House of Lords - European Union

Select Committee on European Union Seventh Report

CHAPTER 5: LOOKING AHEAD

181. The UK Government has made clear that between 2015 and 2020, it would like to see the "present Pillar I and all its works" fall away (Q 3 and Q 6). Lord Rooker explained that the UK views Pillar I as "money straight into the bank for no particular purpose whatsoever" (Q 879). Among its allies, Sonia Phippard of DEFRA told us, the UK counts the Swedish and Danish governments, and to a lesser extent, the German and Dutch governments (Q 5). Among the new Member States, the Estonian, Latvian, Maltese and Czech governments are seen as sympathetic. But Ms Phippard conceded that it is only the UK and Sweden "who have said unequivocally, with a timescale, that Pillar I payments should come to a complete end" (Q 7). The Danish government's policy towards the CAP is premised on a parliamentary decision calling for the eventual abolition of all direct support to farmers (Q 451). But Kirsten Holm Svendsen, Agriculture Counsellor at the Denmark's Permanent Representation to the EU, warned that this position came with strings attached, notably that Danish farmers be left "on an even footing" with competitors. She observed that this "explains why we work very hard for more trade liberalisation and getting rid of support everywhere else" (Q 452).

182. Among the Member States who wish to retain direct payments under Pillar I, France is "probably the most vocal", DEFRA told us (Q 10). Ireland, Luxembourg, Austria, Greece, Finland, Poland and Hungary are among France's allies in this respect (Q 10). Beniamin Gawlik of Poland's Permanent Representation to the EU confirmed that his government "would definitely like to retain the direct income support", adding that "for us, there is no room for discussion about the level of direct payments, especially as we are still waiting to get full direct payments" (Q 782). On behalf of the French government, Yves Madre warned that "Pillar II is useful, but we are afraid that Pillar II is not enough". He argued that "if we want to maintain agricultural activities the best tool is Pillar I" and insisted that "we need Pillar I and Pillar II" (Q 510). Closer to home, Scotland's Cabinet Secretary for Rural Affairs also saw a continued need for Pillar I support in the short- to medium-term (Appendix 4, Para. 23).

183. The introduction of an element of co-financing in Pillar I could be a half-way house between these two visions for the future of direct payments. The idea has been floated by the Dutch government among others (Q 19). The EU Budget Commissioner, Dalia Grybauskaite, made clear that she was open to the possibility, noting that 12 Member States—the most recent entrants—are already co-financing direct payments (Q 648). She warned, however, that this proposal was unlikely to be welcomed by those who benefited most from the current system, who would be asked to add something from their own budgets (Q 649). Ms Grybauskaite predicted that "the easy money which has been decided in the first pillar, especially now for the main beneficiaries and new Member States, is becoming more and more addictive. This will be a serious obstacle to reform" (Q 651).

184. For its part, the UK Government views co-financing as "something of red herring when it comes to Pillar I" (Q 19). It "does not seem to us that it is a particularly helpful step on the way to reducing Pillar I", a DEFRA official explained (Q 19). The official conceded, however, that co-financing "would certainly enhance Finance Ministries' interest in the cost, particularly Finance Ministries in the Member States who are net recipients rather than net contributors" (Q 21). Commissioner Fischer Boel told us that her "personal view on co-financing of the first pillar is that it is the first step to a total re-nationalisation of the Common Agricultural Policy" (Q 139). She warned that "if it was voluntary for Member States to co-finance I know two countries that would be very hesitant, the UK and Denmark, to co-finance one single cent. Then you would have no level playing field for European farmers anymore" (Q 688).[61]

185. Commissioner Grybauskaite pointed out that "rural development is co-financed, all structural actions are co-financed and 12 Member States' direct payments are co-financed until 2013 (until 2016 in the case of Bulgaria and Romania), so practically today we have the phenomenon of co-financing" (Q 647). "Is it renationalisation?", she asked. "We still call it the Common Agricultural Policy." She thus insisted that "it is not really about co-financing, it is if co-financing is voluntary that it is a problem … if it is mandatory and you fix the exact amounts you equalise the conditions and the competition in all Member States" (Q 647).

TRANSFERRING FUNDS TO PILLAR II

186. The desirability of transferring funds from Pillar I to Pillar II generated more consensus among our witnesses. The Agriculture Commissioner explained that "we need more money and, therefore, we want to increase the budget for rural development by reducing the direct payments" (Q 689). Her colleague Dalia Grybauskaite, the Budget Commissioner, appeared to be willing to transfer budget lines accordingly: "if we decide that rural development is a more progressive part of the policy, why not do what we want to without any modulation," she asked(Q 646). Meanwhile the UK Government maintains that Pillar II is "far better value" than Pillar I, and consequently hopes that "the pressure from that angle will be to bring Pillar I down while protecting, and indeed potentially enhancing, Pillar II (Q 6).

187. However, there was resistance in some quarters. Richard Lochhead, Scottish Cabinet Secretary for Rural Affairs pointed out many would question why money needed to be taken away from land managers and food producers in order to achieve the wider goals that are addressed in Pillar II (Appendix 4, Para. 30). Dalia Grybauskaite warned that Member States, "especially the newer ones, are less and less interested in the second pillar because it is more difficult to absorb, it is easier to go for the first pillar" (Q 664). Indeed even some old Member States appear to be wary of such moves. Walter Duebner of the German Permanent Representation to the EU pointed out that Germany's Eastern Länder do not have much money to co-finance Pillar II measures (Q 419). He explained their governments are consequently "very reluctant to have modulation or to spend even more money in the second pillar, they want to keep their money in the first pillar."

188. A different note of caution was sounded by those who felt that some aspects of the CAP—and the associated budget lines—should be repatriated, rather than transferred to Pillar II. On behalf of the UK Government, Sonia Phippard argued that "we should not be either funding at a European level from a taxpayer point of view, or forcing through at a European level bureaucracy and inspection and enforcement of things that should be entirely down to Member State discretion" (Q 19). She concluded that "it is an entirely reasonable area to explore and really to work out what should be done at EU level and what should be done at national level." The Budget Commissioner, Dalia Grybauskaite, expressed similar concerns: "Can we afford to have a Common Agricultural Policy with such diversity between and inside Member States? That is a very fundamental question we need to ask" (Q 659). She too concluded that "what is possible and what can be done at a European level should be done at a European level, the rest should be given back." When asked what support she might garner for this proposition, Ms Grybauskaite identified "time, and only time" as her ally (Q 663).

189. Among those advocating the progressive reduction of Single Farm Payments under Pillar I, it was acknowledged that the environmental benefits currently delivered through the associated cross-compliance mechanism might need to be secured through a different channel. DEFRA made the distinction between the Statutory Management Requirements element of cross compliance, "which is simply obeying the law" and the "more obvious value added, the Good Agricultural and Environmental Condition" (Q 8). It appeared to envisage that the benefits delivered by the latter could be incorporated into the more ambitious entry-level Environmental Stewardship Scheme already in operation in England under Pillar II of the CAP (Q 8). In Scotland, environmental public goods are delivered through Rural Development Contracts (formerly Land Management Contracts), again under Pillar II. However, the Scottish Executive did not view Rural Development Contracts as a substitute for Pillar I in the long term (Appendix 4, Para. 15).

CONCLUSIONS

190. The market and environmental objectives that we regard as the appropriate long-term aims of the CAP can in our view be pursued adequately with Pillar II instruments. We are therefore not convinced of the justification for maintaining direct payments under Pillar I in the long term. We would instead advocate a phased reduction in direct payments over the course of the next financial perspective. Periodic impact assessments should be used to determine the pace at which subsidies are withdrawn.

191. A significant proportion of the funds released by the progressive reduction in direct payments should in our view be transferred to Pillar II of the CAP for the duration of the next financial perspective, thus allowing for an orderly transition. While this course of action may not result in significant savings in the overall CAP budget, we consider it to be the only viable way of re-orienting the CAP, as it would avoid the upheaval involved in attempting to transfer budget lines and responsibilities away from the European Commission's DG Agriculture and national agriculture ministries.

The long-term future for Pillar II

PURCHASING PUBLIC BENEFITS—LAND MANAGEMENT (EAFRD AXIS 2)

192. The second facet of the UK Government's vision for the future of the Common Agricultural Policy is that once Pillar I has been eliminated, any remaining public subsidies should be "targeted at specific public benefits, such as environmental enhancement through Pillar II" (Lord Rooker, Q 875).

193. Our witnesses from the environmental sector presented very similar visions for the long-term future of the Common Agricultural Policy, which were broadly consistent with the principle endorsed by the UK Government. The Campaign to Protect Rural England called for the creation of an "Agricultural Public Benefits Fund" which would support the sustainable management of land for public benefit (Written Evidence, Para. 7). The Woodland Trust presented a very similar proposal (Written Evidence, Paras. 5 and 7). Meanwhile Natural England envisaged that the future of the CAP lay in paying farmers and other land mangers for forms of land management that maintain or restore environmental features that cannot be secured through the market or through advice and regulation alone (Written Evidence, Para. 3). The Environment Agency (Written Evidence, p.1) and the RSPB (Written Evidence, Para. 3) presented similar ideas.

194. The Country Land and Business Association advocated a more comprehensive approach, suggesting that the CAP should in future "incentivise land managers to produce the socially optimal qualities of high quality food and fibre, renewable energy, biodiversity, landscape, heritage, and soil, water and air management" (Written Evidence, Para.2). It also emphasised that "the environmental agenda for land management is larger than that of the agri-environment schemes, which is focussed mainly on landscape and biodiversity. Resource protections and maintenance, and climate change issues, for example, need to be given a higher priority." (Written Evidence, Para 9).

195. While subscribing to the principle that land managers should be rewarded for the public benefits that they provide, the UK farmers' unions felt that this principle provided a justification for continued direct payments under Pillar I, as the public goods that they were being called upon to provide are often inextricably linked to agricultural activity. The NFU Scotland, for example, argued that direct support would be "vital to keep farm businesses going, justified on the basis of paying for the 'non-market' goods that agriculture already delivers" (Written Evidence, Para. 6; see also NFU Q 107). On behalf of England's Regional Development Agencies, Fiona Bryant also made the point that "you need a sustainable business base to deliver those outcomes that they are looking for" (Q 379).

BUSINESS DEVELOPMENT (EAFRD AXES 1 AND 3)

196. The farmers' unions did see a role for Pillar II in providing support for business development. The Scottish NFU proposed that "a direct support payment should be complemented by business development measures as are currently available under Axis 1 of the Rural Development Regulation; and diversification measures as are currently available under Axis 3" (Written Evidence, Para. 7). It envisaged that these business development measures "would be aimed at helping farm businesses add value and reduce costs so that profitability becomes less dependent on direct support." The NFU pointed out that "the UK seems to be out of kilter with other Member States when it comes to the allocation of rural development funds, and has decided to put much less money into competitiveness measures than other Member States" (Carmen Suarez, Q 132). Ms Suarez suggested that this was "probably something that we should call into question." The CLBA echoed this, proposing that greater emphasis be given "to the options under axis 1 and axis 3 [of the EAFRD] that provide support and assistance for improving the competitiveness and profitability of rural land-based businesses" (Written Evidence, Para 9).

197. England's Regional Development Agencies made a case for "mainstreaming" business development support for the agriculture sector. They pointed out that "many of the problems which farmers face are relevant to any business—managing change, improved marketing, adding value, risk planning and so on" (Written Evidence, Para. 16). In oral evidence, Ian Baker expressed the RDAs' belief that "some of the potential developments within the agricultural sector are being held back by the fact that farmers have historically regarded themselves as being separate and being provided with separate support" (Q 381). The RDAs suggested that by directing farmers to existing sources of assistance, they would be given the opportunity to access a wider range of business support mechanisms (e.g. Business Link), while also freeing funds to provide assistance to the wider rural economy (Written Evidence, Para 16).

198. The RDAs also pointed out that the support available under Axes 1 and 3 of England's Regional Development Plan is "very heavily focused on the farming sector" (Written Evidence, Para. 17). They warned that "any switch of funds from Pillar I to Pillar II needs to recognize the reality of the breadth of business interests now located on farms and the broader links to wider rural development."

199. However, there was strong resistance from the agriculture industry to the prospect of Pillar II funds being used to support rural development more generally. The Farmers' Union of Wales drew attention to an "increasing willingness by UK governments to divert Pillar II monies away from agriculture to a far greater extent than occurs in other Member States" (Written Evidence, Para. 5). Its members were of the opinion that "monies paid directly to farmers quickly filter down to other rural businesses while minimising unnecessary administrative costs." The NFU Cymru expressed concern that Pillar II rural development funding was "leaching away in favour of non-agricultural activity because of the minimum spends dictated by the EU under the various axes" (Written Evidence, Para. 17). It too made the argument that since agriculture remains the core activity in rural Wales, "allowing Pillar 2 resources to filter down to rural communities and businesses is a more efficient method of cascading down limited financial resources" (Written Evidence, Para 18). The Scottish NFU echoed these arguments (Written Evidence, Para. 13).

RURAL DEVELOPMENT (EAFRD AXIS 3)

200. For its part, the UK Government has indicated that the CAP should in future include "a central rather than a peripheral role for rural development measures" (DEFRA Written Evidence, Para. 3). However, Lord Rooker emphasized that there was no question of relying solely on Pillar II to achieve rural development objectives (Q 889), a point which received backing from England's RDAs. Ian Baker explained that "the social fabric [of rural areas] is something that requires investment from not just European but also state and local authority funds and by far the largest proportion is available through the local authorities" (Q 402). He consequently insisted that from the RDAs' perspective, "what comes through the national and European resources is really the icing on the cake." DEFRA made a similar argument with respect to the structural challenges facing the agriculture sector in the new Member States (Q 12).

201. The NFU was sceptical of the prospect of the CAP evolving into a rural development policy (Written Evidence, Para. 7). It pointed out that a common agricultural policy is required to prevent competitive distortions when farmers compete in an open single European market. "No such justification attaches to a common rural policy, any more than for a common urban policy", it argued. The NFU conceded that "there is, certainly, a need for a European policy framework to support under-developed regions, some of which may be rural", but insisted that "that is a different issue." On behalf of the French government, Yves Madre too warned that "we are not keen on financing with the CAP things that should be financed by the regional policy" (Q 520).

202. The NFU did, however, envisage a role for the CAP in regulating rural development policy, and drew attention to the distortions of competition that could arise from rural development programmes being run in other member states, alleging that some proposed programmes were close to being coupled support (Written Evidence, Para. 28).

DELIVERY

203. Although Lord Rooker indicated that the way Pillar II operates "is flexible enough and broad enough for us to deal with virtually all the objectives that we would want to deal with" (Q 887), DEFRA drew attention to problems with the practical implementation of rural development measures. It highlighted the "considerable amount of detailed information" that Member States must provide in order to get their rural development programmes approved by the Commission, and pointed out that the implementation and controls requirements "combine to provide a complex operating environment for Rural Development Programmes" (Written Evidence, Para. 19).

204. England's RDAs also lamented that whilst the EAFRD had drawn together a number of previously separate funds to improve the ability to set more strategic priorities, the finance and audit side appeared "to be based on the previously separate programmes, rather than following the integrated emphasis of the policy documents" (Written Evidence, Para 15). It concluded that the control and implementing measures had "done more damage to send those Axes back into their silos than was intended by the policy framework" (Fiona Bryant, Q 378). For example, projects have to be funded from one axis only and through one main measure, meaning that the added value of projects that cut across the axes may not be reflected in programme evaluation (Written Evidence, Para. 15).

205. Our attention was also drawn to the difficulties faced by those seeking to tap Pillar II support. The NFU Scotland called for a simplification of the application process for Pillar II schemes, too many of which require the input of professional consultants (Written Evidence, Para. 20). Lord Rooker too noted that Pillar II schemes "are so complicated that people set up businesses to explain the schemes to people" (Q 887).

CONCLUSIONS

206. Like the UK Government, we believe that the future of the CAP lies in the present Pillar II. A recast Pillar II could in our view form the basis for an EU-level framework for rural policy. For the reasons outlined by the NFU, the framework we envisage would not be a "common" rural policy in the sense of prescribing common solutions to common problems. Instead, the framework should specify a menu of actions that Pillar II funds can legitimately be used for. The main role for the EU would lie in defining the contents of that menu, ruling out measures that might lead to market distortions. Expenditure on R&D for example, might qualify for support, while countercyclical income safety nets would not. Each Member State would then be able to channel funds as it saw fit, in accordance with national priorities for rural development. We envisage that this system would differ from the existing policy framework in three main respects.

207. First, the types of admissible actions—currently organised around the three axes of the EAFRD—should in our view be recast more broadly to include more non-agricultural measures. Funds might thus be used to improve communications, infrastructure, and amenities in rural areas so as to ensure that rural communities are not disadvantaged by their rurality. The ultimate aim would be to ensure that non-agricultural economic activities are genuinely available and viable as the agriculture sector adapts and restructures in response to market signals. However, investment designed to improve the competitiveness of farming businesses should continue, and will become even more critical if agricultural trade is liberalised further.

208. Second, there should be no prescriptions for fixed percentages of Pillar II funding to be spent on different types of actions. Regulation at the EU-level should be limited to identifying the types of actions that are admissible, based on whether they might interfere with the operation of the Single Market.

209. Lastly, the distribution key for Pillar II funds should in our view be reassessed. We have already recommended that the current historical allocation system should be reviewed at the earliest opportunity. We believe that an element of co-financing should be preserved, as it provides Member States with incentives to ensure that funds are spent efficiently. Co-financing requirements should, however, be determined on a needs basis, so that a smaller proportion of co-financing is required from poorer Member States.[62] This will become particularly important if Pillar I funds are progressively transferred to Pillar II. Co-financing should nevertheless continue to be compulsory, in order to prevent distortions of competition.

210. A recast Pillar II such as we have described could in our view be used to tackle the relative deprivation of rural areas compared to urban areas even in relatively rich Member States, and to target pockets of deprivation in otherwise wealthy rural areas—needs that are overlooked by other EU policies that allocate funds on the basis of absolute and average measures of deprivation. In practice, this would mean that all Member States would continue to benefit from access to CAP funds. Rather than duplicating what is being carried out through other EU programmes and funds—notably Structural and Cohesion Funds—the framework we have outlined should therefore close a gap exposed by these existing programmes.

61 Her concern was shared by the National Farmers' Union (Q 139). Back