Summary and conclusions – excerpt from the expert opinion

1. Two decades after the MacSharry-Reform that initiated the shift away from the traditional market and price policy of the EU, the Common Agricultural Policy (CAP) is at a crossroads again. The debate focuses on the first pillar of the CAP that absorbs the bulk of the funds. One chief concern is the question whether the liberalisation of the market organisations should be continued and another the future of the decoupled direct payments: should they be maintained, phased out, modified or used to strengthen the second CAP pillar?
2. Looking back, the Advisory Board has come to the conclusion that, overall, the CAP reforms of the past two decades are to be welcomed. Many undesirable developments arising from the previous market and price policies are now a thing of the past, the competitiveness of the agricultural sector has been improved and the introduction of the second pillar has established measures designed to promote activities desired by society.
3. In response to the financial and economic crisis, the question how to effectively and efficiently regulate the globalised market economy is currently being discussed worldwide. The Advisory Board considers this discussion to be important since a free market system needs guide rails that must be adapted to new findings if required. The recently acquired experience from the financial and economic crisis, however, does not justify a renaissance of the former market controls of the CAP or comparable state interventions in individual product markets. On the contrary: the fact that individual states, unlike in the 1920s, only resorted to protectionist measures of adaptation in exceptional cases proved very helpful in achieving a relatively swift resolution of the crisis.
4. The Advisory Board recommends largely sticking to the market-oriented course of EU agricultural policyin the future. The Board calls for a full decoupling of direct payments from production in the forthcoming CAP reform, i.e. also for those products and those Member States where this is not yet the case. In addition, the production quotas that still remain should be gradually phased out.
5. The payments under the first CAP pillar that were initially called "price-related compensatory payments" were originally introduced in order to offset the negative income effects resulting from the drastic policy turnaround in the 1990s. Since the argument of providing "compensation for policy change" is not suitable in the long run as a means of legitimizing payments made for the benefit of a certain group of people, various new justifications for direct payments have been formulated over the past two decades. Cross-compliance was also introduced as a result of this development. It made the payments conditional on compliance with specific rules of specialised law (e.g. in the environmental field) and with a few other additional requirements.
6. This expert opinion shows that the arguments for the direct payments that arose from this development are on shaky ground:
   
   - The argument that the payments are required in order to permanently maintain a lucrative agricultural sector is not convincing. In most regions farming would be continued even in the face of a progressive elimination of direct payments while for regions where this would not be the case, the second CAP pillar provides for compensatory allowance, which could be stocked up if necessary.
   
   - The argument that the payments are a necessary remuneration for public goods produced by agriculture is also not convincing. It is beyond dispute that agriculture produces many public goods. However, society would only have to "reward" them if they were running low, i.e. could not be produced otherwise. The payments that are currently made hardly contribute to mastering the challenges in the agricultural sector and rural areas.
   
   
7. This is precisely where the expert opinion sets in by addressing in depth the issue of the challenges facing agricultural policy. The following subjects are addressed by way of example: global food situation, food safety, competitiveness in a globalised agricultural economy, reduction of the greenhouse gases, adaptation to climate change, safeguarding biological diversity, development prospects for rural regions facing problems.

8. The arguments considered to this end lead to the following results and assessments:
   
   - In the opinion of the Advisory Board, the above subjects or policy fields are in no way "extravagant subjects" or "alibi arguments" that are designed to bring about the continued existence of a protectionist agricultural policy in a different guise; instead, they concern key future challenges facing mankind.
   
   

   - The core problem of the ongoing discussion about the future of the CAP lies in the fact that many people just use the above themes as buzzwords in order to legitimize the important role that agricultural policy plays and that the specific policy instruments on which EU agricultural funds are to be spent are very limited in their suitability for actually mastering the huge challenges.
   
   - Criticism of the direct payments is legitimate. But it must also be clearly stated that phasing out direct payments would not in itself contribute to mastering the challenges, but would initially only result in a release of funds that could be employed in a more expedient manner.
   
   - The second CAP pillar was created in the 1990s for such target-orientated measures. However, a closer analysis shows that a simple reallocation of funds from the first to the second pillar would only be appropriate to solve some of the problems, but would not produce a satisfactory solution overall. This disappointing outcome can be explained in a number of ways:
   
   

       -- Firstly, some of the challenges require central strategies to deal with them, thus making the current decentralised policy approach under the second pillar unsuitable to deal with these cases.
   
       -- Secondly, the handling of the second pillar in Germany has shown that the division of responsibilities between the Federal Government and the federal states impedes a nationwide strategy even where such a strategy is objectively justified.
   
        -- Thirdly, the efficacy of rural development policy measures which go beyond the agricultural sector is hampered by the fact that this objective is not shared by much of the second pillar, where the focus is on agricultural measures. However, the economic and social development of rural areas requires multi-sectoral approaches.
   
        -- Fourthly, past experience has shown that, besides the known advantages, the principle of co-financing also has some serious disadvantages. On the one hand, the pro-rata EU funding provides incentives for the programming of (known) measures which ensure that the "outflow of funds" goes according to schedule, minimizing the risk that financial correction will be necessary. This is to the detriment of innovative measures. On the other hand, the pro-rata national financing is reaching the limits of its financial viability in the national budgets, making it difficult to develop sustainable development strategies, especially in the regions most in need.
   
        -- In the light of this situation, it is occasionally suggested that the current and future challenges should be addressed using a modified first pillar approach. However, this method has little prospect of success as long as the first pillar is conceived according to the principle of "granting single farm payments to all farmers throughout the country". The direct payments scheme was established for a specific purpose (cushioning the impact of the policy turnaround) and it is, even with major modifications, only of limited suitability for solving a host of problems of an entirely different kind.
   

9. The brief summary of the challenges addressed in this expert opinion and of the agricultural policy approaches suitable in each case (see box) demonstrates once again the wide variety of the necessary measures. Many of these measures do not fit into the second pillar’s pattern of "policy-makers offer support options, companies and municipalities decide on whether to collaborate", but instead require action plans that, subject to the policy field, would have to be located at different policy levels (EU, Federal Government, federal states, municipalities). Many of these measures cannot be assigned to agricultural policy in the strict sense of the term, meaning that it will be necessary to examine what department(s) and with what remit they would need to be established in.
10. The conclusions of these considerations are as follows: it will not be enough if we confine ourselves to making only small modifications to EU agricultural policy, shifting funds back and forth between the two pillars of the CAP and/or contemplating a pooling of the pillars (or parts thereof). What is required is instead to develop a fundamentally different policy architecture for agricultural and rural areas.
11. This change must start with a new guiding vision. The Advisory Board takes the view that a modern agricultural policy should no longer see itself as a protective and distributive policy for the domestic agricultural sector, but as a creative policy for a competitive agri-food industry which should be embedded in cross-sectoral policy fields such as the nature conservation, climate, energy, technology, animal welfare, consumers and the global food situation, and in a newly designed policy for rural areas.
12. It is not possible, at present, to determine the funding requirements for this modern policy for food, agriculture and rural areas because this presupposes that goals, responsibilities and measures have been agreed. It is quite possible that more funds will be needed than are currently being used in the CAP since these are public goods of great importance for society. This analysis, too, shows that: the ongoing policy debate on how high the direct payments for farmers should be or what cuts in direct payments farmers can be expected to tolerate completely bypasses the actual challenges that exist in the policy field of food, agriculture and rural areas.
13.  A shift of Community funds from the policy field of "food, agriculture and rural areas" that has been discussed in this paper to other policy fields cannot be meaningfully justified by arguing that the (relatively high) share of agricultural expenditure in the EU is disproportionate to the economic and social importance of the (relatively small) agricultural sector. This line of argument ignores the fact that the present spending structure in the EU budget primarily reflects the degree of "communitarisation" of policy fields in the EU. Agricultural expenditure (in the broader sense, including food and rural areas) accounts for such a large share in the EU budget mainly because agricultural policy is primarily funded by the EU whereas many other policy areas continue to be funded by the Member States. Thus, a reallocation of EU agricultural expenditure in favour of other EU policy fields (e.g. research policy) cannot be justified by these arguments. The Advisory Board, incidentally, deems it appropriate to subject the efficiency of other EU policy fields and the level (EU, Federal Government, federal state) at which these policy fields should be established to an equally critical analysis to that carried out by the Advisory Board here for agricultural policy. This might result in a recommendation to lower the overall funding at EU level and to leave the contributions thus saved with the Member States or their citizens.

14. It would be unrealistic to want to adopt and implement within only two years such a far-reaching reform of the policy for food, agriculture and rural areas, as the Advisory Board hopes to initiate with this expert opinion. The opinion-forming and decision-making processes in the EU require far more time. What conclusion can we draw from this with respect to the forthcoming decisions for the policy period 2014 to 2020?
    
    

    - The coming policy period should be conceived as a transitional period away from a primarily protective agricultural policy towards a policy that focuses primarily on providing structure. Within the scope of the upcoming reform decisions, the issue of the weaknesses of the "direct payments" instrument and the need for transitional periods until a modern policy can be implemented should be brought up in a pro-active manner.
    
    

    - The EU Commission should be mandated to draw up a comprehensive concept proposal for a fundamental overhaul of the policy field in its entirety. This reorganisation should start with the mid-term review 2017/2018 and take effect by 2020 at the latest. The aim is firstly to establish a convincing logical basis for intervention logic for the political objectives and instruments (what targets should be achieved, what means are best suited for this?), secondly, there should be a careful examination of what policy field should be established at what political level (EU, Member States, regions). In doing so, overlapping responsibilities and inefficient multi-level involvements should be eliminated as much as possible.
    
    

    - Progressive cuts in direct payments should be adopted for the 2014 to 2020 planning period, and to balance this policy measures should be newly designed or the funds available for these measures should be topped up in order to specifically prepare the agri-food sector and rural areas for future challenges.
    
    

    - It should be examined in the middle of the next policy period whether to leave the adopted reduction process unaltered or whether to adapt it in the light of the changes in key parameters (e.g. agricultural market trends) that might have occurred by then. The reduction targets for 2020 should, however, be stipulated now. If the level of direct payments were to be fixed only until the middle of the next policy period, this would send the wrong message to farmers and land owners and thus make long-term planning difficult.

    
    - Given that the interregional disparities in the level of direct payments are becoming increasingly difficult to justify as time progresses, policy-makers should consider gradually aligning area aid payments. This is particularly inevitable if policy-makers, contrary to the Advisory Board’s proposals, intend to retain these payments in the long run.

    
    - The direct payments should, for all products covered by market organisations, be fully decoupled from production in all EU Member States

    
    - The Member States should be free to readjust the distribution of decoupled direct payments in order, for example, to make the transition from historically-based payment entitlements to standard entitlements nationwide.

    
    - The gradual phasing-out of direct payments would render the cross-compliance regime increasingly obsolete. Shortcomings in enforcement regarding the specialised regulations governed by cross-compliance need to be counteracted by tightening penalty options in specialised law and by tightening controls.

    
    - Inasmuch as financial cutbacks prove inevitable in the coming policy period, these should be made at the expense of the first pillar and not of the second pillar. Under the second CAP pillar, the Member States should be able to decide more freely than was previously the case what part of the funds they intend to devote to what measures. EU requirements for minimum funding levels for the individual axes should be cancelled. They are not expedient in technical terms unless they are linked to substantive top-down strategies as demanded by the Advisory Board.

    
    - The attempt should be made to reorganise co-financing for the coming transitional period. The current regime encourages agriculture ministers to develop a strong political preference for the first CAP pillar because they obtain EU funding here without having to contribute additional funds from their national budgets. This bias in favour of the first pillar hampers the development of an agricultural policy that is more target-orientated and creative. The more the direct payments under the first pillar are justified on the grounds of rewarding farmers for the services they provide to society, the more questionable the current distinction between a non-co-financed first pillar and a co-financed second pillar becomes.

    
    - With regard to the alignment of co-financing, the introduction of mandatory co-financing of the first pillar might be considered. However, this option seems unrealistic in view of the expected opposition by many Member States. A second option would be to give the Member States the possibility to pay surcharges to the direct payments from the national budgets on a much larger scale. This is currently practiced to a limited extent by most of the new Member States. A third option would lie in also funding the second pillar fully from the EU budget with the possibility of supplementing these funds by contributions from the Member States. However, the Advisory Board believes that this option poses the risk of fewer funds being available for measures under the second pillar as a result of the elimination of national co-financing funds.

15. It is to be expected that the last-mentioned discussion items (direct payments, second pillar, co-financing) will dominate the political debate about the CAP after 2013 whereas the key message of the proposal made by the Advisory Board (fundamental reform of the entire policy field) will soon be forgotten again. The Advisory Board would like to conclude by again pointing out that the huge challenges facing the agricultural sector and rural areas cannot be mastered by shifting funds back and forth between pillars and priority areas. The policy period 2014 to 2020 should be used in order to firmly establish a new political vision for food, agriculture and rural areas and for progressively setting up an appropriate architecture of responsibilities, measures and finances.

Political challenges and suggested measures (selection)

Global food security

• Sustainable increase in agricultural productivity and efficiency
• Developing site-adapted solutions especially in and for developing countries
• Increased involvement of EU agricultural research in development policy

Food, food safety and food quality

• Initiatives for a healthy diet
• Promoting quality production
• Exchange of information along the food chain
• Improving control and sanction mechanisms

Competitiveness of the domestic agri-food sector

• Data documentation and traceability across all stages
• Promoting quality production
• Enhanced promotion of exports (but no export subsidies)
• Removing the shortcomings in applied agricultural research
• Replacing investment promotion by promotion of innovation

Managing price and yield risks

• Strategies for stepping up the use of commodity futures markets
• Examining different options to cushion the impact of drought damage

Adapting to climate change

• Improving the forecasting systems
• Promoting adaptations in production technology
• Promoting multi-farm investment measures
• Supporting insurance solutions, as appropriate

Reducing emissions from agriculture

• Developing and testing low-emission production techniques and concepts
• Evaluating the Fertiliser Application Ordinance in order to curb N surpluses more efficiently
• Structural measures in order to curtail regional N surpluses
• Emission-reducing strategies for using agriculturally used moorland
• Special protection measures for green wetland on organic soils

Conservation of biological diversity

• Internationally agreed programme for the diversity of beneficial species and breeds
• Monitoring and research concepts for biodiversity in agricultural landscapes
• Expanding nature conversation agreements in order to establish a network of biotopes
• Preserving and tending extensive grassland
• Reducing extensive eutrophication caused by nutrient inputs

Rural development

• Clear responsibilities and more financial resources for the federal states
• The Federal Government/EU should place the focus on financial burden-sharing, monitoring and evaluation
• Federal Government should provide additional funds for programmes (cross-sectoral, competitive)

Released 23. Jun 2010 as article