Annex 6
COMPENSATION FOR
APPRECIABLE REVALUATIONPURPOSE
This briefing sets out the basis for the compensation package
that is available for the successive "appreciable revaluations"
of the green pound that occurred in 1997. It sets out the amount
of compensation that is available and estimates the cost to the
UK Treasury of making these compensations.
BACKGROUND
In a single market with agricultural prices and support payments
designated in a common currency (the ecu) an appreciation in a
national currency will automatically cut prices and support payments
to farmers in that country.
To protect farmers against this effect, until February 1995
a so called "Switchover Mechanism" applied. This meant
that when a currency appreciated against the ecu, all European
prices were increased. In this way, prices in the appreciating
country were kept constant in national currency terms, while in
the rest of Europe they increased.
As can be imagined, this system led to significant increase
in the cost of the CAP and to difficulties in keeping expenditure
within its legal guideline.
The British Government supported the abolition of the Switchover
Mechanism in 1995, but in order to accommodate objections from
traditionally appreciating currency countries (above all Germany)
a compromise had to be agreed. This ensured that if a country
experienced an "Appreciable Revaluation" (defined as
an increase beyond its average value for the last three years)
compensation could be made available from EU funds. This was to
be temporary and degressive over a three year period. The amount
of compensation which could be made available was to be defined
by the European Commission, according to the losses incurred by
farmers, and Compensation Schemes had to be approved to ensure
they did not distort the market or overcompensate producers.
Half of the compensation was to come from EU funds but in
addition national governments could, at their discretion, pay
a matching amount from national funds. However, the entire amount
of the payment was, in effect, made voluntary in the sense that
it was entirely left up to individual governments to decide whether
to apply for the aid or not.
The NFU opposed this compensation mechanism at the time,
precisely because it could see the danger that some governments
would apply for the maximum available compensation and others
would apply for none and there would then be serious distortions
of competition.
COST OF
COMPENSATION
In 1997 the pound strengthened dramatically and this has
led to significant falls in the value of support prices for cereals,
beef, milk and sugar beet. The European Commission calculates
that the loss in income amounts to £980 million. If compensation
for this loss were to be made it would be paid over a period of
three years with 50 per cent in the first year, 33 per cent in
the second year and the balance in the third year. The payments
would be made to cereal, dairy, beef and sugar beet farmers. Of
course the high value of the pound has affected all sectors of
agriculture, but the compensation is only available for those
sectors with support prices linked to an intervention system.
Sectors without price support—eg pigs and poultry, horticulture
and sheep—are specifically excluded.
The compensation is intended to be 50 per cent funded by
the European Commission and 50 per cent funded by the UK Government.
The UK Government does not need to make its share of the compensation
to secure the EU funded share of the compensation. Were the full
compensation to be made the cost to the UK Treasury would be £490
million (the UK share of the compensation) plus a further £348
million which represents the UK's share of the £490 EU funded
compensation. The cost to the UK Treasury of total compensation
would therefore amount to £838 million over three years.
FONTAINBLEAU
The reason why it would cost the UK Treasury £348 million
to obtain the £490 million EU compensation is the "Fontainbleau
Mechanism". This has been in operation since the mid 1980s
and is designed to limit Britain's net contribution to the EU
budget. One effect of the mechanism is, however, that any new
programme of spending which would go to the UK, thereby reduces
our net budget contribution and thus significantly cuts our budget
rebate.
At the margin the effect on our budget contribution can be
dramatic. This is a new item of spending which does not benefit
the UK at all (for example, agri-monetary compensation to Ireland)
would only be 5 per cent funded by the UK whereas a measure which
entirely benefits the UK (eg agri-monetary compensation to British
farmers) would be 71 per cent funded by the UK.
The NFU has drawn the British Government's attention to the
perverse effects of the Fontainbleau Mechanism and asked for alternatives
to be investigated. The NFU supports the need for mechanism to
prevent an excessive contribution to the EU budget and agrees
with the need for budget discipline at all levels. But the present
system is leading the UK to take a very different view to spending
in the UK than our partners are taking and this is causing serious
distortions in competition.
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