CAP Reform

Pascal Lamy, WTO Director-General, used his keynote speech to a recent congress of European agricultural economists to address a perennial issue in agricultural trade policy, namely, whether agriculture should be treated like shirts, shoes and tyres and fall under the same trade regime?

“Now, while the international community broadly-speaking agrees on what the basic objectives of agricultural policy are, I believe that there continues to be a disagreement on what “global integration” can do for agriculture (in particular, international trade). Is greater global integration beneficial or harmful to agriculture? That is the question that underlies trade negotiations in this field at the World Trade Organization, but it is also a question for which a coherent response has yet to emerge.”

Lamy is an international civil servant accountable to the WTO membership as a whole, where countries hold very different views on this issue. He is thus limited in what he could say, but there are three things worth taking away from his talk.

First, the benefits of trade in food are the same as for other commodities, in that it helps to ensure that production takes place in the most efficient regions. Some of the inputs needed for agricultural production, such as water, are increasingly scarce, so this gain to efficiency will become increasingly important in the future.

Second, he noted the belief in many developing country WTO members that labour-intensive subsistence agriculture, or production for local markets, cannot compete with produce originating in capital-intensive agricultural systems. This belief, in turn, underlies the specificity of the agricultural rulebook in the WTO. But Lamy was clear that international trade was not the origin of the recent food crises. Indeed, price volatility was greatest (for example, for rice) for those products where world markets are most thin.

Third, he addressed the issue of export restrictions which was discussed by the G-20 agricultural ministers in Paris earlier this year. The only agreement the ministers could reach on this issue was that supplies for the World Food Programme for humanitarian interventions would be exempted from export bans, and this recommendation will be taken up at the WTO Ministerial Council meeting in December. It is worth reflecting on Lamy’s comment on how to move forward on this issue:

“But we must ask ourselves why there is such widespread resentment to trade opening, if such opening is indeed vital to global food security. To me the answer is clear. It is because we have yet to build robust safety-nets for the world’s poor. Each and every government must turn its attention to this issue, urgently, in my view. In the absence of such safety nets, there will always be resentment at a time of crisis to a country’s food supply going abroad.”

Lamy’s closing remark was a plea for a shared vision of what global integration can bring to agriculture. From his perspective, international trade is not part of the problem, but part of the solution to global food crises. But designing the rulebook for agricultural trade is very difficult when countries disagree on this basic diagnosis.

This guest post is written by Professor Ulrich Koester, Professor Emeritus of Agricultural Market Analysis and Policy at the University of Kiel. It originally appeared in German as an opinion piece in the periodical Wirtschaftsdienst 8/2011.

Discussions on the EU medium-term financial framework 2014-2020 are currently taking place in Brussels. Of particular significance are the expenditures for agricultural and fisheries policies. These policies account until now for €58 billion of expenditure or 47.4% of the EU budget. According to the draft proposal this share should reduce to 39% by 2010. It is rather shocking that, at a time when budget resources are scarce, and in light of the poor experiences to date with the current instruments and the results of numerous scientific and internal EU analyses, that it appears that the volume and structure of EU expenditure will not be greatly changed.

The largest share of EU expenditure goes on the first pillar of the Common Agricultural Policy. The item ‘direct payments to farmers’ corresponds in the 2010 budget year to €39.6 billion of expenditure. The overall budget cost is probably 10% higher, as the member states bear the administrative costs of disbursing these payments and, in some cases, add to these payments from national resources. The continuation of these payments only makes sense if they contribute to the fulfilment of agricultural or more general policy objectives of the EU.

Direct payments lack a rationale

It should be recalled that direct payments were first introduced in 1993 as compensation for possible income losses as a result of reductions in cereals and beef intervention prices, and later increased as further reductions in support prices were made.  However, it was the administrative support prices and not market prices which were reduced.  Market prices in every year fell by less than the reduction in intervention prices and, indeed, for some time have been considerably higher than in the years before 1993 when direct payments were introduced. The most recent OECD-FAO (2011) projections indicate that market prices at the end of the projection period 2011-2020 will be even higher than in the year 2011. Compensation to farmers for past decisions to lower support prices thus hardly seems justified.

The European Court of Auditors in a recent audit report established that direct payments do not contribute to the realisation of the majority of the declared goals of EU agricultural policy and that, in the few cases where they do make a positive contribution, their costs are unreasonably high. Direct payments result mainly in an increase in land rental prices and values. Biofuel subsidies of the German government have a similar negative impact as direct payments. The Scientific Council of the German Federal Ministry for Food, Agriculture and Consumer Protection as well as leading European agricultural economists have advocated renunciation of direct payments as well as biofuel subsidies for this reason.

In defence of direct payments it is claimed that they provide recognition to farmers for their contribution to sustaining the environment. But given that the current direct payments are largely determined by the supposed income losses resulting from price reductions, it is clear that at farm-level there is no equivalence between the level of payment sreceived and the environmental contribution that is made. Nor can the payments be justified by comparison with the additional requirements to comply with good agricultural and environmental practice (cross-compliance). The required expenditures to ensure cross-compliance differ strongly between farms and between regions and, in any case, are much lower than the size of the payments. The Court of Auditors pointed out in its Special Report that both the concept of cross-compliance and the application of the sanction system are quite inadequate.

Equalising direct payments across member states

If, despite these many criticisms, the system of direct payments is maintained, then any talk of levelling these across member states should be strongly opposed. Currently, there are significant differences in the level of payments per hectare between the individual Federal states in Germany and between the old (EU-15) and new (EU-12). The EU-12 are pushing hard for an adjustment. It is argued that this is justified on competitiveness grounds. However, this argument overlooks two things. First, the origin of the payments and their size in the EU-15 still reflects the earlier reduction in intervention prices for agricultural products. In the EU-12, however, following their accession they have experienced almost without exception politically-dictated price increases. Compensation in these circumstances is hardly justified. Second, it does not make economic sense to seek an adjustment in the distribution of payments for competitiveness reasons. Agriculture in the new Member States is competitive when new entrants to the sector can earn an equivalent income as in other sectors in those countries. No one suggests that, for competitiveness reasons, government officials in all EU countries should receive the same salaries. Why, then, should it be necessary to equalise the income to land?

Second Pillar expenditures

The second pillar of the Common Agricultural Policy is based on the European Agricultural Fund for Rural Development. The content of the more than 40 eligible measures demonstrates that the funds are mainly directed to promote the agricultural sector and frequently are in conflict with the principle of subsidiarity. Because agriculture, even in those countries such as Romania and Bulgaria which are the least developed Member States, cannot be the main driver of rural development, much of these funds in the second pillar are ineffective in promoting rural development and often spent inefficiently.

The Court of Auditors has repeatedly stressed the inefficiency of these measures and particularly the administrative difficulties associated with implementing the individual measures, for example, in the handling of agri-environment measures. It has even shown that there are measures whose effectiveness cannot be demonstrated and yet which are continued. Many of these measures are an open invitation to corruption, as detailed business information must be provided usually by the owner himself or herself and then checked by an inspector. It is no secret that, in some countries, the job of inspector is eagerly sought after! There is frequently no strong desire at the national level to check the legality of the measure, in part due to the system of co-financing. The level of co-financing from the EU can reach 85% for some measures in some countries and is at least 50%. Added to this, some Member States relieve the beneficiaries of any contribution at all in the case of certain measures.  Thus co-financing creates distorted incentives for efficiency calculations both among beneficiaries and countries. Further, the Commission is hardly in a position to check the costings for individual measures.

It is striking that, in the discussions on adapting the agricultural policy for the next period, hardly any attention is paid to expert analyses. Since no one is listening to expert advice, at least the costs of experts to provide this advice could be dispensed with. Agricultural politicians instead seem to be searching for new arguments to use to prevent a reduction in their budget. A new vocabulary, such as ‘greening’, must be invented in order to justify the continuation of inefficient measures. A more fundamental reform is required. This EU agricultural policy will further strengthen disenchantment in the EU.

As a follow up to my earlier post on the complexities that may hold up the signing of the extended EU-Moroccan Free Trade Agreement, Korski and Leonard from the European Council on Foreign Relations in an op-ed piece in the International Herald Tribune today outline conflicting issues at play in EU-Egypt agricultural trade relations. The issue here arises from the e.coli outbreaks due to bean sprouts in northern Germany and Bordeaux earlier this year that killed at least 48 people and hospitalised hundreds more.

Apparently, investigators from the European Food Safety Authority found a link between these outbreaks and imported Egyptian fenugreek seeds used to produce bean sprouts. As a result, the Commission imposed a ban on the import not only of fenugreek seeds but all beans from Egypt until 31st October.

According to the article, the ban could affect up to 10 per cent of Egypt’s agricultural exports if kept in place for a full year. The Commission notice announcing the ban puts the figure at the much smaller 0.88% of Egypt’s agricultural exports to the EU, but this may refer just to the impact if the ban is maintained until end-October, suggesting much greater damage if the ban continues past that date. Although the EU is not alone in taking this action (Switzerland and Russia put a similar ban in place), raising trade barriers at this time runs directly counter to the promise of partnership and increased market access made by the EU following the Arab Spring.

Korski and Leonard, from their foreign policy vantage point, are critical of the EU ban, describing it as bureaucratic and technocratic with the implication that it would not have happened if EU policy towards Egypt were properly coordinated such that foreign policy concerns could overrule apparently technical decisions.

This seems to me to ignore the seriousness with which the EU takes food-related health scares, unless we can make the explicit argument that a complete import ban is disproportionate to the risks posed by continued imports. This is a judgement I am not competent to make, and it would be very interesting to hear some expert views on this.

It is worth recalling that, under EU food safety legislation, while the EFSA makes the risk assessment, the appropriate way to manage that risk is a political decision taken by the European Commission alone, and it may well be that it over-reacted this summer in the light of the alarm over the consequences of the e.coli outbreak for agricultural markets.

The issue now has got further politicised in Egypt. The next step to reassure the EU that resuming imports is safe would be to send an inspection mission from the Food and Veterinary Office. But the Egypians are so hostile to perceptions of foreign interference that they have to date made such a mission impossible.

Korski and Leonard conclude their op-ed with a series of suggestions to get out of this crisis. They propose that the EU would announce a compensation fund to help affected Egyptian farmers. The EU in the past has provided aid to exporting countries to help get their sanitary and phytosanitary controls up to standard, but providing compensation to third country farmers as a result of a food safety ban on their imports would be an interesting precedent.

Yet another post on a trade topic, but this is justified by the news from Geneva last week where the WTO Doha Round’s attempts to hang on to life become fainter and weaker. Pascal Lamy was in sombre mood at the meeting:

What we are seeing today is the paralysis in the negotiating function of the WTO, whether it is on market access or on the rule- making.  What we are facing is the inability of the WTO to adapt and adjust to emerging global trade priorities, those you cannot solve through bilateral deals.

While no government has yet declared that the Doha Round is dead, it is clearly on life support. It is therefore important to consider the options facing the WTO before the next Ministerial Conference in Geneva on December 15-17. Two recent volumes from VoxEU.org edited by Richard Baldwin and Simon Evenett provide a good discussion of the current malaise  (see Next Steps: Getting Past the Doha Crisis and Why World Leaders Must Resist the False Promise of a Doha Delay).

There are essentially just two options, but with a number of permutations within each option: either countries stick with the Doha Round agenda and try to bring it to a successful conclusion sooner or later, or countries walk away from the Doha Round, declare it a failure, and seek other routes either under WTO auspices or not for further trade liberalisation. In this post, I enumerate the various roadmaps which have been put forward.

Options to complete the Doha Round

Seek to reach agreement on the Doha Round modalities by December 2011. This option is recommended most clearly in the report of the Trade Experts Group co-chaired by Peter Sutherland and Jagdish Bhagwati published in May 2011 and in the Baldwin and Evenett False Promise book. It has also been endorsed by Robert Zoellick, President of the World Bank and a former US Trade Representative, who has criticised the dumbing down of Doha as defeatist.  The argument is that the draft Doha Round agreement would provide significant economic gains, not least to developing countries, through substantial reductions in agricultural tariffs and significant market-opening in manufactured goods, and the package for least developed countries. All this may well be true, but it does not alter the reality that the political will to make the necessary concessions to conclude the package by the end of the year does not seem to be present.

Reach agreement on a Doha-lite agreement by December 2011 with an agreement to continue negotiations to a comprehensive agreement after that date (‘early harvest’). The idea here, first floated by Pascal Lamy at the informal meeting of the WTO Trade Negotiations Committee in May 2011, would be to salvage elements of the Doha Round of particular interest to least developed countries (LDCs) plus possibly some other issues where agreement was virtually complete. Apart from a deal on duty-free quota-free access for LDCs and cuts in cotton subsidies, candidates for the LDC plus issues include trade facilitation, the agricultural export competition pillar, disciplines on subsidies to fishing fleets and liberalising trade in environmental goods. The difficulty, of course, is that balancing the interests of WTO members in a small package in a way that would be approved by national legislatures (not least, the US Congress) is no easier than in a larger deal. This seems to have been recognised by the WTO Trade Negotiations Committee last week, which concluded that a Doha-lite agreement did not look feasible.

Call a (further) temporary cessation to the Doha Round negotiations with a view to resuming them at a more auspicious time after 2013 (read: after elections and leadership changes have taken place in important negotiating countries in 2012). One twist on this option from Jeffrey Schott of the Peterson Institute is the idea that major trading powers might unilaterally offer a down payment now, for example, by implementing the export competition pillar of the draft agricultural modalities or by making the first 20% reduction in tariffs under the draft agricultural and NAMA modalities. Unlike the ‘early harvest’ or Doha-lite proposal, these concessions would be contingent on negotiations resuming (and perhaps on agreement being reached) in 2013, otherwise they would be revoked by the countries concerned. The idea is to provide both a carrot and stick to stay with the negotiations until successful. Again, the drawbacks are evident. As Baldwin and Evenett note: “The world of trade is changing more rapidly than negotiating positions, so each delay seems to make a compromise based on the existing elements even less likely.” There is also the danger that attempting to keep the Doha Round alive would strangle any attempt to get the WTO to look at new issues which are becoming increasingly important in trade policy.

Options if the Doha Round is declared dead

Under the ‘let Doha fail’ scenario, there are also three options.

Use the opportunity to start negotiations on a series of narrower and more focused agreements under WTO auspices. The most high-profile proponent of this view is Susan Schwab, the former US Trade Representative under President George W. Bush, who in an essay in the May edition of Foreign Affairs called for a formal acknowledgement that the Round has failed in order to allow the WTO to focus on future work plans ( there is a summary of her paper on the VoxEU website and in the Baldwin and Evenett Next Steps book). Schwab’s view is that the Doha Round got locked into a set of modalities (formula cuts with self-designated flexibilities) which inevitably put negotiators in a defensive posture because the impact of their concessions for import-sensitive sectors was easily highlighted but the potential gains to exporters became impossible to identify. Her argument is that declaring Doha dead would allow negotiators to start building the next Round. This would clearly not be a behemoth comprehensive single undertaking like the Uruguay and Doha Rounds – there would be no appetite for that – but would focus much more narrowly on negotiating some small deals with commercial value in order to re-establish momentum. These might include new rules or plurilateral agreements. Another objective of these proponents is to seek a revision of the negotiating conventions that guide the Round. Declaring the Round dead would give time to reflect on new negotiating modalities with a greater chance of success. Not surprisingly, critics question why countries would be willing to negotiate smaller deals with any greater chance of success, and point out that tariff and subsidy reforms in both agriculture and NAMA would remain priorities for countries expected to agree to these new rules.

Seize the opportunity to focus on a new agenda. As Joe Francois put it succinctly, “Success requires a different game, with different rules and different players.” This more radical option, also put forward by John Whalley and by Mattoo and Subramanian among others, builds on the idea that traditional market access negotiations in agriculture, manufacturing and services are issues of the past, and need at a minimum to be complemented by a much broader coverage of new trade issues. As Whalley writes: “By moving into new areas of trade, forward momentum in negotiation can be maintained without first trying to resolve the Doha Round conflicts.” The so-called Singapore issues are obvious candidates. Whalley suggests topics such as intra-state trade in federal states, carbon emission trading schemes and global assets trade. Mattoo and Subramanian suggest adding food security, energy, currencies, finance and the environment to the mix. Consideration of further WTO institutional reform might also be among the issues discussed.There is no doubt these are issues where global governance needs to be strengthened, but it is hard to see how adding them to the WTO agenda now would raise the probability of successful agreements. Much more work would need to be done to build confidence among members on the appropriate disciplines which might be introduced. Also, the argument that the issues the Doha Round is grappling with are now obsolete will be seen by many countries as premature.

Recognise that the overlapping configuration of interests necessary to underpin a successful multilateral outcome does not yet exist and instead pursue the agenda of further trade liberalisation through preferential trade agreements. This option is explored by, among others, Hufbauer and DeRosa. They point out much of the increase in trade during the past decade was due to PTAs. One major objection to PTAs in the past was that it would distract energy from completing the multilateral negotiations. If these are now dead, this objection no longer exists. Another objection is that PTAs are inherently discriminatory and so impose large trade diversion costs on outsiders. With manufacturing tariffs now at such low levels in the US, the EU and Japan, this is no longer a significant criticism of PTAs involving these countries (apart from agriculture). Indeed, we now understand better that the main contribution of modern PTAs is not tariff preferences but rather non-discriminatory rules which also open commercial opportunities for non-members. Hufbauer and DeRosa optimistically forecast that, once the emerging economies pluck up courage to become part of PTAs, the stage would then be set for a new WTO round which would eliminate residual tariffs and harmonise many of the WTO-plus rules found in PTAs.

Associated with the ‘let Doha fail’ options are two further assumptions. Walking away from the Doha Round means accepting the opportunity cost of foregoing the gains on offer from a Doha Round agreement. The ‘let Doha fail’ advocates tend to be dismissive of the size of these gains, arguing that they really don’t amount to very much and are skewed to too few countries, and thus we have little to lose by closing down the negotiations. The ‘lets get Doha done’ proponents naturally disagree. The empirical literature (see Hoekman, Martin and Mattoo; Hufbauer, Schott, Adler, Brunel and Wong) can be read both ways.

The second assumption is that the existing WTO edifice of rules would continue to be enforced. People point to the significant growth in world trade over the past decade without the assistance of a Doha Round agreement However, one does not have to believe in the bicycle metaphor (that is, that unless there is forward momentum on liberalising trade, the existing architecture would come crashing down) to acknowledge that a breakdown of the Doha negotiations would put huge additional pressure on the WTO’s dispute settlement mechanism and would risk undermining respect for existing rules.

What the December 2011 Ministerial Conference must do

The travails of the Doha Round reflect the changing geo-political configuration of the global economy. The US and the EU, the former global leaders, are now both self-absorbed in their own domestic financial and economic crises and, in any case, their shares of global economic activity and trade are shrinking rapidly. China is now the world’s number one exporter, something that was inconceivable even ten years ago when the Doha Round was launched. But China and the other emerging economies have not yet decided how much responsibility they want to take for the global governance of trade. They still benefit from developing country status in the WTO despite being competitive exporters across an increasing range of goods and services. The tripartite distinction in WTO  rules – between developed, developing and least developed countries – does not seem sufficiently differentiated to accommodate these new realities.

Against this background, it may be sensible to accept that a multilateral deal during this time of global geo-political transition is simply out of reach, and to call for a further time-out on the Doha negotiations. To reduce the likelihood that the time-out could become a coma, taking up the down payment proposal put forward by Schott would strengthen the incentive to resume negotiations in the future. Some of the scenarios under the ‘let Doha fail’ option will proceed in any case, particularly the pursuit of preferential trade agreements. The trick will be to ensure that putting Doha into cold storage for a number of years does not paralyse the WTO’s rule-making functions. In particular, there is a need to prepare the WTO to tackle some of the 21st trade policy issues which did not appear on the Doha agenda.

This means giving the WTO authority, not necessarily to start negotiations on these topics, but to initiate a work programme which would contribute to their clarification and the type of international rules which are needed to address them. This is the important task facing the eighth WTO Ministerial Conference in Geneva on December 15-17, and there is limited time to prepare. Developing countries may be suspicious of proposals to further widen the WTO’s remit, but they too should see the advantages of keeping these discussions within the WTO framework rather than leaving them to fora, such as preferential trade agreements, where they have much less influence.

In September 2010 the European Commission forwarded a draft agreement on further reciprocal liberalisation of agricultural trade with Morocco to the Council and the Parliament, and ultimately the member states, for approval. This draft agreement has nothing to do with responding to the Arab Spring, although its ratification now takes place in that context.

The agreement springs from the authorisation given by the EU Council in 2005 to open negotiations under the 2000 Euro-Mediterranean Agreement which provides that the Union and Morocco will gradually implement greater liberalisation of their reciprocal trade in agricultural products, processed agricultural products and fishery products. The negotiations were concluded in December 2009 and the Commission forwarded the agreement for approval in September 2010 with the hope that it would come into effect in 2011. The agreement is in line with the Barcelona Process and the European Neighbourhood Policy.

However, the agreement has run into opposition in the Parliament from a mixture of motives, including foreign policy issues related to Morocco’s claim over Western Sahara and traditional agricultural opposition to further trade liberalisation, strengthened on this occasion by the after-effects of the e.coli outbreak in Germany which led to severe losses for Spanish vegetable producers.

The European Parliament’s Opinion will be formulated by its International Trade Committee which has chosen José Bové as its rapporteur who has already made clear his opposition to the agreement. In February this year, the Trade Committee decided to delay the ratification process because of legal uncertainties over how the agreement would apply in the Western Sahara and whether it would benefit the people there. Morocco currently occupies the territory of Western Sahara despite many UN resolutions calling for self-determination for the people living there. According to Western Sahara Resource Watch, both the USA and EFTA states have explicitly excluded Western Sahara from the scope of their FTAs with Morocco.

Earlier this month, the Agricultural Committee passed on its opinion to reject the agreement to the Trade Committee. The Opinion, drafted by rapporteur Lorenzo Fontana, highlighted the risks of negative consequences for Community regions specialised in vegetable production. It argued, although without providing any evidence, that high Community standards in environmental protection, working conditions, trade union protection, anti-dumping rules and food safety are not reciprocated in Moroccan products imported into the EU (it is worth observing that the major exporters are EurepGAP certified and are required to meet demanding supermarket standards). It noted that protection of GIs has been put off for further negotiations. It underlined that labour cost differentials between the EU and Morocco led to serious competitiveness problems for EU producers, not least in a context where quota increases have already been agreed for other Mediterranean exporters.

The agreement would allow the EU immediate duty-free access to Morocco for 45% of its agri-food exports, rising to 70% over ten years. In return, Morocco would be given immediate duty-free access for 55% of its agri-food exports to the EU, plus improved tariff rate quotas for some of its remaining fruit and vegetable exports. In the case of tomatoes, a key sensitive product, the volume of preferential exports would be increased from 233,000 to 285,000 tonnes over four years, although Morocco would still have to observe calendar periods and the EU entry price system (though with a preferential entry price which gives additional rents on these preferential imports).

Three observations can be made. The first is that the EU has a huge interest in encouraging economic development and employment creation in North Africa – some estimates suggest that up to 40% of people in Morocco between 15 and 34 years of age are unemployed. Lowering EU barriers to trade with Morocco will make a positive contribution to this goal.

Second, the unresolved status of Western Sahara is clearly unsatisfactory and the EU needs to encourage a solution to this problem – not least, it has led to the border between Algeria and Morocco becoming one of the world’s most hermetically sealed which itself frustrates the operation of the Barcelona process. The use of trade agreements to pursue foreign policy and human rights goals can be defended in particular circumstances, but it can be a self-destructive weapon that should only be used in extreme circumstances. The EU has other means of making its views known to the Moroccan authorities and, on balance, now is probably not the time to refuse to ratify this trade agreement on foreign policy and human rights grounds.

This leaves the third issue of the additional competition for southern European vegetable producers. It is clear that Morocco has an advantage in low labour costs and the absence of social benefits – this is the nature of a less developed economy. We cannot demand that Morocco improve its labour conditions without providing it with the means to raise its productivity to support these better conditions by selling goods and services where it has a cost advantage.

Insofar as the benefits from increased trade accrue to the Union as a whole, while the costs of adjustment are borne by particular farm groups in southern Europe, there is a case for transitional support to those farmers adversely affected. There is a role for the EU’s Globalisation Fund here to support job creation and training in areas likely to be damaged by increased exports from across the Mediterranean. With that proviso, the Parliament should support the trade agreement when it comes to a vote later this year.

Photograph courtesy of www.freshplaza.com

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.

Image used under a Creative Commons Licence taken from http://www.flickr.com/photos/46834339@N00/2243341911/in/photostream/

Ever wondered how French farmers (and farmers in general) fight the PR war necessary to keep those CAP subsidies flowing? Then take a look at this, from yesterday’s stage of the Tour de France, the world’s biggest and most prestigious professional bicycle race.

In presenting its proposals for the 2014-2020 MFF on June 29th last, the Commission Services produced a helpful guide to the proposals in the form of a Q&A Questions and Answers memo. Intriguingly, there appear to be two versions in circulation.

For example, one version on the EUBusiness.com website (also picked up by NFU Online) contains the following paragraph on CAP Pillar 2.

The allocation of rural development funds will be revised on the basis of more objective criteria and better targeted to the objectives of the policy. This will ensure a fairer treatment of farmers performing the same activities. In order to avoid a reduction in farmers’ income, the Commission will propose to allow Member States, if they so wish, to maintain the current nominal level of funding through transfers from Pillar Two to Pillar One.

However, in the version now available on the Commission’s MFF website, this paragraph reads:

The allocation of rural development funds will be revised on the basis of more objective criteria and better targeted to the objectives of the policy. This will ensure a fairer treatment of farmers performing the same activities.

In other words, the proposal to allow Member States flexibility to shift funds from Pillar 2 to Pillar 1 in order to maintain farmers’ incomes has been dropped.

Commission Ciolos in his commentary on the MFF proposals made no mention of this possible flexibility, where he promised that “we will keep solid Rural Development programmes, with a consistent level of support, at the centre of the future CAP – in contrast to some of the rumours that have been circulating in recent weeks”.

If the missing sentence turns out to be true, expect an outraged reaction from rural development groups around the Union.

Photograph of Sherlock Holmes statue in London by Bobby Cox from fotopedia used by permission under a Creative Commons licence.

One of the revelations in the Commission’s proposed Multiannual Financial Framework was its proposal to move funding for the programme of food assistance to the most deprived persons out of the CAP Pillar 1 budget to the European Social Fund, thus saving an estimated €3.5 billion which could then be used for other agricultural spending.

Whether the EU should be funding social programmes of this kind remains controversial in the Council of Ministers, although there is unalloyed enthusiasm for the programme in the European Parliament given that the majority of parliamentarians there favour spending of all kinds.

Origins of the programme

The scheme had its origins as an emergency measure in the exceptionally cold winter of 1986/87, when surplus stocks of agricultural produce were given to Member State charities for distribution to people in need. The measure was subsequently formalised and based on intervention stocks. As agricultural surpluses reduced, the programme has been supported by a direct financial contribution, and the scheme was amended in the mid-1990s to make it possible to supplement intervention stocks with market purchases in certain circumstances.

In 2008, with surplus stocks almost non-existent and unlikely to increase in the foreseeable future, and with food prices rising, the Commission proposed that the budget for the scheme should be increased and that it should be allowed to make market purchases on a permanent basis, to complement remaining intervention stocks. But it was extremely difficult to find a Treaty basis for this expenditure, and even more so to justify Community action as a value added measure under the subsidiarity criterion.

In 2010 the Commission presented an amended proposal to revise the scheme, to overcome the impasse in the Council and to help in reaching a sufficient majority. According to this proposal, food would be sourced either from intervention stocks or from the market and would no longer be based solely on products eligible for intervention. The annual financial contribution of the EU would be capped at €500 million, with co-financing by member states up to 25%.

Failing the subsidiarity test

When the scheme was primarily a means of disposing of intervention stocks, it was justified as a measure under Article 33 (1) (c) of the Treaty which sets out the CAP objective “to stabilise markets”. It was now to be justified by Article 33 (1) (e) “to ensure that supplies reach consumers at reasonable prices”.

The attempt to justify the scheme under the necessity test was even more tortuous and self-pleading.

The CAP objective of ensuring food for all EU citizens requires a targeted and subsidiary action. As shown in 3.1, the basis for action exists in Article 33 of the Treaty. The question that remains concerns the form that action at EU level should take, taking into account programmes that already exist in the Member States in the overall context of their social welfare policies.

It is worth recalling that, traditionally, Member States have put in place support systems to address housing, health, employment, education, training and retraining. But very few have specifically addressed the question of food poverty, which since the end of the 19th century has been left to charities to resolve……

.. EU food aid action should complement actions that exist in the Member States and offer a clear value added to MS actions. Factors that can be taken into account when assessing the value added are whether the scale of the intervention is appropriate, what level of administrative capacity is required and any learning processes that may result from EU action…

There follows a table which purports to demonstrate how these factors are addressed by the programme and which includes such gems as “creating civil society attitude” and “EU labelling of food distributed”. These factors have nothing to do with the necessity test as laid down in the Treaty (Article 5 of the Treaty of European Union) and which is worth repeating:

Under the principle of subsidiarity, in areas which do not fall within its exclusive competence, the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level.

There are no obvious impediments either in terms of diseconomies of scale or the existence of regional spillovers which make it more difficult for member states to administer a scheme of this kind.

Recent developments

Despite the enthusiastic support of the European Parliament, the Commission’s proposal has been held up by a blocking minority in the Council. The matter came to a head in April when the Court of Justice issued its decision upholding a complaint by Germany that the programme as it now operates cannot be justified as part of the common agricultural policy and thus has no basis in community law. As a result, the budget for the programme in 2012 has been cut from €480 million in 2011 to €134 million in 2012. This is undoubtedly a disaster for the charities which have been accustomed to receiving this aid.

At the Agricultural Council on June 28th last, Italy put the matter on the agenda and, supported by other member states (France, Poland, Estonia, Spain, Latvia, Bulgaria, Lithuania, Hungary, Malta, Portugal, Romania, Slovenia and Slovakia and some others), requested the Commission to submit proposals to amend the current system to ensure its future continuity.

The Council minutes include the following response from the Commission:

The Commission presented a proposal on this subject to the Council in September 2010 but some delegations expressed reservations on this text, as was the case for the first proposal presented by the Commission in 2008, as regards the legal basis, which in their view should be drawn from social policy rather than agricultural policy. The Commission indicated its willingness to discuss on the basis of its revised proposal tabled in 2010 as soon as possible in order to limit the impact of the judicial decision on this programme.

We can now see, from the proposed MFF 2014-2020, that the Commission has decided to alter its strategy and, indeed, to make this part of the European Social Fund in future.

It is hard to argue against food distribution to the needy. Not surprisingly, the internet-based public consultation on extending the food distribution programme attracted a large response, with replies expressing overwhelming support for the continuation of the Union food distribution programme.

Food poverty, and poverty in general, is indeed an important issue in Europe and member states should be encouraged to give it a higher priority. Sharing of best practice in terms of what works and what doesn’t is a useful value added role for the Union.  For example, one issue which should be considered is whether addressing food poverty is best done by distributing bulk commodities through charities, by the use of food vouchers or through raising child benefit or minimum social welfare rates.

But as I have argued previously with respect to the school fruit and vegetables scheme, public support for the European construction will be better achieved in the long-run if we don’t blur the distinctions between what the Union and the member states should do. This is one area where money could be saved in the budget negotiations.

The publication of the Commission’s proposals for the next Multiannual Financial Framework (MFF) 2014-2020 brings a little more clarity to its thinking on the likely shape of CAP reform post 2013.

Overall, the proposal represents a slight increase in the total size of the EU budget in the next programming period, by between 3.5% and 5% depending on whether one looks at commitment or payment appropriations. While a number of member states have sought a total freeze in real terms, this still represents a much more modest increase than that proposed recently by the European Parliament (which was a 5 percentage point increase in the share of the EU budget in GNI). The Commisison proposal would see the share of the EU budget in GNI shrink (in payment appropriations) from 1.06% in the current MFF to 1.00% in the next MFF.

The CAP budget

In commitment terms, the proposal allocates €281.8 billion for Pillar 1 of the CAP and €89.9 billion for Pillar 2 of the CAP (representing 76% and 24% of the total CAP budget, respectively).

Overall, the CAP share of total budget commitments would be 36%, which would represent a small decline compared to its share in the current 2007-2013 MFF.

Comparing the absolute size of the CAP budget with that available in the current MFF is more difficult, given that CAP expenditure on direct payments in the new member states will only reach its full level in 2013 (2016 in Bulgaria and Romania). One useful measure is to compare 2013 commitments multiplied by 7 with the total budget allocated for the 2014-2020 period. This gives a notional period spending (in commitment appropriations) for 2007-2013 of €401.8 billion compared to €371.7 billion allocated for the period 2014-2020 (both in 2011 prices). On this calculation, the reduction in the CAP budget in real terms is just 7%.

However, some additional proposals in the fine print also need to be taken into account. The Commission is proposing an additional €3.5 billion for crisis management measures in agriculture to be funded outside the MFF. In addition, farmers would become eligible for funding from the European Globalisation Fund designed to assist in adjusting to globalisation (compensation for beef farmers adversely affected by a Mercosur trade deal is an obvious candidate but apparently it may also be available to address problems of price volatility).  Expenditure on food safety (€2.2 bn) and food aid for deprived persons (€2.5 bn) will be moved to other headings in the budget. Finally, an additional €4.5 billion will be ring-fenced in the research and innovation budget for research on food security, the bio-economy and sustainable agriculture. Thus, up to €386.9 billion could be available for agricultural spending in the next MFF, or virtually the same level as in 2013 in real terms.

In overall terms, given that the bulk of expenditure on direct payments is fixed in nominal terms (and will thus decrease in real terms over the next programming period), the Commission proposal represents a stunning victory for farmers and agricultural ministries in holding on to their EU resources. It is now clear that no reduction in Pillar 1 direct payments is envisaged when the Commission’s proposal for CAP reform is published in the autumn.

Specific CAP measures – convergence of payments

The Commission proposal also bring greater clarity to two contentious issues in the CAP reform dossier, namely, the redistribution of Pillar 1 direct payments between member states and the greening of Pillar 1 payments. It also confirms that the Commission intends to proceed with proposals to cap the ‘basic’ Pillar 1 direct payment on larger farms, and to integrate rural development spending better into a common strategic framework for all structural funds.

Convergence of payments across member states will be achieved in a purely mechanical way rather than through the use of objective criteria. All Member States with direct payments below the level of 90% of the EU-27 average (defined as per hectare of potentially eligible land rather than utilised agricultural area) will, over the period, close one third of the gap between their current level and 90% of the EU average direct payments. This convergence will be financed proportionally by all member states with direct payments above the EU average.

This represents a very conservative approach to redressing the imbalances between member states and is about the minimum that the Commission could have got away with.

Specific CAP proposals – greening the CAP

Here the proposal is that 30% of direct support will be made conditional on ‘greening’, which is the first time we get an idea of the relative importance of this component of direct payments in the future. Greening means that all farmers must engage in environmentally supportive practices, going beyond cross-compliance, which will be defined in legislation and which will be verifiable, if they wish to be eligible for this DP component. The idea is to shift the agricultural sector significantly in a more sustainable direction, with farmers receiving payments to deliver public goods to their fellow citizens.

Much more information is required before the implications of this proposal can be assessed. In particular, a key issue is how much deadweight will be involved, i.e. paying farmers for practices they already engage in, such as maintaining permanent pasture. The greater the deadweight, the less onerous the conditions will be for farmers in claiming eligibility for these payments.

The Commission proposal should be seen as a vindication of Commissioner Ciolos’ strategy in seeking to hold on to the agricultural budget by building alliances with environmental interests in the Commission and in civil society. As a strategy, it has worked! However, the proposal represents only the opening shot in the negotiations on the next MFF which will not be concluded until late 2012 at the earliest.