COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 22.01.1998 
COM(1998) 20 final 
REPORT FROM THE COMMISSION TO THE COUNCIL 
AND THE EUROPEAN PARLIAMENT 
ON THE AGRI-MONETARY SYSTEM FOR THE SINGLE MARKET 
1 July 1996 to 30 JuneÏ997 

•irW^m. 
CONTENTS 
Introduction 
I MAINRIPORT 
A Summary ofugri-inonelary cfl'ects observed 
B Analysis, outlook and proposals 
II. ANAI .YSIS OF AGRI-MONKTAR Y EFFRCTS IN 1996/97 
A. Currency developments 
1. Representative market rates 
2. Agricultural conversion rates 
B. Agri-monetary mechanisms 
1. Conversion rate for import charges 
2. Regulations governing appreciable revaluations 
3. The freeze on agricultural conversion rates 
4. Rules on compensation 
5 Compensatory aid 
C. liconomic impact 
Prices 
Trade 
Incomes 
D. Financial impact 
1. Methodological aspects 
2. Results of estimates 
Abbrcviations for national currcncics: 
BLF: Bclgian and Luxcmbourg franc HFL: Ncthcrlands guildcr 
DKR Danish kronc IRL: Irish pound 
DM: Gcrman mark LIT: Italian lira 
DRA: Grcck drachma OS: Austrian schilling 
LSC: Portugucsc cscudo PTA: Spanish pcscta 
FF: Frcnch franc UK.L: Pound stcrling 
FMK: Finnish markka $: dollar 
Other specific abbreviations: 
1998 PDB: preliminary draft budget for 1998 
ACR: agricultural conversion rate 
RMR: representative market rate 
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REPORT FROM THE COMMISSION TO THE COUNCIL 
AND THE EUROPEAN PARLIAMENT 
ON THE AGRI-MONETARY SYSTEM FOR THE SINGLE MARKET 
Uuly 1996 to 30 June 1997 
lnhodnclion 
This report by the Commission has been drawn up pursuant to the commitment entered 
into at the Council meeting (Agriculture) of 19 to 22 June 1995, when the Commission 
undertook to draw up a report each year analysing the consequences for the common 
agricultural policy and the single market of monetary fluctuations and the agri-monetary 
system in force, accompanied by proposals for appropriate remedies to the problems that 
might ensue. 
It also constitutes a response to the own-initiative resolutions of Parliament of 19 
September 1995 on the agri-monetary system,1 calling 6n the Commission "to make a 
detailed assessment of all implications of the Council Decision2 and its financial impact." 
This report relates to the economic sector of agriculture over the period 1 July 1996 to 30 
June 1997 (1996/97). It comprises a main report summarising and commenting on the 
result of thc investigations carried out, and indicates the proposed solutions to the 
problcms idcntificd. The main report is followed by a description of the analysis of agri-
monetary cvents in 1996/97, and their effects. It is a sequel to the annual report for 
I995/96.3 
The first and second parts of the analysis, parts A and B, describe the currency and agri-
monetary developments of the period under review, including the granting of 
compensatory aid. 
Part C is an approach to the economic cohsequences at the level of agricultural markets 
and farm incomes. In view of the available statistics, the most convenient apprpach is to 
compare results for twelve-month periods from July to June for the analysis of prices and 
by notional year for incomes. The analysis of trade has been shortened, in view of the 
results described in the previous report. 
Joint rcsolution undcr Arliclc 40(5) of Parliament's Rules of Procedure, No PE 193.731, of 19 
Scptcmbcr 1995 on the agri-monetary system. 
Decision of Council meeting of 19 to 22 June 1995, on the basis of which two Council Regulations 
were adopted, namely Rcgulation (EC) No 1527/95 of 29 June 1995 regulating compensation for 
reductions in the agricultural conversion rates of certain national currencies (OJ L 148, 30.6.1995, 
p. 1) and Regulation (EC) No 2611/95 of 25 October 1995 establishing the possibility of national aid 
being gxanted in compensation for losses of agricultural income caused by monetary movements in 
otherMember States (OJL 268, 10.11.1995, p.3) 
COM(96) 636 final 
3-
Part I) assesscs the effects of the agri-monetary system on Community expenditure. The 
impact is cslimatcd on the basis of the 1997 budget in the course of execution, and the 
preliminary draft budget for 1998. Budget years cover twelve-month periods running from 
16 October. 
The basic data for this report are presented in tables and graphs appearing in a 
Commission staff working paper : document SEC( 1998)87 available in french, german 
and english version. 
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I. MAIN REPORT 
A. Agri-monetarv effects observed 
1. Conversion rates 
Like the previous year, the period July 1996 to June 1997 (referred to as 1996/97) 
was relatively stable for most currencies. The salient feature was the strong 
revaluation of the UKL, partly followed by the IRL. Once again, traditionally 
strong currencies were slightly devalued. 
The dollar appreciated by 7-89 % against the ecu, following the trend of the earlier 
period, during which it had appreciated by 6-8%. 
In general, monetary gaps remained positive over the period, i.e. ACRs were 
higher than RMRs. The positive gap for the UKL was particu|arly wide from 
October 1996, regularly exceeding 6 points during the periods when the trend was 
confirmed. Except for one ten-day period, there was always at least one currency 
with a positive monetary gap of over 4 points. This meant that the permitted 
margin ("franchise") for negative gaps was very small, at less than 1 point. In this 
situation, no currency showed a constant negative gap. 
Three "appreciable" reductions were made to the ACRs of the IRL and the UKL. 
The reductions in the ACR for the IRL had to be adjusted by a devaluation of the 
ACR on 26 May 1997. The ACR of the LIT was reduced once more on 1 October 
1996 aftcr four non-appreciable reductions in the previous period. These repeated 
reductions lcd thc Council to consider that the conditions for an appreciable 
revaluation of 3-08% had been fulfilled on 1 March 1997. 
The appreciable reduction in the ACR of the SKR on 11 January 1996 was 
followed by a further reduction of 3-280% on 7 July 1996. The second appreciable 
reduction was partly offset by an increase in the ACR of 2-78% altogether. 
Increases in the ACRs for the BLF, DM, HFL, and OS from June 1996 to May 
1997 completely ofFset the appreciable reductions recorded in 1995. 
2. Ad hoc Council measures for appreciable revaluatioris 
The Council adopted ad hoc measures for the period from June 1995 to December 
1996, to deal with any appreciable revaluations. The measures in the basic 
regulation are replaced by compensatory aid on a flat-rate basis and a freeze on the 
agricultural conversion rates applicable to direct aid. Council Regulation (EC) No 
724/97 renewed these arrangements until 30 April 1998, and extended their 
application to other cases of reduction in the agricultural conversion rate, so as to 
deal with all cases that might require the application of Articles 7 and 8 of 
Regulation (EEC) No 3813/92. 
3. Freezing of ACRs 
ACRs for the aid referred to in Article 7 of the basic agri-monetary Regulation are 
frozen at the value actually applied at the time of the appreciable revaluation. The 
frcczc appiics untii 1 January Î999. In view of thc operative events determining 
ihe ACRs applicd to the aid concerned, scvcral ratcs will remain frozen until 30 
June 1999. 
On 30 June 1997, ACRs wcre frozen for all but iivc currcncies (the exceptions 
bcing the DRA, ESC, FF, FMK and PTA). The Council has decided that the 
difference between the frozen ACR and the ACR that would have obtained had 
there been no freeze should be limited to 11-5%, so that the ACRs applied to the 
aid concerned do not diverge too far from the conversion rates for the euro to be 
introduced on 1 January 1999. When the difference between the frozen ACR and 
the current ACR exceeds the limit, the frozen ACR is reduced to a leveî equal to 
the current ACR increased by a margin of 11*5%. As a result of this decision, the 
frozen ACRs for the SKR and the UKL had to be reduced on 1 July 1997, by 
0-11% and 3-61% respectively. 
4, Compensatory aid for appreciable declines in ACRs 
The aid compriscs threc degressivc tranches, the first of which may consist in up to 
100% of the ceiling, while thc second and third arc limited, respectivcly, to 2/3 and 
1/3 of the ceiling. The European Union finances 50% of the maximum, irrespective 
of the national contribution in the form of additional financing by the Member 
State. 
In cases of reduction of the frozen ACR, complementary aid corresponding to the 
consequent ioss of annual income may be granted to the farmers concerned. This 
aid is also made up of three twelve-month degressive tranches, 50% of which is 
financed by the European LTnion irrespective of the national contribution. 
The second tranche of aid to offset the appreciable revaluations of June and July 
1995 was activated in Belgium, Luxembourg, Germany, Denmark, the Netherlands 
and Austria. Almost ECU 210 million was granted uhder the second tranche, 
including ECU 135 million financed by the Community. In view of currency 
developments, the planned third tranche has been cancelled for the Member Slates 
in question. 
Fuither aid may now be granted in view of the appreciable revaluations of the 
SKR, IRL, UKL and LÎT; the first tranche wili total almost ECU 993 million, half 
of which can be financed by the EAGGF. 
Sweden has paid the first two tranches of compènsàtion for the appreciable 
revaluation of 11 January 1996. The authorities have also riotified their intention of 
granîing aid to offset the effects of the appreciable revaluation of July 1996, which 
has been authorised, The second tranche of this aid was cancelled in view of the 
devaluations occurring after the appreciable revaluation. 
Ireland granted the European Union's share of the first tranche of compensatiôn 
for the appreciable revaluations of November 1996 and January 1997, which came 
to ECU 56-7 million. Moreover, in June 1997 Ireland notified its intention of 
granting the Community share of aid for the revaluation of March 1997. The 
maximum for the first tranche of that aid was fixed at ECU 57*5 million. 
By 30 June 1997, Italy had not yet notified any plans for the amount of ECU 247 
million available for granting under the first tranche of compensation for the 
appreciable revaluation of the LIT in March 1997. 
By the same date, the United Kingdom had notified no plans for the ECU 454-4 
million available under the first tranche of compensationi for the revaluations of 
January, March and June 1997, or for the ECU 66-7 milliori to compensate. for 
declines in area aid for arable crops in national currency on 1 July 1997. 
5. General remarks on economic eflects 
In theory, the ACR will affcct only those market prices that are closely linked to an 
intcrvention mcchanism (mainly in thc sectors of cereals, sugar, milk and 
beef/veal). Thc development of ACRs may thus have an impact on farm incomes 
through thc prices of thosc products. Moreover, problems in trade'may arise when 
divergences appear either between ACRs ahd RMRs, or between market prices 
and intervention prices in national currency. 
The prices of other products, on the other hand, are not affected by ACRs. 
However, trade in those products may be distorted by sudden major changes in the 
RMRs. This happens, in particular, when market prices in national currency do not 
follow currency movements. 
As well as the impact of currency movements on prices, farm incomes are subject 
to the direct effects of the ACRs applicable to direct aid to producers. 
6. Effects on markct prices 
As there were no major devaluations, the movements in ACRs with the greatest 
potential rcpcrcussions in 1996/97 were substantial steady revaluations of the UKL 
(13-5%) and the 1RL (8-5%). , 
For products with no intervcntion mechanism, there is, as expected, no observable 
link between movements of prices and movements of ACRs. 
For the third consecutive marketing year, it is quite clear that market prices for 
cereals standing at over 10% higher than the intervention lsvel are not affected by 
ordinary movements in ACRs. It is not possible, using available observations, to 
predict what agri-monetary effects might occur if market prices were closer tb 
intervention prices. However, it seems likely that major changes in ACRs would 
lead to agri-monetary effects against a background of high market prices. In the 
wake of the reduction in the ACR for the UKL, 8% between July 1996 and 
February 1997, the gap between market prices and the intervention level 
developed on broadly the same lines in the United Kingdom and in the rest of the 
market. 
Dcspite the fact that prices cluster around the intervention level in the milk 
products sector, agri-monetary eflfects do not appear systematically. The 
predominant trendfi on the market are usually foUowed by- national prices, wkhin a 
margtn of 5% on ekher side, but movements of ACRs of less than 2% or 3% have 
-7 
no clear impact. Very sizeable price variations may occur for reasons unconnected 
with monetary cohsiderations, and they may be confmed to a single Member State. 
Wider movements of ACRs may be passed on accurately into national prices, as in 
the United Kingdom; but the example of Ireland shows that substantial interference 
from the parties concerned is also possible. 
Prices for the meat of young bovine animals were especially low early in the 
period, generally some 60% to 75% of the intervention price, owing to the bovine 
spongiform encephalopathy crisis. In virtually all the Member States, market prices 
expressed as a percentage of intervention prices followed the same general trend. 
This means that the major changes in ACRs, especially for the UKL and the IRL, 
were on the whole passed on to national markets. 
7. Effects on trade 
Any monetary effects on trade are masked, in the short term, by wide variations in 
the monthly value of exports. Over longer periods, exports may be affected by 
competitiveness; this impact is countered by the impact of domestic demand, 
exporters' attitudes to their profit margins, and structural factors on both a 
sectoral and a wider scale; all these factors are so closely entangled in a complex 
web of reciprocal effects that it is virtually impossible to identify their individual 
impact. 
8. EfTects on incomcs 
According to calculations based on a theoretical model grouping all the 
consequences of ACRs over twelve months, it would appear that their impact on 
incomes was significant, and unevenly spread over the Member States. 
Altogether, the effect on gross value added at factor cost apparently amounted to 
some 1-3%, or ECU 1 884 million, or almost 10% more than in 1995/96. 
, The incomes that have been increased most by the agri-monetary arrangements are 
those which would have declined following a currency appreciatfon if the 
arrangements had not existed. The arrangements have not made much difference 
to incomes in currencies that remained fairly stable over the period under review, 
since the agri-morietary loss was virtually nil. 
In 1996/97, the Member States that benefited most from the effect of the agri-
monetary arrangements by comparison with the situation that would have obtained 
without such arrangements were: Ireland (8%), Sweden (7-4%), the United 
Kingdom, Iialy, Finland and to a lesser extent Denmark. 
9. The cost of agri-monetarv developments 
The figures in the table below show an annual cost of about ECU 1 200 to 1 300 
million (of the same order of magnitude as 1995/96). 
Almost 60 % of this cost is due to the effects of permitted margins. The reason 
margins entail a cost is basically attributable to the asymmetry of the mechanism, 
where'oy positive monetary gaps ean rise to 5 points while negative gaps are 
usually limited by a variable thieshold determined by the maximum positive gap 
minus 5 points. Moreover, in situations of steady and significant appreciation for 
sevcral currencies, the duration of confirmalion periods plays an important role in 
keeping the largest positive gaps in existence over time. 
The cost of operative events is about ECU 160 million, or ECU 60 miilicn more 
than in 1996. Irrespective of any ACR, this cost is due tc currency mcvements 
between the date of the operative event and the accounting date for the 
expenditure. This result is unusually high because Hhere was no offsetiing, in 
1996/97, between currencies that appreciated and those that depreciated. 
The cost of the freeze on ACRs in 1997 is deferred to 1998 because of operative events. 
It will amounl to ECU 500 million in 1998, As the freeze will continue until 1 January 
1999, it also affects the budget for 2000. 
Cost of agri-monetary 
developments 1996/97 
ACR freeze 
Compensatory aid 
Permitted margins 
Operative events 
Total (ECU million) 
1997 1998 
160 499 
214 382 
772 312 
160 
1306 1193 
In 1997, the main beneficiary under the agri-monetary arrangements was the United 
Kingdom, with increased expenditure in UKL of 30-7%. There was also a significant 
increase in the agri-monetary cost of Ireland in relation to 1996. This is the result of the 
effects of the margins and operative events in a context of strong currency appreciation. 
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». A1NALYS1S. (HJTLOOK AN1) PROI'OSALS 
1. Gcneral view 
As in the previous period, observation of the agri-monetary arrangements over the 
period 1996/97 reveals difficulties with technical, economic and financial aspects. 
Some of these difficulties may become serious problems, although this will depend 
on how the situation develops. In general, the conclusions and recommendations in 
the previous report are still valid. 
Three major developments need to be taken into account: economic and monetary 
union, enlargement of the European Union, and the fiiture of the CAP, in 
particular Agenda 2000. The proposals to be made depend not only on the urgency 
and seriousness of the agri-monetary problems to be dealt with, but also on the 
oplions and timing resulting from these three developments. 
2. Financial difficultics 
In financial terms, the costs of the present arrangements are high, but considerably 
less than they would have been if the mechanisms originally planned for 
appreciable revaluations had been applied. This consideration fully vindicates the 
CounciPs ad hoc decisions on compensatory aid and the freezing of certain ACRs. 
The costs of the ad hoc measures can be seen to be fairly moderate, even though 
some of them could have been further compressed, since there is no clear 
economic necessity for flat-rate compensation for loss of income for price 
reductions that did not actually occur. This problem could be solved by a 
verification period, but that would mean deferring compensation for loss incurred 
immediately. 
The costs linked to operative events are unavoidable in relation to the operation of 
the CAP, but the main costs, linked to permitted margins, depend on the choice of 
mechanisms under the agri-monetary arrangements. However, as margins 
constitute a sensitivc system based on fragile cquilibria, it would be dangerous to 
tampcr wilh singlc components in isolation from thc whole. But thc system of 
pcrmittcd margins as a wholc is in fact thc mainstay of the present agri-monetary 
arrangements. 
3. Economic difficulties 
Almost all farmers benefit economically from the agri-monetary arrangements, 
although the extent of the benefit varies according to the currency situation and 
the reasons for it differ depending on the stability of the national currency 
concerned. Effects on markets vary from one product to another, and, for the most 
sensitive products, with the price level in relation to guaranteed institutional prices. 
When currency developments are not passed on, which happens with the freeze on 
certain ACRs applicable to direct aid to producers, there is a risk of long-term 
structural divergence, either between Member States, or between agricultural 
10 
sectors in the same Member State. Mpreover, it may become increasingly difficult 
to envisage return to equilibrium at a common level in ecus. 
When currency developments are passed on only partially and with some delay, 
which happens with products for which there is no intervention mechanism, 
divergences may emerge in the medium to long term, either between prices 
recorded in the different Member States or within overall trade. 
When currency developments are fully passed on, through guaranteed prices, the 
movement in incomes and prices for the products concerned may diverge from the 
gencral dcvclopmcnt of priccs and incomes. 
In all cases, depending on the economic situation and circumstances, major 
difficulties may occur, mainly in the long term. This means that the best system is 
not one that is fixed for ever, but one that can be adapted to the agricultural and 
monetary background and to the risks most likely to materialise. 
4. Technical difficulties 
From the technical point of view, certain aspects of the present arrangements are 
somewhat incoherent and sometimes contribute to the economic and financial 
difficulties described above. They mainly relate to the impact of the revaluation, 
the conversion rate used for import charges and thetiming of changes to ACRs. 
Some mcasure of the impact of currency revaluatiori and decline in ACRs is 
rcquired: it enables past currency developments to be taken into account when 
assessing the possible conscquences of the present currency revaluation. However, 
cxpcrience has shown thc prcscnt approach bascd on thc delinition of 
"apprcciablc" revaluations to be unsatisfactory and excessively complex. 
An appreciable decline in the ACR is based on the confirmation of monetary gaps 
over five reference periods. It is important to set a limit on the period, given the 
risk of deflection of trade flows; but steps must be taken to prevent currency 
movements in the opposite direction just after the appreciable revaluation. 
The use of the twofold conversion system for import charges on agricultural 
products is unnecessarily complicated, leading to economic inconsistency and to 
disputes. The Commission still considers valid*the main idea in its proposal of 
February 1996 [COM (96) 40 final], i.e. the application of a single rate for import 
charges. 
The rulcs for changing ACRs make up the fragile system of permitted margins. For 
example, under one of the rules, an exceptional three-day reference period is 
triggercd when any aggregate bilateral monetary gap exceeds six points. Where 
this rule is applied, it contributes to the instability of ACRs: in particular, it upsets 
the established calendar for changes in rates. This rule has been criticised for its 
shortcomings. The rule was introduced for the practical implementation of the 
agri-monetary arrangements in order to avoid a delay of 10 days, or safeguard 
measures, in cases of sudden major currency movements. Experience of long 
reference periods before an appreciable revaluation has called into question the 
-11-
economic justification for this rule. But the rule does sometimes contribute to 
shortening the overall confirmation period before appreciable revaluation. It would 
oncc again be cconomically justifiable if a sudden and very substantial devaluation 
occurred, creating gaps even larger than those recorded in 1995. This rule too is 
very closely tied in with the whole system of permitted margins, on which the 
present agri-monetary arrangements are based. 
5. Impact of monetarv and agricultural outlook 
The third stage of economic and monetary union, from 1 January 1999, is quite 
exceptionally important for the future of the agri-monetary arrangements. 
Among the Member States that adopt the euro, agri-monetary arrangements will 
no longer be needed. However, the transition from the present arrangements to a 
system of direct payments in euros implies that monetary gaps between agricultural 
conversion rates and market rates will be eliminated. 
The extent of the effort needed will depend, at the end of 1998, on the currency 
situation and the market prices of the products with a guaranteed institutional 
price. 
For the other Member States, those which do not adopt the euro on 1 January 
1999, agri-monetary arrangements will still be needed, if only so that payments of 
prices and amounts fixed in euros can be made in national currencies without 
distortion of the markets. The arrangements will also affect relations between the 
Member States which have kept their national currency on the one hand, and those 
which have adopted the euro on the other. 
The agri-monetary arrangements need to be adapted to the new situation. First, as 
the new arrangements must take account of the risk of variations in national 
currencies against the euro, they must also allow for the relations that will be 
established between the Member States that do and those that do not use the euro, 
and for the possible role of new accessions. Secondly, the arrangements must be 
adaptable to possible developments of the CAP, in particular in terms of Agenda 
2000 . The key factors here will be the level of guaranteed prices, and the level and 
uniformity of direct aid to producers. 
6. Proposals 
According to the calendar for economic and monetary union, the use of the euro 
by the Member States that qualify will be introduced on 1 January 1999. This date 
sets a time limit on revising the agri-monetary arrangements. An informed decision 
on adjustments to the agri-monetary arrangements and the requisite transitional 
measures cannot be taken until it is known which Member States will be adopting 
the- euro, and a more accurate assessment of the gaps to be dismantled has been 
established. The decision on which Member States adopt the euro is planned for 
May 1998. Relevant Commission proposals must be presented towards the end of 
the first half of 1998 at the latest, for a Council decision in the light of the most 
recent available information on the monetary and agricultural situation. 
12 
With the prospect of major and imminent revision of the agri-monetary 
arrangements, it is not a very good idea, at the end of 1997, to consider any 
significant changes other than the strictly essential, which will in any case need to 
be reconsidered in the course of 1998. However, in view of the problems that will 
arise for the transition between national currencies arid the euro, it is best not to 
aggravatc situations and risks created by the freeze on ACRs when appreciable 
rcvaluations take place, in particular owing to the gap between the frozen and the 
current ACR. 
Regulation (EC) No 724/97 dcaling with mcasurcs to be laken in the event of 
appreciable revaluations applies until 30 April 1998 and will probably be extended 
until the introduction of the euro. For cases similar to appreciable revaluations in 
1996/97, care should be taken to ensure similar treatment, that does not create 
discrimination between Member States. 
Altogether, the conclusions can be summarized in four poihts: 
- no change should be made to the general way the present agri-monetary 
arrangements function pending their revision with a view to the third stage 
of economic and monetary union on 1 January 1999; 
- where possible and necessary, rules should be simplified without 
compromising the system as a whole, which means discontinuing the use 
of the agricultural conversion rate for import charges, as already proposed 
to thc Council; 
fulurc appreciablc revaluations should be dealt with, but disparities 
resulting from freezing ACRs should not be aggravated, for they would 
interfere with the changeover to the euro; 
- without prejudice to the Commission's proposals, study and analysis of the 
present agri-monetary arrangements and possible fiiture approaches should 
continue. 
Consequently, there is no immediate call for the Commission to present a new 
proposal for a Council regulation to adapt substantially the agri-monetary 
arrangements. The Commission will, however, need to present a proposal on 
measures to be taken in the event of appreciable revaluation in the period 1 May to 
31 December 1998. 
-13-
II- ANALYSIS OP ACRI-MONETARY EFFECTS IN 1996/97 
A. Currcncv dcvclopmcnls 
I. Rcprcscntalivc market raies (RMRs) 
Like the preceding twelve months, the period from July 1996 to June 1997 (1996/97) 
was relatively stable1 for most currencies. The main development was the strong 
revaluation of the UKL, partly followed by the IRL. Once again, traditionally strong 
currencies depreciated slightly. 
During the period under review, the dollar rose by 7*89% against the ecu, continuing 
the trend of the previous period, during which it had appreciated by 6-8%2. ' 
Generally speaking, this stronger trend for the dollar was reflected in similar 
movements for the UKL and the IRL, with inverse movements for the other 
currencies, except the ESC, LIT and FMK, which were either more stable or more 
volatile. 
The RMRs for the BLF, DM, HFL and OS rose by about 2-5%, a devaluation 
comparable to that of 1995/96, bringing the RMRs for these currencies back to within 
1% of their levels of January 1993. The increase in RMRs for the FF and the DKR, 
1-68% and 1-19% respectively, also brings them to within 1% of the RMR of January 
1993. 
After a few months of stability, the RMR of the DRA gradually increased by a total of 
3-02%. The PTA followed a similar trend, depreciating by 2-33%. 
Following appreciation of 12-6 % in 1995/96, the RMR of the SKR depreciated in 
1996/97 by 5-08%, more than any other currency in the period under review. 
The RMR of the UKL appreciated by 13-46% in 1996/97 thus continuing and 
accentuating the trend that began in January 1996, after a series of devaluations. The 
RMR of the UKL has now returned to the central rate of early September 1992. 
Until March 1997, the IRL was developing in parallel with the UKL (appreciation of 
7-24%), although at a certain distance; however, it fell back thereafter, and aggregate 
appreciation from the beginning to the end of the period 1996/97 was 406%. 
The RMR of the ESC remained stable at the same level as during the preceding 
period. The RMR of the LIT remained virtually stable at the level it had reached by 
the end of the preceding period, during which it had declined by 11 -42%. 
The RMR of the FMK appreciated steadily until February. The trend subsequently 
reversed, and by the end of the period the FMK had depreciated by 1-32% from its 
initial level. 
Scc tables and graphs Al to A4 in thc Working Papcr on Basic Information,. 
Undcr Ihc agri-monclary arrangcmcnls, thc convcrsion ratcs cxpress thc valuc of onc ccu in national 
currcncy. A dcvaluation against thc ecu thcrcforc corrcsponds to an incrcasc in thosc ratcs, whilc a 
rcvalualion is cquivalcnt to a rcduction. 
- A 4 -
2. Agricullural conversion ratcs 
Sincc the swilch-over mcchanism was discontinucd on 1 Fcbruary 1995, all 
agricullural conversion ratcs (ACRs) movc up and down in line with rcprescntativc 
niarkcl rates (RMRs)3. Howevcr, the mcchanism for aligning ACRs on RMRs is not 
symmetrical. Larger monetary gaps, and longer reference periods for their 
observation, are needed to trigger a reduction in the ACR after a currency, has 
appreciated (i.e. after a decline in institutional prices in national currency) than to 
trigger an increase in the ACR following depreciation. 
In accordance with those mechanisms and movements in currencies, the ACRs for 
the FF, DKR, ESC, and FMK remained unchanged during the period under review. 
Apart from the discontinuation of switch-over on 1 February 1995, the last changes 
in the ACRs of the FF and the ESC date back respectively to 21 August 1993 and 1 
June 1994. The DRA and PTA are close to this group of stable currencies, with 
slight increases at the end of the period under review (0-08% et 0-23%). The ACRs 
of the UKL and 1RL declined substantially, respectively by 13-55% and 8-48%. 
Foilowing confirmation of the earlier apprcciation of the RMR, the ACR of the LIT 
was rcvalued by 2-78% at the beginning of the period 1996/97, rcmaining stable 
thcreafter. The SKR declined by 3-28 %, but the revaluation had been virtually 
cancelled out by the end of the period, owing to numerous small increases in the 
ACR. The remaining currencies (BLF, DM, HFL, OS) increased by about 2-5% in 
various stages. 
Monetary gaps were positive for the DKR, UKL, LIT and FMK throughout the 
period under review, and for the SKR, DRA, ESC, FF, IRL and PTA for most of the 
period, except towards the end. The positive gap for the UKL was especially wide 
from October 1996, regularly ih excess of 6 points during the confirmation periods 
that must precede revaluation. With the exception of one ten-day period, there was 
always at least one currency throughout 1996/97 with a positive gap in excess of 4 
points. At the beginning it was the FMK, IRL and LIT, with the UKL taking over 
from October. The available margin for negative gaps was thus always very small at 
below onc point4. In the circumstances, no currency showed a negativc gap 
throughout the period. 
In the period 1996/97, the ACRs of the IRL and the UKL underwent three 
appreciable falls5: that of the IRL declined by 0-328% on 8 November 1996, 4-259% 
5 See graphs A4 to A5 in the Working Paper on Basic Information. 
Where the "aggregate" gap made up of the largest positive gap and the largest negative gap exceeds 5 
points over a certaiio number of reference periods, ACRs must be adjusted to reduce the monetary 
gaps. 
An "appreciable" reduction ir« the ACR is one leading to a reduction in institutional priccs in nalional 
currcncy that is greater than the effects of any devaluation occurring during thc prcccding ihrec years. 
Thesc cfFects arc cstimatcd as two thirds of the increase in institutional priccs due to changcs in the 
ACR occurring bctween 12 and 24 months previously, and one third of the incrcasc between 24 and 
36 months previously 
-15 
on 11 January 1997 and 2-638% on 29 March 1997; that of the UKL declined by 
3-274% on 21 January 1997, 3-256% on 29 March 1997 and 2-706% on 5 June 1997. 
The falls in thc ACR of the IRL had lo bc adjustcd by a devaluation of the ACR on 
26May 1997. 
Aller four non-apprcciablc reductions in the preceding period, the ACR of the L1T 
declined once more on 1 October 1996, remaining stable thereafter. As the effects of 
earlier devaluations of the LIT grew weaker, the Council felt that in view of the 
aggregate declines in the ACR, the conditions for an appreciable revaluation of 
3-08% had been met on 1 March 1997. 
The appreciable fall in the ACR of the SKR on 11 January 1996 was followed by a 
further fall of 3-280% on 7 July 1996. The second appreciable fall was partially offset 
by the aggregate rise of 2-78% in the ACR over the rest of the period 1996/97. 
Increases in the ACRs of the BLF, DM, HFL and OS from June 1996 to May 1997 
fully oiTset the appreciable declines recorded in 1995. 
\i. Agri-monctary iucclianisiiis 
The currency dcvelopments obscrvcd in thc pcriod 1996/97 werc such as to enable the 
managcmcnt of agri-monetary mechanisms to conccntrale on maintaining the general 
functioning of cxisting provisions and policy approaches, as recommended in the 
conclusions of the previous report on agri-monetary arrangements in the single market. 
Measures in the period 1996/97 related to the conversion rates applicable to import 
charges, and also, more importantly, to the consequences of appreciable revaluations. i 
1. CONVERSION RATE FOR IMPORT CHARGES 
Owing to the GATT agreements, many import charges have been fixed in ecus since 
1 July 1995. Most of these charges were previously levies subject to agricultural 
conversion rates, or percentagcs of the value of the product expressed in national 
currcncy. 
Commission Regulalion (BC) No 1482/956 provided for the application, as a 
transitional mcasure, of a monthly rate where thc annual rate provided for in the 
Customs Code should have applied7. From 1 January 1997, Regulation (EC) No 
82/97 amending the Customs Code provides for the use of a monthly conversion rate 
generally. It was therefore possible to repeal Regulation (EC) No 1482/95 from 1 
March 1997. 
6 OJ No L 145, 29.6.1995, p. 43. Amended by Regulation (EC) No 1224/96 (OJ No L 161, 29.6.1996, 
p. 70) and repealed by Regulation (EC) No 259/97 (OJ No. L 43, 14.2.1997, p. 8). 
Article 18 of Council Rcgulation (EEC) No 2913/92 (OJ No L 302, 19.10.1992, p. 1), amended by 
Rcgulation (EC) No 82/97 (OJ No. L 17, 21.1.1997, p. 1). 7 
16 
However, the monthly rate is applicable only to import charges not fixed by an 
instrument under the CAP within the meaning of Article 1 of the basic agri-monetary 
Regulation. In other cases, the agricultural conversion rates are applied. The use of 
dillerent conversion rates has resulted in certain economic inconsistcncics and has 
vcry greally complicated administration, with concomitant scope for errors and legal 
unccrtainty. In Fcbruary 1996 the Commission accordingly proposed amending the 
agri-monetary arrangements so as to eliminate the use of the agricultural conversion 
rate and to use only one rate for import charges on agricultural products8. Parliament 
expressed a favourable opinion on the Commission proposal, and suggested no 
amendments; but the Council was not able to reach a qualified majority on the 
matter. 
2. REGULATIONSGOVERNINGAPPRECIABLEREVALUATIONS 
Ad hoc measures in the event of appreciable revaluations were in force firom June 
1995 to December 1996 under Council Regulation (EC) No 1527/959 and, later, 
Council Regulation (EC) No 2990/9510. 
Thesc measures, which were deemed necessary in particular with a view to 
compliance with obligations under the GATT agrecnient and budgetary disciplinc, 
suspend the application of Arlicles 7 and 8 of the basic agri-monetary Regulation" 
Article 7 provides for an increase in ecus in most types of direct aid to producers12 in 
the event of a revaluation which is greater than the devaluations of the two preceding 
years, with a view to avoiding any reduction in the value of the aid in the currency in 
question. In view of the scale of the aid concerned in terms of the budget (over 60% 
of the EAGGF Guarantee Section), such a measure would cost approximately 
ECU250 million a year for each percentage point revaluation. Article 8 of 
Regulation (EC) No 3813/92 also provides for compensatôry aid for income losses 
due to the effects on prices of reductions in the ACRs. The aid in, question can only 
be granted after 12 months' observation showing that there is a lasting fall in the 
ACR. The amount of aid is established, where necessary, on the basis of the fall in 
farm incomes incurred, which is in principle an observable magnitude. 
In place of the measures laid down in Articles 7 and 8 of the basic agri-monetary 
Regulation, Regulations (EEC) No 1527/95 and No 2990/95 introduce flat-rate 
8 COM(96) 40 final. , 
9 OJ NoL 148, 39.6.1995, p. 1 
10 OJ No L 312, 23.12.1995, p. 7. Amended by Regulation (EC) No 1451/96 (OJ No L 187, 26.7.1996, 
p. 1). 
11 CotMwti Ttntfjintwm QfflC) No 3813/92 (OJ No L 387, 31.12.1992). Last amended by Regulation (EC) 
N* 150/93 (OJ No L 22,31.7.1995, p.l). 
12 Flat-EHe aid mç&as&â in ecus per hestare ©r per livestock unit and aid of a structural er 
envvromwwital nature. 
17 
compensatory aid and a freeze on the agricultural conversion rates applicable to 
direct aid covered by the abovementioned Article 7. 
Under Council Regulation (EC) No 724/9713 the application of these principles was 
prolonged until 30 April 1998, and extended to reductions in the agricultural 
conversion rate other than those defined in Article 1 (e) of the basic agri-monetary 
Regulation, to ensure that they would catch all cases of application of Articles 7_and 
8 of Regulation (EEC) No 3813/92. The detailed rules for applying these provisions 
were laid down in Commission Regulation (EC) No 805/9714. 
3. TlIE FREEZE ON ACRS 
The freeze on the ACRs for aid provided for in Article 7 of the basic agri-monetary 
Regulation relates to the ACRs actually applied on the date of the appreciable 
revaluation and is valid until 1 January 1999 when the single currency comes into 
force. In view of the operative events15 for the ACRs for the aid measures in 
question, several ACRs are frozen until 31 December 1999. Naturally, this entails a 
temporary variation in the level of Community support between the various Member 
States. In national currency, this may affect the balance of aid expressed in ecus 
between the various sectors of agriculture. 
To avoid excessive monetary gaps between the ACRs applied to this aid and the 
conversion rate adopted for the euro on 1 January 1999, in view of existing gaps, the 
Council decided to limit the difference between the frozen ACR and the ACR that 
would have applied had there been no freeze to 11*5%. When the difference between 
the rates exceeds this threshold for certain types of aid, f he frozen ACR for that aid 
is cut to the level of the current ACR increased by 11-5%. On 1 July 1997, the only 
ACRs that were not frozen for the relevant types of aid were those of the DRA, 
ESC, FF, FMK and PTA16. 
Currency developments following the freeze on the ACRs of the DM, HFL and OS 
in June and July 1995 have led to current ACRs almost 0-5% higher than the frozen 
ACRs. The current ACR of the BLF is about 1% below the ACR frozen in 1995, but 
higher than the ACR regarded as appreciable, which, opens the possibility of 
compensatory aid. 
The ACR of the DKR, frozen in 1995, and that of the LIT, frozen on 1 March 1997 
for livestock or structural aid, are both almost 3% higher than the RMRs of 1 July 
13 OJ No L 108, 25.4.1997, p. 9. 
14 OJ NoL 115, 3.5.1997, p. 13. 
15 The ACR on the date the operative event pccurs is that applied to the amount in question. The 
operative event for aid per hectare under the reform of the CAP occurs on 1 July. For most olher aid 
measures referred to in Article 7 of Regulation (EEC) No 3813/92, it occurs on 1 January 
16 See Table A7 in the Working Paper on Basic Information. 
18-
1997: The disparities for area aid for arable crops in LIT, and for livestock aid and 
structural aid in SKR, are almost 5%. 
The frozen ACRs showing the widest gaps in relation to RMRs on I July 1997 were: 
- thc ACR of the IRL, frozcn in Novembcr 1996, a gap of about 9%, 
thc ACR of thc SKR for arca aid for arablc crops, frozen in January 1996, a gap 
of almost 11-5%, 
- the ACR of the UKL, frozcn in January 1997, a gap of almost 15%. 
In view of the gaps between the ACRs previously applicable to area aid for arable 
crops on the one hand, and the current ACRs on 1 July 1997 on the other, the frozen 
ACRs of the SKR and UKL had to.be reduced in order to obtain a difference of only 
11*5% in relation to the ACR that would have applied without a freeze. The 
reductions required were 0-11% for the SKR and 3-61% for the UKL. 
4. RULES ON COMPENSATION 
Aid to compensate farmers for agri-monetary losses due to appreciable revaluations 
prior to 1 January 1997 is subject to ceilings fixed by the Council. For later 
revaluations, the ceilings arc fixed by the Commission in accordance with the 
managemcnt committee proccdure, following a very precise methodology and based 
on the latcst availablc data. The ccilings must take account of the likclihood of 
devaluations occurring after the appreciable revaluation. 
The aid comprises three degressive tranches, the first of which (covering the 12 
months following that of the revaluation in question) may amount to up to 100% of 
the ceiling. The following two annual tranches may nof exceed two thirds and one 
third of the ceiling respectively. The European Union finances 50% of the ceiling 
irrespective of the national contribution which the Member State may supply in 
addition. 
The aid must be granted to agricultural holdings in annual payments. It must vary 
with the size of the holding at a given past period and must be in line with the macro-
economic distribution of income loss between the various sectors of production 
affected. However, where annual payments per holding would be less than ECU 400, 
the aid may be granted for measures in the collective and general interest or those for 
which the Community provisions authorise national aid. • 
In the event of a reduction in the frozen ACR for aid covered by Article 7 of the 
basic agri-monetary Regulation, supplementary aid corresponding to the consequent 
shortfall in annual income may be granted to the farmers affected. This aid is also 
subject to a ceiling fixed by the Commission in accordance with the management 
committee procedure, and comprises three degressive annual tranches, of which the 
EU finances 50% irrespective of the national contribution. 
19 
5. COMPENSATORYAII)17 
The second tranche of compensation for the appreciable revaluations of June and 
July 1995 was applicable from 1 July 1996 forBelgium and Luxembourg, and from 1 
August 1996 for Germany, Denmark, the Netherlands and Austria. As planned, these 
tranches represented 1/3 less than the first annual tranche. Altogether, almost 
ECU 210 million was granted under this tranche, including ECU 135 million financed 
by the EU. In view of currency developments in 1996/97, the third tranche of aid was 
cancelled for all the Member States except Denmark by Commission Regulation 
(EC) No 1137/9718, and for Denmark in July 1997 by Regulation (EC) No 
1473/97'9. 
Appreciablc revalualions in January 1996 for the SKR and in the course of the period 
1996/97 for thc JRL, UKL and LIT led to the possibility of granting further aid, the 
first tranchcs of which total almost ECU 945 million, half financcd by the EAGGF. 
Sweden20 granted the first two tranches of compensation for the appreciable 
revaluation of 11 January 1996. This aid was notified in November 1996 and 
authorised by the Commission in December 1996. 
Only the EAGGF financing of ECU 9-8 million under the first tranche has been 
granted. As this amount corresponds to just under ECU 100 per holding, it was 
allocated through collective measures, for which financing is not provided for in the 
national budget. 
Most of the aid, about 63%, is for work managed by the Agricultural and Forestry 
Research Council into organic farming and the links between the agricultural sector 
and research. A furthcr 21% is entrusted to the Foundation for Research in 
Agriculture, for research and dcvelopmcnt work and improvement of markets. The 
remaindcr, lcss than 2% of the aid, is for machinery syndicates, for outreach and 
training scrviccs. 
A second aid schcme for the appreciable revaluation of 7 July 1996 was notified to 
the Commission in Junc 1997 and authorised the following month. The second 
tranche of the aid was cancelled by Regulation (EC) No. 1137/97 to allow for the 
devaluations that occurred after the appreciable revaluation; a decision on the third 
tranche will be taken in July 1998. Sweden plans to distribute EU financing under the 
first tranche of aid to farmers in the milk, beef and veal, cereals, sugar and potato 
starch sectors. The cereals and sugar sectors do better than the rest in the sectoral 
allocation of aid, but no sector is overcompensated for the losses taken into 
consideration on aflat-rate basis by the Council. 
17 Sec Tablc A8 in the Working Paper on Basic Information. 
18 OJNoL 164, 21.6.1997, p. 15. 
19 OJNoL200, 29.7.1997, p. 22. 
20 Scc Tables A8 and A9 in thc Working Papcr on Basic Information. 
-20-
Individual allocation of aid dcpends on output levels prior to 30 June 1996. For 
ccrcals and bccf/veal, aid is based on thc compcnsatory payments under the reform of 
the CAP. For milk, sugar bcet and starch potatoes, aid is based on quantities supplied 
to processors. 
Ireland21 has granted the EU's share of financing under the first tranche of 
compensation for the appreciable revaluations of 11 November 1996 and 11 January 
1997, i.e. ECU 56-7 million22. This aid was authorised by the Commission in May 
1997. 
The sectoral breakdown is proportional to the figures for output of milk, beef/veal, 
cereals and sugar taken into account to determine incpme loss. At individual level, 
aid for beef/veal is allocated as a function of premiums for male bovine animals and 
suckler cow premiums for 1996 and deseasonalisation premiums from 1 January to 
10 June 1997 for animals present on the recipient's holding on 31 March 1997. For 
milk and sugar beet, the allocation between farmers is based on amounts supplied in 
thc year up to 31 March 1997. For cereals, it is based on the allocation of 
compcnsatory payments undcr the reform of the CAP paid in 1996. 
In June 1997, Ireland notified the Commission of its intention of adding a national 
contribution of ECU 30 million to supplement the above allocation financed by the 
European Union. The Commission had not yet responded to this request at the end 
of July 1997. 
In June 1997, Ireland also notified its intention of granting the Community 
contribution to aid for the revaluation of 29 March 1997. The maximum for the first 
tranche of this aid was cut by the Commission from ECU 65-16 million to ECU 57-5 
million, including ECU 28-75 financed by the EAGGF to take account of the 
devaluations of the ACR of the IRL in May 1997. The planned breakdown of aid 
notified by Ireland is close to that planned for the compensation financed by the 
European Union for the revaluations of November 1996 and January 1997. In this 
case, descasonalisation premiums are not taken into account, but the sectoral 
breakdown is again proportional to the output taken into account for calculating 
income losses. Consequcntly, the Commission authorised this aid in July 1997. 
On 30 June 1997, Italy had not notified any plans concerning the amount of up to 
ECU 247 million available for the first tranche of compensation for the appreciable 
revaluation of the LIT on 1 March 1997. 
By the same date, the United Kingdom had not notified any plans, either for the sum 
of ECU 454-4 million under the first tranches of compensation for the revaluations of 
11 January, 29 March and 5 June 1997, or for the sum of ECU 66-7 million to 
compensate for the fall in area aid for arable crops in national currency on 1 July 
1997. 
21 Sec Tablcs A8 and A9 in the Working Paper on Basic Information. 
22 Maximum sum fixed by Commission Regulation (EC) No 1129/97 (OJ No L 115, 3.5.1997, p. 16), as 
amcnded by Regulation (EC) No 1219/97 (OJ No L 170, 28.6.97, p. 56). 
21 
Both Italy and the United Kingdom may yet notify decisions to grant aid, up to the 
end of the twelfth month foliowing that of the relevant revaluation. 
22-
C. Economic impact 
Theoretically, market prices which are closely linked to an intervention mechanism 
(cereals, sugar, milk and beefiVeal) may be affected by the ACRs. Through the prices for 
certain of the products concerned, the change in ACRs may therefore have repercussions 
on farmers' incomes. Furthermore, difficulties may arise in trade in the event of 
divergence between the ACRs and the RMRs or between market prices and intervention 
prices in national currency. 
However, the prices of other products for which no. intervention mechanism exists to 
provide market guidance are not afFected by the ACRs. Nonetheless a sharp, sudden 
change in the RMRs may distort trade in such products. This is the case in particular 
where market prices do not follow currency fluctuations. 
Lastly, in addition to the impact of monetary repercussions on prices, farm incomes are 
directly affected by the ACRs applicable to direct aid to producers. 
1. PRICES 
The analysis relates mainly to monthly movements during the period 1996/97. 
In the case of products with no intervention mechanism influencing market prices, as 
may be expected no link is observed between the movements of such prices and 
those of the ACRs. For example, variations in the market prices of wine or olive oil 
are out of all proportion with the variations in the ACRs. 
For other products, the analysis focuses on sectors where usable data are available 
and covers a single representative market per Member State concerned23. 
Movements in ACRs likely to have had most repercussions in 1996/97 correspond to 
the strong and steady revaluations of the UKL (13-5%) and IRL (8-5%). 
For the other currencies, we need to compare prices in the context of a stable ACR 
(FF, PTA, ESC) with those in the context of slight revaluation (LIT) or slight and 
repetitive devaluation (SKR, BLF, DM, OS, HFL). 
In general the analysis shows that when market prices are very high in relation to 
intervention prices only major changes in ACRs are passed on. When prices are low 
or very low, small changes in ACRs have no clear impact on prices. The 
repercussions of ACRs on markets thus seem to be passed on only beyond a certain 
threshold, which will be the higher as market prices are higher in relation to 
intervention. However, there are a number of factors that may interfere with these 
mechanisms. 
1.1. Cereals24 
23 See Graphs B2 to B15 in the Working Paper on Basic Information. 
24 See Graph Bl(a) in the Working Paper on Basic Information. 
23 
Market prices for common wheat are substantially higher than intervention 
prices in national currency. During the 1996/97 marketing year from August 
1996 to April 1997, market prices in the three main producer Member States 
(Ciermany, France and the United Kingdom) stood on average 20% above the 
intervcntion price. As in the previous two years (when they stood at 12% and 
22% above the intervention price), at this exceptional level market prices are 
hardly affected by small fluctuations in the intervention price in national 
currency. 
In the period from July 1996 to February 1997 market prices in national 
currency fell, or at best remained relatively stable. Prices recovered in March 
and April, especially in France, just before the upheavals of the end of the 
marketing year. Market prices in FF as a percentage of intervention prices in 
national currency, to which monthly increases apply, fluctuated between 
110% and 118%, i.e. within a margin of around 8 points, without being 
affected by the ACR, which remained stable. Prices in PTA varied between 
125% and 135% of the intervention level; the very slight increase in the ACR 
(+ 0-2%) had no impact. 
From July 1996 to January 1997, the gap between the market price and the 
intervention level narrowed by 5% in FF and 7% in PTA. Over the same 
months, the gap narrowed by 11 % in Germany and 6% in Sweden, despite 
increases in the ACRs of 2% and 3% respectively. Clearly, these levels of 
devaluation had no perceptible impact on market prices. 
In the United Kingdom during the months concerned, the gap between 
market prices and the intervention level in UKL narrowed by 8%, a reduction 
comparable to that observed in the other Member States. The large reduction 
in the ACR of the UKL (8%) was thus passed on, so that the trend in relation 
to intervention prices remained broadly the same as in the other major 
Member States. 
In Italy, the decline of almost 3% in the ACR in October 1996 was 
accompanied by a fall of 1 -9% in prices in L1T from September to November, 
compared to a decline in prices of 2-6% in France, where the ACR remained 
constant. Between September and December 1996, i.e. during a period 
ending two months afler the revaluation of the ACR of the LIT, market 
prices in LIT and FF declined by the same percentage of 0-6%. 
For the third marketing year in succession, it is clear that market prices for 
cereals exceeding intervention levels by more than 10% are not affected by 
routine movements of ACRs. The observations made do not enable any 
conclusions to be drawn abouc possible agri-monetary effects if market prices 
were ciose to intervention levels. 
However, it seems plausible that major changes in ACRs against a 
background of high market prices would lead to an agri-monetary impact. 
As mentioned above, the effects on market prices in the United Kingdom of 
the decline in the ACR of the UKL, 8% between July 1996 and February 
1997, were such that the gap in relation to the intervention level developed in 
the same way as over mosi of the rest of the market. Similarly, in the period 
24 
1995/96, the 12% fall in the ACR in Italy was accompanied by a substantial 
fall in prices in LIT (5%), which was not matched in other Member States. 
From Augusl 1994 to April 1995, the major devaluatioii of the LIT (23%) 
was accompanied by increases in market prices in Staly, which meant that the 
gap in relatlon to intervention levels followed the sarne trend in Italy as 
clsewhere. However, the impact on market prices of sma!ler devaluations, 
such as that of the PTA (+7%) and the UKL (+ 3%), was much less clear. 
1.2. Milk products25 
Market prices for skimmed-milk powder (SMP) in DM, FF and HFL 
remained fairly closely grouped. From a low level in relation to intervention 
prices, they increased by almost 10% between September 1996 and February 
1997 before declining slightly again. Similar developments were observed in 
Bclgium, Austria, Spain and Sweden. 
In relation to France where the ACR did not change, prices in BLF, DM, 
HFL and SKR grew about 3% to 5% faster, matching the devaluations in 
ACRs. For the FMK and DKR, on the other hand, which did not follow the 
general movement, agri-monetary stability was accompanied by variability of 
about 6% in market prices. 
Prices in the United Kingdom followed the revaluation, declining by a 
matching 10% in 1996/97. The general trend of gaps in relation to 
intervention prices in national currency is analogous to that of the other major 
Member States. 
The price of SMP in Ireland at the beginning of the period 1996/97 was kept 
at an abnormal level about 5% higher than in the major Member States. The 
national price fell suddenly by 10% in October 1996, before the first 
revaluation of the ACR of the IRL (2%) in November 1996, thereafter 
remaining at about the same level until towards the end of 1996/97. The other 
falls in the ACR of the IRL, totalling 7 %, were not passed on in national 
currency. These revaluations lowered the intervention level for the IRL, 
bringing it close to the market price, which remained fixed in national 
currency Finally, as a percentage of the intervention price, prices in IRL 
returned, after major divergences, to a more usual level, almost ten points 
lower than UK prices and almost five points lower than those of the other 
major Member States. 
Butter prices on most markets settled in the second half of 1996 within a 
margin of 5 points around a level equal to 95% of the intervention price. The 
most notable exceptions were prices in IRL and UKL, which were much 
lower, and in LIT, PTA and SKR, which were much higher. 
From November 1996 to March 1997, prices rose on the main markets: by 
6% in the case of the FF, whose ACR remained constant. Prices in BLF, DM, 
FF, FMK, HFL and OS converged on a level equal to 97% to 100% of the 
25 Scc Graphs Bl(b) and Bl(c) in thc Working Papcr on Basic Information. 
25 
intervention price, irrespective of the small devaluations affecting some of 
those currencies. 
Priccs in Italy and Spain varicd around thcir high levcls, while those in 
Swcden were reduced by 12% despite the rise in the ACR of the SKR. 
Market prices in the United Kingdom systematically followed declines in the 
ACR, thus keeping at almost 90% of the intervention price, and decoupling 
from prices on the other major markets. Butter prices in IRL developed in 
parallel to SMP prices in Ireland. 
Agri-monetary effects do not appear systematically in the milk products 
sector, despite the background of prices grouped around the intervention 
level. Pronounced trends on the market are usually followed by national 
prices with variations in a margin of 5% above and below, with no clear 
impact when movements in ACRs are less than 2% or 3%. Very large 
changes in prices can happen irrespective of monetary causes, and are 
sometimes confined to one country. Wider movements in ACRs may be 
passed on accurately into national prices, as in the United Kingdom; but the 
example of Ireland shows that thc parties involved may interfere with this 
process. 
1.3. Beef/veal26 
Prices for meat of young bovine animals at the beginning of the period 
1996/97 were especially low, generally between 60% and 75% of the 
intervention price, owing to the bovine spongiform encephalopathy crisis. 
From September 1996, markets in Ireland and the United Kingdom were 
decoupled from the others at a level some 10 to 15 points lower. 
In virtually all the Member States, market prices followed the same general 
development, however, expressed as a percentage of intervention prices. This 
means that the major changes in ACRs, in particular those of the UKL and 
IRL, were passed on to national markets on the whole. 
Nowever, as in the milk products sector, markct developmcnts did not take 
account of small changes in ACRs. Prices in DM, FF and HFL rose in parallel 
from September 1996 to February 1997, which led to a wider gap in relation 
to the intervention price for the FF, whose ACR did not increase as much as 
those of the DM and HFL. 
2. TRADE 
Analyses of agri-monetary effects on trade in the two previous reports on the agri-
monetary system for the single market27 show that: 
26 Scc Graphs Bl(d) in thc Working Papcr on Basic Information. 
26 
in the ?hort term, in almost all cases the scale of the monthly variations in the 
value of exports m&sks the effects of any currency variations; 
- over longer periocs, exports can be influenced by competition; however, that 
impact vies with internaî demand, exporters' attitudes to their profit margins and 
structural causes affecting some product groups more than others; the interplay of 
these factors is such that distinguishing the effects of any particular one is very 
tricky. 
Available statistics for 1996/97 are not such as to affect these conclusions. 
Deflections of trade may occur for products attracting export refunds; in 1996/97 the 
main risks incurred in this respect were due to the positive gaps of the UKL and IRL, 
which exceeded 5 points during the confirmation periods. 
The risk was particularly acute in the case of the UKL, where aggregate gaps in 
excess of seven points, and momentarily in January 1997, as large as nine points, 
arose with, e.g., the BLF, HFL and FF. In view of the consequences of the BSE 
crisis and the high level of world cereal prices, the risks mainly related to the sugar 
sector. 
Nevertheless, export statistics show no movement which can be put down to such 
agri-monetary gaps. 
3. INCOMES 
The latest statistics for farm incomes relate to 1996. In detail, the effects of the agri-
monetary arrangements on incomes in 1996 are very difficult to gauge since they 
depend in particular on the actual impact of the agricultura! conversion rates on 
market prices, on the operative events for ACRs, and on the periods for payment to 
farmers in respect of purchases, sales and aid. As a result some effects visible in 1996 
are due to movements in ACRs in 1995, whereas the consequences of certain 
changes in the ACRs for 1996 will only be felt in 1997 or even later. 
27 Analyses based on monthly statistics October 1991 to December 1993 (COM(94)498 final) and 
January 1992 to December 1995 (COM(96)636 final). 
27 
To assess the cffccts of thc ACRs in thc pcriod 1996/97 on income over 12 months, 
ccrtain appioximalions and assumptions werc nonetheless ncedcd: 
1996 incomc arising from or rclatcd to thc markcting of products is assumed to 
rellecl income in the pcriod 1996/97; 
- to incorporate the findings set out in point Cl, the value of total outpyt is 
assumed to be affected by ACRs for sugar beet, beefiVeal and, in Ireland and the 
United Kingdom, cereals and milk products; elsewhere, the impact of the ACRs is 
considered nil for cereals, and 50% for milk products; 
- income taken inio account for fruit and vegetables, starch potatoes, wine, olive 
oil, tobacco and seed is that arising from quantities for which there is a minimum 
price or aid per tonne of products put on the market; 
- flat-rate aid to producers is as provided for in the 1997 budget, and thus related to 
the 1996/97 crop year for arable crops, 1996 livestock premiums for cattle and 
shecp, 1997 structural aid and agri-monctary compensation due for payment in 
1997; agri-monctary aid in Italy and the United Kingdom has been adjusted to 
take account of the fact that no payment was made during the period under 
review; 
- it is assumed that the intermediate consumption affected is equal to half the value 
of animal feed in the Member States where the ACR is regarded as having an 
impact on cereal prices (Ireland and the United Kingdom); 
- the conversion rates assurned to apply to the various components of income taken 
into account are averages for 1996/97 with the following exceptions: 
- for aid per hectare cultivated and for seed: the rate obtaining on 1 July 199628; 
- for per capita livestock premiums, structural aid and tobacco premiums: the rate 
obtaining on 1 January 1997; 
- for agri-monetary compensation: the rate in force prior to the relevant appreciable 
revaluation. 
This theoretical model, which groups the fiill impact of the 1996/97 ACRs over 12 
months, was used to measure the annual effect of the agri-monetary arrangements in 
1996/97, multiplying the components of income by the gap between the ACRs 
applied and the corresponding RMRs. 
Despite its abstract nature, this model does reveal a significant impact of.the ACRs 
on incomes, and variation in that impact depending on the Member States 29. 
28 For the sake of simplicity, the rare cascs where the operative cvcnt occurs on 1 August have bccn 
assimilaled to the general case whcre it occurs on 1 July. 
29 Scc Tablcs Cl to C3 in the Working Paper on Basic Information. 
28 
The ovcralf impacl on value added at factor cost is 1-3%, or ECU 1 884 million, i.e. 
almost 10% more than in 1995/96. 
The overall impact on farming incomes is made up of: 
monetary gaps relating to prices and market-related amounts: 51%, 
- monetary gaps reiating to flat-rate aid to producers: 38%, 
- agri-monetary compensatory aid: 11%. 
On thc assumptions made, thc value of output and aid affected by ACRs corresponds 
to approximatcly half of gross value cdded at factor cost. This proportion is a sign of 
the sensitivity of the agri-monetary arrangements; it is particularly large in Ireland 
and Sweden, and quite large in Belgium, Luxembourg, Germany and the United 
Kingdom. It is smaller in Portugal, Italy and Spain. 
Flat-rate aid to producers accounts on average for almost 30% of that share of their 
income affected by ACRs. The proportion is almost 40% ih Portugal, Austria and 
Spain. It is very low in the Netherlands at 5%, and low (14% to 20%) in Belgium, 
Luxembourg and Greece. 
The components of income that are increased most by the agri-monetary 
arrangements arc, of course, those that would have contracted as a result of currency 
appreciations. For the currencies that were fairly stable over the period under review, 
the arrangcments did not lead to compensation, since there was virtually no agri-
monetary loss to offsct. 
In 1996/97 the Member States which benefited most from the arrangements in 
relation to gross value added were: 
- Ireland (8%), because of the structure of farm incomes and the sizeable aid to 
compensate for revaluations; 
- Sweden (7-4%), mainly because the ACR was frozen at the high level obtaining 
before the 1996 revaluations; 
- the United Kingdom and Italy, because currency revaluations were not taken into 
account straight away, and there were large gaps before the appreciable decline in 
the ACRs; compensatory aid authorised has not been taken into account because 
it was not actually granted; 
- Finland and to a lesser extent Denmark, which benefited from the system of 
permitted margins and a permanently large monetary gap, without undergoing a 
decline in the ACR. 
29 
D. Fanancial impact 
l. METHODOLOGICALASPECTS 
1.1. Classification of agri-monetary effects 
In the agri-monetary area, the legacy of the switch-over (or green ecu) 
mechanisrn weighs heavy oh the Community budget. Introduccd in 1984, the 
mechanism was discontinued from 1 February 1995. A detailcd dcscription of 
the mechanism and its cost was presented in the report on the period 1 July 
1995 to 30 June 1996. Its annual impact, of the order of ECU 8 000 million, 
does not vary miich. 
The fihancial impact of developments in 1996/97 stems from four 
mechanisms or measures, namely permitted margins, operative events, the 
freezing of ACRs and compensatory aid. 
The cost of agri-monetary compensatory aid is identified in the 1997 budget 
and the 1998 preliminary draft budget. The fact that this cost is degressive is 
laid down in the regulations and the granting of the last tranches of aid 
decided in 1995/96 (Belgium, Luxembourg, Denmark, Germany and Austria) 
should affect the budget for 1997 only, since the third tranche of this aid has 
been cancelled. The budgct forecasts for 1998 for this aid are therefore not 
includcd in this report. 
By the end of the period 1996/97, Italy and the United Kingdom had still not 
notified any plans for compensatory aid related to the appreciable declines in 
their ACRs in 1997; consequently, the relevant budget forecasts for 1997 are 
not included in this report. If the compensatory aid is granted, it will affect 
not only the 1998 budget, but also the budgets for 1999 and 2000. 
The freezing of ACRs results in a cost equal, in national currency, to the 
difference between the frozen ACR and that known on the date of the 
operative event concerned, multiplied by the amount in ecus of the aid to 
which it applies. As the ACRs are frozen until 1 January 1999, this will affect 
the 1999 and 2000 budgets. 
The financial effects of the thresholds and operative events stem from the 
difference between: 
- the agricultural conversion rate on the date of the operative event for the 
amount concerned, 
and 
- the rate applicable for the booking of expenditure in ecus (accounting 
rate), i.e. the rate for the 10th day of the month of entry in the accounts of 
30 
'"' "r ' ifnMlhirT 
the expenditure in national currency; this is generally the month following 
that of payment to the recipient by the Member State. 
The effect of the permitted margins is due to the difference between the 
agricultural conversion rate and the accounting rate on the date of the 
operative event. The effecj; of the, operative events relates to the difference 
between the accounting rate on the date of the operative event and the sjame 
rate on the date of the booking of the expenditure in ecus. 
1.2. Method for estimating the cost of developments in 1996/97 
Agri-monetary events and decisions in 1996/97 mainly affect the budgets for 
1997 and 1998. 
When estimating the agri-monetary effects on the 1997 budget, account was 
taken of the cyclical revision of February 1997, established on the basis of 
conversion rates available on 24 February 1997. 
For the effects in 1998, calculations are based on the 1998 preliminary draft 
budget (PDB) as at 30 June 1997, drawn up using the conversion rates 
available on 30 April 1997. 
The bases (1997 budget and 1998 PDB) were adjusted by replacing the 
ACRs used to draw them up with the ACRs available on 1 July 19971. The 
accounting rate used was not adjusted as it is of minbr significance among the 
agri-monetary effects due to variations in the ACRs. 
- The adjusted 1997 budget and 1998 PDB on 1 July 1997 show the 
situation resulting from the latest ACRs available at the end of 1996/97. 
Expenditure is broken down on the one hand on the basis of the various 
opcrative events for the ACRs affecting it, and on the other hand on the 
basis of past expcnditure, between the various currencies of the Member 
States. 
- An estimate of Community expenditure irrespective of any agri-monetary 
arrangements is arrived at by replacing the ACRs used in the 1997 budget 
and 1998 PDB by the RMRs applying at the beginning of the month of 
booking of such expenditure and deducting agri-monetary compensation 
paid. 
Note that the estimate for the month of booking of each type of expenditure 
is a fairly shaky approximation, subject to wide variations. The RMRs for 1 
July 1997 are used for all dates of entry in the accounts thereafter. 
- The overall effect of freezing the ACRs is calculated by replacing the 
ACRs actually used for the aid in question in the 1997 budget and the 
1998 PDB by the current ACRs applying on the date of the operative 
events for such aid. 
1 See Tables D1 to D2 in the Working Paper on Basic Information 
31 
- The effect of the operative events is assessed on the basis of the difference 
between the results of the calculation outlined in the second indent and the 
outcomc of a similar simulation using the RMRs applying on the date of 
the operativc evcnts for thc ACRs actually applied. (iivcn rcscrvalions 
regarding the identilication of the month of entry in the accounts, that 
assessmcnt is ralher imprccisc and it bccomcs impossible for 1998 as all 
the conversion rates applicable after 1 July 1997 are replaced by those 
available and applicable on 1 July 1997. 
- The impact of the margins is gauged on the basis of the difference between 
the results of the situation with the current (non-frozen) ACRs as 
described in the third indent, and the outcome of the simulation using the 
RMRs valid on the date of the operative events, as outlined in the fourth 
indent. 
The ACRs for 1996/97 affect 77% of expenditure in the 1997 budget. The 
conversion rates valid on 1 July 1997 are applied to the 3% Of expenditure 
actually stemming from an operative event on that date but also to the 
cxpcnditurc covered by opcrativc cvcnts occurring subsequcntly, from 2 July 
to 15 Octobcr 1997. Thc convcrsion rates valid on thc datcs of operativc 
evenls prior lo I July 1997, but not prior to November 1994, are applied lo 
virtually all othcr expenditure in the 1997 budget.. 
Only 1% of expenditure in the 1998 PDB is affected by the ACRs with 
operative events occurring prior to the period under review. 14% of the 
expenditure is affected by the ACRs for early 1997 and 37% by those for 1 
July 1997. Accordingly, almost 50% of the 1998 PDB hinges on the 
conversion rates applicable from 2 July 1997 to 15 September 1998. Those 
rates, which were not available when this report was drafted, are replaced by 
the conversion rates for 1 July 1997. 
Overall, the agri-monetary situation at 1 July 1997 is of great importance in 
estimates for 1998. The salient features of this situation are the very large 
monetary gaps between the frozen ACR on the one hand and the current 
ACR on the other (11-5%) for the SKR and the UKL, and the large sums 
expccted to bc paid in compensation in the United Kingdom and Italy. 
2. RESULTS OF ESTIMATES 
The results set out in the table below show an annual cost of around ECU 1 200 to 
1 300 million per year (a comparable order of magnitude to that shown for 1995/96 
in the previous report)2. 
Almost 60 % of that cost is due to the effects of the margins. The cost of margins in 
1998 will depend closely on future currency developments, ahd the estimate for 1998 
2 For details, see Table D4. 
32 
is half lliat for 1997. Ilowevcr, thal estimate is mainly based on the agri-monetary 
situation as it stood on 1 July 1997. 
The reason margins entail a cost is basically attributable to the asymmetry of the 
mechanisms, whereby positive monetary gaps can rise'to 5 points while negative 
gaps are usually limited by a variable threshold determined by the maximum positive 
gap minus 5 points. Moreover, in situations of steady and significant appreciation for 
several currencies, as in 1996/97, the duration of confirmation periods plays an 
important role in keeping the largest positive gaps in existence over time. 
The cost of operative events, which is difficult to compress without distorting 
markets, is around ECU 160 million in 1997, ECU 60 million more than in 1996. 
This result is unusually high because there was no offsetting in 1996/97 betwcen 
currcncics that apprcciated and those that depreciated. It cannot be cstimated at 
present for 1998, as wc have no figurcs for the differcncc betwccn the RMR on the 
datc of the opcralive evcnt and that in the month of entering in the accounts. 
The freeze on ACRs in 1997 constitutes a cost deferred to 1998, because of 
operative events. It will eventually reach ECU 500 million in 1998. As the freeze 
will, in principle, continue until 1 January 1999, it also affects the budget for the year 
2000. 
Costs of monetary events in 1996/97 
ACR freeze 
Compensalory aid 
Permitted margins 
Operative events 
Total (ECU mUlion) 1997 1998 
160 499 
214 382 
772 312 
160 
1306 1193 
The Member State whose allocation under the agri-monetary arrangements has 
increased most in 1997 in relation to the 1996 budget outturn is the United Kingdom 
with an increase of 30-7% in expenditure in UKL. The agri-monetary cost of Ireland 
also increases significantly from the 1996 level. These increases are due to the effects 
of margins and operative events in a situation where the relevant currencies are 
appreciating. 
On the whole, the agri-monetary costs of the other currencies are much lower in 
1997, especially for those currencies whose ACR had declined substantially in 1995. 
Forecasts for 1998 show that the United Kingdom's share of agri-monetary 
expenditure will increase substantially, to 60%, especially if the planned 
33 
compensatory aid is actually granted. The other main beheficiaries of the agri-
monetary arrangements will be Italy, Ircland and Swcden, mainly owing to the frecze 
on ACRs. Costs for the other currencics, on the other hand, will decline, and may 
even be ncgativc for Gcrmany, Bclgium, Francc, Luxembourg, Spain, Portugal, the 
Nelhcrlands and Auslria. 
34 
1SSN 0254-1475 
:OM(98) 20 linal 
DOCUMENTS 
>N 03 01 17 
Catalogue number : CB-CO-98-015-EN-C 
ISBN 92-78-30147-7 
Office for Official Publications of the European Communities 
L-2985 Luxembourg 
3'-r