Select Committee on European Union Second Report

CHAPTER 2: Introducing the Common Agricultural Policy

8.  The CAP is one of the most important EU policies. It is made up of two "Pillars":

  • Pillar 1: market support measures and direct subsidies to EU producers
  • Pillar 2: rural development programmes

9.  The Commission is proposing the following budgetary ceilings for the two Pillars of the CAP for the period 2007-2013[5]:


Commission's proposed expenditure for Pillars 1 and 2 2007-2013

All figures in billions of euros
2007 20082009 20102011 20122013 Total 2007-2013
Market and direct aids (Pillar 1)43.5 43.743.443.0 42.742.542.3 301.1
Rural development (Pillar 2)11.8 12.212.712.8 88.8

10.  Based on 2004 prices, in nominal terms, the proposals present a further increase in spending, but over the whole 2007-2013 period CAP expenditure would fall to 29% of total EU expenditure, and by 2013 would only comprise 26% of that year's budget. That compares with 45% of the budget in 2006 and 65% in 1988. If the Commission proposals for the next Financial Perspective are adopted, the budget will increase by around 35% in order to accommodate ten new Member States. As far as the agricultural budget is concerned, no increase is planned. In fact for the EU-15 there will be a decline as further enlargement will have to be met though existing funds.

The Brussels Ceiling

11.  In 2002, France's president, Jacques Chirac, and Germany's chancellor, Gerhard Schröder, agreed that spending on Pillar 1 of the CAP (direct subsidies and market support but not rural development spending) should not rise by more that 1% a year in cash terms until the end of the next Financial Perspective in 2013. This is known as the Brussels Ceiling and the agreement was endorsed by the European Council in October 2002. This effectively freezes Pillar 1 expenditure until 2013[6] and is the basis for the Commission's budgetary proposals for agriculture.


The Changing Face of the CAP

The CAP of today bears little resemblance to the CAP of the 1960s. The emphasis of the early CAP was on increasing food production and protecting the incomes of farmers, following the shortages of World War II. The CAP sought to maintain guaranteed prices through market manipulation and frontier protection. To a great extent this policy succeeded and allowed the Community to become self-sufficient in food production in a very short time.

However, by the 1980s, the success of this policy was resulting in an almost permanent over-supply of major food commodities. These had to be either exported (with subsidies) or stored or disposed of within the EU. Such measures were increasingly costly, distorted world markets and proved unpopular with European taxpayers. Increasing international concern over the trade distorting effects of the CAP and other developed country farm policies, and the environmental implications of increasingly intensive agriculture led to overwhelming pressure to reform the policy in the early 1990s.

Agricultural trade issues dominated the Uruguay Round of General Agreement on Tariffs and Trade negotiations which culminated in the Marrakech accord of 1994. The Uruguay Round Agreement on Agriculture, which was a major feature of that accord, imposed important limitations on the subsidising of farm exports, and reduced import barriers. The CAP reforms applied in 1993-6 were the response to this agreement. The Community was forced to cut prices for cereals and other major commodities so that the need to subsidise exports was substantially reduced, and so that domestic production could remain competitive against imports. An important element of this new policy was the introduction of "compensation" to farmers, through direct subsidies, for the reduction of guaranteed prices.

Nonetheless, through the 1990s, the EU continued to operate a policy which maintained important elements of the old CAP: intervention buying, export subsidies and a high import tariff, in addition to the new direct payments. Production and the cost of the CAP continued to increase, with the agricultural budget increasing by over 30 per cent between 1992 and 2000.

The reformed CAP: Pillars 1 and 2

12.  The current approach to European agricultural and rural support was essentially determined by the 1993-96 reforms, and further refined by the Agenda 2000[7] adjustments within the Financial Perspective for 2000-2006. Agenda 2000 further reduced internal market prices and compensated farmers by increased direct payments under what became known as the first Pillar of the CAP. The various elements of support for rural development[8] were amalgamated under the so-called second Pillar.

13.  Following the mid-term review[9] in 2003, a number of radical reforms were agreed[10]. These began a process of change that will fundamentally alter the way in which European farmers' incomes are supported. The single farm payment (which decoupled support from production) was introduced, together with provisions for cross-compliance (making payment conditional on the recipient meeting certain environmental and animal welfare conditions) and for reductions to be made from direct payments ("modulation") in order to provide additional Community support for rural development.


What is cross-compliance?
Full granting of the single farm payment to farmers is linked to compliance with statutory environmental, food safety, animal and plant health, and animal welfare standards. In addition, Member States have to ensure that all agricultural land is "kept in good agricultural and environmental condition"—especially land which is no longer used for production purposes.

In the case of non-respect of these "cross-compliance" measures, direct payments can be reduced or withheld. In the case of negligence, the overall payment to be withheld is set at a maximum of 5%, or 15% for repeated offences. For intentional non-compliance, the fine is not less than 20%, and may go as far as total exclusion from receipt of payment for one or more years. 25% of the total receipts from cross-compliance penalties may be retained by the Member State—the remainder is re-credited to the main CAP budget.

See Appendix 3 for the full list of "cross-compliance" measures.


What is modulation?

The term "modulation" was originally used to describe the adjustment of payments between farms of different sizes. In its current usage, it is used to describe the transfer of funds from direct subsidy payments to rural development expenditure.

Modulation moves money from single farm payment funds (Pillar 1) in order further to fund rural development programs under Pillar 2. Compulsory modulation is being applied in each EU-15[11] Member State from 2005 at a rate of 3%, rising to 4% in 2006 and to its maximum of 5% in 2007, continuing at 5% until 2012.

In addition to compulsory modulation, Member States or regions can opt for "voluntary" modulation of up to 20% to help fund certain rural development measures initiated before 2006. Funds resulting from voluntary modulation will be retained in the region in which they are raised. Any voluntary modulation expenditure must be co-financed by national funding.

14.  The 2003 reforms differentiated between the two Pillars of the CAP: Pillar 1 aims to provide a direct payment to farmers, subject to environmental conditions, as opposed to indirect market subsidies. In future, farmers should produce according to market demand but intervention arrangements will continue. Pillar 2 supports i) agriculture as a provider of public goods (e.g. through funding environmental stewardship schemes) and ii) the development of rural areas (e.g. through improving agricultural marketing, diversification out of agriculture and local structural improvement).

Continuing reform: 2007-2013

15.  Our inquiry has addressed the question of whether the budget proposed by the Commission will be adequate to meet the funding demands of CAP policies for 2007-2013. More importantly, we have considered whether the two Pillars of the CAP will be effective in implementing the objectives of those policies.

16.  The reformed CAP strives to address agricultural problems as well as alleviating more general rural poverty. The 2003 reforms were designed to overcome this fundamental agricultural policy challenge. However, the difficulties posed by enlargement, as demonstrated in evidence to us, highlight that this problem has not been solved. Payments designed to compensate EU-15 farmers for reductions in market support do not of course solve obvious rural poverty problems in the new Member States.

17.  The Commission released its proposed budget for 2007-2013, seeking 1.14% of gross national income (GNI), but a group of net contributor countries including the United Kingdom have responded, wanting to keep spending at a lower 1% GNI. This debate will affect the levels of spending which will be available to meet CAP commitments.

18.  At the same time the organisational structure of the CAP's financial instruments is currently being debated within the context of the next Financial Perspective. The Commission has brought forward two proposals[12] aimed principally at stressing the role of the CAP's rural development Pillar. The current division of the financial instruments would make way for a single framework within which a single fund[13] would provide rural development financing. As part of this report, we consider whether these further reforms to the CAP will enable it to meet effectively the demands of European agriculture today.

5   See Appendix 1 for an overview of the whole EU budget for the period 2007-2013. Appendix 2 provides a detailed breakdown of proposed CAP expenditure. Back

6   In fact, as the agreement was that Pillar 1 spending should rise by no more than 1% a year in cash terms, this implies small annual cuts in real terms. Back

7   Agenda 2000 was a European Commission paper adopted in 1997 which set out a strategy for enlarging the EU and at the same time for reforming EU farm spending and regional aid in advance of new countries joining the EU. Back

8   These include modernising farms; producing safe, quality products; ensuring fair and stable incomes for farmers; meeting environmental challenges; fostering supplementary or alternative job-creating activities; and improving living and working conditions and equal opportunities.  Back

9   For more see our report Mid-Term Review of the Common Agricultural Policy: External Implications (10th report, HL 62). Back

10   Principally in Council Regulation (EC) No.1782/2003. Back

11   Belgium, Finland, France, Denmark, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, the United Kingdom. Back

12   No 11495/04 Proposal for a Council Regulation on support for rural development by the European Agricultural Fund for Rural Development (EAFRD); and No 11557/04 Proposal for a Council Regulation on the financing of the common agricultural policy. Back

13   European Agriculture Fund for Rural Development (EAFRD) Back

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