Member State CAP allocations and progress on the MFF

The Commission’s presentation of its CAP legislative proposals in June 2018 includes Annexes setting out the Member State allocations both for Pillar 1 direct payments (Annex IV of the draft CAP Strategic Plan Regulation) and Pillar 2 rural development (Annex IX of the same draft Regulation). In its draft legislative proposals for the 2013 CAP reform, the Commission had also included an Annex setting out the Pillar 1 Member State allocations (based on the external convergence formula that it had put forward in its MFF proposal a couple of months previously).

But this was not the case for Pillar 2 allocations. Here, the draft Regulation specified that the annual breakdown by Member State would be decided by the Commission by means of an implementing act taking into account (a) objective criteria linked to the three objectives for rural development policy set out in the draft Regulation, namely, competitiveness of agriculture, sustainable management of natural resources, and climate action; and balanced territorial development of rural areas; and (b) past performance.

In practice, the Pillar 2 allocations were agreed as part of the horse-trading within the European Council as it tried to reach unanimous agreement on the MFF for the period 2014-2020. They were not published by the Commission until some considerable time after this agreement was reached. I discussed the basis for the Member State Pillar 2 allocations in the 2013 CAP reform here and here.

The Commission’s proposal in Annex IV for the Member State Pillar 1 direct payment allocations follows from its external convergence proposal in the draft CAP legislation. But what about the basis for its Pillar 2 rural development allocations in Annex IX? And how are these allocations linked to the MFF negotiations now taking place in the General Affairs Council and ultimately within the European Council? I explore these issues in this post.

Member State Pillar 1 direct payment allocations

Pillar 1 direct payment allocations in the Commission legislative proposal still reflect the historical evolution of the CAP. The direct payments ceilings in 2005 for the older Member States that experienced the 2003 Fischler CAP reform were exactly equal to the size of the partially-coupled payments allocated to each Member State. These payments resulted from the commodity-specific compensation for the reduction in market support guarantee prices in the previous decade since the introduction of the MacSharry reforms and were very different across Member States.

The Fischler reform made no attempt to redistribute these funds between Member States (apart from a limited reduction in payments (‘modulation’) for larger farms to be used to strengthen rural development policy). As a result, with payments now based on entitlements linked to a hectare of land, the average direct payment per hectare differed greatly across these Member States.

This heterogeneity was increased with the subsequent EU enlargements since 2004. As the new Member States had no experience with compensation payments, their direct payment ceilings were negotiated as part of their accession agreements. When expressed on a per hectare basis, average payments per hectare were generally lower than in the older Member States. This was not accidental, but a reflection of the belief that these countries were in greater need of structural assistance which was better delivered through Pillar 2. These countries received more generous Pillar 2 ceilings (and lower national co-financing obligations) to recognise the need for structural investments.

Because direct payments were phased in over a ten-year period (and the CAP budget to 2013 was laid out in the European Council October 2002 conclusions) the relative size of these envelopes was not an issue in negotiating the 2007-2013 MFF. Throughout this MFF period the direct payment ceilings for the new Member States increased until they reached 100% of the agreed levels in 2013 (2017 for Bulgaria and Romania and 2023 for Croatia).

Because each Member State’s Pillar 1 direct payments ceiling could be broken down into the product of the eligible agricultural area and the average per hectare (unit) payment, the disparity in unit payments was obvious to all. Thus, in the negotiations on the 2014-2020 MFF and CAP reform, the new Member States argued that their lower unit payments put them at a disadvantage in the single market and demanded the equalisation of unit payments across Member States (a process known as external convergence). The counter-argument made by some of the older Member States was that the unit value of payments should also be evaluated in the context of differences in price levels and living standards across Member States.

The European Council, in its conclusions on the 2014-2020 MFF, decided that “Direct support will be more equitably distributed between Member States, while taking account of the differences that still exist in wage levels, purchasing power, output of the agricultural industry and input costs, by stepwise reducing the link to historical references and having regard to the overall context of Common Agricultural Policy and the Union budget. Specific circumstances, such as agricultural areas with high added value and cases where the effects of convergence are disproportionately felt, should be taken into account in the overall allocation of support of the CAP.”

The specific formula agreed by the European Council in its February 2013 MFF conclusions stated:

“All Member States with direct payments per hectare below 90% of the EU average will close one third of the gap between their current direct payments level and 90% of the EU average in the course of the next period. However, all Member States should attain at least the level of EUR 196 per hectare in current prices by 2020. This convergence will be financed by all Member States with direct payments above the EU average, proportionally to their distance from the EU average. This process will be implemented progressively over 6 years from financial year 2015 to financial year 2020.”

This formula reduced but did not eliminate disparities in unit values of direct payments between Member States. Many (though not all) the newer Member States in the current MFF and CAP negotiations have continued to pursue their demand for uniform unit values for direct payments (albeit without any recognition of a possible link between Pillar 1 and Pillar 2 allocations). The Commission in its draft CAP regulation has proposed a further move in this direction without going all the way to meeting these Member States’ demands.

It proposes that all Member States with direct payments below 90% of the EU average will see a continuation of the process started in the period 2014-2020 and will close 50% of the existing gap to 90%. All Member States will contribute to financing this external convergence of direct payments levels. The Member States’ allocations for direct payments in the CAP Strategic Plan regulation are calculated on this basis.

The resulting allocations in the 2021-27 MFF are shown in the table below, in current prices, with a comparison with Member State allocations in the 2014-20 MFF for comparison (with the latter calculated using the Commission’s preferred approach of taking the 2020 allocation and multiplying it by 7). Note that the 2020 figures are based on the Member State allocations prior to any modulation between Pillars due to capping/degressivity or voluntary transfers by Member States.

Overall, for the EU27, direct payment allocations are expected to fall very slightly, by 1.9%. However, allocations for some Member States will increase slightly, either reflecting the final phasing in of payments following accession (Croatia) or the impact of the external convergence proposal (where the biggest gainers are the three Baltic states Estonia, Latvia and Lithuania but also Greece). For the Member States that are net contributors to external convergence (which includes two newer Member States Hungary and Slovenia), the reduction in direct payments is generally 3.9%.

Member State rural development allocations

We can do the same exercise with national Pillar 2 rural development allocations. Unlike Pillar 1 allocations where a methodology can be used to compare national distributions (even though they are heavily influenced by the path dependence of CAP financing), there has never been agreement on an objective basis for the distribution of Pillar 2 funding (apart from the acceptance that less developed Member States should benefit disproportionately).

The striking conclusion to be drawn from the comparison shown in the next table is that the Commission has simply applied a uniform percentage cut (with the apparent exception of Greece which for some reason escapes with a slightly lower cut than other Member States) to national allocations in the previous MFF. There is no evidence that any political choices based on changing needs or justification for funding have been applied. The statement in the section “Estimated Financial Impact of the Proposal” attached to each draft Regulation that “The allocation [of EAFRD funds] between Member States is based on objective criteria and past performance” just cannot be taken seriously.

Indeed, the impression I get is that these figures are intended as placeholders, with the final outcome still to be decided, presumably as part of the grand bargain that emerges from the European Council’s eventual conclusions on the next MFF. If this is the case, it raises wider issues about the competences of the European Parliament to decide on specific issues in the next CAP reform and has obvious implications for the scheduling of the legislative decision-making on the next CAP reform.

CAP decisions in the MFF conclusions

The extent to which decisions on the financial aspects of the new CAP regulations will be taken by the European Council in its MFF conclusions is a vexed question for the AGRIFISH Council and the AGRI Committee in the European Parliament. The most recent Austrian Presidency progress report on the Council’s discussions on the CAP Strategic Plan regulation in early October 2018 included this paragraph:

“The Presidency recalls that the financial elements of the proposal, such as the proposed percentages of reduction of direct payments, the limits for EU financial assistance to the wine and olive oil sectors, the rules of de-commitment, Member States’ allocation of support as set out in some Annexes, the co-financing rates under rural development and the scope of allowed flexibility between the two pillars are expected to form part of the horizontal negotiations on the multiannual financial framework 2021-2027. The identification of the perimeter of these elements is a dynamic process, and will evolve as negotiations progress.”

In the CAP 2013 reform which also took place at the same time as MFF negotiations, these issues were also included in the European Council’s MFF conclusions. I have described the consequences of this for the CAP negotiations in my chapter on the MFF in the book edited by Jo Swinnen on the 2013 reform The Political Economy of the 2014-2020 Common Agricultural Policy: An Imperfect Storm, which in turn built on an earlier working paper for a European Parliament study on the first CAP reform under co-decision.

Including these issues in the MFF conclusions is contentious because the Parliament views this as over-riding its powers as the co-legislator in deciding on the CAP Regulations under the ordinary legislative procedure. In the CAP 2013 trilogue negotiations led on the Council side by the Irish Presidency, the Council’s initial position was that the elements covered by the MFF conclusions were non-negotiable. The Irish Presidency eventually made a slight concession (accepting a minimum level of mandatory degressivity on large payments in return for the Parliament’s agreement to take all other MFF issues off the table in the final trilogues). Thus, the final CAP agreement essentially reflected the decisions announced in the European Council’s MFF conclusions.

The Austrian Presidency’s reference to decisions that it expects to appear in the MFF conclusions suggests that it will be working towards a similar outcome on this occasion in the General Affairs Council. Nonetheless, there is one important difference in the sequencing on this occasion compared to last time. Perhaps in deference to the Parliament’s objections expressed in its resolution reviewing its experience of negotiating the last MFF, on this occasion the Commission has included figures for all the relevant financial decisions in the draft Regulations, including notably an Annex with the Pillar 2 allocations. This was not the case when proposing the draft Regulations for the 2013 CAP reform.

While commendable in upholding the Parliament’s rights as a co-legislator, the decision to include an Annex with the Pillar 2 allocations by Member State will complicate the MFF negotiations. This could be either because it removes a potential variable in the jigsaw that the Council President must complete to secure unanimity in the European Council on the next MFF. Or if the allocations are changed, there is the risk that such changes lead to losers as well as winners compared to the figures included in the current Annex (even if they are intended only as placeholders) which also could lead to difficulty in reaching unanimity.

One way to avoid this zero-sum game outcome would be to increase the overall size of the MFF and the total resources allocated to the CAP. Most AGRIFISH Ministers favour this option, and the European Parliament also looks set to endorse it, but this does not mean that this is a foregone conclusion.

Differences in view on the future size of the CAP budget have been aired in the General Affairs Council where the ultimate decisions will be prepared. The Austrian Presidency’s most recent report (from September 2018) on the state of play on the MFF discussions noted that many delegations wanted “to preserve the traditional Treaty-based policies (Cohesion and Agriculture) as, in their view, these policies retain a crucial role in achieving EU objectives including the continuation of the convergence process across the EU, and these policies continue to provide EU added value”, while other delegations “prefer a stronger focus on current political priorities, new challenges and key issues of the future where in their view EU added value is the highest. These delegations call for the strict prioritisation of resources in a future Union of 27 Member States and insist on additional savings as regards traditional policies.”

The importance of what is contained in the European Council MFF conclusions for the future CAP budget is also bound to have an impact on the preparation of the Parliament’s position on the draft CAP legislation. The AGRI Committee rapporteurs are pushing ahead with their draft Opinions which are expected to be sent for translation by the end of this week and to be discussed in Committee in mid or late November. There will then be a short period for the submission of amendments, with a view to holding a vote in Committee in late March. This is a very ambitious timetable and will surely be affected by whether there are European Council conclusions on the CAP budget before that date.

This post was written by Alan Matthews.

Update 19 Oct 2018: This post was updated to take acccount of the statement in the material accompanying the draft Regulation that the EAFRD allocation between Member States was based on objective criteria and past performance.

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