Select Committee on European Union Tenth Report

Attitudes to CAP reform in the Candidate Countries

40.  Evidence and other information was received from four Candidate Countries—the Czech Republic, the Republic of Poland, the Slovak Republic and the Republic of Slovenia. From their evidence, and from other information available to the Committee, it is clear that a majority of the new member governments are keen that the subsidy system should act as a stimulus to production of the commodities where they believe they have an advantage in an enlarged common market.[20]

41.  For this and other reasons, most notably the belief that acceptance of the mid-term review proposals would mean lower farm incomes than the application of an unreformed CAP based largely on producer subsidies, there is general opposition to the decoupling proposal among the new member countries. While it has been generally stated by their representatives in evidence to the Committee that the governments of these countries favour reform, their definition of reform is probably not the same as that held by the Commission. We suspect that a majority would tend to side with the conservative element in the Council of Ministers in their attitudes to the mid-term review. This is an important reason why the review process should be completed to meet the completion deadline set by the Commission of mid-2003. It was therefore a matter of regret for us to hear from the Slovenian Minister that his country had already set up what can only be described as a complete CAP in waiting.[21]

42.   It is essential that the Commission's recommendations on decoupling are agreed and applied in advance of the eastward enlargement from 2004 to ensure that any stimulation of production resulting from the application of EU agriculture policy is minimised.

43.  In this same context, we would draw attention to the Commission's failure to recommend the abolition of market intervention and export subsidisation, which in our view should form the corollary to decoupling of subsidies from production. Change in emphasis from production and market support to the stimulation of structural change through modulation is even more essential in eastern Europe than in the EU15.

The likely impact of the mid-term review proposals on the agricultural sector in the Candidate Countries

44.  It has to be acknowledged that direct subsidies, whether decoupled or not, do have the advantage, in those countries with lower per capita incomes, that they are the means of avoiding any inflation of food prices and consequent depression of consumption which would result from the application of a market based support system.[22]

45.  Despite the enthusiasm for stimulating production, it is also obvious that the new members will, in general, support the application of modulation and the gradual switch of policy emphasis and funding from market and production support (Pillar 1) to structural improvement (Pillar 2). There is a strong implication however that they expect this to involve not only a switch in emphasis between the two policy approaches, but also a switch of funding emphasis from west to east, with the money saved on production and market support in the EU15 being spent on re-structuring in the new Member States.[23]

46.  Agreement on modulation is essential to ensure that the emphasis on structural change is maximised where it is most needed and that the subsidising of increased production is minimised. We recommend that modulation should involve a larger proportion than the proposed 6 per cent to be removed from direct subsidies and transferred to structural measures. We also believe that this transfer should take place at a faster rate than the seven years (effectively ten, since the transfer would not start until 2007) recommended by the Commission.

47.  Serious consideration should also be given to transferring funds to Pillar 2 policies in the new Member States at a greater rate than in the EU15, possibly by skimming off a percentage of the yield from modulation in the current Member States.

48.  Early agreement and the application of the Commission's cross-compliance proposals is if anything more urgent in the new Member States than in the EU15. This is because there are many habitats and species still surviving in eastern Europe which are now rare in the west. Failure to apply effective cross-compliance measures could result in these being endangered by the intensification of agriculture in these regions.

Implications of lack of reform proposals for dairy and sugar regimes

49.  The lack of proposals for reform of the sugar market regime and the January 2003 recommendation to continue the dairy quota regime for another eleven years has particular importance for the new Member States. Unsurprisingly, all regard the limitations on production of these two commodities as too restricting for their industries.[24] They also represent considerable administrative problems in those countries with large numbers of small dairy farms, most notably in Poland. The danger of proceeding with enlargement without significant reform of the common market organisations for sugar and milk is that their highly beneficial price levels will stimulate constant political pressure for quota expansion and the consequent further growth in surplus and EU budgetary expenditure.

50.  Urgent consideration should be given to the formulation of proposals for the reform of the market regime for sugar and dairy products. We consider the Commission's recent proposals (January 2003) for the dairy sector to be completely inadequate; they leave the market unliberalised and the market distorting intervention and export subsidisation mechanisms intact. They also go against earlier understandings under Agenda 2000.

51.  Proposals for these two sectors should involve, most essentially, plans for the rapid phasing out of the delivery and production quotas linked to stepped cuts in support prices with a view to rapid abolition of market support and export subsidisation. A short time limit should be set for the further operation of milk and sugar quotas. Compensation for the removal of support should be incorporated into the plans for the payment of decoupled income subsidies.

Relevance of the proposals to the European Union's position in the Doha Round of agricultural trade liberalisation negotiations

52.  The Commission claimed in its July proposals that: "In addition to achieving major internal objectives, the approach also provides benefits in meeting external challenges. First, it will facilitate the integration of the new Member States into the common agricultural policy. Second, it will provide a major advantage within the WTO, since the Green Box[25] compatibility of the scheme will help secure these payments in an international context."[26]

53.  If the Council of Ministers were to agree to the proposed conversion of current production related subsidies to flat-rate income supplements this would certainly put the bulk of EU subsidisation of agriculture into the WTO defined category of production-neutral, or "green box", and thus free it from reduction under any new agreement on domestic support. The important question is, however: would this change have the practical effect of reducing the level of subsidised production, most importantly in terms of export availability? Would it also eliminate the need for market intervention and export subsidisation?

54.  Adoption of the Commission's proposals would allow the European Union to offer significant concessions in the trade round. Maintenance of an unreconstructed CAP, on the other hand, would mean the continuation of all the trade mechanisms which currently protect an over-subsidised agricultural sector. First and most important, continuation of the current direct subsidy system will not allow the EU to agree to any significant reduction in domestic support—with or without elimination of the "blue box" (see Box 5) category of temporarily permitted subsidy. Even with retention of the blue box, it cannot even reduce by any significant amount the significant proportion of its calculated total "aggregate measure of support" of over €35 billion, which is not covered by the blue box concession.
Box 5

WTO classification of subsidies and the Common Agricultural Policy

Under WTO terminology, the various degrees to which policies distort trade are classified into different groups or "boxes", which are subject to differing levels of acceptability. Completely unacceptable are "red light" policies which must be stopped or eliminated. "Amber light" policies are subject to limitations and eventual elimination, while "green light" (or "green box") policies are exempt from support-reduction requirements.

During the Uruguay Round this framework was simplified. Negotiators agreed to distinguish essentially between support that can significantly impact on trade, which should be subject to a reduction commitment (amber box measures) and support that can be considered as having no or at most minimally trade distorting effects (green box measures). The general assumption underlying the reduction commitment is that support based on price and/or the volume of output may lead to a significant trade impact. This is the case with amber box measures, while other measures, even if linked to a certain degree to production, are not subject to reduction commitments under the Uruguay Round Agriculture Agreement. A new category of support measures, the blue box, was introduced. This special "blue light" or "blue box" category was created to classify compensatory payments to producers linked to policies to limit production. Into this blue box fell the EU's (supposedly-transitional) compensatory direct payments to grain, oilseed, and some livestock producers, as well as the pre-1996 Farm Act US deficiency payments. These policies were (temporarily) excluded from reduction commitments.

The invention of the blue box allowed the EU to avoid any commitment to reduce what in 1992-3 became a large part of its support for agriculture: the direct subsidies to arable crops, beef and sheep production, now amounting to some €28 billion. Under the current WTO agreement the EU's total support of agriculture (budgetary expenditure plus so-called "consumer transfers"), the aggregate measure of support (AMS), must not exceed €65 billion. Without inclusion of the €28 billion, "blue box" direct subsidies in the sum, the EU's amber box subsidy payments and transfers amounts to only around €35 billion—well below the WTO limit.

Serious problems will arise for the EU if, in the current trade round, the blue box were to be abolished and the ceiling on total permitted support to be reduced. Were the blue box subsidy category to be abolished, the E28 billion currently spent each year on direct subsidies and the amber box subsidies included in the calculation, the EU's total AMS would rise to €61.4 billion.

If the EU's current domestic support level is recalculated with the blue box removed, then current levels of support as calculated by the AMS is shown to be just below the current limit. The margin is relatively small. Any new WTO agreement to be effective would have to include further large reductions in the level of domestic support. A not unlikely cut of 20 per cent in the AMS—in the EU's case to €52 billion—would be no problem if the blue box is retained; without it there would have to be a 15 per cent reduction in the overall level of support. This assumes of course that the current AMS system is used to calculate the levels of support for subsequent reduction.

It is probable however that the aggregation of support for reduction purposes would be abandoned and a more precise mechanism will be agreed which is specific to individual commodities. What is more likely is that something approximating to the US proposal of a reduction in support to no more than 30 per cent of the value of production of any commodity would be agreed. The adoption of such a formula, even without the abolition of the blue box, would put the EU into a difficult position for its mainstream livestock products and oilseeds. Combined with blue box abolition almost the whole of its support of all the major products would be under threat. Even in wheat, for example, the most notable example where EU exports are competing without subsidy, the level of subsidy represented by the so-called "compensatory payment" is between 35 and 40 per cent of the price of the product. Even with the retention of the blue box, the 30 per cent of value target would mean that dairy support would have to be cut by 44 per cent and beef support by 15 per cent.

55.   Similarly, the continuation of an active intervention and export subsidy system in major commodity sectors such as dairy products, sugar, beef and coarse grains means that the Union cannot agree to any significant reductions in export subsidisation. At the same time, continuation of the present policy will necessitate the retention of tariff levels close to those currently in operation.

56.  In contrast, if the Council of Ministers were to agree the Commission's July 2002 reform proposals, the EU would then have substantial scope for making concessions in the trade round. Decoupling of subsidy payments from production and conversion to income payments would allow the EU to achieve at least de jure if not de facto classification of its €28 billion a year expenditure on direct subsidies as green box rather than blue or amber box status. The implicit abandonment of the principle of support of production in such an agreement would also allow it to make provisions for future intervention and export subsidy reduction which would allow it to make a meaningful offer on export subsidies and market access in the trade round. An agreement on "modulation"[27] on the degressive basis recommended by the Commission would allow the EU effectively to defend itself against charges from the Cairns Group[28] and other exporting countries that—even if decoupled—the subsidies would still be so large as to represent a competitive distortion. This would be further strengthened by agreement on the cross-compliance proposal, which would allow a strong case to be presented that a large part of the EU's subsidisation of farmers was being used to finance the provision of public goods.

57.  It is essential that the EU adopts the proposals for the decoupling of subsidies from production. This is the only way that the EU can present a credible proposal to what is intended to be a "Development Round"—in other words providing real agricultural trade advantages to less developed countries. We do not regard the current minimal EU proposal to the WTO[29] as a valid contribution to progress, since it is based on the assumption that present methods of agricultural support will be maintained and that the EU will continue to support markets, subsidise exports and maintain prohibitive import barriers.

58.  Overall, while it can be strongly argued that the Commission's mid-term review proposals do not make any direct contribution to improving the external aspect of the Union's agriculture policy, it has to be conceded that they would, if accepted by the Council, lay the groundwork for a substantial shift away from export subsidisation and import obstruction as well as from the basic and massive market distortion created by the heavy subsidisation of agricultural production. If the Fischler plan were agreed as now proposed, the EU would have the basis for making important concessions on the three main pillars of agricultural support and protection in any new agreement on farm trade likely to emerge from the Doha Round.

59.  In order to make real concessions in the trade round the Commission should propose and the Council of Ministers agree to the abolition of market intervention and export subsidisation in all commodity sectors—including dairy products and sugar. Only in this way would it be able to offer effective reductions in import tariffs. An important part of this process must therefore be, in fulfilment of expectations created by Agenda 2000, the dismantling of the dairy and sugar market regimes by 2008, as recommended in paragraphs 50-51 above.

Impact of the proposed mid-term review reforms on the less developed countries

60.  Since the publication of the Commission's proposals in July 2002, there has been considerable criticism from the major aid agencies that the proposals will do nothing to improve trading conditions for agricultural exporters in the less developed countries—whether inside or outside the EU. The Commission's response is that while the mid-term review proposals do not overtly deal with the external trade aspects of the agriculture policy, benefits in terms of reduced subsidising of EU exports and improved market access will automatically follow indirectly from reform of the internal market regime. There are also the beneficial effects of the "Everything but Arms" agreement[30] to be taken into account, which will allow access to the EU market for farm exports from the world's least developed countries.

61.  It is argued that the decoupling of subsidies from production and the "modulation" or gradual reduction of total subsidy levels will have the effect of reducing production of those commodities currently in substantial surplus and therefore being dumped on world markets to the detriment of less developed country exporters. At the same time, the need for EU import barriers to protect EU market prices will be reduced.

62.  The major non-governmental organisations concerned with development in the less developed countries are not convinced. They argue that a reduction in the level of direct subsidisation of EU farmers by less than ten per cent and the change in the mode of subsidisation will not have any significant effect on the level of EU production and therefore of subsidised surplus to be shipped on to world markets, however indirect the subsidies might be.[31] The net EU surplus of wheat, other cereals and beef will remain largely unchanged and the price at which these commodities will be sold on world markets will still reflect the substantial subsidy to EU producers still present in the reformed system. More specifically, for those products where both developed and less developed country producers are most seriously affected, sugar and dairy products, the Commission has not presented any proposals for change.

63.  It is argued, with considerable justification, that the Commission's proposals lack the logical extension of the philosophy on which they are based: if the decoupling of subsidies from production means that the support of agricultural markets is no longer necessary, logically the package ought to contain recommendations for the abolition of intervention and export subsidisation The political reality is that such measures would be highly unpopular with most European farmers—which is why reform of the CAP has been such a painfully slow process. A consequence of this logical gap in the proposals is the assumption that if it is still considered necessary to maintain a high EU internal price then there can be no reduction in the level of import tariff (or only so far, as with cereals, where there is a specific recommendation for a price reduction).

64.  An important aspect of the argument about the effectiveness or otherwise of developed country agricultural policy reform is that in global terms reform has only a relatively small effect in terms of overall benefit to the poorer agricultural exporting countries. Recent studies by OECD,[32] for example, indicate that a reduction of support levels by the developed countries by 10 per cent would lead to an average increase in export prices of major commodities of 2.2 per cent. Such figures however are virtually meaningless unless applied to specific examples.

65.  Specific examples show much more graphically the damaging effects of EU policies on less developed country producers and exporters. Not surprisingly, the worst examples are in those products where the level of EU subsidisation and protection is at its highest: dairy products, sugar, beef and cereals. As evidence from the African, Caribbean and Pacific Group of States (ACP) showed, the effects can vary capriciously between different countries.[33]

66.  A good example of the harmful effect of subsidised EU dairy exports on developing country producers is that of skim milk powder exports to Jamaica. According to a report by the aid agency CAFOD, rising imports of cheap milk powder—mainly from the EU but also from the United States—have steadily undermined the market for fresh milk from Jamaican dairy farmers.[34] Over a period of ten years these imports have progressively destroyed the milk marketing and processing structure for the local product and thus the market for fresh milk from small local farmers.

67.  Jamaica's skim milk powder imports from the EU have almost quadrupled during the past 10 years. In 1992, the amount of milk solids imported from the EU was 1,200 tonnes, rising to an average of 4,600 tonnes over the last 3 years, peaking at 6,300 tonnes in 2000. Imports from the EU account for 67 per cent of these imports which carry an annual subsidy from the EU taxpayer of €4 million. These imports have been used largely to replace fresh milk originally supplied from local farms.

68.  Similar examples of short term market and longer term structural damage to developing country producers can be found in other regions: Kenyan grain growers whose prices are regularly depressed by indirect subsidised EU flour imports via Egypt; beef producers in west Africa; cane sugar producers in non-ACP developing countries.

69.  What there is little doubt about is the role of the current arable area payments[35] in substituting for export subsidies in maintaining the competitiveness of EU wheat and other cereals on international markets. According to a recent report by ActionAid, the impact of the CAP on developing countries is much the same whether subsidies on export are paid direct at the port or indirectly in the form of producer subsidies. EU prices for its exported wheat were, thanks to export subsidies, equal to the world price in 1992 before the introduction of arable area payments and similarly at the world price level in 2001 with no export subsidies. The cost of production was much the same in both periods, but over the ten year period the internal price had fallen by 34 per cent, due to the replacement of market support with direct producer subsidies.[36]

70.  The important question is: will conversion of the compensatory subsidy into an income payment, on the basis recommended by the Commission, make any difference to either the level of production or the volume and price of EU exports? To the large and efficient producers responsible for the bulk of EU production it is difficult to see that the translation of the payment will make any significant difference—even with degressive modulation. Because farmers are receiving an income payment—more or less equal to their "historical" drawings of arable area payments—instead of a subsidy directly related to planted area, will they leave their land uncultivated and their machinery idle? The likelihood is that they will not.

71.  Seen from the perspective of the third country exporter therefore, the effect of the Commission's mid-term review proposals may well be to diminish slightly the Union's level of exports of wheat, beef and dairy products, but these exports will still be at a volume and price level that will continue to weaken international prices. This is likely to be the external reality of maintaining an annual subvention to agriculture in excess of €40 billion.

72.  There is little doubt that the degree of protection provided by the present system is excessive and that quite substantial concessions could be made before there would be any appreciable effect on the level of imports.

73.  While the OECD average for agricultural tariffs is 36 per cent (against only 14 per cent for industrial products), among the most important developed economies the EU has the highest. But what matters are the specific tariffs on the major agricultural commodities and the EU has prominent so-called tariff "peaks", or tariff "spikes", on most basic agricultural products. What is particularly damaging for less developed countries is that the real situation is effectively worse than the figures suggest because of the higher tariffs on processed products. Both the WTO and the OECD report a marked escalation of tariffs on processed products in the 1990s. We were told by the Department for International Development (DFID) that although the mid-term review proposals would not directly address the question of tariff escalation and tariff peaks, there was a commitment to do so in the Doha development agenda.[37]

74.  Even if and when reform of European agricultural policy results in improved market access and international market reform, less developed country exporters still face the problem of EU health, safety and quality standards—a point stressed to the Committee by DFID representatives.[38] Product standards are more often than not a bigger barrier to the European market than tariffs and too often these are perceived by third countries as a protectionist barrier. Development programmes need to be directed towards encouraging the establishment of facilities in the less developed countries which allow them to meet EU import standards. As we pointed out in our 2000 Report on the Commission's proposals for the European Food Authority, enlargement of the EU also poses challenges in this field.[39] The approach needs to be one of capacity-building in third countries and the new Member States, without compromising over standards.

75.  There is also the problem of the inequality of benefit to different groups of less developed countries arising from EU reform (and from import tariff dismantling under the "Everything but Arms" arrangements). As the evidence from the ACP Secretariat demonstrated, the more developed less developed countries with multi-faceted economies are able to gain from these changes.[40] Those that are dependent on single commodities, such as sugar or bananas, exported to the EU under current preferential arrangements will lose. It is likely therefore that important ancillary to CAP reform should be revision of the Union's development programmes to deal with the problems created by these changes.


76.  Although the majority of the issues considered by the Select Committee on Economic Affairs, in its recent Report on Globalisation[41], fell outside the scope of our inquiry, we are pleased to find ourselves in full agreement with the Committee's observations on the effects of developed country protectionism on developing countries, including the perverse effects of the US Farm Security and Rural Investment Act 2002 ("the US Farm Act"). In particular we endorse the following recommendation:

"We consider that developed countries' protectionism (mainly in the United States and the European Union) with regard to agricultural and textile products in particular is wholly objectionable and unjustifiable. . . . Developed country protectionism places an unfair burden on developing countries and is in stark contrast to the protestations of the leaders of rich nations that they are committed to helping the world's poor. We urge the Government, within the European Union and the WTO, to take stronger steps to ensure that it is brought to an end".[42]

Conclusions on Less Developed Countries

77.  The EU has a responsibility towards the world community, particularly towards less prosperous members, which it has yet to address properly. We share DFID's disappointment[43] that the Commission has not looked in more detail at the impact of its proposals on developing countries. If there is to be any gain for the less developed countries in the mid-term review process it has to come from a significant reduction in the level of EU subsidisation of production. Only in this way can subsidised competition in the domestic markets of these countries and on the international market be reduced. For this reason it is not only necessary that the EU's subsidies be detached from production, but also that the level of subsidy payment to the individual producer be reduced. It is clear that large subsidies to large farms are a positive incentive to low cost production which will continue to undercut international markets—whatever form the subsidy may take. We deplore the complacent attitude of a number of Member States' governments to this problem, as revealed in the seven ministers' open letter of 23 September.[44]

78.  We therefore recommend that in order to act as intended, as an income subsidy only, the level of subsidy receipts allowed to individual holdings should be capped. We regret the Commission's decision to remove the capping proposal from its January 2003 modification of the mid-term review proposals. The converted subsidy should be utilised only as a transitional income supplement, to be used only where hardship is created by elimination of EU support to production or in economically disfavoured areas.

79.  Developing country trade is particularly affected by the EU's subsidised exports of wheat, dairy products and sugar. It is therefore all the more essential that the EU abandons its direct subsidisation of these exports and takes early steps to reform its dairy and sugar market regimes, which remain the two outstanding examples of unreconstructed common market organisations. The Commission's January 2003 proposal to continue dairy quotas is therefore a step in the wrong direction.

80.  Where reform of European agriculture policy and the introduction of the "Everything but Arms" agreement harms the incomes of countries which are dependent on the high prices maintained in the EU market through long-standing preferential access agreements, the EU's development effort to diversify the economies of these countries should be intensified.

81.  An important conclusion to be drawn from the evidence presented by less developed country and development agency representatives is that reduction of subsidised competition and the lowering of import barriers is only part of the solution to the problem of increasing the agricultural trade of developing countries. As important is the removal of health, technical and quality obstacles. We therefore recommend that more emphasis should urgently be given to development projects which will assist less developed countries to meet EU health, safety, quality and labelling requirements.

Effect of proposals on sustainability of European agriculture

82.  Sustainability has been defined as "development which meets the needs of the present without compromising the ability of future generations to meet their own needs". According to the Rio Declaration, this should have three aspects: ecological, social and economic. [45] Environmentalist opinion would generally have it that modern European agriculture, as encouraged by the CAP, has not fulfilled desired ecological standards, has been instrumental in disrupting the social structure of the countryside by reducing employment and has certainly not achieved economic efficiency, since it has distorted domestic and international markets, harmed consumers and absorbed huge subventions from the taxpayer. The question which the Committee asked itself was: how far would the application of the Commission's proposals eliminate these shortcomings of current agriculture policy?

83.  It is claimed that the new subsidy system, as proposed by the Commission, would both relate production more closely to the market and reduce the intensity of agricultural production. While some may argue that there is a clear conflict here, the effect of removal of production related subsidies is expected to outweigh any compensatory intensification which may result from the reduction in support. The major benefit arising from the change is likely to be in reducing the high cost structure which has been a major stimulant of intensification particularly of arable cropping.[46]

84.  The mid-term review proposals, through decoupling and cross-compliance, provide the opportunity to repair some of the damage to the rural environment caused by the production related subsidy structure of the current policy. The Environment Agency has argued that the CAP has stimulated arable production on marginal land, the elimination of hedges and other field boundaries and encouraged often unsuitable crops—all with harmful environmental side effects, principally erosion and the leaching of fertilisers and pesticides into water courses. The headage payment systems for livestock have also provoked overstocking of both upland and lowland pastures. This latter development has been responsible for the loss of important wildlife habitats, particularly in upland areas.[47] The mid-term review proposals can be expected to provide the incentives and opportunities for better stewardship of the rural environment. They are consistent with the proposals (which the UK Government has endorsed) by the Policy Commission on the Future of Farming and Food (the Curry Commission) for a "broad and shallow" entry-level agri-environment scheme.[48]

85.  It is essential however that the Commission's cross-compliance proposals are effective in preventing what may prove to be the short term harmful effect of decoupling and the extension of permanent set-aside—the desertification of some areas and increased intensification in others.

86.  The changes in the modulation arrangements recommended by the Commission can be expected to play an important part in switching the emphasis in funding and policy from market and production support (Pillar 1) to structural improvement (Pillar 2). It has been stressed by most bodies which have given evidence to our inquiry that the proportion of funds to be switched from Pillar 1 to Pillar 2 is not high enough and the rate at which this change is to take place is too slow. It should be noted, however, that pessimistic assessments of the impact of modulation on farm incomes have generally not taken account of the benefits to the farming industry resulting from the potential increase in income resulting from increased structural spending.[49]

87.  There is a widespread view among witnesses (not shared by the National Farmers' Union of England and Wales) that the amount of funding to be switched to Pillar 2 under the Commission's proposals will not be enough to counteract the harmful effect that intensification of agriculture across Europe has had on the rural environment.[50] Adoption of the decoupling and cross-compliance proposals has particular importance for the European environment as whole in its application to the new Member States. Due to "under-development" in parts of eastern Europe, biological diversity and valued landscapes have survived unaffected by intensive agriculture. The survival of species in eastern Europe which have become close to extinction in the west of the continent will depend upon the operation of sympathetic agricultural and environmental policies. Urgent measures are needed to prevent the conflict between intensive agriculture and the rural environment which has already occurred in the EU15 being repeated in the new Member States.[51]

88.  We are concerned, however, that these measures, however well-intentioned, may fail unless they are backed by a determined effort to reduce bureaucracy and to simplify procedures. At the same time, we agree with the House of Commons Environment, Food and Rural Affairs Committee that implementation of the Commission's modulation proposals will require careful monitoring and rigorous assessment of value for money.[52]

89.  In our recent Report on the impact of EU environmental regulation on UK agriculture[53] we drew attention to the need for a risk-based approach to environmental regulation which relied more on self-regulation and less on formal regulation by enforcement agencies, citing with approval the recommendations of the Better Regulation Task Force and the Policy Commission on the Future of Farming and Food.[54] We suggested that this more flexible approach should be built around whole-farm planning, environmental management systems and effective delivery of advice on best practice. We believe that what is good for the UK environment and farming industry is good for Europe as a whole, and would want to see it better reflected in the Commission's proposals.

Conclusions on sustainability

90.  It is essential that the cross-compliance measures and the closely allied Farm Advisory System recommended in the mid-term review proposals are sufficiently effective to ensure that possible intensification stimulated by the reduction of support to production is discouraged.

91.  The switching of funds from support of production to structural, environmental and other Pillar 2 considerations proposed by the Commission amounts to only a possible total of €1.5 billion for the EU15 by the end of a seven year period. We consider that this is inadequate to have any noticeable effect. We therefore recommend that—subject to careful monitoring and assessment of value for money—the modulation percentage should be considerably more than the maximum of 19 per cent proposed under the Commission's "degressive modulation" proposal of 21 January 2003 and that the time allotted to reach the full figure should be considerably less than what has now effectively become ten years. We deplore the delay in the application of this measure until 2007, as recommended in the January modification of the Commission's proposals.

92.  A revised CAP should be less complicated, less bureaucratic and less centralised. It should offer farmers more choice about how to run their businesses. In this respect these proposals fall far short of the Commission's commendable intentions to deliver such reforms.

93.  If environmental measures are to be effective it is important that, rather than being of an essentially prescriptive nature, the new policies envisaged within the mid-term review proposals should be designed to encourage and reward good land management. We recommend that the type of subsidised "best practice" measures being developed in the UK, for instance in response to the Curry Report, and in some other EU Member States should be adopted at the general European level.

20   See for example the non-paper by the Czech Republic at pp 53-56. Back

21   Q 47. Back

22   Implications of CAP reforms for Poland, Office of the Committee for European Integration, Republic of Poland, Warsaw 2002 (not printed-see Q 110). Back

23   Non-paper by the Czech Republic at p 55. Back

24   See, for example, the evidence of the Slovenian Minister for Agriculture, Forestry and Food at Q 48. Back

25   See Box 5. Back

26   COM (2002) 394, section 2.4, at page 19. Back

27   See Box 2. Back

28   The Cairns Group of 17 agricultural exporting countries (named after its inaugural meeting in Cairns, Northern Queensland, Australia) was formed in 1986 with the objective of ensuring that agricultural trade issues would be given a high priority in multilateral trade negotiations. The members are Argentina, Australia, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Indonesia, Malaysia, New Zealand, Paraguay, Philippines, South Africa, Thailand and Uruguay. Back

29   European Commission Statement "WTO and agriculture: European Commission proposes more market opening, less trade distorting support and a radically better deal for developing countries" IP/02/1892 Brussels, 16 December 2002. Back

30   On 26 February 2001 the General Affairs Council adopted the Everything but Arms (EBA) amendment to the EU's Generalised Scheme of Preferences (Regulation 416/2001, OJ no. L 60, 1.3.2001). With effect from March 2001 EBA extended duty and quota-free access to all products originating in Less Developed Countries, with the exception of arms and ammunition. Only fresh bananas, rice and sugar were not liberalised immediately. Back

31   Such criticisms have been challenged in what the Commons Committee has described as "the (in)famous letter from the French Minister of Agriculture and others" (see paragraph 37 and box 4). Back

32   Agricultural policies in OECD countries: monitoring and evaluation, OECD, 2002. Back

33   QQ 58, 68. Back

34   Duncan Green and Matthew Griffith, Dumping on the Poor: The Common Agricultural Policy, the WTO and International Development, CAFOD, London, October 2002 (provided in support of written evidence to the inquiry by CAFOD, ActionAid, Christian Aid and Oxfam); available on the internet at Back

35   Arable area payments are direct subsidies equal to the difference in market support level before and after the application of the 1992 reforms of the CAP-most importantly the 34% reduction in the cereal intervention price. Paid on the basis of regional historical yields, they were initially equal to 34% of the 1991 intervention price. Back

36   Farmgate: The developmental impact of agricultural subsidies, ActionAid, London, August 2002 (provided in support of written evidence by CAFOD and others); available on the internet at Back

37   Q 32. Back

38   Q 26. Back

39   EUC 7th Report, 1999-2000, A European Food Authority, HL 66. Back

40   Q 58. Back

41   House of Lords Select Committee on Economic Affairs, 1st Report, 2002-03, Globalisation, 17 January 2003, HL Paper 5-I. Back

42   Op cit, paragraphs 25/208. Back

43   Q 26. Back

44   See paragraph 37 and Box 4. Back

45   Written evidence from Defra, p 5, at paragraph 30. Back

46   Written evidence from the Tenant Farmers Association, pp 108-109, at paragraphs 2-3. Back

47   Memorandum by the Environment Agency to the House of Commons Environment, Food and Rural Affairs Committee, printed in the Committee's 3rd Report, 2002-03, The Mid-term Review of the Common Agricultural Policy, HC 151, p Ev 129, at 1.2. Back

48   Response to the Report of the Policy Commission on the Future of Farming and Food by HM Government, Cm 5709, December 2002, recommendation 71. Back

49   Environment Agency memorandum to House of Commons Environment, Food and Rural Affairs Committee, op cit, p Ev 130, at 2.2. Back

50   Written evidence from the RSPB, p 104, at paragraph 5.1. Back

51   The Committee is grateful to the Royal Commission on Environmental Pollution for drawing its attention to a statement (then in draft) by the network of European Environmental Advisory Councils (EEAC). The statement, A sustainable agricultural policy for Europe, was adopted by the EEAC network at its annual conference in Kilkenny, Ireland, in October 2002 and is available at Back

52   Although the Commission's original proposals on modulation have been overtaken by the revised proposals of January 2003 (see paragraph 25 and Box 2), we agree with the House of Commons Environment, Food and Rural Affairs Committee when they say: "We believe that there should be a very rigorous analysis of the scope and purpose of rural development measures and a procedure put in place to assess value for money. Rural development programmes should not be regarded as virtuous simply because they are not production aids. Funding from Pillar 1 should only go to well-founded schemes: if, as a result, there are total savings in expenditure so much the better. Equally, funding required under Pillar 2 to deliver measures which really will deliver clear measurable benefits should be provided. A proper assessment of the measures required would form a more intellectually-sustainable basis for funding." (The Mid-Term Review of the CAP, page 35, recommendation 6.) Back

53   EU Committee 36th Report 2001-02, Environmental Regulation and Agriculture, December 2002, HL Paper 186. Back

54   Better Regulation Task Force, Environmental Regulations and Farmers, Cabinet Office, London, November 2000; Report of the Policy Commission on the Future of Farming and Food, Farming & Food: A Sustainable Future, Cabinet Office, London, January 2002. See also footnote 48. Back

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