Budget impasse creates uncertainty over December farm payments

All eyes have been focused on the US government shutdown from October 1 through 17 after Congress failed to enact appropriations for the fiscal year 2014, and the simultaneous threat of a US default due to the inability to get a political majority to raise the debt ceiling until Congress finally agreed at the last moment yesterday. Less attention has been paid to the warning given by Financial Programming and Budget Commissioner Lewandowski some weeks ago, and repeated by the Director-General of that Directorate at the European Parliament Budget Committee yesterday, that the EU Commission will find itself unable to pay its bills by the middle of November unless additional appropriations are made available to fund the 2013 budget. The inability of the Commission to pay its bills (mainly reimbursements to member states) has of course a much smaller economic impact than the US case, but it is symptomatic of a different type of political gridlock.
Adoption of the Commission’s amending budgets to the 2013 budget to allow it to pay its bills this year is just one element of the high-wire budgetary battle now being played out between the Council and the Parliament. Some MEPs (see, for example, this statement from George Lyon) have expressed the view that this struggle could delay the payment of the second tranche of direct aids due to be paid in early December and which are funded from the 2014 EU budget. I am not convinced this needs to be the case, but the continued budget impasse does create additional uncertainty.
Trying to unravel the intricate linkages in this budgetary battle and its implications for payments to farmers is like peeling an onion, and there are at least four layers. In this post I explain the steps that need to be taken before these payments are made and, as important, their sequencing. (For another attempt at explaining the issues, see this excellent Euractiv post).
In brief, the payments depend on approval of the financial discipline regulation, which in turn is linked to approval of the 2014 EU budget. But the 2014 budget cannot be approved until the 2014-2020 multiannual financial framework (MFF) is in place. And the MFF will not be approved by Parliament (the vote was yesterday further postponed until November) until there is a satisfactory outcome to the 2013 budget. How these elements are linked together is now explained in more detail.
Financial discipline regulation

The CAP Health Check regulation laid down that the amounts for the financing of market related expenditure and direct payments have to respect the annual ceiling for 2014 agreed as part of the 2014-2020 MFF. It also states that an adjustment of direct payments (financial discipline) must be made when the forecasts for the financing of direct payments and market-related expenditure (allowing for mandated adjustments) indicate that the annual ceiling will be exceeded.
The Commission proposed last March to activate the financial discipline mechanism for the first time in the 2014 financial year when it foresaw a shortfall of €1.47 billion to cover Pillar 1 expenditure on market support and direct payments. It originally proposed that all direct payments over €5,000 should be cut by 4.98% (except in Bulgaria, Romania and Croatia where direct payments are still being phased in). The background to this decision is explained in my earlier post, which also pointed out that it was likely that this Commission proposal would be revised later in the autumn.
In fact, the Commission has revised its proposal twice in the last couple of weeks. Because the Council and Parliament had not adopted the first regulation by the due date of 30 June, it fell to the Commission to set the rate by means of an implementing regulation. Following examination by member state representatives in the Committee on the Agricultural Funds in September, this regulation was published on 9 October. It provided for financial discipline cuts of 4.00% on all direct payments over €2,000, based on the assumption that the funding shortfall in 2014 continued to be €1.47 billion.
Then, earlier this week, on 16 October, the Commission forwarded its usual amending letter to the 2014 draft budget in which it revised downwards its estimates of net expenditure on Pillar 1 market-related expenditure and direct payments. This in turn meant that the anticipated funding shortfall was also reduced, from €1.47 billion to €0.93 billion. As a result, the Commission has put forward a new financial discipline proposal, this time for a Council Regulation, in which it proposes to lower the financial discipline cut from 4.00% to 2.45% on amounts over €2,000 for the countries affected. The Council may adapt this adjusted rate before 1 December so it is still possible, if very unlikely, that the rate could change again.
Adopting the 2014 budget

The new adjusted rate is based on the figures included in the second amending letter to the draft 2014 budget which is itself currently undergoing the adoption process between the Council and the Parliament. Even if the Council adopted the financial discipline regulation before the 2014 budget was finally approved (which might be considered unusual), the money to make the payments requires that the 2014 budget is in place (actually, as we will see below, there is the fall-back position of the provisional twelfths mechanism so this statement is not fully accurate).
So how are negotiations on the 2014 budget progressing? It will be no surprise to learn that the Council and Parliament have strong differences on some elements of the budget proposal. (The progress of the 2014 budget can be tracked on the European Parliament’s Legislative Observatory site)
The Commission forwarded its draft budget for adoption in June somewhat later than usual just prior to the political agreement on the MFF, followed by its first amending letter in September to take account of changes made necessary by this political agreement. The Commission’s draft budget amounting to €136.1 billion in payment appropriations was 6% lower in nominal terms than the 2013 budget in terms of both commitments and payments. It amounted to 1.05% of the EU GNI in commitments (against 1.15% in budget 2013) and 1.01% of it in payments (1.1% in 2013). Within this total, the amount allocated to Heading 1a (‘Competitiveness for growth and jobs’) which includes programmes such as Horizon 2020, the new Youth Employment Initiative, the Connecting Europe facility and support measures for Europe’s businesses, including small and medium enterprises, shows a 3.3% increase in commitments.
The Council adopted its position on the budget in early September, making a minor cut (-0.2%) to the Commission’s proposal for commitments but a slightly greater cut in payment appropriations (-0.8%). Compared to the amounts proposed by the Commission, the Council’s position provides for a reduction by €240.68 million in commitments and €1.06 billion in payments.
The Parliament’s Budget Committee report to the Parliament plenary (due to be voted on next week, but more about that vote later) rejects the Council’s cuts. It seeks to restore the amounts included in the Commission’s draft budget, while increasing commitment appropriations slightly above the draft budget on a selected number of budget lines “relating to the programmes of direct benefit for European citizens, and contributing to the delivery of the Europe 2020 priorities … as well as those projecting European values and solidarity abroad”.
If the Parliament in plenary adopts the Budget Committee’s report, because of the differences with the Council position then the draft budget goes to a Conciliation Committee which has three weeks to agree on a common set of figures. The planned timetable is for the Parliament to adopt its amendments to the Council’s position in the coming week on 22-23 October and for the three-week conciliation period to start on 24 October (until 13 November included).
If there is agreement in the Conciliation Committee (a qualified majority of member states, an absolute majority of Parliament members), then both Council and Parliament have each a further period of 14 days to approve it. If the Committee fails to reach an agreement or if both bodies reject it, then the procedure falls and the Commission must submit a new draft budget. If the Conciliation Committee reaches an agreed set of figures which the Council then rejects but the Parliament approves, then the Parliament by a super-majority can adopt the budget and re-impose its amendments (in practice this outcome is highly unlikely to occur).
If, by 1 January 2014, a budget has not yet been definitively adopted, then the provisional twelfths mechanism kicks in and a sum equivalent to not more than 1/12th of the budget appropriations for the preceding financial year may be spent each month. This has happened before, most recently in adopting the 2011 budget. Correction 19 Oct 2013. Although conciliation broke down for the annual budgets in 2011 (and 2013) the Commission rapidly retabled new draft budgets in line with the Council’s position which both Council and Parliament agreed in the December months before the beginning of the new financial years, so avoiding the introduction of the provisional twelfths system. Thx to GB for pointing this out.
Parliament delays MFF vote again
This timetable has now been put in doubt by the decision of the Parliament’s Conference of Presidents (which controls the Parliament’s work programme) to yet again delay the vote on approving the MFF political agreement (which had originally been scheduled for the Parliament’s September plenary session, then rescheduled for next Wednesday, and now put back until November 19th. This followed a budget trilogue between the Council, Parliament and Commission on 16 October last.
The reason for the postponement is that, in the Parliament’s view, the conditions set out in its budget resolution of 3 July are still not met. These are set out as follows:

Reiterates its position, as set out in its aforementioned resolution on the MFF of 13 March 2013, that the consent vote on the MFF Regulation cannot be granted unless there is an absolute guarantee that the outstanding payment claims for 2013 will be covered in full; expects the Council, therefore, to take a formal decision on Draft Amending Budget 2/2013 for an amount of EUR 7.3 billion, no later than the Ecofin Council to be held on 9 July 2013; insists that the Council stick to its political commitment to adopt without delay a further amending budget to avoid any shortfall in payment appropriations that could lead to a structural deficit in the EU budget at the end of 2013; states that Parliament will not give its consent to the MFF Regulation or will not adopt the Budget 2014 until this new amending budget, covering the remaining deficit as identified by the Commission, has been adopted by the Council; Recalls that the outstanding payments carried over from 2013 will have to be deducted from – and consequently reduce – the level of payment appropriations available for 2014; is concerned that only 8% of the 2014 payments will be devoted to payments deriving from new commitments, whereas 52% will be needed to pay the outstanding commitments from previous years (RALs); (bolding added)

Thus, the delay in putting the MFF regulation to a vote is primarily due to the Parliament’s dissatisfaction with what it sees as the Council’s unwillingness to fully commit to paying sufficient additional appropriations to cover outstanding commitments in the 2013 budget. A second issue which is close to the Parliament’s heart is progress on the reform of the budget ‘own resources’ mechanism. The June MFF political agreement provided for the establishment of a high-level working group to look at the own resources question; the Parliament insists that a decision must be taken on the mandate and membership of this group and that the working group should be convened before the MFF regulation is formally approved.
What this delay means for the vote on the 2014 budget scheduled for the plenary next week is not yet clear; Parliament next week must decide how to proceed in negotiations with governments over the 2014 budget.
The Parliament would seem to be caught in a difficult position. Article 314 of the Treaty on the Functioning of the European Union sets out the budget adoption timetable. It requires that the Parliament responds within 42 days after the Council has forwarded its position on the draft budget. There are only three alternatives. Either the Parliament approves the Council position, in which case the budget is adopted; it amends the Council position, in which case the budget goes to conciliation; or it fails to take a decision, in which case the Council’s position on the budget is deemed to be adopted. So, if the Parliament were to follow the stance implied in its July resolution, and refuse to vote on the 2014 budget resolution next week, it would de facto hand a victory to the Council whose budget would then be adopted.
On the other hand, to vote on or adopt the 2014 budget without the 2014-2020 MFF in place to establish the ceilings for expenditure in 2014 also seems to be constitutionally dubious. To retain its freedom of action, it would seem likely that the Parliament next week will pass the Budget Committee report and then use the Conciliation Committee proceedings to vote down the draft budget unless the Council moves to meet its demands.
Finalising the 2013 budget is the key

Yet the Council will argue that it has agreed to the Parliament’s demand to vote extra funding for the 2013 budget, but the problem is that the devil is in the detail. The Commission on 25 September forwarded draft amending budget No 8 (DAB8) which aims to cover the outstanding payment needs in the areas such as cohesion policy until the end of the year. It is the second part of €3.9 billion in line with the MFF political agreement to avoid any shortfall in justified payment appropriations in 2013. On 14 October, member state ambassadors in the Committee of Permanent Representatives (COREPRER) of the Council agreed to support this amending budget.
There are apparently two stings in the tail. The COREPRER decision still requires adoption by national ministers, but Finland and the UK reportedly blocked a move to add its adoption to the agendas of Council meetings this week and next (see also the Euractiv story for more on this). The ambassadors also made adoption conditional on the Parliament giving its consent to the MFF (which would seem to push the working group on own resources into the long grass).
COREPRER also supported DAB9 which would provide €400.5 million in commitments and payments out of the EU solidarity fund to Germany, Austria and the Czech Republic which have suffered from floods, and Romania, which suffered from drought and forest fires. However, it also specified that these payments should be covered by redeployments from the so-called global transfer in the existing budget. The Parliament believes there is no spare money in the 2013 budget and wants these payments to be additional to the €3.9 billion covered by DAB8.
Lithuania, the current holder of the rotating presidency of the Council of Ministers, has now scheduled a special meeting of EU affairs ministers for 30 October to try to unblock the €3.9 billion payment. This, in turn, made it inevitable that the Parliament would postpone its MFF vote until November, given the linkage it has insisted on between the two issues.
So where do we stand?

There is still time for the budget issues to be resolved by the end of November, which would allow farmers’ payments to proceed soon after 1 December. The optimistic scenario looks like this. Parliament votes to amend the Council 2014 budget position next week so the three week conciliation period starts. The Lithuanian Presidency succeeds in getting the Council to adopt the additional funds for the 2013 budget at the European Affairs Council on 30 October which is a pre-condition for the success of the Conciliation Committee talks. Council and Parliament negotiators then agree on a conciliation budget that resolves remaining outstanding differences by November 13. Parliament then votes on both the MFF regulation and the Conciliation Committee budget in the third week of November while Council also adopts the budget. Council also adopts the financial discipline regulation before 1 December. And farmers get paid in December.
If this optimistic scenario fails to materialise, then the Commission will move to operate on the provisional twelfths system until a new draft budget is proposed and agreed. [Addition 19 Oct 2013. In line with the correction above, in view of the experiences in 2011 and 2013, it would seem that the Commission would first resubmit a draft budget with the hope that it would be adopted in December, thus avoiding the provisional twelfths system.] While this would create delays for the launch of new programmes, it need not interfere with the payment of the second tranche of 2013 direct payments. Member states could still make this payment to farmers knowing that their reimbursement from the Commission will be very substantially delayed. But there remains some uncertainty about exactly what would happen in that situation (for example, will financial discipline apply?), which presumably will only be clarified if we move closer to that scenario.