Voluntary Report - public distribution

**Date:** 8/25/2004

**GAIN Report Number:** E34051

E34051

**EU-25**

**Agricultural Situation**

**Debate on future EU budget could impact on EU agricultural subsidies**

**2004**

**Approved by:**

![](media/image1.wmf)Christine Strossman

U.S. Mission to the EU

**Prepared by:**

Peter Talks

**Report Highlights:**

The European Commission has tabled proposals for the EU budget from 2007
to 2013. These foresee up to EUR 158 bn in the EU budget by 2013, around
1.15% of EU GDP, of which EUR 55 bn, or 38% is for agriculture.

Already, the main net contributors to the EU budget have called for an
overall reduction in the size of the EU budget. One of the key tasks in
the first year for the incoming Commission President Barroso will be to
ensure that Member States remain committed to the EU budget. Should the
budget be reduced, then agricultural support, and rural development in
particular, could be seen by many as an easy area to make cuts.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Brussels USEU \[BE2\]

\[E3\]

**Financial Perspectives**

The European Commission has proposed its budget plans for the period
2007-2013. More formally, the proposals are known as the "financial
perspectives" and set out revenue and expenditure ceilings. The
proposals would see the total EU budget averaging out at 1.14% of EU GDP
over the six year period. The EU budget is limited to a maximum of 1.24%
of EU GDP and cannot run a deficit.

The Commission published its proposals in February 2004. The legislation
must be in place by the end of 2005 at the latest, and requires approval
from the European Parliament and Council. It is likely that political
debate over the future EU budget will pick up at the December European
Council and continue to be actively debated well into the first half of
2005.

The Financial Perspectives are based on the EU expanding to 27
countries, with Romania and Bulgaria joining in 2007. Other assumptions
include using 2004 prices and a 2% inflation rate. (Earlier Commission
projections of CAP expenditure were based on 1% inflation, which is why
the CAP market expenditure line falls slightly in the below table, in
practice, spending is being held constant in real terms).

In addition to the €55 bn set for agriculture, or 38% of the EU budget,
a further €700 million is allocated for fisheries expenditure annually.
(See GAIN Report
[E34041[^1]](http://www.fas.usda.gov/gainfiles/200408/146107034.doc) for
more details). It should be noted that during the period 2007 to 2013,
the New Member States and eventually Romania and Bulgaria will also be
receiving an increasing slice of this amount, so in practice the total
expenditure benefiting EU-15 farmers will be falling. GAIN report
[E34004[^2]](http://www.fas.usda.gov/gainfiles/200404/146106177.doc),
'Enlargement of the Common Agricultural Policy' details how the ten new
member States who joined the EU in 2004 will see their allocation of
direct payments, the main component of CAP budgetary expenditure, rise
from 35% of the EU-15 level in 2006 to 100% by 2013[^3].

**Proposed EU Budget Commitments for 2007-2013**

  ------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
  Bn EUR              **2006**   **2007**   **2008**   **2009**   **2010**   **2011**   **2012**   **2013**

  **EU budget**       120.7      133.6      138.7      143.1      146.7      150.2      154.3      158.5

  **As a % of GNI**   1.09       1.15       1.23       1.12       1.08       1.11       1.14       1.15

  **CAP**             54.3       55.3       55.9       56.1       55.9       55.7       55.6       55.5

  **- Agri Markets**  43.7       43.5       43.7       43.4       43.0       42.7       42.5       42.3

  **- Rural           10.5       11.8       12.2       12.7       12.8       13.0       13.0       13.2
  Development**                                                                                    
  ------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Source: European Commission

Notes: GNI -- Gross national income, similar to GDP.

**Political Debate on the size of the EU budget**

The proposals for the 2007-2013 financial perspectives will be the
subject of much political debate. In December 2003, the leaders of the
six main net contributors to the EU budget (Austria, France, Germany,
the Netherlands, Sweden and the UK) sent a letter to the Commission
calling for the size of the EU budget to be limited to 1% of EU GDP (as
opposed to the current limit of 1.24%), with the current EU budget to be
reduced. The net contributors would probably prefer to allocate
resources to domestic policy rather than see the money spent at the
European level where they would receive a much smaller slice of the
cake.

The UK's situation is further complicated by the budget rebate mechanism
which acts to return some of the net contributions that the UK makes to
the EU budget. However, it also encourages the UK to make less use of EU
spending[^4]. The other Member States will likely wish to debate the
future of the UK's budget rebate during the financial perspectives
debate.

The Commission has rejected the approach of a reduced budget and argued
that it would be unable to finance its policies and certainly not be
able to expand its role to include areas such as justice and home
affairs or external relations.

The incoming Commission President, Jose Barroso, has already reaffirmed
his determination to maintain the higher level of spending proposed by
the Commission earlier this year. The outgoing Budgets Commissioner,
Michaele Schreyer, in a recent interview, warned those Member States
calling for a reduction of the EU budget that they would have to tell
the Commission which policies should "be given up" if spending were to
be reduced.

It is expected that the Dutch Presidency will present alternatives to
the Commission proposals during Fall 2004, which will outline how money
could be reduced from the budget, with regional aid seen as one of the
likeliest target for cuts.

The market expenditure component of the CAP is seen as being fairly safe
from cuts, as Member States agreed to limit expenditure in this area in
a December 2002 agreement. However, rural development spending was not
included in this agreement, so could easily be vulnerable to cuts, and
at a proposed level of €13bn might be seen as an area where cuts could
easily be made.

**Visit our website:** our website
**[www.useu.be/agri/usda.html]{.underline}** provides a broad range of
useful information on EU import rules and food laws and allows easy
access to USEU reports, trade information and other practical
information. More information on the EU's Agriculture Budget can be
found at
[www.useu.be/agri/budget.html](http://www.useu.be/agri/budget.html).

E-mail: AgUSEUBrussels@usda.gov

**Related reports from USEU Brussels:**

  ------------------------------------------------------------ --------------------------------------------------------------------- ------------------
  **Report Number**                                            **Title**                                                             **Date Released**

  E34044                                                       [CAP Reform 2003 - Deconstructing                                     8/11/2004
                                                               Decoupling](http://www.fas.usda.gov/gainfiles/200408/146107107.doc)   

  E34041                                                       [New EU Fisheries                                                     7/30/2004
                                                               Fund](http://www.fas.usda.gov/gainfiles/200408/146107034.doc)         

  E34004                                                       [Enlargement of the Common Agricultural                               4/29/2004
                                                               Policy](http://www.fas.usda.gov/gainfiles/200404/146106177.doc)       

  E34006                                                       [Commission presents draft EU agriculture budget for                  4/29/2004
                                                               2005](http://www.fas.usda.gov/gainfiles/200405/146106236.doc)         

  E24054                                                       [EU 2004 agriculture                                                  3/22/2004
                                                               budget](http://www.fas.usda.gov/gainfiles/200403/146105742.doc)       

  E23067                                                       [EU 2003 Agriculture                                                  5/5/2003
                                                               Budget](http://www.fas.usda.gov/gainfiles/200305/145885498.wpd)       

  These reports can be accessed through our website                                                                                  
  [www.useu.be/agri](http://www.useu.be/agri) or through the                                                                         
  FAS website                                                                                                                        
  <http://www.fas.usda.gov/scriptsw/attacherep/default.asp>.                                                                         
  ------------------------------------------------------------ --------------------------------------------------------------------- ------------------

[^1]: http://www.fas.usda.gov/gainfiles/200408/146107034.doc

[^2]: http://www.fas.usda.gov/gainfiles/200404/146106177.doc

[^3]: Romania and Bulgaria will have a similar phase in of direct
    payments delayed by several years compared to the NMS-10. This is
    detailed in GAIN Report E34028.
    http://www.fas.usda.gov/gainfiles/200406/146106691.doc

[^4]: The mechanism means in practice that the UK government has the
    choice between one Euro spent in the UK from the EU budget or €0.66
    spent by the govt. on domestic policy. It frequently prefers the
    latter, viewing domestic policy as much more efficient in achieving
    policy objectives. For example, the UK only receives 3.5% of current
    EU rural development expenditure, despite having some 12% of (EU-15)
    land area.