Select Committee on European Union Tenth Report

PART 4: summary of conclusions and recommendations


94.  In this final part of the Report we bring together some general observations on the mid-term review of the CAP, with our conclusions and recommendations from Part 3. They are arranged, as before, under the key headings of Enlargement, the WTO Doha Round, Impact on Less Developed Countries, and Sustainability of European Agriculture.

95.  Viewed against the background of previous attempts at reform, the European Commission's proposals for the reform of European Union agriculture policy of July 2002 (even in their modified and weakened form of January 2003) in the scheduled mid-term review of the common agricultural policy provide the basis for a major advance in the liberalisation of the EU's external trading relationships, if applied soon enough. They would provide the basis for economically and ecologically sound application of European agriculture policy in eastern Europe. They would provide the framework for a strong EU position in the Doha Round of trade negotiations and would significantly aid the long term sustainability of European agriculture. Nevertheless in some respects the modified proposals go against previous understandings in Agenda 2000. We think this is regrettable.

96.  The most important feature of the plan is the Commission's recommendation that the subsidising of farm incomes should be separated from the subsidising of production. If accepted by the Council of Ministers, this proposal would allow the EU to eventually dismantle its "traditional" market intervention and export subsidisation mechanisms which currently distort both internal markets and force the EU to maintain largely prohibitive import barriers and to subsidise agricultural commodity exports. As well as improving the operation of the internal agricultural market, the implementation of this measure would allow the Union justifiably to present almost all of its agricultural support as production neutral and therefore as being acceptable under World Trade Organisation rules. It would also allow agricultural markets to respond effectively to normal supply and demand movements and diminish the damage to the trade of developing and developed country markets, as well as the domestic markets of less developed markets, resulting from the current operation of EU agricultural market manipulation.

97.  The proposals to ensure that subsidy recipients comply with environmental, food safety, employment, animal welfare and land management conditions are likely to result in a marked improvement in the long term sustainability of European agriculture.

98.  The implications of the mid-term review proposals for the eastward enlargement of the European Union are more difficult to judge. This is because the likely impact is likely to be confused by the agreement of EU heads of government to apply the CAP on the same basis as in the EU15 from 2004. The (unjustified) payment of direct production subsidies in the eight central and east European countries is likely to lead to development of agriculture in these countries contrary to the principles laid by the Commission in its current proposals. The failure of the Commission to table proposals for the rapid removal of dairy and sugar quotas is also likely to prevent efficient working of the market in these commodities in the new Member States.

99.  It should be noted that the weakening of the modulation proposal and the abandonment of the subsidy capping proposal in the January 2003 modification has important budgetary implications. Whereas the July 2002 plan would have left a margin of c €2 billion in the agricultural support budget (1a) for EU25 by 2013, the latest version will leave little more than €300 million. This will mean that there will be little leeway for any contingencies which may occur in the next ten years. It is to be regretted that in its January 2003 proposals the Commission has seen fit to deduct the bulk of the yield from modulation, some €2 billion in 2012, from potential transfer to Pillar 2 and to pass it back into Pillar 1 for the funding of traditional market support measures.

Time is not on the reformers' side

100.  Without an early commitment to the principles of the Commission's July mid-term review proposals, an unreformed CAP applied in the ten and possibly twelve new Member States will mean almost certain bureaucratic chaos and increasing production which will not be able to be encompassed within the new budget limits. The alternative to reform now is the slow attrition of long drawn out budget wrangles to force incremental and disrupting change, rather than the clear signals to the agriculture industry in both east and west which would have been given by a unequivocal commitment to the July mid-term review package. For example, the probable additional €3-4 billion of operating a largely unchanged common market organisation for milk products and higher than estimated costs for direct payments in the new member countries post-2006 could seriously threaten the budget limit. Further intervention price cuts and reductions of direct payments will be inevitable.

101.  If a majority of EU governments continue to obstruct the Commission's plan and opt for a merely cosmetic conclusion to the mid-term review, any substantive, effective reform of European agricultural policy will now become increasingly difficult and could be put off for another decade. The danger is that the Agriculture Council will drag its feet on agreement on the mid-term review to the point where any measures agreed will have little immediate effect and very little by 2006-07. By the time the Commission and the supporters of reform are able to mount a new reform campaign in the EU25 they will be in a very much smaller minority than at present.


102.  Assessment of the effect of the mid-term review proposals on the new Member States is complicated by the EU's commitment to apply the current producer subsidy system in these countries. What is certain is that a majority of the governments of the new Member States favour the application of the current production linked subsidies in order to stimulate their production of major agricultural products. These governments are not enthusiastic supporters of decoupling. There is little doubt however that the transfer of funds from market support (Pillar 1) to rural development measures (Pillar 2) would be of substantial benefit to the rural structure and environment in these countries, where the need for such measures is considerably greater than in the EU15. The scheduled delay in applying the modulation measure to the new members until the end of the transition period will unfortunately delay the development of the new Pillar 2 measures; this should however not prevent the development of the new measures in the east through the transfer of funds saved through application of modulation in the EU15.

103.  The introduction of cross-compliance should also be particularly important in the new Member States. It is unfortunate that the governments of the new Member States have already been encouraged to establish the major mechanisms—market intervention, high import tariffs and export subsidisation—of an unreformed CAP. This is most notable in Slovenia, Poland and Hungary. The minimalist proposals for adjustment of the common market organisation for dairy products and the lack of any proposals to reform the common market organisation for sugar will reinforce this process.

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).

105.  A necessary corollary to decoupling of subsidies from production is the abolition of market intervention and export subsidisation. 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 (paragraph 43).

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).

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).

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).

The WTO Doha Round

110.  The European Union will significantly strengthen its negotiating position in the current trade liberalisation negotiations if it agrees the Commission's proposals. Adoption of the decoupling proposal will allow it to present almost three quarters of its current €42 billion expenditure on agricultural support as non production positive and therefore not subject to reduction under any current or future World Trade Organisation agreement. It will also provide the basis for eventual dismantling of market intervention, the elimination of the need to subsidise exports and scope for significant reduction of the EU's import tariffs. Agreement of the cross-compliance measures will ensure protection against charges by other exporting nations that the substantial resulting expenditure on income subsidies is still production-positive.

111.  It is essential that the 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).

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).

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