Tag: COVID-19

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COVID-19 leaves limited traces in preliminary 2020 agricultural accounts

Eurostat has now published its preliminary estimates for the economic accounts for agriculture in the EU for 2020. This gives us the first authoritative overview of the impact of the COVID-19 pandemic on agricultural markets and farm incomes in what has been an extraordinary year. Until now, information on monthly trends in agricultural prices and agricultural trade has given us some partial insights into the impact of COVID-19 on the agricultural sector. Despite wobbles in some sectors, by and large these indicators show that the agricultural sector has been remarkably resilient. Despite this, significant aid packages have been made available to farmers by EU Member States. These preliminary estimates of the 2020 agricultural accounts give us a status update over these developments.

The accounts confirm a small fall in the value of EU agricultural output in 2020 and a greater fall in farm income compared to 2019, although not all of this is linked to COVID. Surprisingly, there is no visible impact of the support measures put in place. This contrasts with the U.S. experience where very sizeable aid packages have increased U.S. farm income significantly. This post explores what the latest release can tell us.

Agricultural output in 2020

The following table shows the preliminary value of agricultural output in 2020 compared to previous years. The value of output of the agricultural industry declined by 1.6% compared to 2019 but was still ahead (by 0.3%) of the average of the previous three years. All in all, this suggests that the potential for COVID-19 disruption flagged at the beginning of the lockdowns – border closures and transport restrictions, shortages of seasonal workers, closures of processing plants, and the significant shift in food consumption patterns due to the closure of the food service and hospitality sectors – failed to materialise. This was due at least in part to prompt action by the European Commission at the beginning of the crisis to ensure the continued flow of food products within the single market. It also testifies to the remarkable resilience of farmers and the European food system when faced with a shock of this magnitude.

Source:  Eurostat, Economic accounts for agriculture – values at current prices [aact_eaa01]. EU27 is without the United Kingdom.

These overall figures net out the impact of different influences on agricultural markets. It is possible that a negative COVID-19 impact might be offset by more positive influences from international markets, for example. A closer look at some individual items reveals some of the wobbles.

Potatoes and olive oil stand out as two sectors that were particularly hard hit in 2020. Potatoes were affected by the drop in demand for potatoes for processing because of the fall-off in demand for French fries as fast food and other restaurants closed. This is a direct COVID-19 impact. The sharp fall in the value of olive oil output is more related to the high level of production in 2019 which led to low market prices in the first half of 2020. The U.S. has imposed tariffs on imports of Spanish table olives, but this is not a factor in olive oil prices. Global olive oil consumption was at a record high in 2020 and EU exports increased by 16% in the marketing year Oct 2019 to Sept 2020. Although the harvesting of olives is affected by reduced numbers of foreign seasonal workers, the sharp drop in the value of olive oil output in 2020 does not appear to be COVID-related.

The stability in revenues for other sectors that were thought to be adversely affected in the early period of lockdowns should also be underlined. For example, overall revenue for vegetables and horticulture, particularly exposed to vulnerabilities due to labour shortages and transport bottlenecks, was maintained. This is the case also for the flowers sub-sector despite early indications of losses in the Netherlands. On the other hand, the value of meat and milk output fell somewhat, with a particularly large fall in the value of poultry output which, again, may reflect the closure of food service outlets during lockdowns.

This relatively benign outcome for agricultural output is confirmed by the limited interest in the market support measures introduced by the Commission at the outset of the COVID-19 pandemic. Private storage aid was opened for various dairy products as well as beef and sheepmeat from 7 May 2020 and was closed for dairy products on 30 June 2020 and for beef and sheepmeat on 17 July 2020. This measure allowed the temporary withdrawal of products from the market for a minimum of 2 to 3 months, and a maximum period of 5 to 6 months. It was the only measure that involved a direct cost to the EU budget with an allocation of €80 million. Overall, the use of the private storage aid has been limited. By early November 2020, the cumulative volume of contracts concluded amounted to 18,300 tons for skimmed milk powder, 65,019 tons for butter, 43,669 tons for cheese, 1,959 tons for beef, and 15 tons for sheepmeat.

Farm income in 2020

The next table shows the derivation of family farm income (‘entrepreneurial income’) in 2020. Expenditure on intermediate consumption held stable, so the decrease in agricultural Gross Value Added (GVA) at basic prices at 3.5% was larger than the fall in the value of agricultural output compared to 2019. A further rise in fixed capital consumption meant an even greater fall in net value added at basic prices of 6.9%.

Subtracting compensation of employees and adding other subsidies on production (while subtracting other taxes on production, not shown) gives the operating surplus in agriculture. Subtracting rents and interest paid (noting that rents paid show a small increase, another sign of the resilience of the agricultural sector) gives us entrepreneurial income which experienced a significant 7.9% reduction in 2020 compared to 2019. Note that the absolute reduction in the value of entrepreneurial income (€7.1 billion) is fully accounted for by the drop in the value of agricultural output (€7.5 billion). The larger percentage fall in the former reflects the amplification and leveraging of changes in income compared to changes in the value of output given the stability in intermediate consumption and other expenditures.

Source:  Eurostat, Economic accounts for agriculture – values at current prices [aact_eaa01]. EU27 is without the United Kingdom.

National changes

As is always the case, there is considerable variability in Member State experiences around this EU average, as illustrated in the table below. The value of agricultural output increased in several countries, although the sharp drops in Bulgaria and Romania stand out. Because entrepreneurial income is highly leveraged, its variability is much greater than agricultural output value changes. The extent to which these differences across countries can be explained by differences in the impact of COVID-19 impacts would require detailed research. The Netherlands, for example, where both flowers and potatoes were hit early on, has a more negative outcome than most other EU countries. But it cannot be assumed without more detailed analysis that the large falls in entrepreneurial income in Romania, Germany or the UK were COVID-related or not. In general, the national figures do not support the view that there was a general negative COVID-19 effect for EU agriculture as a whole.

Source:  Eurostat, Economic accounts for agriculture – values at current prices [aact_eaa01].

The contribution of subsidies to EU agricultural income

The direct EU budgetary response to the COVID-19 crisis was extremely limited – the €80 million set aside for aids for private storage mentioned earlier. Otherwise, the measures taken at EU level merely permitted Member States to make use of unspent commitments in their rural development programmes and sectoral programmes. This reflected the very limited budgetary room for manoeuvre in the last year of the Multi-annual Financial Framework and the unwillingness of Member States to activate the crisis reserve.

Instead, the EU introduced a Temporary Framework for State Aid that allowed Member States to provide additional assistance to, among others, their agricultural and food processing sectors. The EU has notified those schemes that had a specific agricultural focus to the WTO Committee on Agriculture. The following table, drawn from these notifications, indicates that Member States planned to allocate over €4.4 billion to their agricultural and food processing sectors. This is certainly an underestimate. Large countries such as France, Germany and Spain are omitted from this table, most likely because the farm assistance provided in these countries was included under an umbrella assistance scheme for all sectors and the share allocated to farmers is indeterminate. Nonetheless, Member States sought permission to provide at least €4.4 billion in support to agriculture in response to the pandemic.

Source:  Own tabulation based on EU WTO notifications in WTO documents G/AG/GEN/159, G/AG/GEN/159/Add.1, G/AG/GEN/159/Add.2 and G/AG/GEN/159/Add.3. Includes measures adopted by EU Member States up to 10 November 2020.

The puzzling fact is that this additional assistance does not show up in the subsidy elements of the 2020 economic accounts for agriculture. Subsidies are included either as product subsidies (coupled to specific commodities) or as other subsidies on production (including direct payments and area-based payments in rural development programmes). According to the accounts, there was a small increase in product subsidies (of around €150 million) but no significant change in other subsidies on production.

There could be several explanations. One is that Member States have made commitments to farmers but this money was not paid out in 2020. Another is that the assistance notified under the Temporary State Aid Framework can be a mixture of grants and loans. The loan elements would not necessarily show up as a subsidy transfer to farmer (interest rate subsidies on subsidised loans are not separately notified in the accounts, but the very small fall in interest paid shown in the table above does not seem to reflect any major impact from this source). I find it overall puzzling why subsidy payments to farmers in 2020 have remained unchanged despite the huge assistance packages, it would be helpful if anyone is able to throw further light on this.

Source:  Eurostat, Economic accounts for agriculture – values at current prices [aact_eaa01]. EU27 is without the United Kingdom.

This is in dramatic contrast to the U.S. where one-off COVID-related payments to farmers have pushed U.S. farm income to a near-term high. The value of agricultural output in the U.S. in 2020 is expected to decline only slightly relative to 2019 by 0.9%. But net farm income is forecast to increase $36.0 billion (43.1%) to $119.6 billion in 2020. This is largely due to an increase in direct Government farm payments to $46.5 billion in 2020, an increase of $24.0 billion in nominal terms (107.1%) because of supplemental and ad hoc disaster assistance for COVID-19 relief.

Source:  USDA, U.S. Farm sector financial indicators

Conclusions

In the very early days of the COVID-19 pandemic there were justified fears that the lockdowns and associated restrictions could have very negative impacts on EU agriculture and the food industry. Thanks to extraordinary effects by farmers, the food system, regulators and the Commission, these dire predictions did not come to pass. The end-of-year accounts just published by Eurostat, while documenting a significant fall in family farm income compared to 2019, also highlight how resilient the farm sector has been.

The big puzzle in these figures is that the significant increase in Member State assistance to their agricultural sectors does not show up in the figures. It would be really good to get a clear explanation why this is not the case.

This post was written by Alan Matthews

Photo credit: bogitw on pixabay, used courtesy of a Creative Commons licence.

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Commission proposes European Recovery Fund as part of revised 2021-2017 MFF

The stakes for the European Union have never been higher. In a year when the latest Commission economic forecasts project a 8% decline in GDP as a result of the measures taken to contain the spread of the coronavirus, the question is whether the European Union can provide a response that is macroeconomically significant and builds on the principles of solidarity inherent in the concept of a common citizenship. If it fails to deliver, we can say good-bye to the European Union and prepare to take our chances in an unforgiving geo-political world where the only other leaders are an increasingly authoritarian and self-centred China and an increasingly unpredictable and self-centred America.

The Commission has done its homework. Building on a Franco-German initiative the previous week, it put forward on 27 May 2020 a proposal for a recovery plan instrument and a reinforced Multi-annual Financial Framework (MFF) that is innovative, ambitious, and worthy of support. Although it tries hard to take account of the many sensitivities around budgetary policy in the Union, its success is by no means guaranteed. If it fails, decide now if you want a Chinese or American passport. Europe, as an idea and as an actor, may limp on but it will no longer have global relevance.

The new Commission proposal also has implications for agricultural spending in the EU budget. While the sum proposed has obvious significance for farm beneficiaries, it is important to keep a sense of proportion. Set against the broader issues at stake, what happens to agricultural spending is of second-order importance.

In this blog post, I discuss the Commission’s proposal for the next MFF and the complementary recovery instrument. I leave its agricultural spending proposals to a later post. The latter will be irrelevant unless the whole of the Commission’s ‘grand design’ comes together, which is by no means certain at the time of writing.

Commission emergency response to support jobs and the economy

It is helpful to see the Commission’s recovery proposal in the context of its previous economic interventions to address the fallout from the coronavirus lockdown and those of other economic actors, particularly the European Central Bank.

The Commission’s first response to the COVID-19 pandemic was to propose an increase of €3.0 billion in the 2020 EU budget on 2 April 2020, largely intended to fund the provision of emergency healthcare support. This made available almost all of the remaining money in the 2020 budget to fight the pandemic. These amendments to the EU budget were adopted by Council and Parliament on 14 April 2020 (see here for the Commission’s full infographic on the 2020 budget amendments). The Commission also relaxed the fiscal and state aid frameworks to give Member States room to act. Up to the end of April, state aid amounting to €1.8 trillion has been approved by the Commission.

The EU also redirected EU funds in the 2020 budget to help Member States tackle the COVID-19 crisis. This included two packages, the Coronavirus Response Investment Initiative and the Coronavirus Response Investment Initiative Plus, which mobilised cash reserves and unspent monies in the EU structural funds as well as allowing greater flexibility in the spending of these funds to redirect resources to where they are most needed. This initiative also included limited support for farmers and fishermen (see Commission infographic on the support made available for farmers). I discussed these aid measures for agriculture in this previous post.

Resolute action by the European Central Bank

The impact of these EU budget measures is limited, both because of the relatively small size of the EU budget but also because it is unable to borrow. Instead, the heavy lifting has been done by national governments. Eurozone governments have provided a fiscal stimulus worth around 4% of GDP and provided liquidity support in the form of loan guarantees, deferred tax payments etc. worth a further 20% of eurozone GDP. Also taking account of the working of automatic stabilisers, the aggregate government deficit has surged from 0.6% of GDP in 2019 to 8.5% of GDP in 2020 in both the eurozone and EU. The European Central Bank (ECB) estimates that eurozone governments’ national responses would result in additional funding requirements equal to 10 percent of eurozone gross domestic product, leading to national debt issuance in the range of €1tn to €1.5tn in 2020 alone.

The ECB has been supporting larger national fiscal deficits by helping to keep sovereign bond yields under control. According to the Financial Times, the ECB has already committed to buying more than €1tn of assets this year and to providing banks with about €3tn of ultra-cheap loans while also freeing up more than €120bn of capital for lenders to support the eurozone economy. However, the recent ruling on ECB policy by Germany’s Constitutional Court has raised doubts about the future of ECB monetary policy and further underlines the importance of a fiscal policy response from the European authorities.

The problem is that the fiscal firepower available to Member States differs widely across the bloc. This is underlined by the fact that 52% of the value of the national state aid measures put in place to shelter the economy from the worst impacts of the corona lockdown have been approved for Germany alone which accounts for just one-quarter of EU GDP. Without a common European response the recovery risks further fragmenting the single market and ultimately risking the future of the Union itself.

Eurogroup package

Following a request in the conclusions of the European Council meeting on 26 March 2020, the Eurogroup of Finance Ministers meeting in inclusive format (meaning that all EU27 Finance Ministers took part in the discussions) adopted a report on 9 April 2020 agreeing on several safety net measures worth up to €540 billion, following several failed attempts.

The three safety net measures are intended for workers via a temporary support to mitigate unemployment risks in the emergency (SURE); for businesses via the European Investment Bank (EIB); and for Member States via the European Stability Mechanism (ESM). The hope is that these will all be in place by 1 June, with the latest update given by the Eurogroup President Mário Centeno on 15 May 2020 .

The SURE package was adopted by the Council on 19 May 2020. SURE is a temporary scheme which can provide up to €100 billion of loans under favourable terms to Member States. Member States can request EU financial support to help finance the sudden and severe increases of national public expenditure, as from 1 February 2020, related to national short-time work schemes and similar measures, including for self-employed persons, or to some health-related measures, in particular at the work place in response to the crisis. SURE loans will be backed by the EU budget and guarantees provided by Member States according to their share in the EU’s GNI. The total amount of guarantees will be €25 billion. SURE will become available after all member states have provided their guarantees.

The European Investment Bank will create a pan-European guarantee fund of €25 billion based on Member State guarantees, which could support €200 billion of financing for companies with a focus on SMEs, throughout the EU, including through national promotional banks. Both SURE and EIB financing will be available to all Member States.

Loans through the ESM Pandemic Crisis Support will be reserved for euro countries. These countries will be able to seek loans up to 2% of their GDP (amounting to €240 billion if all countries borrowed their maximum entitlement but this is not envisaged) for expenditure on health-related expenses in response to the coronavirus, directly or indirectly. The latter limitation reflected the compromise reached between those countries (led by the Netherlands) that wanted to insist on macrostructural reforms as a condition for eligibility, and those countries (led by Italy) that rejected any form of conditionality.

The Eurogroup report also agreed to work on a Recovery Fund which would mobilise future-oriented investment and help to spread the costs of the extraordinary crisis over time through appropriate financing. However, the divisions on this issue were spelled out in the Eurogroup President’s letter forwarding the Eurogroup report to the European Council President. “Some Members were of the view that it should be based on common debt issuance, while others advocated alternative solutions, in particular in the context of the multi-annual financial framework.”  

European Council mandate

The Joint Statement of the members of the European Council adopted on 26 March 2020, although primarily focused on the immediate response to the COVID-19 outbreak, also called for a co-ordinated exit strategy, a comprehensive recovery plan and unprecedented investment. It invited both the President of the European Council and the President of the Commission, in consultation with other institutions, especially the European Central Bank, to start work on a roadmap for recovery.

On the basis of this mandate, a Joint Roadmap for Recovery was jointly presented by the Commission President and the European Council President on 21 April 2020 to address the need for a comprehensive recovery plan and unprecedented investment to help relaunch and transform EU economies. It was drawn up after consultation of other EU institutions, social partners as well as Member States.

The Joint Roadmap is a high-level document outlining general principles and highlighting some key areas for action. These include restoring and deepening the single market while also ensuring greater strategic autonomy through a dynamic industrial policy: a Marshall Plan-type investment effort focused on the green and digital transitions and the circular economy, alongside other policies such as cohesion policy and the common agricultural policy; taking on the EU’s global responsibilities in helping a frame a global response to the pandemic as well as providing assistance to countries in need; and addressing the weaknesses in governance that were so evident in the early days of the crisis.  

The European Council at its video meeting on 23 April 2020 welcomed the Joint Roadmap for Recovery and endorsed its guiding principles and the key areas for action. The Council also agreed to work towards establishing a recovery fund with the following parameters.

This fund shall be of a sufficient magnitude, targeted towards the sectors and geographical parts of Europe most affected, and be dedicated to dealing with this unprecedented crisis. We have therefore tasked the Commission to analyse the exact needs and to urgently come up with a proposal that is commensurate with the challenge we are facing. The Commission proposal should clarify the link with the MFF, which in any event will need to be adjusted to deal with the current crisis and its aftermath.

However, this text concealed the strong disagreements within the Council over both the size of the fund, how it would be financed and whether it should be allocated in the form of loans or grants. In her press conference after the Council meeting, Commission President von der Leyen, made clear her preference for linking the recovery fund to the EU’s MFF.

“The budget is time-tested,” she said. “Everybody knows it. It is trusted by all member states and it is per se designed for investment, for cohesion and convergence.” Von der Leyen added: “The next seven-year MFF budget has to adapt to the new circumstances, post-corona crisis. We need to increase its firepower to be able to generate the necessary investment across the whole European Union.”

The European Parliament, in its resolution on EU coordinated action to combat the COVID-19 pandemic and its consequences adopted on 17 April 2020 also called on the Commission “to propose a massive recovery and reconstruction package for investment to support the European economy after the crisis, beyond what the European Stability Mechanism the European Investment Bank and the European Central Bank are already doing, that is part of the new multiannual financial framework (MFF). To that end, it reiterated its proposals for an increased MFF budget, a revision of the own resources ceiling to gain sufficient fiscal room for manoeuvre, and the need for new own resources.        

The Franco-German axis weighs in, but frugal four not impressed

The Commission’s plans for a European Recovery Fund got a boost in a joint Franco-German proposal on 18 May 2020. This called for “an ambitious, temporary and targeted Recovery Fund in the context of the next MFF, boosting a front-loaded MFF during its first years”. It went on to state that “France and Germany propose to allow the European Commission to finance such recovery support by borrowing on markets on behalf of the EU under the provision of a legal basis in full respect of the EU Treaty, budgetary framework and rights of national parliaments”. It envisaged a recovery fund of €500m in EU budgetary expenditure for the most affected sectors and regions on the basis of EU budget programmes and in line with European priorities, particularly the green and digital transitions and research and innovation. The financing of the recovery fund would be “an extraordinary complementary provision, integrated in the own resource decision, with a clearly specified volume and expiry and linked to a binding repayment plan beyond the current MFF on the EU budget”. 

The Franco-German proposal was met with a immediate response in the form of a non-paper from the ‘frugal four’ – Austria, Denmark, the Netherlands and Sweden. They attacked the key strategic idea in the Commission’s thinking and the Franco-German proposal that allocating resources through grants is precisely what the MFF does, and thus building on the MFF is a way of getting around fears about debt mutualisation. The frugal four instead proposed a separate Emergency Fund based on a ‘loans for loans’ approach that would have a strong commitment to reforms and the fiscal framework and would avoid any debt mutualisation. Importantly, the frugal four’s paper rejected any significant increase in the EU MFF budget.

The Commission’s recovery package

The Commission response was delivered last week on 27 May 2020 under the heading ‘Repair and Prepare for the next generation’. It has two elements: a Next Generation EU recovery instrument to boost the Community budget with new financing raised on the financial markets for 2021-2024, and reinforcement of the long-term EU budget (2021-2027). The recovery fund includes a total of €500 billion which will be given to Member States through grants, and an additional €250 billion via favourable loans. The Commission proposal therefore includes the Franco-German proposal but adds a further loan element. It comes on top of the EU’s current liquidity package of up to €540 billion, including potential credit lines from the European Stability Mechanism.

Although the Commission proposal is divided into two components, the total package is fully anchored in a revised but front-loaded MFF for the 2021-27 period. The European Recovery Instrument (‘Next Generation EU’) amounting to €750 billion will temporarily boost the EU budget with new financing raised on the financial markets. It will be used to reinforce EU programmes in the MFF with an end date by 31 December 2024. Raising funding on the financial markets will help to spread the financing costs over time, so that Member States will not have to make significant additional contributions to the EU budget during the 2021-2027 period..

The reinforced MFF is essentially an update of the Michel MFF proposal to the European Council in February 2020 with slightly altered priorities and a tiny boost in overall volume to €1.1 trillion.

In addition, in order to make funds available as soon as possible to respond to the most pressing needs, the Commission proposes to amend the current multiannual financial framework 2014-2020 to make an additional €11.5 billion in funding available already in 2020. This additional funding would be made available for REACT-EU, the Solvency Support Instrument and the European Fund for Sustainable Development, reflecting the urgency of these needs.

The Next Generation EU instrument

Most of the Next Generation EU recovery instrument will be allocated to Member States for support to investment and reforms, with a particular focus on the green and digital transitions. Four components are envisaged. The largest will be a €560 billion European Recovery & Resilience Facility available to all Member States but concentrated on the most affected and where the resilience needs are greatest. This facility will be embedded in the European Semester. Member States will draw up recovery and resilience plans as part of their National Reform Programmes. These plans will set out the investment and reform priorities and the related investment packages to be financed under the facility, with support to be released in instalments depending on progress made and on the basis of pre-defined benchmarks. Disbursements must also fully respect the rule of law.

In addition, there will be a €55 billion top-up of the current cohesion policy programmes between now and 2022 under a new REACT-EU initiative to be allocated based on the severity of the socio-economic impacts of the crisis, including the level of youth unemployment and the relative prosperity of Member States. It is also proposed to strengthen the Just Transition Fund up to €40 billion, to assist Member States in accelerating the transition towards climate neutrality.

Also under this heading the Commission proposes a €15 billion reinforcement for the European Agricultural Fund for Rural Development to support rural areas in making the structural changes necessary in line with the European Green Deal and achieving the ambitious targets in line with the new biodiversity and Farm to Fork strategies.

Financing the Next Generation EU. Financing will be raised by temporarily lifting the ‘Own Resources’ ceiling to 2% of EU Gross National Income (GNI), allowing the Commission to use its credit rating to borrow up to €750bn on behalf of the Union on the financial markets. This would be done through the issuance of bonds, for measures during the recovery period (2021-2024).

The loans would be paid back between 2028 and 2050. This can be done in various ways. Member States could agree to pay more into the common EU budget in future MFFs. They could cut expenditure to create headroom in future MFFs to pay back the loans. Or, the Commission’s dream, the Union would be given additional own resources. Proposals on additional new own resources reflect ideas that the Commission has previously put forward. They include a possible planned extension of the emissions trading scheme to cover maritime transport and aviation, a carbon border adjustment mechanism to counterbalance imports of cheap products from abroad or a new digital tax on companies with a global annual turnover of above €750 million. The Commission has promised to table proposals on these possible revenue sources at a later stage of the financial period.

Importantly, the Commission has signalled, in a gesture to the frugal four, that it is not realistic to pursue the phasing out of national rebates within the next financial period and this will only be possible over a longer period.

Next steps

The Commission has invited EU leaders and co-legislators to “examine these proposals rapidly” with a view to hammering out a political agreement at European Council level by July 2020. Officials pledge to “then work closely with the EP & Council to finalise an agreement on the future long-term framework & the accompanying sectoral programmes” in the early autumn, so the new Community budget is “up and running and driving Europe’s recovery on Jan 1, 2021.”

The Commission proposal is a well-judged response to the economic state in which Europe finds itself and builds on some solid technical work by the Commission services. It is a radical proposal that would exceptionally allow the EU to borrow and run a deficit to finance the recovery. Pascal Lamy has likened it to “crossing the Rubicon for member states”.  For that reason, its passage is by no means secure.

The Commission proposal for the borrowing against the security of increased EU government guarantees for the 2021-2027 budget will be discussed by EU leaders at a European Council meeting on June 19th. Initial reactions from Member States suggest it is unlikely to get immediate approval because states are wary of taking on extra risk. Linking the recovery fund to agreement on the MFF is a gamble given that talks on the latter have been at a stalemate for two years. Chancellor Merkel has suggested that an agreement is more likely in the second half of the year under the German Presidency. At this point, the chemistry between the two German women who have previously worked together, Merkel and von der Leyen, will be crucial. It must be recalled that it is not only the European Council leaders as well as the European Parliament who must sign off on the final agreement, but also each and every national parliament. It will be important that the frugal four (or five, if we include Finland) realise that failure to support the Commission’s proposal now will cost them far more in lost GDP after 2028 than what they will expect to pay back in loan repayments.

It is already clear that the decisions to be taken over the coming weeks and months will be a defining moment for the European project.

This post was written by Alan Matthews

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Financing emergency aid to address market disruption due to COVID-19

There has been strong pressure on Commissioner Wojciechowski to get the Commission to do more to protect farmers and agricultural markets from the adverse effects of the lock-down responses to the coronavirus pandemic.

The Commissioner has argued that there is no funding available for these measures in the EU budget. In this post, I assess the funding that may be available to the Commissioner. I conclude that available funding is limited but not exhausted. It now seems time to make use of the crisis reserve that was put in place for exactly this eventuality as well as unused margins under the European Agricultural Guarantee Fund (EAGF) in the EU budget.

The EU budget is a very complex entity, and it is not easy for an outsider to have a complete understanding of how it works. There may well be errors in the following account, and if so, I would be grateful to have them pointed out. The exercise is still valuable as context for any future debate on crisis management in the CAP as part of the ongoing negotiations on the future CAP framework post 2020.

Growing demand for EU intervention

Copa-Cogeca has highlighted the market breakdown for livestock producers in the dairy, beef, sheep and goat sectors and called for additional targeted market measures for the livestock sector, including exceptional measures, financed outside the CAP budget. Specifically, it has called for the activation of private storage measures for dairy products and the different meats, as well as more targeted management of Tariff Rate Quotas for imports.

Copa-Cogeca has also highlighted problems in the ornamental sector and for some fruits and vegetables. Also the wine market, where exports had already been hit by US tariffs of 25% imposed as part of US retaliation against Airbus subsidies, has been further affected by the loss of sales of higher-quality wines as restaurants remain shuttered.

The European Milk Board has called for a voluntary supply reduction programme in the dairy sector covering a few months in which producers would be compensated, similar to that introduced at the time of the last milk price crisis in 2016. The French dairy sector representative group CNIEL has already introduced a €10 million solidarity fund under EU rules to compensate suppliers who agree to reduce production.

According to Euractiv, MEPs in the European Parliament’s Agriculture Committee have also written to the Commissioner calling on the Commission to use the emergency instruments in the common market organisation (CMO) “as soon as possible”. The Committee is looking for intervention measures as well as opening private storage. In addition, it supports the activation of the crisis reserve which has been financed by withholding a proportion of the direct payments paid to farmers at the end of 2019 and which if left unused would be returned to them as part of their direct payment paid out at the end of this year. Some MEPs have called for a compulsory volume reduction in the dairy sector to avoid milk storage or destruction as the spring peak in milk production approaches.

Ministers of Agriculture have also supported these calls. In a letter initiated by Ireland and sent to the Commissioner on 16 April, all EU agriculture ministers, while welcoming the measures taken in the European response to date, called for urgent additional measures to be taken under the CAP, including aid for private storage to support those sectors where significant price impacts have been identified, as well as exceptional aid to farmers in the most affected sectors.

Commissioner Wojciechowski, when addressing the Parliament’s AGRI Committee on 15 April, accepted that requests for market intervention measures were legitimate but pointed to the absence of money in the EU budget to finance such measures. “These are legitimate expectations and if the Commission had a sackful of money it would dip into it straight away”, the Commissioner is reported as telling MEPs. However, he added that there is no such sack in the current financial framework, as there was no reason to do so when adopting the budget last year.

The Commission has announced two sets of measures so far to help the agri-food sector in its response to the pandemic. On 25 March, DG AGRI announced an extension of the deadline for submitting CAP payment applications, as well as details of additional flexibilities for Member States to provide aid to farmers and food processing companies under the newly adopted Temporary Framework for State Aid (especially paragraph 23 in that Framework).

A further set of measures were announced by DG AGRI on 2 April. These included the possibility to reallocate unused funds within Rural Development Programmes to finance relevant actions to face the crisis, an increase in the advance payment of direct payments farmers will receive after mid-October and rural development payments, plus a reduction in the number of physical on-the-spot checks to ensure eligibility conditions are met.

Whether market intervention measures are justified or not is always a judgement. Agricultural market prices are anyway volatile, and normal market risk is something that should be left to producers and processors to manage. However, some agricultural sub-sectors have experienced an exceptional drop in demand where taxpayer assistance can be justified. Market intervention can also be justified to provide some market stability when there is a sudden and temporary drop in prices.

State aid measures will remain the most important response

Following the changes made in the 2013 CAP reform to the crisis management measures available under the Common Market Organisation (CMO) Regulation, the CAP has the policy flexibility to respond to market disruption but not necessarily the budget. This reflects the relatively inflexible structure of the EU budget more than any ceiling on available funds per se.

The EU cannot borrow to finance a sudden increase in the demand for resources such as can result from an agricultural market crisis. Especially for an EU-wide crisis that affects all agricultural sectors, the EU budget will never be able to cope on its own. It is also relevant to recall that, under the Treaties, agriculture is a shared competence between the Union and the Member States. It is thus reasonable to expect Member State initiatives to play a role, perhaps even the major role, in providing income assistance to farmers where this is justified.

This is the rationale behind the Temporary Framework for State Aid Measures introduced in response to the COVID-19 outbreak in March. As the Commission noted when bringing forward this measure: “Given the limited size of the EU budget, the main response will come from Member States’ national budgets”. Under the Temporary Framework, Member States have the possibility to provide up to €100,000 per farm in state aid following rapid approval by the Commission, provided the aid is not fixed on the basis of the price or quantity of products put on the market. In addition, Member States can top up this amount by de minimis aid with a ceiling of €20,000 per farm which does not require Commission approval.

To get a sense of the potential scale of this assistance, if we multiply €120,000 per farm by the approximately 6.5 million beneficiaries of EU direct payments, then the theoretical total pot of money available in the EU for farm income support is €780 billion if Member States decide there is a need to activate it. Clearly, we will never come anywhere near this theoretical maximum but it is helpful to be reminded of the firepower that is available.

Member States have already begun to use this option. DG COMP, the Competition Policy Directorate-General, maintains a webpage with a weekly e-News update which gives details of all decisions approving state aid. Most decisions refer to economy-wide support and it would require further work to identify to what extent farmers will benefit from the assistance provided. But it is up to national governments to decide on those sectors they deem to be in greatest need of support.

EU budget financing for market measures

Member States, however, cannot undertake market intervention which is reserved to the Union. Thus it is also important to assess the Commissioner’s claim that there is no money in the kitty to finance such measures.  There are four potential sources of EU revenue:

  • The crisis reserve
  • Appropriations-in-aid
  • Margin below the ceiling in Heading 2 of the MFF
  • Special flexibility instruments.

We now look closer at each of these options.

The crisis reserve. The EU budget no longer contains specific amounts for crisis spending for export refunds or intervention. Instead, there is a crisis reserve made up by withholding a portion of direct payments (€478 million withheld from 2019 payments that should be reimbursed to farmers after October 2020). The Commissioner has argued against using this because it is farmers’ own money that they rely on during the crisis. As we have seen, the EP’s COMAGRI believes it should be used.

There are three arguments in favour of the Committee’s position. The first is that using the money now means it can aid farmers in the next few months when it is needed, rather than waiting until after the middle of October to disburse these cheques. Second, using the reserve as it was intended to provide crisis assistance would allow the money to be targeted to those sectors in greatest need. Not all agricultural sectors have experienced an adverse shock to the same extent, for example, pigmeat prices are up 40% on a year earlier because of the impact of African swine fever on Chinese herds. Third, reimbursing the crisis reserve to farmers in October is a form of income support, whereas the crisis reserve can also be used for market intervention which, by managing supply to prevent prices from falling further, could have a multiplier effect on income.

Appropriations-in-aid. During the financial year, there are often exceptional and unexpected appropriations-in-aid that provide additional resources to the CAP budget over and above what is appropriated through the budget process. Commissioner Hogan was able to use significant revenue from milk superlevy fines to support the milk market in the 2016 price crisis. It is too early in the financial year to know whether there will be an unexpected surge in such receipts this year, but it is hard to see why this might occur. On this front, Commissioner Wojciechowski will not be so lucky as Commissioner Hogan.

MFF margins. The ceilings established in the Multi-annual Financial Framework (MFF) for specific headings and sub-headings represent the maximum level of authorised commitment appropriations under these headings as well as overall annual payments. The annual budgets rarely use all of these ceilings, and the difference represents a margin of unused expenditure.

The second Draft Amending Budget to the 2020 General Budget providing emergency support to Member States to respond to the COVID-19 outbreak proposed by the Commission on 2 April gives an updated table of current margins under commitment appropriations by MFF Heading. The unused margin for Heading 2 Sustainable Growth: Natural Resources (which includes the CAP) is shown as €514 million whlie the margin for the EAGF sub-heading (covering direct payments and market expenditure) is shown as €477 million – almost exactly the same figure as in the crisis reserve. It only requires the agreement of the budgetary authority (the Council and Parliament) to make use of this margin, no revision of the MFF ceilings (which would require unanimity in the Council) is required.

There is also a flexibility instrument in the budget called the Global Margin for Commitments (GMC). This allows the Commission to propose the re-deployment of margins left available in precedent years to subsequent years. Originally, these funds could only be used to finance actions related with growth and employment. In 2016, this was extended to migration and security issues. The Commission has now proposed an amendment to the MFF regulation so eliminate all scope restrictions to the use of the GMC in the current financial year. However, at the same time, it has proposed to deploy all of this funding (around €2 billion) to finance the Emergency Support Instrument intended to help Member States address the COVID-19 outbreak. Therefore, no funds are available under this instrument for agricultural market price support.

Special flexibility instruments. The need to increase the EU’s ability to respond to unforeseen events at the time when the MFF was agreed has led over time to the creation of a number of special flexibility tools that allow the financing of specified expenditure that cannot be financed within the limits of the ceilings available for one or more MFF headings (this briefing from Magdalena Sapala of the European Parliamentary Research Service gives an excellent overview).

The Flexibility Instrument specifically provides funding for clearly defined expenditure that cannot be covered by the EU budget without exceeding the maximum annual amount of expenditure set out in the MFF. However, its funding in 2020 has been fully exhausted to support measures to manage the migration, refugee and security crisis. Thus, there is no possibility of recourse here to fund unanticipated agricultural market expenditure.

Relaxing environmental measures is not an appropriate response

This review of the options available to support those farmers who have been particularly badly hit by the economic fall-out from the coronavirus pandemic highlights, first, the crucial role of national measures. The Commission has indicated its willingness to approve very substantial amounts of State aid if Member States request it. This is up to individual member states. There will be significant differences both in the ability of individual countries to fund such assistance packages as well as differences in the relative severity to which different economic sectors have been affected (for example, the tourism and hospitality sectors have borne the brunt of employment losses in many countries).

At the same time, it appears there may still be some funding available in the EU budget, consisting of the crisis reserve as well as the unused margin under the EAGF sub-heading in the MFF, that could be used to provide some targeted market support. However, the total amount is limited to around €950 million, with half of this made up of the crisis reserve that farmers would expect to receive after October in any case. The Commissioner’s declaration that his hands are tied by a lack of EU budget resources is thus partly justified, although there are some steps that can be taken.

At the same time, we are hearing calls from various groups (for example, the EPP group in the European Parliament or the Farm Europe think tank) calling for the postponement of planned initiatives necessary to address increased climate ambition and to promote more sustainable farming that are expected to be announced in the Farm to Fork Strategy as part of the European Green Deal, now delayed to the end of the summer. Indeed, there are worrying indications that some national administrations may be willing to relax existing conditionalities that farmers should observe to be eligible for payments, for example, with respect to Ecological Focus Area requirements.

Following this advice would both be a false economy as well as result in shifting the costs of responding to the crisis to the environment just at the time when we are realising more and more the value of environmental services to society. Improving soil health, restoring biodiversity habitats, protecting water quality, tackling water depletion, addressing air quality and reducing greenhouse gas emissions were all urgent environmental challenges before the coronavirus pandemic and they are no less urgent after it.

As thirteen environment and climate ministers from around Europe wrote in a joint letter emphasising that the European Green Deal must be central to a resilient recovery from the COVID-19 outbreak: “The lesson from the Covid-19 crisis is that early action is essential. Therefore, we need to maintain ambition in order to mitigate the risks and costs of inaction from climate change and biodiversity losses”.

Update 22 April 2020: The day following the publication of this post, DG AGRI announced a third package to assist the agricultural sector including measures for private storage aid (PSA) in the dairy and meat sectors, the authorisation of self-organisation market measures by operators in hard hit sectors and flexibility in fruits and vegetables, wine and some other market support programmes. The details of their financing are not yet available but it seems some additional funding has been found within the CAP budget.

This post was written by Alan Matthews

Photo credit: Downloaded from pxhere.com, used under CC0.