Tag: multi-annual financial framework

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Commission proposes increased agricultural spending in reinforced MFF

My previous post discussed the rationale for the Commission’s revised MFF proposal put forward on 27 May 2020 which includes a proposal for a European Recovery Instrument (ERI) to finance front-loaded expenditure in the next MFF plus a slightly revised ‘standard’ MFF (which the Commission refers to as a ‘reinforced’ MFF). In broad terms, the reinforced MFF allows for commitment appropriations amounting to €1,100 billion over the 2021-2027 period, while the ERI would help to finance a further €750 billion of spending in the 2021-2024 period, in constant 2018 prices.  Together, they add up to a total proposed spending of €1,850 billion over the MFF period.  

The following table tracks the debate on the overall size of the MFF since the Commission’s initial proposal in May 2018. It also describes the allocation for the CAP budget in the various proposals. The farm unions and their supporters have paid particular attention to comparing the latest Commission proposal with commitment appropriations under the current MFF. There is no unique or right way to make this comparison. In this post, I examine the issues involved.

Source:  Elaboration by Alan Matthews on basis of Massot and Negre (2018) for current MFF figures and Commission May 2018 proposal; European Parliament position from Resolution of 14 November 2018 on the Multiannual Financial Framework 2021-2027; Finland Presidency proposal from Council document 14518/1/19 5 December 2019; Michel first attempt figures from Council document 5846/20 14 Feb 2020; Commission reinforced MFF figures from Commission COM(2020) 442 ‘The EU budget powering the recovery plan for Europe’.  MFF totals include the European Development Fund.
Note.  The Commission Questions and Answers on the EU budget: the Common Agricultural Policy and Common Fisheries Policy reports that the latest Commission proposal is a 2% increase in constant 2018 prices over the 2014-2020 baseline, the same as in current price terms. This does not seem plausible and the reason for the discrepancy with the figure I estimate in this table is not clear.

As a first comment, it is worth highlighting that, excluding the ERI, the reinforced MFF total in constant 2018 prices of €1,100 billion is still well below the Commission’s original MFF proposal in May 2018. Indeed, it is only a very small increase over the first MFF negotiating box presented by European Council President Charles Michel to the European Council on 14 February 2020. This received such harsh criticism from Member States that Michel circulated amendments to this proposal in the course of the meeting itself, which reduced the overall MFF volume further to €1.069 billion. As this was not a formal proposal (it consisted of two pages of loosely-drafted amendments) I have not included it in the table above. The new Commission proposal is a very minor ‘reinforcement’ of the MFF totals compared to the February 2020 negotiating box.

The table highlights two of the issues in making comparisons between the CAP budget in the next MFF and the current MFF. The first is the appropriate baseline to use. One alternative is to take the total commitment appropriations in the 2014-2020 MFF as the baseline. This is what the European Parliament does in its Resolution adopting its interim position on the MFF in November 2018. The other alternative is to take commitment appropriations in the final year of the current MFF and multiply it by seven to get a ‘baseline’ allocation to serve as the comparator. This is the Commission’s preferred approach as set out in this Questions and Answers on CAP spending in the EU Budget. In both cases, pre-defined allocations to the UK have been deducted to generate an EU27 baseline.  

The Commission’s preferred approach provides a lower baseline in constant 2018 prices but a higher baseline in current prices compared to the Parliament’s use of committed resources over the whole MFF period.

A second issue is whether the comparison is made in constant (2018) or current prices.  Again, there is no uniquely correct approach. The MFF Regulation sets out commitment appropriations each year in constant prices. It also specifies that these are converted to current prices using a fixed 2% annual deflator. These current price amounts are what are shown in the Annexes in the CAP Strategic Plans Regulation which set out the annual pre-allocated ceilings for direct payment and rural development spending for each Member State. The table above shows that, using the Commission’s baseline for the 2014-2020 MFF as the comparator, its proposal implies a 5% fall in constant prices, but a 2% increase in current prices.

Commissioner Wojciechowski was particularly at pains in his press conference following the publication of the Commission’s MFF proposal to highlight this increase in current prices not only relative to the current MFF but even more so with respect to the Commission’s original MFF proposal. In current prices there is now €26.5 billion more for the CAP compared to what the Commission proposed two years ago.

Real, constant and nominal prices: a discursion

The farm unions have criticised the Commission proposal because they claim it fails to maintain the value of payments in line with inflation. They make this criticism pointing to the reduction in the CAP budget in constant 2018 prices. But there is a subtlety in the constant price figures that is often ignored. These figures are often presented as being in ‘real’ terms. A cut in real terms implies that the money received by farmers will purchase fewer real goods and services in the future. But constant price figures will only represent ‘real’ amounts if the actual rate of increase in the prices of real goods and services (the rate of inflation) is exactly equal to the 2% deflator set out in the MFF Regulation.

Each year, the Commission updates the MFF ceilings by 2% to convert to current prices. However, if the rate of inflation in that year is 3%, then the real value of a fixed MFF amount in constant prices would actually fall, by 1%. Conversely, if the Commission increases the ceilings by 2% but the actual rate of inflation is only 1%, then the real value of payments to farmers increases, in this case also by 1%.

For the eurozone, the European Central Bank has a price stability mandate that it interprets as maintaining inflation rates below, but close to, 2% over the medium term. But the real problem in recent years has been that inflation has been too low, and this seems likely to continue in the immediate future. The ECB flash estimate for inflation in the eurozone in May 2020 is -0.1%.

What this means for future agricultural spending is that a budget that is held constant in constant prices could imply an increase in the real value of that spending if future inflation is less than 2%. Put another way, an agricultural budget that is cut in constant price terms could still maintain the real value of farm payments depending on the future rate of inflation.

Of course, if we want to compare the ‘real’ value of the agricultural budget included in the Commission’s latest MFF proposal with the ‘real’ value of the agricultural budget included in the current 2014-2020 MFF, the current price MFF figures should also be deflated by the actual rate of inflation. Here, Eurostat figures show that actual inflation particularly in 2014-2016 was well below the MFF 2% deflator, implying a 1% annual gain in the real value of farm payments over this period.

If this pattern continues into the next MFF, then the ‘real’ value of farm payments will be 7% higher at the end of the MFF period relative to the trend shown in constant prices. This would effectively more than wipe out the apparent ‘cut’ in farm payments in constant prices, and would maintain the value of CAP payments in ‘real’ terms. Yet this adjustment is never acknowledged in the public debate.

There are other subtleties in the CAP budget that are also often forgotten.  Massot and Negre (2018) point out that EAGF payments can often by higher than the appropriated amounts because of the existence of assigned revenue. ‘Assigned revenue’ includes the recovery of funds from the CAP as well as the fresh carry-overs of those recoveries. They estimate that assigned revenue to Pillar 1 could amount to €1,160 million for the 2021/2027 period in current prices (which would be added to the EAGFs sub-ceiling of €290.7 billion in current prices under the last Commission proposal).

Furthermore, the MFF includes an entry for ‘Margins’ under each of its main Headings to allow for contingencies. In the Commission’s May 2018 MFF proposal, the total margin for Heading 3 ‘Natural Resources and the Environment’ was €814 million (€918 million in current prices) over the whole MFF period. In principle, this could be budgetised for CAP expenditure if emergency needs arise. In the latest Commission proposal, this margin has been increased to €1.5 billion in constant prices (€1.7 billion in current prices).

Finally, the Commission has maintained the EU co-financing rates for rural development in the revised proposal at the ones proposed in May 2018: 70% for less developed regions, POSEI and Aegean islands; 43% for other regions; 65% for agri-environmental support; 80% for certain rural development support (e.g. LEADER); 100% for amounts transferred from direct payments. Readers will recall that this implied a 10 percentage point increase in national contributions to EAFRD spending. When this is factored in, it represents a further increase in the total transfers to farmers from both EU and national sources.  

The conclusion from this analysis if that, if inflation remains subdued in the next MFF period (implying an inflation rate of around 1% rather than 2% per annum), then the Commission proposal would actually maintain the real value of the CAP budget as the farm unions request. While predicting macroeconomic indicators so far into the future is always risky, this does not seem to be an unreasonable assumption at this point in time.

Pillar 1 under the hood

The overall budget figures are one thing; equally important is the use that is made of them. The Pillar 1 (EAGF) budget is used for pre-allocated amounts to Member States (direct payment envelopes and sectoral interventions) and for market-related expenditure. The criticism in the current MFF has been that the provision for crisis market-related expenditure has not been sufficient.

Pillar 1 has received an increase of €4.0 billion in constant 2018 prices (€4.5 billion in current prices) compared to the Commission’s May 2018 MFF proposal. No change is proposed in the ceilings for direct payments and sectoral interventions. Thus, the Commission’s figures for the direct payment ceilings by Member State in its 2018 proposal remain valid for the CAP transitional Regulation currently in trilogue between the Council and Parliament. All of the proposed increase will be reserved for market-related expenditure. According to the Commission’s budget communication, this money is intended for “Strengthening the resilience of the agri-food and fisheries sectors and providing the necessary scope for crisis management”.

Apart from a general sense that more headroom should be included in the CAP budget to address crisis management, it is likely that this additional money covers the €1 billion safety net instrument promised by the former Agriculture Commissioner Phil Hogan to address potential market disruption if the EU-Mercosur Free Trade Agreement enters into force. It is also highly likely that the Commission wants to prepare for possible market disruption at the beginning of next year if the UK-EU free trade negotiations end in a ‘hard Brexit’.

Pillar 2 under the hood

The increase in Pillar 2 commitments comes from two separate pots:  on the one hand, there is an increase of €5 billion in constant 2018 prices (€5.6 billion in current prices) in the reinforced MFF; on the other hand, there is a €15 billion top-up from the ERI (€16.5 billion in current prices) which will contribute as assigned revenue to Pillar 2 expenditure.

The different sources for this additional financing make a difference to how the money can be used. The increase in MFF appropriations will be available throughout the MFF period for standard rural development interventions decided under the national CAP Strategic Plans. This money will also be subject to various limits set out in Article 86 of the Strategic Plans Regulation. For example, at least 5% must be reserved for LEADER, and at least 30% must be reserved for interventions addressing the three environment and climate-related specific objectives set out for the coming CAP.

For the ERI assigned revenue, this money must be committed within the three years 2022-2024, although payments can continue to be made in later years (the indicative sequencing of commitment and payment appropriations for the EAFRD funding is shown in the following table).

Source:  Commission, Proposal for Omnibus Regulation amending CAP Strategic Plans, COM (2020) 459.

It is intended that the allocation of these additional resources by Member State will follow the distribution key set down in the original SP Regulation.

There is some ambiguity around the kinds of interventions for which this ERI money can be used. Although the Agriculture Commissioner has indicated that the additional EAFRD financing should be used to support the green transition as set out in the Commission’s Farm to Fork and Biodiversity Strategies, the legislation puts more emphasis on responding to COVID-19. Is the ERI funding intended mainly to address the fall-out from the COVID-19 measures, or is it intended to support the farming sector in the transition to the European Green Deal?

According to the Commission’s proposal for the European Recovery Instrument [Next Generation EU], Recital (6) states: “As the Instrument is an exceptional response to these temporary but extreme circumstances, the support under the Instrument should only be made available in order to address the consequences of the COVID-19 pandemic or the immediate funding needs to avoid a re-emergence of the COVID-19 pandemic.”  In Recital (7), it notes specifically that the Instrument should “support rural areas in addressing the impact of the Covid-19 pandemic”.

Article 2 of the ERI Regulation ‘Scope of the Instrument’ gives as one objective to “(i) support measures to address the impact of the COVID-19 pandemic on agriculture and rural development”. This seems a rather narrow interpretation of what the additional €15 billion might be used for.

In the Commission’s Omnibus Regulation legislative proposal that, inter alia, amends the CAP Strategic Plan Regulation to provide for external financing through the ERI, a new recital 71(a) confirms that the intention is that “recovery and resilience measures under the European Agricultural Fund for Rural Development should be carried out to address the unprecedented impact of the COVID-19 crisis”. Note there is no mention in these texts of the green and digital transitions.

The explanatory material accompanying the Omnibus legislative proposal does suggest a potentially broader scope for the use of these funds: “The instrument should also reinforce support, through the European Agricultural Fund for Rural Development (EAFRD), making available for Member States exceptional additional resources to provide assistance to the farming and food sectors that have been hardly hit, for fostering crisis repair in the context of the COVID-19 outbreak and preparing the recovery of the economy”

However, it seems that we have not yet seen the full package from the Commission.

In the proposed amendment Article 84a to the CAP Strategic Plans Regulation there are two noteworthy provisions. One is paragraph 4 which states that Article 86 of the SP Regulation (setting out minimum and maximum amounts of financial allocations) does not apply to the additional ERI €15 billion. As this is the Article that requires at least 30% of the EAFRD funding to be used for environment and climate-related interventions, it is no surprise that environmental NGOs on social media have expressed alarm about this apparent backsliding.

On the other hand, it appears (under paragraph 6 of this new Article 84a) that “The additional resources [under the ERI] shall be used under a new specific objective complementing the specific objectives set out in Article 6 to support operations preparing the recovery of the economy”. In other words, it appears that the Commission plans to introduce a new, tenth, specific objective but no further details are given. It is strange that an amendment to set out this new specific objective was not already included in this Omnibus legislative proposal which is the obvious place for it. It may be that in the rush to prepare this legislation the need to spell out this tenth specific objective was overlooked.

However, the language of this new specific objective still refers to recovery of the economy. If the new specific objective focuses the ERI spending on recovery interventions that at the same time further the green transition, then it could imply that much more than 30% of the additional expenditure would be devoted to environmental and climate-related spending. But until we see the text of this new specific objective, as well as Commission guidance on what interventions Member States can fund under the ERI in their CAP Strategic Plans, we cannot be sure.

Conclusions

Within the context of a significantly reduced volume of resources for the ‘standard’ MFF as compared to its original MFF proposal in May 2018, the Commission has added an additional €24 billion in constant 2018 prices (€26.5 billion in current prices) to the CAP budget. This is made up of €4 billion extra for Pillar 1, €5 billion extra in the MFF for Pillar 2, and a further €15 billion for Pillar 2 under the ERI.

The additional Pillar 1 commitments are earmarked for market-related expenditure and to bolster the EU’s crisis management capacity in agriculture. No change is proposed in the direct payment ceilings set out in Commission’s May 2018 proposal. It is worth noting that President Michel, in the second draft of his negotiating box at the European Council’s February 2020 meeting, proposed to increase the direct payments ceiling by €2 billion (€1.5 billion from the Heading 3 margin and €0.5 billion by switching funds from CAP market promotion measures). The Commission’s new proposal could still be amended by the European Council to increase direct payment ceilings though I would view this as unlikely.

With the additional assigned revenue from the ERI, EAFRD funding in Pillar 2 is now cut by less in constant 2018 prices/increased by more in current prices than EAGF spending in Pillar 1, thus reversing the priorities between the Pillars in the Commission’s original proposal. The Commission has also maintained its co-financing proposal whereby national governments will increase their contribution to EAFRD spending by 10 percentage points.

However, there does appear to be a potential mismatch between the great bulk of the additional EAFRD funding deriving from the ERI, which has to be committed within the first three years and which has recovery from COVID-19 as it main priority, and the longer-term need to provide funding to support farmers in the green transition. In this context, the Commission’s conversion to the idea of a mandatory minimum ring-fencing of eco-schemes in Pillar 1 could be an important commitment.

Analysis of the CAP budget numbers shows that there is a small (5%) cut in the volume of resources in constant price terms compared to the final year of the current MFF, but a small increase (2%) in current prices. However, if current price amounts are increased each year by 2% but inflation remains subdued at 1% per annum over the programming period, the real value of payments to farmers will be maintained. This conclusion is only strengthened if the focus is put on total transfers to farmers and not just the EU transfer by factoring in the additional national contribution to EAFRD spending proposed by the Commission.

This post was written by Alan Matthews

Update 4 June 2020. CAP share figures in column G in the first table changed to reflect share in reinforced MFF alone, excluding ERI.

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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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President Michel’s solution to the MFF conundrum

In my previous post I discussed the challenges facing European Council President Charles Michel as he took over responsibility from the Finnish Presidency to prepare the draft conclusions on the Multi-annual Financial Framework for the coming meeting of the European Council on 20 February next.

The Finnish Presidency proposal had been attacked on all sides as unsatisfactory. Yet, in that previous post, I speculated that Mr Michel was unlikely to hear anything very different to what the Finnish Presidency had heard when charged with forwarding the ‘negotiating box with figures’ to the December 2019 meeting of the European Council. Thus, I did not expect Michel’s draft conclusions to be dramatically different to the figures in the Finnish Presidency’s December proposal.

On the other hand, I noted that the new Commission’s flagship proposal for the European Green Deal had been published after the Finnish Presidency had prepared its final draft of the negotiating box, and I wondered if this might be sufficient to reframe the conversation between the ‘frugal Five’ and net recipients on the overall size of the EU budget.

It seems that I was correct in my first assumption and that the European Green Deal proposal has failed to move the dial where the MFF negotiations are concerned, based on a leaked draft of the European Council MFF conclusions uploaded by the Romanian multimedia website caleaeuropeana.ro (link here to the draft MFF conclusions). This is very closely based on the Finnish Presidency draft with the addition of €7.5 billion for the Just Transition Fund financed from Heading 3 (but not the CAP).

CAP figures in the Michel draft MFF conclusions

For readers of this blog, the main interest will be in what Michel has proposed for agricultural spending. The table below updates the similar table in the previous blog post by including an additional column to show Michel’s draft conclusions compared to the spending in the current MFF, the Commission’s proposal, the Finnish Presidency negotiating box last December, and the European Parliament’s position.

Sources: Table in previous post and Council of the European Union Document 5824/20

The key takeaways are the following:

  • There has been a very small upward adjustment in the overall size of the MFF (from 1.07% to 1.074% of EU27 GNI reflecting the addition of funding for the Just Transition Mechanism in Heading 3;
  • Despite the slightly larger overall MFF, the budget allocated to the CAP has been cut back compared to the Finnish Presidency proposal, although there is a slight increase (of around €5 billion over the coming seven years) compared to the Commission proposal in May last year;
  • The Finnish Presidency had increased the CAP budget as compared to the Commission proposal by adding a further €10 billion to rural development spending in Pillar 2 while maintaining Pillar 1 spending at the level proposed by the Commission. The Pillar 2 increase has been significantly cut back in the Michel proposal while there is now a small increase in the Pillar 1 budget, both compared to the Finnish proposal. The small increase in the overall CAP budget as compared to the Commission proposal is now divided equally (in absolute terms) between the two Pillars.
  • These small increases in both the EAGF and EAFRD funds in the Michel proposal will need to be distributed as national envelopes to Member States in the annexes to the CAP Strategic Plans Regulation. While the distribution key for EAGF envelopes will follow the external convergence rule agreed in the MFF conclusions, the distribution key for the additional EAFRD resources is not specified. This may give the Council President some leeway to offer ‘gifts’ if these are necessary to conclude a deal.
  • Unlike under the Commission proposal but similar to the Finnish Presidency proposal, agricultural spending would remain slightly greater than cohesion spending in the coming MFF.

There are further interesting differences in the fine print of the Michel proposal compared to the Finnish proposal, reflecting the political pressures on Michel in his confessionals with Member State leaders.

First, on external convergence of direct payments, the text maintains the further partial convergence that all Member States with direct payments per hectare below 90% of the EU average will close 50% of the gap between their current average direct payments level and 90% of the EU average in six equal steps starting in 2022.

However, the Finnish Presidency draft had held open the possibility that, as in the 2014-2020 MFF, there would be a guarantee of some minimum level of direct payments per eligible hectare by 2027. It was reported that this was a critical ‘red line’ for Poland but it has been removed in the Michel draft.

The other main change concerns flexibility between Pillars. Whereas in the Commission proposal and in the Finnish Presidency drafts, Member States would be able to shift up to 15% of their direct payments envelopes under Pillar 1 to rural development programmes in Pillar 2, this percentage has now been increased to 20%.

The converse arrangement whereby Member States could shift up to 15% of their EAFRD funds in Pillar 2 to direct payments in Pillar 1 has also been increased to 20%. Furthermore, in a gesture to those Member States that would no longer receive a guarantee of a minimum payment per eligible hectare by 2027, the Michel draft would allow this percentage to be increased up to 25% for Member States with direct payments per hectare below 90% of the EU average.

There is a certain rough justice in this proposal as I pointed out in this post. Those Member States that now complain most strongly that they are discriminated against due to receiving lower direct payments per hectare ignore the deal made at accession that the EU deliberately skewed the transfer of CAP funds towards Pillar 2. If these countries now seek to re-negotiate this deal by pushing for external convergence in Pillar 1, the quid pro quo would be some relative reduction in transfers received through Pillar 2. This is in effect what the Michel proposal achieves.

The third major change is that EU co-financing rates for rural development support have been increased from 70% to 75% in outermost and less developed regions. The rates for other regions and minimum and maximum rates are left unchanged.

In the case of the two other CAP measures covered in the draft MFF conclusions, the Michel paper confirms that capping would begin at €100,000 per beneficiary solely for the Basic Income Support for Sustainability and with Member States allowed, on a voluntary basis, to subtract all labour-related costs. Similarly, the figure to be transferred to the agricultural reserve is confirmed at €450 million  in current prices.

Proposed changes to own resources

While the overall size of the MFF and the distribution between spending priorities attract the most attention, the draft MFF conclusions also make proposals with respect to new resources. As the European Parliament, which must give its consent to the MFF, has insisted on the need for new resources, the Michel proposals are worth highlighting.

  • While the Finnish proposal had left open that Member States could retain a range of between 10-20% of traditional own resources (mainly customs duties) as collection costs, the Michel proposal fixes this at 12.5%.
  • While the Finnish proposal had left open the possibility that the VAT resource might be abolished, the Michel proposal comes down in favour of using the Commission’s refined alternative method from January 2019.
  • Two new own resources would be introduced. The first would be a national contribution calculated on the weight of non-recycled plastic packaging waste with a call rate of €0.80 per kg with a mechanism to avoid excessively regressive impact on national contributions.
  • The second would be any revenue generated by the European Union Emissions Trading System that exceeds the average annual revenue per Member State generated by allowances auctioned over the period 2016-2018. This limitation to additional revenues contrasts with the Finnish proposal of a uniform call rate of possibly [20%] on these revenues.
  • There is also a commitment in the Michel proposal to assess possible proposals for additional new own resources in the period 2021-2027. Such new own resources may include a digital tax, aviation levy, or a carbon border adjustment mechanism or a Financial Transaction Tax. These proposals have all been previously considered and rejected, so we can interpret this as a sop to the Parliament that its hopes for significant new own resources are still alive.
  • Finally, while the Finnish Presidency proposal had opted for an end to the current national rebates (corrections) from the end of 2020, the Michel proposal recognises that lump-sum corrections on a degressive basis will continue to be necessary in the period 2021-2027 to reduce the GNI-based contributions of Denmark, Germany, the Netherlands, Austria and Sweden.

European Parliament position

Getting agreement among Member States in the European Council is one thing; any MFF deal must also receive the consent of the Parliament. The Parliament has set out its position (reflected in the table above) in various resolutions. This position was reiterated in a letter from the leaders of the four main political groups (EPP, S&D, Renew Europe and the Greens) to the European Council President earlier this week.  

While the letter does not explicitly refer to the Parliament’s demand for an MFF budget equal to 1.3% of EU27 GNI, it does stress that the MFF must finance the new political agenda and the strategic headlines ambitions of the Union including the European Green Deal. It also states that the Parliament will not give its consent to the MFF without an agreement on the reform of the EU’s own resources system, including the introduction of a basket of new own resources from the very first day of the entry into force of the next MFF. Whether the proposed plastics waste tax and a share of ETS revenues will satisfy the Parliament remains to be seen.

Conclusions

While it may seem unlikely that the differences between Member States will be bridged at the European Council meeting on 20 February, it is clear that the movements of the budget pendulum are homing in on a potential landing ground. It is unlikely that any final agreement will be significantly different to what this leaked draft conclusions contains, although some marginal adjustments in response to national pressures are still possible.

The ‘friends of CAP’, who did relatively well under the Finnish Presidency proposal, have lost some ground in the past two months. Even though the Michel proposal is for a slightly bigger MFF and cohesion funding is kept at the same level as under the Finnish Presidency proposal, the CAP budget is reduced in favour of higher spending on other priorities.

At the same time, the ‘friends of CAP’ have succeeded in shifting the balance of CAP spending back in favour of Pillar 1 direct payments and away from Pillar 2 rural development funding. These two changes may not be unconnected.

This post was written by Alan Matthews

Update 15 Feb 2020: The post has been corrected to recognise that funding of €7.5 billion has been made available for the Just Transition Mechanism (Paragraph 96 in Heading 3). Also small corrections made to Cohesion and Other Priorities spending in the table.

Photo credit: Wikipedia Commons

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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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How much progress has been made on agreeing the 2014-2020 MFF?

Discussions on the CAP regulations post-2013 and negotiations on a new multi-annual financial framework (MFF) for the period 2114-2020 are inextricably linked. As EU politicians and civil servants take to the beaches for their summer vacation this month, it is timely to review how far the negotiations on the MFF package have come and how close/far we are to/from an agreement. The official view (see the Council MFF website) is that we are on course to reach political agreement on the MFF package by the end of this year. This would allow legislative work to be finalised in sufficient time for the new MFF, new rules on own resources and new spending programmes to apply from 1 January 2014, but this may be more wishful thinking than a real forecast.

The MFF package is more than the MFF Regulation which decides the ceilings for the different expenditure chapters in the EU budget for the 2014-20 period. It also includes legislative acts on own resources as well as the 70 or so sector-specific legal acts on areas such as research, cohesion policy, agriculture and fisheries, environment, justice and home affairs and foreign affairs which are part of the package because the proposals define the conditions for eligibility and the criteria for the allocation of funds. Different decision-making processes apply to the different elements of the package.

The MFF Regulation is adopted by the Council by unanimity after having obtained the consent of the European Parliament (the European Parliament may approve or reject the Council’s position, but not adopt amendments). In addition, there are five legislative acts on own resources. The basic act is adopted by the Council by unanimity and is also subject to ratification by national parliaments; the implementing acts are adopted by the Council by qualified majority. The European Parliament has to give its consent on one implementing act and is consulted on all other acts (i.e. it gives its opinion but has no legal means to influence the outcome, apart from the blunderbuss option of refusing to forward its opinion). The sector-specific legal acts are subject to the ordinary legislative procedure (co-decision). This means that the Council and the European Parliament decide together, and that the Council decides by qualified majority.

As regards the political track of the negotiations, what we have to work on at the moment is the latest version of the Danish Presidency’s ‘negotiating box’ (which covers both expenditure and revenue) submitted on 19 June in preparation for the European Council meeting on 28-29 June, the conclusions of that European Council meeting, the MFF work programme of the Cyprus Presidency released on 2 July, and the Commission’s latest update of its MFF expenditure proposals submitted on 6 July 2012. All of these documents are found on the Documents page of the Council’s MFF website.

In addition, the European Parliament approved a resolution on 13 June restating its views on the MFF prior to the European Council meeting. It emphasised that the Parliament would not agree to a new long-term budget without political agreement on the reform of the own resources system including ending existing rebates and other correction mechanisms (the Parliament’s news service has a useful feature on the Parliament’s attitude to budget issues here).

The issues involved in the MFF are complex

The range of issues under discussion in the MFF negotiations is very wide, and very divergent views are expressed both by member states and the institutions. There is an excellent resume of the debate to date focusing particularly on cohesion policy in this euinside blog post, as well as a good review from a Spanish perspective in this brief from the Real Instituto Elcano but some of the key issues can be briefly summarised. [euinside is an online media based in Bulgaria focused on EU affairs, the Western Balkans, global politics and the place of Bulgaria and the Balkans on the global scene which has a consistently high standard of reporting on this issue].

Overall size of budget. The Commission proposed a financial framework with 1.05% of GNI in commitments translating into 1% in payments coming from the EU budget. A further 0.02% in potential expenditure outside the MFF and 0.04% in expenditure outside the budget would bring the total figure to 1.11%. (Note that MFF commitments represent a ceiling for the annual budget headings and actual commitment appropriations are often lower, except for cohesion spending where the MFF ceilings are carried over automatically into the annual budgets).

In absolute terms, the Commission proposed an MFF expenditure ceiling of €1,025 billion for the 2014-2020 period compared to €994 billion in the 2007-2013 period (all in constant 2011 prices). This represents a modest 3% increase in real terms over the seven years. However, if expenditure outside the MFF and outside the budget is included, the 2014-2020 total rises to €1,083 billion which is a 9% increase on the previous period (these figures are helpfully provided in the European Parliament Note on the CAP in the MFF 2014-2020).

Seven member states in a non-paper in May 2012 called for a freeze on EU spending in the coming period (this number was a reduction from the eight that signed a similar letter a year ago due to new governments in France and Italy which are reviewing their MFF negotiating strategy). However, the European Parliament and other member states have supported the Commission’s proposal for an increase in real terms, thus underlining one major source of division in the negotiations.

Introduction of new own resources. The Commission has proposed a new own resource system to include a financial transactions tax (FTT) and a new VAT resource. These new own resources would partially finance the EU budget and could fully replace the existing complex VAT-based own resource, which the Commission proposes to eliminate, and reduce the scale of the GNI-based resource. The result should be that the new own resources would finance around 40% of total EU expenditures and traditional own resources would account for close to 20% of the total. The GNI-based own resource would remain the single most important resource, financing about 40% of the budget. Other suggestions for new own resources, such as a charge related to air transport and a share of auctioning revenue derived from the bloc’s CO2 emissions trading scheme, were considered by the Commission but rejected.

There are also strongly diverging views on the issue of new own resources. France has taken the lead in supporting the Commission’s proposal for an FTT, placing Paris firmly on a collision course with Berlin. Germany favours simplification of the current system by eliminating the current VAT resource and, apart from the traditional own resources of tariffs and levies, relying entirely on the GNI-based resource. This is anathema to the European Parliament which sees these as ‘national contributions’ and has come to believe that earmarked taxes more truly represent the spirit of ‘own resources’.

Other issues. Other issues also divide the member states, such as the composition of EU expenditure. The Visegrad states want to maximise the share of cohesion funds as well as demanding equal treatment in CAP payments. France wants to keep the CAP as much as possible like it is while willing (at least under Sarkhozy) to see cohesion policy reduced. German demands revolve around no increase of German net payments but at the same time no reduction of cohesion funds and CAP payments. Britain wants to retain its rebate, the Nordic countries would like to see higher spending on research and development, and so on. And for each country how the outcome affects their ‘net balances’ remains of crucial importance.

Then there are more technical issues such as how to provide for flexibility in the EU budget (is placing funds outside the MFF the way to do this?) and how to deal with the accumulation of unused commitment appropriations. The negotiations are not helped by the worsening economic recession in Europe which gives rise to two contradictory reactions – those who see it as justifying the Commission’s proposal to raise EU spending as part of an ‘investment budget’ for Europe, and those who argue that the EU budget must also be subject to the same austerity measures affecting the budgets of member states.

The Commission’s modified MFF proposal

The Commission produced a ‘technical’ update to its MFF proposal in July which responded to two needs: the budgetary impact of Croatia’s accession to the EU on 1 July 2013, and the effects of the most recent economic data affecting member states’ allocations under structural funds.

On this basis, the revised proposal estimates an overall ceiling of €1,033 billion (1.08 of EU GNI) in commitments for the 2012-2014 period as opposed to €1,025 billion (1.05% of EU GNI) in the original proposal. In payments, the amended proposal amounts to € 988 billion (1.03% of EU GNI) as opposed to €972 billion originally (1,00% of EU GNI). The increase expressed in percentage of the EU’s GNI largely stems from a lower GNI estimate than the one of June last year, and, to a lesser extent, from the inclusion of Croatia in the multiannual financial framework.

The minutes of the July General Affairs Council meeting record that many ministers voiced concerns about the amended MFF proposals:

Some considered that the increase in the overall expenditure ceiling was inconsistent with the current economic crisis and member states’ fiscal consolidation efforts, and reiterated their calls for substantial cuts. Several ministers advocated a top-down approach, meaning that the overall expenditure ceiling would be agreed upon ahead of the discussions on the rest of the MFF package. A number of ministers felt that steps needed to be taken to address the issue of “RAL” (reste à liquider) unused commitments.
Other ministers stressed the investment character of the EU budget and highlighted the important contribution that cohesion policy makes in terms of growth and employment. They regretted that as a result of the update, the Commission proposed fewer financial resources for cohesion policy in the current 27 member states. This was inconsistent with the conclusions of the June European Council which recognised cohesion policy as a major instrument for supporting investments in growth-enhancing measures. In their view, the economic crisis requires “more”, not “less” cohesion.

European Parliament position

The Parliament approved a resolution on the next MFF tabled by 5 parliamentary groups on 13 June. The joint resolution was adopted by an overwhelming majority (541 votes in favour, 100 votes against and 36 abstentions). The resolution which favoured the Commission’s proposal for a financial transaction tax as well as a new EU VAT as new own resources also got a large support (486 +, 130 -, 33 abstentions). It was the first time the Parliament had officially backed the Commission proposal for own resources, especially the FTT (the Parliament had voted in favour of the Commission’s proposal for a common system of financial transactions tax in May, but this was separate from making it part of the Commission’s own resources).

Despite the Lisbon Treaty giving to the Council the dominant role in formulating the next MFF, the Parliament is determined to maximise the opportunities for influence it has been given, making an implicit threat to use its real powers of consent and co-decision to hold up the package if its opinion is ignored. According to its resolution, the Parliament:

Strongly demands that political positions agreed by the European Council be negotiated between Parliament and the Council, as represented by the General Affairs Council, before the Council formally submits its proposals with a view to obtaining Parliament’s consent on the MFF regulation pursuant to Article 312 TFEU; stresses that the negotiations on the legislative proposals relating to the multiannual programmes will be pursued under the ordinary legislative procedure and will be finalised once an agreement on their financial envelopes is reached; is determined to make full use, as appropriate, of its consent and ordinary legislative powers, as enshrined in the Treaty.

European Council

In the light of these issues and conflicting views, the first European Council discussion on the MFF in June seems to have a relatively anodyne affair, overshadowed by the negotiations on the growth and jobs agenda as well as the broader eurozone financial crisis. The discussions revolved around two questions posed by the Council President who invited leaders, first, to share their priorities for the MFF: in which areas they think the EU should invest in the first place. Second, the Council discussed how to get the best value for money, by having policies with the right structures, incentives and controls to guarantee the biggest impact on growth.

All agreed an MFF agreement is needed quickly, before the end of the year. However, there is little evidence that the Council has engaged with the nitty-gritty of the details, including actual numbers. The European Council will have further opportunities to discuss the MFF at its meeting in October and also in December. Even at that stage the consent of the European Parliament to both the MFF regulation and the basic own resources decision must still be obtained.

Presidency work programme

The intention of the Cyprus Presidency is to develop the negotiating box so as to reach an agreement by December 2012. The next step is an informal meeting of ministers for European affairs (General Affairs Council) on 30 August when the MFF will be the sole issue on the agenda. Given the continuing distraction of the ongoing eurozone crisis and the wide range of issues on the table, it is hard to see the Cypriots making a decisive breakthrough on the dossier in a four month period. Some of these issues (such as the UK rebate) go back for decades and are hardly likely to be resolved in the immediate future.

In the absence of a strong and determined Franco-German axis, how an agreement will actually be brokered is unclear. Indeed, with the expansion of the Union to 28 countries (with Croatia’s accession next July), it is unclear if even a united Franco-German axis would any longer be sufficient to push an agreement through (see this blog post from Robert Kaiser). As France’s new Socialist government clarifies its position the points of difference with Germany are becoming clearer. Some argue that Germany is in no hurry to conclude a deal, preferring to wait until after its next elections in October 2013 so as to avoid dragging yet another issue involving transfers to other EU member states into its volatile political debate.

What happens if no agreement?

In the event that no agreement is reached on the next MFF in time, the Inter-Institutional Agreement of 17 May 2006 provides that the payment ceiling for 2014 and thereafter will be the same as for 2013, after annual technical adjustment. Some member states might actually prefer that outcome if it maintained the status quo. CAP Pillar 1 payments based on the 2013 level and allocation would be rolled over into the following year.

However, as Peter Becker argued in a post last April,

.. many lines of European expenditure are dependent upon the successful negotiation of a new MFF. The multiannual programmes in cohesion policy, the European Agricultural Fund for Rural Development of the second pillar of CAP and the multiannual framework programme for research will all end on 31st December 2013. Without new legislation, the European Union is not allowed to continue the programmes let alone to launch new spending programmes. And without a new MFF there will be no legislation for new multiannual programmes.

[Incidentally, this Budget in Perspective blog on the next EU Multiannual Financial Framework sponsored by the German Federal Foreign Office is a rich source of information from a German perspective].

The failure to reach agreement on a new MFF thus would risk to bring about a collapse of the integration project itself. The stakes are high, but so are the obstacles to reaching agreement.

Photo credit Investment Insider

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Agricultural consequences of the eurozone crisis

The consequences of the decisions at the fateful Brussels summit on 9 December 2011 will take time to assess. Whether leaders did enough to calm the markets and allow eurozone governments to refinance their enormous debts next year at reasonable interest rates will be known relatively quickly. Many commentators feel that financial markets will not be impressed, and that the EU is facing into a prolonged depression in which the break-up of the eurozone is a real possibility.

The significance of the institutional changes implied by the creation of a new inner core of EU member states pledged to achieve greater fiscal integration will only be known over a longer time span. Whether Britain, by opposing a new treaty, has lost influence and will move towards the EU’s exit door is also still unclear.

EU agriculture and agricultural policy-making in the EU will not be immune to these momentous changes. Whether the CAP budget can be safeguarded in the negotiations for the next Multi-annual Financial Framework must be increasingly in doubt. The growing likelihood of an EU recession next year, possibly inducing further economic turmoil beyond the continent, will lower demand for agricultural output and could lead to another collapse in output prices. Difficulties in Europe’s banking sector will curtail credit to farmers and to the small and medium-sized enterprises which make up the bulk of the EU’s food industry. In an extreme scenario, the EU’s prized single market in agricultural and food products could come under threat.

Implications for the CAP budget 2014-2020

Stefan Tangermann has argued strongly that the Commission’s proposal for CAP funding in the 2014-2020 period does not recognise the need for austerity which member state budgets are grappling with. Net contributors (for example, in the letter from David Cameron to the President of the Commission in December 2010 but signed also by France, Germany, Netherlands and Finland) have called for a budget in which commitment appropriations do not exceed the 2013 level and with a growth rate below the rate of inflation, implying annual budgets decreasing in real terms and even more as a share of EU Gross National Income (GNI). The European Parliament had argued that freezing the MFF at the 2013 was not realistic and that at least a 5% increase in resources was required.

The starting point for the Commission proposal for the next multi-annual financial framework is commitment appropriations of €145.65 billion in 2013 (in 2011 prices), corresponding to 1.12% of EU GNI. Commitment appropriations in the MFF would fall in 2014 to €142.56 billion, gradually rising to €150.72 billion in 2020. However, additional extra-MFF expenditure would bring total commitments to €159.13 billion in the Commission proposal (all figures in 2011 prices). Using the Commission’s projected growth in GNI over the period, as a percentage of GNI, MFF commitment appropriations would fall from 1.08% in 2014 to 1.03% in 2020, averaging 1.05% over the period (these figures would be 1.13% in 2014, falling to 1.09% in 2020 and averaging 1.11% over the period if the extra-MFF expenditure is included). (All figures from the tables in the Commission’s MFF proposal COM(2011) 500).

The projected GNI shares are dependent on the Commission’s economic growth assumptions for the EU. The Commission regularly updates its growth forecasts which are used as an input into its various “European Semester” policy surveillance activities, such as the Annual Growth Surveys, Stability and Convergence Programmes, National Reform Programmes as well as the MFF projections.

The basis for the MFF projections was its assumption that GDP rates will fall from an average of 2¼% in the 1998-2007 period to 1½% in the 2011-2020 period, although with significant differences across countries. If growth were further weakened as a result of the eurozone crisis, then the MFF proposal (which is set in absolute amounts) could result in a situation where the EU budget started to grow as a percentage of EU GNI. This would further strengthen the hand of those member states seeking to reduce EU budget spending, and would put further pressure on the budget proposed for the CAP.

Outlook for economic activity

The recent OECD Economic Outlook no. 90 (published 28 November last) presented a sombre outlook for EU economic activity even while assuming that monetary policy remains very supportive, that sovereign debt and banking sector problems in the euro area are contained, and that excessive fiscal tightening will be avoided. It shows the eurozone in recession in the last quarter of this year and the first quarter of next year. It assumes that confidence will recover gradually in the second half of 2012 if it becomes clear that worst-case outcomes have been avoided (it refers to this as the muddling-through scenario).

The OECD Economic Outlook also examines a downside scenario which assumes that contagion from a disorderly sovereign debt restructuring, for instance in Greece, is widespread in the euro area. The scenario does not allow for the possibility of exit from the euro area, or for stronger expectations thereof, or for possible major discontinuities that might arise if any major financial institutions ceased to operate. It projects that, in this scenario, the level of output in the OECD economies would be 5% lower in 2013 than in the muddling through scenario. A change of this magnitude from the muddling-through baseline would be associated with a deep recession in the euro area, and also push the United States and Japan into recession. It would also give rise to strong disinflationary, or even deflationary, forces.

The Economic Outlook continues:

If everything came to a head, with governments and banking systems under extreme pressure in some or all of the vulnerable countries, the political fall-out would be dramatic and pressures for euro area exit could be intense. The establishment and likely large exchange rate changes of the new national currencies could imply large losses for debt and asset holders, including banks that could become insolvent. Such turbulence in Europe, with the massive wealth destruction, bankruptcies and a collapse in confidence in European integration and cooperation, would most likely result in a deep depression in both the exiting and remaining euro area countries as well as in the world economy.

The OECD study does not look at the implications of such scenarios for commodity prices, but it is at least plausible that we would see price falls for agricultural commodities similar to those that occurred in 2009 as economic activity collapsed in the wake of the Lehmann Brothers bank collapse in the United States.

Implications for the EU’s single market

It may seem strange to link the future of the single market with the eurozone crisis. After all, many EU members enjoy the benefits of the single market without adopting the euro. The legislation that underpins the single market will remain in place regardless of what happens to the euro. At least that is the hope, and the argument that David Cameron made explicitly in his press conference after the summit arguing that life in the EU, particularly the single market, will continue as normal.

Others disagree. The Polish Foreign Minister made an impassioned and remarkable speech in Berlin at the end of last month in which he appealed to Germany to take a more active role in helping the eurozone to survive (the speech ran as an op-ed in the Financial Times on Nov 28th last). Sikorski wrote: “The break up of the eurozone would be a crisis of apocalyptic proportions, going beyond our financial system.” He went on to suggest that the EU’s single market would be unlikely to survive such a trauma.

It is indeed very hard to imagine that we would see tariffs reintroduced on agricultural trade between EU members. But a few months ago, the idea that a eurozone member state might leave the euro was also unthinkable. A country forced to leave the eurozone, and faced with the calamitous contraction in economic activity that would result, might be very tempted to put in place what would be no doubt called temporary import surcharges (although the currency depreciation that would accompany exit from the euro zone would in itself provide a significant barrier to imports). The rise of nationalistic and populist sentiment in other countries particularly if unemployment (currently over 10% in the euro zone and almost 10% in the EU as a whole) continues to rise could also create a climate conducive to the return of protectionism.

At present, there may be only a very small probability of the break-up of the single market. But there is no doubt that this is a dangerous time for Europe. EU agricultural policy, and the food and farming sectors that it regulates and supports, is unlikely to remain unaffected.

Update added 17 December 2011: The AgriCommodities Research Team at Rabobank have just produced their end-of-year forecast for agricultural commodities in 2012 which takes a more relaxed view of the impact of the eurozone crisis and recession on agricultural market prices. According to Rabobank, “slowing global economic growth in 2012 will only have a modest impact on agri commodity prices as resilident emerging-market demand offsets anaemic growth expectations in the developed world”. They go on to note that supply is forecast to be historically tight for many agri commodities, and supply-side concerns will remain a supportive factor for most markets. They conclude:

In general, recessions do not impact agri commodities uniformly. In fact, supply dynamics are much more important for price movements, and this is expected to be the case in the event of a recession in 2012. Recessions have little effect on the demand side in the developed world and economic contractions do not generally impact supply, which is much more dependent on long-term prices and weather. The downside risk for commodities is much larger if a sizeable slowdown in emerging markets occurs, as this is the source for much of the expected expansion in consumption.


This post was written by Alan Matthews