Select Committee on European Union Twenty-Seventh Report



Government Response to the Tenth Report of the House of Lords Select Committee on the European Union, Session 2003-03


This reply to the House of Lords European Union Select Committee's report on Mid-Term Review of the Common Agricultural Policy: external implications (HL 62) is submitted on behalf of the Government by the Department for Environment, Food and Rural Affairs. The response addresses the recommendations as they are laid out in the report's summary of conclusions and recommendations (report text shown in bold below). The numbers refer to the paragraph number in which the recommendations appear in the report.

104.  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 (paragraph 42).

We share the Committee's view. Decoupling will remove the perverse incentives to over-production in the current system and allow producers in both new and old Member States, to optimise, rather than maximise, production. Furthermore decoupling will also minimise the distortion of market signals in the accession countries when the CAP is extended to them. Many of the accession countries' agricultural sectors are in need of significant restructuring. We believe enhanced rural development measures would be the best way to support them.

105.  A necessary corollary to decoupling of subsidies from production is the abolition of market intervention and export subsidies. Change in emphasis from production and market support to the stimulation of structural change through modulation is even more essential in eastern European than in the EU15 (paragraph 43).

In general it is true that the new Member States need to restructure their agriculture even more than the EU15. The predominant structure of farming in the new Member States—large numbers of small holdings with limited interaction with the markets—means that their agricultural productivity tends to lag some way behind levels in the EU15. This is why direct payments are being phased in and why the new Member States are being offered a broader and more generous rural development instrument. Rural development commitments for the new Member States are in excess of direct payment commitments for the period 2004-2006—this should help to prevent ossification of their current structure of farming. Furthermore, beneficial co-financing terms and an extended and adapted rural development regulation between 2004-2006 should help candidates further to restructure and to modernise their agricultural economies in their first years after Accession. Contrary to the implications of paragraph 102 of the report on decoupling, Poland has stated it intends to make use of the option available to new Member States to apply a flat rate, decoupled direct payment system and others are at least giving consideration to following suit. The UK supports the gradual reduction in CAP market support which will benefit the whole of the enlarged EU.

106.  As we recommend in paragraph 91, modulation should involve a larger proportion than the maximum of 6 per cent to be removed from direct subsidies and transferred to structural measures, and this 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 (paragraph 46).

The Government agrees that the proposed level of modulation funds to be made available for rural development may not be sufficient for a strengthened second pillar. We have led calls for a faster and larger transfer of funds to the second pillar. At the time of writing, the outcome of Council negotiations on CAP reform is not known.

107.  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 (paragraph 47).

The Commission proposal to transfer funds from direct payments to rural development is vital to meet our objectives for rural areas in the EU15; in fact we have called for a more signification transfer of resources. The new Member States will benefit from a more generous rural development instrument in the 2004-06 period as a result of the accession negotiations. We can look again at levels of Rural Development commitments when we come to set levels post-2006. We would want such allocations to be based on objective criteria. The UK receives an unfairly small share of Rural Development funds and we are actively seeking to increase this.

108.  Urgent consideration should be given to the formulation of proposals for the reform of the market regime for sugar and dairy products, which have particularly important implications for the new Member States. 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 (paragraph 50).

109.   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 (paragraph 51).

112.  Urgent consideration should be given to the formulation of proposals for the reform of the market regimes for dairy products and sugar. We do not regard the latest proposals for modification of the dairy common market organisation as a valid contribution to trade liberalisation. These should involve, most essentially, plans for the rapid phasing out of the delivery and production quotas in both sectors, linked to stepped cuts in support prices with a view to rapid abolition of market support and export subsidisation (paragraph 59).

Paragraphs 108, 109 and 112 (sugar aspects)

On sugar, the Government agrees that a high priority should be given to early and radical reform of the EU regime. The Commission has indicated that their report and conclusions will be issued shortly, and we welcome this. The Government believes that the current EU Regime, based on high internal prices, import controls and export subsidies, is unsustainable.

If the present CAP reform proposals for other sectors, including decoupled payments to farmers, are agreed this summer, we hope and expect that sugar would follow this model.

Paragraphs 108,109, and 112 (dairy aspects)

On milk, the Government shares the Sub-Committee's disappointment that the Commission has proposed the extension of quotas to 2015, despite the clear mandate from the Berlin Council for their abolition. However, the price cuts proposed, which go much further than those agreed under Agenda 2000, are welcome as a stage towards the abolition of quotas, and a more market-orientated milk regime. (In our assessment, the cuts would probably result in the alignment of EC skimmed milk prices with those on the world market by 2008/09, although additional cuts of around 12% would still be required for butter). We agree that the direct aid in compensation for the milk price cuts should be decoupled, and therefore support the Commission's proposal to integrate the dairy premium into the single income payment.

111.  It is essential that the European Union agrees 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—and strengthen its own negotiating position. We do not regard the Commission's draft current minimal EU proposal to Geneva 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 (paragraph 57).

The Government supports decoupling of subsidies from production. We believe that the EU's current proposals on agricultural trade, submitted to the WTO in January, offer a valid contribution to the negotiating process although we share the Committee's views that we will need to move further. Decoupling would provide the opportunity.

114.  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 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 from 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 (paragraph 77).

The Government shares the Committee's concern for the less prosperous members of the world community and agree that if the current proposals for CAP reform are to offer any real gain to less developed countries it can only come through significant reductions in production-related subsidies. The Doha Trade Round commits all member countries to substantial reductions in market protection and trade-distorting subsidies and we support the current CAP reform initiative as a means to helping achieve this.

115.  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, as originally proposed, but at a much lower rate than that recommended by the Commission. 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 (paragraph 78).

The UK did not support the Commission's earlier idea to cap the subsidies available to large farms. This would discriminate against the UK, which has more such farms than most other Member States, and discriminate against employed labour which tends to be more important on the larger farms. We will argue for a fair, transparent and simple method of degression with flat-rate, across-the-board reductions. Our experience of administering modulation in the UK supports this approach. A simpler approach would avoid these discriminatory impacts, encourage efficient restructuring in rural areas and provide a simple way of raising funds for rural development.

116.  As part of the mid-term review the EU must abandon its direct subsidisation of exports and scale down its import tariffs. 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 a step in the wrong direction (paragraph 79).

The Government supports the substantial reduction, with a view to phasing out, of all forms of export subsidies and substantial reductions of import tariffs. We are committed to continue negotiating with other WTO members to achieve a successful agreement on these issues in the ongoing WTO negotiations on agriculture. We support the need for reform of the diary and sugar market regimes including the abolition of dairy quotas (see also replies to paragraphs 108, 109 and 112).

117.  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 (paragraph 80).

The Government is working with multilateral and other bilateral agencies to build trading capacity within developing countries so that they are better able to compete on the world markets. For example, we are working with some ACP countries, such as Barbados, to help them adapt for the reform of the EU sugar regime once the EBA agreement is fully implemented.

119.  An important conclusion to be drawn from the evidence presented by less developing 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 (paragraph 81).

We agree that more emphasis should be given to help developing countries in the area of standards. We work with a number of multilateral agencies and in particular through the Standards and Trade Development Facility of the World Bank with the WTO, FAO, and WHO which delivers capacity building to developing countries to meet the Doha objectives. DfID also supports developing country representation at a number of international committees to support the interests of developing countries and ensure that their views are taken into account in the standards-setting process. The European Commission has a number of development assistance projects on Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT) matters, which DfID contributes to.

120.  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 (paragraph 90).

On cross-compliance: The Government anticipates that the overall effect of de-coupling will be to reduce the incentive for production. We acknowledge that a degree of intensification may ensue, but other farms may see significant reductions in the intensity of production and problems of under-grazing. We are continuing to work to establish a meaningful set of cross-compliance conditions attached to Pillar I payments to counter potentially negative environmental effects. The proposals envisage that the redeployment of some Pillar I funds to Pillar II schemes will target money at increasing environmental protection and enhancement. Furthermore, in the event of changing land-use practices, there are a number of existing policy mechanisms which provide safeguards as well as incentives for enhancement of the environment.

On the Farm Advisory System: The Government agrees with this view and with the related comments in paragraph 89 on the need for a flexible risk-based approach to environmental regulation relying more on self-regulation and effective delivery of advice. The government does not consider that the Commission's proposed farm advisory system would fit well into this model, and is pressing for changes designed to yield better value for money and promote more effective outcomes.

121.  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 (paragraph 91).

The Government agrees that the proposed level of modulation funds to be made available for rural development may not be sufficient for a strengthened second pillar. We are therefore continuing to press for a faster and larger transfer of funds to the second pillar.

122.  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 (paragraph 92).

We agree with the Committee's assertion that a revised CAP should be less complicated, less bureaucratic and less centralised. Decoupling will lead to significant simplification for farmers, the industry, and the various agencies involved in distributing and enforcing the CAP. We also agree that CAP reform will offer farmers more choice, as they will be able to optimise their production, as it will be market oriented. Although we would have liked the Commission's proposals to go further, we do not believe they fall short of the Commission's intentions, as they do go a long way in the direction of developing a sustainable, simplified and market oriented common agricultural policy.

123.  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 and in some other EU Member States should be adopted at the general European level (paragraph 93).

The Government agrees that rural development measures should be sufficiently flexible to allow Member States to target rural development priorities including good land management. 'Agri-environment measures are a compulsory requirement of Rural Development Programmes. To ensure agri-environment schemes reflect the varying needs and characteristics of each Member State, the responsibility for scheme design should remain at Member State level. The Government agrees, however, that having such agri-environment measures should continue to be a compulsory element of Rural Development Programmes. The Government will consider, in advance of decisions on the next EU Financial Perspective, whether further changes are needed to the EU framework to ensure that a consistently high contribution to objectives such as the protection of biodiversity are made across the EU's Member States.

124.  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. Faire to apply effective cross-compliance measures could result in these being endangered by the intensification in these regions (paragraph 48).

The Government supports the principle of cross-compliance, which, among other things, seeks to establish minimum standards for environmental conditions on farms. Under the current proposals, farmers would also have to ensure minimum maintenance levels to avoid deterioration of habitats.

While the Government acknowledges that there may be a number of vulnerable habitats and species in Eastern Europe, we envisage that effective implementation of all relevant EU legislation in accession States, and not only that which relates to cross-compliance, would ensure that habitats and species are adequately protected.

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