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“Analysis From Brussels” –By Roger Waite – CAP Backgrounder

In conjunction with expanding FarmPolicy.com viewership, FarmPolicy will also be broadening the amount of information available to readers.

In addition to the daily news summaries, starting today, FarmPolicy.com will also be featuring a new farm policy analysis section, entitled, “Analysis from Brussels”- by Roger Waite.

On Saturday, March 1, 2008, The German Marshall Fund of the United States (GMF) announced that, Roger Waite, editor of the AGRA FACTS and AGRA FOCUS newsletters and long-time agriculture policy correspondent in Brussels, has joined GMF as a Journalism Fellow. Roger will provide insight and comment on issues relating to the EU’s Common Agriculture Policy, in particular in relation to the forthcoming “Health Check”.

Roger’s analysis at FarmPolicy.com will be posted on a semi-regular basis and will provide readers with additional information that will assist them in assessing and gauging the political dynamics of the farm policy debate in Brussels – much as Dan Morgan does on US policy issues from Washington.

Roger’s updates will be available exclusively at FarmPolicy.com (homepage, Email and RSS feed)

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The first installment of Roger’s “Analysis from Brussels” is available below.

CAP Backgrounder

By Roger Waite – Roger is editor of AGRA FACTS, the Brussels-based newsletter on EU agriculture policy, and a Journalism Fellow at the German Marshall Fund of the United States. “Analysis from Brussels” is posted exclusively at FarmPolicy.com.

The evolution of the C.A.P.
Europe’s Common Agricultural Policy (CAP) has changed considerably in recent years. Goodness knows this was overdue. But successive policy changes in 1992 (“Mac Sharry”), 1999 (“Agenda 2000”), and 2003/4 (“Mid-Term Review” also known as the “Fischler” reforms) have turned the policy around from an expensive, severely trade-distorting , inefficient system based on price support and surpluses dumped on the world market to a much more market-oriented and flexible system, which is considerably less trade-distorting. It remains expensive (in terms of the overall EU budget), but considerably less so than in the past, and a growing share of the funding is being dedicated to policy options which are perceived to be more acceptable to the taxpayer.

Why has it changed so much?
First of all the previous system was unsustainable. Set up in the 1950s and 1960s when Europe was still short of food, the policy worked brilliantly well in encouraging farmers to produce more and more. The only problem was that the politicians of the 1970s and 1980s did not have the foresight or political pressure to adjust the system when the surpluses started to grow. Instead, production control concepts were introduced such as set-aside and dairy quotas – and budgetary stabilisers in order to keep spending in check. Nevertheless, farmers’ production decisions continued to be dominated by what subsidies (direct or indirect) were available, rather than what the market wanted – in the knowledge that the EU would pick up the tab for any surplus production (through public buying up of surpluses and/or using export refunds).

Mac Sharry reform – the first big step

It was only when the GATT Uruguay Round (WTO) talks failed in Brussels in December 1990 that European politicians accepted that they could no longer put off the inevitable reforms. Irishman Ray MacSharry – the then Farm Commissioner – came forward with proposals, based on the US model, to reduce the support price but introduce direct payments for farmers as “compensation” for their potential loss in revenue. While arable payments were based on historical reference yields, the livestock payments were per animal. In terms of reform, this was the most important first step in changing the direction of the policy, and one could argue that the 1999 and 2003/4 reforms were mere extensions of this. The reform also set up “accompanying measures”, notably for agri-environment and early retirement schemes, which were the forerunners to today’s Rural Development policy.

The other major influence on the process of CAP reform was the political changes in Central and Eastern Europe which meant that 10 New Member States including countries such as Poland, Hungary and the Czech Republic joined the EU in May 2004, with Bulgaria and Romania following in 2007. The need to integrate these poorer countries meant that the CAP had to change further as the EU could simply not afford to subsidise these countries’ agriculture in the same way. Indeed, the EU could not afford for farmers in these New Member States to get into the bad habit of western European farmers of allowing subsidies to influence significantly their production decisions.

The Mid-Term Review – also known as the Fischler reforms
With EU Enlargement imminent, the 2003/4 reforms were the last chance to make certain key changes. It was agreed to “decouple” subsidies from production as much as possible – also in order to make EU subsidies more “Green Box” in WTO negotiating terms. But in order to reach agreement among 15 Member States (as it was then), it was agreed to continue some Member States to retain “partial coupling” for some products. For example, France and Spain have kept 25% “coupled” payments for arable crops. The political reason for retaining “coupled” payments is quite simply the fear that if payments are fully decoupled, farmers in marginal areas will reduce production to the absolute minimum. (In order to receive direct aid, a farmer is not obliged to produce, but is required to keep the land in “Good Agricultural & Environmental Condition”.)

One other change in 2003 was the introduction of “cross-compliance”, seen by Fischler as a new way of justifying CAP direct support. After all, was it acceptable to the European taxpayers in 2005 and beyond that farmers were still being “compensated” for cuts in the support price in 1993? The EU has a range of environmental, animal welfare and other rules that farmers were already obliged to meet, such as the Nitrates Directive. The concept of cross-compliance links the payment of direct aid to 18 existing pieces of legislation, giving Member States the right to reduce a farmer’s payment if he is found to be failing to meet these rules.

Single Farm Payment
The 2003 reform also established what is in effect a “national envelope” of farm subsidies for each Member State on the basis of all past direct payment subsidies it received, with Member States being given much more flexibility on how to allocate this predominantly decoupled aid under this new “Single Farm Payment”. National governments could decide whether to implement this Single Farm Payment on the basis of an individual farmers’ historic subsidy receipts or to move towards a simpler, flat-rate payment per hectare in each region, i.e. “historic” or “regional” model. Or a fixed combination of the two, i.e. a “static hybrid” model. Or allow a progressive combination which moves slowly from a historic base towards a hectarage payment, i.e. a “dynamic hybrid”.

By allowing this flexibility, Farm Commissioner Franz Fischler achieved a much greater reform than was expected. But, this flexibility over the amount of “coupled” support and the type of Single Farm Payment model, means that there is virtually no “common” element to the Single Farm Payment received in any 2 Member States. For the record, there are 19 different SFP “models” applied in the 15 “Old” Member States – because Belgium is split into 2 regions (Flanders & Wallonia), and the UK is split into 4 (England, Scotland, Wales and Northern Ireland).

SAPS and phasing in for the New Member States

To confuse matters more, the situation in the New Member States is different. In their terms of EU accession, it was agreed how much direct aid they would have received based on historic production – and respective national envelopes were calculated. Because they lacked a proper historical reference, however, these countries are not allowed to apply a “historic” model Single Farm Payment, i.e. only a regional model per hectare. In fact, in an attempt to reduce the bureaucracy they face – and to set a signal for the “Old” Member States – the Commission agreed that the NMS could apply the Single Area Payments Scheme (SAPS), whereby the NMS merely pays a flat-rate per hectare for all farmland, calculated by dividing the national envelope by the eligible area. Under this system, rules about cross-compliance and compulsory set-aside are not applicable.

The big political and budgetary decision about how to treat the New Member States was resolved by phasing in the system of direct aids starting at 25% of EU-15 levels (i.e. just the full national envelope), rising to 30% in Year 2, then 35%, 40%, 50, 60, 70, 80 90 and reaching 100% after 10 years (i.e. 2013 for most of the NMS and 2016 for Bulgaria & Romania). During this period, the concept of compulsory modulation [see below] does not apply to the New Member States.

Article 69 – targeted payments
One further option open to Member States – defined under Article 69 of the EU Regulation on the Single Farm Payment (1782/03) – is the possibility for national or regional governments to filter off up to 10% of the aid in a particular sector and use it for targeted “environmental or quality production” support in that same sector . For example, the Scottish government decided to siphon off 10% of the amounts previously dedicated to beef production to fund an additional “coupled” payment for beef producers in the Highlands to ensure that the decoupling of payment does not see a massive reduction in cattle numbers. This is done in the form of a “coupled” payment per beef bred calf (with a lower rate payable from the 11th calf onward).

The growing importance of Rural Development
All of this “traditional” direct aid is funded from what is known as the 1st Pillar of the CAP (which also covers export refunds & intervention spending, i.e. “Market” spending). Both “Agenda 2000” and “Fischler” reforms established and expanded a “2nd Pillar” for the CAP of measures relating to Rural Development. In broad terms this are now divided into 3 “Axes” – i) modernisation & improving competitiveness, ii) land management & the environment, and iii) diversification in rural areas. Each Member State is granted an envelope of funding and Member States have come forward with national or regional programmes for the 2007-2013 period on how to spend this money. One key political point is that these measures are co-funded, i.e. 50%-75% comes from the EU budget, with the remainder coming from the national/regional government.

In overall budgetary terms, many Finance Ministers seem to feel that there is greater justification for committing EU funds to RD measures than to direct payments – arguing that this is paying for the “public good” that farmers provide. (Others argue that the cross compliance link give the Single Farm Payment a link to “public good”.) Rather than suddenly cutting the Single Farm Payment to increase RD funding, however, the 2003 Fischler reform introduced the concept of “compulsory modulation” whereby all farmers had their Single Farm Payment amounts above €5000 reduced by 3%, then 4% and now 5% – with the money shifted across to the Rural Development budget envelope. (At least 80% of the funding transferred stays within the original Member State.) For the record, 75% of EU-15 recipients of the Single Farm Payment get less than €5000 a year – and are therefore unaffected by this measure.

By Roger Waite