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WEDNESDAY 11 DECEMBER 2002 __________ Members present: Mr Jimmy Hood, in the Chair __________ Memorandum submitted by Lord Whitty Examination of Witnesses LORD WHITTY, Parliamentary Under-Secretary of State (Farming, Food and Sustainable Energy), MR TOM EDDY, Head of European Union Agriculture and Co-ordination Division and MR DAVID DAWSON, Head of European Union International Division, Department for Environment, Food and Rural Affairs, examined. Chairman
(Lord Whitty) This is Mr David Dawson and Mr Tom Eddy from our International and European Division. (Lord Whitty) It is a moving situation, Mr Chairman. The original offer from the Commission has gone through the various iterations and on Monday of this week there were some further relatively minor, but for the individual country fairly significant, further concessions. The Commission is stuck with the 25 per cent of direct payments. The requirements on meeting most of the regulations in the agricultural and food safety areas, there are a few transitional periods, are much less than had been thought in the earlier stages. The accession countries to a varying degree, were looking for two things, they were looking for the 25 per cent to go up so that the structure of the increase of direct payments would be faster. Alternatively their fallback position was that they could fund a higher proportion of direct payments from a combination of their own resources and the allocation that has been given to them under Pillar II, the agricultural policy. The Commission on behalf of the Presidency made further offers on that latter point which will allow them the ability to top-up to 40 per cent, part of which can come from the rural development side. It is EU funded. There does appear to be some complication in this but the original proposal was that 80 per cent of it could come from their Pillar II allocation. The arithmetic of that is still being looked at. I may ask my colleagues to explain the latter situations in a moment. The other additional concessions which were made related to diary quotas, and a number of further concessions were made to these countries individually on varied quotas over the past few days. The results of Monday and yesterday's deliberations were that most countries went away saying they could sell the package, although they all had their individual concerns. The Hungarians were still arguing for an increase in the 25 per cent. The Poles in particular are still arguing for more concessions on the quotas or alternatively some other way of getting additional money. I believe the Polish Government has endorsed that stance, so Poland wants to come back later to argue, one way or another, that there should be more money on the CAP side. The increase in quotas for the accession countries has, of course, some knock-on effect in relation to existing members. The Portuguese in particular have said, "If we are changing reference periods and other things in relation to incoming countries we are at a disadvantage under the current system, which have limited justifications". It would open up the floodgates. The Portuguese have put in a pretty comprehensive request that their quota system should be looked at and raised significantly. We understand it will be less systematic if the Portuguese are going to do it and we want to. We are in difficult situation. I think the Greeks will be there soon. That is broadly the position, it is not a very clear one. There is reasonable confidence that we can include all of this without significant additional expenditure or significant additional knock-on effect on existing members at the time. Mr Marshall (Lord Whitty) The Berlin limits will apply. The expenditure limit agreed in Brussels beyond 2006 does indeed apply Pillar I of the European Agricultural Policy. Clearly post 2006 the total budget will add limits on all parts of EU expenditure, presumably including Pillar II. We are not at that stage of deciding that. What is often said by the British Government, although we may have to swallow it as part of the deal, is that the ability to top-up from 25 per cent of direct payments for a mixture of their own resources, as is allocated in Pillar II, actually slows the potential for those countries for three years, at least, to shift the expenditure under CAP in the wrong direction. We would wish to see for both the Mid-Term Review Report and WTO reasons a shift out of Pillar I into Pillar II, whereas this provides for the incoming countries the ability to shift some payments in the other direction. That seems to us to be a bad precedent, admittedly it is for a limited period and in order to do a deal and we are not talking about vast amounts of money in terms of the total budget, but it is not desirable. (Lord Whitty) The deal in Brussels insofar as it related to post 2006 related only to expenditure under Pillar I, effectively freezing Pillar I from plus 1 per cent and spreading it from 15 to 25 countries. There has been no equivalent ceiling agreed for Pillar II, but then there is no equivalent ceiling yet agreed for structural funds for any other element of expenditure but there will have to be before we move into the new financial perspective for Europe in 2006, there will have to be an overall budgetary ceiling equivalent to the Berlin ceiling. It is not there yet. (Lord Whitty) No, I am saying two things, we are talking about two different periods: One, eventually there will have to be a limit on all parts of EU expenditure, including rural development post 2006. The deal proposed to the incoming countries allows them to shift expenditure for the next three years, ie pre 2006, which notionally bears to draw down under the rural development theme, expended on areas which are Pillar I and therefore in a sense go above what was previously allocated in relation to Pillar I. Initially the proposition was that if they were to do that, fine, they do it from their own resources. The Commission then effectively made an offer which said that your own resources includes the money that has been allocated to you under Pillar II. That, we think, is not a particularly helpful move but it a time limited one and therefore it will expire in 2006/2007, 2006 in EU terms terms. Angus Robertson (Lord Whitty) We have regular discussions with the Scottish Executive. There is a meeting this afternoon with Scottish ministers, Welsh ministers and Northern Irish ministers. We discuss the negotiating positions that we should take in relation to the enlargement discussions. There is not a particular Scottish view in relation to enlargement. If you are talking about wider issues like the Mid-Term Review then there are differences of emphasis amongst the devolved administrations there which we have to take into account when negotiating an United Kingdom position. In relation to enlargement I do not think there is any serious approach amongst us in the devolved administration. (Lord Whitty) I do not think it is a question so much of that, it is a question in relation to modulated money, there were reservations on behalf of the Scottish Executive as to whether we should support modulation. The conditions on which they would reluctantly support modulation include an ability to be more flexible in the payment out of Pillar II, so that we would have differential ways of spending, and the formula would be the same for the whole of the United Kingdom, but the way that the money was spent would allow the Scottish Executive more flexibility as to how they would spend it. That has been urged on us by the Scottish Executive and is part of our approach to the Mid-Term Review. Modulation is part of the Mid-Term Review deal and then we will be looking at the Scottish Executive, who spend their money in a different way than England, whereas at the moment the presumption is that any form of expenditure would be across the nation state. Jim Dobbin (Lord Whitty) Of course this is the point that the accession countries make. We are talking about direct payments here, everything else is a level playing field. Quotas, we would argue, are on the same basis as for the existing members, given the different time scales. They may argue round the edges of that but in general they accept that. The direct payments were provided, direct payments are a combination of compensation for the past price support that has been removed. As far as the incoming countries are concerned they never had that form of price support to need to be compensated for. Put crudely, in a sense whenever we do a direct payment it is a bonus for them. I know they do not see it that way, but it is. In a sense they are being compensated for past systems and they did not have those systems. They would argue, nevertheless, that once they are all part of a single market and there are relatively few transitional arrangements in this market that after a few years we should be equal, whereas the proposal is that we will not be equal on direct payments until 2013. The United Kingdom Government's view in the Mid-Term Review, and beyond, is that direct payments should be phased out in any case. By the time we have reached 100 per cent direct payments that would be a small proportion of support that goes to rural areas. I think our view is that the quantum would come down as the percentage goes up and that we would therefore reach something closer to a level playing field relatively rapidly. That is the historic rational for existing members getting direct payments at 100 per cent and not necessarily the incoming ones. Mr Cash (Lord Whitty) I think it would be justifiable for some of the accession countries to say, because we have such a large agricultural sector unless we do a positive deal then there will be political problems in winning any referendum. Probably Poland, and possibly Lithuania are the only ones where that is a serious problem, actually making a difference between winning and losing, because in countries like the Czech Republic and Hungary the reality is that while there are problems in their agriculture their population which is directly engaged in agricultural is pretty much approaching Western European levels, if not quite British levels, and it is less of a political problem. A political problem for all of them is having to sell a total package, not just the agricultural package. The total package, details of which will be determined at the end of the week, will ensure that if there is any disbenefit as a result of the individual items, including agriculture, then there will be a compensatory mechanism making sure the country as a whole is no worse off than it previously was. If that arose because of the fact they are only getting 25 per cent as a direct payment as far as the incoming countries as a whole are concerned the amount of money going to them will not suffer as a result of that. That is fine for most of the incoming countries but I suspect in terms of the politics you are referring to in relation to Poland they have to be assured that they will have access for their agricultural and rural sector to a greater degree than many of the other accession countries. I have argued with those from the accession countries I have met in various contexts that actually it is in their interest to do what the United Kingdom wants in terms of the future of the CAP, that is to shift resources away from these direct payments and into rural development issues. What is really the problem is that they need both infrastructure and modernisation of their rural industry and their agricultural sectors rather than a direct encouragement to over produce, which the subsidy regime under direct payment currently provides. I think there is a question of looking in the immediate term at the total package rather than the individual measures that make up the total package and in the longer term looking at where their real interests lie in terms of developing what are in some cases very under developed and poor rural areas dependent on a form of agriculture which is going to have to change to some degree. (Lord Whitty) There are two periods we are talking about, the money we are talking about would be available within the Berlin ceiling for the first three years. The situation thereafter is that we do not have an overall ceiling, we have a CAP Pillar I ceiling and certainly if we were to pay the money via 100 per cent direct payments or something approaching it then we would very rapidly run out of that money - we would calculate by 2008, and indeed if we make any more significant concessions earlier than that. We are actually at the beginning of the next financial round. The immediate compensation is to ensure that the total package of money does not leave any of the countries, for everything, not just agriculture, worse off than they currently are and could be met under the Berlin ceilings. Miss McIntosh (Lord Whitty) I think as far as the enlargement negotiations are concerned I think there was some concern as we approached enlargement from the farming community that they would be faced with an influx of competitive agricultural produce from Eastern Europe and Central Europe. I think the reality is, and I think most farmers represented recognise that, under the arrangements between the EU and the accession countries in the EU there would be access for most of those products in any case. What we provide with a single market is that they are produced under the same conditions as they are produced in Western Europe amongst the existing Member States. Therefore accession of the ten new countries will mean that we will be on more of a level playing field than we are now. I think in general that it is now accepted in the farming community that enlargement as such is not a threat to them and, indeed, should provide them with the prosperity that it will bring a larger potential market for competitive British farming produce. It is a different issue when we talk about the reform of the CAP, but in relation to enlargement, as such, I think there is not so much alarm in the farming sector as when they first contemplated it. (Lord Whitty) I think that is an entirely different issue. I think that France has been brought to heel and that is the main outcome of that process. As you know, the decision whether to pursue further damages was a matter for the Commission, the Commission did take them to court, they got the court judgment and they went back to the court to enforce that judgment. The only issue a few weeks ago was whether they went back again - France having finally agreed to implement the court decision - to impose fines on France. The Commission decided against that. If you want my opinion on that I would have preferred the Commission to have been a bit heavier, however I think the result is the important thing. Mr Marshall (Lord Whitty) I am not necessarily talking about additional costs because the application of some of the EU regulations of themselves, at least in the medium term, will be a more efficient way of producing. I am saying it would be unfair competition if they were not subject to the same regulations, it would be reasonable for British farmers to argue they are subject to unfair competition. If that comes in in Tariff 3 that without EU regulations applied there is an argument that they are undercutting Western European and particularly British produce there will be a cost for some of the regulations, but that is not the main point. (Lord Whitty) The main point is that they are produced under the same conditions, they are subject to the same regulations. (Lord Whitty) It may or may not be an increased cost, in some cases it will be an increased cost. (Lord Whitty) Certain production methods will not be allowed. In that sense the production methods which continue to be allowed and the food safety standards which are in force might lead Polish agriculture to become more efficient, and they are on the same conditions. Mr David (Lord Whitty) I am not sure the Commission propose to increase the level of subsidy. The system is still the same, the quotas have gone up slightly and there is a cost attached to that. It is on a reasonably rational basis, obviously there is a bit of fudging and mudging when you get to the end of these negotiations. The issue of topping up, it is topping up to 40 per cent of what Europe is getting, it is not new money in that sense, it is either accession countries money or it is money that was previously provided for a different purpose. What I do think, which I think lies behind your question, is, does the nature of a settlement make it less likely that the incoming members will favour support when they become full voting members of the change in the CAP? That is one of the reasons why I was a bit apprehensive about moving money from rural development back into Pillar I. As far as the Mid-Term Review itself is concerned decisions on that will be before enlargement, they will be decided on votes of the 15 not on votes of the 25. Whilst enlargement was one pressure for reform it is not the main pressure for reform. There are three main pressures for reform, one of which is the budget limits, one of which is changing public opinion in most European countries towards agricultural support and the third, which is the most immediately acute, is the need for the EU to go into the WTO negotiations with a package which removes or is committed to removing the direct production subsidies under CAP. We have to decide that before we get to the crunch WTO negotiations in September. Mr Cash (Lord Whitty) The current proposition will leave very little headroom under Pillar I. The ceiling is only a Pillar I ceiling and it is beyond 2006. Leaving aside all of the other pressures for reform that I was talking about, if we continue to operate on the present basis then on our calculations the deal would move close to the ceiling budget anyway and any better deal would reverse the headroom, if you like, even more. There is not any real headroom if we are only focusing on Pillar I. If we are to look at Pillar II, then Pillar II expenditure, a shift of the whole support system into Pillar II, is not only desirable for WTO purposes but it is also desirable for internal purposes. We would be in a situation where, just to put some figures on the Pillar I position, in 2007, which is the first full year of the new system, there would be headroom on our estimate of 800 million euro, whereas by 2008 that would go into minus 200 million. (Lord Whitty) Our objective and the Committee officials objective is to reduce the direct payment and therefore bring Pillar I expenditure pretty rapidly down during the period post 2006, as well as start on that before 2006, which would mean we were less likely to hit the ceiling. Clearly they will have to find a new financial perspective, it will have to be the overall constraints of the budget as well as on Pillar I. At the moment the only ceiling we have extant is the Pillar I ceiling. You are right, if we go on as we are and we spread Pillar I expenditure over 25 countries rather than 15 then one year in we would be in serious trouble. (Lord Whitty) No. I think the Chancellor has made his opinion very clear on that and far be it from me to dissent. Mr Cash: I am very glad to hear that. Mr Tynan (Lord Whitty) The decisions on the Mid-Term Review, including the modulation proposals, will be negotiated over the next six months. We would have liked not only a shift from Pillar I to Pillar II but also some digressivity, ie cuts in the total budget. The proposition is not for cutting the total budget, the proposition is to shift money via modulation out of Pillar I into Pillar II. There were other ways of doing that, you could have just cut Pillar I and established a higher Pillar II - that is in Fischler's proposals - if that happens then we will not run up against the ceilings which run to 2006 we would only run up against the ceilings post 2006, a bit later, because the only ceiling is on Pillar I. The modulating money would go out of Pillar I, into Pillar II and therefore it would not be effected by the ceiling. The decoupling proposal, as I understand it, which is decoupling the sheep regime from so many euro per sheep giving a general payment to farmers that would still count, as we understand it, as Pillar I expenditure. The fact that you will be bouncing up against the ceiling fairly early in the new financial perspective you currently could not avoid it by only going for decoupling, you could through modulation, depending on what the ultimate ceilings are going to be in the new financial perspectives for all EU expenditure. The other big factor here, I will return to it, is in a sense if you ignore the decoupling or ignore modulating then there is not a credible EU position in the WTO negotiations because our subsidies will still be seen in WTO terms as trade distorting and related to subsidising reduction. (Lord Whitty) I think the proposals which were agreed at the GAERC on Monday and Tuesday would be unacceptable to the heads of state, although there will be a bit of shifting, partly because the Portuguese proposal is that we look at existing members. There will be some late night negotiations with a fine print that will be less than totally logical. I think a deal is there. If, however, the Hungarians, the Poles and others who are saying this is not acceptable were to maintain that position to any great degree and the Portuguese and others would say, "the only way we can deal with that is by a significant increase in our own quotas and our own money", then there is a possibility of failing. I believe the deal as it stands at the moment broadly speaking, subject to a little bit of shading, is likely to be acceptable to the heads of government. Mr Cash (Lord Whitty) Shading. (Lord Whitty) The sugar regime runs to 2006 and the diary regime, which is the other big one, which is not really reformed by the mainstream NTR proposals, comes to an end in 2008. Fischler wants to make propositions to reform and liberalise both of those regimes, probably trying to wrap up the diary one in the overall proposals and sugar would probably be dealt with secondly. If the result of removing the present price support system from sugar, for example, meant that you had to compensate beet farmers, at least for the transitional period, the cost of that would have to come out of the Pillar I money and therefore it does make the total amount of money there more difficult. It means you have to reduce something else if you are going to keep within the ceilings. At the point where the transitional cost of reforming the sugar regime emerged it would have to be paid for out of that. At the moment if the beet farmers get it right it does not really appear on the budget in quite that way. Any compensation for loss of that price would have to be paid for out of Pillar I money, other bits of Pillar I money would have to give. Mr Cash: You have given a very good explanation of how difficult it all is. Mr Marshall (Lord Whitty) It is not the Commission's proposals any more, it is the proposals that have come out of the GAC. Do you mean the enlargement negotiations or the MTR negotiations, we are in danger of confusing the two. Do you mean the decision to be taken at the end of this week? (Lord Whitty) There is a common position with the current EU members orally that would accept, in my view, what has come out. There is this complication of the Portuguese having raised their own quotas. Subject to that all Council members would be prepared to accept the proposals that have come out on Monday this week. Clearly the Germans are particularly concerned that we do not pay any more. We consider that the present deal is very generous to the accession countries and is significantly more than the original proposition. We do not wish to go further than that. I believe that to be the position of most countries. The complications of people saying, you have been so generous that we now must look at our own structure does mean that the Portuguese and possibly other southern countries might have a slightly different position. I think that will be a minority position which will eventually be accommodated or brought in line. I think there will be a deal. There is very strong political will for a deal of enlargement. I think these issues will be resolved, but it is not absolutely clear as of today. Jim Dobbin (Lord Whitty) Yes, I think it is the main impetus for reform, the main external impetus. It also relates to the Johannesburg agenda where if we are not careful we will not commit ourselves to reform and the EU will effectively be in the dock with the rest of the world. Already in the pre Johannesburg discussions in Bali and in Johannesburg itself it was clear that the developing countries, the Cairns group, Australians, free traders, if you like, were regarding the EU and their agricultural subsidy system as the main impasse to getting a deal which would really make the Doha Round of the WTO generally in the development round. The Americans are in the frame as well, to some extent, because of their Farm Bill and their level of expenditure. The Americans are already trying to dress up some of their subsidies in a way which would be compatible with WTO, but in reality they have a lot of production subsidies and the EU have a lot of production subsidies. Whilst it may be relatively easy for the EU to remove any remaining tariff restrictions and any remaining refunds on export commercial aspects the key to a successful WTO round is that the EU commits itself to removing production subsidies. That is why Commissioner Fischler along with the rest of the Commission are so insistent that decoupling of any forward support system is agreed in principle as rapidly as possible. You no longer get any money per sheep or per ton or hectare of grain. You would get it for environmental performance or land management or whatever, but not on the basis that you get a leg up in the market by direct subsidy. The rural support would be green box in WTO terms, most of it, and therefore would be WTO compatible. If the system remains as it is it is clearly not WTO compatible. Strictly speaking the timetable for the EU having an negotiating position on this is March. If it is not possible for us to have agreed on the Mid-Term Review by March Fischler is aiming, the Greek Presidency is aiming to finish negotiations by June, but by September we will have to be to in a position where we can make a proposition to remove production support over the period of the WTO negotiations, which may be several years in terms of phasing. If we do not, if we get to Cancun in September, where the main WTO decisions will be taken, and the EU is not in a position, we will definitely be on the back foot. The Americans have already made a proposition, which maybe slightly dubious, which puts them in the liberalising camp. The rest of the negotiating partners are in the liberalising camp, the EU needs to get itself into that position to be a credible partner in the WTO in September rather than be dragged there during the course of the WTO Round, which is what happened last time. Mr Tynan (Lord Whitty) The objective is to remove production subsidies. Politically the only way we can really do that, at least in the short-term, is to say, "We will decouple the payment that the farmer gets there" is not the ideal solution and it will be subject to cross compliance of various forms so the standard of the land and farming will have to meet certain standards. It is the only way, really, that we can negotiate a fairly early move away from production subsidies. I think Fischler recognises the political reality of that and the price of doing that both in changing the nature of the CAP and in WTO terms such that we recognise the necessity that you will have to give some payment based on historic receipts. (Lord Whitty) One of the problems is that the exact terms of decoupling are not yet clear. Our understanding and our position would be, no, there would not be a requirement that you would necessarily continue to use that land for beef farming. Whatever you use the land for, however, would have to met certain standards, if it was continued to be used for beef there would be some cross compliance with those standards. Of course this may take place over a period of time but there would not necessarily be a direct requirement that you continue to use the land in the same form of agricultural production as you did historically. (Lord Whitty) It might. The benign effect would be that put farmers into an area where they get the highest value for farming, which I suggest would include Scottish beef, and not produce every last sheep or every last beast to not quite such a good standard, I would not like to geographically locate it, to get the premium. Chairman (Lord Whitty) As far as the first is concerned, as far as the franchise at the bottom excluding small farms is concerned, we do not in principle object to that, we recognise that there are very small farms that probably need to be exempt from this proposition. There are not many of them within the UK. What we object to is the implication of that as to how much each country puts into the pot because clearly a higher proportion of Greek farms would be excluded than of UK farms and, therefore, the amount of money would be disproportionately based on Northern European farming. Also, some of the complications of the way Fischler is proposing this linked to employment and other aspects make it hugely complicated. We are not in principle opposed to having some de minimis level so that very small farms, effectively small peasant farms, are not affected by it. What we do object to very strongly is the ceiling at the top in that although the UK as a whole would not miss out because any money saved as a result of that ceiling would come back to the national government to be used for agricultural purposes, some of our larger farms, our most efficient farms, would suffer and it would be a serious disincentive to increase efficiency in a number of fields. I understand anecdotally already it is having the effect of making people look to de-merging and disaggregating farms for purely subsidy receiving reasons, which is perverse. We are strongly against a ceiling. Other countries than the UK will be hit by that ceiling and the country that will be most hit is Germany, partly because of ex-collective farms in Eastern Germany but also because of some large farms in the former Western Germany. Other countries will have a few farms affected. Denmark, France, will also have some farms affected. If I am right, the money we would miss out on is _20 million at the end of the period, the amount of money Germany would miss out on is _115 million. I forget which year that is but we will clarify that. That shows the size of the problem in Germany is considerably greater than it is in Britain, so the Germans are strongly opposed to that and I think we will get support from some of the other northern countries. (Lord Whitty) Thank you very much, Chairman. |