A critical perspective on the Reflection Paper on the future finances of the EU

The reflexion paper tabled by the European Commission  end of June provide a picture of a budget that would neglect the economic reality of European agricultural and agri-food businesses and may compromise the goals of responsible environmental stewardship and high-quality food, for all of us.

On the 28th June, the European Commission (EC) published a Reflection Paper on the future finances of the European Union (EU). The Paper is presented as a starting point for a debate that will inform the EC’s 2018 proposals for the EU’s post-2020 multi-annual financial framework; it includes initial ideas and options which it hopes can be developed through the negotiation process to ensure an effective future budget.

The Reflection Paper was drafted by President’s Juncker’s Cabinet team and co-signed by the Commissioners for the Budget and for Regional Policy. Yet, when it comes to the EC’s ambition for the future of Europe, it simply leaves us baffled. We are also concerned at the absence of any economic vision for Europe’s agriculture and agri-food sector. The paper ignores agriculture’s strategic importance for the sustainable development of over 70 % of the EU’s territory and it ignores that, with 16 % of total industry turnover in the EU, it is second only to the metals industry. It ignores, moreover, that agriculture employs 10 million people and that 4.1 million industrial jobs directly depend on it.

A budget with no vision at all would have been better than the one proposed. The EC’s idea of the European Food System barely goes beyond niche markets for a free-spending urban elite with an idealized image of traditional agriculture. This vision is disconnected from the real world of a sector, which, while certainly suffering from structural economic difficulties, is on the cusp of a new technological revolution ripe with genuine opportunities to build an agriculture that is both competitive and sustainable, and a far cry from the stereotypes and prejudices that may exist.

On the question of how to fund the EU’s budget, the Paper mentions the recurring question of increasing the Union’s own resources, but offers no specific proposal for achieving this. By the end of the Paper, it is hard to escape the feeling that the EC has abandoned all hope of making any substantive progress on this question, even before negotiations have begun. In this case the lion’s share of the budget will continue to be funded through Member State contributions; with discussions focusing on whether or not to remove the 1 % GNI ceiling. Under this scenario, the gulf between net contributor MS and the others can only widen, with Germany’s voice likely to be the loudest in the forthcoming negotiations.

In order to finance the new challenges that it identifies (“the management of irregular migration and refugees, including integration, control of external borders, security, cybersecurity, the fight against terrorism and common defence”), the EC presents 5 potential scenarios and discusses the need to reform the EU’s current main policies, with the CAP chief among them.

A biased analysis of the CAP and a proposal based on handouts and degrowth.

– A reminder of the CAP’s objectives and the spirit of the 2013 reform

“Ensuring the economic, social and environmental sustainability of agricultural and rural communities is the core objective of the Common Agricultural Policy (CAP).”

The most recent reform of this policy introduced major changes to the system of direct payments, targeted to address the particular needs of young farmers and smaller farms, specific sectors or regions in difficulties, and the environment. (Commission Reflection Paper, 28 June, 2017)

Today, it is as if the EC has forgotten the strategic goals of CAP.

The picture painted by the EC in its Reflection Paper of today’s CAP contrasts with the EU’s policy of investing in growth, (in no small part) through agriculture and agri-food, which has been an explicit objective for more than 50 years. It contrasts too with the spirit of the reforms introduced in 2013, which sought to combine the development of agricultural businesses across the whole of the EU coupled with more effective environmental stewardship of all rural agricultural areas.

Taken from the end of the section discussing the CAP, the diagram reproduced below would not be out of place in a British tabloid in that it neglects to say that the 20 % of farms which receive 80% of funding – that is, all farms of 10 hectares or more in size – manage more than 88 % of the utilized agricultural area of the European Union and produce nearly 90 % of the Union’s agricultural production (Eurostat). This omission reveals the limitations of the Paper’s analysis: contrary to the clichés, the vast majority of the 20% of European farms that receive the lion’s share of the CAP budget receive this support precisely because they not only ensure European food security but also ensure the sustainable stewardship of rural territories – without which no public policy for agriculture could succeed.

An objective analysis of European agriculture and of the CAP should also lead to the observation that 45 % of registered farms have an annual turnover of less than 2000 euros. These are not commercial farms operating in the market, but small subsistence farms or farms in which the farmer has a second professional activity, which together occupy less than 4.6 % of the EU’s UAA (Eurostat).

A ‘status quo’ or even ‘degrowth’ based vision of the future of European agriculture, and a departure from the growth objective promoted by the Junker Commission.

“Among the debated options is the suggestion to target 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.”

There is room to further improve the performance of the policy by putting more emphasis on incentivising farmers to deliver environment and climate public goods and services. (Commission Reflection Paper, 28 June, 2017).

A reading of the sections in the EC’s Reflection Paper related to the CAP gives the strong impression that the EC:

• is turning its back on the CAP, a policy whose primary goal is economic (and by doing so is failing to respect the provisions in the Treaty) but which is able to integrate solutions to environmental and societal challenges related to agricultural areas and activities;
• is proposing to turn the CAP into a social and environmental policy in which production is no longer the core focus, or even becomes a secondary focus.

Such a vision implies a deep misunderstanding of (1) the agricultural sector, (2) the economic situation and (3) the reality of the CAP itself.

To suggest that it is possible to sustain a farming sector covering the whole of the EU on any other basis than that of sustainable farming businesses is wishful thinking, not to mention a mistake. In this regard, the European Union needs to get to grips with the reality of its own agricultural world: farms of 10 ha and larger constitute 20 % of all farms, produce 90 % of agricultural output and manage 88 % of agricultural land.

These farms don’t work against the other 80%, they work with them: both have their roles.

In more objective terms, in addition to primary agricultural production, this 20 % provide an essential foundation for the agri-food sector, which generates employment, products and exports. This industry is undeniably an asset and second only (in turnover) to the metals industry. The EU should take pride in it and stop depicting agriculture as somehow lagging behind, existing in some bucolic 19^th century that we should want to preserve.

The European agricultural and agri-food sector is one of the most innovative, it is at the cutting edge of technology. In the 5 to 7 years ahead, technological advances will place opportunities within reach, and these will, if seized, enhance competitiveness and enable the sector to make a massive contribution to meeting our environmental challenges. But the CAP must guide this transition, make it possible, not put it at risk !

European policymakers and their advisors must get to grips with the reality which is far from the stereotypes of a small fringe group of urban executives. Time is of the essence. European agriculture needs to produce in all the EU’s territories and act as stewards for them, but it must also produce for every market segment, supplying the high-quality, healthy and affordable products that three-quarters of European citizens, who can’t afford to pay more, expect.

The EU deserves better than a mere ‘status quo’ policy. It needs agriculture in all its forms. It must encourage and support all its agricultures equitably and ensure their sustainable growth.

Food security is not a given. It is built and preserved and the EU has a massive responsibility to preserve it not only for Europeans but for world markets: pursuing a degrowth policy makes no sense and would occasion not only serious economic difficulties for the EU and European consumers but would massively increase instability in global markets. The first victims of such instability would be the most fragile importing nations, which need a minimum level of stability to be able to develop their own agricultural production.

Contrary to certain ideas popular within the EC’s Directorates, agriculture is not of secondary importance, it is not an expendable asset to be trimmed or circumscribed in order to benefit superior ‘environmental’ products that can shoulder the burden of problems caused by other industries.

If merely maintaining the status quo situation were to remain the main ambition, this would relegate production to a secondary order goal, and would probably have negative effects on both the economic development of territories and the environment. We should take the time to ponder whether, what would amount to a ‘bureaucratic’ rather than a ‘productive’ vision of the farm (i.e. small scale and strongly pushing towards extensification with as a consequence a large-scale use of subcontracting and farms operating at the end of the day as extensive holdings similar to the large estates in Scotland), would produce a sufficient number of responsible farmer-entrepreneurs to constitute a viable industry distributed across the whole of the EU? ; would they be able to protect the environment or produce in sufficient quantity to avoid the collapse of local agri-food businesses and the jobs they create? ; would such farms be able to offer European consumers products that respect European norms?

A set of scenarios and a strategy whose only real ambition for the CAP seems to be a substantial squeeze on the budget.

Apart from scenario 5 ‘Doing much more together: ‘the EU27 decides to do more together across all policy areas’ highly improbable, each of the scenarios imagined by the EC have in common a reduction to the CAP budget in order to refocus on “• Better targeted support for farmers under special constraints (e.g. small farms, mountainous areas and sparsely populated regions) and risk management tools for all farms • Investment in rural development (particularly agri-environmental measures)”.

One option to explore is 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. (Commission Reflection Paper, 28 June, 2017).

This proposal for the national financing of direct payments is nothing other than a proposal to end any shared ambition for the EU’s diverse agriculture(s), a blatant desire to dismantle the CAP and to renationalize it while appearing to maintain an EU policy but appearing only.

How is it possible to have national co-financing for direct aid and at the same time claim to be maintaining an effective internal market? To juxtapose these strategies, to link them in a single sentence is audacious in style, but it does not stand up to rigorous scrutiny.

Today, the CAP is the only European policy which (1) fuels the economies of all MS in a tangible way (with an almost 100% absorption rate by the MS), and (2) which supports a geographically balanced development of rural territories. To propose such cofinancing:

• suggests a serious misjudgement of the state of public finances in many MS;
• riskswould creatinge a significant disparity in the treatment of MS, between those which have the resources to provide substantial cofinancing and a high level of aid to farmers and those which do not;
• appears to show that the EC has openly taken sides with net contributor MS which have a financial vested interest in limiting the European budget and designing the latter in order to prioritize policy action that gives them a better financial return.

If the EC’s proposals were to be enacted, three consequences would ensue very quickly:

• there would be an effort to market national agricultural production and food products to the detriment of other MS, and MS would seek to put in place barriers for non-national (imported) products;
• it would become impossible to pursue any significant initiative at the European level as MS that cofinance would wish to retain the ability to decide how farmers should use funding – the idea that European norms can survive without a common budget is wishful thinking;
• ultimately, there would be a call for the abandonment of all direct aid to agriculture from a number of MS, which would inevitably lead to massive restructuring and the concentration of agricultural production. This would also lead to the appearance of abandoned areas, which would need to be kept alive with significant sums of public money (either from national sources or from what remains of European agricultural policy devoid of any economic objective) where extensification would become the rule and the emergence of large holdings maximizing drawdown but with no productive logic would be the end result. In either case (no public aid means no leverage for policymakers to justify any extra policy demands from beneficiaries, and no essential support for the others ‒ deliberately cut adrift by policy), the EU would not be in a position to require any farmer to make any particular effort for the environment ‒ leading to the very opposite of the officially desired outcome of better environmental stewardship.

Some may think that this EC proposal too brazen to actually be implemented. But is this wishful thinking? Whether it is or not will depend on how farmers in the MS, MS themselves and influential members of the European parliament respond over the coming weeks.

At any rate, our experience with this type of negotiation compels us to ask one final question: do these proposals reflect the common negotiating tactic of pitching for 10 while aiming for 5 with the negotiating opposites pleased to accept (despite them being short-changed in the case at hand), or even satisfied/relieved with the outcome?

More specifically, by proposing that direct aid be confinanced nationally, is the EC ultimately seeking to obtain the cofinancing of the CAP’s Pillar 1 greening measures, by integrating these into Pillar 2, making them voluntary in the form of an ‘entry level scheme’, which is a required step for accessing any other agri-environmental measure?

Mathematically speaking, the transfer of greening measures to Pillar 2 would mean a reduction of 15 % of the CAP’s budget for the community’s financiers, with the other 15 % coming from the MS from national budgets (and very likely from the budget that is currently, in the case of MS with fewer resources, allocated to the CAP’s Pillar 2).

Politically, this would allow the EC to present its proposition, in the short term, as being just as pro-environment within a cofinanced CAP but knowing full well that the reality will be very different. The large net contributing MS will gain from the process but the others will not be able to find the necessary resources nationally. The consequence will be basic measures (‘entry level scheme’) that are more restrictive than those for greening and less funding for the other agri-environmental measures and investment for competitiveness, not to mention the complexity of managing such a basic scheme… which has been introduced in England where its complexity and relative ineffectiveness are manifest.

It is useful in this respect to bear in mind the fundamental difference between the greening measures under Pillar 1 and the agri-environmental measures under Pillar 2. Under Pillar 1, the funding for greening is a lump-sum incentive to promote the implementation of good basic practices across the EU. That these practices, or better ones, may already have been adopted by farmers or that that farmers may need to align their practices (whatever the cost), the greening payment is made. Under Pillar 2, only the additional costs incurred from implementing an agri-environmental practice are covered. These additional costs need to be properly documented, calculated and accepted by the EC. The transfer of the greening measures to Pillar 2 would prevent the most virtuous farmers, (who may have already adopted or may even have exceeded the required practices and may indeed have done so even before the 2013 reforms) from accessing the corresponding funding. In sum, punishing the virtuous.

It is highly likely that many farmers would choose to withdraw from the entry level scheme greening measures under Pillar 2 and would receive no AEM payments from the CAP. Once again, between the differential treatment of MS and disinterest among farmers who would tire with a bureaucracy so disconnected from the real world, the very future of the CAP would be at risk, which would be quite an achievement.

The idea of transferring greening measures to Pillar 2 is being very seriously considered by the EC. We think that the political decision may be imminent.

Add to this the poker-faced proposal to reduce cohesion funding, but the idea of stopping all these funding opportunities for the most developed MS is to reserve them for the other MS, thus being able to seduce them with an increase in their cohesion fund allocations.

Even if the latter MS have a very low absorption rate for cohesion funds, and are unlikely to be able to improve their rates in the coming years, it may prove very tempting for their governments to cry victory, albeit one in appearance only. Lurking behind these proposals there appears to be a thinly veiled desire to drive a wedge between those MS that would, in theory, be beneficiaries of future cohesion funding and those MS that would favour keeping a strong CAP.

In this context, we call on European policymakers, Heads of State and governments, and leaders of the European Parliament to take up the gauntlet and show their ambition for the European Union and for its farmers. You have a stark choice:

Either;

• stand up for a European Union with vision, believing in growth, coupling a simultaneous drive for competitiveness and sustainability, ensuring the development of rural territories through a strategy focusing on the sustainable competitiveness of agricultural and agri-food businesses, and endorsing true solidarity between MS;

Or ;

• adopt a narrow profit & loss approach to the benefit of the wealthiest contributor MS and by so doing expose agriculture to massive restructuring or condemn it to shrink thereby placing European food security and market stability in the hands of other world agricultural powers.