Mr Stefan Lehner, Mr Marco Pecci-Boriani and Ms Eleanor Brooks

3 MARCH 2005

  Q460Lord Haskins: It is part of Pillar 2?

  Mr Lehner: Yes, it is part of Pillar 2. When I am talking about possible cuts in the Brussels ceiling of 2002, I am referring to the first pillar and not to the environmental part at all. I was not planning to mention the environmental part of this at all because that is discussed quite separately. You are asking could we still meet the undertakings made to the agricultural sector if there was a cut. For that, one has to remember where this 2002 ceiling came from. It took the final year agreed in Agenda 2000 of 2006 and extended it to 2013 adding an artificial inflation rate of 1 per cent per year. Although in nominal terms this was a slight increase, in real terms as real inflation will be higher than 1 per cent it will be a slight decrease. The starting point of the ceiling was the 2006 ceiling. As we are now in 2005 we are coming closer to that moment so we are not without possibilities to assess whether that is a meaningful ceiling at all. We have just had the 2004 budget closed and the actual execution was some 4.5 billion below the 2004 ceiling. That is the budget year just behind us.

  Q461Lord Haskins: Below?

  Mr Lehner: Below the ceiling.

  Q462Chairman: It is 4.5 billion below and it is about 10 per cent of the voted budget.

  Mr Lehner: Yes, not used. This is particularly due to the fact that 2003 was a very poor year in agricultural terms. What is bad for farmers is always good for the EU budget because if there is a bad harvest then prices are high and we have to intervene very little. However, the 2004 harvest, which we are now taking account of in terms of the 2005 budget, was much better and, therefore, we will probably have to spend more in the 2005 budget. We have had to open some interventions on cereals. The 2005 budget has been adopted with a margin of 1.7 billion under the ceiling and currently execution is in line with the budget. I am just pointing this out to give you the notion that while we have not even started to establish a 2006 budget yet, we are coming to the starting point of the next financial perspective, and there may be a small margin under the ceiling.

  Q463Lord Haskins: The swing between the two is about three billion. Is that about the extreme that you would expect?

  Mr Lehner: These are the kinds of swings which there are for market measures. Market measures is now only about 10 billion of our annual budget, so it is really shrinking in importance, less than 20 per cent of our total agriculture budget. Nevertheless, these swings still occur and they have their origins in harvests, in world market prices and in dollar exchange rate fluctuations. I wanted to make that point in particular today. Although market measures are a diminishing part of our total agriculture budget and will diminish even further in the future, we are still not protected against swings of this order of magnitude and we will not be protected against these swings in the future. We have to deal with an area where our budget requirements are subject to considerable uncertainty. That is a point that I wanted to underline. The final element in reply to your question whether we can meet requirements is we have important reforms still outstanding, such as   sugar, fruit and vegetables, and I think Commissioner Fischer Boel has announced there will be some reflections about wine next year.

  Q464Lord Haskins: Dairy?

  Mr Lehner: It is discussed but I am not sure that it has been formally announced.

  Mr Pecci-Boriani: In principle there has already been a reform.

  Mr Lehner: There has been a reform of the dairy sector already with a certain agreement until 2013, even 2014. There may be further discussions but it is not on the list of outstanding reforms. The outstanding reforms are clearly sugar, fruit and vegetables and probably wine. Let us say from a Treasury point of view, which I represent here, we will certainly approach these proposals on the assumption that there can be no extra costs to the EU budget from these reforms. We know that the Treasury view does not always prevail and maybe even if the Commission proposes no extra cost, that may not be the outcome of the Council's decisions. I am sure we will come back to that, and in the future we will have this financial discipline mechanism which imposes a strong discipline on overall outlays in agriculture and we may succeed in having no extra costs from these outstanding reforms, but it is very early days and they have not even been proposed. In summary my answer to that part of your question is we are at an early stage of negotiations still and we do not know whether the outcome will affect agriculture. With the Commission's proposal we think we can meet the requirements. We have a certain grey zone, an area of uncertainty, which could be of the order of magnitude of one or two billion where we cannot say with conviction whether we need them or we do not need them.

  Chairman: Thank you very much. I am conscious that some of my colleagues are sadly going to leave us fairly soon and I am going to ask them what questions they would like to ask first. Lord Lewis and Earl Peel.

  Lord Lewis of Newnham: I think I am quite happy.

  Q465Earl Peel: Can I come in on the question of the Single Farm Payment. Do you see it as a permanent part of the European agricultural and rural policy or merely as a transitional measure which should be phased out sooner rather than later?

  Mr Lehner: I have been much intrigued by this question, maybe I do not understand it very well. The Single Farm Payment is an innovative approach which has just been decided in a major reform. Member States are just starting to introduce it and have several years—if you include the new Member States a total of five years—to introduce it and to phase it in. It brings together numerous specific and individual direct payments which exist at the moment so we would expect considerable administrative simplification both for the farmer and for the payment agency who have to run this. From an administrative point of view, at least, it looks very attractive on the drawing board. Also, the cross-compliance aspect, which is entirely new to our direct payments, links them to a certain catalogue of conditions—environmental, animal and plant health, for example which are issues which have come much to the foreground of consumers' concerns and citizens' concerns. Personally, I am very intrigued by this instrument and I see it as a very positive, forward looking element of the Common Agricultural Policy in the future. As I said, this has just been introduced so at this stage I do not see any reason or incentive to re-discuss it.

  Chairman: Earl Peel is a farmer himself, and I think he will tell you—

  Earl Peel: I am not a farmer. I have eight tenant farmers but I do not farm myself.

  Chairman: I think he can tell you in his supplementary why he has asked the question.

  Earl Peel: I am fascinated by the answer because it is a very robust one and in many ways certainly more robust than some of the answers we have had. There is a view that as the financial difficulties begin to unfold there may be a move to try to modulate the funds away from Pillar 1 to Pillar 2 in order to deal with those difficulties that might arise in the future. That is really behind the nature of my question.

  Q466Chairman: Also, perhaps it can seem very unpopular to the average European who is not a farmer that farmers are getting Single Farm Payments possibly for doing nothing with their land.

  Mr Lehner: I have heard views of people who were rather awed by the long list of cross-compliance tasks they had to fulfil which for a non-farmer, like me, with no agricultural background whatsoever looks like quite an impressive list. Doing nothing is not something that would come to my mind seeing that list. Maybe we will allow a little time to see how this plays out on the ground. The question of whether any kind of direct payment in whatever way, be it separate as at the moment or combined in to a Single Farm Payment, would come under pressure and whether there would be future pressure to modulate more towards rural development is quite independent from how you organise it, but I will be pleased to take up that question because it is also on your list, whether there could be more modulation in the future. From a Treasury point of view, we love modulation because modulation means that paying for a new priority—rural development—by means of taking money from other spending, and treasuries always like that if we can meet new requirements by re-allocating. That is what we are doing, taking money away from the first pillar and meeting the requirements of the second pillar, so we like modulation. Secondly, could it be more? There is no law, no treaty condition, limiting it to the 3 to 5 per cent which is the state of law at the moment. However, in all fairness I also have to recognise that modulation is a sectoral tax. It is a tax on farmers' income and it is taking away 3 to 5 per cent of the farmers' income with the promise that it will be recycled to the redevelopment of the regions in which they live. It is difficult to hold later in the implementation. It is a bit like a road user's tax, you promise people that the money will be recycled into better roads later on but it does not mean it will make it more attractive to those who have to pay. Modulation as a sectoral tax has now been agreed and there is union-wide agreement and a regulation which says 3 to 5 per cent. That is part of the overall reform package. At the moment we should see it as a compromise deal and should let the reform be implemented first.

  Q467Earl Peel: But it could be more than 3 to 5 per cent.

  Mr Lehner: Theoretically there is no superior law preventing that, no constitutional law limiting it to 3 to 5 per cent, it is just the current regulation in place and a new regulation can always replace an existing one. I am just mentioning a theoretical possibility.

  Chairman: Can I just bring in Lord Haskins, I know he has to leave us and he is very anxious to bowl one at you.

  Q468Lord Haskins: My observation of that is as long as it goes into agri-environment schemes that is fine but if it goes into all sorts of obscure social schemes that is not right. I presume you hope the impact of Doha is going to be neutral on the budget. You could make a case for saying it will be a saving on the budget and you could make a case for saying it is going to cost a bit more in order to buy those farmers out who are affected by it. Do you hope to save money from Doha?

  Mr Lehner: I came with the intention of refusing to discuss Doha because it is way out of my league to speculate on what could be the outcome of this global trade negotiation round. I observe two things from a budgetary point of view in the agriculture area. In my understanding there was a framework agreement last July which has enshrined the CAP reform into the Doha outcome. There is no stepping back from this reform. I find that remarkable. Secondly, there is the joint letter which the Agriculture Commissioner and the Trade Commissioner at the time—Fischler and Lamy—sent offering to phase out all export subsidies if that were to be met by the other partners. What does that mean in budgetary terms? In 2006 we are expecting to have export subsidies of some 3.6 billion in our annual budget and we expect that will go down under the reform to 1.6 billion per year. This remaining 1.6 billion per year could be reduced still further if there was this kind of global agreement to phase out all export subsidies. How much that would represent in savings would depend on how radical this global agreement would be and by when and whether there would be a transition period and so on.

  Q469Lord Haskins: It is not a huge figure, is it? It is not an enormous figure.

  Mr Lehner: It is not an enormous figure at all. We have come down to this 1.6 billion per year on average between 2007 and 2013. But it represents still a bit which would make it interesting from a budgetary point of view to come to this kind of agreement.

  Chairman: I am very sorry but four of my colleagues have to leave. I think they will take away with them the phrase that you love modulation. They have got to catch a train but the rest of us have got quite a lot of ground still to cover, if that is all right with you.

  Mr Lehner: Absolutely.

  Q470Chairman: I think you understand there is a general feeling on this Committee, which Lord Plumb might reflect, that there is a concern because it is new really, is it not, in some ways, the transfer of the money from Pillar 1 to Pillar 2, as to how is it going to work and at the end of the day if, as Lord Plumb knows better than anyone, farmers at this moment are relying for 10 years or so on the regularity of their Single Farm Payment, what happens if the whole of the rural development simply becomes more attractive and more money is transferred out of Pillar 1. Is that a fair summary?

  Q471Lord Plumb: It is a very fair summary. I think it is the uncertainty that is of concern to farmers everywhere. Structurally farmers are changing, size is changing regularly and many young farmers are not going into farming and, therefore, on the farms that are kept on technology takes over and this reduces the total labour force. I would like to put a question that you may not like to even comment on. It struck me when Earl Peel said he was not a farmer but he has eight tenant farmers that one of the issues which is not fully resolved because it is variable throughout the United Kingdom is that we have, perhaps more so than other countries, a landlord/tenant system. In the landlord/tenant system the question is who is entitled to the Single Payment? There are landlords who say, "It is my land and, therefore, I am entitled to the payment", the tenant says, "But I am the occupier and it is my decision to plant this crop or not to plant this crop, I am entitled to it" and the landlord may say, "We will do a deal and we will take half each" or whatever. Those are the sorts of things that create a lot of uncertainty but say it is mischief on the part of some people, nevertheless it is an issue that is continually worrying a lot of farmers, both landlords and tenants.

  Mr Lehner: With regard to the first aspect of your question about uncertainty, I very much understand that the longer I work on the Common Agricultural Policy. It is not from the Commission's point of view that any uncertainty is introduced because the Commission has fully signed up to the 2002 ceiling and has integrated that into its proposals for the financial perspectives until 2013. I think the aspect of certainty has played an enormous role in this decision of the Commission to integrate the ceiling to avoid uncertainty to the farmers who have to know what they have to rely on, uncertainty also with regard to the new incoming member states who must have felt that there was an agreement struck before they joined which is now part of what will be their financial agreement, and an agreement for the old Member States who felt that this ceiling was part of the enlargement deal. That is why the Commission has put it forward and why the Commission is still thinking that this ceiling should be part of the final decision. I have reacted more to your question than the letter of the six which is ambiguous, which on the one hand reconfirms the ceiling and on the other hand asks for 1 per cent which is incompatible with the ceiling in a way. I do not think the uncertainty comes from the Commission, it comes from a negotiating situation where we do not see the outcome yet but hopefully we will see this uncertainty resolved in less than three and a half months' time if we get an agreement in the June Summit.

  Q472Chairman: Which is the Luxembourg aim.

  Mr Lehner: The Luxembourg aim is the full commitment of all Member States. It is in the Council's timed work programme. All are committed to it, and the Commission in particular, because of this uncertainty that has to be lifted as quickly as possible.

  Q473Lord Plumb: You mentioned modulation and said it is a very popular word in your field and it is a very unpopular word in the minds of many farmers perhaps, but there is another form of modulation and that is the modulation of the large farm and the small farm and so on and so forth. There was a feeling in the past on the payments farmers received that there perhaps ought to have been a cut-off point somewhere for some of the larger farmers. That is described by many as a tax on efficiency. You can read into that whatever you will but I think it is a very interesting point and one that is valid in relation to the new development.

  Mr Lehner: Let me just underline that modulation as it is today in the regulation foresees that annual payments below

5,000 are exempt so there is a slight bias in favour of the small recipient. Should it ever come to the application of financial discipline, which would mean a further cut in the Single Farm Payment, the Commission has declared that it would also apply this kind of franchise so it would exempt the very small recipients. An attempt exists to strike a balance protecting the smallest of recipients without punishing efficiency. This is already built into the current reform.

  Q474Lord Livsey of Talgarth: The implication of what you have said, given that our farm structure in the United Kingdom is already larger than most other members of the European Union, is that we could be hit quite hard by that in the UK.

  Mr Lehner: I cannot analyse it by Member State. The fact is modulation has been agreed now between 3 to 5 per cent. If I have expressed positive feelings towards this I want to be understood as having these positive feelings within that range which has been agreed of 3 to 5 per cent. I cannot argue for anything further. It is clear that modulation has been agreed but there is now the risk of the application of the financial discipline mechanism and should there be the risk of an overrun of the ceiling there will be a cut in direct payments. First of all, it is part of the rules that the new Member States will be exempt from this financial discipline until their direct payments have reached the level of the old Member States. The financial discipline mechanism will fall on the old Member States. The Commission intends to lessen the impact on the small recipients by applying a

5,000 franchise, an exemption. Indeed, "old" Member States which have larger farm holdings which receive higher amounts on average would be more affected by the application of this discipline mechanism than other Member States.

  Lord Livsey of Talgarth: That is what I would have expected.

  Chairman: I think we will go on to rural development issues and I will ask Lady Mar to ask questions on that. If we have time we will come back to sugar at the end but it is such a large subject and it is not wholly immediate for us. Lady Mar, would you like to take us into rural development?

  Q475Countess of Mar: I think your pattern has been that you have had the questions and you have prepared answers to them, so would you like to do your bit and then if I have got any questions coming out of that, I will ask those.

  Mr Lehner: You want me to follow the questions that were submitted to me?

  Q476Countess of Mar: Yes.

  Mr Lehner: The first one asks whether there is a limit with regard to the national capacity for uptake and you refer particularly to the experience of the new Member States. It is a matter of public record that the 10 candidate countries, which included Bulgaria and Romania but not Malta and Cyprus, which participated in the programme have had great difficulties with the start-up of the implementation. Just to give you two numbers: for the first four years to 2003 there was an amount of 2.2 billion which was made available and only 425 was executed in that period, so about 20 per cent.

  Q477Chairman: In the whole of the 10 countries?

  Mr Lehner: In the whole of the 10 countries in the first four years.

  Q478Chairman: Was this a specific lack of organisation?

  Mr Lehner: That was due very much to the completely new administrative infrastructure which had to be built up for the running of such community programmes which had never existed in these countries, the setting up of payment agencies which had to go through a lengthy certification process. I remember vividly debates between the advocates in favour of pushing money to these countries as quickly as possible and the advocates who said "Be careful, let us build up the infrastructure first and make sure this money is well spent". Commissioner Fischler has always been very clearly part of the second camp and he has insisted that this is a careful building up of infrastructures because he said that these infrastructures will serve them for the community programmes once they are members.

  Q479Countess of Mar: That can only make sense.

  Mr Lehner: It is a learning process, the building up of an infrastructure. The 2004 execution, and we have the results just coming in, was that 574 million had been spent in 2004 alone, so considerably more than the first four years together. There could have been even more if we had the payments appropriations because at the end of last year we had a considerable shortage of payment appropriations in the 2004 budget. The feeling is that 2004 was the first good year of executing these rural development programmes in the new Member States and this is an indication that they have reached cruising speed. My answer to your first question would be that we interpret the experience more as a necessary building up and phasing in period rather than indicating a structural obstacle to taking up these kinds of funds. Also, you ask whether there is a total maximum capacity of uptake and to save time I will not go into that very much. You may recall that in Agenda 2000, Heads of Government decided that 4 per cent should be the maximum of Structural Funds, of which rural development is only part. The Structural Funds in total should not exceed 4 per cent of GDP. This is part of our proposal for 2007-13. I could go into depth on this because it is very interesting for economists to argue. There are questions of additionality and of co-financing which are constraining the national capacity to increase this kind of uptake. We have this 4 per cent now and we think this is a reasonable order of magnitude. Your second question on rural development is whether it should be incorporated into Structural and Cohesion Funds. That is a very good question because I think the pendulum has swung back and forth on this question whether rural development is more sectoral assistance or part of a wider regional concept. At the moment we have it separate, we have the funding under the first pillar, which is sectoral, which are so-called accompanying measures, which is rural development spending but to the sector, and we have the rural development part of the Structural Funds, which is clearly integrated in the Structural Funds. We have a dual system at the moment. The new instrument is a single instrument that is proposed. In my understanding, this retains this dual nature. It has a catalogue of measures from which Member States can choose with some proposed minimum percentages but leaving a wide range of choice to the Member States as to where to put the emphasis. I think the instrument is both sectoral and regional still and Member States are free to make it a bit more sectoral or a bit more regional if they have a preference one way or the other. There are two elements which make it a bit more sectoral than it has been in the past. One is the new instrument will permit some assistance to meet the cross-compliance criteria. The first pillar introduces the Single Farm Payment with cross-compliance and farmers have to meet certain environmental standards, animal health standards and so on, and to meet these standards they can get some assistance from the new Rural Development Fund, so there is a direct inter-link between the two which makes the second pillar a bit closer to the first pillar than in the past. Then we have the modulation. Farmers are taxed to give something to rural development, so they would like rural development money to be spent as close as possible to the farm rather than to some other economic activities which may benefit the farmers' sons who can then go out of farming into another economic sector altogether but stay in the rural area. That may be quite interesting but it is a bit further away from direct farming activities. To sum up, I still think that the new instrument has a dual nature, that Member States have a choice whether to make it more a structural instrument or a sectoral instrument. I would suspect farmers who contribute to the funding of this by means of modulation will have some preference for this to be spent closer to them rather than in any other economic activity in rural areas.