Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Examination of Witnesses(Questions 1-19)




  1. Mr President, we are all hoping that you may have some shafts of illumination for us since we are all trying to find out what actually happened over the last couple of days and what the implications are for the future of CAP and where it leaves the Fischler proposals. I understand that you do have a text<fu1> which you might share and I ask that you serve that as a starter in order to try and at least elucidate some of the facts of the situation. Is that the case?

<fo1> Not printed.

  (Mr Gill) Yes, we do have a text. It is our own writing, it is our own analysis and it is therefore taken at face value because there is a good deal of confusion still about the implications of what has been decided, but we thought if we shared with you a copy of the briefing assessment, which has literally just been completed in the last few hours, it might give you some help to understand what we believe happened towards the end of last week at the Heads of State summit.

  2. I wonder whether the sensible place to start might be on page 2, "Agreements regarding the enlarged EU" of a financial ceiling. Would you like to talk us through what you think is there and then we will move on to the rest of the document.
  (Mr Gill) Chairman, you will be well aware that the budget was already fixed up to the end of 2006 and that the Commission had found from within its own resources the necessary expenditure to meet the costs of enlargement. Up until the end of that period, they had been 25, 35 and 40 per cent of the payments due. The agreement last week sought to determine the agricultural budget beyond 2006 and you will see at the bottom of the second page the figures for 2007 to 2013. We have in the first column put them down at the fixed 2006 prices. The original concept that had been anticipated was that these would be inflated each year by a 2 per cent inflation factor. The outturn has been that the Heads of State, after a lot of shenanigans, eventually came down to 1 per cent per year, which gives you the second figure therefore which has inflated the 2006 prices and what will be the physical limit. It will not be percentage income, it is a physical limit, and this pertains to the direct payments and market related expenditure. It does not pertain to that expenditure that is in the Rural Development Regulation which, at the current stage, has no cap on it. That does not mean to say that at some later stage, there may not be an attempt to limit it, but that is a point that has not escaped the attention of Dr Fischler's Cabinet and he made that very clear too. What we then have to do is two things. One, in the second table at the bottom of the second page, is deduct the increasing requirements for new Member States and you will see there that they are identified in two separate categories: direct payments at current prices and then put into market related expenditure at current prices as well, the two separate elements. The summation of those two is deducted from the current prices at the other part of the table to leave what money is left for the current EU 15 and you will see that the 1 per cent inflation figure, as far as we can tell, delivers sufficient funds to retain a current budget figure of there or around 42.5 to 43 billion euros per annum. Can we deduce, if that is sufficient? It is important to understand that the bulk of these prices are not inflation related inasmuch that the payments, for example, are fixed in euros, the livestock payments are fixed in euros and certainly with the sheep annual premium now determined at an absolute level, that is fixed in euros. So, it does give you some degree of comfort on that basis. Where it does not give you the comfort is in the market related expenditure because who is to know where we are to go in terms of any future intervention purchases or indeed export subsidies of one sort or another and that is the unknown. The unknown is particularly relevant in that we cannot predict the dollar/euro relationship which has been exceptionally kind to the European Union budget on agricultural expenditure in recent times, but could just as equally turn the other way in the years ahead and therefore add to the budget.

  3. Just interrupting you there, what you are saying is that the bottom line could be that they could be fairly benign figures in the right circumstances but that, if a number of factors turned against them, they could turn out to be much tougher in practice than appears at first sight.
  (Mr Gill) That is correct, Chairman, but it does not cover the second point to which I was going to refer. There is currently before the WTO a challenge of the sugar regime emanating from a challenge from the United States. If the sugar regime is to be reformed, this would, under current procedures, require a significant amount of direct payment expenditure for which there is no provision in this budget and that is the more urgent of the two major elements. The second major element is the reform of the dairy regime and while there is some limited provision in years 2005-06, there was an anticipated requirement of up to 3 billion euros per annum post 2006 in terms of the phasing out of the dairy quotas and the introduction therefore of compensatory payments offsetting the old regime. There is no such provision in here for either of these two regime changes or indeed a number of other smaller regime changes that are deemed necessary such as in the rice sector or the tobacco sector. Therefore, this places enormous pressure on the budget if it is to be capped within these limits and would have considerable consequences, we would fear, if there are to be reforms in terms of degressivity on the existing periods.

  4. Do you conclude from that that the sugar regime, providing that is not challenged within the procedures of the WTO, so whatever the outcome will be on that, and these figures make the reform of milk quotas even less likely because of their budget implications?
  (Mr Gill) I do not necessarily think they make them less likely, although I believe the French Government would like to think that to be the case. I think what they do is place an enormous financial stranglehold on the reform of where the Commission is going to raise the money from. Remember that even with the existing regime, there is a liability that falls on the Commission in terms of, as we have seen in the last 12 months, significant expenditure that has taken place in market related aspects of intervention purchases of butter and skimmed milk power and, in the case of export sub-restitutions that have been going on, there is a trend therefore on the budget. What we believe from the dialogue with Commissioner Fischler's cabinet, which took place over the weekend, is that the Commissioner intends to reflect very quickly on the implications of all this for his mid-term review proposals and, within a matter of weeks, come forward with new proposals. I think there is a determination on his part to go ahead with the decoupling element of the proposals, which of course then puts pressure on the reform of the dairy regime itself because it is very difficult to conceive decoupling in some centres until you have one major sector outwith that decoupling scenario.

  5. It seemed to me listening to the Prime Minister yesterday and looking at the communique«s that a number of Member States were all spinning what one might call different narratives about this agreement which is really rather common, indeed in many ways it is essential to the community working at all. On one side was the argument that in practice what this does is to minimise the whole scope for Fischler reforms, minimise the scope Europeans have for the Doha offer and basically being as close to keeping the lid on as you can be. On the other side, there is the argument that none of this precludes Fischler's reforms. If Doha comes along, we have to re-open the whole box, as it were. What is your judgment of quite where this leads us?
  (Mr Gill) First of all, I would make the comment that I found it absolutely extraordinary that Heads of State choose to focus on a very specific subject such as agriculture expenditure and from the information I have to hand, which may be incorrect but I do not think so, the relevant Commissioner was excluded from those discussions, so there was no potential dialogue as to whether this was feasible or not. I find that just incredible and something that I think is to the detriment of the mechanisms of the European Union and perhaps reflects as much as anything the positioning taken by the French President Jacques Chirac who was on a mission to stall the mid-term reform to see his term of office out over the next four-and-a-half years that he has left and go on from there. What we believe there to be is an overwhelming need to reform the CAP to make it much more market orientated, to remove the bureaucratic cost and restraints that are not only causing considerable additional cost in the farming community but are not allowing us to become properly focused on the marketplace and hence not achieve the best returns from the marketplace in a variety of outcomes and we believe, that being the case, the reform is still needed. Furthermore, we believe that it would be far better, given the other dynamics in the World Trade talks, that, if the European Union were to pick up on and debate the proposals that Dr Fischler had put forward, not all of which we would agree with, I would be quite clear on that, then we could be in the driving seat in terms of the WTO talks rather than falling into the position we did last time round in the unifying round of being on the back foot all the time with the Americans taking the lead.

  6. There is a line of funding for the new Members States but in fact those negotiations are not completely tied up because things like level of entitlements, quotas and headage payments are not yet finally agreed, so presumably, though there may not be a great deal, there could be some adjustment in that line.
  (Mr Gill) I think that is a very valid point, Chairman, and, in one of my other roles as Chairman of the Federation of European Agriculture which embraces not only the 15 States but all the 10 countries coming in, I can tell the Committee that the level of people in some of those countries, most notably Poland, for whom the current offer is just not acceptable, is very, very strong and seems to be significantly under-estimated or perhaps under-appreciated by those in the decision making positions within Europe and within the Member States. The approach of, `like it or lump it, we are giving you this so you can't complain' I think is remarkably shortsighted. We must not lose sight of the fact that the farming constituency, for example, within the country of Poland still accounts for over 20 per cent of the electorate, some would have it at nearly 30 per cent, and that should they decide to campaign therefore against it, there could well be a substantial derailment of the enlargement process. It adds to the point which I think I made, Chairman, that to make these decisions at this stage without discussion of the implications and before the points are finalised seems quite bizarre to me.

Mr Borrow

  7. One thing that I am not clear of either from the documents which I have seen before and the document you have just circulated is whether the amount for direct payments is frozen as being for direct payments or whether, through the mid-term review and through the negotiations on the Doha round of the WTO, it would be possible to transfer some of the direct payments within the budget into other rural/agricultural supports which would not be direct payments and therefore would not have the same effect in terms of our negotiations within the WTO. Is that interpretation that there is that flexibility correct or have we already cast in stone as a result of the European Council on Friday that these direct payments will continue for x number of years in the future and therefore we cannot negotiate those away as part of the WTO negotiations?
  (Mr Gill) As I understand it, there was certainly no discussion at the Heads of State meeting last week on the details of modalities of the CAP. Furthermore, the original mid-term proposal that Dr Fischler put forward was his so-called dynamic modulation which sought to reduce the direct payments by 3 per cent per annum up to a limit of 20 per cent and reallocate those by a variety of means into the structural funds element, the element you are talking about, with an initial complementary introduction of a 300,000 euro individual cap and a 5,000 lower franchise. The question is—and this is the unknown—will the Commission now drop this element of their original proposals? There is some suggestion from preliminary discussions I had with the Commission that they may have to consider doing this, the reasoning being that the necessary reforms that I have talked about that they perceive as necessary, i.e. dairy, sugar and the other more minor regimes, will mean that they will have to take money out of the 45 billion CAP figure and require money to come from the existing regime supports: beef, arable, sheep and so forth. So there will be an element of degressivity in those direct payments on those regimes that will have to be re-introduced and, to add to that further by a 3 per cent dynamic modulation figure could create sufficiently large strain marks in the whole regime as to make it unstable. That is just one line of thinking that is being debated at the moment and it is not a conclusive decision, but that is a possibility as a result of these decisions. Does that answer the question?

  8. I think it answers the question to the extent that you are probably slightly wiser than I am, but I am not sure that I am a great deal wiser as to where we are at the moment on this issue.
  (Mr Gill) I would agree that nobody is specifically wise when you have one person taking decisions without consulting the people who have to implement it.

Mr Drew

  9. May I just look at the mechanics at this end because clearly there are a number of unhappy people over the outcome at the weekend, but that is inevitable because there are going to be some losers and it is the degree to which the level of losing really strikes home. What I am interested in is, if the new entrants bite their tongue until they are in but then really do say, "This is just undeliverable. You are going to crucify our agriculture by trying to protect and giving out this amount of support while you still have that amount of support", is this not a recipe for some real conflict over the months of the entry and thereon in?
  (Mr Gill) I would agree with that observation. Indeed, in some circumstances, it could go further than that. When I was in the Czech Republic in April, there was a specific example given to me of the sort of problems that are being faced at the moment and the Czech Republic, in anticipation of membership, has already introduced milk quotas and what we had seen was one specific example of a dairy farmer whose milk quota allocation had meant that he had had to reduce his dairy herd from 80 to 50. At that time—and it has been changed a little since then—on the basis of what was proposed by the Commission, he would have had to go from 50 down to about 20. His unit was made unviable: 80, 50, 20, just unviable. The Commission recognised that there were mistakes in there. The reason I use that illustration is that there is tension there because, even if he gets his 50, there is a lot of bad feeling against this backdrop. Having said that, there is of course the advantage that the acquis communautaire is not going to be fully represented in spite of what has been said in 2004 and it seems to me that there will be some time after that before quite critical parts in some countries are fully implemented, which means the cost structure consequent with much of what we have does not fully bear on those farmers or those involved in the food chain. Of course there are already exemptions built in certain sectors, particularly in Poland, to allow those delays in the implementation of the acquis communautaire, but I do believe that much greater thought needs to be given to many aspects of the social consequences and the social strains that could accrue along the lines we have been talking about and indeed of the sort that I think I may have mentioned before, the ultimate free movement of labour that is going to be a factor of the free market. This is not to say that I have been dragging my feet at enlargement because I do strongly believe that it is the correct way ahead, but I am equally concerned that, if we do it, we go into it with our eyes open, trying to assess the problems in advance and seeing where we can stand them off in advance rather than just waiting for them to become the sort of problem that you have described.

Mr Jack

  10. Can you fill us in a little on your understanding of the politics that led Chirac and Schro­der to do what they did. Was it, if you like, domestic politicians, or was it your counterparts in terms of farmer representatives in France and Germany that lobbied powerfully behind the scenes to get the politicians to do what they did? I am trying to establish a little more clearly in my mind as to what the true attitude is in France and Germany about the original Fischler proposals, the mid-term review. That is the first matter. Secondly, do you think that the stance which Schro­der and Chirac took in effectively I will not say totally torpedoing but putting a large hole in the side of the Fischler proposals, enabled them to take comfort from the American format because, in global cash terms, because this thing has been argued out in money terms, Europe was said, even with this current position, to look quite good compared with the American position? So, do I deduce from that that they thought they could ride out, if you like, a bigger tack in the WTO on the current structure of the CAP because of what the Americans did and that therefore they thought it was OK to scupper mid-term review?
  (Mr Gill) In answer to the first question, I think it is quite clear that, in the case of France, the rural lobby and indeed the approach of the general population is definitely more orientated towards the needs of rural communities or the perceived needs of rural communities. With regard to the short-term needs, what we see all too often, and we see this particularly in Germany, is the rise of populistic policy determination rather than having to bite the hard things. There is no doubt in my mind that, particularly because of the financial situation of the farming community, there is a real fear of change. That is common. My members in Britain fear that change very really, but they equally recognise that sticking with the status quo because of the peculiar pressures in the UK, i.e. the value of sterling against the euro which has fallen so heavily on incomes, and the way we have been regulated and increasingly regulated and taxed over time has meant that we have a different perspective to the whole and we must recognise the need to embrace that change and seek to turn it to advantage in a much more positive way. In the German situation from the dialogue I have had with my German opposite numbers and indeed within the German Government, I would say that the situation is different. The accord between the German people and the farming community following on BSE and not just BSE but various other food scandals—and I use the word scandals with inverted commas around it because they have not really been scandal events—has built a chasm of confidence between the farming community and the Central Federal Government. Indeed, following the first case of BSE in Germany, I understand that the German Chancellor, Gerhard Schro­der, personally blamed and held responsible my opposite number publically on television for the whole problem, which was quite stupid. It was ridiculous, aside from the fact that the man had only been in post a shorter time than I had. It was ridiculous to do that, but it was a populistic trend that we have seen rather going that way. The German Government is clearly faced with the financial problem and it needs to cut back on its expenditure and that was overriding and was seen. Now, when you talk privately to German farmers, you will find that there is a greater recognition of the need to change and for simplification than there would be in the French situation. What you had here was a mixture of the two coming together: the French wanted to cut a deal to try and they thought maintain CAP until at least the end of 2006 getting closer to Chirac's end of office though perhaps I am being cynical, and the Germans wanted to cut a deal that at least the French would agree to some reform at some stage in the future and cap the budget. There is some disagreement as to whether the Germans really understood what they had agreed to with the French and I think that has become clear in the descriptions of what went on in the subsequent council meeting and I think that is quite possibly the case, in which case everybody has come out of this looking, I think, rather naive in some respect leading to some anger. What I think has angered people widely is that two countries, even though they are senior members of the European Union, can come together and dictate what the other 13 will or will not do or think.

Mr Mitchell

  11. That has always happened.
  (Mr Gill) It may have always happened in the past but I think, as the community enlarges, they cannot expect to have the dominance that they had when the community started as a community of six and, after all, we have moved on. The German economy a decade ago was the motor of Europe; it is no longer the motor that it was. It is faced with outdated practices that need to be reformed which successive German Governments have refused to tackle head-on for a variety of reasons of which I am sure you are well aware.

Mr Jack

  12. And the American situation?
  (Mr Gill) I took part in a discussion in Northern Italy at the end of last week and one of their speakers was the renowned Professor Stefan Tangermann. He did not take very kindly when, in my section, I did give a quote from Disraeli when I said that he had often said there were lies, damned lies and statistics. That of course, as we well know, is the fact. The way American figures are presented is always to their advantage. The reality is that the farming expenditure in the arable is greater in the States as a result of the consolidation in the recent Farm Bill than it is for the European situation. There are selective quotations from there that are the case and I cannot be sure but I do not believe that that was necessarily an element of thinking in there because it was purely domestic politics coming in that were driving it forward.


  13. If you look at grain futures, you will see that the price is stuck at around £52, £53, £54 pounds a tonne because of the expansion in American plantings because of the support for the Farm Bill.
  (Mr Gill) I hesitate to disagree, Chairman; it depends which crop you are talking about.

  14. Wheat.
  (Mr Gill) If you are talking about wheat, the current price on the Chicago ... I have not seen it for a week or so and I hope it has not dropped dramatically in the last few days, but it was trading at around 150 to 155 US dollars per tonne. This arises from the fact that the US wheat harvest this year was the lowest one from memory from since 1971 or 1973.

  15. I was talking about 2003.
  (Mr Gill) There is some speculation that they may increase their plantings for 2003 but, with the other drivers that have been put into the Farm Bill and from dialogue I have had with American colleagues in the last two weeks, they discount that quite considerably. There has been a massive incentive within the Farm Bill to plant maize for example, but there is also the pronounced effects of the drought which, in some of the areas, has gone on for several years.

Mr Jack

  16. Do you think that Schro­der and Chirac took comfort from exactly that statistical analysis in saying, "We do not need now to radically change the CAP" in the context of the WTO because, as I have understood it, part of the mid-term package was to give us some defence against attacks on direct payments etc by reformulating the way that money went to rural communities, if you like putting some defence lines into the reformed CAP. Given the figures you have given as to the size of the American farm budget, did Chirac and Schro­der say to themselves, "Whoopee, there is our line of defence, then QED, we do not have to change the CAP"?
  (Mr Gill) I do not believe that would be the case. I think it might be disrespectful to say that it forms too detailed an analysis of those people involved and perhaps I should not say that, perhaps I should withdraw that statement.

  Chairman: I think you may have to withdraw it in respect of Chirac; I think he knew what he was doing all along. . .

Mr Mitchell

  17. Did you say with regard to the table on the second page, direct payment on current prices to new Member States, that that was going to be financed by the Commission out of its resources?
  (Mr Gill) Are you looking at the table at the bottom of page 2?

  18. Yes.
  (Mr Gill) That is the total budget from the years 2007 on to cover all EU 25, assuming 10 come in. That is the total budget for direct payments and market related expenditure and it is inflated by 1 per cent per annum as you can see along the second line of the payment.

  19. But that is financed by the Commission rather than coming out of the agricultural budget.
  (Mr Gill) That is part of the EU budget, yes; it comes out of the 1.27 per cent of GDP elements and the other elements that go forward and is a part of the total EU budget, yes.

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