7.  We have long argued that reform of the CAP is urgently needed and way overdue. In this chapter we weigh what has been agreed against what we believe should be the aims of the Union's agricultural and rural policy. Given the diversity of circumstance and outlook across the Union we accept that it is unrealistic to expect a single dramatic shift, and in any case it is desirable that there should be a transitional period for those affected. But we do expect that the new deal should provide evidence of real progress, and we are deeply disappointed by what has been agreed. Precisely the wrong signal has been given to the farming industry, and this will lead to continued misdirection of investment with long-term costs for the EU economy.

8.  The most welcome aspect of the package is that because of the price cuts some food prices will fall - the Government estimate that this will benefit UK consumers by £1 billion per year when the reforms are fully implemented in 2008. The continuation of price support (other than as a safety net) means, however, that consumers will continue to pay more than they need to for their food. The delay in implementing price cuts, which are estimated to have an impact of 0.25% on the Retail Price Index, means that by the time they arrive their effect is likely to be imperceptible even with very low rates of inflation. Furthermore, half the gains to consumers will be offset by the taxes needed to fund the policy[8].

PROMOTING ECONOMIC EFFICIENCY

9.  One of the most serious defects of the CAP has been that it entrenches economic inefficiency. Subsidies to producers result in the production of goods the value of which is less than the cost of the inputs involved. This is a very poor use of taxpayers' money. The CAP also dislocates European agriculture from the rest of the world, so that trade is distorted, third countries suffer subsidised competition from the EU and EU consumers are denied goods which they might wish to buy. As Lord Donoughue emphasised, the reductions in price which have been agreed should lead to some improvement in agricultural efficiency (Q 1). However, the price cuts agreed on 11 March fell far short of reducing beef, arable and dairy prices to world levels. Other regimes, such as sheepmeat, sugar, tobacco and fruit and vegetables were not touched. The continuation of set-aside at 10% is a consequence of the failure to cut support prices further.

10.  What is most regrettable is that there was no commitment to end production subsidies even in the long run, perhaps by a "declaration of intent" on price support mechanisms and the phased reduction of compensation payments over time ("degressivity"). One of the goals of the CAP as set out by the Commission is to make EU agriculture internationally competitive[9]. Continuing to offer support based on production and encouraging investment decisions based on the assumption that these payments will continue indefinitely retards the process of structural change within EU agriculture, and ensures that it will remain less competitive in global terms than it need be given its natural endowment or economic advantages. In relation to the wine regime the Commission even spoke recently of making a "substantial financial commitment to maintain and develop one of Europe's most competitive sectors"[10]. It hardly needs saying of this confused thinking that on the basis of sufficient subsidy any industry, including bananas on Ben Nevis, could be made competitive.

11.  Because production is subsidised more food is produced than can be sold, and so ways are sought artificially to control production. Set-aside is one example of this, but it also seems that the CAP is inimical to new technology which could improve productivity. One of the factors which has hampered the EU's attempt to maintain its ban on artificial growth hormones in meat is that it has enabled others to argue that the ban is not based on scientific evidence, but the desire to restrict production.

FACILITATING ENLARGEMENT

12.  The enthusiasm for enlargement which burnt bright in the immediate aftermath of the Cold War now seems - if this deal is any indication - to have disappeared. Agricultural prices in the applicant countries of Central and Eastern Europe are generally lower than in the EU, and so extending the existing price support regimes to them would be prohibitively expensive. Raising prices in these countries would lead to an increase in output (and so more surpluses) and a decrease in consumption as domestic consumers would be priced out of the market for their own country's produce. There is then the question of how to treat the direct compensatory payments introduced with the 1992 reforms: should farmers who never benefited from the original regimes receive compensation for those regimes' withdrawal? If the answer is no, then the EU will have to try to address the political implications of creating a two-tier CAP (Q 10).

13.  The failure of this reform to address these problems jeopardises the applicant states' prompt accession. Significantly lower support prices would have reduced both the cost of extending the commodity regimes to the applicant countries, and the disruption which would be caused by higher food prices within those countries. If the compensation payments had been made degressive the question of whether to extend them to the new members would be far less important. Reducing the cost of the CAP would also have released funds for enlargement, as well as for any eventual contribution towards reconstruction in the Balkans. Agenda 2000 was supposed to create a Union ready for expansion, but - as the Minister agreed - the CAP will now have to be reformed again before the EU is ready for enlargement (Q 11).

MEETING INTERNATIONAL OBLIGATIONS

14.  Recent rounds of international trade negotiations have opened more and more markets to competition. Progress in the area of agriculture has been slow, but the EU's protectionist regime is likely to find itself increasingly challenged by the liberalising agenda of the World Trade Organisation (WTO). A new WTO trade round will begin at the end of this year and much attention is likely to be given to subsidies which affect the level of agricultural production, of which the CAP commodity regimes are a prime example. It is clear that the EU has made only a half-hearted attempt to move away from these subsidies. Even the "compensation" payments may come under pressure, as they are linked to past and continued production. This failure is made all the more serious by the expiry in 2003 of the "Peace clause" agreed in the Uruguay Round which provided that individual agricultural subsidies would not be the subject of complaints to the WTO. The expiry of this clause may lead to the EU's trading partners, such as the US and the Cairns Group of countries[11], testing the compatibility of the CAP with existing trade commitments, let alone those that may be negotiated in the near future. The possibility that this might lead to confrontation and a trade war between the EU and its major trading partners represents a grave threat to the global economy. The Cairns Group have already said that the EU reforms were not a satisfactory contribution to the forthcoming WTO talks and would "continue to shield EU producers from international market signals"[12].

PROTECTING AND ENHANCING THE ENVIRONMENT

15.  Historically the CAP has been much more successful in boosting production than in protecting and enhancing the natural environment. In the context of agricultural and rural policy, there are convincing arguments for providing payments for the delivery of positive environmental goods[13], but the aims of environmental policies should be clearly defined and not grafted on to production-based payments with quite different objectives. It is also undesirable that production subsidies should be legitimised by dressing them in environmentally-friendly clothing. By subordinating environmental issues to commodity support regimes there is a failure explicitly to identify environmental goals, to prioritise them and to ensure that appropriate funds are provided to pursue them.

16.  We were therefore pleased that, under the new Rural Development Regulation, Member States will continue to be obliged to offer specific environmental schemes such as the UK's Environmentally Sensitive Areas and Countryside Stewardship schemes. However, given the failure to cut back on other areas of CAP expenditure and the transfer of the Less Favoured Area payments from the structural funds to the agriculture budget, funding for such schemes is likely to remain woefully inadequate[14]. The Committee was concerned that there is no clear date for the phasing out of production subsidies, and that environmental conditions will now be attached to them ("cross-compliance"): it would be better to remove production subsidies altogether than try to give them a spurious legitimacy which may make it more difficult either to reduce the cost of the CAP or to redirect spending towards those objects which are of genuine benefit to the economy or the environment of the EU. However, as there is no clear timetable for the ending of production subsidies we can understand the pressure to use them to achieve some good in environmental terms. Lord Donoughue expressed the dilemma well in saying that the good - getting some environmental benefits through cross-compliance - could be the enemy of the best - removing production subsidies altogether and obtaining better funding for properly assessed and implemented environmental programmes (Q 21).

PROMOTING RURAL DEVELOPMENT

17.  One of the aims of the Agenda 2000 reforms was to make rural development "the second pillar of the CAP"[15]. So far the CAP has had very limited success in promoting development in rural areas by creating new opportunities for the redeployment of resources.

18.  The consolidated Rural Development Regulation should have introduced more coherence to rural development policy. We are disappointed that the policy remains in the shadow of agriculture and does not take a broad perspective on the wider development of rural communities in general[16], and that the failure to reduce the expense of the commodity regimes means that there will be little money available for rural development measures, particularly as the main agri-environmental schemes will be funded from the same pot. We hope that the Government will not pursue those measures which will further retard adjustment in the agricultural sector, but that sensible use will be made of locally devised schemes which will assist rural adjustment and development. The key test of the success of rural development policy is that over time it will become unnecessary, but for the present we hope that the Government will make available the resources to co-fund plans with clearly defined and coherent objectives.

THE FUTURE

19.  Our meeting with the Minister made it clear that the Government broadly agree with our own analysis of the need for reform (QQ 1, 11, 15, 20, 31, 34), and we hope that the Government will in future have more success in convincing other Member States of the truth of that case. Agenda 2000 reformed in particular the beef, dairy and arable regimes. The Commission is due to make proposals to reform the sugar and sheepmeat regimes next year. Lord Donoughue spoke of the need to form alliances and devise compromises which secure UK objectives (Q 34). We commend this approach, but hope that the desire to be good club members will not lead to an exaggerated willingness to compromise.

20.  The task of the reformers is made more difficult by the fact that in the short term reform is likely to be at least as expensive as - and possibly more expensive than - maintaining the status quo, as price cuts are matched by compensation payments. The Government's preferred device for restricting the cost of reform in the medium term is "degressivity", reducing compensation payments over time, which the Committee wholeheartedly supports. Degressivity reduces the cost of the CAP, gives the right signals for world trade negotiations, facilitates the accession of new Member States, and eases the return of EU agriculture to market conditions.

21.  The Government emphasised that while the agriculture reform was less than they had hoped for, the overall Agenda 2000 package was a good outcome for the UK because the rebate[17] had been protected and there were some successes with the regional and structural funds[18]. The CAP plays an important part in the disproportionate cost of Community membership to the UK which made the rebate necessary. It is therefore disappointing that the agriculture settlement does not begin to change the policy in ways which could remove this imbalance. We note that the Commission has been charged to re-examine the issue of "own resources" in 2003 and believe that if a satisfactory basis for future funding through Member States' contributions is to be devised a much more radical reform of the CAP will be essential.

22.  We welcome the elements in the deal which allow Member States to adjust policies to suit their own circumstances. The details are yet to be worked out, but it is in these discretionary areas that it may be possible to get the most out of a disappointing outcome. There are various discretionary provisions in the arable, dairy and beef regimes, and in the beef regime each Member State will be given a financial "envelope" which can be used to top up subsidies in accordance with centrally-defined criteria. It will be necessary to determine and apply appropriate environmental measures to be applied by farmers in receipt of subsidies, and to develop the 7-year plans demanded by the Rural Development Regulation. We are encouraged that the Government have promptly issued a set of information and consultation documents[19], and will examine the outcome with great interest.

CONCLUSION

23.  The Commission's proposals in Agenda 2000 would not have been sufficient to equip European agriculture for the challenges of the next decade, in particular the needs to improve productivity; to facilitate enlargement of the Union; to develop a policy consistent with international trading agreements; better to protect the environment; and to promote rural development. The Berlin European Council agreement is substantially worse than the Commission's proposals, and is a bad outcome for the Community: its agricultural industry, its taxpayers and its consumers. Lord Donoughue and others such as the German deputy foreign minister have said that the deal will not be able to withstand the pressures acting against it and will have to be reformed before 2006[20]. We hope that they will be proved right.

24.  This report is made to the House for debate.

9   Agenda 2000 - Volume I, p 27. Back

10   Newsletter of the European Commission Directorate General of Agriculture, Special edition 11 March 1999. Back

11   Named after the Australian city where it was formed, this is a group of liberal agricultural exporting countries including Australia, Canada, New Zealand, Argentina, Brazil, Indonesia and South Africa. Back

12   Financial Times, 21 April 1999. Back

13   CAP Reform in Agenda 2000 (18th Report, Session 1997-98) paras 23 to 31 and 69 to 82. Back

14   For example, in England the Commission is likely to make available £8 million per annum for all new non-accompanying measures (ie. those which were not part of the 1992 MacSharry reforms), with the possibility of some additional funding for agri-environment schemes (MAFF, Rural Development Regulation - Consultation on implementation in England (no date), p 1). This will be complemented by UK national or local government funding, but compares unfavourably with the current level of expenditure in the UK on CAP regimes: more than £3 billion per annum (MAFF, Agriculture in the United Kingdom (1998), p 126). Back

15   See, for example, Newsletter of the European Commission Directorate General of Agriculture, Special edition 11 March 1999. Back

16   Despite the fact that the Commission itself recognised the diminishing size of the agricultural sector (in Agenda 2000 - Volume I (July 1997), p 26). Back

17   It was agreed at the June 1984 Fontainebleau European Council that the UK's VAT contributions to the Community budget should be abated because the UK was bearing excessive budgetary costs in relation to its relative prosperity: this is the "rebate". Back

18   QQ 1, 2; House of Commons Official Report, 25 March, cols. 732-33. Back

19   MAFF, CAP Reform Agreement - An Information Document; Rural Development Regulation - Consultation on Implementation in England; and Supporting the Hill Farmer - A consultation document (no dates). Back

20   QQ 11, 15; Farming News, 9 April 1999. Back