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What future for the CAP financial discipline mechanism?

One issue which was not specifically addressed as part of either the Commission’s November 2010 Communication on the CAP post 2013 nor its proposal for the Multiannual Financial Framework is the future of the financial discipline mechanism for CAP Pillar 1 spending. Financial discipline is the process by which EU Farm Ministers each year determine if percentage reductions are required to keep Pillar 1 spending within the budget (in practice, by making reductions in direct payments).

Financial discipline explained

Financial discipline was introduced in the Fischler 2003 CAP reform to take effect over the period 2007-2013. The aim is to anticipate budgetary problems before they occur. Each year, the Commission assesses whether there is a prospect of a budget overrun during the coming year and, if necessary, proposes action to address this. The Commission must make a proposal for adjustments to spending if it projects that Pillar I spending (market measures and direct aids of the CAP) is likely to exceed the Pillar 1 ceiling reduced by a margin of €300 million. Direct aid payments in the new Member States are exempt until they have reached EU levels after phasing-in.

Many commentators were sure that the mechanism would be invoked once Bulgaria and Romania joined the EU, as there had been no provision to increase the Pillar 1 ceiling to accommodate the anticipated additional CAP expenditure following their membership. However, buoyant agricultural markets together with successive CAP reforms reduced market expenditure sufficiently over the years that the mechanism has not been needed.

In fact, a significant margin opened up between the Pillar 1 ceiling and expenditure levels. In 2008, the Commission proposed that some of the financing for its €1 billion Food Facility to encourage a supply response in developing countries to the 2008 price spike should be financed by the unused margin under Pillar 1, given that this margin reflected high world food prices which were also the cause of acute distress in developing countries.

In the previous year surplus agricultural funds had been diverted to funding Galileo, the EU project to develop its own satellite navigation system, following the withdrawal of private partners, thus setting a precedent. However, this second raid on the agricultural budget met with objections from both the new Member States (who wanted to use the margin to top up their direct payments to bring them quicker to the EU level) and the net contributing member states (who wanted to maintain the principle that unused funds should be returned to the member states) and it failed to win agreement.

The future of financial discipline

Will the financial discipline mechanism be continued in the next MFF? Some might argue that Pillar 1 expenditure in the new MFF will be sufficiently stable that it will not be needed. While there will still be some provision for market expenditure in Pillar 1, crisis expenditure to deal with, for example, a food safety problem (up to €500 million per year in each of the seven years, of €3.5 billion in total) and measures to address price volatility and other risks associated with globalisation (worth a further €2.5 billion) will be financed outside the MFF entirely.

On balance, however, it is likely that the Commission would want to retain a measure which could still be helpful in the future in maintaining control of the overall budget. But given the proposed new differentiation of direct payments in Pillar 1, further elaboration of the financial discipline mechanism will be needed. Would it be only the basic income element of direct payments that would be cut, or only the green payments, or both?

Presumably, the Commission’s draft legislative proposals in the autumn will clarify the details in this regard.

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