The future for national envelopes and Member State flexibility in Pillar 1

A feature of the move towards decoupled direct payments in the EU since the Fischler 2003 reform has been greater flexibility for Members States in the management of these payments. This can be seen in various ways: the different options on which to base the Single Payment Scheme; different cross compliance requirements including definition of Good Agricultural and Environmental Conditions; different possibilities for modulating payments between Pillar 1 and Pillar 2; and provisions for ‘national envelopes’ and for the retention of partial coupling.

In this post I examine the future for national envelopes and partial coupling in the light of the Commission’s draft regulation on direct payments after 2013. At issue is the extent to which the draft proposals expand the scope for coupled payments and national flexiblity more generally in the post-2013 period.

National envelopes sometimes refer to the overall ceiling on the funding for direct payments allocated to each Member State, but here I use it in the more specific sense to refer to the share of direct payments over which Member States have some discretion over how to make these payments. They have been contested since their introduction as part of the Agenda 2000 reform. On the one hand, proponents argue that they are a response to calls for greater subsidiarity because they give greater flexibility to Member States on how to allocate aid payments to help specific groups of farmers. For this reason, they have been viewed sceptically by other Member States which fear that they could lead to distortions of competition since they are implemented according to national criteria.

Article 69 in the 2003 reform

The 2003 reform allowed Member States to retain up to 10% of their previously coupled payment ceilings under Pillar 1 for specific supports to farming and quality production (Article 69 of Council Regulation (EC) No. 1782/2003). The additional payment had to be granted for specific types of farming which were important for the protection or enhancement of the environment or for improving the quality and marketing of agricultural products. Furthermore, the money had to be returned to the sectors from which it was withheld.

Seven Member States and one region chose to implement national envelopes under Article 69 – Finland, Greece, Italy, Portugal, Slovenia, Spain, Sweden and Scotland (UK) [see Commission summary here]. All Member States which implemented national envelopes used the measure to support the beef sector, with support for the arable and sugar sectors supported by four Member States each. Other sectors for which national envelopes were used included the sheep, dairy, tobacco, olive oil and cotton sectors, with Italy introducing a national envelope for energy crops in 2007.

Article 68 in the 2008 reform

In the 2008 Health Check, Article 69 (now renumbered as Article 68 of Regulation 73/2009) expanded the scope of national envelopes while keeping the overall 10% share of each Member State’s direct payments ceiling [IEEP has a good briefing on this]. Its purpose remains assistance to sectors or regions with particular difficulties but its use became more flexible. Member States can continue to use these payments for environmental measures or improving the quality and marketing of products or animal welfare. However, the money no longer had to be used in the same sector although this option was continued.

But in addition, the national envelope can now be used to help farmers producing milk, beef, goat and sheep meat and rice in disadvantaged regions or to support economically vulnerable types of farming. It can be used to top up entitlements in areas where land abandonment is a threat. It may also be used to support risk management measures such as contributions to crop and animal insurance premia and mutual funds for plant and animal diseases. Countries operating the Single Area Payment Scheme (SAPS) became eligible to use national envelopes for the first time. Moreover, Member States which made use of Article 69 of Regulation (EC) No 1782/2003 were given a transitional period in order to allow for a smooth transition to the new rules for specific support.

In order to comply with WTO Green Box conditions, support for potential trade-distorting measures under Article 68 is limited to 3.5% of national ceilings. This includes support for types of farming important for the protection of the environment, support to address specific disadvantages, and support for mutual funds.

Member States were given three opportunities to make use of Article 68 in that they could notify the Commission of their intentions in August 2009, August 2010 or August 2011. By comparing the Commission’s regular summaries of the implementation details it is clear that use of Article 68 has expanded over time. In the May 2011 summary, only Cyprus, Malta and Luxembourg appeared not to make use of Article 68 at all.

Partial coupling

The provisions for specific support in the national envelope articles should be seen in the context of the possibilities for continuing partial coupling under the Single Payment Scheme. In the 2003 Fischler reform, there was significant scope to retain partial coupling. For example, Member States could continue to couple 25% of arable payments and 40% for durum wheat (Article 66), 50% of payments to sheep and goats (Article 67), 100% suckler cow premium and 40% of slaughter premium or 100% slaughter premium or 75% of special male premium (Article 68). Some coupled payments for minor crops and processing aids also continued.

The 2008 Health Check integrated the partially coupled payments in the arable crops, olive oil and hops sectors into the Single Payment Scheme from 2010. Processing aids and most other coupled payments, including some specific payments in the beef sector, are integrated into the single payment scheme by 2012 at the latest. With the implementation of the Health Check agreement, the suckler cow and sheep and goat premia as well as payments for cotton will be the only formally coupled payments still allowed to remain in 2013.

The amounts available for coupled payments under the Health Check reform (either as partial coupled payments or under the specific support provisions in Article 68) are calculated annually by the Commission. The specified amounts for 2011 can be found here. The share of direct payments which are maintained coupled in 2011 is just under 7% (some minor payments for protein crops, nuts etc. but also cotton are not included). However, the percentages differ quite significantly across individual Member States, as shown in the diagram below.

Share of coupled payments 2011

Portugal, Belgium and Slovenia have the highest shares of coupled payments. For the old Member States, the main coupled payments are the suckler cow premia (Portugal, Belgium, Austria, France and Spain) while in the new Member States the main coupled payments relate to sugar and fruits and vegetables. Also of interest is the balance between residual coupled payments and specific supports introduced under Article 68. For countries to the right of the diagram, the main payments are those under Article 68. Overall, specific supports under Article 68 account for 2.6% of direct payments while residual coupled payments account for 4.0%.

Coupled payments under the Commission’s draft legislative proposal for direct payments post 2013

The main innovation around national envelopes in the draft Regulation is that Article 68 is replaced by a general provision to allow voluntary coupling where certain conditions are met. Member States can grant up to 5% of their national ceiling to sectors or regions where specific types of farming or specific agricultural sectors undergo certain difficulties and are particularly important for economic and/or social reasons. This proportion is increased automatically to 10% of their national ceiling for the new Member States or countries that have provided coupled support to suckler cows (Portugal, Belgium, Austria, France and Spain). If desired, these latter Member States can apply to the Commission to use an unrestricted proportion of their national ceiling for coupled payments provided they meet a series of conditions set out in the draft Regulation.

Furthermore, after 2016, all Member States can apply to increase the specified percentages (5% or 10%, respectively) that apply to them if they can show that an increase is necessary to meet these specified conditions. These conditions include:
– the necessity to sustain a certain level of specific production due to the lack of alternatives and to reduce the risk of production abandonment and the resulting social and/or environmental problems,
– the necessity to provide stable supply to the local processing industry, thus avoiding the negative social and economic consequence of any ensuing restructuring,
– the necessity to compensate disadvantages affecting farmers in a particular sector which are the consequence of continuing disturbances on the related market;
– where the existence of any other support available under the DP Regulation, the RD Regulation or any approved State aid scheme is deemed insufficient to meet the needs referred to in this Article.

As some of the existing coupled payments (sugar, fruits and vegetables) will lapse and be fully integrated into the decoupled payments scheme after 2012, these provisions would seem to give plenty of scope for Member States to maintain or even increase coupled payments after 2013. Particularly the inclusion of market disturbance as a justification for specific payments is a new departure, even if the scope of these measures is limited to maintaining the existing level of production but not increasing it.

On the other hand, Member States will lose the possibility to provide support to specific agricultural activities entailing agri-environment benefits under Pillar 1 (the current Article 68(1)(v)), while support for risk management schemes are also moved to Pillar 2. Whether any Member State will feel strong enough about these omissions to fight for their retention in Pillar 1 remains to be seen.

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