MFF negotiations risk reducing funding for rural land management

The negotiations on the EU’s budget for the next seven years – called the Multi-annual Financial Framework (MFF) – are now fully underway. The Cypriot Presidency has just published their attempt to bridge the gap between the Commission’s proposals for a small increase and those that are calling for reductions, most notably the UK. These negotiations and the debates on the reform of the CAP strongly interact because agriculture takes a major share of the EU budget. How this is resolved will have major implications for the environmental performance of EU agriculture. Something has to give between the UK insistence for a smaller total budget and smaller CAP budget, and the insistence led by France that the Commission proposals for a cash freeze on direct payments to farmers must be adhered to. There are precedents which suggest that Pillar 2 rural development funding could be the victim. If at the same time options to water down the Commission’s Pillar 1 greening proposals are agreed, then rural environmental management could suffer a double blow: cuts in agri-environment expenditure and weak provisions for greening direct payments. There is much to play for in these negotiations.

The MFF proposals

The European Commission has proposed a €1.033 trillion budget, for 2014-20 equivalent to 1.08% of the EU’s Gross National Income (GNI), showing a small 5% increase over the period (COM(2011)398). Note that the Commission also, controversially, proposed a number of items of extra-budgetary expenditure which increases all these figures. In July 2012 the 2011 proposal was amended to take account of the accession Treaty with Croatia and reworked given subsequent developments in the macro-economy (COM(2012)388). The total budget now proposed is €1033 billion commitments at 1.08% of EU GNI and €987.6 billion payments which is 1.03% GNI. Counter proposals have emerged from Germany for a budget taking 1% of GNI which would mean cuts of about 7.5%, and from the UK calling for larger cuts of €100 billion or over 10%. But the Commission proposal is criticised as insufficient by some other Member States and many in the European Parliament who point out ambitious EU programmes and commitments, and that EU membership is still growing. Decisions on the MFF have to be reached in The European Council by unanimity and the European Parliament has no amending powers only the ability to veto the Budget. If vetos are exercised this means delay in the decision making and potentially a year-by-year roll-over of the existing budget. In view of the crowded agenda of the European Council which is still dealing with the banking liquidity and sovereign debt crises, a special Council to settle the MFF has been convened for 22-23 November. The uncertain outcome of these negotiations on the MFF has encouraged the European Parliament not to agree its report on the Commissions reform proposals for the CAP until the budget is settled. This is unlikely to happen now until 2013.

The CAP’s share of the budget and the MFF negotiating box

The Commission’s proposal for heading 2 of the MFF, which mostly funds the Common Agricultural Policy (CAP), is a cash freeze averaging €55 billion per annum (in 2011 prices), declining in real-terms by 10% by 2020. This freeze applies equally to both Pillars. The effect of the proposals is to bring the CAP share of total EU expenditure down to 34% by 2020.

The Cypriot Presidency has released a new version of the ‘negotiating box’ for the MFF dated 29 October 2012. They have proposed a €50 billion (5%) cut in the total budget, just short of the German proposal. They have also judged that the various budget headings are defended with different intensity and therefore that Heading 2 should be reduced by only 2% whilst some other headings are cut much more. Within Heading 2 the Presidency suggests Pillar 1 direct payments be reduced by [0.27 to X%] per year for the years 2015 to 2020, i.e. a total reduction of 1.3% and rural development funds cut at the same rate. Yet, even this modest cut in Pillar 1 is likely to be contested as the French Minister of Agriculture, has been active in corralling support from several Member States for the Commission’s proposed cash freeze for Pillar 1. CAP budget. The resolution of this will be very important for environmental interests as well as farmers given that the CAP contains considerably more EU budgetary power for achieving environmental objectives in rural areas than any other fund.

Threat to Pillar 2

We have twice previously seen that when CAP Pillar 1 funds are threatened with cuts there is a ferocious defence which then results in a poorer deal for rural development. This happened at the last MFF round in 2005 when a Franco-German deal pre-empted protection of Pillar 1 funding, and diminished Pillar 2 funding for the current period. It almost happened in the run up to the publication of the MFF proposals in June 2011. It is all too plausible therefore that history may repeat itself in the present MFF settlement to the detriment of Pillar 2 funding. There is a risk that many Member States may argue that greening Pillar 1, which is a key aspect of the CAP reform proposals, is a substitute for Pillar 2 agri-environmental programmes. They might argue that it is therefore acceptable that Pillar 2 absorbs most of the expected cuts in the CAP budget, and furthermore this would also relieve their stretched public finances of some co-financing expenditure. In extremis, if the outcome of the MFF negotiation is a cut in EU and all headings by, say, 10% and all the Heading 2 cut is borne by Pillar 2, this would mean a 42% cut in total rural development public expenditure. If the defenders of Pillar 1 win the day, even a 4% CAP budget cut all borne by Pillar 2 would cut its expenditure by 17%. This would mean a substantial restructuring of rural development programmes to the detriment of their objectives in fostering sustainable competitiveness, natural resource and climate protection, and innovation. A recent report for the European Parliament concluded that in contrast to the passive payments of the first Pillar, Rural Development provides the effective measures for these goals.

There are several other aspects of MFF negotiating box which could impair the ability of the CAP to improve EU environmental land management. The Commission’s proposals are that all farmers will have to follow three proposed greening actions in return for 30% of the direct payment funds. In the negotiating box ‘all farmers will have to follow’ is square bracketed and the 30% greening share is shown as a maximum. Also it is added that: ‘Flexibility for the Member States relating to the choice of greening measures will be established’. If accepted, these three options are likely to result in a watering-down of the greening proposals – which most environmental interests have suggested are already worryingly light in prospective environmental delivery.

Offering a little more comfort to potential Pillar 2 funding is that the flexibility clause in the Direct Payment proposals – which allows Member States to shift funds from Pillar 1 to Pillar 2 – could be extended beyond the 10% proposed to 15% of national ceilings. However the benefit for Pillar 2 funds of this proposal is diminished by the proposed zero Member States co-financing rate for these switched funds. Rural development funding will also be diminished if the suggested increase in transfers (from 5 to 10%) in the opposite direction for Member States with direct payments below 90% of the EU average is agreed by the Council. The other big uncertainty in the MFF negotiations for CAP funding relevant to environmental management is the distribution of Pillar 2 funds between the Member States. It is still contested if this will be decided by the Council or if it remains the prerogative of the Commission. Neither is it clear how the proposed objective criteria and past performance will be defined and weighted. The past distribution of these funds is extremely uneven and not at all related to objective needs for the Pillar 2 measures.

In conclusion, the strategic reform direction for the CAP which has been, all too slowly, unfolding over the last decade may grind to a halt if the MFF and CAP reform discussions go badly. The strategy since the late 1990s has been to reduce subsidies for agricultural commodities (for which markets work quite well) and to switch public support to farmers to the public environmental goods (for which there are no markets). Unless the supporters of this strategy ensure that Rural Development support is protected within the CAP budget and that proposals to green the CAP are not watered down, the small progress of the last decade could easily be lost.

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01 Nov 2012