Select Committee on European Scrutiny Twenty-First Report


TWENTY-FIRST REPORT


The European Scrutiny Committee has agreed to the following Report:—

AGRICULTURAL ISSUES RELATED TO ENLARGEMENT



(23214)
5638/02
SEC(02) 95

Commission Communication: Enlargement and Agriculture: Successfully integrating the new Member States into the CAP — Issues paper.


Legal base:
Document originated:30 January 2002
Forwarded to the Council: 31 January 2002
Deposited in Parliament: 26 February 2002
Department:Foreign and Commonwealth Office
Basis of consideration: EM of 6 March 2002
Previous Committee Report: None; but see (23133) 5745/02: HC 152-xx (2001-02), paragraph 5 (6 March 2002)
Discussed in Council: 12 February ECOFIN
Committee's assessment:Politically important
Committee's decision:For debate in European Standing Committee B (together with the Common Financial Framework 2004-2006 for the Accession Negotiations and other documents)



Introduction

  1.1  On 30 January, the Commission issued an Information Note in which it put forward proposals for a Common Financial Framework for the accession negotiations for the period 2004-2006. We have recommended it for debate in European Standing Committee B[1].

  1.2  On the same date, the Commission issued an accompanying paper, which we consider here. It deals at greater length with the agriculture issues raised by enlargement and includes more detailed calculations than the framework paper. We have avoided repeating here information from that paper which was in the relevant paragraph of our Report last week.

Background and the purpose of the paper

  1.3  Negotiations on agriculture (Chapter 7) have been opened with the ten candidate countries that are expected to join the EU in 2004. In the negotiations on the aspects of this chapter which relate to the Common Agricultural Policy (CAP), the requests of the candidates concerning direct payments, production quotas and other supply management instruments have not been discussed so far and nor has rural development been extensively addressed. According to the Commission, it was made clear to the candidates that these questions would be addressed at a later stage in the negotiations, after a thorough examination of all the related issues.

  1.4  The Commission says that all the other negotiating issues regarding the CAP have been "thoroughly discussed, examined and, as far as possible, addressed" in the existing Common Positions. According to the EU "road map" on enlargement, the remaining issues for negotiation arising under Chapter 7 should be addressed during the first half of 2002. This means that the EU must now establish Common Positions on those aspects of the CAP mentioned above which have not been discussed, and on rural development, as well as on accession-related rules and procedures for state aids in agriculture, the rules to apply to the Community taking over the new Member States' public stocks of agricultural products and the question of "normal and abnormal stocks" in the new Member States on accession.

  1.5  This paper and the framework paper will form the basis of these Common Positions.

The agriculture issues paper

  1.6  As in the framework paper, the Commission notes that its proposals respect the budget ceilings agreed at the Berlin European Council in 1999, whilst making adjustments to take account of a wider and later enlargement than envisaged then — that is, with ten rather than six new members joining, and in 2004 rather than 2002.

  1.7  Theoretically, the candidates should be expected to apply the acquis communautaire for agriculture on the date of accession, allowing for time-limited transitional periods where necessary. However, the Commission says that it has to be acknowledged that the present situation in the candidate countries on agriculture poses a range of administrative and economic dilemmas for the CAP. Amongst the issues that need to be taken into account are the relatively low competitiveness of agriculture in the candidate countries; the continuing need for restructuring of agriculture and food industries; and the considerable number of small semi-subsistence farms.

  1.8  The Commission says that the EU should make it clear, both within the EU and to the candidate countries, that, in the longer term, there will not be a two-tier agricultural policy, but one CAP for all the Member States.

  1.9  The Commission sets out the key points as follows.

Direct payments

  1.10  Direct payments have been granted to farmers for a number of arable crops and cattle since the support price cuts of the 1992 and Agenda 2000 reforms of these sectors. Although they were introduced initially to compensate for support price cuts, they have lost part of their compensatory character after ten years of implementation and have instead become simple direct income payments. Therefore, the term "direct aid" has replaced "compensation payment". Furthermore, the Commission says, Agenda 2000 made direct payments subject to a range of environmental conditions, notably through the cross-compliance mechanism:

    "The issue of whether and in which way direct payments should be granted in the new Member States after accession is of crucial importance for defining the EU position on Chapter 7. In their negotiating positions on this chapter all candidate countries have requested that direct payments be granted to their farmers after accession to the same extent as farmers in the EU. In the negotiations the EU has not yet expressed a view on the issue..."

  1.11  The Commission recalls that the Berlin European Council in 1999 did not make any explicit statement on the question of extending direct payments to new Member States, and did not make any specific provision for them when calculating the expenditure ceilings for enlargement. However, it argues that:

    "As direct payments are part of the CAP acquis as it currently stands, the permanent exclusion of the new Member States from direct payments would not reflect the EC Treaty's concept of a single market for agricultural products that is inextricably linked with the existence of a common agricultural policy. This raises the question of how the introduction of direct payments should be managed."

  1.12  In defining its position on the issue, the EU needs to take a number of considerations into account:

  • the impact of suddenly introducing significant direct aids could reduce the incentive to restructure and could stop agricultural restructuring altogether, creating a durable vicious circle of low productivity, low standards and high hidden unemployment;

  • high levels of direct payments are likely to entrench existing farming structures when there is considerable need for consolidation of farms. This particularly applies to subsistence and semi-subsistence farming where there would be little incentive to invest direct payments in production or alternative activities;

  • excessive cash injections through direct payments in favour of specific segments of one professional group would risk creating considerable income disparities and social distortions in the rural societies of the new Member States, potentially creating imbalances both within rural areas, due to wide differences in land ownership, and between rural and urban areas; and

  • subsistence and semi-subsistence farming has an important social and welfare function in rural communities.

  1.13  The approach which the Commission advocates should, in its view, ensure the smooth integration of the candidate countries in the CAP, while maximising the opportunity for restructuring their agricultural sectors. The effects of high direct payments would be immediate and negative and not provide incentives to restructure and invest. Direct payments should start at a low level and should be combined with intensified support for restructuring, in particular through support for rural development. It comments:

    "Since experience shows that it will be at least five years for the effects of EU programmes to be felt, and at least ten for their full impact to be seen, in the early years levels of direct payments should remain relatively modest. Ten years would appear necessary before the normal EU-level of direct payments should be reached".

National top-ups

  1.14  Some candidate countries offer CAP-like direct payments to their farmers. On accession, these aids would be incompatible with the acquis on state aids in agriculture and could no longer be paid. Where the national aids were higher than the CAP direct payments under the phasing-in approach, this could lead to economic problems for the farmers concerned. The Commission comments that accession would be held responsible for a reduction in agricultural income support. To avoid this, it proposes allowing candidate countries to supplement the CAP direct payments with national top-ups up to the total level applicable prior to accession, on condition that the total level of direct payments in the candidate country does not exceed full CAP direct payments.

Simplified implementation of direct payments

  1.15  There are almost thirty types of direct payments paid within the CAP and the administrative system is complex. The Commission has some concern, however, that, even if the necessary administrative structures[2] are fully operational by the time of accession, there may be problems in applying this complex system initially. In particular it refers to:

  • the difficulties of differentiating between marketable and non-marketable production;

  • the scope for errors and even irregularities which could be relatively high since farmers would be applying for support the first time, with no historical basis for comparison. This could be compounded by the shift between different types of production encouraged by direct payments, for instance from potatoes to rye or from dairy to specialised beef production; and

  • the administrative challenges of applying direct aids to the large number of very small farms, accentuated by the low level of payments in the early years.

  1.16  To avoid these problems, the Commission proposes giving new Member States the option of applying a flat rate payment per hectare of agricultural land. This would apply to all agricultural land in use, regardless of production, providing that it was kept in a "manner compatible with the protection of the environment". The total amount of money available to each candidate country for these simplified flat-rate direct payments would be equal to the total that it would receive were it to apply the standard, that is non-simplified, direct payment system, reduced by the appropriate percentage during the transition period. This option would be available for three years, with the possibility of a two-year extension.

  1.17  The Commission stresses that:

    "this simplified system is not an alternative to IACS,[3] but rather a limitation of IACS application in the early years to simpler arrangements for direct payments. ...

    "There are a number of advantages to this approach. Implementation would be simple, and relatively easy to verify, reducing possibilities of irregularities. This would provide time to consolidate in particular the IACS system for direct payments. At the same time it would reduce adjustment effects: changes in support levels would be more homogenous and pressures towards intensification and environmental damage would be attenuated. During the transitional period this would also reduce the shift from potatoes into rye, or from grassland into cereals production. Finally, it would facilitate the access of smaller farmers to EU funds."

  1.18  Direct payments by main sectors are shown in a chart on page 25 of the paper.

  1.19  The Minister for Europe (Mr Peter Hain) summarises this section and the following one, in his Explanatory Memorandum, as follows:

Reference years for direct payments and quotas

    "Direct payments are calculated by reference to the eligible base area in a member state and the average yield of that area for the commodity in question (reference yield). For other commodities, production is controlled by quotas. The Commission proposes to base its proposals for direct payments and quotas on the historical production of the commodity in question between 1995 and 1999. Proposed base areas, reference yields and quotas for each candidate have been calculated on the basis of this reference period and on the statistical information submitted by candidate countries, cross-checked for internal consistency and with external data. In almost all cases these are substantially lower than the areas, yields and quotas requested by the candidate countries, who have based their bids on a variety of indicators including reference periods further in the past, current production with a margin for future growth, or production potential."

Rural development policy

    "Given the short programming period for rural development policy (2004-6) until the end of the financial perspective, the Commission proposes to build on the pre-accession instrument SAPARD,[4] which has been available to the candidates for rural development measures.

    "The Commission proposes an adaptation of the Rural Development Regulation for the candidates by offering them the possibility of additional rural development measures. These measures include a flat rate aid scheme to help semi-subsistence farms restructure to become economically viable; aid for technical assistance in implementing rural development policy; aid for the establishment of producer organisations; and aid for advisory services for farmers.

    "Rural development projects are co-financed by the EU up to a maximum percentage of the project's cost. In order to facilitate the take up of funds in the new Member States, the paper proposes a maximum co-financing rate of 80%, as currently applied in the cohesion countries.

    "In terms of overall expenditure, the Commission proposes to increase the Berlin rural development figures for the first three years of enlargement both to allow for ten new Member States and to provide additional amounts to cover further rural development expenditure to support restructuring of the agriculture sectors in the new Member States. The Commission estimates that the adjusted costs for rural development policy would amount to _1532 million in 2004, _1674 million in 2005, and _1781 million in 2006."

  1.20  Rural Development measures are shown in a chart on page 16 of the paper.

State aids

  1.21  According to the paper, the candidate countries currently apply a wide range of state aids in the agriculture sector. The Minister simply notes under this heading that the paper "suggests... following the precedent set in the last enlargement which required the Commission to be notified of any existing state aids within four months of the date of accession."

Stocks of agricultural products

  1.22  The Minister summarises this section as follows:

    "The Commission's principle is that accession arrangements should avoid market disturbance as a result of uncontrolled stocks released onto the Community market. Public stocks (stocks which result from the market-support policy of a candidate country) which meet EU intervention requirements should therefore be taken over by the Commission. Any public stocks not taken over by the EU would have to be dealt with 'by transitional measures' to ensure their placement on the market is not disruptive. Any excess stocks in free circulation would have to be eliminated at the expense of the Member State. A normal level of carry-over stock will be determined for each commodity and effects of pre-accession trade liberalisation would also be taken into account.

    "The adjustment to CAP support prices upon accession can lead to a surge of imports into candidate countries from the EU in the period preceding accession as speculators seek to gain from anticipated price rises. Certain candidate countries have requested an import safeguard clause in order to avoid this market disturbance due to excessive EU imports. However, the Commission argues that a blanket safeguard clause is not necessary. Rather, speculative imports can be dealt with by specifying appropriate rules for import and export transactions in the run up to accession, as was the case for the last Accession."

The Government's view

  1.23  The Minister says that the Government welcomes the fact that the Commission has presented this paper and agrees that agricultural restructuring in the candidate countries should be the priority. He continues:

    "The Government ... agrees with the Commission that EU positions should be designed so as to support in the best possible way the efforts undertaken by the candidate countries to restructure and modernise their agricultural economies. In this regard, it notes the Commission's arguments that high levels of direct payments, introduced too fast, may be a hindrance to restructuring given the fragmented structure of agriculture in the candidate countries and the low level of agricultural incomes. It is important to evaluate fully this risk in considering the Commission's proposals and to consider what other options may be available to help restructuring.

    "The Government considers rural development spending to be one of the most effective ways to help new Member States restructure agriculture sectors, improve productivity and undertake diversification of the rural economy. The Government therefore particularly welcomes the focus on rural development in this paper. Beneficial co-financing terms and an adapted rural development regulation between 2004-2006 should help the candidates further restructure in their first years as Member States.

    "The Government welcomes the Commission's thorough analysis and proposals for base areas, yields and quotas for the various commodities. In principle the UK welcomes basing these proposals on production figures from 1995-1999. This is a fair way of treating all candidates, is an objective measure and in many cases mirrors the way quotas have been allocated in the past."

Timetable

  1.24  This paper was discussed at the Foreign Minister's Informal meeting at Caceres on 8-9 February and at ECOFIN on 12 February. The Presidency invited the Commission to take note of the Council's discussions in drafting the Common Positions on these aspects of agriculture, which the Commission is expected to present to the Council at the end of March.

Conclusion

  1.25  When we considered the Commission's Information Note on the Common Financial Framework last week, we said that we expected the Minister to make a fuller comment on the issue of direct payments in his Explanatory Memorandum on this agricultural issues paper. However, we assume that he had signed off the EM on this paper before seeing the comment in our Report, which was agreed that day, 6 March. He again simply notes the Commission's arguments against early introduction of direct aids at a high level, in language which suggests that he supports the Commission's case. He does not tell us whether the Government opposed the proposals in principle, despite the extensive press coverage reporting that the UK, with other named Member States, had argued at the 12 February ECOFIN Council against direct aid payments to farmers in the new Member States. Nor does he take the opportunity to refute the press reports. This seems to us an example of why the Council should be more open about its deliberations.

  1.26  This paper, like the Common Financial Framework paper which it is intended to accompany, is of political importance and we recommend that it be debated in European Standing Committee B, together with the framework paper and other documents already recommended for debate. We suggested in our Report last week on the framework paper a number of issues which Members might wish to raise with the Minister during the debate.


1  (23133) 5745/02; see headnote to this paragraph. Back

2  Integrated administration and control system for certain Community aid schemes established by Council Regulation (EEC) No. 3508/92 (OJ L 355, 5.12.92, p. 1), known as IACS. Back

3  Integrated Administration and Control System. Back

4  Special Accession Programme for Agriculture and Rural Development. This instrument is not applied in Cyprus and Malta. Back


 
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