Coronavirus uncertainty as CAP decisions are postponed

There is increasing focus on how the coronavirus pandemic is likely to affect agricultural markets, food supply chains and farm incomes (for example, the series of IFPRI Resources and Analyses on COVID-19). Panic buying of long-life staples – as well as toilet roll, of course – led to temporary shortages on supermarket shelves but supplies were very quickly replenished.

In the medium-term, there are concerns that labour shortages, logistical difficulties in transporting goods across borders and falling export demand have the potential to cause disruption. The various actors in the European food chain issued a statement on 19 March calling attention to likely operational difficulties and asking the Commission to ensure that free movement of goods within the single market can continue, including through managing ‘green lanes’ at borders, to allow the food chain to function effectively.

The European Milk Board has called on the Commission to start preparing the launch of a voluntary milk supply reduction scheme as it expects processing capacity will not be sufficient to handle the volume of milk farmers are able to produce.

Any or all of these initiatives would require policymakers to respond. The question how policymaking can continue with stringent social distancing restrictions in place has thus become more urgent. In this post, we look not at the short-term responses to the potential for disruption but rather at the implications of the COVID-19 pandemic for ongoing negotiations affecting the future of the CAP. The most important of these is the need to agree on the EU long-term budget, the Multi-annual Financial Framework (MFF), for the 2021-2017 period.

The 2021-2027 MFF

The extraordinary meeting of the European Council called to discuss the MFF in February failed to reach agreement with positions between the net contributor Member States and the net recipient Member States far apart. Farmers are aware that the CAP budget included as part of the package put on the table for that meeting represented a 3% reduction in nominal terms compared to CAP spending in the current MFF period.

Another meeting of the European Council should have taken place later this week which might have provided another opportunity for discussion. However, this European Council meeting has been postponed and will be replaced by a videoconference where only responses to the coronavirus pandemic will be discussed.

The MFF negotiations are important not only because they establish the ceiling for CAP support in the medium term, they also determine the value of payments that farmers will receive later this year. This is because direct payments to farmers in 2020 are financed from the 2021 EU budget due to the way the EU budget works.

When the MFF negotiations resume, they will take place in a vastly different economic context. The fall in economic output this year could rival that of the Great Financial Recession in 2008, depending on how long the economic lockdown continues.

Such a negative economic shock will require a major injection of public funds to overcome. Already, we are seeing European governments respond to the crisis with astronomical compensation packages for businesses and workers. One estimate is that countries such as Germany, the UK and Denmark have already announced stimulus packages (or what some economists are calling shield packages) amounting to 15% of their GDP. In the context of the enormous sums now being mobilised at very short notice to minimise the adverse effects of the restrictions necessary to address the pandemic, the amounts at stake in the MFF negotiations are puny.

Whether these compensation packages will encourage Member States to look more favourably on increased EU spending including the CAP budget, or whether they will constrain their ability to finance such spending, is not yet clear. It will depend, in part, on the depth and persistence of the economic collapse and on how farm incomes are affected relative to other workers in the economy including the self-employed.

There is still time to reach an MFF agreement before the end of this year but Member States may be reluctant to resume serious negotiations until the economic fallout from the coronavirus pandemic is clearer.

If no agreement is reached, the EU Treaties provide that there is an automatic and temporary extension of the ceilings in the last year of the current MFF. Paradoxically, this would result in a significantly higher MFF volume (around 1.15% of EU GNI) compared to the 1.11% proposed by the Commission and the 1.074% proposed by the European Council President prior to its February 2020 meeting.

However, as the MFF co-rapporteurs in the European Parliament’s Budget Committee have pointed out in a draft own-initiative resolution, having money available to spend does not help if there is no legal authority to use this money. Many expenditure programmes contain expiry dates that have to be prolonged to avoid a shutdown of the concerned programmes and to protect the beneficiaries. Their draft resolution calls on the Commission to propose legislation by 15 June 2020 that would extend the time limits laid down in the basic acts of all concerned expenditure programmes and to update the relevant financial amounts on the basis of technical prolongation of the 2020 MFF ceilings.

The CAP transition regulation

As it happens, such a transition regulation was already proposed by the Commission in October 2019 to cover the CAP. This was not because of the delays in the MFF at the time, but in the light of the slow pace of negotiations on the CAP reform package proposed by the Commission in 2018. This slow pace was due to disruptions caused by the Brexit negotiations, elections to the European Parliament in the middle of 2019, as well as the failure until now to agree a budget framework for the coming period. All of this meant that the deadline for submission of national CAP Strategic Plans for approval by the Commission by 1 January 2020 could not be met.

The idea behind the transition regulation is that existing rules would continue to apply for at least one more year within the framework of the budget ceiling given by the new MFF. Member States that have already used up their funds avaliable for the 2014-2020 period will be able to finance these extended programmes from the corresponding budget allocation for the year 2021. They will be expected to maintain at least the same overall environmental and climate ambition when prolonging their schemes. Member States that still have funds available are given the option to transfer their 2021 budget to the 2022-2027 period if they wish.

The Parliament’s AGRI Committee had intended to provide its opinion on this draft regulation in April with a vote scheduled in the whole Parliament in June which would allow negotiations to open with the Council of Agriculture Ministers. The position of the Council is not yet finalised and its working documents with proposed amendments are not available to the public. However, decisions should be made by mid-2020 to allow Member States to make the necessary adaptations at national level.

Many are of the view that it would make sense to extend the transition regulation for a two-year period given this uncertainty. In the COMAGRI rapporteur Elsi Katainen’s draft report, the Commission’s draft regulation is amended to extend the transition period to two years if MFF conclusions for the period 2021-2027 are not published in the Official Journal by the end of September. I suspect this amendment will be supported by the Committee and by the Parliament in plenary and will also find support in the Council. Given the delays and difficulties in finalising the MFF, a two-year transition must now be the most likely outcome.

The CAP budget for direct payments in 2020

The transition regulation also sets out the national envelopes for Member States for 2021 for both direct payments and rural development spending. Because the MFF was not concluded when the Commission prepared the draft regulation, it entered figures based on the overall ceilings for Pillar 1 and Pillar 2 spending contained in its own MFF proposal from May 2018. While this proposal foresees a relatively small reduction in spending on Pillar 1 direct payments in nominal terms, it included a significant reduction in Pillar 2 spending on rural development.

The COMAGRI rapporteur argues that, if farmers should work to the same rules in 2020 as in 2019, they should also work for the same money. She has proposed that the national allocations included in the Annexes to the transition regulation should be calculated on the basis of the figures agreed for the MFF 2021-2027 or, if not adopted in time, on the basis of extended 2020 ceilings in accordance with the Treaty provisions.

In case this results in a sharp cut in Pillar 2 ceilings in 2021, the rapporteur suggests allowing Member States to increase their national co-financing to allow rural development programmes to continue without any cuts to farmers.

When discussing the roll-over arrangements for the MFF ceilings in the event of no MFF agreement being concluded before the 2021 EU budget is adopted, I highlighted that the 2020 ceilings for the various headings and sub-headings, including the CAP, would automatically be carried forward to 2021. In principle, therefore, it would be possible to continue to make direct payments to farmers at the same level in 2020 as in 2019.

Whether this would happen in practice would depend on the outcome of the EU’s 2021 budget negotiations later this year, where decisions in the Council are taken by qualified majority and the Parliament has equal status as co-legislator. It could therefore be quite late into this year before farmers know the value of their direct payments.

Farm to Fork Strategy

Another argument for a longer transition period is that it would allow more time to absorb the implications of the Farm to Fork Strategy which is the agri-food component of the European Green Deal and to integrate its objectives into the CAP Strategic Plans.

The Strategy was originally expected to be announced this week but this has now also been postponed by at least one month. It is expected to contain high-level targets for reduced use of fertilisers, pesticides and antibiotics, an expansion in organic farming while also highlighting the more ambitious targets to reduce net greenhouse gas emissions and incentivising carbon sequestration practices.

Finding a way to properly debate these potentially far-reaching proposals if the social distancing measures to address the coronavirus pandemic remain in place will be a challenge. At a purely banal level, EU rules of procedure to allow decisions to be taken by videoconference rather than requiring a quorum at physical meetings will be necessary.

Conclusions

In summary, policymaking in the coronavirus era will have to adapt until population immunity is built up and a vaccine is available. A way will be found to make farm direct payments in 2020 but the level of these payments may not be known until much later this year.

The delays in decision-making mean that any new CAP rules under the CAP Strategic Plans will be postponed most likely now for two years.  To the extent that the new CAP framework would have facilitated a greater emphasis on addressing urgent environmental and climate challenges, this delay is unfortunate.

These challenges do not simply disappear because of the coronavirus. This makes it all the more important to use the additional time as productively as possible to see how best to integrate the recommendations of the Farm to Fork Strategy into Member States’ CAP Strategic Plans. As the European Court of Auditors notes in its Opinion on the transition regulation: “This additional time should be used to address the climate and environmental challenges set out in the Green Deal, ensure robust governance of the future CAP and shore up its performance framework“. I agree totally.

This post was written by Alan Matthews.

Update 12 May 2020: The description of the options available to Member States with respect to their rural development programmes has been corrected.

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