The setting-up of the European Innovation Partnership (EIP) ‘Agricultural Productivity and Sustainability’ as a new instrument under the rural development pillar in the next funding period has – in comparison to other elements in this CAP reform – so far not been the subject of contentious debate.

According to the draft regulation, the EIP is seen as a driver for innovation in the primary and food sectors. Added-value creation is expected by linking researchers and practitioners, promoting the transfer of new approaches into practice, informing the science community about research needs that matter “on the ground”, and by focussing existing policies on innovation. It is intended that the EIP will help build a competitive primary sector that secures sustainable global food and raw material availability. Dissemination of results (on innovation) and EU-wide networking should lead to gains for the sector as a whole.

Operational Groups (OGs), to be formed by interested actors such as farmers, producers and scientists, are foreseen to be supported under the future Cooperation measure in Pillar 2. Funds can be provided for OGs’ running costs and for realising innovative projects. An EIP Network will be set up initiated at the European level. Furthermore, transnational initiatives may compete for funding under EU’s Horizon 2020 Research programme.

Discussion of the EIP frequently underlines the vagueness of the (still) abstract concept (for example, see this earlier post). The EIP has been developed based on stakeholder consultation and workshops and lessons learned from a pilot EIP. On the one hand, it should be acknowledged that a pilot project has been initiated. On the other hand, one trial, implemented under special attention, offers quite a limited insight into the potential functioning of the EIP as an inherent part of CAP programming across all member states.

The same applies to the presentation of existing initiatives at the preparatory workshops: individual good-practice stories, from among possibly numerous failed initiatives, have been stimulated by “self-interest” and have not been framed by interventional conditions. Both the pilot EIP and good-practice examples are likely to provide limited guidance to the implementation challenges of what appears to be – at first glance – a new process and methodological approach.

Actually, apart from its name, the EIP approach is not that novel; the instrumental features of cross-sectoral partnerships and networking as drivers for innovation in the agricultural and rural sectors can already be found in the current funding period. Support for local public-private partnerships, as a lever for regional rural development, as well as their interregional and transnational cooperation projects, is currently provided under the EAFRD’s LEADER Axis.

The European and National Rural Networks link the implementation of all four EAFRD Axes by circulating information on EU rural development policies, promoting best practices, and bringing rural stakeholders together. So why not build on the experiences already gained from implementing partnerships, cooperation and networking interventions?

Networking – an ambitious catalyst….

The promotion of the EIP claims that “it is not about additional funding, adding measures or duplicating efforts” (EC 2012). Instead, the emphasis is on the promise of added-value creation through stimulating partnerships and networking.

Due to the instrumental features of partnerships and networking, the EIP has indeed the potential for socially-based added value. This can be exploited if cooperation and sharing of information are achieved by actors’ own initiatives. Since funding is planned for the running costs of the OGs, it is already obvious that it is about additional funding. Experience shows that without financial support for transaction costs, hardly any formal partnerships would be formed in the rural sector; in addition networking needs at least management and organisational support to be effective (Marquardt 2013). Therefore, allocating funds to drive the EIP is indeed useful, even if it does not reflect how the EIP is promoted.

The EIP strives for added value through complementarity by bringing practitioners and scientists together, and for synergies through fostering exchange among partners from different projects, sectors and policy fields. Such (added) value might indeed be more valuable than the funds invested in partnership and networking activities.

The preconditions for achieving this are that actors collaborate with each other and contribute to EIP activities. This requires that they see their potential benefits and act from self-interest. Actors are particularly likely to contribute when the objectives of partnerships and networking are developed endogenously (Marquardt 2013). Therefore, the EIP’s bottom-up approach can generally be endorsed.

…. or a threat to effectiveness and efficiency?

However, drawing on the experience of existing rural networks, there are at least five reasons to question whether the desired contribution of actors and their collaboration will be easily achieved, and whether OGs “will constitute themselves around topics of interest”:

1) Reporting for funded local public-private partnerships and their involvement in networking activities is currently obligatory (as is also foreseen for the OGs), but their current contribution to rural networks is limited.
2) Currently in rural networks it appears difficult to bring together different stakeholder groups in the networks, even if such activities are strongly stimulated. The rural networks (at least some of them, particularly the European network) already follow the objective of bringing researchers and rural practitioners together. Experience shows that this ambition is not easy. Scientists in some member states are often not even aware of the networks; the same applies to farmers, particularly those operating on a larger scale. This difficulty in stimulating the collaboration of different stakeholder groups even exists for actors in more closely related fields such as education and research [e.g. the 2012 SCAR report on AKIS).
3) Stakeholders from the agricultural and research sectors are comparatively uninvolved in rural networks even though they are desired members, and often explicitly addressed.
4) Not all objectives ascribed to the EIP might be advocated by the stakeholders who it is anticipated will be involved. For example, the emphasis on fostering competitiveness “in harmony with the environment” might decrease the motivation of farmers to get involved, since some societal challenges are not naturally the central concern of farmers.
5) Member states might narrow the field of topics to be dealt with in OGs, and eligibility/selection criteria might further determine who is motivated / able to engage in OGs.

These experiences suggest that although the actors involved in OGs can potentially expect added value going beyond their own effort, high incentives are needed to stimulate OG creation and to get the desired actors involved. In designing the OG intervention, it is worth noting that although there are currently incentives for formal/institutionalized funded cooperation, they are often not used by the target groups because the administrative burdens are too high; instead, informal or other alternative partnerships are created. This applies for instance to cooperation projects between rural regions funded under LEADER (Marquardt 2013).

Avoiding duplication through multiple networks

The claim that the EIP “is not about duplication” calls for attention in two regards. First, the draft RD regulation states that the scope of the National Rural Networks will explicitly include innovation in agriculture, so one might question whether it is necessary to create three different networks (the rural network, the EIP network and the evaluation network). The reasoning for these different organisational structures is only partly convincing. Specialised networks may increase overall effectiveness but the underlying promise, namely: “as it ensures that the necessary knowledge on various aspects will be mobilised” may not be fulfilled.

With specialised networks, actors can be targeted more directly. If the subject of a network is too broad actors lose interest in the network (Marquardt 2013). The argument is also made that “as regards innovation, a dedicated network at EU level is necessary in order to have the adequate expertise (technical, practical and scientific) and an effective two-way interaction between all the stakeholders working in the agricultural sector and the scientific community”.

However, this can also appear as a somewhat artificial argument when considering that a) the rural networks are also expected to strive for innovation in agriculture, b) rural networks also seek to involve representatives of the agricultural and food sector as well as scientists, c) the potential for complementary ideas and innovation increases with a greater heterogeneity of actors involved in networking activities, and d) results of OGs/ the EIP need to be promoted throughout the whole sector.

No matter whether setting up an independent EIP network resulted from the necessary transposition of Horizon 2020 into the CAP, or from deeper considerations about the design of this instrument, fine-tuning the scope of the various networks will certainly be needed.

To assume that the “network will animate activities at Union, national, regional, and local level” (EC 2012) in the most efficient way is questionable, even if the EIP Service Point at European level works ambitiously. Having national network units, and in some countries even regional network units, in place is essential for mobilising actors on the ground, and to address regional needs. The argument adduced by Brussels might only be to justify the statement that the “number of networks at EU level does not affect national networks as member states may handle matters as they want” (EC 2012).

Relying solely on a Service Point at the European level might make sense if the EIP were only administered at this level; but since member states will have their own priorities and programme criteria, it will not be possible to address all the questions of the actors interested in EIP activities in Brussels. Thus, member states will be indirectly forced to designate a unit as an interface between the EU-wide EIP network and national programming, which will involve additional effort.

Coherent instrumentation?

The second question one might raise concerning duplication/non-duplication is how many network- and transfer-of-best/good-practice initiatives are already supported within EU programmes. Even only considering the field of research, one can find many initiatives with similar topics running in parallel, paying little attention to each other. Consequently, striving to fruitfully interlink different policy fields within the EIP is quite ambitious.

Moreover, how many research reports and databases could be screened for relevant issues which could be transposed into practitioner-friendly reports and translated into practice? These questions highlight how duplication cannot only be seen in the context of parallels between rural networks and the EIP, but has further dimensions in improving coherence and efficiency in the overall range of EU instruments.

EIP governance – positive design feature or increased risk of failure?

The presentation of the EIP goes along with flowery phrases linked to governance structures that evoke positive impressions, such as “bottom-up approach” and “light” governance. Use of the latter is motivated by the idea that the EIP will build on existing structures. “Light” governance probably also underlines a potential flexibility in terms of how to implement the EIP in the member states.

However, “light governance” does not imply the avoidance of governance failure. This applies not only to avoiding duplicated organisational structures and the responsibility for selecting the focus research topics – which might be (further) narrowed down at EU and national levels, and potentially limit the EIP’s contribution to the overarching 2020 Horizon objectives. It also applies to the relevance of endogenously developed objectives for effective partnerships and networking.

Another reason for consciously including governance in the design of this instrument is to transpose superior EU legislation into the CAP. Indeed, under the Common Strategic Framework and the 2020 Strategy there is no obligation to introduce instruments particularly focussing on improving governance. However, improving governance is an ambition manifested in the treaties. Authorities in the agricultural sector do well to underline the fact that also within the CAP, some effort in this direction is undertaken.  Rural stakeholders at national and European levels also see shared management and good governance as essential for effective policy implementation.

Promoting the positive governance aspects of the EIP goes along with the risk of making false promises and failing in terms of policy effectiveness. Experiences show that one (missing) sentence within the legislative framework can easily destroy all ambitions in this regard. For the current funding period, the obligation resulting from horizontal Community priorities to translate “improving governance” into the CAP has been mentioned in the strategic guidelines for rural development in the context of the rural networks; but it has not been transposed into and operationalized in the binding rural development regulation. As a consequence, the objective of improving governance is in many cases not actively pursued (Marquardt 2013).

Therefore if, at the European level, within the context of the EIP, the aim is to propose the use of new governance mechanisms and/or improve governance. that ambition should be made explicit in some kind of intervention logic, and should also be evaluated.

Even if consultation on the EIP is currently in progress, and the need for a bottom-up approach is stressed several times, there is a strong sense that the EIP is top-down driven. Not only is the set-up of the EIP at EU and national levels, including the prescription of certain topics and the ambition for innovation and public-private partnerships, driven from the top, but also the initiation of OGs is a top-down stimulus. This is not necessarily a weakness, since top-down and bottom-up approaches might fruitfully complement each other; however, the underlying rationale should be made clear.

Governance has at least two dimensions: vertically, the EU’s multi-level governance system covers the local, regional, national and European levels, and horizontally, it strives to involve various stakeholders in policy-making. Within the EIP, the latter will become particularly relevant in the context of OGs. For both dimensions, the absence of prescriptions on structures, processes or/and framing conditions or their poor formulation entail the risk of worsened governance, and legislative conditions need to be carefully designed.

For LEADER, naming only one example, it turned out that due to the final programme design and administrative requirements, the vertical dimension was severely constrained by limiting the spectrum of measures fundable under LEADER. In addition, efforts to improve governance horizontally through local public-private partnerships sometimes evoked the opposite, as exclusive partnerships were funded.

In the context of OGs, besides the risk of exclusive partnerships, there is the danger that the research sector shows interest in the EIP ahead of stakeholders from the agricultural and food sectors; then EIP topics would likely be research-driven rather than reflecting practitioners’ needs. Target-group-adapted promotion of the EIP to mobilise practitioners might counter this outcome. But within the implementation process, scientists might have the upper hand if the practitioners shy away from programme-related bureaucracy. The patterns of dependency might change when it comes to the need for (co-)financing the translation of research into practice.

Governance structures become relevant not only in transposing strategic objectives into eligible topics and setting selection criteria for OGs, but also when the budgetary distribution for the EIP is determined. While funds appear to be secured for competing transnational initiatives under the 2020 Horizon research budget, the total EIP budget will depend on the motivation of member states to allocate funds to EIP activities, specifically to OGs, which will significantly determine the EIP’s overall effectiveness.

Outlook

The planned creation of the EIP and its promotion holds opportunities and risks. It is now time to overcome vagueness, and to replace promises and flowery phrases with concrete recommendations. The potential of harvesting added value from partnerships and networking as a way to increase the efficiency of interventions is promising; however, setting added-value creation as an objective is ambitious and prone to policy failure. Failure will be easier to avoid if its risk is communicated in a timely manner. The set-up of rural networks in the current funding period has revealed that a warm-up period for “new” interventions might be needed, and this must be reflected in the EIP design.

In many member states networks have successfully contributed to enhancing rural development policies, which ultimately depends on personal engagement by staff in the network units. Persons in charge will have to show that they are really committed to implementation of the EIP. Consultations and workshops are a first step, where results must be translated into programming documents to avoid the impression that these are only a facade.

The authorities at both European and national levels must demonstrate that they really do want to further the objectives behind the EIP and to use the full potential of this instrument.

Photo credit Hungarian National Rural Network

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

At issue here is the impact of CAP direct payments on farm productivity. As the Twitter exchange indicates, there are potentially both positive and negative effects.

How direct payments might affect productivity

In the agricultural economics literature, the positive effects rely on credit constraints and assumptions about risk behaviour in agriculture. If farms find it difficult to access credit, then subsidies may provide an additional source of financing, either directly by increasing farms’ financial resources or indirectly through improved access for formal credit (your local bank manager may look more kindly on your request for a loan if she is aware that most of your income is a stable cheque guaranteed by the government). Even if farms are not credit-constrained, subsidies may represent a cheaper source of financing than the credit available from your local bank.

Subsidies can also positively affect farm behaviour under uncertainty through a wealth effect. Farmers may be more willing to expand production through certain types of activities that would otherwise be viewed as too risky in the absence of the guaranteed income from the direct payment.

On the other hand, subsidies may negatively affect farm productivity because they distort the production structure of recipient farms. An obvious example is a coupled subsidy which keeps farmers engaged in a loss-making enterprise (which might be keeping suckler cows, for example) simply in order to draw down the subsidy.

Subsidies may give rise to technical inefficiency if higher profits lead to slack, a lack of effort and disinclination to seek cost-reducing methods. Subsidies also lead to a soft budget constraint, meaning that farmers might be inclined to over-invest leading to inefficient use of resources. The number of shiny new tractors on Irish farms despite the evidence of low incomes testifies to this effect. More generally, subsidies help to keep existing resources in the industry and slow down the rate at which resources are reallocated to more productive uses in response to new technologies or market conditions.

Thus, whether the positive or negative effects dominate is an empirical question. By chance, a new study by three agricultural economists, Marian Rizov, Jan Pokrivcak and Pavel Ciaian, attempts to answer exactly this question. The authors investigate the impact of CAP direct payments on farm productivity in the EU-15 member states (the absence of sufficiently long data time series precluded covering the new member states).

Measuring the productivity effects of direct payments

Previous attempts to examine the relationship between CAP subsidies and farm productivity used a two-stage approach. First, a production function is fitted to farm-level data and estimates of productivity are derived. In a second stage, those productivity estimates are regressed on subsidies to try to identify the impact of the subsidies on the level of productivity.

The problem with this approach is that, if it is assumed that subsidies affect productivity, then subsidies should also be included in the first stage estimation of productivity levels, as otherwise the estimates will be biased.

The authors of the new study use a methodology which explicitly incorporates subsidies in estimating farm-level productivity. They also controlled for the selection bias which might arise due to the exit of farms over time (it is likely that those farms that exit have lower productivity on average than those farms that remain, so failing to take this effect into account will also bias the productivity estimates). Their methodology further takes account of the well-known simultaneous relationship between productivity levels and input demands (the choice of inputs will be correlated with the farm’s productivity level). With their approach, they are able to test for the impact of direct payments both before and after decoupling was introduced in the period 2005-06.

For their study the authors use FADN data for six main farm types for the 15 old member states over the period 1990-2008 (for Austria, Finland and Sweden which entered the EU in 1995, the period of analysis is 1996-2008). Their empirical strategy is to run regressions within the six farm-type samples for each country, which gives them 83 farm-type country samples; this approach allows for flexibility and variation in technology choices across farm systems and countries.

In order to test for the relationship between farm productivity and subsidies, the authors first estimate farm-level productivity levels and growth rates. Productivity is measured as the growth in output after all measured inputs are accounted for (a measure known as total factor productivity, or TFP). These are aggregated to national levels using output weights, thus giving bigger weight to productivity levels/growth rates on larger farms.

The calculated average annual percentage TFP growth rates by member state are shown in the figure. The southern European countries Italy, Spain and Portugal all show rapid TFP growth over the period; perhaps surprisingly, the countries in north-west Europe (Belgium, Netherlands and Ireland) as well as the Nordic countries (Finland, Sweden and Denmark) show negative productivity growth (either 1990-2008 or 1996-2008 depending on the date of EU accession).

How important are the productivity effects of direct payments?

The main purpose of the study was to identify the impact of CAP direct payments on productivity levels and growth. Here the authors find evidence that coupled payments (prior to 2005) had a clear negative effect on productivity (the finding is statistically significant even if economically the magnitude of the effect is not great – a doubling of subsidies leads to a reduction of between zero and 3.7 per cent in TFP depending on the country).

However, for the period when subsidies were decoupled, a more varied pattern of results is found. For ten of the EU-15 countries there is a positive relationship between subsidies and productivity although this relationship is statistically significant for only six countries for both productivity level and growth. Overall, they conclude that decoupled subsidies after 2005 either have no effect or a small positive effect on productivity in the majority of EU-15 countries.

These findings are consistent with the study by Kazukauskas, Newman and Sauer of Danish, Dutch and Irish farms using a similar methodology but with a uniform production function for each of the member states. They also found that decoupling had a positive and significant effect on productivity.

These are net effects; the methodology does not distinguish between the separate effects of the allocative and technical inefficiency losses and the investment-induced productivity gains. What the results suggest is that, with decoupling, the allocative and technical inefficiency losses are reduced, and/or the positive investment effects due to the interaction of the subsidy with market imperfections are increased. However, in all cases, the economic importance of the effects identified is very small.

Going back to my Twitter debate with Martin Crowe, the results of this study suggest that, in the era of decoupled payments, Martin’s point that the “70% [of income coming from direct payments] gives the security and confidence to try and improve the 30%” trumps my concern that “If 70% of your income is coming as a cheque in post there is less incentive to innovate to grow the remaining 30%”. However, the economic importance of the productivity effect is small.

Whether decoupled subsidies impact on output levels by encouraging higher levels of investment and/or variable input use is also of interest but this is not a question addressed by this study.

(Note: Right click on the images below and select Show picture to get clearer view of the graphics)

Centre-right wins battle over CAP reform; net contributor country MEPs outvoted

MEPs voted on a package of four legislative proposals that make up the reform of the Common Agricultural Policy (CAP). The subject was hotly debated, as CAP currently accounts for close to 40% of the EU budget. CAP is to be reformed with effect from 1 January 2014. To ensure better targeting of aid, the proposal gives Member States the responsibility for defining what constitutes an “active farmer”.

Other provisions are that no Member State’s farmers should receive less than 65% of the EU average, that young farmers should get a 25% top-up payment for a maximum of 100 ha and that direct payments to any one farm should be capped at €300,000.

The most closely fought issue was the regulation of the European Parliament and of the Council establishing a common organisation of the markets in agricultural products, which was pushed through by a narrow majority of EPP and S&D MEPs:

Within the EPP, the Swedish delegation and a third of the German delegation voted “against:

In the S&D the opposition came from the German, British, Swedish, Danish, Dutch and Austrian delegations (all from countries which are net contributors to the EU budget):

Click here to see how each MEP voted.

Amendment 406 by the ALDE group, which proposed to eliminate export refunds and which was also supported by the Greens/EFA, GUE/NGL groups and a minority of S&D Members (from UK, Germany, Denmark, Sweden and Austria) was voted down by a coalition of EPP, ECR and a majority of S&D MEPs. Click here to see how each MEP voted.

In another key vote, amendment 90 called for the phasing out of a number of sectorial measures, including on milk quotas, sugar quotas and other sugar measures and of certain state aids. This amendment was voted down by MEPs in the EPP (except for Swedish, Dutch and several Germans) and S&D groups (except for German, Swedish, Danish and Dutch Members). Click here to see how each MEP voted on amendment 90.

This commentary was published by VoteWatch Europe and is reproduced under the terms of its Creative Commons licence.

Some readers found this useful so I have now updated the spreadsheet to take account of the COMAGRI proposal for a negotiating mandate in February 2013 (that is, after COMAGRI voted on the compromise and other amendments), the mandate following the European Parliament plenary vote in March 2013, and the successive versions of the regulation prepared by the Irish Presidency for the March 2013 Agricultural Council meeting. The updated spreadsheet can be downloaded here (use the download arrow in the top left corner when the Google Drive document opens to download the spreadsheet to your computer).

The Irish Presidency prepared three versions of Council’s general approach on the direct payments regulation. The first, dated 12 March 2013, included all amendments for which the Presidency noted the broad support of delegations in the Special Committee on Agriculture and the Working Party on Horizontal Agricultural Questions, as well as the final amendments suggested by the Presidency to address the remaining outstanding concerns (7183/13). Some amendments to address the remaining outstanding concern whereby Member States applying Article 18(3) should be allowed to allocate new entitlements on any extra land declared in the first year of the new scheme were circulated the following day (7183/13 + ADD 1). This was supplemented by an Annex circulated on 15 March on the voluntary extension of the SAPS (Single Area Payment Scheme) to 2017 (7183/13 ADD 2). (These documents can be found together on the Council documents website here)

Then on the first night of the Council meeting following the series of bilateral confessionals with each Minister the Irish Presidency prepared a second set of amendments (the ‘midnight draft’) which were circulated late the following morning (7539/13 19 March 2013). This document formed the basis for the final discussions on the 19 March and led to some further amendments and the final agreement which were circulated as document 7539/13 ADD 1. The spreadsheet allows the evolution of the amendments during the Council meeting to be compared. The original documents can be found on the Council documents website here.

The successive Council drafts do not directly delete the Commission’s original position on many issues. For example, the paragraphs stating that all payment entitlements should have a uniform value by 2019 (Article 22(5), the paragraph on capping (Article 11) and the Chapter on the agricultural practices beneficial for the climate and the environment (Articles 29-33) all continue into the final agreement. However, the practical impact of the Commission’s proposals is totally changed, either by making the proposal voluntary for member states, or by introducing derogations which allow member states to do something completely different.

This has implications for the way we conceptualise the agricultural policy decision-making process. Although the legislative process is not yet completed, it is already clear that, under co-decision, the old idea that the Commission has the sole right of initiative needs qualification. Although the final structure of the Council general approach exactly follows the structure of the Commission’s original draft proposal, the new elements in the Council’s position (such as the redistributive payment, extension of SAPS to 2020, the rewriting of the greening measures) all suggest more legislative ‘activism’ than the traditional model allows.

The main interest now turns to the comparison of the final position of the Council and the negotiating mandate of the Parliament. The attached spreadsheet makes it easy to draw a side-by-side comparison of the remaining differences (I suggest hiding all the other columns). Happy browsing!

Photo credit www.euinside.eu