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19/09/2017

European funding, in danger

  • Political-economic uncertainty in the European Union has put the future of Common Agricultural Policy financing at risk

Ricardo Migueláñez. @rmiguelanez

At the end of June, the European Commission released a reflection paper entitled "The future of EU finances", the fifth and final text in a series of reports published by the Commission aiming to lay the groundwork for discussing the future of Europe.

The text sets out the potential budgetary repercussions in connection with the funding options proposed by the European Union, following Brexit and the challenges faced by the "club", as well as the migrant crisis, domestic and border security, the fight against climate change, employment, the technology revolution, etc., all of which require funding.

In short, although its "simply" a reflection paper, the topic is as important as what's going to happen as from 2021, when there's less revenue, following Brexit, and there are much fewer challenges to face and, therefore, to fund. Against that backdrop, it's worth noting that 4 of the 5 scenarios imagined by the EU's Committee on Budgets do not envisage maintaining current funding for the Common Agricultural Policy (CAP).

This is the standpoint from which the Commissioner for Agriculture and Rural Development, Phil Hogan, aims to use public consultations, debates and conferences of all kinds on the future of the CAP to justify to the rest of society the need to continue supporting the agriculture sector.

The sector ensures stable, quality food supply at affordable prices, contributing, from its privileged position in extensive rural areas, to the defense and protection of the environment and the fight against climate change in the European Union, creating economy and jobs. In other words, the goal is to convince society that supporting farmers is not in vain but, rather, that it continues to be necessary because it provides added value to society.

According to the document, the EU's budget for 2014-2020 "supports a dynamic agricultural sector with around €400 billion, supporting 7 million farmers, provides for the modernization of 380,000 farms with €8.7 billion and finances rural development investments targeting biodiversity, improved energy efficiency, the setting up of businesses and the modernization of production facilities."

Direct payments represent approximately 70% of CAP funds, income support which, according to the EU, "partially fills the gap between agricultural income and comparable income for other economic sectors." However, it recognizes that "there are growing demands to orient the CAP further towards the provision of public goods related to the protection of the environment and climate action. This would require more targeted and regionally adapted support measures".

The paper also underlines the fact that "there is no consensus on the level of income support necessary when taking into account competitiveness within the sector. In some cases, these payments do not contribute to the structural development of the sector, but tend to increase land prices that may hinder the entry of young farmers into the market."

It goes on to say that "direct payments are still largely determined by historic entitlements and concentrated on large farms and land owners in richer Member States". On average, 20% of beneficiaries (around 1.5 million farms) receive around 80% of support (35.5 billion euros) and just 20% of support (6.6 billion euros) is received by 80% of farms (5.7 million). However, this general picture does not accurately reflect the huge differences between Member states. For example, 92% of farmers in Romania and 97% in Malta operate small farms, while in Germany less than 9% of farms are small.

Finding balance

According to the EC, apart from the rural development measures financed under the second pillar of the CAP, "This is the only policy area managed together with the Member States without national co-financing," adding that "Developments over recent years have shown that the EU budget has had to provide recurrent ad hoc emergency support to react to specific developments, such as the fall in dairy prices or the Russian ban on imports of certain agricultural products".

Going forward, it notes that "There is a need to explore the right balance of instruments in the future CAP between policy measures and financial envelopes, grants and financial instruments and risk-management tools and other market arrangements to cope with risk and unexpected adverse events in the agricultural sector."

Broadly speaking, the document recognizes the CAP's achievements and notes that efforts are under way to modernize and simplify the policy. Among those options being analyzed is the possibility of "targeting direct payments more effectively to ensure income to all farmers across the EU, particularly for marginal areas and the poorest farms. Such an option could reduce direct payments for large farms".

Another option is to explore "the introduction of a degree of national co-financing for direct payments in order to sustain the overall levels of current support. Risk-management tools could be envisaged for dealing with crises. Any changes would need to preserve one of the key assets of the policy: the protection of a well-functioning internal market ensuring a level playing field for all producers across the EU".

With a view to maintaining "viable rural communities that ensure the sustainability of the vast majority of EU territory... there is margin for improvement and for enhancing synergies with other funds and a suggestion is to rationalize the action of the various structural funds in rural areas and eliminate overlaps."

The EC maintains that "There is room to further improve the performance of the policy by putting more emphasis on incentivizing farmers to deliver environment and climate public goods and services." As a result, "Farmers should be encouraged to invest in new technologies and environmental protection within the rural development policy through positive incentives on the basis of contracts. This would lighten the current administrative burden for all farmers."

Funding scenarios

The reflection paper presents five possible funding scenarios, which may be combined for 27 Member States with the various implications for the budget in terms of size, structure, degree of change and modernization.

Some horizontal issues are valid for all scenarios: the first one is ensuring that EU money is spent in the most efficient way, with expenditure focusing on programmes with proven value added designed to deliver results with the minimum costs. Performance should be at the center of the next generation of programmes.

Second, simplification is the other common driver for modernizing the EU budget in all scenarios. Overall coherence and complementarity between the different programmes and instruments should be ensured and overlaps should be prevented at the design stage. To simplify implementation, the same rules should apply for the same type of interventions to the extent possible with a view to moving towards a single rule book. The ongoing processes to modernize existing programmes and policies should continue (for the CAP, cohesion policy, the research programme and others). Weaker-performing programmes could be discontinued or integrated elsewhere.

Third, all scenarios require factoring in flexibility to respond to major unexpected developments and unforeseen needs. Special instruments in the EU budget proved crucial for dealing with the migration and security challenges in the current MFF (2014-2020). They may need to be streamlined and strengthened to provide more inbuilt flexibility within spending programmes.

Finally, rebates on contributions of Member States should be abolished in all scenarios. Likewise reporting on net balances should be dropped or the methodology significantly improved to better reflect reality and national treatment of contributions to the EU budget should be aligned.

Options and scenarios

According to this logic, the EC proposes five basic options for the future of EU finances, impacting the CAP as from 2011. They are as follows:

-Scenario 1: Carrying on. The EU-27 continue to deliver their positive reform agenda. In this scenario, the CAP would receive a smaller percentage of the EU budget, with better targeted support for farmers under special constraints. This includes small farms, mountainous areas and sparsely populated regions. It would also include risk management tools for all farms and investment in rural development, particularly agri-environmental measures.

-Scenario 2: Doing less together. The EU-27 do less together in all policy areas. In this scenario, the CAP would receive a small amount of the EU's budget. Support would be provided only for farmers under special constraints, such as small farms, mountainous areas and sparsely populated regions. Risk management tools would be provided for all farms.

-Scenario 3: Some do more. The EU-27 allow groups of Member States to do more in specific areas. In this scenario, the CAP would receive a smaller percentage of the budget, similar to scenario 1.

-Scenario 4: Radical redesign. The EU-27 will do more in some areas, while doing less elsewhere. In this scenario, the CAP would also receive less of the budget, which would reduce direct payments and focus on farmers under special constraints (e.g. small farms, mountainous areas and sparsely populated regions) and agri-environment-climate actions and risk management tools for all farms.

-Scenario 5: Doing much more together. The EU-27 decide to do more together across all policy areas. In this scenario, the CAP would receive more of the EU budget.

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