The Future Financing of the Common Agricultural Policy · 2005. 6. 15. · § Lord Cameron of Dillington Baroness Maddock Lord Christopher § Baroness Miller of Chilthorne Domer

HOUSE OF LORDS

European Union Committee

2nd Report of Session 2005-06

The Future Financing of the Common

Agricultural Policy

Volume I: Report

Ordered to be printed 6th June 2005 and published 15th June 2005

Published by the Authority of the House of Lords

London : The Stationery Office Limited £price

HL Paper 7-I

The European Union Committee The European Union Committee is appointed by the House of Lords “to consider European Union documents and other matters relating to the European Union”. The Committee has seven Sub-Committees which are: Economic and Financial Affairs, and International Trade (Sub-Committee A) Internal Market (Sub-Committee B) Foreign Affairs, Defence and Development Policy (Sub-Committee C) Environment and Agriculture (Sub-Committee D) Law and Institutions (Sub-Committee E) Home Affairs (Sub-Committee F) Social and Consumer Affairs (Sub-Committee G)

Our Membership The Members of the European Union Committee are: Lord Blackwell Lord Maclennan of Rogart Lord Bowness Lord Marlesford Lord Brown of Eaton-under-Heywood Lord Neill of Bladen Lord Dubs Lord Radice Lord Geddes Lord Renton of Mount Harry Lord Goodhart Baroness Thomas of Walliswood Lord Grenfell (Chairman) Lord Tomlinson Lord Hannay of Chiswick Lord Woolmer of Leeds Lord Harrison Lord Wright of Richmond The Members of the Sub-Committee which carried out this inquiry (Environment and Agriculture, Sub-Committee D) are:- § Lord Cameron of Dillington Baroness Maddock Lord Christopher § Baroness Miller of Chilthorne Domer Countess of Mar Earl Peel Lord Haskins Lord Plumb Lord Lewis of Newnham Lord Renton of Mount Harry (Chairman) Lord Livsey of Talgarth Lord Sewel § Member since 25 May 2005

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CONTENTS

Paragraph Page

Introduction 5

Summary of Conclusions 6

Chapter 1: Funding Agricultural and Rural Policy—the EU Budget 1 11

Chapter 2: Introducing the Common Agricultural Policy 8 13 Table 1: Commission’s proposed expenditure for Pillars 1 and 2 2007-2013 13

The Brussels Ceiling 11 13 Box 1: The Changing Face of the CAP 14

The Reformed CAP: Pillars 1 and 2 12 14 Box 2: What is cross-compliance? 15 Box 3: What is modulation? 15

Continuing reform: 2007-2013 15 16

Chapter 3: Strains on the CAP Budget 19 17 Table 2: European Commission’s spending projections for the CAP 2006-2013 17

Implications of a 1% budget 21 18 Operation of the financial discipline mechanism 34 20

Box 4: The financial discipline mechanism in practice 21 Bulgaria and Romania 37 21 The Brussels Ceiling 43 22

Chapter 4: Pillar 1 spending—is it Justified? 46 23 The pros and cons of the single farm payment 49 23 The future of Pillar 1 61 25

Chapter 5: Rural Development—The Rise of Pillar 2 63 26 Box 5: The existing Regulation 27

New rural development arrangements 68 27 Box 6: The new Rural Development Policy 28

What does rural development achieve? 69 28 Is there a need for an EU rural development policy? 71 29

Table 3: Translation of rural development regulation measures into schemes in England 30 Table 4: Total planned expenditure 2000-2007 on rural development programmes by category 31

Financing rural development within the EU 83 32 Table 5: Funding available for Pillar 2 on assumption that Pillar 1 cannot change 34

Structure of EU financing 93 34 Box 7: The new Member States 34 Box 8: LEADER 36

Chapter 6: Global Pressures: The WTO 107 38 The end of subsidy in sight—the impact on the CAP 112 39

Box 9: What are the WTO trade boxes? 39

Chapter 7: Looking Ahead: The CAP beyond 2013 117 41 Continued expansion of the Union 122 41

Appendix 1: Overview of the new financial framework 2007-2013 as proposed by the Commission COM(2004) 498 43

Appendix 2: Breakdown of proposed agriculture and fisheries expenditure 44

Appendix 3: Cross-compliance 45

Appendix 4: Membership of Sub-Committee D 48

Appendix 5: List of Witnesses 51

Appendix 6: Call for Evidence 53

Appendix 7: Glossary of Acronyms and Technical Terms 55

Appendix 8: Recent Reports 57 NOTE: The Report of the Committee is published in Volume I, HL Paper No 7-I. The Evidence of the Committee is published in Volume II, HL Paper No 7-II.

INTRODUCTION ___________________________________________________________________________________________________________________________________________________________________________________________________________________

The Common Agricultural Policy (CAP) is at a crossroads. There are many who say that it should disappear altogether and others who point out that, without it, the great majority of farmers in the European Union (EU) would go out of business. Ironically, at the same moment as the European Commission is asking for an overall increase in funding of 35% to deal with the needs of the 10 new Members States, to be followed in 2007 by the accession of Bulgaria and Romania, their proposed budget for the CAP is a very tight one and effectively shows no increase between 2007 and 2013. However, some of the most insistent demands from new EU Members will be for help with their antiquated systems of minute rural holdings; while farmers in the EU-15 countries are having to deal with the complication of switching from production subsidies to single farm payments which require compliance with environmental objectives. Terms such as “cross-compliance”, “modulation” and “decoupling” pepper the papers that our agricultural community receive from Defra. This report examines these problems. We look at the intricacies of the current CAP changes and we make recommendations for the future. Some of these will be unpopular either with the farmers or with environmentalists. But, in our view, they are necessary if the European countryside is to remain beautiful, productive and a home for working families.

SUMMARY OF CONCLUSIONS

Funding Agricultural and Rural Policy—The EU Budget

The pressures on Pillar 1 will increase even as the budgetary ceiling remains static. This will place a tremendous strain on the Pillar 1 funds allocated for 2007-2013. (paragraph 20) Were a reduction [to a 1% EU budget] to be agreed, it is highly unlikely that those responsible for the reduction would be prepared to accept that the necessary cuts in spending should fall only on the non-agricultural sections of the budget. (paragraph 22)

To re-open the Brussels ceiling now would be to create further instability in an already complex negotiation. We therefore do not recommend that the agreement be re-opened. (paragraph 24) On the other hand, we acknowledge the overwhelming evidence we received that spending on the single farm payment and market support measures within the enlarged EU has the potential to exceed the Pillar 1 Brussels Ceiling. (paragraph 25)

Enlargement will be the main pressure facing the 2007-2013 CAP budget. (paragraph 28). The 2004 wave of enlargement has changed the needs as well as the number of EU farmers. (paragraph 29) Enlargement will also result in increased levels of EU agricultural production, leading to further pressures on the CAP budget. (paragraph 32) The demands placed on Pillar 1 market support and intervention measures seem likely to grow significantly following accession of the CEECs. (paragraph 33)

The financial discipline mechanism is a welcome measure and will prevent over-run of Pillar 1 spending. We urge the European Council to ensure that the Council of Agriculture Ministers is not allowed to alter this measure. Its effectiveness in preventing any over-run of the Pillar 1 budget must not be weakened. (paragraph 36) The most foreseeable reason for the financial discipline mechanism’s use will be the planned accession of Bulgaria and Romania in 2007. (paragraph 37)

It is clear to us that farmers in the EU-15 are likely, from 2007 onwards, to receive reduced single farm payments, and these will dwindle further to 2013. The European Commission must make this clear to the Council of Agriculture Ministers. (paragraph 42)

It is clear to us that ceilings have been set which do not fully anticipate the demands on the 2007-2013 Pillar 1. (paragraph 43) We believe the Brussels ceiling represents a missed opportunity to plan fully for the enlargement of the EU. In particular, as we have shown, due thought has not been given to the future financing of the EU agriculture sector following accession of Bulgaria and Romania. Future enlargement should be planned for much more carefully when preparing the Financial Perspective for the period beyond 2013. (paragraph 44)

We reiterate our previous recommendation that the Council should never again seek to pre-empt negotiations on the Financial Perspective by agreeing certain ceiling limits beforehand. (paragraph 45)

Pillar 1 Spending—Is It Justified?

The British Government are to be commended for undertaking voluntary modulation above and beyond their mandatory requirements, but it is a matter of concern that the United Kingdom is the only Member State to do this, because it is bound to raise issues of equity and distortion of the competition in the British farming community. (paragraph 48)

We fully acknowledge that the non-marketable services farmers provide should be recognised. Such activity justifies payment for the environmental, animal welfare and other “non production services” farmers are expected to provide to society. We are not however convinced that the single farm payment will achieve this objective in the most efficient manner. (paragraph 53)

In the long term we believe a separate fund focussed purely on achieving environmental objectives could be a more efficient way to pay farmers for their environmental contribution. (paragraph 54) Such a payment should be considered during the 2008 review, in order to be established during the 2014+ financial perspective. (paragraph 54)

We acknowledge, however, that there are benefits to the continuation of the single farm payment in the short-term. The decoupling of financial support of the agricultural sector from agricultural production requires some transitional compensation during the period when the industry is adjusting to a liberalised market from which support is being withdrawn. The Committee believes that the single farm payment can be justified only on these grounds. (paragraph 55)

The single farm payment has been the vehicle for the most radical reforms of the CAP and we commend the European Commission for this work. (paragraph 57) [However] we recommend the continued use of the single farm payment only for the 2007-2013 period as a transitional tool to i) provide stability and ii) prepare farmers for the more market oriented and environmentally focussed future of European agriculture. (paragraph 58) We acknowledge that environmental payments should continue in recognition of the contribution farmers make to the environment. (paragraph 59)

It would be extremely disappointing if the benefit to farmers of receiving a consolidated single payment was negated by the time and paperwork required in applying for it. Immediate thought must be given to how this can be improved. (paragraph 60)

Following the decoupling of subsidy from production, current levels of Pillar 1 expenditure, even following reform, may not be necessary. It is clear that if the EU continues to pay out in excess of €38 billion a year for the single farm payment beyond the 2007-2013 Financial Perspective period, there will still remain a major distortion in the domestic and international markets for agricultural commodities. (paragraph 61)

Rural Development—The Rise of Pillar 2

We commend the intentions of the Commission to pull the strands of rural development into a single Regulation funded with a single financial instrument. (paragraph 68)

It is our opinion that a review of the objectives of rural development is needed in order to clarify what that policy is trying to achieve. It is not acceptable for rural development to be used as a continuing subsidy for farmers, but instead the Commission should develop a clear rural development agenda aiming to improve economic and social development. (paragraph 79)

It is essential that rural development schemes should not be allowed to develop in such a way as to damage the environment. We believe that an expert study should be carried out to find out how far agri-environment schemes and cross-compliance overlap in order to clarify rural development, environmental and agricultural objectives. (paragraph 80)

Rates of compulsory modulation were agreed under the Brussels ceilings and will therefore exist up to 2013. The first test that is always applied to rural development measures must be that they are effective and value-for-money. Only if this test is met could we recommend a straightforward fiscal transfer into a rural development budgetary heading, without linking the funds to agricultural objectives. (paragraph 82)

The Committee received compelling evidence that rural development funding from the EU budget was only one contributory factor in United Kingdom and EU-15 rural development policies and agrees with the movement of funds towards the new Member States. As EU rural development funding is likely to remain relatively static for the EU-15 we recommend that, where possible, these countries should seek to supplement rural initiatives through their own national budget. (paragraph 86)

Her Majesty’s Treasury stated that funding rural development primarily from national funds need not mean a reduction in funding. While being somewhat sceptical of this approach, we would encourage it and reinforce the view that there are real needs in the rural communities in the United Kingdom which should not be neglected. The existence of co-financing means that EU funds cannot be accessed without appropriate matching at the national level. (paragraph 88)

It is likely that if the net contributor Member States succeed in having the global EU budget reduced, the rural development fund will be substantially diminished. (paragraph 90) If all of this reduction were to be applied to Pillar 2, the amount of money available for rural development 2007-2013 would be cut from €88.6 billion to €40 billion—a reduction of 55%. We strongly recommend that such a reduction be avoided. (paragraph 91)

We were impressed by the success of rural development funding through the LEADER approach which enables very small projects to be established. We do not believe that rural development should be included in structural and cohesion funds, but that a separate rural development heading should remain to fund small projects which we feel may be lost under structural and cohesion policy. (paragraph 98) In order to align rural development funding to new Member States’ needs, we recommend that the percentage of funds directed towards Axis 3 (wider rural development) should be increased. (paragraph 99)

We support the British Government’s position of basing spending on need rather than past expenditure because this will ensure that disadvantaged regions in all Member States will benefit fully from rural development funding. (paragraph 101)

In our judgement it is most important that, in the 2008 review the Commission identify how rural development targets will be set and reviewed. This will be necessary in order to establish local objectives, assess the success of individual projects and avoid unjustified or fraudulent spending. (paragraph 104)

A major conclusion of this report is that market support and direct subsidies to farmers will become of declining importance. The restructuring of rural areas on the other hand, has become of paramount importance. This is particularly true in the new Member States and in those countries likely to join the EU during the next ten to fifteen years. (paragraph 105)

There is a need to build on the rural development work already undertaken by the Commission. We recommend that a new European Rural Development policy, concentrating particularly on the rural poverty problems of the least advantaged areas of the EU, should be established. At the same time, all rural development schemes should pay due attention to the protection of the rural environment. (paragraph 106)

Global Pressures: The WTO

We commend the EU for its decision to “move” on export subsidies. The EU must do all it can to build an environment where farm production is based on market demand and not subsidy entitlement. The EU should negotiate on the basis that it will firmly commit itself to phasing out its agricultural export subsidies within a specified time frame. It will be extremely difficult to secure the agreement of other developed countries to this objective, however, that should not stop the EU from making every effort to achieve it. (paragraph 110)

The decoupling objective of the 2003 reforms is commendable. The EU must build on this to reform the CAP fully and eliminate all market support measures. (paragraph 114)

We recommend that the EU should push ahead to attain a successful Doha agreement. Political will to cut subsidies and create freer trade must be met with strong action to move all EU subsidies into the Green Box by a specified date. Such action must be accomplished if the CAP is to be fully reformed. (paragraph 116)

Looking Ahead: The CAP Beyond 2013

We recommend that the 2008 review focus on the future of the CAP after 2013. It is essential that during the 2008 review the Commission prepares further reforms for the CAP so that it is best suited to deal with the challenges it will face during the Financial Perspective of 2014-2020. (paragraph 121)

The likely future enlargement of the Union will be the most significant pressure on the CAP post-2013 and the strongest driver of change. (paragraph 123) If Turkey does accede to the EU during the next budgetary period, it will provide a clear impetus to have completed reform of the CAP by the end of the 2007-2013 budget period. (paragraph 124)

Such reform must ensure the future CAP is fully able to meet the needs and demands of the very different rural and agricultural conditions of its many Member States. A successful Doha agreement would pave the way for the

end of all market support, intervention and export subsidies. The single farm payment should be phased out and a separate environmental fund established to recognise and reimburse farmers for the non-production benefits their activity brings to society. Meanwhile, the restructuring and modernising needs of new Member States’ agricultural sectors should be provided for out of a single rural development fund completely separate from any other agricultural objectives. Richer Member States should fund a higher proportion of their own rural development programmes. (paragraph 125)

Tough policy decisions will face future CAP policy-makers considering an EU of 27, 29 or even more Member States. The disparity between the agricultural needs of the EU-15 and those of new Member States is only likely to grow wider. That reason alone justifies the need for further substantial CAP reform. This must be fully considered in the 2008 review and completed in the period 2014-2020. (paragraph 126)

The Future Financing of the Common Agricultural Policy

CHAPTER 1: FUNDING AGRICULTURAL AND RURAL POLICY—THE EU BUDGET

1. Negotiations are underway to set the next seven year budget of the European Union1. The Council of Ministers and the European Parliament are currently negotiating on the basis of recommendations from the European Commission, known as the “Financial Perspective”, which will determine the expenditure of the European Community for the period 2007-20132.

2. The Common Agricultural Policy (CAP) is funded by taxpayers from the EU Member States as part of each government’s contribution to the EU budget. Almost half the EU budget is spent on the CAP while 5.2% of the EU work force is employed in agriculture3.

3. Supporters of the CAP say it has succeeded in making the EU almost self sufficient in major food products, and in providing security to farmers. Others argue that the CAP has raised food prices, cost taxpayers dearly in maintaining subsidies, distorted world trade and harmed the environment. However, fierce competition has resulted in the retail price of food to consumers remaining relatively low. At the same time, prices obtained by farmers and other primary producers have been subjected to considerable downward pressure.

4. Major reform of the CAP was carried out in 2003 in an attempt to address these concerns. During the next budgetary period the full impact of these changes will become clear. However CAP funds will face unprecedented pressures during 2007-2013. For the first time agricultural funds will have to be made available for a 25 Member State EU4. Preparations must also be made to accommodate the planned accession of Bulgaria and Romania in 2007, and the possible accession of Turkey and of other applicants.

5. To add further to the complexity, the six net contributor Member States are insisting on a smaller budget than the Commission has proposed. If they were to achieve this, it would be unlikely that CAP funds, by far the largest single item in the EU budget, would escape unscathed.

6. The backdrop to the Financial Perspective negotiations is therefore one of change, uncertainty and much political wrangling. Against this background we decided to consider the pressures which the Commission’s proposed budget for CAP expenditure on direct payments, market support and rural

1 Negotiations are based upon the budgetary proposals published by the European Commission in February 2004:

Building our common Future – Policy challenges and Budgetary means of the Enlarged Union 2007-2013 (COM (2004) 101). The budget must be agreed unanimously by the 25 heads of government of the EU.

2 A report by our Committee has examined the implications of the overall budget: European Union Select Committee, 6th report, (2004-05) Future Financing of the European Union, (HL 62).

3 Agriculture in the European Union - Statistical and economic information 2004, European Commission website. 4 Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovenia and the Slovak

Republic joined on 1 May 2004.

12 THE FUTURE FINANCING OF THE CAP

development will face during the period 2007-2013; and whether the CAP as structured will be able to meet and deliver on those demands.

7. We started our inquiry with the following questions in mind:

• What funds will be available from the EU budget to finance agricultural and rural policy in the period 2007-2013?

• What will be the potential strains on those funds?

• In what ways could the methods of funding be altered better to aid the development of European agricultural and rural policy?

This report:

• considers the context of the current budget negotiations;

• examines the Commission’s proposed expenditure ceilings;

• scrutinises the demands upon agricultural and rural spending;

• analyses the need for and potential scope for future agricultural reform; and;

• comments on the future of European agricultural and rural policy beyond 2013.

We make this report to the House for debate.

THE FUTURE FINANCING OF THE CAP 13

CHAPTER 2: INTRODUCING THE COMMON AGRICULTURAL POLICY

8. The CAP is one of the most important EU policies. It is made up of two “Pillars”:

• Pillar 1: market support measures and direct subsidies to EU producers

• Pillar 2: rural development programmes

9. The Commission is proposing the following budgetary ceilings for the two Pillars of the CAP for the period 2007-20135:

TABLE 1

Commission’s proposed expenditure for Pillars 1 and 2 2007-2013

All figures in billions of euros 2007 2008 2009 2010 2011 2012 2013 Total

2007-2013

Market and direct aids (Pillar 1)

43.5 43.7 43.4 43.0 42.7 42.5 42.3 301.1

Rural development (Pillar 2)

11.8 12.2 12.7 12.8 13.0 13.1 13.2 88.8

10. Based on 2004 prices, in nominal terms, the proposals present a further increase in spending, but over the whole 2007-2013 period CAP expenditure would fall to 29% of total EU expenditure, and by 2013 would only comprise 26% of that year’s budget. That compares with 45% of the budget in 2006 and 65% in 1988. If the Commission proposals for the next Financial Perspective are adopted, the budget will increase by around 35% in order to accommodate ten new Member States. As far as the agricultural budget is concerned, no increase is planned. In fact for the EU-15 there will be a decline as further enlargement will have to be met though existing funds.

The Brussels Ceiling

11. In 2002, France’s president, Jacques Chirac, and Germany’s chancellor, Gerhard Schröder, agreed that spending on Pillar 1 of the CAP (direct subsidies and market support but not rural development spending) should not rise by more that 1% a year in cash terms until the end of the next Financial Perspective in 2013. This is known as the Brussels Ceiling and the agreement was endorsed by the European Council in October 2002. This effectively freezes Pillar 1 expenditure until 20136 and is the basis for the Commission’s budgetary proposals for agriculture.

5 See Appendix 1 for an overview of the whole EU budget for the period 2007-2013. Appendix 2 provides a

detailed breakdown of proposed CAP expenditure. 6 In fact, as the agreement was that Pillar 1 spending should rise by no more than 1% a year in cash terms, this

implies small annual cuts in real terms.


BOX 1

The Changing Face of the CAP

The CAP of today bears little resemblance to the CAP of the 1960s. The emphasis of the early CAP was on increasing food production and protecting the incomes of farmers, following the shortages of World War II. The CAP sought to maintain guaranteed prices through market manipulation and frontier protection. To a great extent this policy succeeded and allowed the Community to become self-sufficient in food production in a very short time.

However, by the 1980s, the success of this policy was resulting in an almost permanent over-supply of major food commodities. These had to be either exported (with subsidies) or stored or disposed of within the EU. Such measures were increasingly costly, distorted world markets and proved unpopular with European taxpayers. Increasing international concern over the trade distorting effects of the CAP and other developed country farm policies, and the environmental implications of increasingly intensive agriculture led to overwhelming pressure to reform the policy in the early 1990s.

Agricultural trade issues dominated the Uruguay Round of General Agreement on Tariffs and Trade negotiations which culminated in the Marrakech accord of 1994. The Uruguay Round Agreement on Agriculture, which was a major feature of that accord, imposed important limitations on the subsidising of farm exports, and reduced import barriers. The CAP reforms applied in 1993-6 were the response to this agreement. The Community was forced to cut prices for cereals and other major commodities so that the need to subsidise exports was substantially reduced, and so that domestic production could remain competitive against imports. An important element of this new policy was the introduction of “compensation” to farmers, through direct subsidies, for the reduction of guaranteed prices.

Nonetheless, through the 1990s, the EU continued to operate a policy which maintained important elements of the old CAP: intervention buying, export subsidies and a high import tariff, in addition to the new direct payments. Production and the cost of the CAP continued to increase, with the agricultural budget increasing by over 30 per cent between 1992 and 2000.

The reformed CAP: Pillars 1 and 2

12. The current approach to European agricultural and rural support was essentially determined by the 1993-96 reforms, and further refined by the Agenda 20007 adjustments within the Financial Perspective for 2000-2006. Agenda 2000 further reduced internal market prices and compensated farmers by increased direct payments under what became known as the first Pillar of the CAP. The various elements of support for rural development8 were amalgamated under the so-called second Pillar.

13. Following the mid-term review9 in 2003, a number of radical reforms were agreed10. These began a process of change that will fundamentally alter the

7 Agenda 2000 was a European Commission paper adopted in 1997 which set out a strategy for enlarging the EU

and at the same time for reforming EU farm spending and regional aid in advance of new countries joining the EU.

8 These include modernising farms; producing safe, quality products; ensuring fair and stable incomes for farmers; meeting environmental challenges; fostering supplementary or alternative job-creating activities; and improving living and working conditions and equal opportunities.

9 For more see our report Mid-Term Review of the Common Agricultural Policy: External Implications (10th report, HL 62).


way in which European farmers’ incomes are supported. The single farm payment (which decoupled support from production) was introduced, together with provisions for cross-compliance (making payment conditional on the recipient meeting certain environmental and animal welfare conditions) and for reductions to be made from direct payments (“modulation”) in order to provide additional Community support for rural development.

BOX 2

What is cross-compliance?

Full granting of the single farm payment to farmers is linked to compliance with statutory environmental, food safety, animal and plant health, and animal welfare standards. In addition, Member States have to ensure that all agricultural land is “kept in good agricultural and environmental condition”—especially land which is no longer used for production purposes.

In the case of non-respect of these “cross-compliance” measures, direct payments can be reduced or withheld. In the case of negligence, the overall payment to be withheld is set at a maximum of 5%, or 15% for repeated offences. For intentional non-compliance, the fine is not less than 20%, and may go as far as total exclusion from receipt of payment for one or more years. 25% of the total receipts from cross-compliance penalties may be retained by the Member State—the remainder is re-credited to the main CAP budget.

See Appendix 3 for the full list of “cross-compliance” measures.

BOX 3

What is modulation?

The term “modulation” was originally used to describe the adjustment of payments between farms of different sizes. In its current usage, it is used to describe the transfer of funds from direct subsidy payments to rural development expenditure.

Modulation moves money from single farm payment funds (Pillar 1) in order further to fund rural development programs under Pillar 2. Compulsory modulation is being applied in each EU-1511 Member State from 2005 at a rate of 3%, rising to 4% in 2006 and to its maximum of 5% in 2007, continuing at 5% until 2012.

In addition to compulsory modulation, Member States or regions can opt for “voluntary” modulation of up to 20% to help fund certain rural development measures initiated before 2006. Funds resulting from voluntary modulation will be retained in the region in which they are raised. Any voluntary modulation expenditure must be co-financed by national funding.

14. The 2003 reforms differentiated between the two Pillars of the CAP: Pillar 1 aims to provide a direct payment to farmers, subject to environmental conditions, as opposed to indirect market subsidies. In future, farmers should produce according to market demand but intervention arrangements will continue. Pillar 2 supports i) agriculture as a provider of public goods (e.g. through funding environmental stewardship schemes) and ii) the development of rural areas (e.g. through improving agricultural marketing, diversification out of agriculture and local structural improvement).

10 Principally in Council Regulation (EC) No.1782/2003. 11 Belgium, Finland, France, Denmark, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,

Spain, Sweden, the United Kingdom.


Continuing reform: 2007-2013

15. Our inquiry has addressed the question of whether the budget proposed by the Commission will be adequate to meet the funding demands of CAP policies for 2007-2013. More importantly, we have considered whether the two Pillars of the CAP will be effective in implementing the objectives of those policies.

16. The reformed CAP strives to address agricultural problems as well as alleviating more general rural poverty. The 2003 reforms were designed to overcome this fundamental agricultural policy challenge. However, the difficulties posed by enlargement, as demonstrated in evidence to us, highlight that this problem has not been solved. Payments designed to compensate EU-15 farmers for reductions in market support do not of course solve obvious rural poverty problems in the new Member States.

17. The Commission released its proposed budget for 2007-2013, seeking 1.14% of gross national income (GNI), but a group of net contributor countries including the United Kingdom have responded, wanting to keep spending at a lower 1% GNI. This debate will affect the levels of spending which will be available to meet CAP commitments.

18. At the same time the organisational structure of the CAP’s financial instruments is currently being debated within the context of the next Financial Perspective. The Commission has brought forward two proposals12 aimed principally at stressing the role of the CAP’s rural development Pillar. The current division of the financial instruments would make way for a single framework within which a single fund13 would provide rural development financing. As part of this report, we consider whether these further reforms to the CAP will enable it to meet effectively the demands of European agriculture today.

12 No 11495/04 Proposal for a Council Regulation on support for rural development by the European Agricultural

Fund for Rural Development (EAFRD); and No 11557/04 Proposal for a Council Regulation on the financing of the common agricultural policy.

13 European Agriculture Fund for Rural Development (EAFRD)


CHAPTER 3: STRAINS ON THE CAP BUDGET

19. The proposed Financial Perspective for 2007-2013 allocates significantly more funds to Pillar 1 than Pillar 2 (see Table 1). However, whereas Pillar 2 funding levels are set to increase from €10.5 billion in 2006 to €13.2 billion in 2013, Pillar 1 levels will stay the same as 2000-2006 allocations. Market support and direct subsidy expenditure (Pillar 1) will remain static at around €42-43 billion per year. This represents the 2002 Council agreement—the so-called “Brussels Ceiling”—to freeze Pillar 1 spending.

TABLE 2

European Commission’s spending projections for the CAP 2006-2013

Breakdown of Pillars 1 and 2 compared to Brussels Ceiling

20. Our evidence highlighted that Pillar 1 will face increasing strain during the

2007-2013 budgetary period14. It must cover the cost of direct aid payments and market support to the EU-15 as well as the new Member States; the cost of incorporating Romania and Bulgaria into the European agricultural market from 2007; and meet the cost of additional reforms of the sugar, fruit and vegetable and wine market regimes which are likely to take place in 2006-2007. The pressures on Pillar 1 will increase even as the budgetary ceiling remains static. This will place a tremendous strain on the Pillar 1 funds allocated for 2007-2013.

14 In this chapter we consider the potential pressures on Pillar 1 which is the largest component of the CAP budget.

In Chapter 5 we consider the detail of Pillar 2 funding.

0

10

20

30

40

50

60

BIL

LIO

N E

UR

O

Pillar 1 Market supportmeasures

13.3 8.4 7.6 8 6 5.2 4.4 3.6

Pillar 1 market support anddirect aid measures

43.7 43.5 43.7 43.4 43 42.7 42.5 42.3

Pillar 2 Rural developmentexpenditure

10.5 11.7 12.2 12.7 12.8 12.9 13.1 13.2

Brussels ceiling on Pillar 1 45.306 45.759 46.217 46.679 47.146 47.617 48.093 48.574

Pillar 1 Direct payments tofarmers

30.4 35.1 36.1 36.3 37 37.5 38.1 38.7

2006 2007 2008 2009 2010 2011 2012 2013


Implications of a 1% budget

21. An initial stress which has been placed on a ceiling which is, as the Commission told us, “already very tight” (Q 366)15 is the ongoing political negotiations on the overall EU budget. The six net contributor Member States are suggesting that the overall EU budget be reduced. The United Kingdom Government, together with those of Austria, France, Germany, the Netherlands and Sweden, considers the Commission’s overall proposals for a 35% real terms increase in the EU budget to be unrealistic and unacceptable. Of course, the prime reason for the increase is the accession of ten (soon to be twelve) countries. They argue that the Commission’s requirement of an annual budget equivalent to 1.14% GNI is too high and instead have called for the total budget to be limited to only 1% of GNI16. Such an adjustment would reduce the overall EU budget by 12.3% from €158,450 million in 2013 to €138,960 million.

22. Were such a reduction to be agreed, it is highly unlikely that those responsible for the reduction would be prepared to accept that the necessary cuts in spending should fall only on the non-agricultural sections of the budget. Since agriculture is likely to remain the most significant expenditure item, they would be likely to argue that cuts should also be applied pro rata to agricultural spending. If this occurred, the total available for Pillar 1 would be reduced from the Commission’s estimate of €43.5 billion for 2007 down to €38.15 billion; and of €48.57 billion for 2013 down to €37.1 billion. The total available for Pillar 1 in the 2007-13 period would be reduced from €302 billion to €265 billion. Assuming that the 12.3% cut were applied to the whole agricultural budget, the total for both Pillars would be reduced from €390 billion to €342 billion.

23. The British Government maintain that a 1% GNI budget is feasible and told us that with “growth and reprioritisation on those policy areas with significant EU value added”, a reduced EU budget would still be sufficient to support the Union’s agriculture priorities. However, Mr Stefan Lehner, Head of CAP and Structural Policies Unit of the Commission’s Budget Directorate-General, told us that “one per cent financial perspectives are not imaginable without reopening the 2002 ceiling for the first Pillar” (Q 458).

24. It is unlikely that the political will would exist to renegotiate the Pillar 1 ceilings, given that they were agreed as part of the 2002 Brussels agreement to act as “compensation” to EU farmers for the 2003 scaling down of market support. To re-open the Brussels ceiling now would be to create further instability in an already complex negotiation. We therefore do not recommend that the agreement be re-opened.

25. On the other hand, we acknowledge the overwhelming evidence we received that spending on the single farm payment and market support measures within the enlarged EU has the potential to exceed the Pillar 1 Brussels Ceiling. Even the British Government believe expenditure will exceed the budgetary ceiling by as early as 2008. Lord Whitty, the Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs, told the 2005

15 All references to evidence refer to volume II of this Report 16 Austria, France, Germany, the Netherlands, Sweden and the United Kingdom: letter to President Prodi, 15

December 2003.


Oxford Farming Conference17, that “irrespective of wider financial reform the cap set on Pillar 1 expenditure by the Brussels Ceiling will be hit by 2008 as direct [Pillar 1] payments to the 10 accession countries increase—earlier if Bulgaria and Romania are members.”

26. It is not generally realised that the reforms of 2003 did not eliminate the traditional market support measures of the CAP. Market intervention and export subsidies continue to be used, in combination with high import tariffs, to maintain high market prices within the common EU market. This means that, particularly for cereals, dairy products, sugar and Mediterranean commodities (mainly olive oil and wine), this official market manipulation will continue to operate until the end of the 2007-2013 budgetary period. Because this system guarantees prices for EU farmers which are frequently greater than international prices, expenditure on these market measures is still, and will remain, significant.

27. Evidence to us indicates such expenditure will be greater than currently estimated by the European Commission. Mr Séan Rickard, Senior Lecturer in Business Economics at Cranfield School of Management, told us that, “all the evidence to date is that production will keep growing. There will be more milk or milk products to dispose of; there will certainly be more cereals to dispose of; and I very much doubt if we will see much in the way of a reduction in beef production” (Q 19) 18.

28. Enlargement will be the main pressure facing the 2007-2013 CAP budget. The Financial Perspective of 2000-2006 addressed the budgetary needs of 15 Member States. The next Financial Perspective will have to respond to the needs of at least 25 Member States, planned to increase to 27 in 2007. The number of farmers eligible to receive CAP funding has therefore increased significantly even as Pillar 1 funding remains static.

29. However the 2004 wave of enlargement has changed the needs as well as the number of EU farmers. The inclusion of eight Central and Eastern European Countries19 (CEECs) into the Union has introduced particular agricultural issues and needs which did not exist in the pre-accession Union of 15 countries. A pre-accession Commission report20 found that 21% of the CEEC population worked in agriculture which compares to only 4.3% of the active work force in the EU-15. If Bulgaria and Romania accede as planned in 2007 the agricultural needs will change even more dramatically—the same report found 42% of the Romanian population was engaged in agriculture in 2002. This highlights the problem of developing a CAP which will satisfy a diverse range of expectations within an enlarged Union.

30. Those countries which are primarily focussed on agriculture will inevitably require significant CAP funding which, like the EU-15, they are entitled to receive (see Box 7). This will place huge demands on a Pillar 1 budget which is essentially the same as the 2000-2006 Pillar 1 budget for a 15 Member

17 Speech to the Oxford Farming Conference, 5 January 2005:

http://www.defra.gov.uk/corporate/ministers/speeches/1w050105.htm 18 Recent figures produced by Eurostat support this view. During 2004 large increases in EU output volumes were

reported for crops: cereal (+24%), wine (+21.1%), olive oil (+25.3%) and oilseeds (+25.4%) EU25 real agricultural income per worker up by 3.3% (Eurostat news release, 17 December 2004).

19 The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia and the Slovak Republic. 20 Executive Summary, Analysis of the Impact on Agricultural Markets and Incomes of EU Enlargement to the CEECs,

March 2002, European Commission Directorate General for Agriculture.


EU. €1.8 billion has been allocated for direct payments to farmers in the new Member States in 200521. At the eventual full rate of payments, this suggests that the annual cost of direct payments to the new Member States will be just over €7 billion.

31. With the addition of Bulgaria and Romania, the total cost of applying policies provided by Pillar 1 (direct payments plus market support) is likely to total in excess of €10 billion by the end of the 2007-2013 period. This figure includes the annual €1.6 billion estimated by the European Commission for Pillar 1 expenditure to Bulgaria and Romania by 201322.

32. Enlargement will also result in increased levels of EU agricultural production, leading to further pressures on the CAP budget. Pillar 1 funds market support and intervention measures. The level of funding required is dependent in part on the volume of commodities the EU produces and the fluctuations in the price of major commodities on international markets (the lower the world price the greater the need for export subsidies and other market intervention).

33. Eurostat recently reported that the new Member States registered a rise in their cereal production of on average more than 40% between 2003 and 2004, a rise twice that recorded for the EU-1523. Significantly, additional EU measures and expenditure were needed to deal with a substantial cereal surplus in the new Member States during the 2004-05 marketing year24. The demands placed on Pillar 1 market support and intervention measures seem likely to grow significantly following accession of the CEECs.

Operation of the financial discipline mechanism

34. A mechanism to cope with these strains of possible further enlargement, over-production and cuts in the overall budget has already been foreseen by EU policy-makers. The CAP reforms of 2003 made provision for the operation of a so-called “financial discipline mechanism” from 2007. The financial discipline mechanism reduces the single farm payments by the percentage necessary to keep total Pillar 1 expenditure below the agreed Brussels ceiling.

35. The European Commission estimates any likely overrun in any given budget year at the beginning of the previous year. The expected excess will then be deducted from the single farm payment in the following year. The financial discipline mechanism applies only to payments in the EU-15 until 2013. It will not operate in the new Member States until they reach their full entitlement to direct payments in 2013.

21 Under Regulation 118/2005, published in Official Journal L24, 27 January 2005. 22 See Appendix 1. 23 EU25 cereals production increased by nearly a quarter in 2004 (Eurostat news release, 8 March 2005). 24 No 6206/05 Proposed Regulation amending Regulation (EEC) No 1883/78 laying down general rules for the financing

of interventions by the European Agricultural Guidance and Guarantee Fund, Guarantee Section


BOX 4

The financial discipline mechanism in practice

Illustrative timetable for adjusting direct payments, assuming mechanism is triggered for budget year 2007

By 31 March 2006 Commission present proposal to adjust direct payments for 2006

By 30 June 2006 Council agree to adjustments

Late 2006 Member States begin to pay out adjusted direct payments for 2006

1 January 2007 Budget year 2007 commences; 2006 direct payments charged to the budget during the year

Direct payments in the ten new Member States are being phased in by stages up to 2013. Reductions will not apply to phased-in direct payments in the new Member States until direct payments have reached the level in EU-15.

36. The financial discipline mechanism is a welcome measure and will prevent over-run of Pillar 1 spending. We urge the European Council to ensure that the Council of Agriculture Ministers is not allowed to alter this measure. Its effectiveness in preventing any over-run of the Pillar 1 budget must not be weakened.

Bulgaria and Romania

37. The financial discipline mechanism’s purpose is to “recycle” funds within Pillar 1. The most foreseeable reason for the financial discipline mechanism’s use will be the planned accession of Bulgaria and Romania in 2007. There has been much confusion over whether or not expenditure for supporting Bulgarian and Romanian agriculture has been allocated within the Brussels Ceiling. The majority of our witnesses were clear that the cost of direct payments and other CAP support measures to Romania and Bulgaria is not covered by the Commission’s current budget proposals. If extra funding is not provided, the cost would therefore have to be financed through cutting direct payments to the EU-15 via use of the financial discipline mechanism.

38. Our witnesses were clear that the financial discipline mechanism would have to be used from its inception in 2007. In addition to the automatic 5% “modulation” or movement of funds away from EU-15 direct payments to Pillar 225, Mr Jean-Luc Demarty, Deputy Director General for Agriculture at the European Commission, suggested direct payments may experience a reduction of another 5% in order to cover i) extra CAP costs associated with the recent accession of ten new Member States, and ii) higher than currently estimated spending on market support (QQ 354-358).

39. If separate funding is not made available for the accession of Bulgaria and Romania, there would have to be a further reduction of the direct payments, beginning at 4% at accession and rising to 8% by 2013. The total reduction in direct payments through use of the financial discipline mechanism could therefore be as much as 18-20% by 2013 (QQ 361-363).

25 As part of the reformed CAP’s objective to reduce direct payments, automatic modulation is in place to move

funds from Pillar 1 to Pillar 2. Member States can opt to modulate up to 20% of Pillar 1 funds. See Box 3 for further explanation.


40. Dr Franz Fischler, former Commissioner for Agriculture and Rural Development, also confirmed unequivocally to us that the additional modulation figure from 2007 (excluding the automatic 5% modulation) would have to be 8%; without even including the cost of applying the CAP to Bulgaria and Romania (QQ 544-545).

41. Additional funds will not be provided for the agricultural cost of the accession of Bulgaria and Romania. The financial discipline mechanism will divert funds from direct payments to farmers in the EU-15 to farmers in the new and future Member States. This should not necessarily preclude a move to increase the proportion of funding on rural development measures which are more likely to benefit farmers in the new Member States.

42. This use of the financial discipline mechanism will encourage the Brussels ceiling to be treated as a limit on spending rather than an allocation. It will also encourage moderation of the single farm payment in the short term, in advance of long term reforms. For the reasons stated above, it is clear to us that farmers in the EU-15 are likely, from 2007 onwards, to receive reduced single farm payments, and these will dwindle further to 2013. The European Commission must make this clear to the Council of Agriculture Ministers.

The Brussels Ceiling

43. We understand the 2002 Brussels Ceiling was agreed within the CAP reform negotiations occurring at that time. It provided stability by allowing EU farmers to know exactly how much money would be allocated for direct payments until 2013 at a time of considerable change in agricultural financing. However it is clear to us that ceilings have been set which do not fully anticipate the demands on the 2007-2013 Pillar 1. As Mr Rickard remarked, “given the scale and importance of the Union’s policy objectives” the Commission’s proposals as based on the Brussels ceiling are “conservative” (p 1).

44. We believe the Brussels ceiling represents a missed opportunity to plan fully for the enlargement of the EU. In particular, as we have shown, due thought has not been given to the future financing of the EU agriculture sector following accession of Bulgaria and Romania. Future enlargement should be planned for much more carefully when preparing the Financial Perspective for the period beyond 2013.

45. The Brussels ceiling has also created a situation whereby future Pillar 2 funding may be held hostage to negotiations over Pillar 1 funding. If, as we have recommended, the Brussels ceiling is not re-opened, it is likely that any reduction in the overall CAP budget resulting from negotiations on a 1% GNI budget would fall on Pillar 2. Calculations based on a 1% budget suggest this could reduce Pillar 2 funding by 55% if no cuts were made to Pillar 1. This would be highly regrettable as the setting of the first Pillar ceiling should not prejudice the setting of the second Pillar. We reiterate our previous recommendation26 that the Council should never again seek to pre-empt negotiations on the Financial Perspective by agreeing certain ceiling limits beforehand.

26 European Union Select Committee, 6th Report (2004-05): Future Financing of the European Union (HL 62),

paragraph 19.


CHAPTER 4: PILLAR 1 SPENDING—IS IT JUSTIFIED?

46. The Commission has proposed that €308 billion be spent on Pillar 1 during 2007-2013. As we have already shown, these funds may face significant pressure during 2007-2013 to meet the demands of an enlarged Union facing further reform of its agricultural regimes. But what exactly does Pillar 1 comprise?

Pillar 1 is made up of two parts:

• Market price support (largely via intervention in the domestic market to purchase surplus product, import tariffs and export subsidies);

• Direct payments to farmers, made through the single farm payment system from 2005.

47. Direct payments to farmers will continue to absorb the bulk of Pillar 1 funds in 2007-2013, with direct payments accounting for around 81% of funds, compared with 19% for market price support. In total, Pillar 1 funding will continue to dwarf Pillar 2 funding.

48. The Government believe the future for a sustainable European agriculture lies in shifting the emphasis of expenditure from Pillar 1 to Pillar 2. The Financial Secretary, Mr Stephen Timms MP, was clear to us that the remaining direct production-linked payments to farmers should be phased out altogether and the current single farm payment only be considered as a transitional measure (Q 144). Agenda 2000 agreed provisions which allow Member States to divert up to 20% of Pillar 1 funds into Pillar 2 to fund rural development schemes. The British Government are to be commended for undertaking voluntary modulation above and beyond their mandatory requirements,27 but it is a matter of concern that the United Kingdom is the only Member State to do this, because it is bound to raise issues of equity and distortion of the competition in the British farming community.

The pros and cons of the single farm payment

49. Rather than pay EU farmers to produce agricultural commodities within quotas, the single farm payment, the main feature of the 2003 reforms, provides the means to sever the link between subsidy and production— so-called “decoupling”. The Government believe28 this new payment will free farmers to produce in response to market demand, rather than to maximise subsidy income. It is also designed to improve the environmental impact of farming by making payment conditional upon compliance with environmental standards (“cross-compliance”).

50. However several witnesses stressed that they could see no justification for the single farm payment as an environmental measure. Mr Alastair Rutherford, Head of Agriculture at English Nature, told us that cross-compliance29 was “a very inefficient tool” in delivering positive environmental management and strongly believed the single farm payment should be phased out. It was a

27 See Box 3 for an explanation of modulation. 28 See the statement CAP Reform (England) made by the Secretary of State for Environment, Food and Rural Affairs

(HC Deb 12 February 2004, cols 1585-87). 29 See Box 2 for an explanation of cross-compliance.


“lowest common denominator” set of requirements that did not take into account the differing needs of different farming areas (Q 176). In Mr Rickard’s view cross-compliance requirements were only “minimal conditions” for achievement of the EU’s environmental objectives (Q 11).

51. At the same time, witnesses stressed the need to compensate farmers for the non-production services which they provide to the community. As Professor Allan Buckwell, Chief Economist and Head of Research at the Country, Land and Business Association described it, there is a whole “quantum of public environmental services and landscape management services, resource protection services, [which are] delivered by farmers and landowners” (Q 69).

52. Dr Franz Fischler considered the payment justifiable on the grounds that it allowed EU farmers to compete on the world market whilst meeting stringent animal welfare and environmental standards (Q 565). Ms Shelby Matthews, Director of General Affairs of COPA-COGECA30, told us the single farm payment enabled “farmers to survive with prices going down to world price levels, therefore it is essential for [it] to be maintained” (Q 390).

53. We fully acknowledge that the non-marketable services farmers provide should be recognised. Such activity justifies payment for the environmental, animal welfare and other “non production services” farmers are expected to provide to society. We are not however convinced that the single farm payment will achieve this objective in the most efficient manner.

54. In the long term we believe a separate fund focussed purely on achieving environmental objectives could be a more efficient way to pay farmers for their environmental contribution. Such a payment scheme should be completely separate from agricultural support and would be likely to be much reduced from the current levels of the single farm payment. Such a payment should be considered during the 2008 review, in order to be established during the 2014+ financial perspective.

55. We acknowledge, however, that there are benefits to the continuation of the single farm payment in the short-term. The decoupling of financial support of the agricultural sector from agricultural production requires some transitional compensation during the period when the industry is adjusting to a liberalised market from which support is being withdrawn. The Committee believes that the single farm payment can be justified only on these grounds.

56. It has to be acknowledged, however, that agreement on the single farm payment was achieved only at great political cost. It is natural that those responsible for its design and for directing its difficult passage through the EU legislative system are loath to see it modified or even discarded. For them, phasing out or significant modification of the single farm payment is not envisaged for the foreseeable future. We were told by Dr Fischler that the single farm payment will be a reality for European farmers for at least the next 15 years (Q 565). It is regarded by all of the EU officials interviewed by the Committee, as Mr Stefan Lehner of the European Commission’s Budget Directorate-General described it, as “a very positive, forward looking element of the Common Agricultural Policy in the future” (Q 465).

30 Committee of Professional Agricultural Organisations in the European Union (COPA) and General

Confederation of Agricultural Co-operatives in the European Union (COGECA).


57. The proponents of the single farm payment therefore argue that it provides stability to Europe’s farmers and also acts as “an important step in…changing the attitudes and mindsets of all concerned—farmers, managers and the public—to this change in direction” towards more environmentally conscious farming envisaged within Pillar 2 (Q 69). We share this view. The single farm payment has been the vehicle for the most radical reforms of the CAP and we commend the European Commission for this work.

58. While we accept this argument for a limited transitional period, we recommend the continued use of the single farm payment only for the 2007-2013 period as a transitional tool to i) provide stability and ii) prepare farmers for the more market oriented and environmentally focussed future of European agriculture.

59. We acknowledge that environmental payments should continue in recognition of the contribution farmers make to the environment. We draw a distinction between the income subsidy element of the single farm payment, which we believe should not continue indefinitely, and its separate important function of rewarding farmers for the environmental and non-agricultural services which they provide.

60. That said, we were alarmed at difficulties farmers are currently facing when claiming the single farm payment. Mr Mark Thomasin-Foster, President of the European Landowners’ Organisation, suggested to us that farmers face an inordinate level of bureaucracy in order to claim their payments (QQ 87-88). The Financial Secretary said it was inevitable that a new system would create a certain level of bureaucracy but thought this would “hopefully” decline (Q 132). Yet part of the reason for introducing a consolidated single payment was to reduce bureaucracy and simplify the system. It would be extremely disappointing if the benefit to farmers of receiving a consolidated single payment was negated by the time and paperwork required in applying for it. Immediate thought must be given to how this can be improved.

The future of Pillar 1

61. If payment for environmental benefit was provided through a separate fund, it is difficult to see what justification would remain for the long-term continuation of the single farm payment. Following the decoupling of subsidy from production, current levels of Pillar 1 expenditure, even following reform, may not be necessary. It is clear that if the EU continues to pay out in excess of €38 billion a year for the single farm payment beyond the 2007-2013 Financial Perspective period, there will still remain a major distortion in the domestic and international markets for agricultural commodities.

62. We share the Financial Secretary’s vision of a European agriculture sector that is “internationally competitive without reliance on subsidy…rewarded by the market for what it produces and…. environmentally sensitive.” (Q 144). To this end the single farm payment must only be considered a stepping stone towards this goal.


CHAPTER 5: RURAL DEVELOPMENT—THE RISE OF PILLAR 2

63. Rural development is in many respects an unknown quantity. This will be the first Financial Perspective to include a singly funded rural development heading. Unlike the ceilings set in Brussels for Pillar 1, no agreement has been prearranged for the levels of rural development funding, which means that this part of CAP funding is fully open to discussion during the budget negotiations. We have therefore been particularly keen to assess what “added value” this fund could bring to EU taxpayers during 2007-2013.

64. The Commission proposes to spend €88.8 billion on rural development over the 2007-2013 Financial Perspective. This represents only a fraction of the much larger sum of €301.1 billion allocated for Pillar 1 direct subsidies and market support during the same period but it would represent an overall increase of around 25% compared to current rural development spending (p 39).

65. It became apparent early on in the inquiry that the lack of fixed ceilings for the rural development budget means that it is vulnerable to bearing any cuts required from the CAP budget as a whole. In their evidence to us Her Majesty’s Treasury estimated that if the overall budget is agreed at the 1% level, there will be pressure to make savings under several budget headings including the CAP (Q 105).

Three key questions emerged:

• Is there a need for an EU rural development policy?

• If so should it be funded by the EU or national budgets?

• Is there a difference between the EU 15 and the new Member States’ priorities?

66. The present rural development policy, the new “Pillar 2”, resulted from the radical CAP reform prompted by Agenda 2000. The main legal framework for rural development in the EU is the Rural Development Regulation31 which will be replaced in 2007 (see Box 6). The current Regulation aims to complement the direct support offered by Pillar 1.

31 (EC 1257/1999).


BOX 5

The existing Regulation

The Commission states the objective of rural development is:

“To introduce a sustainable and integrated rural development policy governed by a single legal instrument to ensure better coherence between rural development and the prices and market policy of the common agricultural policy (CAP) and to promote all aspects of rural development by encouraging the participation of local actors. In this spirit, the new rural development policy, relating to farming and conversion to other activities, aims:

• To improve agricultural holdings,

• To guarantee the safety and quality of foodstuffs,

• To ensure fair and stable incomes for farmers,

• To ensure environmental issues are taken into account,

• To develop complementary and alternative activities that generate employment, with a view to slowing the depopulation of the countryside and strengthening the economic and social fabric of rural areas,

• To improve living and working conditions and promote equal opportunities.”

Source: Regulation 1257/1999

67. The situation is complicated by the existence of modulation, which takes a small percentage of the direct subsidy payment to finance environmental and rural development objectives. Modulation only applies to farms receiving over €5000 per year. From 2007-2013 it will result in a 5% reduction in direct payments per year for such farms, in Member States which receive at least 80% of their modulation funds. Modulation will not apply to the new Member States until they reach their full CAP entitlement in 2013.

New rural development arrangements

68. At the same time as the budget is being negotiated a new rural development Regulation32 is being drafted which will replace existing legislation33. It will provide a rural development fund34 separate from normal CAP mechanisms which is intended to simplify the administrative system. It is intended to be in operation during the period of the 2007-2013 Financial Perspective. We commend the intentions of the Commission to pull these strands of rural development into a single Regulation funded with a single financial instrument.

32 No 11495/04 Proposal for a Council Regulation on support for rural development by the European Agricultural

Fund for Rural Development (EAFRD). 33 Regulation 1257/1999. 34 European Agriculture Fund for Rural Development (EAFRD).


BOX 6

The new Rural Development Policy

The Commission proposes to streamline rural development operation under a single funding and programming instrument known as the European Agricultural Fund for Rural Development (EAFRD). The fund will set minimum spending requirements in three thematic areas, and continue to support community projects under the LEADER35 heading, making up a fourth category.

Axis 1 – a minimum of 15% national allocated funds to improve the competitiveness of the farming and forestry industry.

This will support schemes such as the development of infrastructure, setting up young farmers and assisting semi-subsistence farmers in new Member States through the process of restructuring. Schemes will be co-financed with EU funding providing a maximum of 50% (75% in convergence regions36) which means that there has to be significant commitment from national funds.

Axis 2 – a minimum of 25% national allocated funds to support environment and land management schemes.

Measures under this axis include agri-environment measures, Natura 200037 payments and animal welfare improvement payments. Agri-environmental measures will remain compulsory. Again, schemes will be co-financed with EU funding providing a maximum 55% (80% in convergence regions).

Axis 3 – a minimum of 15% national allocated funding is aimed at improving “quality of life” and diversification of the rural economy.

Measures could include the encouragement of tourism, diversification to non agricultural activities, village renewal and support for the creation of micro enterprises to absorb surplus labour and other resources from agriculture and to create new employment in rural areas. The EU co-financing rate is maximum 50% (75% in convergence regions).

LEADER – local development strategies developed through a bottom up approach. A minimum of 7% of program funding is reserved for LEADER which is separate from the three axes. Each programme should contain a LEADER initiative to finance the implementation of the local development strategies of local action groups built on the three main thematic axes.

Source: No 11495/04 Proposal for a Council regulation on support for rural development by the European Agricultural Fund for Rural Development (EAFRD)

What does rural development achieve?

69. Rural development policy has so far emerged in a relatively piecemeal fashion, as a result of the reforms of CAP. However, the Government have made clear that they consider the future of European agriculture to lie within the growth of Pillar 2 and the demise of Pillar 1 (p 38). The focus has shifted

35 LEADER is an acronym for “Liaison Entre Actions pour le Développement de L’Economie Rurale” which

translates as “links between actions for the development of the rural economy”. It is an initiative to assist rural communities in improving the quality of life and economic prosperity of their local areas.

36 Regions with less than 75% of EU-25 GDP 37 Natura 2000 is a European network of protected sites designated under the habitats (92/43/EEC) and birds

(79/409/EEC) directives .


instead onto the non-production based services that rural environments provide.

70. The proposed rural development ceilings represent a relatively small share of the CAP budget overall, but the use of modulation will make it a more visible option for developing rural communities as pressure to reduce direct subsidies mounts. Modulation moves a small percentage of Pillar 1 direct payments into Pillar 2 to finance environmental and rural development objectives. From 2007-2013, automatic modulation of 5% of Pillar 1 to Pillar 2 funds will operate.

Is there a need for an EU rural development Policy?

71. The case for having an EU rural development policy, as opposed to only taking action at the Member State level, was forcefully made by representatives from the new and acceding Member States. While taking evidence from experts on agriculture from the new and prospective Member States38, we were impressed by the obvious difficulties in applying an agriculture and rural policy that has evolved in the EU-15. Mr Wladyslaw Piskorz, Polish Minister Counsellor39, told us that in Poland, for example, there are 1.8 million people classified as farmers, many of them cultivating holdings on an average of little more than one hectare. While the average farm size is 8 hectares, the majority are clearly much smaller than this and are concentrated in the south and east of the country (Q 659).

72. In Romania the problem is even more pronounced. Mr Mugur Craciun, Romanian Secretary of State for European Integration, told us that 32% of the active population of 22.5 million people work in agriculture. The country is estimated to have 4.7 million holdings, half of them with less than a hectare of land, meaning most are subsistence farmers (Q 767). It is questionable whether a very small annual direct payment from the European agricultural budget is relevant to the needs of these farmers .

73. This problem was stressed by Dr Sophia Davidova, Reader in European Agricultural Policy at Imperial College: “What we now observe in the eastern part of Europe are vast rural areas. In some of these rural areas we have a very low density of services; we have high unemployment; and we have agriculture as a buffer, where people stay at subsistence level… The priority is, if possible, to take these people out of agriculture…and to provide some employment for them in the vicinity… so that the countryside is not depopulated. From this point of view, my strong opinion is that the emphasis should be on rural development” (Q 622).

74. Evidence from the new Member States supported the view that there were significant rural issues which would need to be tackled over the next budgetary period. Dr Janet Dwyer, Reader in Rural Studies at the University of Gloucestershire and Senior Associate at the Institute for European Environmental Policy, reinforced this view by stating that the EU-25 has “considerable unmet need for rural development funding” (p 90).

75. We were concerned however that rural development should not become a proxy for continued subsidy to farmers. The current rural development Regulation is heavily focussed on agriculture and agri-environment schemes.

38 We received oral evidence from Romania, Poland and Slovenia. 39 Minister Counsellor in the Permanent Representation of the Republic of Poland to the EU in Brussels


Lord Haskins’ rural delivery review40 gives a breakdown of how the funding is used in the United Kingdom and it is difficult to see any non-agriculturally related projects.

TABLE 3

Translation of Rural Development Regulation measures into schemes in England

Source: Lord Christopher Haskins, October 2003, Rural Delivery Review – a report on the delivery of government policies in rural England

76. This is supported by evidence to our inquiry from Regional Development Agency representatives who stated that most of the money to be allocated under Pillar 2 in the United Kingdom is to be spent on agri-environment schemes (Q 745). Lord Haskins’ review also found that this was the case in other EU-15 countries, where Pillar 2 is being used to support farm incomes41. This is not entirely unexpected as the stated objective of the rural development Regulation is to complement Pillar 1 activities. However, following accession should rural development policy move towards encouraging wider economic restructuring?

40 Lord Christopher Haskins, October 2003, Rural Delivery Review – a report on the delivery of government policies in

rural England. 41 Lord Haskins’ Rural Delivery Review, p156

EU Rural DevelopmentRegulation Measure Scheme in England

Early Retirement [Articles 10 - 12]

Agri-environment [Articles 22 - 24]

Less Favoured Areas and Areas subject toenvironmental constraints [Articles 13 - 21]

Investments in agricultural holdings[Articles 4 - 7]

Setting up of Young Farmers [Article 8]

Vocational Training [Article 9]

Improving Processing and Marketing ofAgricultural Products [Articles 25 - 28]

Forestry [Articles 29-32]

Promoting the Adaptation and Developmentof Rural Areas [Article 33]

None

Environmentally Sensitive Areas SchemeCountryside StewardshipOrganic Farming Scheme

Hill Farm Allowance Scheme

Rural Enterprise Scheme�Energy Crops Scheme (Miscanthus)

None

Vocational Training Grant Scheme

Processing and Marketing Grant

Woodland Grant SchemeFarmland Wood Premium schemeEnergy From Crops (Short RotationCoppice and SRC Producer Groups)

Rural Enterprise Scheme


TABLE 4

Total Planned Expenditure 2000-2007 on Rural Development Programmes by Category

Source: from paper presented by Dr Janet Dwyer at United Kingdom Agricultural Economics Society Conference, 2003: The Second Pillar and Sustainable Rural Development—early experience with the RDR and SAPARD.

77. Our evidence pointed strongly to the mismatch between EU funding of farming and its economic situation. Agriculture currently contributes less than 6% to the EU GDP. We believe that any rural development policy should look to the future and the wider developmental issues, not just at supporting agriculture.

78. There is also evidence of overlap between Pillar 1 and 2 support. Dr Fischler pointed out that cross-compliance, funded by the single farm payment, already provides for environmental and welfare standards and in some cases there is overlap with Pillar 2 agri-environment schemes (Q 604). Lord Whitty also felt that cross-compliance meant “some of the objectives of shifting money into Pillar 2 will now be achieved, at least at a minimal level, under Pillar 1” (Q 225) and went on to say that the United Kingdom will be aiming to increase the flexibility with which Pillar 2 is used and to move money into the economic and social area.

79. It is our opinion that a review of the objectives of rural development is needed in order to clarify what that policy is trying to achieve. It is not acceptable for rural development to be used as a continuing subsidy for farmers, but instead the Commission should develop a clear rural development agenda aiming to improve economic and social development.

80. It is essential that rural development schemes should not be allowed to develop in such a way as to damage the environment. We believe that an expert study should be carried out to find out how far agri-environment

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schemes and cross-compliance overlap in order to clarify rural development, environmental and agricultural objectives.

81. These overlaps in policy have been exacerbated by the existence of modulation, which enables a certain percentage of funds allocated to Member States under Pillar 1 to be moved to fund projects under Pillar 2. Modulation was introduced to encourage the shift from direct payment to rural development, but has also meant that rural development has been dominated by agricultural objectives.

82. Rates of compulsory modulation were agreed under the Brussels ceilings and will therefore exist up to 2013. The first test that is always applied to rural development measures must be that they are effective and value-for-money. Only if this test is met could we recommend a straightforward fiscal transfer into a rural development budgetary heading, without linking the funds to agricultural objectives.

Financing rural development within the EU

83. A clear disparity emerged in our evidence between the agricultural and rural development needs of the EU-15 and those of the new Member States. It was also apparent that, at the EU level, rural policy is not yet clearly formed. In their proposed Financial Perspective the Commission have shifted the balance of expenditure on rural development away from the EU-15 and towards the new Member States. Whilst overall the Rural Development Fund would increase by 25% for 2007-13, the amount paid out in the EU-15 would fall by 8%, but increase by 25% in the new Member States.

84. In the context of this enlarged Union we thought it even more important to examine what added value is achieved by funding rural development schemes at EU level rather than national level. The Regional Development Agencies (RDA) took the view that, if the British budget could be relied on to provide adequate funds for rural development, funding rural development at the nation level would make their schemes much easier to administer (Q 755). In fact, according to the RDA, the amount of money coming to the United Kingdom appears to be very small, and the process of administration is complex. Combined with the ill-defined objectives of rural development the Committee became more convinced that funding at the EU level is unnecessarily bureaucratic.

85. English Nature provided evidence that many biodiversity related targets are being funded by Pillar 2. We agree that these are important programmes, but as English Nature themselves point out, EU funding is likely to be inadequate to meet the commitments and greater use of sources of national funding may have to be used (p 56). English Nature cite the example of management of sites of special scientific interest which are already funded nationally, due to state aid rules which allow up to four times the EU funded amount for some rural development and agri-environment schemes. We agree with this approach and urge the Government to assess whether state aid rules would need to be altered to enable Member States to increase funding to such schemes.

86. The Committee received compelling evidence that rural development funding from the EU budget was only one contributory factor in United Kingdom and EU-15 rural development policies and agrees with the movement of funds towards the new Member States. As EU rural


development funding is likely to remain relatively static for the EU-15 we recommend that, where possible, these countries should seek to supplement rural initiatives through their own national budget.

87. The main objection to a wholly nationally funded rural development appeared to be that leaving social and environmental objectives to the discretion of Her Majesty’s Treasury would prompt serious cut backs. Matched funding arrangements, where the EU provides half the funding and national funds make up the rest, mean that in reality many schemes are already dependent on the availability of national funds.

88. Her Majesty’s Treasury suggested a key question for these negotiations is whether EU funding should be focussed on the poorest Member States with the better off countries financing rural development from their own exchequers instead (Q 139). Her Majesty’s Treasury stated that funding rural development primarily from national funds need not mean a reduction in funding. While being somewhat sceptical of this approach, we would encourage it and reinforce the view that there are real needs in the rural communities in the United Kingdom which should not be neglected. The existence of co-financing means that EU funds cannot be accessed without appropriate matching at the national level.

89. The British Government’s view is that rural development spending should be increased only through modulation by Member States or across the EU as a whole. As discussed above compulsory modulation has already been fixed up to 2013, however, voluntary modulation by individual Member States (the EU-15 at this stage) could be increased. In reality, the impact of the financial discipline may mean that money from this source is likely to be limited. This is because the operation of the mechanism has the effect of reducing the total fund from which the 5% compulsory modulation for rural development is taken.

90. It is also likely that if the net contributor Member States succeed in having the global EU budget reduced, the rural development fund will be substantially diminished. If significant reductions in the global EU budget for the 2007-2013 period from the European Commission’s recommended 1.14% of GNI are agreed by Council this could be expected to have a disproportionate effect on the funds available for financing rural development (Pillar 2). This is because (we now assume) the amount laid down for market support and direct subsidies (Pillar 1) is fixed by the “Brussels ceiling” and cannot be reduced, even if the global EU budget is cut. Therefore the whole of any necessary reduction in agricultural spending would fall upon Pillar 2.

91. If it is assumed that the total agricultural budget would be cut by the same proportion as the Structural Funds and other major budget items, then it can be deduced that a reduction from 1.14% of GNI to 1% would represent a 12.3% reduction in the overall budget. Applied pro rata, this would reduce the total CAP budget for the 2007-13 period by €47 billion to €342 billion. If all of this reduction were to be applied to Pillar 2, the amount of money available for rural development 2007-2013 would be cut from €88.8 billion to €40 billion—a reduction of 55%. We strongly recommend that such a reduction be avoided.

92. A reduction in the global budget from 1.14% to 1.03%, a possible Council compromise figure, would mean a 9.65% reduction in total budget funds.


This would reduce the total CAP budget by €37.63 billion to €352.27 billion for the seven year period and on the assumption that Pillar 1 cannot be reduced would reduce the funds available for Pillar 2 to €50.3 billion—a reduction of 42%. Adoption of the European Parliament’s recommendation of 1.07% GNI would, on the same basis, cut funds available to rural development by 27.8% to €63.96 billion.

TABLE 5

Structure of EU financing

93. If the rural development funding of the EU is to be focussed towards the new Member States then the structure of the financing set out in the proposed rural development Regulation needs to reflect their priorities.

BOX 7

The new Member States

The agricultural situation for the new Member States is as follows:

• Agricultural market policies are applied in full from the outset, but the direct aid payment system42 (Pillar 1) is being applied gradually in the period 2004 to 2013;

• Farmers in the new Member States receive 25% of the EU-15 level of direct payments in 2004, 30% in 2005, 35% in 2006, 40% in 2007 and then further adjustments of 10% in each subsequent year to reach 100% by 2013.

42 In eight of the new Member States the payments are made under the Single Area Payment Scheme, a fully

decoupled aid regime under which farmers receive a flat-rate payment per hectare for all eligible agricultural land. Malta and Slovenia instead receive direct payments in the original production-linked form that applied in the EU-15 prior to 2005. They will continue to receive payment in this form until 2007, when they will adopt the single farm payment.

Funding Available For Pillar 2 On AssumptionThat Pillar 1 Cannot Change

0

2

4

6

8

10

12

14

BIL

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N E

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1.14% GNI 11.70 12.20 12.70 12.80 12.90 13.10 13.20

1.07% GNI 8.40 8.77 8.26 9.47 9.58 9.68 9.79

1.03% GNI 6.46 6.81 6.30 7.51 7.62 7.73 7.84

1.00% GNI 5.00 5.32 4.81 6.02 6.15 6.26 6.37

2007 2008 2009 2010 2011 2012 2013


• This process could however be altered by application of the financial discipline mechanism in the EU-15: if the full subsidy is reduced by financial discipline, then the full amount eventually to be paid in the new Member States will also be reduced and the final year for payment of the full subsidy will be brought forward (for example, if application of the financial discipline mechanism resulted in a reduction of 10% in the single farm payment by 2011, then the last year of adjustment for the new Member States would not be 2013 but 2012).

• The new Member States become liable for compulsory modulation and financial discipline mechanism adjustment from the last year of transition to full payment.

• Rural development policies (Pillar 2) are being applied in the new Member States in the same manner as in the EU-15.

• New Member State governments are allowed to “top up” direct payments from national funds, and rural development allocations from the EU farm fund, to a higher proportion of EU-15 level.

94. We initially investigated the approach of subsuming rural development into structural and cohesion funds as they are targeted at the poorest regions. Although several witnesses agreed with the idea of targeting funds to poorer areas, the use of the structural and cohesion funds was treated cautiously as they are generally only available for large infrastructure projects which would lose the benefits from small scale local action. While the Structural Policies would have a greater effect in achieving cohesion objectives, Pillar 2 expenditure is likely to be important at the local level. Dr Davidova told us “Pillar 2 can help small local initiatives which will be overlooked by structural funds... I think that there is a niche for Pillar 2, in comparison to the big funding. I treat Pillar 2 as a very important tool or avenue for further CAP reform” (Q 624).

95. Agriculture must not be subsidised by rural development funds. However, we recognise the importance of rural development funds in enabling new Member States to diversify their rural economies. Even in the more agriculturally developed countries among the new Member States, such as Slovenia, Pillar 2 schemes can help to deal with a variety of issues, such as, early retirement of farmers, farm restructuring and diversion of the farm population out of agriculture into alternative rural industries. This was a point strongly endorsed by Mr Franc But, Slovenian Secretary of State for Agriculture and Food, who told us that “on average, a Slovenian farm would be 7.5 hectares. We never had any so-called collectivisation as in the other new Member States. There was a prohibition on increasing the level of hectares. The normal procedure [of farm enlargement] in the old EU of 15 was frozen for 40 years in Slovenia. The first axis [of the new Rural Development Policy] will be extremely important for Slovenia” (Q 695).

96. The direct payment is seen as a useful interim social measure to slow down rural migration to the towns in countries where unemployment rates were in excess of 18% and there was considerable hidden unemployment in rural areas. The Polish Minister Counsellor remarked that “if you are giving money for semi-subsistence farms it will help them to stay a few years more in the business. Normally they will go out, but this is a kind of social support, because we are not ready with the jobs for those people and it is better socially to keep them as farmers then keep them on the street” (Q 677).


97. Throughout the EU the majority of small family farms are dependent for their survival on having a non-agricultural income or wage coming into their household. A prosperous and broad-based rural economy is therefore vital for the long term survival on the land of most EU farmers. Thus a meaningful budget for rural development in the EU, predominantly targeted at economically backward regions, is the most sustainable way of supporting traditional landed communities throughout the EU-25.

BOX 8

LEADER

LEADER is a Community initiative for rural development which began in 1991 with LEADER I. LEADER II ran between 1994 and 1999, and it is now in its third phase, LEADER+ (2000-2006). LEADER has initiated small-scale rural development projects in lagging regions and vulnerable rural territories, for example objective 1 areas. A total of €5046.5 million for the period 2000-2006 will be spent, of which €2105.1 million is funded by the EAGGF Guidance section and the remainder by public and private contributions. There are currently three priority streams of funding:

• Action 1: Support for integrated territorial development strategies of a pilot nature based on a bottom-up approach

• Action 2: Support for cooperation between rural territories

• Action 3: Networking

Local action groups set up under action 1 can establish projects with a variety of objectives such as; making the best use of natural and cultural resources; improving the quality of life in rural areas; adding value to local products, and exploiting new technologies to improve competitiveness.

Source: European Commission

98. We were impressed by the success of rural development funding through the LEADER approach which enables very small projects to be established. We do not believe that rural development should be included in structural and cohesion funds, but that a separate rural development heading should remain to fund small projects which we feel may be lost under structural and cohesion policy.

99. In order to align rural development funding to new Member States’ needs, we recommend that the percentage of funds directed towards Axis 3 (wider rural development) should be increased.

100. Under the existing rural development Regulation funds are allocated on a historic basis, using criteria based on past levels and types of spending. This has meant that countries such as the United Kingdom have been entitled to low levels of rural development funding. It has also meant that new policies and schemes have been restricted.

101. We support the British Government’s position of basing spending on need rather than past expenditure (p 39) because this will ensure that disadvantaged regions in all Member States will benefit fully from rural development funding.

102. Some witnesses were concerned by the ability of new Member States to absorb rural funds, and also to distribute them. The Polish Minister Counsellor stated that the accession funding programmes did take a while to


operate to capacity but the infrastructure was now in place to take advantage of development funds. Dr Dwyer had found that the most recent figures for spending on Special Assistance for Pre-accession Agriculture and Rural Development (SAPARD) showed that around 60% of funds allocated were taken up (Q 258).

103. The infrastructure for delivering rural development funding exists across the EU, but it differs from country to country and there are widespread concerns over how the money is spent. The new rural development Regulation will create the structure for distributing the finance for rural development and a key objective in reforming the Regulation is to improve transparency and accountability. A number of witnesses, including Dr Dwyer, identified a lack of focus on rural development objectives which has made it difficult to evaluate successes. The difficulty for the new Regulation is to retain flexibility of application, but to allow clearer evaluation of projects.

104. Given the diverse needs across the EU we recognise the difficulty in establishing a single definition of rural development. Once the single farm payment is phased out, the importance of EU funds for rural development will inevitably increase. In our judgement it is most important that, in the 2008 review the Commission identify how rural development targets will be set and reviewed. This will be necessary in order to establish local objectives, assess the success of individual projects and avoid unjustified or fraudulent spending.

105. A major conclusion of this report is that market support and direct subsidies to farmers will become of declining importance. The restructuring of rural areas on the other hand, has become of paramount importance. This is particularly true in the new Member States and in those countries likely to join the EU during the next ten to fifteen years.

106. There is a need to build on the rural development work already undertaken by the Commission. We recommend that a new European Rural Development policy, concentrating particularly on the rural poverty problems of the least advantaged areas of the EU, should be established. At the same time, all rural development schemes should pay due attention to the protection of the rural environment.


CHAPTER 6: GLOBAL PRESSURES: THE WTO

107. The reforms of 2003 significantly altered the CAP but further change is on the horizon. Despite reforms of recent years, the CAP still maintains a high level of domestic support for its agricultural markets through Pillar 1’s market price support mechanisms43 and pressure is mounting to change this situation and to change it soon. The Financial Secretary told us this was the “most damaging part of the CAP”, more so even than the direct subsidies (Q 102).

108. The CAP has acted as a barrier to the free flow of trade. According to a recent World Trade Organization (WTO) report, the EU “continues to limit foreign competition and to generate surpluses of some products”44. While maintaining high prices through market intervention and import barriers, the payment of production and export subsidies allows EU farmers to export surpluses created at lower cost, thus undermining the market for produce from third countries. If such subsidies and protection of agricultural markets were cut, agricultural exports from developing nations could help those economies to grow.

109. The current WTO Doha Development Round of talks is aimed at eliminating just such support. The EU has committed itself to the Round by being among the WTO signatories who signed up to an outline of the eventual new trade agreement in August 200445. Of most immediate importance to the EU is likely to be the agreement eventually to phase out all export subsidies.

110. We commend the EU for its decision to “move” on export subsidies. The EU must do all it can to build an environment where farm production is based on market demand and not subsidy entitlement. The EU should negotiate on the basis that it will firmly commit itself to phasing out its agricultural export subsidies within a specified time frame. It will be extremely difficult to secure the agreement of other developed countries to this objective, however, that should not stop the EU from making every effort to achieve it.

111. The impact of a Doha agreement on the EU 2007-2013 agriculture budget will depend greatly on timing. It is expected that December’s WTO ministerial meeting in Hong Kong will further endorse the outline agreement of August 2004. Negotiation on the detail could be expected to take up most of 2006 with an agreement possible in 2007. It therefore would be probable that a new agreement on agricultural trade could begin to be applied from 2008-2009. Any effects for the CAP could significantly begin to impact the budget from approximately 2011-2012.

43 The level of subsidising of production remains substantial: “The total value of aid that potentially has the most

production-distorting effects (market price support, output payments, and input subsidies) accounted for 68.7% of support to producers in 2002, down from 69.9% in 2000.” (TRADE POLICY REVIEW European Communities: Report by the Secretariat, World Trade Organization, Restricted WT/TPR/S/136 23 June 2004 (04-2591), pp2-13).

44 ibid. 45 The so-called “July package”: WTO General Council Decision WT/L/579, 2 August 2004.


The end of subsidy in sight—the impact on the CAP

112. If agreed in its current form, the Doha agreement could have a beneficial effect on the EU budget. Savings of €1.5-3 billion could be made annually if the EU was no longer allowed to fund its current export subsidies. However this saving could be wiped out by possible payments of compensation that would have to be paid to those sectors hit hardest by the reduction and removal of export subsidies and the scaling down of import tariffs—most notably, the dairy and sugar sectors (Q 150 and QQ 211-2).

113. Our witnesses were confident that a Doha agreement would not require a significant change to the level of EU domestic support for farmers. This was mainly due to the 2003 reform agreement having moved most of the Union’s agricultural support from the proscribed blue and amber box classifications of support into the permitted green box (Q 60, Q 247 and Q 433).

BOX 9

What are the WTO trade boxes?

In WTO terminology, agricultural subsidies are identified by “boxes” which are given different colours depending upon their acceptability or otherwise. There are exemptions for developing countries.

Amber box

All domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box. These include measures to support prices, or subsidies directly related to production quantities. The reduction commitments are expressed in terms of a “Total Aggregate Measurement of Support” which includes all supports for specified products together with supports that are not for specific products, in one single figure.

Blue box

This is the “amber box with conditions” — conditions designed to reduce distortion. Any support that would normally be in the amber box, is placed in the blue box if the support also requires farmers to limit production. At present there are no limits on spending on blue box subsidies. In the current negotiations, some countries want to keep the blue box as it is because they see it as a crucial means of moving away from distorting amber box subsidies without causing too much hardship.

Green box

In order to qualify, green box subsidies must not distort trade, or at most cause minimal distortion. They have to be government-funded (not by charging consumers higher prices) and must not involve price support.

They tend to be programmes that are not targeted at particular products, and include direct income supports for farmers that are not related to (are “decoupled” from) current production levels or prices. They also include environmental protection and regional development programmes. “Green box” subsidies are therefore allowed without limits, provided they comply with policy-specific criteria.

Source: Based on WTO Fact Sheet: Domestic Support in Agriculture – The Boxes

114. The National Farmers’ Union pointed out that “CAP reform has anticipated some of the changes that the Doha Development Round is expected to bring about, most notably the reduction (or even eventual elimination, subject to the adoption of total decoupling by all countries) in support currently


classified within the Blue Box”(p 14). Decoupled payments have allowed for the reclassification of most direct agricultural supports into the Green Box. The decoupling objective of the 2003 reforms is commendable. The EU must build on this to reform the CAP fully and eliminate all market support measures.

115. The National Farmers’ Union and other farm linked organisations however were concerned that, in the absence of export subsidies and with tariffs being reduced, “only the introduction of a quota system and/or a reduction in the support provided by the intervention price could prevent a potential dramatic increase in intervention support expenditure” (p 14).

116. We acknowledge these views but do not consider that they justify the continuation of measures which cause trade distortion. We recommend that the EU should push ahead to attain a successful Doha agreement. Political will to cut subsidies and create freer trade must be met with strong action to move all EU subsidies into the Green Box by a specified date. Such action must be accomplished if the CAP is to be fully reformed.


CHAPTER 7: LOOKING AHEAD: THE CAP BEYOND 2013

117. The main hurdle the 2007-2013 Financial Perspective faces will be matching a decreasing level of Pillar 1 funding with the unprecedented needs and demands of today’s EU-25. We therefore raise the important question, what will be the policies for European and British agriculture after 2013? Given the accession of the ten new Member States to the EU, and its likely further expansion, is CAP expenditure in its current form politically acceptable when agriculture’s contribution to the EU’s GDP continues to decline?

118. It is essential that fully considered agriculture policies are in place well before the end of the next Financial Perspective. This report therefore makes a number of recommendations aimed at reforming the CAP during the 2007-2013 budgetary period and beyond. However we recognise that careful thought must be given to the timing of such further reform. It will be important to assess the success of the 2003 reforms before implementing any further changes to the Common Agricultural Policy.

119. A review of the CAP is already planned to take place during 2008. By this time, Bulgaria and Romania may have acceded and it will also be clearer as to whether any further accession would be likely to take place during the 2014-2020 budgetary period. Reforms of the sugar, wine and fruit and vegetable regimes are also likely to have occurred46. It will probably be too soon at this stage however to assess fully the effect of decoupling and the single farm payment. Use of the financial discipline mechanism may have begun in 2007-2008 but will still be a relatively untested measure.

120. It is unlikely therefore that further changes would be made to the CAP before the end of the budgetary period 2007-2013. The majority of Member States would not wish to face further substantive change following the 2003 reforms and following a possible WTO agreement. The Slovenian Secretary of State told us that “at this stage the EU has to keep the system as it is” (Q 704). However it will be particularly important for the EU to consider what changes the CAP will face after this next Financial Perspective and prepare accordingly for it.

121. We recommend therefore that the 2008 review focus on the future of the CAP after 2013. It is essential that during the 2008 review the Commission prepares further reforms for the CAP so that it is best suited to deal with the challenges it will face during the Financial Perspective of 2014-2020.

Continued expansion of the Union

122. The size, geography and membership of the EU are changing dramatically, and the CAP must change with it. The Union has experienced unprecedented recent change with the accession of ten new Member States, predominately Central and Eastern European countries, in May 2004. Two further CEEC countries, Bulgaria and Romania, are due to accede in 2007. It is conceivable that Turkey could join the Union during the budgetary period 2014-2020, as well as other possible applicants.

46 It is however unlikely that the planned further changes in the wine and fruit and vegetable regimes will have any

major impact on expenditure. This is because they consist essentially of refinement and improvement of reforms that have already been applied during the last five to ten years.


123. The likely future enlargement of the Union will be the most significant pressure on the CAP post-2013 and the strongest driver of change. Further enlargement would require a significant increase in CAP expenditure compared to the 2007-2013 budget. If it is assumed that Turkey would join under a similar arrangement as that proposed for Bulgaria and Romania (with phasing in of direct payments over a three year period) it is estimated that Turkey will require €5.8-6 billion per year in CAP costs by 201747. If coupled with possible accession of other countries, the total agricultural budget could rise by as much as 19% on 2013 expenditure levels.

124. It is our view that the agricultural needs faced by Turkey will be even more disparate from those of the EU-15 Member States than Romania is likely to face upon accession. The Slovenian Secretary of State told us that, although he thought it too early to implement renationalisation of Pillar 1 or 2 now, it might become “an important question if and when, for instance, Turkey joins the EU” (Q 704). If Turkey does accede to the EU during the next budgetary period, it will provide a clear impetus to have completed reform of the CAP by the end of the 2007-2013 budget period.

125. Such reform must ensure the future CAP is fully able to meet the needs and demands of the very different rural and agricultural conditions of its many Member States. A successful Doha agreement would pave the way for the end of all market support, intervention and export subsidies. The single farm payment should be phased out and a separate environmental fund established to recognise and reimburse farmers for the non-production benefits their activity brings to society. Meanwhile, the restructuring and modernising needs of new Member States’ agricultural sectors should be provided for out of a single rural development fund completely separate from any other agricultural objectives. Richer Member States should fund a higher proportion of their own rural development programmes.

126. Tough policy decisions will face future CAP policy-makers considering an EU of 27, 29 or even more Member States. The disparity between the agricultural needs of the EU-15 and those of new Member States is only likely to grow wider. That reason alone justifies the need for further substantial CAP reform. This must be fully considered in the 2008 review and completed in the period 2014-2020.

47 Turkey and the European Union: Just another enlargement? Exploring the implications of Turkish accession. Kirsty

Hughes, Friends of Europe working paper, June 2004


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incl

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), r

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for

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as w

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s th

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agr

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: BR

EA

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F P

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DIT

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APPENDIX 3: CROSS-COMPLIANCE

Statutory Management Requirements (SMR)

The Statutory Management Requirements require compliance with a small number of articles from 19 EC Directives/Regulations which address environmental, public, animal and plant health and animal welfare. 9 of these will apply for cross compliance purposes in 2005, (a further 7 from 2006, with the remaining 3 being applied from 2007).

Farmers/land managers will need to meet the requirements in the specified articles of the Regulations and Directives as transposed into English law. Virtually all of these Directives and Regulations are existing requirements.

Good agricultural and environmental condition (GAEC)

Protection and maintenance of soil

Practical illustrated guidance on soils will be published shortly on the management of agricultural soils in order to protect them from soil erosion, and to maintain soil organic matter and soil structure.

In accordance with new guidance, farmers/land managers will have to draw up a simple risk-based simple soil management plan in 2006.

Plans to be implemented on farms from 2007.

Overgrazing

The current controls on overgrazing semi natural vegetation, which require an assessment of the condition of vegetation, will be retained. Where there is evidence of current damage, limits on stocking rates will be advised, and if necessary imposed, to prevent further damage. The existing supplementary feeding rules will also be re-enacted.

Stone walls

Farmers will not be permitted to remove or damage stonewalls, without consent from the relevant authority—which may be granted where there are particular extenuating circumstances.

Hedgerows

Trimming of farm hedgerows must not be carried out during the period 1 March to 31 July. A derogation will be possible for health and safety aspects, particularly for hedges next to roadsides and access ways.

Permanent pasture

Permanent pasture is defined by the Commission as land that has been under grass for at least 5 years and has not been ploughed for other crops in that time. A control mechanism has to be put in place to ensure that the national area of permanent pasture is not reduced by more than 5% of the total area of agricultural land—to meet the EU Regulations. Afforestation of permanent pasture that is “compatible with the environment” is exempt from this requirement providing it has been assessed under the existing Forestry EIA Regulations.


Setaside

The existing set aside rules will largely be re-enacted with a few additional flexibilities for farmers. For example we will permit a small percentage of clover to be included in seed mixes to encourage biodiversity, and we will be encouraging the use of narrower set aside strips in particular locations to provide targeted environmental protection (see below).

6-10m setaside strips

Farmers have the option to put all or part of their setaside land into these narrow strips, subject to certain restrictions, and only next to controlled water, wet ditches, Sites of Special Scientific Interest, woodland and hedges.

Land not wholly in agricultural production

Farmers are required to ensure that land no longer in production remains classed as agricultural land under the SP. This means for example that scrub invasion must be easily removed and notifiable weeds controlled, so that the land would be capable of being returned to production by the next growing season at the latest. The land must also be in a condition where an inspector could easily identify the eligible land and undertake normal control activity.

Protection of landscape features—supporting existing legislation

Farmers will be required to comply with existing legislation that protects a diverse range of habitats and landscape features, including Tree Preservation Orders, Hedgerows Regulations, Environmental Impact Assessment, Scheduled Monuments Legislation, SSSI legislation under Wildlife and Countryside Act, Heather and Grass Burning Regulations and the Forestry Act.

Hedge and watercourse protection measures

Farmers are required to establish a protection zone in fields along hedges and water courses. This must not be cultivated or have fertilisers, herbicides or pesticides applied. It must measure 2 metres from centre of a hedge or ditch, with a minimum of 1m from the top of the ditch bank.

This measure will only target key habitats (watercourses and hedges)

The introduction of this measure will be delayed until the beginning of the next planting season (July 15th 2005).

The measure will not apply to small fields (2 hectares or less) or to newly planted hedgerows (up to 5 years old).

Rights of way

Farmers must not obstruct or disturb the surface of the path of a public right of way which runs across their land (however farmers may plough the path of a right of way so long as the path is reinstated within any prescribed time limit); and must maintain any stile or gate for which they are responsible that is on the path of a public Right of Way.

Moorland measures

Farmers must comply with the Heather and Grass (Burning) Regulations.

Source: Defra website


1. M

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ten

ance

of

Per

man

ent

Pas

ture

3.

Sta

tuto

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anag

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nd

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nm

enta

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dit

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s E

nvi

ron

men

t (f

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1 J

anu

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2005

)

Soi

l man

agem

ent

and

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1

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EC

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GA

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of

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s S

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and

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, she

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GA

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Inte

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S

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7

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8

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of b

ovin

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of b

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prod

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8

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lic R

ight

s of

Way

S

RM

8a

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mal

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on a

nd r

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– sh

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& g

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GA

EC

9

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zing

and

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supp

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ry f

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Pu

bli

c, a

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nd

pla

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hea

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(fr

om 1

Jan

uar

y 20

06)

GA

EC

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ther

and

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of

wee

ds

SR

M 1

0 U

se o

f ho

rmon

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nd o

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sub

stan

ces

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EC

12

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ible

land

whi

ch is

not

in a

gric

ultu

r al p

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ctio

n S

RM

11

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d la

w a

nd f

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safe

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alls

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12

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vent

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pong

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Enc

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AE

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and

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s S

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13

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of

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15

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ws

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win

e V

esic

ular

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16

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of t

rees

S

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15

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trol

and

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dica

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of

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17

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e P

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Ord

ers

An

imal

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fare

(fr

om 1

Jan

uar

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07)

SR

M 1

6 M

inim

um s

tand

ards

for

pro

tect

ion

of c

alve

s

SR

M 1

7 M

inim

um s

tand

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for

pro

tect

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of p

igs

SR

M 1

8 P

rote

ctio

n of

ani

mal

s fo

r fa

rmin

g pu

rpos

es

Su

mm

ary

of C

ross

-com

pli

ance

Mea

sure

s


APPENDIX 4: MEMBERSHIP OF SUB-COMMITTEE D (ENVIRONMENT AND AGRICULTURE)

Sub-Committee D

The members of the Sub-Committee which conducted this inquiry were:- § Lord Cameron of Dillington

Lord Christopher Lord Haskins Lord Lewis of Newnham Lord Livsey of Talgarth

† Baroness Maddock † Countess of Mar § Baroness Miller of Chilthorne Domer

Earl Peel Lord Plumb Lord Renton of Mount Harry (Chairman) Lord Sewel

§ Member since 25 May 2005 † Member until 24 May 2005

The Sub-Committee records its gratitude to Brian Gardner for his services as Specialist Adviser.

Declaration of Interests

Members have declared the following interests:

Lord Cameron of Dillington Dillington Park Farms Ltd (farming business) Allangrange Farming Co. (farming business) Lets Go Travel Ltd (travel agency) Dillington Farms & Estate (rural property management including farming, forestry, domestic and commercial let property Shareholding in Lets Go Travel Ltd (travel agency) in excess of £50,000 nominal value (5 October 2004) Part owner of Dillington Estate - consisting of agricultural property in Somerset with revenue derived from agriculture, forestry, residential and commercial lettings Member of Executive and Council of County Land and Business Association Trustee of Vaughan Lee Memorial Trust (managing our village hall) President of the South West region of the National Federation of Young Farmers Clubs - 2004 Member of Council of the Royal Bath and West Agricultural Society Fellow of the Royal Institute of Chartered Surveyors - FRICS Fellow of the Royal Society for Arts & Commerce - FRSA


Lord Christopher

Consultant, BNFL plc Countryside Member, NFU Member, RSPB Supporter, RSPCA

Lord Haskins Director, JSR Farm Ltd Two sons are farmers (one in Yorkshire, and one in Ireland)

Lord Lewis of Newnham No relevant interests

Lord Livsey of Talgarth President, Brecknock Federation of Young Farmers Clubs Trustee, Campaign for the Protection of Rural Wales

Baroness Maddock No relevant interests

Baroness Miller of Chilthorne Domer Occasional work for Improvement & Development Agency Husband Chair of Regional Flood Defence Committee Member of Somerset County Council Vice President, Council for National Parks Vice President, British Trust for Conservation Volunteers Chairman, Somerset Food Links Trustee, Global Action Project

The Countess of Mar Partner in family farm


Owner of an agricultural and sporting estate in North Yorkshire, (comprises Common Land and several tenanted farms. One other parcel of land subject to a Farm Business Tenancy)

Lord Plumb Ex-Chairman, Agriculture Committee of European Parliament Ex-President, NFU Ex-President, Royal Agricultural Society of England Ex-President, Royal Association British Farmers Association President, Campden Food Research Association President, Emeritus-International Policy Council of Food and Agriculture and Trade President, National Sheep Association

Lord Renton of Mount Harry (Chairman) Chairman, Sussex Downs Conservation Board Agricultural land on the South Downs, Sussex, (with wife)

Lord Sewel No relevant interests

Earl Peel


APPENDIX 5: LIST OF WITNESSES

The following gave evidence. Those marked * gave oral and written evidence. Those without an asterisk gave written evidence only.

*Councillor Patricia Aston, Local Government International Bureau

The Biscuit, Cake, Chocolate and Confectionary Association

*Mr Reimer Boege MEP

*Ms Christina Borchmann, European Commission

*Ms Lisa Bremner, Local Government International Bureau

British Sugar plc

*Ms Eleanor Brooks, United Kingdom Representation

*Ms Fiona Bryant, East of England Development Agency

*Professor Allan Buckwell, Country Land and Business Association

*Mr Franc But, Slovenian Secretary of State for Agriculture and Food

*Mr Dacian Ciolos, Government of Romania

The Commercial Farmers Group

*Mr Mugur Craciun, Romanian Secretary of State for European Integration

*Dr Sophia Davidova, Imperial College, London

*Ms Melanie Dawes, Her Majesty’s Treasury

*Mr Jean-Luc Demarty, European Commission

*Dr Janet Dwyer, University of Gloucestershire

Environment Agency

*Mr Mark Felton, English Nature

*Dr Franz Fischler, formerly of the European Commission

*Mr Mark Thomasin-Foster, European Landowners’ Organisation

*Mr Martin Haworth, National Farmers’ Union

*Mr Dariusz Laska, Permanent Representation of the Republic of Poland to the EU in Brussels

*Mr Andrew Lawrence, Department for Environment, Food and Rural Affairs

*Mr Stefan Lehner, European Commission

*Mr Thierry De L’Escaille, European Landowners’ Organisation

*Mr Simon Michel-Berger, Committee of Professional Agricultural Organisations in the European Union and General Confederation of Agricultural Co-operatives in the European Union

*Ms Shelby Matthews, Committee of Professional Agricultural Organisations in the European Union and General Confederation of Agricultural Co-operatives in the European Union

*Mr Wieslaw Moldawa, Permanent Representation of the Republic of Poland to the EU in Brussels


National Farmers’ Union of Scotland

National Sheep Association

*Mr Martin Nesbit, Department for Environment, Food and Rural Affairs

*Professor Michel Petit, Institut National Agronomique Paris-Grignon

*Mr Marco Pecci-Boriani, European Commission

*Mr Corrado Pirizio-Biroli, European Landowners’ Organisation

*Mr Wladyslaw Piskorz, Minister Counsellor in the Permanent Representation of the Republic of Poland to the EU in Brussels

*Mr Séan Rickard, Cranfield School of Management

Royal Society for the Protection of Birds

*Mr Alastair Rutherford, English Nature

*Mr Bojan Skoda, Slovenian Embassy

*Mr Claus SØrenson, European Commission

*Sir Harry Studholme, South West Regional Development Agency

*Mrs Carmen Suarez, National Farmers’ Union

*Mr Stephen Timms MP, Financial Secretary, Her Majesty’s Treasury

*Mr David Thomas, Her Majesty’s Treasury

*Emeritus Professor Kenneth Thomson, University of Aberdeen

*Ms Carmen Turturea, Government of Romania

*Mr Dusan Vujandinovic, Government of Slovenia

Which?

*Lord Whitty, Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs

*Mr Terry Wynn MEP

Information was also received from Dr Simon Bilsborough, Senior Economist, Countryside Council for Wales and from Professor Johan Swinnen, Catholic University of Louvain, Belgium. It has not been printed, but is available for inspection at the House of Lords Record Office (020 7219 5314).

Supplementary evidence was also received from Dr Janet Dwyer, Reader in Rural Studies, Countryside and Community Research Unit, University of Gloucestershire and Senior Associate, Institute for European Environmental Policy and from Mr Alastair Rutherford, Head of Agriculture, English Nature in conjunction with the Environment Agency. It has not been printed, but is also available for inspection at the House of Lords Record Office.

We would like to take the opportunity to thank all our witnesses for their submissions to our inquiry.


APPENDIX 6: CALL FOR EVIDENCE

FUTURE FINANCING OF THE COMMON AGRICULTURAL POLICY

The House of Lords EU Sub-Committee D (Environment and Agriculture) has decided to examine the future financing of the Common Agricultural Policy in the context of the current negotiations on the next EU budget.

The European Commission has released proposals, known as the financial perspective, for the next budgetary period between 2007 and 2013. They include a proposal for a Regulation on the financing of the Common Agricultural Policy48.

Some Member States have indicated that they would like to see the EU budget capped below the Commission’s initial estimates49. The final overall budget will have an impact on money available for the Common Agricultural Policy (CAP), both in terms of direct subsidy (Pillar 1 spending) and rural development funds (Pillar 2 spending).

The CAP is a major part of the EU budget, and underwent initial reforms in 2003. Although the reforms have already fixed spending ceilings for direct subsidies (Pillar 1) until 2013, rural development expenditure under the CAP will be negotiated over the next year.

Events such as enlargement of the European Union, and the ongoing discussions of the EU’s agricultural policies (e.g. sugar, dairy and export subsidies) during the current Doha Round of World Trade talks, will all have an impact on how much money is needed and where.

The Committee is keen to explore how the budget for the CAP will be set through the financial perspective negotiations. The Committee will also want to examine details of rural development spending, the impact of CAP reforms and enlargement.

The Committee would very much welcome your views on the following key questions:

CAP as a part of the EU Budget

How will total CAP expenditure be affected by the European Commission’s proposed financial perspectives, or the 1% of GNI limit proposed by the group of net contributors, if agreed by the Council of Ministers?

Is there a need for further reform of the CAP? If so, what opportunities exist for reforming it further as a result of the financial perspective negotiations?

Enlargement

Structural and regional aid will mainly be available to the new Member States of Central and Eastern Europe, which raises questions over what impact this will have on farmers in older Member States with reduced agricultural support.

How will rural development expenditure (Pillar 2) be affected by enlargement, recent and future?

48 Proposal for a Council Regulation on the Financing of the Common Agricultural Policy 49 The United Kingdom, France, Germany, Sweden, the Netherlands and Austria have proposed that the EU

budget should be capped at 1% GNI overall, compared to the Commission’s proposed 1.14% GNI.


What is the potential impact on the rural economy of increasing structural funds, which will mainly be available to new Member States, at the same time as reducing direct (Pillar 1) payments?

Financial Discipline

As part of the June 2003 CAP reform, a “financial discipline mechanism” was introduced with a view to ensuring that from 2007 direct subsidy payment ceilings would not be exceeded. The mechanism allows automatic reductions in Single Farm Payments whenever the budget ceiling is likely to be exceeded. However, there is likely to be significant pressure on these spending ceilings when single farm payments are phased in for new Member States, and after further enlargement in 200750. Reform in the dairy and sugar sectors would also have an impact.

How far are market support and direct subsidy expenditure (Pillar 1) likely to increase as a result of further enlargement and the payment of new subsidies to the dairy and (possibly) the sugar sector?

Can use of the financial discipline mechanism realistically be avoided?

Will market support and direct subsidy (Pillar 1) be affected by any concessions which the EU has to make on export subsidisation, import tariffs and domestic support expenditure in any agreement in the Doha Development Round of trade negotiations?

Rural Development

Although the 2003 CAP reforms agreed spending ceilings for direct payments (Pillar 1), the amount of the EU budget to be spent on rural development (Pillar 2) remains to be agreed during the financial perspective negotiations. If it appears that the financial discipline mechanism is likely to be implemented over direct subsidies, it is possible that cutbacks would have to be made to the rural development part of the CAP budget.

Are the spending ceilings likely to be exceeded? If so, what will the consequences be for the farming industry if the EU fails to meet the financial demands of both market and structural policies in an EU25 or EU27?

Is the negotiating stance of the net contributor countries, who aim to keep the budget at 1% of GNI, appropriate to balance the needs of rural development and promote agricultural reform in the EU as a whole?

Should the Rural Development budget be increased significantly up to 2013, or can spending remain similar to current levels?

Will the Rural Development fund set up by the Regulation on the Financing of the Common Agricultural Policy improve the distribution of funds to rural development projects?

50 Romania and Bulgaria are due to accede in 2007.


APPENDIX 7: GLOSSARY OF ACRONYMS AND TECHNICAL TERMS

Glossary

Agenda 2000 Agenda 2000, published in 1997, was a blueprint for the future of European Policy after enlargement

Agri-environment Schemes to improve the environment in an agricultural context

Brussels ceiling Agreed in 2002, the Brussels ceiling refers to fixed annual limits for Pillar 1 spending up to 2013, prior to the Financial Perspective negotiations on the rest of the EU budget

CAP Common Agricultural Policy – the EU system of support for European agriculture

Convergence regions Poorest areas of the EU where development is being encouraged

Cross-compliance Making subsidy payments conditional on compliance with environmental and other non-production requirements (see Appendix 3 for full list of requirements)

Degression Percentage reduction in subsidy payments

Doha Development Round WTO trade liberalisation negotiations initiated at the Fourth WTO Ministerial Conference in Doha in November 2001

Financial discipline mechanism Reduces the single farm payment by the percentage necessary to keep total Pillar 1 expenditure below the agreed Brussels ceiling

Financial Perspective Document produced by the European Commission setting out a basis for negotiating the EU Budget

GDP Gross Domestic Product

GNI Gross National Income

LEADER Community initiative promoting rural development through small scale projects in lagging regions (see Box 8 for greater detail)

Mid-term review Review of the CAP, so called because it is mid-way through a budgetary period

Modulation The transfer of funds from direct subsidy payments to rural development expenditure (see Box 3 for greater detail)

Objective 1 status Poorest areas of the EU with lower than 75% EU average GDP

Pillar 1 Production subsidies and direct market support measures within CAP


Pillar 2 Support for rural development, environmental protection and structural measures within the CAP.

SAPARD Special Accession Programme for Agriculture and Rural Development providing assistance to future Member States

Single farm payment Payment to farmers from the Pillar 1 budget

World Trade Organization International organisation which exists to promote and regulate the free flow of trade


APPENDIX 8: RECENT REPORTS

Recent Reports from the Select Committee

Session 2003-04

The Future Role of the European Court of Justice (6th Report Session 2003-04, HL Paper 47)

Remaining Government Responses for Session 2002-03 (7th Report Session 2003-04, HL Paper 60)

Proposed Constitutional Treaty: Outcome of the Irish Presidency and the Subsidiarity Early Warning Mechanism (22nd Report Session 2003-04, HL Paper 137)

Annual Report 2004 (32nd Report Session 2003-04, HL Paper 186)

Session 2004-05

Developments in the European Union: Evidence from the Ambassador of the Grand Duchy of Luxembourg and the European Parliament’s Constitutional Affairs Committee (3rd Report Session 2004-05, HL Paper 51)

Reports prepared by Sub-Committee D (Environment and Agriculture)

Session 2002-2003

Reform of the Common Fisheries Policy: The Current Crisis over Fish Stocks (2nd Report Session 2003-04, HL Paper 16)

Mid-Term Review of the Common Agricultural Policy: External Implications (10th Report Session 2003-04, HL Paper 62)

Progress of Reform of the Common Fisheries Policy (25th Report Session 2003-04, HL Paper 109)

Revision of the EC Bathing Water Directive (46th Report Session 2003-04, HL Paper 193)

European Union Waste Management Policy (47th Report Session 2002-03, HL Paper 194)

Session 2003-2004

The EU and Climate Change (30th Report Session 2003-04, HL Paper 179 Volumes I-II)

Documents

The Future Financing of the Common Agricultural Policy · 2005. 6. 15. · § Lord Cameron of Dillington Baroness Maddock Lord Christopher § Baroness Miller of Chilthorne Domer