Savings directed to rural development

19 March 1999

A good deal for agriculture?

AFTERa year of discussion and three weeks of tortuous negotiation, EU farm ministers finally reached agreement on CAP reform late last week.

"A good deal for agriculture," was how most of them described the package, as they emerged from their late night session. Yet, within hours, questions were being raised as to whether the package had any chance of holding together.

French farm minister Jean Glavany was quick to distance himself from the deal, mindful of his dissenting voters back home. "The compromise reached on March 11 does not constitute an agreement to reform the CAP," he claimed. Without a mandate from the president of France, or a vote in the council, how could he have approved it?

Portugal expressed its outright opposition from the start, while several others had reservations.

UK farm minister Nick Brown said it worked as an agricultural package, setting the EU in the right direction for eastward expansion and freer world markets.

But he had strong suspicions that EU heads of state would want to look at the financial implications of the package at their summit in Berlin next week.

Certainly it is this funding issue that makes the farm package most vulnerable in the short term.

Although a bit cheaper than some of the earlier compromises tabled by the German council presidency, with savings of about k4bn (£2.7bn) from delaying dairy reform by two years, overall the package is estimated at k1.5bn (£1bn) more than the commissions original proposal.

EU heads of state had already set their farm ministers the target of stabilising the farm budget at 1999 levels by 2006, allowing for 2% annual inflation. They accepted that costs would rise initially, due to the shift from price to direct income support. But they should be falling again by the end of the reform period.

To achieve this budgetary stability, CAP expenditure would have to total no more than k307bn (£206bn) over the next seven years. Last weeks deal is put at k314bn (£210bn), k7bn (£4.7bn) over budget.

Speaking to journalists immediately after their marathon meeting, council president, Karl-Heinz Funke, said he believed heads of state and finance ministers would be happy. "Given what we have had to achieve, the fact that we have not stuck to the absolute letter is understandable," he said.

That remains to be seen. But there is clearly a threat that heads of state will want to see more financial rigour before they sign off the whole Agenda 2000 package next week.

In particular, doubts remain about the reliability of some of the commissions cost forecasts. Only a few weeks ago, caretaker farm commissioner, Franz Fischler, was warning that if ministers only went for a 20% price cut in beef, instead of the 30% he was advocating, then intervention stocks would climb by another 800,000t with massive cost implications.

Yet, when the council finally settled on 20%, Mr Fischler conceded that his figures could be wrong and the commission was prepared to take the risk. That is unlikely to instil confidence in finance ministers or heads of state.

Furthermore, if surpluses get worse, then Brussels will probably have to use costly export refunds, (while they still can), to help clear the market.

Wary of these consequences, heads of state may well want to see some changes to the package next week.

They will be reluctant to unravel the deal totally. But there is a strong possibility they will demand the return of degressivity – trimming aid payments annually. This was left out of last weeks agreement, but is one way in which governments can really control the budget, as they pave the way for new countries to join the EU from the east.

Degressivity would bite once compensation payments reach their peak in each sector (2001 for arable, 2004 for beef and 2006 for milk). Various models have been suggested, but it seems that even the 3% cuts proposed by the commission would still not balance the books and a higher figure would be needed.

Budgetary considerations aside, the other big question is whether this reform will be acceptable in the eyes of the World Trade Organisation, seeking further liberalisation in the new millennium.

Much has been made of the need to get ahead of the game. But large sections of the CAP still look dubious, (from a WTO perspective) after the reforms. For example, the new beef slaughter premium is patently a production-linked subsidy, something governments have been encouraged to get away from.

Milk quota is another anomaly, yet there is no effort made to remove them – just a promise to have a review in four years time. Already EU cheese exports are up against the limits of what can be exported with subsidies under the last GATT agreement. The decision to raise quotas in some countries in 2000 without cutting support prices until 2002 can only exacerbate this situation.

UK farm minister, Nick Brown, said shortly after last weeks meeting broke up that the agreement set the EU in the right direction. "It will endure in the short term, but I have my concerns whether it meets the demands of the World Trade Organisation or satisfies the conditions for eastward expansion in the medium term." Time will tell if he is right. &#42

Savings directed to rural development

WITH reform on the way, most attention has focused on the three main commodity regimes affected.

But a significant chunk of the package relates to what is known as the horizontal measures and rural development.

The horizontal measures include such things as cross-compliance, (making direct aid conditional on meeting environmental conditions), modulation, (linking aid to farm employment levels), and capping, (putting payment ceilings on larger farms).

The first of these will be compulsory, though Brussels has so far given practically no guidance on what sort of schemes will be required.

"It is far from clear what should be the standard of these conditions or how common levels of environmental protection will be achieved across member states," complains the NFU. It fears that this is inviting discrimination.

Modulating payments according to employment is also included in the deal, though only as an option. Simon Ward of Bidwells believes the UK government will be unlikely to take this up. "Charging penalties for failure to fulfil employment levels is almost impossible to implement and would not create sustainable employment," he says.

Similarly, capping is retained in the final deal as an optional measure for governments that wish to link aid to the overall prosperity of the holding. "We are concerned that this might mean cutbacks on larger farming businesses by the back door," says Strutt and Parkers Julian Gairdner.

Savings from all these horizontal measures would be redirected into agri-environment schemes.

As for rural development – the so-called "second pillar" of the CAP – member states are required to submit specific plans by June 2000.

Optional measures include schemes to promote forestry, early retirement, training and tourist activities. Development of non-food crops is another possibility.

The NFU has welcomed the early retirement scheme which offers individuals 15,000 euros/year (£10,000), up to a maximum 150,000 euros (£100,000).

But since these rural development programmes require co-funding between Brussels and government, there is some pessimism as to the extent to which they will be available in the UK. &#42

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