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What explains the differential cuts in CAP P1 and P2 spending in the Commission’s MFF proposal?

As I discussed in this post, the Finnish Presidency has been tasked with presenting a first draft of the MFF ‘negotiating box’ with numbers prior to the next European Council meeting 12-13 December 2019. This will be no mean feat given the wide differences of opinion between the ‘frugal five’ Member States – Austria, Denmark, Germany, the Netherlands and Sweden – that want overall a smaller budget than what the Commission has proposed, and other Member States that want to reverse some of the Commission’s cuts in cohesion and agricultural spending (Politico’s Lily Bayer goes through the different alliances in this article published today).

The agricultural Ministers of seventeen Member States circulated a statement at the last AGRIFISH Council in October 2019 calling for the CAP budget to be maintained at its current level in nominal terms.  Austria manages to be both a member of the ‘frugal five’ in the General Council while at the same time calling for increased CAP spending in the AGRIFISH Council, which suggests statements of agriculture ministers may be meant more for domestic consumption rather than reflecting the views of their governments.

On the other hand, Germany was not a signatory of the October 2019 paper although German and French agriculture ministers had called for exactly the same thing in a joint statement published in June 2018. Here at least there seems to be greater coordination between finance and agriculture ministries on the home front!

The October 2019 statement clarified that the position of those Member States seeking to reinstate the cuts in the CAP budget as compared to their earlier statement (the ‘Madrid’ statement) in May 2018 is the restoration of the nominal level of CAP spending. This is a more modest ambition than that of the European Parliament which, in its resolution on the MFF of 10 October 2019 (the first time the Parliament newly-elected in May 2019 has expressed a view on this issue) reiterated the position of the previous Parliament that the agricultural budget should be maintained in real terms.

Neither the Member States’ statements nor the European Parliament position refers explicitly to the division of CAP funding between the two Pillars. The most puzzling aspect of the proposed CAP budget in the Commission’s 2021-2027 MFF proposal was not the small overall nominal cut of 3-5% (depending on how the calculation is done) compared to the current period – after all, the Commission’s Reflections Paper published in June 2017 had simulated a number of scenarios including up to a 30% reduction in the CAP budget.

The most puzzling aspect was rather the way the Commission opted to distribute the overall reduction in the CAP budget between Pillar 1 (a small nominal increase of between 0.5% and 2%) and a severe reduction in the Pillar 2 budget (of between 17-19%, again depending on the method of calculation, see the detailed figures in this European Parliament Policy Department briefing for the AGRI Committee).

This reversed the trend in the last three MFF’s to increase the share of Pillar 2 in the overall CAP budget. It also went further than an equi-proportionate cut in both Pillars that might have been seen as the least controversial way of presenting the reduction.

In this post, I put forward some potential explanations for the Commission decision. I should emphasise that these are not based on interviews or inside information on the Commission’s decision-making process but are rather speculations from an outside observer. Hopefully, they might inform some of the questions that political scientists or historians might put to the key players when the time comes.

Rationale for deeper cuts in Pillar 2 spending in the next MFF

Prioritisation of income support

The most obvious explanation is to take at face value the rationale given by Commissioner Hogan immediately after the Commission’s MFF figures were published. In a Facebook post, Commissioner Hogan defended the Commission proposal as follows:

Travelling throughout Europe in recent months, I have heard a strong and consistent message from farmers and farm leaders, as well as rural community leaders and politicians, emphasising the vital importance of direct payments as essential income support. I have listened very carefully to these messages and have therefore decided to prioritise the protection of direct payments in the new budget. As a result, direct payments will not fall by more than 4 per cent in any Member State.

Thus, the first and simplest explanation is that the Commissioner has chosen income support as a more important objective of the CAP than addressing environmental and climate challenges. The Commission has, it is true, proposed a more targeted income support (though hardly with much conviction). Member States are also required under its proposal to integrate the greening requirements into enhanced conditionality and to use at least some of the Pillar 1 direct payments for eco-schemes designed to address environmental and climate challenges. Nonetheless, the choice sits oddly with many of the other statements made by the outgoing Commissioner regarding the importance of raising the level of environmental and climate ambition in the next CAP.

A political economy argument 

The Commissioner’s decision may have been influenced by the lessons learned from the successful CAP reform of former Commissioner Franz Fischler in his Mid-Term Review of the CAP in 2003 which ushered in decoupling. Decoupling was a major change in the design of direct payments, and one for which there was little prior demand among Member States (the Parliament at that time had only a consultative role in CAP policy-making).

Fischler’s reform strategy was built on a complete separation of the redesign of CAP payments from any distributional consequences either between Member States or among farmers. Member States and farmers got exactly the same payments as they did previously (apart from a limited reduction in payments (‘modulation’) for larger farms to be used to strengthen rural development policy); these payments were now no longer linked to production as before.

Fischler’s reform left us with the legacy of grossly unequal payments per hectare both between countries and among farmers within countries. The continuing debates over external and internal convergence testify to the challenges in removing these disparities. It is clear that, if Fischler had attempted both to introduce decoupling of direct payments and to redistribute payments more uniformly, his reform would have stopped in its tracks.

Hogan may have reasoned similarly. The big innovation in his CAP reform proposal is the new delivery model which is intended to transform the governance of the CAP from a compliance-based to a results-based policy. Although put forward as a step towards simplification of the CAP, Member States have given the proposal an ambiguous welcome. They fear that strategic planning and performance monitoring could increase the burdens on public administrations and lead to greater uncertainty around the delivery of payments to farmers.

These fears are felt most strongly around Pillar 1 payments, given that Pillar 2 payments are already governed by a programming logic and build around targets and result indicators. Hogan may have reasoned that, if Member States were at the same time asked to accept a cut in Pillar 1 payments, opposition to his new delivery model would have been stronger. Pragmatically, therefore, like Fischler, he may have concluded that his best chance of getting the new governance model accepted was to rock the boat as little as possible on the size of Pillar 1 direct payments.

Greater flexibility to top up Pillar 2 resources from national funds

Another argument for making cuts in Pillar 2 rather than Pillar 1 payments is that Pillar 2 payments require national co-financing. This favours cuts in Pillar 2 for two reasons.  For the same overall CAP budget, a cut in Pillar 2 reduces the financial cost to Member States of drawing down CAP funds, which is always welcomed. On the other hand, if the objective is to maintain overall transfers to farmers from both EU and national sources, Member States are able to add to Pillar 2 resources from national funding whereas this is not possible for Pillar 1 direct payments.

The Commission in its proposal makes use of this latter lever by proposing an increase in national co-financing rates for Pillar 2 spending by 10 percentage points. Commissioner Hogan, in his Facebook post, optimistically claimed that this additional national co-financing would “allow public support to rural development to remain largely unchanged”. It would go a long way to closing the gap but would not eliminate it completely, as the following calculation shows.

The EU contribution to rural development spending in the EU27 in 2014-2020 was €97.7 billion in current prices (measured using the Commission’s preferred approach of taking the 2020 commitments and multiplying by seven) and €95.6 billion if the commitments are summed over the seven-year period. The Commission proposes to reduce this contribution over the period 2021-2027 MFF to €78.8 billion in current prices.

In the 2014-2020 programming period, €95.6 billion in EU funding prior to transfers attracted around €50.9 billion in national co-financing, for a total spend on rural development (excluding top-ups and transfers between Pillars) of €146.5 billion (the national funding includes the UK so this total is slightly exaggerated). The EU contribution averages 65% and the national co-financing rate averages 35%. Changing these ratios to 55:45 by shifting 10 percentage points from the EU to national co-financing and applying these ratios to the proposed lower EU Pillar 2 spending increases the national co-financing contribution by €13.6 billion to €64.5 billion. Overall spending on rural development (excluding top-ups and transfers between Pillars) would then reach €143.3 billion.

Thus, there would still be a slight fall in rural development spending in nominal terms (before transfers and top-ups) of around €3.2 billion even with the proposed increased rate of national co-financing but less than the reduction in the EU’s contribution alone of €16.8 billion.

Equally important as the possibility to offset some of the reduction in the EU Pillar 2 budget through an increased compulsory rate of national co-financing is the possibility for Member States to voluntarily increase their spending on rural development programmes (RDPs) in the form of top-ups, a possibility that does not exist in the case of Pillar 1 direct income support payments.

To comply with State aid requirements, Member States have to include this RD-like expenditure in their Rural Development Programmes. It is then signed off as part of the approval process of national and regional RDPs by the Commission. In the 2014-2020 period, a total of €10.7 billion in national top-ups are included in Member State RDPs.

It would be open to any Member State to make similar additional national contributions in the coming programming period. The objection is made that Member States do not have an equal capacity to make these voluntary contributions.

The fungibility of resources between the two Pillars 

A third factor behind the Commission’s thinking may have been that its CAP proposal increasingly blurs the distinction between the Pillars. Expenditure in both Pillars must now be programmed and measured against results. There is increased flexibility to transfer funds between Pillars, as well as the ability to fund similar measures from either Pillar (for example, eco-schemes can fund farmers who undertake commitments to observe agricultural practices beneficial for the climate and the environment just as agri-environment-climate measures do in Pillar 2).

From this perspective, the precise division of a country’s total CAP receipts between the two Pillars is now a much less significant constraint on how a country allocates its national envelopes between income support, on the one hand, and environmental and climate action, on the other hand. I am not evaluating in this blog post whether this flexibility makes sense if we want to encourage a higher level of environmental and climate ambition. I am instead trying to understand the Commission’s thinking when it put all of the nominal cut in the CAP budget on Pillar 2 and nothing on Pillar 1.

Knowing that Member States can shift resources between Pillars and that some Pillar 2-type measures can now be funded from Pillar 1 makes the Pillar allocations much less predictive of how Member States will spend their CAP monies than in the past.

There is one vital way in which differential cuts between the Pillars still have a major significance. Member States differ greatly in the composition of their CAP receipts between Pillar 1 and Pillar 2 payments. Differential cuts in the two Pillars imply, therefore, asymmetric impacts on individual Member States. This aspect of the Commission’s MFF proposal has been widely overlooked. We explore its implications in the following section.

Rebalancing the consequences of external convergence

The demand for external convergence has been, along with liberalisation of the rules governing voluntary coupled support, the principal negotiating objective for some of the newer Member States in this round of CAP reform, notably the Baltic States but also some other central European countries. In a joint declaration on the CAP post 2020 in June 2017 by Ministers for Agriculture of the Visegrad Group (Poland, Hungary, Czech Republic and Slovakia) together with Bulgaria, Romania and Slovenia, a subset of these countries with unit payments per hectare below the EU average (Bulgaria, Poland, Romania and Slovakia) insisted on the importance of continuing the process of levelling unit payments per hectare among Member States. They have continued to emphasise this objective at successive AGRIFISH Council meetings and in further Visegrad Group interventions.

It is important to recall the rationale for the national envelopes that were included in the accession agreements of the newer Member States. For direct payments, the amounts were based on the level then pertaining in the EU15 but applied to base areas, reference yields and ceilings for livestock that were individually negotiated with each accession country. Because of lower yields and lower volumes of production, the outcome was that by the end of the ten-year phasing-in period when payments were intended to be ‘at the same level’ in both older and newer Member States, payments per hectare in the newer Member States averaged about 70% of those in the older Member States (University of Bologna, 2007).

This was not necessarily an unwanted outcome. There was an obvious concern among the older Member States to keep the enlargement ‘bill’ as low as possible. But there was also a feeling that the enormous inflow of CAP direct payments could slow down necessary structural change. It would make more sense to provide CAP transfers to the newer Member States through Pillar 2 rather than through Pillar 1 in order to assist in the necessary restructuring.

The resulting compromise was that the newer Member States got lower amounts through CAP Pillar 1 but larger amounts through CAP Pillar 2. The countries now pressing for increased Pillar 1 payments through raising their direct payments per hectare to the EU average fail to recognise this implicit relationship between the funding they receive through the two Pillars.

The following graph shows the relative shares of CAP transfers received through the two Pillars in the 2015-2020 period (the Pillar 1 shares only show pre-allocated receipts under the direct payments envelope, market-related expenditure allocated for sectoral programmes such as wine, olive oil, etc as well as non-pre-allocated spending such as school schemes and promotion are not included). The differences in the shares between countries is very striking.

Countries such as Denmark and the United Kingdom receive only 9% of their pre-allocated CAP transfers through Pillar 2, while for countries like Portugal, Croatia and Malta, the shares are over 50%. The newer Member States are all located to the right-hand side of the graph but there are also some older Member States (notably Austria and Finland as well as Portugal) that are disproportionately dependent on Pillar 2 transfers.

These differences in dependence on the two Pillars for transfers become highly significant when the Commission’s draft MFF regulation proposes to make all of the reduction in the CAP budget in nominal terms in Pillar 2. This proposal has very asymmetrical implications for different Member States, depending on their relative share of Pillar 2 receipts in total CAP transfers. This is shown in the following table, which presents the percentage changes in each Member State’s receipts under the two Pillars and the CAP as a whole in 2021-2027, compared to their receipts in the 2014-2020 period.

The first column shows the changes in direct payments envelopes. For the EU27 the average reduction is 1.9% but the figures for individual Member States vary between +7.4% for Estonia, +7.1% for Latvia and +6.5% for Lithuania to -3.9% for many of the other Member States as a direct result of the Commission’s external convergence proposal in the MFF. The increase for Croatia is even higher at +22.1% but this reflects the final phasing-in of its direct payments after accession.

The average reduction in rural development envelopes is much greater at 15.3%. The Commission has proposed to make this cut across-the-board. Overall, there is a cut in pre-allocated transfers (excluding market-related expenditure) of 5.3% for the EU as a whole. 

The third column shows the combined impact of both proposals (external convergence in Pillar 1, and the larger nominal cut in Pillar 2 payments) on overall CAP receipts (again, we note market-related expenditure is not included).  For Malta, the overall outcome will be a cut of 12.1%, for Slovenia a cut of 9.3% and for Austria a cut of 9.0%.

The results for the Baltic countries are especially noteworthy, as these are the countries that benefit the most from the external convergence ‘uplift’ in the first column. Because of their large dependence on Pillar 2 transfers, the overall receipts of Estonia and Lithuania will fall under the Commission’s proposal in the coming period, while Latvia will just about hold on to its current level.

The extent to which the larger proposed reduction in Pillar 2 payments rebalances external convergence is shown in the final column by subtracting the proposed percentage change in direct payment envelopes from the overall percentage change in CAP receipts. I have ranked the table by this column to highlight those countries most affected in the upper half of the table.

Croatia is by far the most affected. Its expected gain of 22% in its direct payments envelope due to the final phasing-in these payments is almost nullified by the reduction in its Pillar 2 receipts.  It is also clear that those Member States that have been most vocal in calling for further progress towards external convergence also find their gains reduced by the larger cut to Pillar 2.

The question I am raising is whether this is simply an accidental outcome of the way the Commission chose to allocate the cut in the CAP budget between the Pillars? Or does it represent a more conscious decision to revisit the compromise agreed with the newer Member States at the time of their accession? It was thus no surprise to see the Member States most adversely affected by this differential cut with Slovenia in the lead come out with a statement in January 2019 extolling the virtues of rural development spending, without however mentioning explicitly their specific financial interest in avoiding a differential cut.

Conclusions

Perhaps the most puzzling, because unexpected, part of the Commission’s budget proposal for the CAP post 2020 was not the nominal reduction in the budget in itself (which had been predicted if not welcomed) but rather the fact that the Commission chose to impose all of the cut on Pillar 2 funding while maintaining the level of Pillar 1 funding. In this post, I explore some potential rationales for the Commission’s decision.

The most obvious and simplest explanation is Commissioner Hogan’s own account that the feedback from farm unions and politicians emphasised the vital importance of direct payments as essential income support and that he therefore decided to prioritise the protection of direct payments. While a plausible acknowledgement that it is farm unions that set EU farm policy, it contrasts with other positions he has taken underlining the importance of greater emphasis on environmental and climate goals. It makes one wonder if there were not other factors in play.

In this post, I suggest a number of other possible factors that may have played a role in this decision. Even if this were not the case, the discussion highlights some of the implications and consequences of the Commission’s approach.

  • A pragmatic decision to minimise expected opposition to the new delivery model (which has most implications for Pillar 1 payments) by avoiding at the same time cuts to the Pillar 1 budget.
  • The fact that Member States can make additional contributions to Pillar 2, either through an increase in co-financing rates or through voluntary top-ups, which is not the case for Pillar 1. The counter-argument here is not all Member States have an equal capacity to make such additional payments.
  • The greater ability given to Member States to move resources between Pillars and to finance similar agri-environment-climate measures using Pillar 1 funds to those that can be funded from Pillar 2 means that the practical significance of the division between two Pillars will become increasingly blurred. While this assessment is broadly correct, it ignores a vital distinction between the two Pillars, namely, that the relative importance of transfers under the two Pillars is strikingly different across Member States.
  • This last point gives rise to a final potential rationale for the Commission’s decision, namely, that it is intended to rebalance the consequences of external convergence on the net transfers among Member States in the light of the implicit bargain struck at the time of the last accessions. This implicit bargain was that lower direct payments ceilings would be compensated by higher rural development ceilings. External convergence now disturbs this balance. If some newer Member States insist on getting a larger share of the direct payments pie, their case for preferential treatment with respect to rural development funding is weakened. Whether this rationale motivated the Commission’s budget proposal or not, it has this undoubted effect. It is, however, a relatively crude rebalancing instrument, with some older Member States (Portugal, Austria and Finland) also negatively affected.

The outgoing Budget Commissioner Gunther Oettinger has lambasted critics of the Commission budget proposal for focusing too much on net balances, particularly when a growing share of the budget is spent on EU programmes that provide general benefits rather than specific transfers to Member States.

However, CAP spending remains primarily a redistributive policy and net balances remain all-important. The fact that Austria and Finland are not only expected to pay relatively more into the EU budget (due to the elimination of budget rebates proposed by the Commission) but are also likely to lose relatively more in terms of receipts because of the stronger reduction in the CAP Pillar 2 budget may only confirm their hard-line position on the EU MFF ceilings as members of the ‘frugal five’.

Spare a thought for Charles Michel who assumes office as President of the European Council on 1 December next and who will have the job of coming up with an MFF proposal that will satisfy all 27 Member States.

This post was written by Alan Matthews

Update 6 Nov 2019: The calculation of the change in total rural development spending has been changed to use the figure of €95.6 billion as the base for deriving the existing average national co-financing ratio rather than the figure of €97.7 billion that I had used initially. A reference to the modulation of payments in the Fischler reform was also added.

Photo credit: CosmoShiva at pixabay.com licensed for re-use

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MFF discussions pushing small increase in CAP budget compared to Commission proposal

The European Council leaders at their meeting on 17-18 October 2019 failed to make progress in advancing discussions on the next Multi-annual Financial Framework (MFF) due to start on 1 January 2021. The Council’s conclusions noted that: “Further to a presentation by the Presidency, the European Council exchanged views on key issues of the next Multiannual Financial Framework such as the overall level, the volumes of the main policy areas, the financing, including revenues and corrections, as well as the conditionalities and incentives. In the light of this discussion, it calls on the Presidency to submit a Negotiating Box with figures ahead of the European Council in December 2019”.

The European Council’s conclusions in June 2019 had anticipated a more ambitious timetable. At that meeting, it called on Finland’s Presidency “to pursue the work [done under the Romanian Presidency] and to develop the Negotiating Box. On that basis the European Council will hold an exchange of views in October 2019, aiming for an agreement before the end of the year.”  It is now clear that this ambitious timetable will not be met.

Indeed, originally, the Commission had hoped that the MFF would be in place prior to the European Parliament elections in May 2019 (an ambition supported by the Parliament) in order to avoid delays in implementing EU programmes with potential to spur the European recovery.

The European Council had before them a two-page discussion paper prepared by the Finland Presidency, based on a questionnaire it circulated to Member States last July and bilateral consultations (thanks to Euractiv for making this paper available).  The paper says Member States differ on the overall contribution to the future MFF, with the range between 1.00% of the EU27 GNI, and the Commission’s proposal of 1.11%. The paper also says that while the modernised approach proposed by the Commission has received broad support from Member States, many of them also highlighted the importance of continued support for Cohesion policy and the Common Agricultural Policy (CAP).

In this post, I look at the implications of the Finland Presidency paper for what it tells us about the state of play of the MFF negotiations at this point in time, as well as what it might mean for the absolute size of the CAP budget in the next MFF programming period. It seems that the Presidency proposal could point to a small increase in the size of the CAP budget in nominal terms by between 0% and 6% in the next MFF period compared to the Commission’s draft proposal, but many uncertainties remain.

Why agreement on the MFF is difficult

For many reasons, the difficulties Member States have in progressing the MFF negotiations should not surprise. As summarised in the conclusions of the October 2019 Council quoted above, the issues to be addressed are enormous, complex and intertwined. They raise fundamental questions regarding what the EU budget is for and what the money should be spent on; how the EU budget should be financed and whether new sources of revenue should be introduced; whether and how the EU budget can play a stabilisation function particularly in the context of managing the single currency; as well as more recent debates around conditionalities and particularly whether a requirement to observe the rule of law should be made a condition for the receipt of EU funds.

Looming behind these discussions is the perennial division between net payers and net contributors to the EU budget which is played out particularly in the debate around the overall size of the EU budget.

This debate is further sharpened on this occasion by the withdrawal of the UK from the EU, given that it has been the second largest net contributor to the EU budget. Brexit not only leaves a financing gap which the remaining Member States have to decide how to cover, whether through expenditure cuts or increasing their budget contributions. It also calls into question the rationale for the system of rebates that has grown up as a way of securing unanimous agreement to the MFF in the past, but which has undermined the transparency and, some argue, the fairness of the resulting outcomes.

The Commission’s suggestion to remove all rebates in its draft MFF proposal exacerbates the impact on the remaining net payers of its concurrent proposal to increase the size of the MFF, whatever the individual merits of these proposals on their own.

At the end of the day every Member State has to walk away feeling that they have won something. The decision has to be unanimous (unless the European Council unanimously agrees that the Council can act by qualified majority in adopting the MFF Regulation). Furthermore, the European Parliament must approve the MFF Regulation (which sets the ceilings on particular headings of expenditure) and must be consulted on the Own Resources Decision (which sets the maximum limit for payment appropriations in any year). Not only that, but the Own Resources Decision has also to be approved unanimously by national parliamentary bodies as well (by one count, this requires 42 separate votes across the EU). It took two-and-a-half years before the Own Resources Regulation for the current MFF passed all of these hurdles.

This fixation on net budget balances – the ‘juste retour’ principle – as the criterion for declaring ‘success’ in the MFF negotiations is repeatedly criticised for ignoring the wider benefits of EU membership (the Commission makes this case in this factsheet for the single market) as well as, more narrowly, the European value added of the budget expenditure on its own.

The problem is that even accepting the validity of these arguments leaves unclear what is a fair distribution of the costs of obtaining these benefits. It is thus not surprising that Member States fall back on the calculation of net budget transfers as a proxy measure and that this is the criterion used by national parliaments and national taxpayers to evaluate the reasonableness of the MFF outcome when finally agreed.

On this occasion, a group of net payers known as the ‘Frugal Four’ – Austria, Denmark, Netherlands, and Sweden – have rejected the Commission’s draft MFF proposal to raise the level of commitment appropriations from 1.0% of GNI to 1.08% of GNI (from 1.03% to 1.11% if the European Development Fund is included as the Commission has proposed) and have insisted on retaining the ‘political ceiling’ of 1.0% of GNI.

This group has now been joined by Germany to become the ‘Frugal Five’.  Germany’s hard line on the overall size of the EU budget was communicated to the Finnish Presidency in response to a series of questions in July designed to elicit Member State positions. According to Politico Europe’s account of the German response, the government replied that “We will conduct the MFF negotiations on the basis of 1% of the EU27 GNI”.  The German Finance Ministry has calculated that, even on this basis, the German contribution to the EU budget would increase by €10 billion annually. The German Chancellor, in an address to the Bundestag just prior to the European Council meeting, said even this increase was unacceptable and demanded that the rebate that limits Germany’s net contribution to the EU budget as a result of the UK rebate should be kept in place.

This hard-line position appears to contrast with the forward-looking, historically-aware speech by the former German Foreign Minister, Sigmar Gabriel, at the EU budget conference Shaping our Future: Designing the Next Multiannual Financial Framework in January 2018 which lambasted the obsession with net budget balances also in Germany and called on the Commission to put forward an ambitious MFF proposal. I was present to hear that speech and remember how much it impressed me at that time (the video of the speech is available here). This was not the first time that Gabriel had made this argument, but it seems with his departure Germany has reverted to a more traditional accounting perspective to the budget negotiations.

The Finland Presidency proposal

According to the Finland Presidency paper, the majority of Member State views on the overall level of the MFF differs between 1.00% and the Commission’s proposal of 1.11% (EU27 GNI). “In taking the negotiations forward, the Presidency sees that the overall level range is to be symmetrically narrowed from both ends”.

What this implies is that the Commission proposal for an MFF based on 1.11% EU27 GNI is seen as the high-water mark. No Member State is proposing to go beyond this ceiling, and many want to stay below it, with the Frugal Five presumably being the Member States advocating that the MFF should be limited to a ceiling of 1.00% EU27 GNI. In these discussions, the net payers tend to have the whip hand (as shown by the success of the UK in the last MFF negotiations in getting agreement on the political ceiling of 1.0% of EU28 GNI). One might surmise, therefore, that the ultimate compromise will be towards the lower end of this range.

The Presidency’s approach to allocating the budget between traditional and new priorities is based on the following principles:

1) Keeping the modernised division between the policy shares (approx. 1/3rd to Cohesion, 1/3rd to CAP and 1/3rd to other policy areas, excluding administration.

2) Balancing the proposed decrease between Cohesion and CAP, so that both policies would face a similar level of decrease compared to the current MFF.

3) Increasing funding for other policy areas, but limiting the level of increase proposed by the Commission.

Under the Commission proposal, the traditional spending areas of CAP and Cohesion would be reduced to 60% of the overall MFF. The Presidency proposal therefore implies some shift of the MFF budget back to agriculture and cohesion (with a combined share of 62.2%) . However, the overall budget ceiling is also reduced, so what this means for the absolute level of CAP and Cohesion spending remains to be determined. In any case, it is clear that the Presidency proposal implies the largest cuts fall on other policy priorities, both because the overall size of the budget is reduced and because their share of that budget is also reduced.

What does the Finland Presidency paper mean for the CAP budget?

As noted, the Presidency paper does not give specific figures to show how these principles would translate into actual budget numbers. But by making certain assumptions, the potential range of outcomes for CAP spending can be explored.

First, the Presidency proposes the principle that the range for the overall MFF level should be symmetrically narrowed from both ends. According to Euractiv reporting, the Presidency is proposing a range of between 1.03%-1.08% EU27 GNI compared to the range 1.00%-1.11% EU27 GNI supported in the bilateral discussions. This range does represent  a symmetrical narrowing although these figures do not appear in its two-page discussion paper for the European Council summit itself. A similar range is used in an excellent post by Nicolas Wallace on the Science|Business blog on the Presidency budget proposal, although there are some minor divergences in my figures compared to those he presents.

Second, the Presidency paper is not specific in what it means by the MFF ceiling. There are three uncertainties: a) whether it refers to commitment or payment appropriations; b) whether it refers to an MFF total including the European Development Fund (EDF), as proposed by the Commission; c) whether it takes account of EU expenditure outside the MFF ceilings which has become an increasingly important element in the current MFF period (examples include the European Globalisation Adjustment Fund, the European Union Solidarity Fund, the European Investment Stabilisation Function, the European Peace Facility and the Facility for Refugees in Turkey).

For the purpose of the indicative calculations below, I have assumed that the Presidency principles a) apply to commitment appropriations; b) include the EDF in the ‘other priorities’; c) refer only to expenditure inside the MFF.

In parenthesis, the range identified by the Presidency of between 1.00% and 1.11% of EU27 GNI appears to conflate two well-known positions. The 1.11% figure is the Commission’s proposal for the overall MFF ceiling but this includes the EDF. The 1.0% figure is the current MFF ‘political ceiling’ but this refers to an MFF without the EDF. If the ‘Frugal Five’ want to be consistent, the corresponding GNI share including the EDF is 1.03%. In this context, calling for a 1.0% ceiling for an MFF including the EDF represents a further tightening of the ceiling compared to the current programming period. The 1.03% ceiling used for the lower bound in my calculations actually corresponds to maintaining the 1.0% ‘political ceiling’ from the current MFF.

On the basis of these assumptions plus others set out in notes to the table, indicative spending levels for the CAP are shown in the following table in both current and constant prices. The conclusion is that, with the overall MFF pegged at the lower GNI percentage of 1.03%, the budget for the CAP is broadly maintained in current prices compared to the Commission proposal because it gets a higher share of this budget despite the reduction in the MFF size (in fact, a small increase is shown but given the inherent uncertainty in the way the calculations are done, I would not put too much weight on this).  

If the MFF size is towards the upper end of the anticipated range, then the CAP budget increases in current prices relative to the Commission proposal by up to 6%. Conversely, if the overall MFF ceiling were to fall below 1.03% of GNI, then CAP expenditure would be cut relative to the Commission proposal.

In real terms (constant prices), the Presidency proposal would still represent a significant cut in the amount of CAP expenditure in the 2021-2027 period compared to the current MFF. With an MFF ceiling of 1.03%, the value of CAP expenditure in real terms is very similar to what is proposed in the Commission’s draft MFF proposal. The closer the MFF ceiling moves to 1.08%, the larger the amount available for CAP spending becomes.

Notes: Figures attributed to the Finland Presidency proposal are estimates derived from the principles set out in its discussion paper. Other assumptions are that the share of administration spending is held constant at the share included in the Commission proposal. With a smaller overall budget, this implies that administration spending is also reduced. Cohesion spending is assumed to comprise the European Regional Development Fund, the Cohesion Fund and the European Social Fund+. A final source of uncertainty is the implicit level of EU27 GNI for the 2021-2027 period against which the MFF totals are assessed due to the rounding errors introduced by having to use percentage shares truncated to two decimal figures to derive this number.
Source:  Alan Matthews calculations based on MFF figures in European Parliament’s MFF Resolution adopted 14 November 2018

Conclusions

The Finland Presidency discussion paper represents a first attempt to try to arrive at a landing ground on the size and composition of the next MFF. The Presidency has been asked by the European Council to submit a Negotiating Box with figures ahead of the European Council meeting in December. That leaves the Finns with about six weeks to narrow the range from that implied in this discussion paper!   To arrive at a single figure within this short timescale would seem impossible, so one assumes that the best that can be hoped for in December is a narrower range.

What we learn from the exercise so far is that the Commission proposal for the overall MFF level has already been dismissed as too high. The question is whether the numbers converge to the mid-point of 1.055% or whether the net payers pull the ultimate landing point closer to the lower bound of the range identified in the Presidency discussion paper. Recall that a ceiling of 1.03% of GNI actually corresponds to the ‘political ceiling’ of 1.00% in the current MFF due to the inclusion of the EDF in the MFF figures.

It appears that even with a smaller MFF than that proposed by the Commission, the rebalancing proposed by the Finnish Presidency between the traditional and new spending priorities would at least maintain the level of CAP spending proposed by the Commission and could result in a small increase of between 0-6%. These are indicative figures at this point in time and can easily change as the negotiations proceed.

However, it is hard to see what might change the dynamics of this negotiation and bring the Commission’s ceiling level of 1.11% back into play.

In her Political Guidelines for the incoming Commission entitled “A Union that Strives for More”, the Commission President-elect von der Leyen included a number of additional spending commitments, including a new Just Transition Fund, a Sustainable Europe Investment Plan, a European Child Guarantee, tripling and not just doubling the ERASMUS+ budget and higher spending on external action investment. These commitments are not reflected in the Presidency’s discussion document and it remains an open question whether they will be in the Negotiating Box presented to the European Council next December. Many of these commitments will require legislative proposals to establish new instruments in order for their financing to be included in the next MFF. Even with further delays in agreeing the MFF it must be doubtful whether such legislation could be passed in time.

Another possible trigger that would change the dynamics of the negotiations, not entirely far-fetched, would be a referendum in the UK between Prime Minister Johnson’s Brexit deal and a Remain option in which the UK electorate votes to Remain. If the UK were to remain an EU Member State, it would alter dramatically both the political and economic context for the MFF negotiations.

Ultimately, the Parliament must also give its consent. The newly-elected Parliament passed a resolution setting out its views on the 2021-2027 MFF and own resources on 10 October 2019. The resolution confirms the Parliament’s position that the ceiling for the next MFF should be set at 1.30% of EU27 GNI and that spending on traditional EU policies such as agriculture and cohesion should be maintained in real terms. It also reaffirmed other elements in its negotiating position including reform of the own resources system and a rule of law mechanism where the ultimate European Council conclusions may disappoint. The Parliament declared “its readiness to reject any Council position that does not respect Parliament’s prerogatives or take due account of its positions”.

The Finns must now make a heroic effort to translate the principles set out in their discussion document for this October European Council into a Negotiating Box with figures for the December European Council. There will be another opportunity to take stock at that stage to see how far the negotiations have progressed.

This post was written by Alan Matthews

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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 account 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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CAP spending in the next MFF

Last week, the European Parliament secretariat (Policy Department for Structural and Cohesion Policies) presented a briefing authored by Albert Massot and Francois Negre to the AGRI Committee comparing the Commission’s CAP legislative proposals for the period after 2020 with the current regulations. It consists of two documents: a relatively short contextual statement, and an annex containing six ‘Dashboards’ which in a two-column format set out in specific detail how the CAP reform package (2021-2027) proposed by the Commission on 1st June 2018 compares with the current CAP (2014-2020) regulations, topic by topic. It makes a very useful contribution in structuring the debate around the Commission’s CAP proposals.

In this post, I want to pick up on just one issue addressed in the briefing, namely the budgetary framework. In previous posts (here and here), I have tried to establish what the Commission’s MFF proposal made on 2 May 2018 implies for the future CAP budget. This has been a frustrating process because a key Commission document circulated to the Parliament’s Budget Committee seemed to contain an obvious error (see discussion in the second of my two posts). Some further insights into the budgetary framework were since provided in a recent European Court of Auditors report discussing the MFF proposal.

However, this European Parliament briefing sets out the numbers in what I think will be the definitive version. They can be consulted in the paper itself, but for convenience I reproduce them here. The proposed CAP budget for the 2021-2017 is compared in both nominal and real terms with the CAP budget available in the 2014-2020 period for both Pillars, taking into account the difference made by the departure of the UK, and using two different points of reference. The tables compare the total resources allocated to the CAP over the two seven-year MFF periods adjusted for the UK departure, as well as comparing the allocation for the 2021-27 MFF with the last year of the current MFF (multiplied by seven). Note that the briefing does not compare the two end-years in each MFF, as I did in this post. In passing, one can remark that the Commission would have saved a lot of aggravation by making this information available at the time the MFF proposal was published.

It must be stressed that this is still a Commission proposal. It assumes that the European Council will go along with the proposed increase in the MFF ceiling (from 1.00% to 1.11% of EU27 GNI). Because the proposal for the 2021-2027 MFF includes the budgetisation of the European Development Fund, the actual increase proposed by the Commission is somewhat smaller, from 1.03% to 1.11% of EU27 GNI. It also assumes that Member States in the European Council will agree to the change in the proposed structure of EU spending, with a higher share of the MFF going to new challenges and a smaller share going to the ‘traditional’ big ticket items of cohesion and agricultural spending.

The figures show that, comparing the 2021-2027 MFF to the last year of the current MFF (2020 multiplied by seven) gives a smaller increase (but larger decrease) relative to comparing the size of the two MFFs as a whole. The Commission prefers to emphasise the comparison with the year 2020 multiplied by seven. On this basis, CAP spending in nominal terms is expected to fall by 5%. However, if we compare total MFF resources for the two periods, the fall is only 3%. In either case, Pillar 1 spending in nominal terms is projected to increase.

When the figures are compared in constant price terms, these rankings are reversed for the CAP. Now it is the comparison of total resources in the two MFF periods which shows the largest decreases.

Implications for rural development expenditure

The tables also confirm what has been long recognised, that the Commission proposes a substantial reduction in Pillar 2 resources in both nominal and, especially, real, terms. However, three points need to be kept in mind when trying to project the likely impact on total rural development spending.

First, the resources devoted to Pillar 2 in the current MFF period (€100.3 billion in current prices and €102.0 billion in constant 2018 prices) are calculated after the flexibility decisions of Member States to transfer resources between the two Pillars. The Pillar 2 allocation in the 2021-2027 MFF is before Member States have made their decisions on transfers between Pillars. In the current MFF period, Member States have made a net transfer of resources from Pillar 1 to Pillar 2.

This option to transfer resources between the Pillars is maintained and expanded in the Commission’s legislative proposal. In addition to the possibility to transfer 15% between pillars, Member States will also have the possibility to transfer an additional 15% from Pillar 1 to Pillar 2 for spending on climate and environment measures (without national co-financing). We might thus expect a similar net transfer to Pillar 2 to happen at the start of the next MFF as well. Also, the scope to finance RD-like measures using a Member State’s Pillar 1 ceiling (limited to ANC payments in the current CAP) will be expanded through the obligatory eco-scheme to fund agri-environment-climate expenditure without necessarily transferring these resources to Pillar 2.

Second, the Commission is proposing a reduction in the EU co-financing rate for Pillar 2 expenditure of 10 percentage points, meaning that Member States will be expected to contribute additional national resources to fund rural development programmes. This will help to maintain the overall volume of spending on Pillar 2 projects, regardless of any decisions taken to use the flexibility to transfer resources between Pillars. However, it will not be sufficient on its own to prevent an overall reduction in Pillar 2 spending, as shown in the following table.

The EU budget RD spending figures are taken from Table 2 in the European Parliament briefing comparing total MFF spending (adjusted for the UK departure) in the two periods in real terms. The average EU co-financing rate is derived from the figures for EU and national RD spending in this DG AGRI publication, and I assume this percentage is also valid for the EU27 in the 2014-2020 period.

The next column looks at what would happen to total RD spending in the absence of any change in co-financing rates. Total RD spending would fall by 28%, which is the same reduction as for EU Pillar 2 spending alone.

The final column shows the impact of reducing the EU co-financing rate by 10 percentage points. We assume that the composition of spending across programmes and regions eligible for different co-financing rates does not change. This will crowd in additional national RD spending; in fact, national co-financing of EU rural development programmes would slightly increase compared to the current MFF period. However, the additional national financing is not sufficient to offset the cut in EU budget spending. Overall, there would still be a cut of €21 billion in total RD spending, a reduction of 14% in real terms compared to the current period.

Third, it is important to underline that Member States are able to top-up rural development spending out of their own resources. If there is no EAFRD co-financing associated with this spending, the Member State must seek State aid approval for this expenditure. Where the measures are exactly similar to those that can be funded under Rural Development Programmes (”RD-like”) and are limited to SMEs (thus covering measures directed at most farmers), there may be scope to notify these measures under the Agricultural Block Exemption Regulation. This is a simplified procedure intended to reduce delays and the bureaucratic hassle of formally seeking Commission approval for State aid expenditure.

If this is not the case, Member States can seek approval from the Commission under the Agricultural Guidelines for State aid in the agricultural and forestry sectors. Provided the criteria in these Guidelines are met, such State aid will be approved. Member States make considerable use of these State aid possibilities for RD spending in the current MFF period. Again, this is likely to continue in the next MFF period. As national expenditure of this kind will be expected to contribute to the achievement of the nine specific objectives spelled out for the CAP Strategic Plans, it will be important to include this proposed expenditure when submitting these Plans for approval to the Commission.

For these three reasons, it is not possible at this stage to state definitively whether total spending on RD projects will increase or decrease in the years after 2020. Much is left to the decisions of Member States when drawing up their Strategic Plans.

Critical reactions

There has been a strong critical reaction from the European Parliament, many Member States and farm unions to the CAP budget proposals in the MFF, as Budget Commissioner Oettinger admitted to the General Affairs Council at its MFF discussion on 18 September last. The Commissioner has emphasised that the withdrawal of the UK as a significant net contributor is one reason why cuts are necessary to ‘traditional’ programmes. The mantra chosen by the critics has thus been that “farmers should not bear the cost of Brexit”. The implication is that the gap should be made up by additional Member State contributions.

The European Parliament briefing notes that “Since 1992, the date of the first significant overhaul of the CAP and the substantial increase in the volume of direct aid, agricultural expenditure remained stable in real terms… The CAP budget has never suffered such an overall reduction in any of the previous reforms. The explanation lies in the cumulative effect of Brexit and in the need to finance the new challenges facing the EU.”

While one might quibble with the conclusion that the CAP budget has never been cut in real terms (in the 2014-2020 MFF it was held constant in nominal terms implying a real cut at that point), the proposed 3-5% cut in nominal spending on this occasion is a break with the past, brought about for the reasons mentioned in the briefing.

The European Parliament’s resolution of 30 May 2018 on the Commission’s MFF proposal “Deplores the fact that this proposal leads directly to a reduction in the level of both the common agricultural policy (CAP) and cohesion policy, of 15 % and 10 % respectively”. It went on to call “to maintain the financing of the CAP and cohesion policy for the EU-27 at least at the level of the 2014-2020 budget in real terms.”

The draft COMAGRI Opinion prepared by Peter Jahr MEP for the Parliament’s interim report on the MFF proposal to be voted in plenary in November “Reiterates its call for the CAP budget to be maintained in the 2021-2027 MFF at least at the level of the 2014-2020 budget for the EU-27 in real terms, given the fundamental role of this policy; reaffirms its view that agriculture must not suffer any financial disadvantage as a result of political decisions such as the withdrawal of the United Kingdom from the EU or the funding of new European policies.”

On 31 August, the AGRI Committee Chair Czeslaw Adam Siekierski put down a question for oral answer by the Agriculture Commissioner to “ask the Commission and the Council to increase the proposed CAP budget to bring it back to the current EU-27 level, and for it to be maintained in real terms over the duration of the next MFF period to ensure proper funding of the CAP objectives and avoid any possibility of re-nationalisation in the future.”

At the June 2018 AGRIFISH Council meeting, the French delegation presented a joint memorandum on the CAP budget in the context of the future MFF on behalf of a group of member states (Finland, France, Greece, Ireland, Portugal and Spain, supported by Croatia, Cyprus, Hungary, Lithuania, Luxembourg, Poland, Romania and Slovakia). The memorandum regrets the proposed reduction of the CAP budget in the context of the MFF “as this would threaten the viability of European farming, and requests that the future CAP budget is increased and brought back to the current EU-27 level”. Important to underline here is that the memorandum does not specify whether “the current EU-27 level” is defined in nominal or real terms. One might impute that, because the memorandum does not make an explicit reference to real terms, it is implicitly looking for this restoration in nominal terms.

Noting that last caveat, the Parliament’s reactions all ignore that the largest expenditure item in the CAP budget is direct payments, they account for 73% of total spending. Direct payments were introduced in 1994 as compensation for reductions in market intervention prices at the time. The value of these payments has been more or less maintained in nominal terms since then. As Table 1 shows, this will continue to be the case in the next MFF under the Commission proposal. To the extent that the CAP budget has been maintained in real terms, this is because of successive enlargements of the EU. There has never been a commitment to inflation-proof the value of direct payments.

The CAP share in the EU budget

Yes, there would be a small cut (of around 3-5%) in the total CAP budget in nominal terms in the next MFF period under the Commission proposal. But when we look at the trend in the share of the CAP in total EU budget spending (shown in the next chart), the fall in the CAP budget share in the 2021-2027 period follows very closely the trend of the previous four decades.

The message from the chart is that there is no real break in the trend in CAP expenditure in the Commission’s MFF proposal, it is very much business as usual. The CAP share in the total EU budget was around 73% in 1980, and is projected to fall to around 27% in 2027. This is very much in line with the trend. The Commission could no doubt refine the figures behind this chart (see Technical Note below) so that they are more comparable, but I don’t think this would change the underlying conclusion

The Commission would do well to promote this chart in the coming months in making its case that the proposed structure of spending in the next MFF is a justifiable compromise between competing demands.

Technical note: There are two definitional problems in comparing the share of CAP spending in total EU budget spending over the period 1980-2027. The first is that the data for the period 1980-2017 are based on actual spending (derived from the DG BUDGET Financial Reports and, for 2000-2017 from its interactive workbook). We do not know what actual spending will be for the decade ahead.

For the period 2018-2027, therefore, the data are based on commitment appropriations in current prices derived from the MFF tables. Thus the percentage figures for the CAP share in the total EU budget are not exactly comparable for the periods 1980-2017 and 2018-2027.

The second adjustment that must be made is that the MFF totals for the period 2021-2027 include commitment appropriations for the European Development Fund (EDF). In previous periods this spending has been outside the MFF. Thus, I have subtracted estimated EDF spending from the MFF totals set out in the Commission’s 2 May 2018 proposal to ensure comparability. This spending is not given directly in the MFF proposal as the EDF is included in the Neighbourhood, Development and International Cooperation (NDIC) instrument. The European Court of Auditors report on the MFF puts EDF spending in the proposed MFF at current prices at €28.2 billion over the 7-year period. I have distributed this spending over the seven years in line with the growth in nominal spending for the NDIC Instrument as a whole.

This post was written by Alan Matthews

Photo credit: Davy Landman, Sunset at Roermond,NL, used under a CC BY-SA 2.0 license.

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France’s puzzling interest in increasing the CAP budget

The Commission’s CAP legislative proposals which were published on 1 June 2018 attracted some immediate reactions from different groups of stakeholders setting out their positions. The proposals are far-reaching and complex. Together with the impact assessment, they amount to 662 pages of text. They require time and careful analysis to fully understand. In the coming weeks, I hope to examine some of the key elements one at a time.

I begin with the budgetary allocations by Member States which are included as Annexes to the draft CAP Strategic Plans regulation. This combines the current direct payments and rural development regulations into one.

This has a certain topicality because agricultural Ministers from six Member States – FR, ES, IE, PT, FI and EL – met in Madrid recently to formulate a declaration calling for the CAP budget to be maintained at its current level. This declaration – which is open to agricultural Ministers from other Member States to support – will be presented and discussed at the next AGRIFISH Council on June 18-19.

That the CAP budget will be reduced in the coming programming period under the Commission’s MFF budget proposal announced in May is clear (see my analysis of the percentage reductions here). That agricultural Ministers from some Member States wish to maintain the CAP budget at its present level in the next programming period is also not a surprise.

What perhaps is surprising is the group of countries behind the proposal, and particularly the leadership role of France. As background, the following table shows the net contributor/beneficiary status of Member States to increases in the CAP budget in the next programming period following the UK exit. It compares the shares of each Member State in total pre-allocated Pillar 1 direct payment ceilings and total P2 rural development expenditure with their shares in EU GNI after Brexit

The CAP shares are based on the totals allocated to each Member States over the period 2021-2027. Cotton payments are excluded. The idea is to examine the incentive of each Member State at the margin to seek an increase in the CAP budget (or either of its components). Because cotton payments are fixed, they would not change if there were a change in the CAP budget.

Similarly, Member State shares in GNI are examined rather than their shares in financing the overall EU budget. It is the GNI resource which is the marginal resource which would be called upon to finance an increased CAP budget.

The EU GNI share is based on the latest 2017 data available. To the extent that Member States growth rates differ from the EU27 average during the next decade, these GNI shares will gradually change. It is not possible to speculate on what might happen to economic growth rates over this period. To the extent that growth rates in the newer Member States exceed growth rates in the older Member States, their shares in EU GNI will tend to increase while the shares of the older Member States will tend to decrease.

(click on image for greater clarity)

In total, 15 Member States will be net beneficiaries of any increase in the CAP budget after 2021 and Brexit, while 12 will be net contributors. The table highlights the dominant position of Germany which alone would finance 25% of any changes in the CAP budget in the coming period.

Note that it is not strictly correct to say that Germany will finance 25% of the CAP budget, as opposed to 25% of any changes in the CAP budget. The CAP budget is financed, like all other EU policies, from the totality of own resources and not just the GNI resource. However, Germany’s share in the overall budget will not be that different.

If we look at the six original signatories of the Madrid Declaration, the signatures of Ireland, Portugal and Greece are not surprising – they are all strong net beneficiaries from increases in the CAP budget.

The case of Finland

Finland, Spain and France are more puzzling. In Finland’s case, it is a net contributor both to increases in the CAP budget as a whole and increases in Pillar 1 direct payments but a net beneficiary of increases in Pillar 2 rural development.

If an increase in the CAP budget were used to increase expenditure proportionately on both Pillars, Finland would be better off financing increased expenditure on Finnish farmers using its national budget resources rather than through the CAP budget. However, if an increase in the CAP budget were used exclusively to soften or eliminate the cuts in the Pillar 2 rural development budget, Finland would indeed benefit.

In the case of Pillar 1 direct payments, Finland cannot directly increase its budget for these payments. But it could use the flexibility allowed in the regulation to shift 15% of its Pillar 2 resources to Pillar 1 (Finland does not use this flexibility in the current programming period). As Finland’s Pillar 2 allocation will be 57% of its Pillar 1 allocation in the 2021-2027 period under the Commission’s proposal, this would allow Finland to increase its Pillar 1 payments by more than 8%.

There is no such constraint on Finland (and other Member States) increasing national spending on Pillar 2 rural development instruments, as Commissioner Hogan pointed out at his press conference when presenting the legislative proposals. So Finland would be able both to switch Pillar 2 resources to Pillar 1 and more than make up the difference in its rural development spending if it wished from national resources, under the Commission’s present proposals.

So another argument why Finland might support the Madrid Declaration is if it wanted to increase direct payments by more than 8%, even if this meant increasing Finland’s net contribution to the CAP budget. Finland’s position is puzzling since it is one of the few countries which is so far refusing to agree to an increase in the own resources ceiling on the EU budget beyond 1% to 1.11% of EU GNI, on which the Commission’s proposal for modest cuts in the CAP budget is based. Further increases in the CAP budget would require even further increases in the MFF own resources ceiling (notionally, further cuts in the non-CAP headings in the budget could also be considered, but Finland’s call to maintain a 1% ceiling already implies severe cuts in those headings).

The case of Spain

Spain’s support for the Madrid Declaration is more understandable. Overall, it will remain a net beneficiary from the CAP budget in the coming programming period. However, this is due to its large receipts under Pillar 1 direct payments. If an increased CAP budget were used to increase the resources devoted to CAP Pillar 2, Spain would be better off doing this directly from its own national resources.

The case of France

The case of France has similarities to Spain except that France will be a (small) net contributor to increases in the CAP budget in the 2021-27 period after Brexit. However, France would still gain, albeit marginally, from increases in the Pillar 1 budget (here it would receive back 19.0% of increases in the CAP Pillar 1 budget while contributing 18.1% of its financing). So it is only if all of any increase in the CAP budget were allocated to increasing direct payments that France would be a marginal beneficiary.

If any increased spending from the CAP budget were devoted to Pillar 2, France would be better off financing these increases from its national budget rather than seeking an increase in the CAP budget. Indeed, given the disproportionate cut in the rural development budget in the Commission’s budget proposal, it would seem plausible that any increased CAP budget would not result in proportionate increases in the budget of the two Pillars, but would be skewed towards Pillar 2.

It is worth noting that France transferred funds from Pillar 1 to Pillar 2 in the current MFF period. If indeed this is where France wants to spend more money, it can do this by increasing its national spending on rural development interventions more cheaply than by seeking an increase in the CAP budget for this purpose. For these reasons, why France wants to go to the barricades to call for an increase in the CAP budget is hard to understand.

I suspect the answer to this puzzle lies in the political economy of agricultural budget negotiations. If the French Minister for Agriculture Stéphane Travert can create support for an increased CAP budget, then the money arrives in his Ministry without any further negotiation. If he wants to increase agricultural spending from the French national budget, then he must negotiate with the French Finance Ministry for those resources. These would not be easy negotiations, particularly if he wants a significant increase in decoupled payments.

It should make no difference to the mandarins in the French Finance Ministry whether the money for French farmers comes with an EU flag on it or a national flag if it is ultimately French taxpayers who are paying. Surprisingly, Mr Travert’s position seems to have the support of the French government as a whole. Perhaps the calibre of the civil servants in France’s Ministry of Finance is no longer what it was in the past, if the wool can be pulled over their eyes so easily by their colleagues in the Ministry of Agriculture.

This post was written by Alan Matthews

Update 7 June 2018: This post has been revised to correct the analysis of Finland’s position as well as some errors in attributing CAP budget status to Member States in the table.

Update 9 June 2018. The raw data and calculations are shown in this spreadsheet.

Photo credit: Aron Urb (EU2017EE) via Flickr under CC licence

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Co-financing CAP Pillar 1 payments

After a couple of Brexit posts, it is time to return to the debate on the future of the CAP and its financing. Early last month, I wrote a post making the case for co-financing CAP Pillar 1 payments in the forthcoming MFF proposal from the Commission. I have since fine-tuned the arguments and the result has appeared as a policy brief published by the Swedish Institute for European Policy Studies.

From the summary:

The idea of national co-financing of the EU’s income support to farmers was introduced into the debate on the next Multi-Annual Financial Framework (MFF) in June 2017 in the Commission Reflection Paper on the Future of EU Finances. The European Commission mentioned the idea only in passing and it was immediately rejected by Agriculture Ministers, a stance that can be understood on political economy grounds.

This paper makes four arguments in favour of this policy instrument – for example that it would make better value-for-money choices in the CAP more likely – while also responding to some of the criticisms of the proposal. CAP Pillar 1 direct payments are unique among the major EU spending programmes in being 100% financed from the EU budget. This is the anomaly that must be explained and justified, rather than the case for national co-financing.

The paper concludes by recommending that national co-financing of CAP Pillar 1 direct payments should be included in the Commission’s MFF proposal in May 2018, and the European Council should endorse it as part of its MFF conclusions in due course.

This post was written by Alan Matthews

Picture credit: stevepb on Pixabay, CC licence

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Mr Oettinger’s budget arithmetic

Two events in the previous week give us a much clearer idea of what to expect for the CAP budget in the Commission’s proposal for the next Multiannual Financial Framework (MFF) at the end of May. Of course, the Commission’s proposal is only the start of the MFF negotiations. The MFF must ultimately be agreed unanimously by all Member States and (for the own resources decision) by their national parliaments, and also gain the approval of a majority in the European Parliament. Much can happen between the initial proposal and the final Council conclusions.

The two events in the previous week were Budget Commissioner Oettinger’s speech setting out his approach to the MFF proposal at a meeting in Brussels organised by the European Political Strategy Centre, the Commission’s in-house think tank, and his comments following the first presentation of his ideas to the Commission College.

Commissioner Oettinger states that he expects to make cuts of between 5-10% in both CAP and cohesion funding. Based on these comments, the good news for the agricultural sector is that the CAP budget will be broadly maintained in nominal terms, which would be the same outcome as for the current MFF. Or, to put it another way, it now seems unlikely that budget pressures will be a driver of any major CAP changes in the next period. Those interested in the main message of this post need read no further. What follows is my attempt to explore the implications of Oettinger’s comments in more tedious detail.

The reconciliation of this apparent contradiction is that direct payments which make up more than 70% of the CAP budget are not indexed to inflation. They are fixed in nominal terms, and thus fall in real terms in the MFF given that the Commission assumes an annual 2% rate of inflation each year. This alone means that the CAP budget will fall by over 5% in real terms in the next MFF, even if Pillar 2 spending is held constant in real terms and without any cut in the nominal amounts for Pillar 1.

Oettinger’s budget parameters

These are the main points in Commissioner Oettinger’s approach to the next MFF:

• The MFF will be for a seven year period (moving to 5 year periods for the MFF after next).

• The MFF has to address two main financial gaps, one on the revenue side caused by the departure of the UK which is a major net contributor to the EU budget, and one on the expenditure side to fund new priorities which were not envisaged or foreseen at the start of the current MFF.

• The Brexit financing gap is estimated at €13 billion annually, which Oettinger proposes to close 50% by making savings in existing programmes, and 50% from ‘fresh money’ from the remaining EU-27 Member States. This would require an additional €6.5 billion annually in additional contributions.

• For the new priorities, Oettinger proposes that these should be financed 20% by making savings in existing programmes, and 80% from ‘fresh money’ from the remaining Member States.

• Proposed Member State contributions to new programmes (refugees, fight against terrorism, security and defence) will be around €10 billion annually, suggesting total expenditure on these new priorities of €12.5 billion (assuming the 20:80 financing key).

• We can derive the expected savings in traditional policies as €6.5 billion annually to cover the Brexit shortfall plus a further €2.5 billion to be switched to new priorities (this is 20% of the total spend of €12.5 billion on new priorities), for a total of €9 billion savings annually. As total new spending on new priorities is €12.5 billion, this implies a relatively small increase in the total size of the MFF of around €3.5 billion annually.

• The shares of the CAP and cohesion policy will fall from around 35% each in the current MFF to around 30% each in the next MFF. Cuts will be ‘reasonable’, possibly of the order of 5-10%. However, there will be no cuts in either the Horizon post 2020 research or ERAMUS+ student and young people exchange programmes.

• Commissioner Oettinger has requested Member States to enter into negotiations as soon as the Commission publishes its proposal, with a view to reaching a decision by February 2019. This would allow the European Parliament to approve the MFF before its current session comes to an end in March. The feasibility of this timeline can, of course, be questioned, but Commissioner Oettinger cannot be faulted for lack of ambition.

Commissioner Oettinger has also made some proposals on the financing or revenue side of the budget:

• He argues that there is a need to raise the ‘political ceiling’ which limits the share of EU budget commitment appropriations to 1% of EU Gross National Income (GNI). (I discuss the background to this political commitment, which was originally stated in terms of payment appropriations, in this earlier post). He talks in terms of an EU budget which would amount to 1.1x% of EU GNI, that is, somewhere between 1.1% and 1.2% of GNI.

• New sources of revenue will be proposed, and he has specifically mentioned the proceeds from auctioning emissions allowances in the Emissions Trading Scheme and a tax on plastics (though apparently he had not run this latter idea past his fellow Commissioners before launching it, and the Commission has quickly retreated from this idea).

• All rebates should be ended.

Based on these parameters, it is possible to put together an MFF which fits these targets. This is a very speculative and approximate exercise, but it helps to identify some of the key decisions. To prepare this outline of the Commission’s MFF proposal, I make some further assumptions:

• A number of instruments are available outside the expenditure ceilings agreed in the 2014-2020 MFF (e.g. Emergency Aid Reserve, European Union Solidarity Fund, Flexibility Instrument and others). It is assumed they are either included in the next MFF as part of the new priorities or continue to be funded outside the MFF. Either way, they are not considered further.

• Commissioner Oettinger has put absolute figures on the two financial gaps, but it is not clear how these are defined or what units they are measured in. For the purpose of constructing a speculative MFF, I assume that these figures are in 2020 prices and they represent the average annual amounts over the next seven-year MFF period. The annual figures could be lower at the beginning of the next MFF period and be greater towards the end. Rather than try to guess a schedule of commitments, I choose to work with the mid-year 2024 as the representative average year for the whole period. This means that the MFF total for the seven-year period is obtained by simply multiplying the 2024 figure by seven.

doub• Similarly, Commissioner Oettinger has stated that he intends to maintain expenditure on ERASMUS+ and Horizon post 2020 programmes. But it is not clear if he intends to maintain these programmes at their levels in the current MFF (which includes the UK) or whether he intends to maintain spending levels for the remaining EU-27 Member States. Because the UK can make voluntary contributions to these programmes if it wishes to continue to participate in them after Brexit, I choose to interpret Mr Oettinger’s commitment as maintaining expenditure levels for the remaining EU-27 Member States.

• I choose to present the MFF expenditure headings in 2020 prices, although the Commission proposal in May will probably be made in 2018 prices.

A speculative Commission MFF proposal

Based on these assumptions, my speculative Commission MFF proposal in commitment appropriations is shown in the table below (click on the table for a better view). The starting column shows the MFF figures for the last year of the current MFF (2020) which is taken from the Commission’s Technical adjustment of the financial framework for 2018 in line with movements in GNI (ESA 2010).

In the next column, I deduct the estimated UK share of pre-allocated commitments in 2020 as these will not be carried forward as a charge into the next MFF. UK commitments for CAP Pillar 1 and Pillar 2 expenditure for each year in the MFF are set out in the CAP regulations. For cohesion fund spending, I have conservatively estimated 2020 commitments in the UK by dividing the UK’s seven-year MFF allocation equally across years – this figure is close to the average payment appropriations paid to the UK in the years 2014-2016 converted to 2020 prices.

Funds under the ‘Competitiveness for growth and jobs’ heading are not pre-allocated but the UK has been successful at drawing down funds under this heading – for example, the UK is allocated around 15% of Horizon 2020 funds which accounts for around 40% of this heading. Again, I have approximated the UK share of commitments by the payments data for the years 2014-2016 converted to 2020 prices. The result of these calculations is Column 3, which shows the commitment appropriations for the last year of the current MFF for the EU-27.

I assume that the Commission maintains the same level of expenditure on the other MFF headings even after the UK departure.

As noted above, I use the year 2024 as the reference year for the next MFF period. As a starting point, I assume that, apart from CAP direct payments, all other expenditure will be held constant in real terms. This gives me an initial estimate for the commitments budget in 2024. However, under Oettinger’s approach we have to find €9 billion in savings which I assume will be found solely in Headings 1 and 2.

The impact of inflation on the real value of direct payments automatically reduces Heading 2a by 8% and a reduction of 7% in the other headings (1a, 1b and 2b) would be sufficient to produce the necessary savings (note that Heading 1a is actually only reduced by 3.5% because around half of the 2020 expenditure under this heading is allocated to Horizon 2020 and ERASMUS+ which will be exempt from cuts).

Finally, to complete the MFF for 2024 we need to add in the proposed €12.5 billion expenditure on new priorities. This gives a total MFF (on an annual basis) in 2021-2027 of €164.9 billion in 2020 prices, compared to MFF commitments for the EU-27 of €161.5 billion in 2020, the last year of the current MFF.

Note that, on the basis of these assumptions, the share of cohesion (Heading 1b) falls to 32% while CAP spending falls to 30% of total MFF commitments in 2024 (the share for Heading 2 in total falls to 32% but this also includes spending on fisheries policies and the LIFE environment and climate programme).

A slightly larger cut than 7% in cohesion funding to bring it down to 30% of the total would free up sufficient resources to avoid any cut in CAP rural development spending. While one can easily imagine other permutations of the numbers, my conclusion is that, given Oettinger’s spending parameters, no significant cut in CAP spending over and above the impact of inflation on direct payments will be required in the next MFF.

Increased Member State contributions

However, Oettinger’s proposal also has implications for the gross contributions of the EU-27 Member States, and already Member States are queuing up to say they should not have to pay more into the EU budget because of Brexit (for examples, see the Dutch view here, the Swedish view here, the Austrian view here, whereas the German view appears to be more accommodating depending on how the additional funding is spent).

What is not entirely clear from these protestations is whether these countries are casting their bottom lines in terms of absolute amounts or shares of GNI. The implied increase in gross contributions from Member States in Oettinger’s proposal is €16.5 billion (€6.5 billion to cover half of the Brexit bill and €10 billion to cover 80% of spending on new priorities). In a total MFF budget of around €160 billion, this is an increase of around 10% in gross contributions on average.

However, as I discussed in this post, the burden of extra contributions does not fall equally on Member States because of the operation of the ‘rebate on the UK rebate’. If this is also abolished, then four Member States – Austria, Germany, Netherlands and Sweden – will be asked to pay disproportionately more, possibly up to 15% more. Whether this is politically likely or not will only become clear as the negotiations progress.

The other way of looking at gross contributions is as a share of EU GNI. In previous MFF negotiations, net contributors in particular had insisted that the EU budget should not exceed 1% of EU GNI in commitment appropriations (originally payment appropriations). Recall that Commissioner Oettinger is proposing that this should be raised to somewhere between 1.1% and 1.2% of EU-27 GNI.

Here, my speculative budget looks more reassuring, although the margin of error in the assumptions that I make is also greater. I have derived the EU-28 and EU-27 GNI in 2020 by taking the 2018 EU-28 GNI by Member State used to calculate the own resources shares in the 2018 EU budget and grossing up by 3.8% per annum (assuming 1.8% real growth per annum and the 2% MFF inflation factor). I have used the same formula to project EU-27 GNI forward to 2024 (but this time only using the 1.8% real growth factor as the 2024 figures are denominated in 2020 prices).

There are three observations to be made on the resulting figures:

• The 2020 figures show that the EU-28 commitment appropriations in the final year of the current MFF will be just under 1% of EU-28 GNI.

• Note that on the EU-27 budget on a ‘business as usual’ scenario in 2020 would be considerably higher, at 1.13%. This is the result of Brexit, and the exit of a Member State which makes a larger contribution to EU revenues than it receives in EU expenditure.

• Commissioner Oettinger’s proposal is for a relatively modest increase in overall EU MFF expenditure commitments of €3.5 billion. This would bring the EU budget share to 1.15% of EU-27 GNI. However, this fails to take into account the growth in EU-27 GNI over the MFF period. Assuming growth of 1.8% per annum means that in 2024 (the average year in the next MFF period), the budget share would have fallen back to 1.07%. This figure is a little smaller than Commissioner Oettinger’s request for an MFF of 1.1x% of EU-27 GNI.

Conclusions

Readers should not put too much weight on my speculative MFF budget, although I would welcome feedback if anyone feels that I have left out some important consideration.

The bottom line is that the Commission’s MFF proposal is likely by and large to shield the CAP budget from further unexpected cuts. However, it will also require additional gross contributions from Member States, substantial in some cases, as well as a small increase in the share of the EU budget in EU-27 GNI.

The MFF negotiations will not be easy, they never are.

This post was written by Alan Matthews

Photo credit: Wikipedia, under a Creative Commons licence

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Another look at the possible Brexit implications for the CAP budget

Preparations within the Commission for its next MFF proposal, which is now expected in May next year, are well under way. Thinking on the shape of the next MFF began in January last year with the Dutch Presidency Conference on preparing for the next MFF. In December 2016 the High Level Group on the Future Finances of the EU produced its final report and recommendations for a reform of the own resources side of the MFF. In June 2017, the Commission produced its Reflections Paper on the Future of EU Finances. This was one of a series of Reflection Papers published by the Commission in the wake of its White Paper on the Future of Europe published in March 2017.
The Reflections Paper provides a coherent account of the challenges that the EU budget is required to address, including those that have recently emerged. In addition to classical areas such as investments in public goods managed at the EU level (including research and major infrastructure), economic and social cohesion and sustainable agriculture, the paper notes the growing importance of managing migration as well as external challenges in security, humanitarian aid and development. The Reflections Paper set out a number of scenarios for the evolution of the EU budget up to 2015 which were aligned with the scenarios for the future evolution of the Union set out in the White Paper.
Another issue which has been raised in the preliminary discussions not least by the European Parliament is the need for greater flexibility in the EU budget, to give it the capacity to respond more quickly to unforeseen crises. The system of pre-agreed ceilings for different headings in the MFF has contributed to greater stability around the annual budget decision-making process, but it has also constrained the EU’s response when faced with short-term crises.
Ian Begg has written a good summary of the current state of the debate on the next MFF in this short paper for the Stockholm Institute of European Studies. Another paper by Eulalia Rubio for the Parliament’s Budget Committee provides a good overview of the lessons from the use of flexibility in the 2014-2020 MFF to date and how it might be enhanced in the coming MFF.
The UK’s withdrawal from the EU (Brexit), given that it is the second largest net contributor to the EU (in cash terms though not as a proportion of GNI), adds yet another element of complexity to the mix. Last week, Politico.eu reported that the current Budget Commissioner Günther Oettinger reviewed studies undertaken within different Directorates-General on the impact of three different post-Brexit scenarios on their policy areas. The three options included the status quo, as well as cuts of 15% and 30%, respectively, in the current MFF totals.
In previous posts on this blog I have had a look at what Brexit might mean for the overall EU budget (here) and the CAP budget (here). More recently, the Research Department of the European Parliament commissioned Jörg Haas and Eulalia Rubio from the Notre Europe – Jacques Delors Institute to examine this issue in greater detail. Their excellent report notes that “There is no default method for adapting the current MFF to the departure of a Member.” They model the different consequences for individual Member States of closing the hole in the EU budget left by the UK’s departure depending on whether the gap is closed by increasing the gross contributions of the remaining Member States or by reducing expenditure (where they look particularly at the effects of cutting CAP expenditure by around 20%).
The very different distributional consequences between Member States of these options illustrates how difficult it will be to reach agreement in the European Council on the next MFF. The Budget Commissioner Günther Oettinger appears to be seeking a middle ground. In a blog post in October 2017 entitled “A new deal between net payers and net beneficiaries”, he called for a “fair 50:50 deal” in which “net payers would pay a little more into the EU pot for the guarantee that every single Euro paid is spent efficiently and has an added value. Net beneficiaries by contrast, would have to accept more control over their structural projects in exchange for avoiding drastic cuts”. It will only become clearer in the coming months whether such a middle ground has the prospect of gaining support.
In this post I re-examine the possible implications of these debates for the funding that might be made available for the CAP budget in the next MFF. Of course, the size of the future CAP budget will not be dependent on financial considerations alone. It will ultimately be decided on the basis of the political priorities of the European Council. The Commission Communication on the Future of Food and Farming published today can be, in part, interpreted as an attempt to hold on to as large a share of the next MFF for the CAP budget as possible, by showing that the CAP is ready to make adjustments to justify its continued relevance. Nonetheless, the financial parameters set constraints on what is possible, and it is these financial constraints that I wish to examine in this post.
How might the MFF evolve over time?
Let us take as a working assumption that the size of the next MFF remains ‘broadly stable’ and that the current status quo is maintained (recognising that this is the most optimistic of the three scenarios that Budget Commissioner Oettinger asked his departments to consider). This does not mean a constant budget in absolute terms, but rather one limited by the ‘political ceiling’ currently in place that payment appropriations cannot exceed 1 percentage point of EU GNI.
This ‘political ceiling’ was first set out in a joint letter in December 2003 from six net contributor states (Austria, France, Germany, the Netherlands, Sweden and the United Kingdom) to Commission President Prodi when negotiations were beginning on the 2007-2013 MFF. This ceiling was also reflected in the Commission’s initial proposal for the 2014-2020 MFF. The European Council MFF conclusions in February 2013 agreed an even tighter ceiling, in that it limited commitment appropriations to 1% of EU GNI and payment appropriations to 0.95% of EU GNI.
For comparison, the MFF ceiling for commitment appropriations for the 2018 Union budget represents 1.02% of EU GNI and the MFF ceiling for payment appropriations 0.92% of EU GNI (using the new ESA 2010 methodology for calculating GNI). Although budgeted commitment and payment appropriations in the draft 2018 budget are a little below the MFF ceilings (more so for payment appropriations), when the figures are rounded they comprise the same percentage share of EU GNI as for the MFF ceilings.
The current recovery in the EU economy, if it continues into the coming decade, implies that there could be considerable buoyancy in the EU’s own resources even if limited to 1% of EU GNI. The latest economic forecasts from DG ECOFIN show that, compared to the 2001-2010 period when average annual growth in real GDP in the EU-28 was just 1.3% p.a., real GDP growth is now running at over 2% p.a. and is expected to do so until the end of the forecast period in 2019. We assume a real growth rate for GNI in the period 2021-2027 of 1.8% p.a.
Assume further that the next MFF will cover a seven-year period. The MFF can be stated in either constant or current price terms. In the following, we choose to state it in current prices in order to highlight the share of CAP spending. In preparing the MFF in current prices, the Commission uses a 2% annual price deflator. Combining this deflator with the assumed real growth rate of 1.8% p.a. yields a nominal growth rate in EU GNI of 3.8% p.a. over the period 2021-2027. If the Commission prepared its MFF proposal on this basis, total EU own resources under a ‘stable’ budget scenario would increase by 30% in nominal terms by the end of the period in 2027 (leaving aside for the moment the impact of Brexit).
CAP expenditure is composed of direct payments and market-related expenditure in Pillar 1 and rural development spending in Pillar 2. Direct payments make up 70% of the total CAP budget. Direct payment ceilings are fixed in nominal terms; there is no commitment to maintain them in line with inflation. One scenario for future CAP spending is to maintain the total budget (including Pillar 2) constant in nominal absolute terms based on 2020 levels.
This assumption about the CAP budget is made purely to illustrate the scenario; it is not necessarily a recommended outcome. It recognises the political difficulties there are in reducing payments to CAP beneficiaries in absolute terms, but strong arguments have also been made (e.g. in this RISE Foundation report CAP: Thinking out of the Box) for a major restructuring of CAP spending which might be accompanied by some reduction in the overall total.
The figure below shows the outcome of these assumptions. The starting point is the 2020 figures for total EU budget commitment appropriations and CAP spending in current prices as given in the forward projections contained in the Commission’s draft 2018 budget document. These are €168.8 billion and €58.6 billion, respectively. We assume that a stable budget implies maintaining the ratio of EU spending to EU GNI constant at the 2020 level (this ratio is not given in the draft 2018 budget document but, as noted earlier, the 2018 ratio for commitment appropriations was 1.02% of EU GNI). We further assume that EU GNI (and thus total EU budget spending) will increase by 3.8% annually over the period 2021-2027.

These assumptions allow non-CAP expenditure to grow by almost 50% (46%) over the seven year MFF period. Were this scenario to come about, the share of the CAP in the EU budget would fall from 34.7% in 2020 (the last year of the current MFF) to 26.7% in 2027 (assumed to be the last year of the next MFF). This would continue the steady decline in the CAP’s share of the EU budget since 2001.
I emphasise again the four key assumptions behind this analysis (i) that Member States agree to maintain the ratio of the EU budget to EU GNI at its 2020 level for the next MFF period; (ii) that the Commission proposal for the next MFF is based on an annual real growth rate of 1.8% and a nominal growth rate of 3.8%; (iii) that the CAP budget is held constant in nominal terms; (iv) and that no account is taken of Brexit. The next step is to identify the Brexit impact on these projections.
What is the scale of the Brexit budget gap?

The starting point is the size of the budget gap left when the UK net contribution is no longer paid into the EU budget after Brexit. Here we are concerned with the structural (long-term) impact of Brexit, and not the terms of the financial settlement to settle past liabilities that may be agreed with the UK as part of a withdrawal agreement under Article 50 TEU. The potential size of this funding gap in the future is uncertain, because of uncertainties over future economic growth rates in the UK (assuming it remained a part of the EU) and the future exchange rate between sterling and the euro.
Also, there is considerable volatility in the UK net contribution from year to year, as can be seen from the table below (this updates the table given in this earlier post taking account of the recent publication of the 2016 net operating balances of Member States by DG BUDGET). Taking an average of the three years 2014-2016 suggests that the UK’s net contribution is around €10.2 billion annually. This compares to EU budget expenditure excluding expenditure in the UK in 2016 of €129 billion, or a gap of 7.9%. This net contribution would be expected to grow over time with economic growth in the UK.
Another point to note in this table is the disparity between the UK’s contribution to EU GNI (17.0%) and its share of EU expenditure (5.7%) (see last column). This means that, when the UK leaves, there will be an increase in the share of EU-27 expenditure relative to the remaining EU-27 GNI, assuming expenditure is kept unchanged. Expenditure has to be reduced by the equivalent of €10.2 billion (in 2016 prices) if an increase in Member States’ gross contributions is to be avoided. But, according to Haas and Rubio, the reduction would have to be €16 billion (in 2016 prices) if the ‘political ceiling’ of an EU budget not greater than 1% of EU GNI in the EU-27 (rather than the EU-28) is not to be breached. This would represent a much more severe constraint on the growth in EU spending in the coming MFF period.

What will be the impact of the Brexit budget gap?

Figure 1 made the point that the combination of economic growth in the EU and holding the CAP budget constant in nominal terms would give a ‘room for growth’ for non-CAP spending in the EU MFF to address new challenges of around 46% by the end of the period. The departure of the UK would considerably reduce this ‘room for growth’.
To assess the Brexit impact, we make the simplifying assumption that the UK net contribution of €10.2 billion (in 2016 prices) would grow in line with the growth in EU GNI over the period 2016-2027 (assumed to be 3.8% p.a.). In practice, the growth in the UK net contribution if the UK remained a Member State would depend on the growth in the UK GNI, the growth in non-EU imports into the UK (which would impact on the customs union tariff revenue transferred to Brussels), the growth in EU expenditure in the UK, and the way the UK rebate would be affected by future EU expenditure growth.
Under this assumption, the UK net contribution in 2020 (in nominal prices) would increase to €11.8 billion. Over the period to 2027, it would increase to a further €15.4 billion. Cumulating these net contributions (in nominal prices) over the full MFF period would amount to €96.5 billion. This amounts to exactly half of the anticipated ‘room for growth’ in non-CAP spending over this period of €195 billion. Thus Brexit, in one swoop, results in the disappearance of half of the expected ‘room for growth’ in non-CAP spending over the period 2021-2027.
If, in addition, the remaining EU-27 Member States agreed (presumably under pressure from the remaining net contributors) that the ‘political ceiling’ for the EU budget of 1% of the GNI of the remaining EU-27 Member States should be maintained, the ‘room for growth’ in non-CAP spending would fall by even more. The required €16 billion reduction in expenditure in 2016 (in 2016 prices) would be €18.6 billion in 2020 and this reduction would amount to €24.1 billion in expenditure in 2027. Cumulating the required reductions over the period 2021-2027 amounts to €151.4 billion, or nearly 80% of the projected ‘room for growth’ in non-CAP spending in the absence of Brexit.
In that scenario, it is hardly conceivable that the EU’s new political priorities for the coming period, including security and migration as well as growth, could be financed from the ‘room for growth’ made available by holding CAP spending constant in nominal terms. The likelihood of a cut in the absolute size of the CAP budget even in nominal terms would be overwhelming.
These are scenarios, not forecasts. They illustrate the likely impact of decisions that have yet to be taken. Key variables will be the Commission’s assumptions regarding future EU-27 growth when drawing up its MFF proposal, but even more whether the remaining net contributor Member States will be prepared to lift the ‘political ceiling’ on the size of the EU budget and by how much. This will only become clear when the MFF negotiations get under way.
This post was written by Alan Matthews

Photo credit: Sam Neill via Twitter

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Will there be a CAP reform in 2017?

On Friday last, I took part in a panel discussion at the Centre for European Policy Studies in Brussels on the theme “Will there be a mid-term review in 2017? And, if so, what should it do?” My contribution focused on the timing and procedural issues which will influence the prospect of a substantive early review of the CAP basic acts. Other speakers on the panel (Allan Buckwell from IEEP, Rolf Moehler formerly of DG AGRI and Paolo de Castro MEP from the Socialists and Democrats Group in the European Parliament) addressed what the contents of such a review might or should be.
The purpose of the event was to formally launch the book The Political Economy of the 2014-2020 Common Agricultural Policy: an Imperfect Storm which has been edited by Johann Swinnen and published by CEPS together with Rowman & Littlefield International. This book is a fascinating series of essays on the story behind the 2013 reform but also includes three chapters looking ahead to the future by three of Friday’s panellists, including one which I contributed. A copy of the book is freely available on the CEPS website.
There are a number of milestones set out in the CAP legislation which require the Commission either to report on the consequences of the last reform or to bring forward proposals (including the impact of greening and especially of ecological focus areas) and which could trigger more substantial proposals to revise the CAP regulations. In addition, Commissioner Hogan has outlined his own political agenda and that of this Commission which includes proposals on simplification as well as strengthening the link between the CAP and rural job creation.
Although some of these trigger points occur in 2016 (including the mid-term revision of the EU’s Multi-annual Framework (MFF) 2014-2020), I anticipate that the most likely trigger for substantial Commission proposals, if they were to be made, would be at the end of 2017 to coincide with the publication by the Commission of its proposals for the next MFF after 2020.
This will be a crucial document as it will set out the Commission’s view of the EU’s priorities in the years after 2020 including the level of the CAP budget that it deems appropriate, even if it could take up to a further two years before agreement is reached by the European Council and the Parliament gives its consent. One could expect that the environmental benefits (or lack of them) arising from the new greening payment which accounts for 30% of the CAP Pillar 1 budget might play a role as the negotiations take place within the Commission College before the MFF proposal is made.
On the last occasion, publication of the Commission’s MFF proposals in October 2011 was accompanied by a proposal for a major rewriting of all four of the CAP basic acts (direct payments, single common market organisation, rural development and horizontal issues). This reflected the outcome of a reform process which the Commission had launched the previous year in a Communication outlining various options for reform accompanied by an impact assessment, and which had been kick-started some years earlier under the French Presidency at Annecy in July 2008.
The situation is clearly different when the Commission comes to propose its next MFF at the end of 2017. Member states have been struggling to implement the last reform, and the first payments to farmers under the new rules were only delivered last month. Very limited evidence will be available on the impact of the new reforms even in 2 years’ time. The Commission’s political agenda does not suggest that a further major reform is on the agenda and, with so much else on its plate, it will be reluctant to re-open old battlelines around the CAP.
The legislative timetable complicates any prospects for a major reform because it is likely that negotiations would be completed in 2019 with a new Parliament and a new Commission. In any case, the enormous amount of flexibility which is given to member states under the new CAP means that member states can already largely mould the CAP to suit their political preferences without requiring a wholesale rewriting of the basic rules.
At the same time, the Council has flagged that simplification may require some changes to the basic acts, and one could envisage other changes to some of the parameters in the basic acts without completely rewriting them. For example, will the Commission propose further moves towards regional uniformity of direct payments after 2020? Will the Commission listen to those member states and MEPs in the Parliament which wish to see increased intervention prices? Would the Commission propose even greater flexibility to shift funds between the two Pillars? Will the broad framework of greening remain untouched?
My conclusion is that 2017 will be an important year for the CAP but we should not be misled by the experience of the Fischler Mid-Term Review in 2003 or the Fischer-Boel Health Check in 2008 to assume that a possible Hogan Mid-Term Review would take the same form.
In my view, it is more likely that we will see a rolling series of proposals for incremental changes in the various basic acts over the period of the Commissioner’s tenure, designed to address specific problems and issues, but without fundamentally changing the structure of the 2013 reform.
Of course, like all speculations about the future, this one could also be wrong…..
My presentation at the CEPS meeting is attached below

This post was written by Alan Matthews.
Photo credit: Euractiv

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The CAP budget in the MFF agreement

Today the European Parliament approved the political agreement on the MFF reached with the Irish Presidency, thus concluding the negotiations on the EU’s medium-term financial framework until 2020. A mandatory review will be undertaken by the Commission before the end of 2016 taking account of the economic situation at that time. The actual MFF Regulation and the accompanying inter-institutional agreement including various declarations by the parties will be voted in the Parliament in the early autumn once the Council has adopted the draft MFF regulation.

The overall MFF ceiling and the allocations by heading as agreed by the European Council in February 2013 were not changed in the final agreement. So the allocation for the CAP Pillars 1 and 2 remain as agreed last February. Many commentators have tried to compare the amount of money allocated to the CAP in the next programming period with that in the current period, and various figures have been circulated. The European Parliament secretariat has just produced a Note European Council Conclusions on the Multiannual Financial Framework 2014-2020 and the CAP. Although the text was completed before the final political agreement in the trilogues and the support for this agreement today in the Parliament, this report is a hugely valuable reference and it will become the definitive work on this topic.

Apart from a very thorough reporting of the legal background and progress of the MFF negotiations, the report makes two important contributions from the perspective of those interested in the CAP:

  • It compares the overall outcomes proposed by the European Council for commitment appropriations for Pillar 1 and Pillar 2 with the Commission’s original proposal and with commitments in the 2007-13 MFF.
  • It presents the figures for each country’s receipts from Pillar 1 and Pillar 2 in the next MFF. This is the first official publication of the Pillar 2 breakdown since the agreement was concluded.

In this post, I comment on the comparisons of CAP spending between the two MFF programming periods, leaving the presentation of the Pillar 2 national allocations to another post.

The pitfalls of comparing CAP allocations across MFF periods

Comparing the amount of money allocated to the CAP in the 2014-2020 period with the CAP budget in the 2007-2013 is fraught with difficulties. Think of the following issues (for readers not interested in this technical detail, skip down to the following section):

  • What is the counterfactual to which the 2014-20 budget should be compared? Is it the expenditure actually committed to the CAP in the 2007-2013 period, or is it the expenditure which would have been incurred for the CAP in 2014-2020 if the rules and the framework had stayed the same as in 2007-2013? This is a particularly important distinction for Pillar 1 spending. Most Pillar 1 spending is allocated to direct payments which are fixed in nominal terms. This means that the counterfactual baseline for Pillar 1 spending should show a decrease; comparing the commitment appropriations for Pillar 1 to the level of spending on direct payments in the 2007-2013 period (or to the 2013 year) in 2011 constant prices makes the presumption that direct payments were intended to be inflation-proofed, which was never the case. On the other hand, working in the opposite direction is the fact that direct payments for the new member states were only being phased in during the 2007-2013 period (and will continue to be phased in for Bulgaria and Romania until 2016 and now for Croatia until 2023). A steady-state counterfactual would therefore require an increased baseline in the 2014-20 period if the CAP budget were to be held constant in real terms. It is possible these two opposing arguments cancel each other out, but they certainly complicate the comparison.
  • In making comparisons across Pillars, it makes a difference whether the compulsory modulation from Pillar 1 to Pillar 2 agreed in the 2017-2013 period is taken into account.
  • Estimates of the reduction in the CAP budget will differ depending on whether the comparison is between the total amounts committed in the two MFF periods, or whether the comparison is between the end years (2020 compared to 2013). The latter approach minimises the bias due to the phasing-in of the payments in the new member states but leaves the bias in making the assumption that direct payments are inflation-proofed in place. 2020 is also important because it will be the reference year for the succeeding MFF, as the EP Note points out. Yet another approach is to compare the 2014-2010 MFF allocation with the 2013 appropriations x 7 years to get a better estimate of what the ‘status quo’ allocation might imply (again with the caveat that this presumes that the appropriate counterfactual baseline is to assume that direct payments would be inflation-proofed).
  • The scope of the expenditure items covered by the CAP budget in the two programming periods is different. Certain sanitary and veterinary measures worth €2.2 billion are moved out of the CAP budget as well as €2.5 billion for the Fund for Aid to the Most Deprived, and farmers now have access to the European Globalisation Fund.
  • For meaningful comparisons, expenditure in both programming periods must be expressed in the same monetary units (chosen as 2011 prices). Expenditure in the 2007-2013 period is inflated/deflated by the 2% per annum deflator set out in the MFF agreement for the adjustment of the nominal ceilings. However, the actual inflation rate in the EU as a whole over the period 2007-2013 is more likely to be closer to 18% compared to 15% assumed using the MFF deflator. The real value of CAP commitments in the current MFF period in 2011 prices, and thus any reduction in the next MFF period, may be overstated using the MFF deflator.
  • Finally, it should be remembered that actual payment appropriations in the 2007-2013 period were less than commitment appropriations for a variety of reasons. In the case of market-related expenditure, generally high global food prices during the programming period meant that commitments set aside for market support expenditure were not required; in the case of Pillar 2 commitments, there can be a lag in payments of up to two years because of the nature of the programmes. Such factors can also come into play in the 2014-2020 period. However, comparing commitment appropriations is the most relevant indicator as they represent the maximum amounts that policy-makers have committed to spend on agricultural support in the two periods; they are thus the best indicator of political preferences, whereas outcomes in terms of payment appropriations are influenced in unpredictable ways by the actual course of events.

How much has the CAP budget been reduced?

The Parliament secretariat’s Note summarises the changes in CAP allocations between 2013 and 2020 in the following graphic which takes some of the issues raised in the previous section into account. The 2013 figures are adjusted by the amounts transferred to other MFF headings and take account of the compulsory modulation of expenditure from Pillar 1 to Pillar 2 in 2013. They show that committed expenditure to direct payments and market measures in 2020 is 13% less than in 2013, while committed expenditure to rural development measures is 18% less.



The calculation can also be done in other ways, as noted above. If the ‘status quo’ expenditure is based on the 2013 commitments x 7 years and compared to the total allocation for the 2014-2020 period, then Pillar 1 expenditure falls by 6.4% and Pillar 2 expenditure by 7.5%, which is a much narrower differential (the Pillar 1 numbers are €283.1 billion compared to €302.3 billion, and the Pillar 2 numbers are €89.9 billion compared to €97.2 billion).

The total commitment allocation for 2014-2020 could also be compared to the total commitment allocation for the 2007-2013 period (all in 2011 prices). However, the figures in the EP report (Table 10) do not adjust CAP spending for the whole of the 2007-2013 period for the transfer of some items out of the CAP budget and for the effect of compulsory modulation from Pillar 1 to Pillar 2. Therefore, the result of this comparison is not particularly helpful.

For what it is worth, based on the numbers in the EP report, the figures for this comparison show a 16% reduction in Pillar 2 but only a 6% reduction in Pillar 2 expenditure in the coming MFF period (the Pillar 1 numbers are €283.1 billion compared to €336.7 billion, and the Pillar 2 numbers are €89.9 billion compared to €95.5 billion). Failing to account for the effects of compulsory modulation and for the movement of some items out of the Pillar 1 budget explains the apparent reversal in the rates of reduction between the two Pillars.

What does it all mean?

Anyone who has followed the numbers thus far will be forgiven for agreeing with Mark Twain’s aphorism that there are ‘lies, damned lies and statistics’. But the European Parliament secretariat’s approach of comparing 2020 proposed expenditure with the revised committed 2013 expenditure on the two Pillars gives the most realistic appreciation of the relative trends in expenditure in the two Pillars.

Indeed, recalling once again that the baseline for Pillar 1 expenditure should build in the gradual decline in direct payment expenditure in constant prices, then the European Council made no discretionary reduction in the Pillar 1 ceiling. Holding direct payments constant in nominal terms at the 2013 level (and adding back the market measures expenditure) would have resulted in a 2020 budget of €37.9 billion in comparison to the agreed figure of €37.6 billion, both in 2011 prices. To repeat, the next MFF contains no discretionary reduction in CAP Pillar 1 expenditure, over and above what a continuation of current rules would imply.

For comparison, the discretionary reduction in Pillar 2 is the full 18% shown in the figure above. Indeed, the use that member states make of any eventual flexibility granted to shift funds between the two Pillars could even exacerbate this disparity further.

This outcome can be interpreted either as a triumph for the Ciolos strategy of legitimising Pillar 1 payments in this CAP reform, or as a shameful capitulation to the current beneficiaries of Pillar 1 payments and to those member states opposed to any meaningful CAP reform, depending on one’s perspective. I adhere to both views.

This post was written by Alan Matthews