Financing emergency aid to address market disruption due to COVID-19

There has been strong pressure on Commissioner Wojciechowski to get the Commission to do more to protect farmers and agricultural markets from the adverse effects of the lock-down responses to the coronavirus pandemic.

The Commissioner has argued that there is no funding available for these measures in the EU budget. In this post, I assess the funding that may be available to the Commissioner. I conclude that available funding is limited but not exhausted. It now seems time to make use of the crisis reserve that was put in place for exactly this eventuality as well as unused margins under the European Agricultural Guarantee Fund (EAGF) in the EU budget.

The EU budget is a very complex entity, and it is not easy for an outsider to have a complete understanding of how it works. There may well be errors in the following account, and if so, I would be grateful to have them pointed out. The exercise is still valuable as context for any future debate on crisis management in the CAP as part of the ongoing negotiations on the future CAP framework post 2020.

Growing demand for EU intervention

Copa-Cogeca has highlighted the market breakdown for livestock producers in the dairy, beef, sheep and goat sectors and called for additional targeted market measures for the livestock sector, including exceptional measures, financed outside the CAP budget. Specifically, it has called for the activation of private storage measures for dairy products and the different meats, as well as more targeted management of Tariff Rate Quotas for imports.

Copa-Cogeca has also highlighted problems in the ornamental sector and for some fruits and vegetables. Also the wine market, where exports had already been hit by US tariffs of 25% imposed as part of US retaliation against Airbus subsidies, has been further affected by the loss of sales of higher-quality wines as restaurants remain shuttered.

The European Milk Board has called for a voluntary supply reduction programme in the dairy sector covering a few months in which producers would be compensated, similar to that introduced at the time of the last milk price crisis in 2016. The French dairy sector representative group CNIEL has already introduced a €10 million solidarity fund under EU rules to compensate suppliers who agree to reduce production.

According to Euractiv, MEPs in the European Parliament’s Agriculture Committee have also written to the Commissioner calling on the Commission to use the emergency instruments in the common market organisation (CMO) “as soon as possible”. The Committee is looking for intervention measures as well as opening private storage. In addition, it supports the activation of the crisis reserve which has been financed by withholding a proportion of the direct payments paid to farmers at the end of 2019 and which if left unused would be returned to them as part of their direct payment paid out at the end of this year. Some MEPs have called for a compulsory volume reduction in the dairy sector to avoid milk storage or destruction as the spring peak in milk production approaches.

Ministers of Agriculture have also supported these calls. In a letter initiated by Ireland and sent to the Commissioner on 16 April, all EU agriculture ministers, while welcoming the measures taken in the European response to date, called for urgent additional measures to be taken under the CAP, including aid for private storage to support those sectors where significant price impacts have been identified, as well as exceptional aid to farmers in the most affected sectors.

Commissioner Wojciechowski, when addressing the Parliament’s AGRI Committee on 15 April, accepted that requests for market intervention measures were legitimate but pointed to the absence of money in the EU budget to finance such measures. “These are legitimate expectations and if the Commission had a sackful of money it would dip into it straight away”, the Commissioner is reported as telling MEPs. However, he added that there is no such sack in the current financial framework, as there was no reason to do so when adopting the budget last year.

The Commission has announced two sets of measures so far to help the agri-food sector in its response to the pandemic. On 25 March, DG AGRI announced an extension of the deadline for submitting CAP payment applications, as well as details of additional flexibilities for Member States to provide aid to farmers and food processing companies under the newly adopted Temporary Framework for State Aid (especially paragraph 23 in that Framework).

A further set of measures were announced by DG AGRI on 2 April. These included the possibility to reallocate unused funds within Rural Development Programmes to finance relevant actions to face the crisis, an increase in the advance payment of direct payments farmers will receive after mid-October and rural development payments, plus a reduction in the number of physical on-the-spot checks to ensure eligibility conditions are met.

Whether market intervention measures are justified or not is always a judgement. Agricultural market prices are anyway volatile, and normal market risk is something that should be left to producers and processors to manage. However, some agricultural sub-sectors have experienced an exceptional drop in demand where taxpayer assistance can be justified. Market intervention can also be justified to provide some market stability when there is a sudden and temporary drop in prices.

State aid measures will remain the most important response

Following the changes made in the 2013 CAP reform to the crisis management measures available under the Common Market Organisation (CMO) Regulation, the CAP has the policy flexibility to respond to market disruption but not necessarily the budget. This reflects the relatively inflexible structure of the EU budget more than any ceiling on available funds per se.

The EU cannot borrow to finance a sudden increase in the demand for resources such as can result from an agricultural market crisis. Especially for an EU-wide crisis that affects all agricultural sectors, the EU budget will never be able to cope on its own. It is also relevant to recall that, under the Treaties, agriculture is a shared competence between the Union and the Member States. It is thus reasonable to expect Member State initiatives to play a role, perhaps even the major role, in providing income assistance to farmers where this is justified.

This is the rationale behind the Temporary Framework for State Aid Measures introduced in response to the COVID-19 outbreak in March. As the Commission noted when bringing forward this measure: “Given the limited size of the EU budget, the main response will come from Member States’ national budgets”. Under the Temporary Framework, Member States have the possibility to provide up to €100,000 per farm in state aid following rapid approval by the Commission, provided the aid is not fixed on the basis of the price or quantity of products put on the market. In addition, Member States can top up this amount by de minimis aid with a ceiling of €20,000 per farm which does not require Commission approval.

To get a sense of the potential scale of this assistance, if we multiply €120,000 per farm by the approximately 6.5 million beneficiaries of EU direct payments, then the theoretical total pot of money available in the EU for farm income support is €780 billion if Member States decide there is a need to activate it. Clearly, we will never come anywhere near this theoretical maximum but it is helpful to be reminded of the firepower that is available.

Member States have already begun to use this option. DG COMP, the Competition Policy Directorate-General, maintains a webpage with a weekly e-News update which gives details of all decisions approving state aid. Most decisions refer to economy-wide support and it would require further work to identify to what extent farmers will benefit from the assistance provided. But it is up to national governments to decide on those sectors they deem to be in greatest need of support.

EU budget financing for market measures

Member States, however, cannot undertake market intervention which is reserved to the Union. Thus it is also important to assess the Commissioner’s claim that there is no money in the kitty to finance such measures.  There are four potential sources of EU revenue:

  • The crisis reserve
  • Appropriations-in-aid
  • Margin below the ceiling in Heading 2 of the MFF
  • Special flexibility instruments.

We now look closer at each of these options.

The crisis reserve. The EU budget no longer contains specific amounts for crisis spending for export refunds or intervention. Instead, there is a crisis reserve made up by withholding a portion of direct payments (€478 million withheld from 2019 payments that should be reimbursed to farmers after October 2020). The Commissioner has argued against using this because it is farmers’ own money that they rely on during the crisis. As we have seen, the EP’s COMAGRI believes it should be used.

There are three arguments in favour of the Committee’s position. The first is that using the money now means it can aid farmers in the next few months when it is needed, rather than waiting until after the middle of October to disburse these cheques. Second, using the reserve as it was intended to provide crisis assistance would allow the money to be targeted to those sectors in greatest need. Not all agricultural sectors have experienced an adverse shock to the same extent, for example, pigmeat prices are up 40% on a year earlier because of the impact of African swine fever on Chinese herds. Third, reimbursing the crisis reserve to farmers in October is a form of income support, whereas the crisis reserve can also be used for market intervention which, by managing supply to prevent prices from falling further, could have a multiplier effect on income.

Appropriations-in-aid. During the financial year, there are often exceptional and unexpected appropriations-in-aid that provide additional resources to the CAP budget over and above what is appropriated through the budget process. Commissioner Hogan was able to use significant revenue from milk superlevy fines to support the milk market in the 2016 price crisis. It is too early in the financial year to know whether there will be an unexpected surge in such receipts this year, but it is hard to see why this might occur. On this front, Commissioner Wojciechowski will not be so lucky as Commissioner Hogan.

MFF margins. The ceilings established in the Multi-annual Financial Framework (MFF) for specific headings and sub-headings represent the maximum level of authorised commitment appropriations under these headings as well as overall annual payments. The annual budgets rarely use all of these ceilings, and the difference represents a margin of unused expenditure.

The second Draft Amending Budget to the 2020 General Budget providing emergency support to Member States to respond to the COVID-19 outbreak proposed by the Commission on 2 April gives an updated table of current margins under commitment appropriations by MFF Heading. The unused margin for Heading 2 Sustainable Growth: Natural Resources (which includes the CAP) is shown as €514 million whlie the margin for the EAGF sub-heading (covering direct payments and market expenditure) is shown as €477 million – almost exactly the same figure as in the crisis reserve. It only requires the agreement of the budgetary authority (the Council and Parliament) to make use of this margin, no revision of the MFF ceilings (which would require unanimity in the Council) is required.

There is also a flexibility instrument in the budget called the Global Margin for Commitments (GMC). This allows the Commission to propose the re-deployment of margins left available in precedent years to subsequent years. Originally, these funds could only be used to finance actions related with growth and employment. In 2016, this was extended to migration and security issues. The Commission has now proposed an amendment to the MFF regulation so eliminate all scope restrictions to the use of the GMC in the current financial year. However, at the same time, it has proposed to deploy all of this funding (around €2 billion) to finance the Emergency Support Instrument intended to help Member States address the COVID-19 outbreak. Therefore, no funds are available under this instrument for agricultural market price support.

Special flexibility instruments. The need to increase the EU’s ability to respond to unforeseen events at the time when the MFF was agreed has led over time to the creation of a number of special flexibility tools that allow the financing of specified expenditure that cannot be financed within the limits of the ceilings available for one or more MFF headings (this briefing from Magdalena Sapala of the European Parliamentary Research Service gives an excellent overview).

The Flexibility Instrument specifically provides funding for clearly defined expenditure that cannot be covered by the EU budget without exceeding the maximum annual amount of expenditure set out in the MFF. However, its funding in 2020 has been fully exhausted to support measures to manage the migration, refugee and security crisis. Thus, there is no possibility of recourse here to fund unanticipated agricultural market expenditure.

Relaxing environmental measures is not an appropriate response

This review of the options available to support those farmers who have been particularly badly hit by the economic fall-out from the coronavirus pandemic highlights, first, the crucial role of national measures. The Commission has indicated its willingness to approve very substantial amounts of State aid if Member States request it. This is up to individual member states. There will be significant differences both in the ability of individual countries to fund such assistance packages as well as differences in the relative severity to which different economic sectors have been affected (for example, the tourism and hospitality sectors have borne the brunt of employment losses in many countries).

At the same time, it appears there may still be some funding available in the EU budget, consisting of the crisis reserve as well as the unused margin under the EAGF sub-heading in the MFF, that could be used to provide some targeted market support. However, the total amount is limited to around €950 million, with half of this made up of the crisis reserve that farmers would expect to receive after October in any case. The Commissioner’s declaration that his hands are tied by a lack of EU budget resources is thus partly justified, although there are some steps that can be taken.

At the same time, we are hearing calls from various groups (for example, the EPP group in the European Parliament or the Farm Europe think tank) calling for the postponement of planned initiatives necessary to address increased climate ambition and to promote more sustainable farming that are expected to be announced in the Farm to Fork Strategy as part of the European Green Deal, now delayed to the end of the summer. Indeed, there are worrying indications that some national administrations may be willing to relax existing conditionalities that farmers should observe to be eligible for payments, for example, with respect to Ecological Focus Area requirements.

Following this advice would both be a false economy as well as result in shifting the costs of responding to the crisis to the environment just at the time when we are realising more and more the value of environmental services to society. Improving soil health, restoring biodiversity habitats, protecting water quality, tackling water depletion, addressing air quality and reducing greenhouse gas emissions were all urgent environmental challenges before the coronavirus pandemic and they are no less urgent after it.

As thirteen environment and climate ministers from around Europe wrote in a joint letter emphasising that the European Green Deal must be central to a resilient recovery from the COVID-19 outbreak: “The lesson from the Covid-19 crisis is that early action is essential. Therefore, we need to maintain ambition in order to mitigate the risks and costs of inaction from climate change and biodiversity losses”.

Update 22 April 2020: The day following the publication of this post, DG AGRI announced a third package to assist the agricultural sector including measures for private storage aid (PSA) in the dairy and meat sectors, the authorisation of self-organisation market measures by operators in hard hit sectors and flexibility in fruits and vegetables, wine and some other market support programmes. The details of their financing are not yet available but it seems some additional funding has been found within the CAP budget.

This post was written by Alan Matthews

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