a political commitment regarding the second tranche. The parties further agreed that the negotiations on the MFF for the 2014-2020 period would proceed in parallel with the negotiations on the draft amending budget for 2013.

Subsequently, the first MFF trilogue took place on 13 May in which the Council and the Parliament agreed both the scope and the calendar for the negotiations. The parties agreed that the negotiations will focus mainly on future flexibility of the EU budget, a revision clause, the future of the EU budget’s own resources and the unity of the EU budget.

The Ecofin Council last Tuesday reached a political agreement which supported the Irish Presidency compromise in the following terms:

Draft amending budget no. 2 for 2013 is about meeting outstanding payment needs in the 2013 EU budget. The Council agreed to provide EUR 7.3 billion in a first stage and to focus this amount on measures to support economic growth, create jobs and tackle unemployment, especially amount youth people.

The Council also adopted a statement confirming its willingness to take all necessary additional steps to ensure that the EU’s obligations are honoured in a second phase, when the Commission will have more information on implementation, the possibilities for redeployment and on budget revenues.

In a second statement the Council stressed the political nature of the agreement and declared to formally adopt its position on this draft amending budget at a later stage in parallel with the conclusion of the talks on the EU’s multiannual financial framework (MFF) for 2014-2020. Ministers stressed that nothing is agreed until everything is agreed.

The European Parliament’s Budget Committee must now take a view on these conclusions at its meeting tomorrow Thursday 16 May and decide if it is sufficiently water-tight to allow the MFF trilogue to proceed (the next meeting is scheduled for 28 May). Some initial reactions were negative, with Ivailo Kalfin (the Bulgarian MEP who is Vice-Chair of the Budgets Committee and one of the two rapporteurs on the MFF regulation) in this tweet refusing to accept the parallelism between the two processes and arguing that the 2013 additional funds are legally due in any case.

#ecofin agreed on part of DAB2/2013 only and made it conditional on the #EP conscent on #MFF.Ridiculous,these are funds legally due.A no go!

— Ivailo Kalfin (@IvailoKalfin) May 14, 2013

Even if the MFF trilogue gets the go-ahead tomorrow and a political agreement is reached by end-June, the Council’s decision to wait until the Commission comes forward with revised figures in October before committing to approve the remainder of the draft amending budget seems to suggest (if parallelism means what it says) that the MFF regulations will not be formally tabled for approval by Parliament until after that point in time.

This, in turn, may mean that the MFF sectoral legislation (including the revised CAP regulations) must also wait for first reading approval until after that point in time. The Commission has already accepted that the new rules for direct payments cannot come into force until 1 January 2015 and it has also proposed transitional rules for rural development programmes. However, a further delay in formal approval of the new CAP regulations is likely to further complicate the process of drawing up and approving member state rural development programmes.

CAP reform

While the political agreement on the fisheries reform was an undoubted political triumph for the Irish Presidency at last Monday’s Agricultural Council, the CAP reform debate was a curious affair. The Presidency made clear that it was not yet seeking a new mandate from the Council, but instead it sought feedback on three of the politically contentious items in the trilogue negotiations with the Commission and Parliament.

The issues it chose to focus on were the young farmers scheme, the small farmers scheme and the definition of an active farmer. According to Minister Coveney in the chair, the aim of the session was to narrow down the number of issues on which there needs to be a ‘political’ negotiation and compromise in order to get a whole package agreed in June.

While important, the differences on these three issues are not at the heart of this CAP reform. The decision to focus on these issues for the Council debate suggests that the Presidency did not want an open discussion on the more complex and central issues remaining – greening, internal convergence, flexibility between Pillars, sugar quotas, and the role of delegated and implementing acts – which might only have hardened positions and made an ultimate compromise more difficult rather than easier.

According to the Council conclusions (see also this statement released by Minister Coveney):

On the active farmer requirements, several delegations showed openness to a compromise solution consisting of a short mandatory ‘negative list’ to avoid farm payments being allocated to natural/legal persons with marginal agricultural activities (e.g. airports, sports facilities), with the possibility for member states to complete this list according to national needs. However some member states repeated their preference for a voluntary negative list. On the nature of both the young farmers’ scheme and the small farmers’ scheme, while member states generally reiterated their commitment to the position set out in the Council’s general approach, they showed openness to exploring compromise solutions, including on certain operational aspects of these schemes (in particular the maximum number of hectares eligible for the young farmers top-up and the maximum amount for farmers participating in the small farmers’ scheme).

The outlines of the Presidency compromises on these issues point to the possible solutions on other issues. The central theme of the Ciolos CAP reform is turning out not to be greening or a more level distribution of payments, but rather enhanced member state flexibility in policy design or what one observer has described as the ‘pick and mix’ approach.

We saw this already in the drafting of the Council’s mandate where a range of possible models was included from which member states could choose (for example, with respect to establishing eligible hectares for direct payments, on internal convergence, and on greening mechanisms). Additional flexibility is now proposed to address the divisions between Council and Parliament on the definition of active farmers.

Flexibility (or subsidiarity by another name) can be broadly positive, particularly where it allows policies to be better designed at national or regional levels to achieve better outcomes. The danger with flexibility is if it leads to distortions of competition between farmers in different countries, and thus puts at risk the great achievement of the single market in agricultural products.

Allowing member states to voluntarily recouple direct payments to production is an example of the more dangerous form of flexibility in the current proposals. Allowing member states to make up their own minds if throwing money at young farmers in a totally untargeted way and without conditions is the best way to achieve generational renewal in agriculture is surely a wise example of the use of flexibility.

Next steps

Following Monday’s Council meeting, discussions within the Council continue at official level in the Special Committee on Agriculture, and between the Council, Parliament and Commission in the trilogues. The Presidency has scheduled an informal Council for three days at the end of this month (26-28 May), to which the COMAGRI chair is also invited.

The Presidency will be hoping that most of the hard bargaining on where the Council is prepared to compromise with the Parliament on the outstanding political issues will be decided at this meeting, away from the direct glare of video lights and public sessions. Provided the Parliament feels that sufficient concessions to its positions have been made, this would then allow the Presidency to present new texts of the four CAP regulations at the final Agricultural Council under the Irish Presidency on 24-25 June. Ultimately, it only requires a qualified majority of member states to support the compromise position. These texts would then have to be approved by the Parliament, possibly at its July meeting, but if a linkage is made with the MFF agreement then approval could be delayed until the late autumn.

This is the most favourable scenario for the timing of an agreement on CAP reform. Its very tight, there are a lot of ‘ifs’, but it could be done. But even this favourable scenario would still be just the first step in the approval process which could last until the late autumn (note: these two concluding paragraphs slightly revised 16 May).

Alan Matthews, Environmental Public Goods in the New CAP: Impact of Greening Proposals and Possible Alternatives, 2012, Brussels, European Parliament.
This note prepared for the European Parliament’s COMAGRI discusses the greening component of direct payments in the Commission’s legislative proposals of October 2011 for the Common Agricultural Policy in the period after 2013. Based on an analysis of their likely consequences it puts forward a range of options for the consideration of MEPs for how these proposals might be amended to improve their environmental impact, to reduce their administrative complexity and to improve their cost-effectiveness, including possible alternatives.

Update 7 May 2013.
Allen B., Buckwell A., Baldock, D. and Menadue, H., Maximising environmental benefit through ecological focus areas, London, Institute for European Environmental Policy,60pp, 2012.
The creation of Ecological Focus Areas, extending to seven per cent of the eligible area of arable and permanent crops, has been recognised as having the greatest potential to address a range of environmental concerns in the farmed countryside. How much of this potential is realised in practice depends to a large degree on precisely how the proposals evolve, the final form they take, the scope for tailoring the approach to local circumstances and the way in which Member States use this discretion, as well as the response by farmers. This report, prepared at the request of the Land Use Policy Group (LUPG), has been prepared to identify some key issues while this detail is awaited. Based on the literature, past experience and a seminar in Brussels, it aims to identify the key parameters that need to be addressed in a new policy.

Alan Matthews, 2012. Greening the CAP: the way forward, QA Rivista dell’Associazione Rossi-Doria, 4, 37-60.
This paper reviews the debate on the proposal to introduce a green payment in Pillar 1 of the CAP since the publication of the Commission’s legislative proposals for the EU’s Common Agricultural Policy post-2013 in October 2011 to June 2012. Both arms of the legislative authority have begun to formulate their positions in response to stakeholder reactions. Many relevant details of how the proposals will be implemented remain unclear, but an attempt is made to examine their potential contribution to environmental improvement. Increasing the ambition of agri-environment measures in rural development programmes in Pillar 2, combined with strengthened cross-compliance standards, could offer more effective environmental protection at a lower cost in terms of foregone food production. The legislative process to date indicates that the final outcome will be based on the Commission’s original ideas but there is still scope to improve the environmental impact of CAP spending in the next MFF period.
This paper is based on an earlier conference paper
Alan Matthews, Greening the CAP: the way forward, Paper prepared for the 126th EAAE Seminar “New challenges for EU agricultural sector and rural areas. Which role for public policy?”, Capri (Italy), June 27-29, 2012.

Kaley Hart and Jonathan Little, Environmental approach of the CAP legislative proposal, Politica Agricola Internazionale – International Agricultural Policy, 2012, Issue 1, 19-30.
For the past two decades, the integration of environmental concerns within the CAP has been characterised by a gradual shift in emphasis towards more targeted, regionally defined and programmed approaches, embodied in the agri-environment measures and Pillar 2 more generally, underpinned by cross compliance. These elements all remain within the current proposals, however, a major new element has come into play – the introduction of green direct payments in Pillar 1. The proposals aim to extend a basic level of environmental management to the majority of farmland in Europe, recognising the scale of the environmental challenges to be met. However, these are contentious proposals, faced with criticisms that they are both too demanding and too weak. At the same time, their introduction is coupled with a net reduction in the Pillar 2 budget over the next programming period. Within the context of the broader CAP proposals, this paper considers the opportunities and risks embodied in the proposals for green direct payments as well as possible alternative options. It considers the implications of the proposals for the environment and whether they genuinely will lead to the much needed improvements in environmental outcomes required to meet the significant environmental and climate challenges facing the EU.

Matthews, A., Greening the Common Agricultural Policy post-2013, Intereconomics, 47, 6, 326-331, 2012.
The projected allocation in the Commission’s proposal for the 2014-2020 Multi-annual Financial Framework (MFF) of €42.78 billion for Pillar 1 direct payments in 2020 implies an annual allocation of €12.8 billion to the green payment during the latter years of the programming period. This compares to annual average spending on agri-environmental measures in Pillar 2 in the 2007-2013 period of just over €3 billion. At a time of severe public funding difficulties in EU member states, the environmental pay-offs need to be clearly demonstrated in order to justify this expenditure. We argue that there are inherent flaws in the Commission’s approach to greening which make it difficult to defend the proposal. In the ultimate political compromise on the CAP2020 negotiations, there is a danger that greening will be little more than a rhetorical device used to justify the continuation of direct payments to EU farmers.

Matthews, A., Greening CAP payments: a missed opportunity?, Dublin, Institute for International and European Affairs, 2013, 14pp.
The most prominent innovation in the European Commission’s 2011 proposal for new regulations for the Common Agricultural Policy post-2013 was undoubtedly to earmark a proportion of direct payments as a mandatory green payment for farmers who follow a number of practices beneficial to the environment and climate. This was put forward both to address some of the pressing environmental challenges arising from farming activity across the EU as well as to justify the continuation of a large budget for agricultural policy in the parallel negotiations on the future of the EU’s long-term budget. The proposal met with a frosty reception, and the amendments being considered by both the Council and Parliament suggest that, while greening Pillar 1 payments will survive as a concept, its practical environmental benefits will be negligible. This policy brief suggests some reasons for this apparent failure of the Commission’s strategy and reflects on the implications for future efforts to better integrate environmental objectives into agricultural policy.

Allen, B. and Hart, K., Meeting the EU’s environmental challenges through the CAP – how do the reforms measure up? Aspects of Applied Biology, 118, pp9–22, 2013.
Since 1985 there has been a gradual integration of environmental objectives and ambition into the CAP, yet there continues to be a mismatch between the scale of the environmental challenges facing EU farmland and the scale of the policy response. Taking an EU perspective, this paper considers the extent to which the 2014?2020 CAP reforms have the potential to meet the EU’s considerable environmental challenges. It explores the opportunities and barriers to achieving real environmental progress and reflects on whether the reform is likely to be looked back on as a genuine step forward in mainstreaming the environment into the CAP or a missed opportunity.

Kaley Hart, Principles of Double Funding, London, Institute for European Environmental Policy, 2013.
A fundamental principle underpinning the rules for public expenditure in the EU is that no costs for the same activity can be funded twice from the EU budget. This is known as double funding and is the subject of heated debate within the current CAP reform debates, specifically with regard to the relationship between the new green direct payments and support under the agri-environment-climate measure in Pillar 2. This briefing, written by IEEP on behalf of the UK’s Land Use Policy Group (LUPG), explores this double funding issue in relation to the CAP proposals and ongoing negotiations, considering the environmental implications of any weakening of these rules.

Kaley Hart and Hetty Menadue, Greening the CAP – how ‘equivalent’ are alternative approaches?, London, Institute for European Environmental Policy, 2013.
The study assesses in broad terms the degree to which existing certification schemes for farm products (involving environmental requirements) or voluntary measures under agri-environment schemes could be considered to be ‘equivalent’ to the three greening measures proposed by the Commission in October 2011. The review shows that while the concept of equivalence may sound like a reasonable and convenient approach in theory, the practical issues with its application are likely to lead to far greater administrative complexity and cost, both for Member States and within the Commission, with arguably little additional environmental benefit. As the CAP reform negotiations enter their final stages, the study urges the Commission, Council and European Parliament to think through the issues that equivalence raises and find solutions that simplify rather than over-complicate the future delivery of environmental outcomes from agriculture.

Alan Matthews, Greening agricultural payments in the EU’s Common Agricultural Policy, Contributed Paper prepared for presentation at the 87th Annual Conference of the Agricultural Economics Society, University of Warwick, United Kingdom, 8 – 10 April 2013.
In formulating its proposals for the revision of the CAP post-2013, the Commission opted to pursue further integration largely through Pillar 1 through the introduction of a ‘green’ payment for farmers following a specified set of mandatory farm practices. The legislative process was not concluded in April 2013, but the initial positions of the Council and the European Parliament indicate that the level of greening ambition in this CAP reform will be very limited. Some explanations for the apparent failure to significantly reshape the CAP to tackle the problems faced by the natural environment are proposed. It is suggested that, far from being complementary, cross compliance and voluntary agri-environment measures are competing approaches to further greening of the CAP. Advocates of a greater focus on environmental objectives need to choose between these approaches.

(Updated 17 May 2013) A longer version of this paper can be found as
Alan Matthews, Greening agricultural payments in the EU’s Common Agricultural Policy, Bio-based and Applied Economics 2(1): 1-27, 2013

David Baldock and Kaley Hart, A greener CAP: still within reach, London, Institute for European Environmental Policy, 2013.
This short paper provides an overview of the state of play on the greening in Pillar 1, Pillar 2 and cross-compliance. It reflects on the architecture of the CAP as well as the implications of the different ways in which green elements have been watered down in negotiations, suggestions are made about how the outstanding issues should be resolved if greenwash is to be avoided and a credible CAP put in place.

If there are additional papers that I have missed, please let me know.

Picture credit B. Monginoux / Landscape-Photo.net (cc by-nc-nd)

According to the conclusions of the meeting:

Ministers supported the presidency’s efforts to find a compromise with the European Parliament on the next MFF in a timely manner. Ministers expressed their willingness to discuss the four key elements of the European Parliament’s resolution (flexibility, revision, own resources and unity of the budget). Some ministers also stressed that substantial elements of the Parliament’s demands had already been agreed by the European Council in February, in particular as regards flexibility.

More than two months have passed since the European Council agreed its proposal on 8 February, and the Presidency was anxious to lose no more time. Eamon Gilmore, Irish deputy prime minister and chair of the GAC, announced he would meet with the Parliament’s contact group later in the week in the first of the planned trilogue meetings on Thursday 25 April 2013.

However, last Thursday the Parliament’s contact group refused to meet with the Presidency to start the trilogue process. According to Reimer Böge, co-rapporteur of the European Parliament on the Multiannual Financial Framework (MFF), Parliament denies any responsibility for the delay of the start of the MFF negotiations:

Over the past weeks, the Parliament has been preparing its negotiating position and is thus ready to start negotiations. The situation in the Council, however, is catastrophic and makes real negotiations at this point impossible. Firstly, the Irish Presidency has not managed up until now to receive a formal mandate from the General Affairs Council for the legal texts on the basis of the Council conclusions from February; secondly, ECOFIN has shown absolutely no willingness to cooperate with regard to a swift solution for the draft amending budget.

Given that the Council has given no signs of making concessions on the draft amending budget or on the EP priorities regarding the MFF, the Parliament had no choice but to postpone the start of the negotiations and to invite the Presidents of the Institutions to accelerate the process, making a timely agreement possible.

The Parliament had previously rejected the European Council’s MFF agreement in its resolution of 13 March 2013 which set out the Parliament’s demands. The GAC conclusions give the Presidency scope to explore where agreement might be found (although whether the ‘guidance’ given to the Presidency amounts to a ‘mandate’ appears to be a disputed issue). The European Parliament is now waiting for a formal Irish Presidency response on behalf of the Council to the EP’s resolution and specific demands.

The Parliament’s resolution underlined its willingness to enter into fully fledged negotiations with the Council. It set as a precondition that the Commission should come forward with an amending budget for 2013 devoted to the sole purpose of covering all unpaid claims for 2012. It also demanded a political engagement from the Council that all legal obligations due in 2013 will be paid out by the end of this year.

Disappointingly, the Parliament’s contact group concluded on the Tuesday evening that these preconditions were not met and thus abandoned the trilogue process. In this post I try to unravel some of the issues at stake.

Parliament’s initial MFF reactions

The European Council agreed that the next MFF should shrink as compared to the current one. Total commitment appropriations were set at €960 billion (-3.5% and -€35.2 billion as compared to the current MFF) which is 1% of EU gross national income, while payment appropriations were set at €908 billion (-3.7% and -€34.4 billion as compared to the current MFF).

The Parliament’s initial reactions to the European Council MFF conclusions were marked by a bout of silliness. Under the Treaty of Lisbon, the European Council has no formal legislative powers but it “provide[s] the Union with the necessary impetus for its development and shall define the general political directions and priorities thereof.” (Art. 15, TEU). The Council is also mandated, in accordance with a special legislative framework, to adopt the regulation laying down the MFF, acting unanimously after obtaining the consent of the European Parliament (Article 312, TFEU).

It is understandable that the Parliament, which along with the Commission had sought a higher EU budget, would be disappointed with the Council’s proposal. However, when the EP’s Budget Committee met on 20 February 2013 to consider the Council conclusions, the committee’s chair Alain Lamassoure claimed that the European Council had staged a legal coup d’etat and had ignored the role of the Parliament. This reaction simply ignored the statement in the European Council conclusions that “This is the basis on which the Council will now seek the consent of the European Parliament in accordance with Article 312(2) TFEU which stipulates that the Council shall adopt the MFF regulation after obtaining the consent of the European Parliament.” (Para. 6).

Then there was the idea announced by EP President Martin Schultz in a speech on 7 February 2013 that the Parliament might seek to have a secret vote on its MFF resolution, apparently in a bid to avoid MEPs coming under pressure from national governments to support the European Council position. Fortunately, however, wiser heads also prevailed on this issue.

More serious is the apparent willingness of senior EP figures to countenance a delay in approving the MFF, possibly until after the May 2014 elections to a new European Parliament. This would trigger a system of annual budgets linked to the 2013 level which would make available more money than foreseen under the European Council’s MFF. It may also have the role of a bargaining counter as it would mean that some net contributor countries such as Germany, Netherlands, Austria and Sweden would lose their rebate on their net contribution to the UK rebate after 2013.

However, there is no guarantee that the sectoral legislation which is required to release funds under the EU’s research, cohesion and rural development programmes could be adapted in a way which would allow the continuation of these programmes after 2014. Thus, from the point of view of enabling Europe to invest in growth and employment this is a very dangerous game to play.

The key sticking point now is the Parliament’s linkage between opening trilogue negotiations on the MFF and evidence of the Council’s willingness to reach agreement on the Commission’s second draft amending budget for the 2013 budget. Essentially, this seeks to ensure that sufficient funds are available in the 2013 budget to fully pay all the EU’s commitments which fall due in this year, so that further liabilities are not rolled further into the 2014-2020 MFF.

At last week’s GAC, a number of member states made clear they were not convinced by the Commission’s figures. Member states whose domestic budgets are already under severe pressure do not relish the idea of making a larger-than-expected payment to Brussels.

The Parliament is right to insist that simply refusing to pay bills that have already been incurred is to adopt an ostrich-like attitude. But it is wrong to refuse to open trilogue negotiations on the MFF until there is evidence of progress on the 2013 amending budget. The Parliament’s position that it will not even enter into negotiations until it is clear how the unpaid payment claims for 2012 as well as 2013 claims would be covered is not reasonable. The two issues need to progress in parallel and trilogue negotiations on the MFF need to begin now.

Parliament’s substantive MFF demands

There are five substantive issues mentioned in the EP’s MFF resolution of 13 March 2013 (see also this commentary from Notre Europe written by Jacques Delors and António Vitorino which gives strong support to the Parliament’s position).

Overall size of the MFF

The Parliament has consistently argued for greater spending on growth and employment initiatives, including innovation, R&D, infrastructure and youth, meeting the EU’s climate change and energy objectives, improving education levels and promoting social inclusion (although it has refused to consider reducing the CAP budget to make room for these initiatives).

However, the overall size of the MFF and the amounts allocated to the different headings were not listed in the GAC meeting as a contentious issue in the negotiations with the EP. There appears to be a reluctant acceptance in the Parliament that the numbers in the European Council’s MFF conclusions will not be increased. However, not all political groups in the Parliament are happy with this; there is pressure, in particular, to re-open the amounts devoted to Heading 1(a) Competitiveness.

Revision clause

The Parliament’s stance on revision is set out as follows:

Firmly believes that, in order to ensure full democratic legitimacy, the next European Parliament and Commission – that will come into office following the 2014 European elections – should be in a position to reconfirm the Union’s budgetary priorities and carry out a revision of the MFF 2014-2020; underlines, therefore, its position in favour of a compulsory and comprehensive revision of the MFF, or possibly a sunset clause; considers that the revision should be legally binding, enshrined in the MFF Regulation and decided by qualified majority in the Council, making full use of the passerelle clause of Article 312(2) of the TFEU;

The reference to the passerelle clause is designed to get round a constitutional objection to the EP’s position, namely, that the Lisbon Treaty specifies that the MFF should be adopted by unanimity in the Council. The Treaty introduced passerelle clauses in order to be able to apply the ordinary legislative procedure (i.e. qualified majority voting) to areas for which the Treaties had laid down a special legislative procedure. The specific passerelle clause relevant to the MFF (contained in Article 312) states that: “The European Council may, unanimously, adopt a decision authorising the Council to act by a qualified majority when adopting the regulation referred to in the first subparagraph.”

There are various arguments in favour of including a revision clause in the seven-year MFF. One is that Europe is now in the midst of a recession and that, over a 7-year period, changed circumstances might justify a reordering of priorities. A second argument, used by the Parliament, is that it is wrong for the outgoing Parliament to bind its successor and that the latter should have a renewed opportunity to express its views on the Union’s spending priorities at the beginning of its term. This also justifies its view that the revision should occur as early as 2016. The difficulty here is that there is no support in the Treaty for the view that a new Parliament should have another opportunity to give its consent to the MFF in place at the time of its election.

The Council is willing to consider a revision of the MFF but in a much more limited context. Here the view is, not surprisingly, that what is agreed by unanimity cannot be altered by qualified majority. Revision, in the Council’s view, would be limited to updating the MFF on the basis of more recent macroeconomic indicators which might justify, for example, changes in the shares of cohesion spending. It buttresses its position by arguing that any potential for greater reallocation among headings would lead to uncertainty. For the Council, the revision should take place no earlier than 2017 or half-way through the current MFF.

Flexibility

The EP’s position on flexibility is set out as follows:

Requests that the agreed MFF ceilings for commitment and payment appropriations be used to the fullest extent when establishing the annual EU budgets; considers, therefore, that the maximum overall flexibility between and within headings, as well as between financial years, needs to be ensured in the next MFF and decided by qualified majority in the Council; believes, in particular, that such flexibility should include the possibility of fully utilising the available margins of each heading in one financial year (for commitment appropriations), as well as an automatic carry-over of available margins to other financial years (for both commitment and payment appropriations);

President Barroso has supported the Parliament in its quest for greater flexibility, saying that without this the new MFF cannot work. He has called for the possibility for transfers between headings, carry-over between years, and the n+3 rule for commitments (allowing member states that are not in a position to spend an extra year to draw down their commitments).

The European Council opened the door to meeting the Parliament’s demand for flexibility. Its February 2013 conclusions state that: “Specific and maximum possible flexibility will be implemented in order to comply with Article 323 TFEU to allow the Union to fulfil its obligations. This will be part of the mandate on the basis of which the Presidency will take forward discussions with the European Parliament ….” However, the Council will be reluctant to allow transfers across headings on the basis of qualified majority voting, given that these ceilings are considered an integral part of the MFF which is adopted by unanimity.

Own resources

The European Parliament’s position on own resources is as follows:

Stresses the importance of reaching an agreement on an in-depth reform of the own resources system; emphasises that the EU budget should be financed by genuine own resources, as provided for in the Treaty; states, therefore, its commitment to a reform that reduces the share of GNI-based contributions to the EU budget to a maximum of 40 % and phases out all existing rebates and correction mechanisms;

Reiterates its support for the Commission’s legislative proposals on the own resources package, including a binding roadmap; considers, furthermore, that in the event that the Council waters down these proposals so that they do not result in a significant decrease in the Member States’ GNI-based contributions to the EU budget, the Commission should come forward with additional proposals on the introduction of new genuine own resources; insists that revenues from the Financial Transaction Tax should be allocated at least partly to the EU budget as a genuine own resource;

In its agreement on own resources in the MFF 2014-2020, the European Council reached the following conclusions: collection costs on traditional own resources (customs duties and agricultural levies) should be lowered to 20%; a new VAT resource should be further worked on and could replace the existing one; those member states cooperating on a Financial Transactions Tax (FTT) should examine if this could become an own resource; the UK rebate should be kept and corrections should be granted to Denmark, Germany, the Netherlands and Sweden until 2020 (and to Austria until 2016).

Already, doubts are being raised about the feasibility of implementing the FTT. It is not clear whether and when it will be implemented, let alone whether some of the proceeds would be earmarked for the EU budget. What the Parliament is looking for is a political agreement with the Council including a roadmap that the EU budget should be financed by own resources that are different to national budget resources.

Some member states, including France, favour a timetable for the introduction of additional own resources. However, many member states, including Germany, are opposed to any new own resource because it would be seen as introduction of a new tax.

Unity of the budget

The unity of the budget is an old Parliamentary chestnut and refers to the fact that there are a number of off-budget items (notably the European Development Fund) which are formally not part of the MFF.

The European Council conclusions accepted that the MFF should include, as a rule, all items for which EU financing is foreseen, as a means of ensuring transparency and appropriate budget discipline. However, in addition to the EDF, it also proposed to place the Flexibility Instrument, the Solidarity Fund and the European Globalisation Adjustment Fund outside the MFF.

The Parliament’s demand is that full information on all expenditure and revenue, including borrowing, lending and loan guarantee instruments, should be summarised each year in a document annexed to the draft budget to allow for full information and parliamentary control.

The issue of unpaid appropriations

On 27 March 2013 the Commission forwarded its second draft amending budget for the year 2013 which proposes an increase of payment appropriations of €11.2 billion for all headings in the current MFF except for administration. It would allow all the legal obligations left pending at the end of 2012, as well as those arising before the end of 2013, to be covered in this year’s budget.

The background to this is that the three institutions undertook in a joint declaration at the end of the 2013 budget negotiations to finish 2013 with a “clean sheet”, by settling all unpaid bills incurred by member states for EU programmes before the start of the next MFF. Indeed, the Parliament believes that the sum required is nearer to €16 billion.

The General Affairs Council conclusions noted:

With regard to draft amending budget no 2 for 2013 (by which the Commission proposes to increase the 2013 EU budget by EUR 11.2 billion and which the European Parliament links to the MFF), the Council expressed its willingness to work urgently and constructively on the Commission proposal with a view to reaching agreement in order to meet clearly justified payment needs. The Council will also follow very carefully the evolution of the budget through the year and take any necessary further steps to ensure that the EU can fulfil its obligations.

The Parliament abandons the trilogue

At the EP’s Budget Committee meeting on Wednesday 24 April, the Committee chair explained the rationale behind the Parliament’s refusal to meet with the Presidency and Commission in trilogue. Members of the EP’s contact group had met with two Ministers from the Irish Presidency the previous evening seeking evidence of a commitment to reach agreement on the draft amending budget.

They failed to get the assurances they were seeking – Lamassoure complained that they were not even willing to adjust the calendar for the two sets of trilogues to be sure that they could be completed in parallel – with the result with the EP contact group took the unanimous decision that the preconditions were not in place to begin the MFF trilogue.

Lack of transparency

Another theme of the Parliament is the lack of transparency in the budget negotiations. For example, despite numerous requests, the Parliament does not yet have access to official figures for the national envelopes for each country’s cohesion fund or rural development allocation. Apparently, each institution (European Council, Council and Commission) says it is up to the other institutions to provide this information. This is hardly a satisfactory state of affairs.

According to the Budget Committee which has attempted to produce its own numbers on the cohesion fund allocations, Greece and Spain will lose 30% of their payments in the current MFF period, while the Scandinavian countries will gain. Assuming these numbers are correct, the Parliament wants to know the objective criteria on which such a distribution has been agreed.

I might add my own example: the conclusions of the GAC meeting on 22 April note that the Presidency tabled a draft MFF regulation and IIA (inter-institutional agreement) regulation earlier this month and that work will continue in COREPER (the Permanent Representatives Committee composed of the ambassadors of the 27 EU member states which prepares decisions of the Council). But these documents are not yet publicly available. The Parliament is absolutely right to complain about this lack of transparency.

Next steps

Eamon Gilmore on behalf of the Irish Presidency took the opportunity of a speech in Brussels on Thursday 25 April 2013 to lament the unwillingness of the Parliament to take part in the first planned meeting of the MFF trilogue earlier that day.

According to Gilmore:

The MFF is central to progress on jobs and growth in Europe. If we fail to agree in good time, the Union will struggle to plan, manage and programme the expenditure of 960 billion euro of public money. That puts in jeopardy the efficient planning and spending of 325 billion euro in Cohesion funds for example, money that our regions and citizens are depending on, not least to provide jobs during this economic crisis. And the perception of the Union’s capacity to take hard decisions will suffer if we are unable to agree on a solid financial basis on which to implement the Union’s programmes.

The next step now will be a trilateral summit convened by the Commission (making use of its powers under Article 324, TFEU) comprising the Presidents of the Council, the Parliament and the Commission, which is scheduled for May 6 2013. The EP Budget Committee meeting the following day 7th May will then decide if enough progress has been made to allow the trilogue to begin.

However, the MFF timetable is slipping. Three MFF trilogues had been planned under the Irish Presidency – one end-April, one mid-May and the third mid-June. With the end-April trilogue abandoned and even if the next meeting takes place in mid-May, that leaves only a month to reach a political agreement on the MFF.

It is also necessary to look at the trilogue timetable for the 2013 amending budgets as, politically, these negotiations have to be concluded at the same time.

Under these circumstances, it seems hardly possible that a political agreement on the MFF can be achieved under the Irish Presidency. It would then fall to the Lithuanians, who had hoped to concentrate on pushing through the 2014 budget, to deal also with the outstanding 2013 budget and MFF items.

If so, it is interesting to speculate on what this might mean for the CAP negotiations as the Parliament has also created a linkage between concluding these negotiations and agreeing the MFF.

The trilogue process between the Council, the Parliament and the Commission on the new CAP regulations has now started. Over thirty meetings are scheduled to take place between now and end-June with a view to reaching a political agreement on the four main CAP regulations proposed by the Commission (direct payments, rural development, the single CMO, and the horizontal regulation).

The proposed greening of Pillar 1 payments is one of the key elements in the direct payments regulation. In their responses to the Commission’s proposal both the Council and the Parliament have moved to dilute considerably the impact of the three greening measures proposed by the Commission. The Council’s position on greening following the March 2013 Council meeting is well summarised by this post on the IEEP CAP2020 blog.

Although there is considerable convergence of views between the Council and the Parliament on the greening amendments they put forward to the Commission’s proposal, one area where a significant gap has opened up following the Parliament’s plenary vote concerns the possible role for equivalent measures.

Whereas both the Council and the Parliament’s Agriculture Committee (COMAGRI) proposed that member states could substitute a range of equivalent measures for the Commission’s three greening measures, this flexibility was rejected by the Parliament when approving its negotiating mandate for the trilogue (the proposals of the Commission, COMAGRI, the Parliament and the Council can be found side by side in this spreadsheet, look for Article 29). Instead, the Parliament backed the Commission in limiting greening to the three measures proposed by the latter. This is thus one area where negotiations will be required to reach a common position.

In thinking about more flexible alternatives to the Commission’s proposals in creating eligibility for the Pillar 1 green payment, I find it useful to make a distinction between ‘green by definition’ approaches and ‘equivalent measures’ although, as we will see, these distinctions have become blurred as the legislative process has evolved.

Green by definition

The ‘green by definition’ approach was originally introduced by the Commission for organic farmers. Article 29(4) in the Commission’s proposal reads:

Farmers complying with the requirements laid down in Article 29(1) of Regulation (EC) No 834/2007 as regards organic farming shall be entitled ipso facto to the payment referred to in this Chapter.

The rationale for this exception spelled out in the preamble was that “organic farmers should benefit from the green payment without fulfilling any further obligation, given the recognised environmental benefits of the organic farming systems.” This, in itself, might have been deemed unexceptional, except that the Commission opened a hornet’s nest by also proposing (in the horizontal regulation, Article 30) an apparent exemption from the principle of no double funding for organic farming.

But if organic farmers were already deemed to be doing their bit for the environment, what about farmers enrolled in agri-environment measures (AEMs)? COMAGRI therefore proposed that ‘green by definition’ eligibility should also be conferred on all beneficiaries of AEM payments as well as farmers whose holdings are situated in areas covered by the Natura 2000 network. It also proposed that the environmental baseline for AEM measures (which are funded on the basis of income foregone) would not include the greening measures or their equivalent.

Taken in conjunction with the small farmer exemption from greening, and recognising that around 25% of the EU’s agricultural land area is enrolled in AEMs, this alone would mean no additional environmental benefit from greening on one-third or more of the EU’s agricultural land.

Equivalent practices

If the motivation for ‘green by definition’ approaches was not to penalise farmers who were already doing their bit for the environment, the motivation for ‘equivalence’ seems to have been a desire expressed by some member states for simplification. If farmers are already recognised as following green practices, why inspect and monitor them twice? (we come back later to assess whether equivalence would lead to simplification or not).

Although equivalence has been associated (and with justification) with ‘greenwashing’, it should also be acknowledged that some member states believe (also with justification) that they could achieve better environmental outcomes more cheaply with a different and more ambitious set of greening measures than the three limp measures proposed by the Commission.

Equivalence means that member states could substitute an alternative eligibility criterion for one or more of the Commission’s three greening measures. The most common formulation (adopting the wording of the COMAGRI proposal for a negotiating mandate) was that “Farmers whose holding is certified under national or regional environmental certification schemes shall be considered to be complying with the relevant agricultural practices referred to in paragraph 1 [i.e., the three greening measures] provided that these schemes have an impact that is at least equivalent to that of the relevant practices referred to in paragraph 1.”

COMAGRI went on to identify various kinds of certification schemes which it felt would be sufficient to confer eligibility for the green payment. They included (but would not necessarily be confined to) an on-farm nutrient management plan; an on-farm energy efficiency plan for the holding, including optimisation for the use of effluents; a biodiversity action plan, including creation or maintenance of biodiversity corridors; a water management plan; soil cover; or integrated pest management.

The Council has also endorsed the use of equivalent practices as an alternative to the Commission’s three measures. In the Council’s view, eligibility for the green payment could be met by national or regional certification schemes which aim to meet objectives relating to soil and water quality, biodiversity, landscape preservation, and climate change mitigation and adaptation. In the Council’s view, these schemes must be “effective and objective”.

Commission’s concept paper on greening

The Commission had argued that the strength of its three proposed greening measures is the fact that they are compulsory for almost all farmers (apart from farmers in the small farmers scheme), would apply to the entire relevant area of their holding, and ensure a level playing field in the Union. It also expressed the view that, because the greening measures go beyond cross-compliance obligations and raise the baseline, they thereby increase the environmental ambition for more targeted rural development measures.

However, in its concept paper on greening circulated in May 2012, “with a view to simplification and recognising the environmental contributions farmers may make by taking up Pillar II agri-environment-climate commitments or in the context of an environmental certification scheme” it proposed:
• to foresee, under certain conditions, that a beneficiary of a Pillar II agri-environment-climate measure can be considered as fulfilling one (or several) of the greening measures;
• to foresee, under certain conditions, that a farmer, subject to an environmental certification scheme can be considered as fulfilling one or several of the greening measures.

The conditions which the agri-environment-climate commitments or the environmental certification scheme would have to comply with concern:
• the coverage of the whole farm (in line with the greening objective that almost all agricultural area is subject to greening requirements),
• an environmental ambition level that goes beyond the ambition level of greening and
• a type of agri-environment-climate commitment or certification scheme requirement that corresponds to the nature of the greening measures (e.g. crop rotation requirements corresponding to the greening requirement of crop diversification).

Note a subtle difference in this last Commission formulation from the COMAGRI position. COMAGRI wanted mere enrolment in an AEM to be sufficient to make a farmer eligible for the green payment, thus ‘green by definition’. The Commission insists that the AEM requirements should contain measures similar to its three greening proposals in order to confer eligibility, and thus requires a form of ‘equivalence’.

Moreover, only certification schemes that ensure equivalence in environmental ambition, are effective, with a sound quality control system, impartial and operate in a fully transparent manner may be taken into consideration.

The Commission commented that: “This adjustment could bring simplification to those farmers who already generate significant benefits for the environment and the climate. It would also encourage other farmers to join the schemes and programmes in question thus increasing the overall environmental and climate benefit of the CAP.“

But allowing AEM measures to qualify a farmer for eligibility for the green payment would only encourage farmers to join AEMs if the principle of no double funding were abandoned. And in this case, there would be no basis for the Commission’s aspiration that, because the greening measures go beyond cross-compliance obligations and raise the baseline, they thereby increase the environmental ambition for more targeted rural development measures.

The Council of Minister’s general approach

The Council’s general approach would give member states four different options.

1. Farmers could qualify for the green payment by observing the three Commission greening measures. However, as the IEEP post notes, the content and reach of the three green measures has been altered in a way that will reduce their potential impact and the list of types of farms to whom the measures do not apply has been extended.

2. Farmers could also qualify by observing equivalent practices instead of or in combination with the Commission proposals. These equivalent practices should yield an equivalent or higher benefit for the climate and the environment compared to the Commission’s greening measures. Equivalent practices could be measures undertaken as part of enrolment in an AEM, or as part of a national or regional certification scheme. In either case, member states must notify the specific commitments which they intend to qualify as equivalent practices, and the Commission must decide on the equivalence of these practices. Note that mere membership of an AEM would not necessarily be sufficient to confer eligibility, so one must be careful in describing enrolment in an AEM as conferring ‘green by definition’ status.

3. As a third option, the equivalent practices in AEMs could be identified in member state rural development programmes which must in any case undergo an approval process by the Commission.

4. As a fourth option, member states may decide that farmers should carry out the three greening measures in the Commission’s proposal in accordance with national or regional certification schemes. Presumably, the attraction of this option, which was only added at the last minute during the midnight discussions during the March 2013 Council meeting, is that member states would be freer to set their own monitoring and inspection criteria and would not be bound by the requirements in the horizontal directive. Otherwise it is hard to see what additional flexibility is given to member states by this option, as the certification scheme must cover the Commission’s three greening measures and only those measures.

Update 21 April 2013. It should also be pointed out that, in addition, the Council has separately proposed an exemption from the EFA and crop diversification requirements for any holding where at least 75% of the eligible arable area is enrolled in an AEM where the only requirement (Article 29(2) of the Rural Development regulation) is that the farmer carry out at at least one agri-environment-climate commitment on that land. This exemption possibility is quite separate from any use of AEM enrolment as a form of equivalence, where in that case the equivalent measures in the AEM must be identified and approved by the Commission. Given that making use of AEM enrolment through the exemption route is far less onerous than the equivalence route, it would seem daft for member states to want to pursue equivalence through AEMs.

The rapporteurs’ dilemma

The Commission, in its May 2012 concept paper, moved a long way towards meeting member state and COMAGRI desires for flexibility. It accepted that, under certain conditions, both a beneficiary of a Pillar 2 AEM and a farmer enrolled in an environmental certification scheme could be considered as fulfilling one (or several) of the greening measures.

Yet the Parliament, in its plenary vote on the mandate for the trilogue, wanting to register (rightly, in my view) its objection to the possibility of double funding, not only threw out double funding but also threw out flexibility. The Parliament mandate says only the Commission’s three greening proposals should give eligibility for the green payment. No additional flexibility. No brownie points for participating in an AEM.

We now have the surreal situation where the Parliament’s representatives in the trilogue (the COMAGRI rapporteurs and shadow rapporteurs) will be defending a position which, in their heart of hearts, they clearly do not believe in. One would love to be a fly on the wall in the relevant trilogue meeting to hear these rapporteurs denounce flexibility and defend a strict interpretation of the Commission’s proposals against the Presidency’s arguments for equivalence. It does not take a genius to work out which side is going to win on this particular issue.

The future of equivalence

Assuming that equivalence appears in the final legislation and includes AEM measures, then the question of double funding must also be addressed. Here the Council and Parliament representatives do have a genuine difference of opinion. Hopefully, the presence of the Commission at these discussions will ensure that the long-established principle in Union law of no double funding is maintained.

A very practical issue is the requirement for the Commission to pronounce on equivalence. This could take the form of prior approval, but with potentially hundreds of individual certification schemes the question of establishing their equivalence in the period before the launch of the new scheme (now accepted to be 1 January 2015 given the slow pace of the legislative process) this could threaten to overwhelm the capacity of the Commission.

The alternative is to allow member states to proceed on the basis of their best judgement and for the Commission to assess ex post whether the measures required of farmers in AEMs or certification schemes are indeed equivalent. But no member state is going to allow the possibility of large disallowances and face the prospect of returning large sums of money to Brussels because of a differing interpretation of a highly subjective comparison.

There is also the unresolved question of how to compare the environmental impact of very different types of measures – hence the Commission’s insistence that, under flexibility, the equivalent measures should correspond to its three greening requirements so as to make this comparison feasible. So the simple injunction in the Council draft of the regulation that “The Commission shall decide on the equivalence of these practices” is fraught with difficulty.

From another perspective, it is becoming increasingly clear that administering flexibility at the national or regional level is far from being an administrative panacea. Flexibility is more likely to introduce additional parallel systems of monitoring and inspection and complicate even more the life of the paying agencies.

A recent study conducted by the IEEP for the European Environmental Bureau concluded that, while the concept of equivalence may sound like a sensible and practical option in theory, the practical issues with its application are likely to lead to far greater administrative complexity and cost, both for member states and within the Commission, with arguably little additional environmental benefit. Update 16 April The full IEEP study can now be downloaded here.

It is thus not unlikely that, faced with the very emasculated greening conditions likely to emerge from the trilogue process, member state administrations will simply decide that certification and AEM equivalence is not worth the candle.

For those few member states which genuinely regret the missed opportunity in this CAP reform to properly integrate environmental objectives into the CAP, the alternative is to make use of the modulation option under financial flexibility and to transfer up to 15% of the Pillar 1 national ceiling to Pillar 2 to strengthen their AEMs, where the funding should have gone in the first place.

The Commission’s original proposal was that farmers would receive entitlements based on the number of eligible hectares declared in 2014 (Article 21 of the direct payment regulation). I have previously discussed how the requirement for an eligible farmer to have received a payment (and thus have activated at least one entitlement) in 2011 was introduced into the Commission’s October 2011 proposals at the last minute.

This was in response to Irish concerns that defining eligibility for the new basic payment scheme solely on the basis of land farmed at a date in the future (2014 in the Commission’s proposal) would lead to drastic disruption of the land rental market (characterised in Ireland by annual leases). Farmers would have a huge incentive to stop leasing out land in order to obtain a valuable entitlement in 2014, causing enormous problems for those farmers relying on the leased land.

Possessing at least one entitlement in 2011 can be seen as a ‘gatekeeper’ condition which must be fulfilled before taking into account the other criteria for eligibility for payments in 2014. The intention was to dampen speculation in the land market in the run-up to the entry into force of the new regulation.

Parliament and Council amendments

The European Parliament mandate would give some greater flexibility to member states in their choice of the ‘gatekeeper’ year. Farmers who in any one of the three years 2009, 2010 or 2011 had activated at least one payment entitlement, who received an entitlement from the national reserve in 2012, who received a coupled payment or who could show that they were actively farming in 2011 would be prima facie eligible to receive entitlements based on their eligible area in 2014 provided they meet the other eligibility conditions.

The Council’s general approach proposes to amend the Commission’s proposal more radically. The number of payment entitlements allocated to a farmer can continue to be equal to the number of eligible hectares declared in 2014. However, as an alternative, the number of payment entitlements granted may be equal to the number of eligible hectares activated in 2012, 2013 or 2014 under the current SFP scheme.

Furthermore, the Council proposes that member states that operate the SFP on a regional or regional hybrid basis can decide to continue with the existing allocation of payment entitlements (that is, the 2013 or 2014 basis depending on when the new system kicks in). But as this option is already included in the alternative in the previous paragraph, it is not clear what additional value it has.

As regards the gatekeeper condition, Member States would now have an option to decide that payment entitlements will only be allocated to farmers who, in 2010 or 2011 received a direct payment, or were allocated payment entitlements through the national reserve in 2012 or 2013 (other provisions cover some special cases).

Thus, under the Council’s proposal, a farmer’s entitlement could be based on her 2012 claim, her 2013 claim, or her 2014 claim under the current SFP scheme (given that the new scheme will not now come into effect until 1 January 2015) or her 2014 eligible hectares actually farmed. They may also implement a gatekeeper condition that a farmer must have activated at least one entitlement in either 2010 or 2011 to be eligible to receive the new entitlements. Member states have to communicate their decision to the Commission by 1 August 2013 (note this optimistic assumption that the legislation will be approved before this date). So until then, at least, farmers cannot know the basis for their entitlements for 2015 and beyond.

In addition, two other possible amendments will also have a bearing on the number of entitlements allocated to farmers when the new scheme enters into force.

The Parliament proposed an amendment that, where the number of hectares declared in 2014 exceeds the number of hectares declared in 2009 by more than 45%, then the total number of 2014 hectares could be capped at 145% of the 2009 total. The Council proposes to lower the threshold to more than 35% of the 2009 declared area, and to give member states the option to cap at either 135% or 145% of the 2009 area. This restriction would only affect farmers who applied for more entitlements in 2014 than they had in 2011.

A second amendment proposed by the Council would allow member states to apply a reduction coefficient if the eligible hectares declared by a farmer consist of permanent grassland located in areas with difficult climate conditions, especially due to the altitude and other natural constraints like poor soil quality, steepness and water supply. Where used by a member state, this option could potentially exert an important influence on the value of entitlements in that member state.

As an aside, this ‘base updating’ is not currently in breach of WTO Agreement on Agriculture rules for decoupled support. However, the revised draft modalities for the Doha Round Agreement circulated by the Chair in December 2008 would require payments eligible for the green box to be based on a fixed unchanging base period save in exceptional circumstances.

The market for entitlements

There are two stylised facts about entitlement trading. The first is that the value of entitlements appears in most EU countries to be much less than their net present value. The second is that higher-priced entitlements appear to sell at a higher multiple of their value than lower-priced entitlements (an exception to this generalisation may be Germany and England which opted for the dynamic hybrid model implying a flattening of the payments over time, see here for English evidence that the higher the value of the entitlement the lower the multiple of the face value paid due to the regional hybrid system).

Buying an entitlement to a stream of future payments is an investment decision. How much the entitlement is worth depends most immediately on the duration of the stream of payments, the value of those payments, any risk associated with the payments, and the interest rate. But other factors play a role.

Many member states have placed restrictions on the transfer of entitlements. For example, a member state may decide that entitlements may only be transferred or used within a specific region. Member states may also require that a proportion of the entitlements are siphoned off for the national reserve when a transfer is made. Such restrictions lower the price of entitlements.

Other factors influencing their value are that entitlements are associated with cross-compliance costs and the fact that the direct payment income is taxable while the purchase of the entitlement is not tax-deductible. There may also be transactions costs in bringing buyers and sellers together (although the number of websites by agricultural valuers offering to help buy and sell entitlements suggests that this is not a major issue). But even when these caveats are taken into account the price of entitlements has been below their estimated net present value.

One answer to this puzzle given by Kilian and Salhofer (2007) is that the market for entitlements is not an independent market because, to be valuable, entitlements must be activated. That is, a farmer must show that he has a hectare of eligible land for each entitlement he possesses. Thus, there is only a demand for entitlements from farmers who have naked land, that is, land without existing entitlements. The price of entitlements will be determined by whether there are surplus entitlements relative to eligible land, or vice versa.

If there are more entitlements than eligible land, then the price of entitlements will be driven down towards zero. At first sight, this may seem strange. If the entitlement provides a stream of direct payment income, surely it must be valuable.

But if a farmer needs to acquire a naked hectare in order to activate the entitlement, and if naked hectares are scarce, then the higher rent paid to acquire that naked hectare is going to eat into and offset the expected direct payment income. In the limit, this could drive the price of entitlements down to zero.

Thus, their explanation for the relatively low price of entitlements is that eligible land is scarce relative to the number of entitlements. But this cannot be the whole story because the discounting of the price of entitlements also occurs in countries (such as Ireland) where there is a considerable amount of naked land available.

The other stylised fact is that higher-valued entitlements sell at a higher multiple than lower-valued entitlements. By definition, this means that there is a (relatively) greater supply of low-value entitlements and/or a (relatively) greater demand for high value entitlements. In particular, it appears that very few high-value entitlements come on the market. One might speculate on the reasons for this differential behaviour (one possible reason is that, if there are fixed cross-compliance costs, the net stream of income from a higher-valued entitlement is relatively greater than from a low-valued entitlement).

Consequences of reform proposals for market for entitlements

Changes in the rules for establishing entitlements under the new CAP have the potential to influence the current market for entitlements (for example, if a member state decided to base future entitlements on the entitlements declared in 2013 or 2014 under the current SFP scheme there would be an incentive for farmers to acquire more entitlements).

The current market for entitlements is also affected in those member states that use the historic SFP model by the proposals for future internal convergence. In member states using the historic model, the current value of entitlements will be reflected in the value of entitlements in the period 2015-2020 although to a declining extent as internal convergence takes place.

Under the Commission’s proposal, all payments in a region must have a uniform unit value by 2019 with a first step of 40%. Under the Council amendment, the first step shall be no less than 10%. Making use of this flexibility alone would give current payments greater influence on payments in the coming period.

The influence of historic payments will be even more important in member states that opt for the new approximation model for internal convergence proposed by the Council. Under this model, the historic variability in the value of entitlements will still be very evident by the end of the period.

The approximation model is that member states may decide that payment entitlements whose unit value in 2014 is lower than 90% of the national or regional unit value in 2019 shall have, for claim year 2019 at the latest, their unit value increased at least by one third of the difference between their unit value in 2014 and 90% of the national or regional unit value in 2019.

Additionally, member states may provide that no payment entitlement shall have a unit value higher and/or lower than fixed percentages of the national or regional unit value, for claim year 2019 at the latest. In other words, member states can opt for a maximum and minimum payment per hectare although no percentages are specified. Finally, the Council amendments introduce the possibility of a redistributive payment on the first hectares, which would redistribute payments from larger to smaller farms, but not necessarily from farms with high-value entitlements to farms with low-value entitlements

What is important is that the unit value of entitlements in 2014 will be determined by the value of entitlements which the farmer holds in 2013.

Thus, in contrast to the Commission’s proposal that all entitlements within a member state should have a uniform value by 2019, the new amendments mean that the value of entitlements held in 2013 will have a much stronger influence on the value of future entitlements. This is even more the case if the Council amendment that the 30% greening payment can be based on the value of a farmer’s entitlements rather than a uniform payment per hectare were chosen by a member state.

If farmers in 2011 or 2012, anticipating that the Commission’s proposal would come into force, strongly discounted the significance of the value of entitlements in the current period for their value in the next period, that would have dampened their enthusiasm to purchase particularly high-value entitlements. Under the Commission’s flattening proposal, the carryover effect of high-value entitlements would rapidly diminish (as this press report in early March before the Agricultural Council meeting confirms)

Under the proposed amendments from the Council and Parliament, however, the carry-over effect of high-value entitlements held in 2013 is greatly enhanced, while there is now an extra penalty imposed on those with low-value entitlements in 2013. This is both because of the slower rate of internal convergence proposed under the amendments, as well as the option to use the approximation model.

It is not yet clear that farmers understand these signals, at least in Ireland where the Minister has committed to using the approximation option if it is eventually approved in the final legislation.

Recent press reports (see here and here) suggest that, while interest in acquiring entitlements has increased in Ireland, there is as yet no clear trend favouring higher-valued entitlements over lower-valued ones. This is despite the fact that, assuming the Council’s amendments are accepted, there are now much stronger reasons for buying high-valued entitlements than there were before.

However, nothing has been agreed until now. The Agricultural Commissioner continues to insist that there should be a minimum convergence threshold by 2020, so the final outcome remains uncertain. So any farmers thinking of buying entitlements for 2013 before the window closes in a month’s time will still be taking a gamble.

Photo credit: Merrionstreet.ie under CC licence