Opinion of the European Economic and Social Committee on "The Future of the CAP"

(2002/C 125/18)

On 31 May 2001 the Economic and Social Committee decided to draw up an opinion, under Rule 23(3) of its Rules of Procedure, on "the Future of the CAP". On 4 September 2001 the European Parliament decided to consult the Economic and Social Committee, under the final paragraph of Article 262 of the Treaty establishing the European Community, on the mid-term review of the CAP under Agenda 2000.

In the light of these two decisions, the Section for Agriculture, Rural Development and the Environment, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 4 March 2002. The rapporteur was Mr Ribbe, the co-rapporteur Mr Geraads.

At its 389th plenary session (meeting of 21 March 2002), the Committee adopted the following opinion with 91 votes in favour and six abstentions.

1. Preliminary remarks

1.1. The European Council's Laeken declaration of 15 December 2001 expressly refers to the European Union as a success story - starting with the coal and steel community, and then with the common agricultural policy (CAP). The Committee would stress that the common agricultural policy is the only policy conducted and managed at Community level. It is thus a key component of the European venture. At the same time, the Laeken declaration makes it clear that Europe today faces fresh challenges requiring fresh approaches.

1.2. The decisions taken under Agenda 2000, which was adopted at the Berlin summit in March 1999, cover the period to the end of 2006. The mid-term-review in 2002 and 2003 can make only minor adjustments to the existing regulations. A dependable framework is thus in place for the agricultural sector until the end of 2006.

1.3. After 2006, however, changes may have to be made to the Community's common agricultural policy (CAP). The need to act is already becoming clear today, and is due among other things, to:

- upcoming EU enlargement;

- forthcoming WTO negotiations (with growing pressure for liberalisation);

- still-unresolved economic, social, environmental and regional difficulties;

- the sustainable development debate and application of European agricultural model, and

- the need to meet the changing demands placed on agriculture.

1.4. A critical debate - of unprecedented intensity and taking in more sections of society than ever before - has been sparked off not least by the events of 2000 and 2001 (the BSE crisis, the dioxin scandal and the tragic pictures which the public saw of the fight against foot-and-mouth disease). This debate has covered the running of both agriculture and agricultural policy.

1.5. The Eurobarometer poll conducted in spring 2001, and the European Commission's flash poll of November 2000 clearly show that European consumer confidence in the common agricultural policy has been damaged. The crisis of confidence among European consumers could for the most part not be blamed directly on farmers, but, for instance, had its origins further upstream and particularly in the feed sector. Nonetheless, it is farmers who bear the brunt of the growing criticism. Farmers are increasingly under threat of social marginalisation.

1.6. Urgent action is needed to stem the tide, for the preservation and ongoing development within the Union of multicultural agriculture run along "traditional" lines(1) in line with the principles of sustainability (the "European agricultural model"(2) is the key to (i) high-quality, regionally varied food production on a sufficient scale, (ii) diverse, species-rich cultural landscapes in Europe and (iii) rural development.

1.7. The need for reform is the result not only of the political exigencies outlined above but also of discussions within society. The Committee is therefore particularly keen to turn this need to good account and to work out a policy that can take us forward into the future, and thus offer worthwhile prospects to farmers, to all agricultural players and to those affected by farming. It is vital to profit from the growing interest shown by many individuals and groups in how agricultural production operates in order to secure lasting political safeguards for the European agricultural model, which is a sine qua non of multifunctionality.

1.8. The various demands made on agriculture must therefore be linked up as quickly as possible so that the European farming sector is not again repeatedly faced with renewed reform discussions at relatively short intervals. Never-ending reform discussions are harmful and inevitably lead to irritation, ill feeling and uncertainty both among farmers and in society as a whole.

1.9. As the representative of organised civil society, the Economic and Social Committee, like virtually no other body, has to address both the various demands made on agriculture and the debate about the farming sector. The Committee has therefore decided to make a technical contribution in the form of an own-initiative opinion at this stage, prior to the upcoming reform discussion. This opinion - which will have to be built on in further opinions (e.g. on the WTO, enlargement or specific market organisations) - focuses mainly on reform after Agenda 2000 expires, rather than on the upcoming mid-term review.

1.10. This opinion also comes in response to the European Parliament's request that the Committee set out its views on the CAP generally and on the workings of Agenda 2000.

2. Changing times: 45 years of the CAP

2.1. The CAP's foundations in the Treaty

2.1.1. The objectives of the common agricultural policy at that time were set out in what was then Article 39 of the Treaty establishing the European Community, namely

- to increase agricultural productivity;

- thus to ensure a fair standard of living for the agricultural community;

- to stabilise markets;

- to ensure the availability of supplies; and

- to ensure that supplies reach consumers at reasonable prices.

2.1.2. Many times over the years, circumstances - mainly financial and market-related - have pointed to the need to adjust the CAP, and each time, policy has reacted to this.

2.1.3. Other European treaty articles are also particularly important for the CAP, including, at least, the following:

- Article 6 (integrating environmental protection requirements into Community policies, in particular with a view to promoting sustainable development);

- Article 152 (ensuring a high level of health protection in the definition and implementation of all Community policies);

- Article 153 (ensuring a high level of consumer protection);

- Article 158 (reducing disparities between the levels of development within the Community);

- Article 174 (Community policy on the environment, the objectives of which include preserving, protecting and improving the quality of the environment and which is based inter alia on the precautionary principle and on the principles that preventive action should be taken and that the polluter should pay).

2.2. The different stages of the CAP and the different demands made on it

2.2.1. At the CAP's inception, agriculture policy - and its mechanisms - focused on raising productivity and production levels. At that time, the main concern was to provide adequate food production, to foster the structural changes that were required for economic reasons and to free up workers for both the expanding industrial sector and for the service sector as well. It was possible relatively quickly to eliminate undersupply in key agricultural goods in what was then the EEC.

2.2.2. The main EU policy tools used to achieve this were (i) support for certain internal producer prices and (ii) protection against cheap imports (via import duties)(3).

2.2.3. Once the aim of providing adequate supplies at reasonable prices(4) had been achieved in some sectors, these had to face the question of how to deal with the increasing quantities that could no longer be sold in the common market. Surplus production was caused by (i) the expansion of European production and (ii) loss of market share as a result of imports. Since the growth potential of EU consumption was limited, the focus increasingly shifted to exports. Given that prices were generally substantially higher than world market levels, most exports were possible only with support. Export refunds, together with intervention in the form of storage measures, became a key agricultural policy tool.

2.2.4. A number of negative factors (not least the build-up of excessively large internal stocks and overly high costs) led to further changes and reforms to the policy tools. For instance, supply management emerged in certain areas through the introduction of quota systems (e.g. for milk and sugar).

2.2.5. Social and environmental issues increasingly entered the CAP debate by the mid-1980s at the very latest and a number of initial specific policy moves followed.

2.2.6. However, neither the voluntary set-aside schemes nor the other extensification measures adopted at that time (such as the promotion of environmentally-friendly farming) were able to resolve the increasingly apparent environmental difficulties or the escalating costs of the market regulations. Nonetheless, these may be deemed forerunners of the first measures designed to link economic and environmental objectives. Thus, the CAP did start, even some fifteen years ago, to take on board some issues that today are becoming ever more important against the backdrop of sustainability. Apart from the productivity gains within European farming, world market developments - particularly competition from heavily subsidised American producers - and the emergence on the international scene of new exporting countries such as Brazil and Argentina have also been responsible for the European Union continuing to run up surpluses in some production fields. This has further tempered the desired success of extensification measures.

2.2.7. These at the time relatively modest schemes did trigger some key developments. For instance, environmentally-friendly farming evolved in leaps and bounds after the EU gave it financial support and, thanks to the eco-regulation, an important framework in which to operate. The number of environmentally-friendly farms rose from 9521 in 1988 and 28868 in 1993 to 124462 in 2000(5).

2.2.8. At least two issues marked the debate on the social and environmental impact of the CAP, viz.:

- whether ongoing structural change would have an adverse impact on regional viability and on the environment and if so, what form would that take;

- whether the funding provided by Brussels would reach the "right" targets.

2.2.9. There was a growing awareness that the productivity trend set in motion and successfully pursued using traditional CAP tools, not only has economic limitations but is also constrained by biological, environmental and social factors, and that it has a regional impact and raises consumer issues, too. It became clear that the development criteria applicable to agriculture - which is tied to a specific area and handles "live" production factors - have to differ from those applicable to industry.

2.2.10. It is clear that

- many of the changes made to agricultural policy did succeed in their stated objectives; the CAP became to some extent the engine of European integration - especially in the case of southern enlargement;

- all moves for reform have been accompanied by vigorous political debate about reshaping the CAP; and

- new "problem areas" have continually emerged - and still emerge - to trigger new discussions about reform. For instance, interest is now focused in addition on the issue of sustainable development and on eastward enlargement. It must be noted that, in some fields, adoption of the CAP by the candidate countries may lead to difficulties that are not easy to resolve.

2.3. The 1992 reform

2.3.1. The 1992 reform was an important turning point in the CAP. The decisions taken must be seen in the context of the GATT round that was then under way and which was subsequently completed.

2.3.2. The measures adopted in 1992 related mainly to:

- cuts in guaranteed producer prices(6);

- the offsetting of these cuts by direct price compensation payments;

- the introduction of mandatory set-aside; and

- lower export refunds (volumes and budget) and reduced external protection (with an eye to GATT).

2.3.3. Given the key factors behind the reform, the 1992 measures may be deemed a success:

- Surpluses of butter, milk powder, cereals, fruit and vegetables which could be utilised only at great expense (and the measures undertaken to destroy them) are now largely a thing of the past and EU agricultural produce is now increasingly being exported to non-EU markets without export refunds(7).

- Over the following years, it was possible to slash high intervention costs(8) and the share of export refunds(9) as part of total expenditure(10). Henceforth, farmers' incomes were to be safeguarded less by the traditional policy tools, than by the newly introduced price compensation payments(11).

2.3.4. At the same "flanking" measures were introduced, including the agri-environment schemes. However, this part of the 1992 reform, designed specifically to extensify production, was limited to just a 5 % share of EAGGF guarantee expenditure.

2.3.5. Looking back on the discussions held in the run-up to the 1992 reform, it is, however, also clear that other issues were already raised in the debate at that time that were never put into practice. The then Agriculture Commissioner, Ray MacSharry, set out the new aims of agriculture policy as follows:

- the retention of an adequate number of farmers, in order to protect the environment, preserve the cultural landscape and maintain the "traditional" farming model;

- recognition of farmers' two key remits: production and environmental services, in conjunction with rural development;

- the development of rural areas along these lines and also including the promotion of other, non-farming economic activities.

2.3.6. Under the Commission's proposals at the time, market regulations were to be revamped to foster extensification and environmentally sound production methods(12). Direct income support, which had been introduced, was to be differentiated to reflect social and regional conditions, and the same was to apply to all other quantity-based provisions such as quotas and set-aside. Arable crop payments were to be conditional on the use of environmentally-sound production methods.

2.3.7. As we know, at that time, no differentiation was made and no corresponding conditions were attached to the newly introduced direct income support.

2.4. Agenda 2000

2.4.1. It became necessary to consider and launch new reform moves more quickly than expected after the 1992 reform.

2.4.2. Considerations focused inter alia on

- a more extensive market-led approach to agricultural production and enhanced competitiveness on international markets by bringing EU prices closer into line with prices on the world market;

- a stronger EU position in the new WTO negotiations to be achieved among other things by cuts in export refunds and the further switch from market support to direct payments;

- preparations for EU enlargement;

- wider inclusion of environmental objectives in the CAP;

- merging various agricultural structural measures and support schemes in moves towards an integrated rural development policy (second pillar of the CAP ).

2.4.3. The Agenda 2000 reforms are consistent with the Marrakech agreements. They have several objectives:

- to maintain Community preference for the major agricultural products, despite reduced customs duties;

- to win back market shares in our internal market, e.g. for cereals in animal feed;

- to exploit opportunities on world markets which would are not expected to fall between 2000 and 2007;

- to incorporate environmental objectives into the CAP;

- to put together a rural development policy on the basis of a second pillar.

2.4.4. In the run-up to the reform, criticism was again voiced about arrangements for the distribution of EAGGF resources. "The Commission acknowledged ... that the ... support system ... was devoted, in large part, to a small minority of farms"(13). This again sparked internal deliberations within the Commission about redirecting resource distribution to farmers and regions on the basis of actual need.

2.4.5. Thus, the negotiations again included some of the basic points of the 1992 reform relating to the incorporation of new social and environmental aspects - albeit some in a modified form ... One example was the proposal to introduce ceilings for direct payments. The Commission plans also included mandatory "modulation" to reflect the prosperity of the farm and/or its workforce in order to secure a "fairer" distribution of support. And the mandatory linkage of direct support to environmental constraints was planned, too.

2.4.6. The Agenda 2000 negotiations also included unprecedented discussion about all three "sustainability" pillars, in that equal consideration was given to economic, environmental and social aspects. After many rounds of negotiations, the Council eventually agreed on a raft of measures to reshape many market regulations ("economic pillar"), but considerable differences remained on social and environmental issues(14).

2.4.7. For example, the Council failed to endorse the Commission proposal for mandatory modulation or retention of the 90 head of cattle limit per holding in respect of the special premium for male bovine animals. The same is true of the Commission proposal to scrap the silage maize premium(15). As a result, other fodder plants such as alfalfa and clover remain at a disadvantage, even although, for environmental reasons, much would be gained from promoting them.

3. Changes in agricultural policy over the last ten years: an assessment

3.1. Among other things, the reforms undertaken in 1992 and as part of Agenda 2000 made European agriculture more competitive internationally. The problem of surpluses was substantially eased, on the one hand, by world market access becoming simpler and, on the other hand, by the use of European cereals for animal feed becoming economically more attractive. Many of the market difficulties that arose in the past have been greatly mitigated by the adoption of first-pillar measures.

3.2. The further dismantling of price support under Agenda 2000 was only partially offset by an increase in first-pillar direct payments (price compensation payments). Economic pressure on many "traditional" farmers has continued to grow apace. There has been growing tension between the new demands made by society on agricultural production (sustainability, multifunctionality) and the economic exigencies that farmers have to contend with as a result of ever-sharper competition.

3.3. Direct payments to farms now play a key role. They require much more funding than traditional agricultural policy tools such as export refunds, interventions and storage measures, and, generally speaking, direct payments to farmers are probably more socially acceptable than indirect aid via the old mechanisms. In all, there are now three different kinds of direct payments to farmers, i.e.

- price compensation payments (first pillar)

- compensatory allowances in less-favoured areas (second pillar) and

- direct payments to farmers for specific services provided as part of the agri-environmental schemes (also from the second pillar).

3.3.1. The system of first-pillar direct payments based on acreage or livestock numbers ties in closely with the former price support arrangements. Its purpose is to offset the losses incurred by farmers as a result of changes to the old price support system.

3.3.2. By extension, the beneficiaries of this mechanism are, quite understandably, first and foremost the same farms and regions that benefited most from the previous price support system. This state of affairs often leads to public criticism that a large share of direct payments goes to a relatively small number of farms or has resulted in the concentration on certain crops(16). However, it must be remembered that Member States would have an opportunity to influence the distribution of these direct payments, for instance through modulation or by setting limits for male bovine animals.

3.3.3. The Committee feels that very careful consideration must be given to whether the existing mechanism does in fact best serve the issues society sees as vital for the future - sustainability, multifunctionality and the maintenance of a broad-based agricultural sector - and whether, in the long run, this can be squared with WTO rules.

3.3.4. Second-pillar direct payments, are a different matter. These involve financial compensation for actual natural disadvantages and/or payment for the performance of specific environmental services. Such payments are thus a key element - but also an element with room for improvement - for incorporating environmental protection into the CAP.

3.3.4.1. On the down side, these direct payments offset only disadvantages and/or extra burdens, but often offer no genuine direct incentives to give priority to more extensive, rather than more intensive, production methods or to apply key elements of consumer protection as part of the European agricultural model (such as the promotion of food safety, traceability and quality assurance).

3.3.4.2. Environmental schemes have failed to provide many farmers with an adequate incentive to shift to more extensive production procedures in all but a few Member States. A Commission study concludes that agro-environmental schemes mainly have an impact in areas beset with production problems and have virtually no effect in intensive farming regions, where the financial incentives for farmers are so poor.

3.4. The first-pillar direct payment scheme continues to place the cultivation of many crops that are of key importance for the environment and for regional economies - e.g. fodder crops or grassland farming - at a disadvantage compared with earlier price-supported crops, since they are not eligible for direct payments.

3.5. Over the past few years, it has become clear that conflicts may arise between, on the one hand, productivity trends that make economic sense and are necessary under given conditions and, on the other, the requirements of the regional economy, the environment, animal protection and welfare, and consumer protection. The CAP has not yet acted to resolve these conflicts, i.e. it has not yet been possible to find a genuine balance between the three sustainability pillars.

3.6. Nor has this yet been achieved by Agenda 2000, despite the fact that the flanking measures introduced under the 1992 reform (forestry, early retirement and agri-environmental schemes) were expanded and combined with other, sometimes existing Structural Fund support measures to form - under the heading of "rural development policy" - the CAP's second pillar. This may have heralded a new era for the CAP, but the question is whether measures now coming under the first pillar are, as yet, tailored to be an ideal adjunct to the regional policy, environmental and social objectives that are to be specifically achieved with the aid of second-pillar measures.

The Committee has, in principle, consistently welcomed the higher political profile given to rural development, despite the fact that, so far, this second pillar makes up only 10 % of the overall agricultural budget and currently enjoys no better financial provision than the former flanking measures taken together with Objective 5a and 5b support from the Structural Funds in the late 1990s. Integrated rural development policy must be broadly expanded as a useful adjunct to a number of first-pillar tools that, while essential, may be in need of revision, since such a policy is becoming ever-more important for a multifunctional agricultural sector. The Committee would stress that first-pillar measures and rural development tools must help maintain and promote multifunctionality, and must be consistent with the three sustainability pillars (economic, social and environmental). Neither the first nor the second CAP pillar should focus on one facet of sustainability alone.

3.7. The upcoming mid-term review of Agenda 2000 must not only consider whether the objectives of the individual market regulations have actually been met in terms of market and budget stability. In the Committee's view, the focus should be more on resolving a range of other issues in order to determine how to take account of the new demands being made on the CAP. These issues are of fundamental importance for the CAP's continued development beyond 2006. In the Committee's view, they include the following questions:

- Has it been possible to improve the incomes of the majority of the farmers?

- Have the reforms managed to halt job losses in the farming sector(17) and rural areas and, if so, to what extent? Is this the purpose of the CAP at all?

- Have the reforms changed the distribution of aid to farmers and, if so, how?

- How far has use been made in the Member States of Article 3 (Environmental protection requirements - cross compliance) and Article 4 (Modulation) of Regulation (EC) No 1259/1999, and what has been the outcome?

- How far have the new demands made on agricultural production been met? Are the criteria attached to the allocation of expenditure consistent with what is required under European agricultural model and the exigencies of the sustainability debate?

- What has been achieved in resolving existing environmental and nature conservation problems and overcoming regional disparities?

- Is there a balanced distribution of expenditure between the first and second pillars and between the sectors within the first pillar(18)?

- Is there a sufficient balance between regions and between producers?

- Is there scope for additional measures to better exploit the special features of many agricultural products, their quality and their importance for the environment, for animal welfare and for the region concerned(19)?

- Are second-pillar resources really used effectively to promote rural development? How effective were the individual elements of the programme in practice? For instance, do early retirement schemes help foster rural development? Is it not the case that some reafforestation measures conflict with efforts to keep the countryside open?

- How could compensatory allowances for less-favoured areas - which are proving to be a key policy tool - be developed further?

- Why are there such different take-up rates both between Member States and between individual regions within Member States of, for instance, second-pillar resources and agri-environmental measures(20)?

4. The demands made on agriculture now and in the future

4.1. Despite the fact that the CAP is changing constantly and that many challenges have been overcome in the past, it is clear that key tasks remain to be tackled. These concern both policymakers and individual consumers, whose behaviour often conflicts with the demands for, for example, for a more regionally-based or a more environmentally-sound approach.

4.2. A change has taken place in what society expects and demands of farming.

4.3. Today, politics and society take a different view of agricultural production. Over the past fifteen years or so, there have been ever-increasing calls - arising out of the sustainability debate and from issues relating to regional development, jobs and the quality of employment, animal welfare and consumer protection - to factor environmental considerations into the CAP. Across Europe, more importance is now attached to the quality of the countryside and of production processes. European farming's remit is not merely to produce, but also to play a multifunctional role in rural areas.

4.4. Today's farmers face additional tasks that in the first place cost them money, without - so far - earning them any, since market prices for agricultural products do not include services performed by the farming sector as part of its multifunctional remit.

4.5. As for farmers' incomes, it must generally be recognised today that there is a wide discrepancy between producer and consumer price trends and that the gap is continuing to widen. Yet even within the farming sector, there are major income differentials that cannot be simply attributed to different skills levels, hard work or entrepreneurial spirit. Some marketing chains have encouraged disastrous price trends by offering foodstuffs at dumping prices. Market prices that are sometimes below cost price greatly limit farmers' room for manoeuvre and their ability to take decisions that foster more sustainability and multifunctionality. In many regions and agricultural sectors, farmers' incomes no longer bear any relationship to the work they actually perform.

4.6. Given the difficult economic climate, farmers are forced to take part as far as possible in every conceivable move (within the law) to increase productivity in order to compensate for real or de facto falls in (producer) prices and simultaneous increases in input costs.

4.7. The situation is exacerbated not only by the competition between European farmers, operating on sometimes over-saturated markets, but also by relentless pressure from the WTO to liberalise global trade in agricultural products. EU production requirements and constraints differ from those in other regions. Outside Europe, agricultural goods are often produced more cheaply, inter alia because:

- the climatic conditions are sometimes more favourable or farming systems enjoy greater structural advantages;

- some production methods fail to comply with European values (lower environmental, animal welfare, consumer and social standards, use of production-boosting substances banned in Europe);

- world market prices are often greatly influenced - and distorted downward - as a result of export subsidies, guarantees or securities.

4.8. Hence the growing conflict between, on the one hand, the need for farms to increase productivity and, on the other, environmental, animal welfare and consumer considerations (i.e. multifunctionality).

4.9. The hard struggle involved in the various reform negotiations and the incessant discussion about the next steps that are required clearly show that the aims being pursued by the EU are in fact in permanent conflict and that it is not possible to square the circle. It is illusory - and will in future remain illusory:

- to want to have an agricultural sector which can produce under (often distorted) world market conditions (as far as possible without financial support);

- and, which at the same time, meets all the production expectations (in terms of quality, safety, protection of natural resources, animal welfare etc.) and copes with European costs(21);

- and also to secure a modern and attractive labour market that helps protect employees and is marked by high standards of employment, safety, and basic and further training.

4.10. All stakeholders must be aware of this as yet unresolved conflict of aims when assessing the CAP reforms to date and considering how to reshape the policy. Even many political decision-makers seem to be insufficiently aware of the complex, interrelated issues involved.

4.11. The key task for the future is thus to seek new ways of helping the concepts of agricultural sustainability and multifunctionality to achieve a breakthrough. The European agricultural model can only function if a new balance is struck between the economic, social and environmental pillars of sustainability.

4.12. There also has to be a way of offering farmers - and young, next-generation farmers in particular - attractive and economically stable prospects. In this connection, the Committee would point to the guidelines set out in its recently adopted opinion(22) and its backing for the joint declaration on young farmers issued by the European Parliament, the Committee of the Regions and the Economic and Social Committee on 6 December 2001.

4.13. The Committee stresses how important it is to maintain these different functions of European agriculture. In theory, a possible option might be to introduce liberalisation, with food needs being supplied from outside Europe because this would apparently be "more economical" even though it would of course run counter to the principle of security of supply. However, farming culture, stewardship of the land and job provision - all the elements of multifunctionality - cannot be imported.

4.14. Maintaining the European agricultural model and extending it to the new Member States will cost a lot of money, probably more money than currently estimated in the agricultural guideline. Given that money is tight and that many finance ministers are seeking to cut public expenditure, the question of whether the transfer of public funds to farming is warranted will play a key role. The issue of the future - sustainability - may be the key to society's continuing acceptance of long-term financial transfers to agriculture.

5. Reflections on the future development of the CAP

5.1. Reflections on fundamental issues

5.1.1. The EU has decided to promote a "multifunctional agriculture". The services to be provided by EU farmers in this context include:

- producing adequate levels(23) of high-quality, safe foodstuffs;

- producing within an agricultural structure that fits in with the countryside and respects regional exigencies;

- producing in accordance with environmental requirements (environmental protection);

- preventing rural exodus;

- maintaining employment;

- rearing livestock without the use of hormones and antibiotics;

- heeding animal welfare;

- preserving rural culture and rural cultural heritage;

- providing valuable cultural landscapes;

- maintaining biodiversity.

5.1.2. These services involve very much more than simply producing food and to this extent agriculture is not directly comparable with other economic sectors.

5.1.3. There are only two ways of paying for such quality production and the services involved, i.e. of covering the attendant costs for farmers, namely:

- through the price charged for the product or

- through direct state transfer payments (or a combination of the two).

5.1.4. As long as consumer prices do not cover the (external) costs involved in taking account of multifunctionality, it will be necessary to provide transfer payments for farmers who meet the multifunctionality criteria that still have to be determined.

5.1.5. In this context it has to be borne in mind that the volume of transfer payments would show a further increase if:

- the additional constraints imposed on farmers were stepped up, and if

- producer prices were to fall further, inter alia under pressure from a distorted global market or from the marketing sector.

5.1.6. Compensation - in the form of direct payments - for the concrete additional services which farming is expected to provide might form the socially acceptable basis for income-support measures for EU farmers. EU farmers would no longer be offered support simply to produce food cheaply and reliably (product-based aid) but because competitive disadvantages arise on the liberalised world market as a result of society wanting agriculture to have a sustainable, multifunctional role in rural areas and because they make key social and regional contributions (maintaining jobs, farming of less productive peripheral areas) (rewards for using the desired production model). The aim should be to maintain broad-based, environmentally compatible production that is focused on quality - something which may require particular efforts and measures in certain production sectors.

5.1.7. European society would thus recognise the unique role of farmers as: producers of healthy and safe food; custodians of the countryside; guardians of cultural heritage; and committed supporters of natural and regional diversity.

5.1.8. This means of course that, in the context of the debate on the future of the CAP, all existing agricultural policy instruments will have to be reviewed to see that they fit in with this new approach and are thus compatible with the "European agricultural model". New instruments and models will also need to be considered.

5.1.9. CAP instruments of proven value must, as a general rule, also continue to be applied in future; such instruments will, of course, have to be further developed and brought into line with the new conditions.

5.2. Direct payments

5.2.1. Direct payments will play an increasingly important role as long as the "external" costs associated with multifunctionality are not reflected in the price formation but have to be met by society.

5.2.2. The Committee expressly endorses the principle of linking direct payments to specific tasks and providing long-term safeguards for this increasingly important CAP tool. This does not in any way conflict with the requirement that if any kind of direct payment is to be generally accepted, there must be adequate justification.

5.2.3. This therefore raises the question of how far changes might need to be made to current direct payment arrangements. Doubtless, key sections of society will in future increasingly question the current direction of, and justification for, direct payments under the first pillar, with calls to tie such payments to multifunctional requirements. Policymakers will have to address this debate.

5.2.4. For the future, therefore, the establishment of a link between the awarding of direct payments and the provision of multifunctional services by agriculture might be a key issue in the discussion. As things stand, a right to public aid cannot, as a matter of principle, be derived from compliance with existing legislation. However, consideration must be given to whether, in the light of differences in production standards and conditions across the world, it is necessary to deviate from this principle in order to safeguard the multifunctionality of European agriculture.

5.2.5. The Committee stresses that multifunctionality not only means meeting environmental requirements and demands. It also means, among other things, sustainability, upkeep of the countryside, management of less-favoured areas, the use or non-use of certain production techniques, animal welfare and compliance with quality and safety requirements.

5.2.6. The Committee would ask the Commission to consider whether, in future,

a) a multi-tiered and varied system of direct payments is feasible:

- which is directed at active farmers who produce to harmonised European environmental and animal welfare standards that have been laid down uniformly and go beyond what is practiced outside Europe, in other words in compensation for the competitive disadvantages resulting from higher European standards;

- which, at a second level, is designed for farmers who meet additional, mandatory multifunctional criteria(24) that go beyond good agricultural practice and take account of factors such as stocking densities or the preservation of features of the countryside; and

- which, like the current agri-environmental schemes, is designed not only to cover payment for the performance of specific services, but also offers real incentives to be multifunctional.

and whether

b) the first pillar of the CAP could be enhanced with new forms of support which enable each Member State (in a framework of subsidiarity and within limits which avoid distortions of competition) to strengthen its support for those farms which accept additional commitments with regard to quality improvement, environmental protection and the safeguarding of jobs.

5.2.7. The Committee recognises that potentially tying all direct payments to particular (environmental, social and area-specific) responsibilities represents a decisive change for farmers, particularly since this would be likely to mean a significant redistribution of funds among farms, regions and even Member States. The Committee feels, however, that making such a linkage provides the social justification for the retention of transfer payments on a permanent basis.

5.2.8. The examination should clarify how useful it would be if, in future, entitlement to assistance were not confined solely to enterprises whose products used to be, or continue to be, subject to a market organisation and if these payments by society were to be awarded on a general basis in compensation for multifunctional production methods. All agricultural areas would therefore be covered(25).

5.2.9. One way to do this, which has been mooted by various parties, could be to make a direct payment - in the form of a standard per hectare premium to all farmers fulfilling multifunctional criteria(26), that will have to be defined, irrespective of the crop produced. The Committee asks the Commission to give closer consideration to whether this is feasible. It may be useful here to draw on the Commission's experience with the transposition of Regulation 1244/2001 (simplifying rules for the payment of direct support to small producers). At the same time, consideration must be given to the special features of particular crops such as olive oil.

5.2.10. In addition to responding to the questions raised in points 3.7 and 5.2.6, an assessment should be carried out into how the current system for the distribution of direct payments would change if a standard per hectare premium were in place, and what impact that would have on the individual sectors, regions and farms.

5.2.11. Consideration should also be given to whether:

- greater political and social acceptance can in fact be expected;

- this is a better way to secure multifunctionality in European agriculture in every region and

- the administration itself can be simplified.

5.2.12. In order to resolve the existing conflict between the claims of nature conservation, on the one hand, and those of agriculture, on the other, the Commission should also consider whether a possible basic premium should also be paid in respect of areas that, in economic terms, are either non-productive or of limited productivity (e.g. designated Flora-Fauna-Habitat (FFH) areas, hedgerows, boundary strips, etc.).

5.2.13. Direct payments currently come under both the first and second pillars. Second-pillar measures must be cofinanced by Member States. The Committee recommends that, in the upcoming reform debate, consideration be given to whether more acceptance and coherence could be attained if this different type of financing were to be abandoned - at least in part - and/or what other options are available to resolve the difficulties arising in cofinancing the second pillar.

5.3. The future of rural development (second pillar of the CAP)

5.3.1. Rural areas not only have key functions to perform as areas of land but above all also have a fundamental, existential role to play for the people in economic, social and cultural terms,

5.3.2. Rural areas derive their distinctive features and originality from the diversity of regional resources. Sustainability arising out of a feeling of responsibility for future generations is a top priority and must be complemented by action based specifically on subsidiarity. Rural areas and agriculture have close functional links. Rural policy therefore requires the dovetailing of a range of different approaches. In future, therefore, second-pillar tools must be backed up by measures that go beyond the farming sector. These must cover, in particular the technical and social infrastructure, which is vital and indeed a sine qua non if rural areas are to fulfil their widely-ranging tasks.

5.3.3. Under the influence of extensive market liberalisation, there is a move towards concentration. This not only has an adverse impact on structurally weak regions but would also call into question key aspects of the European agricultural model (e.g. regional closed-circuits). The European Commission's White Paper on Commerce(27) states: "There is a long-term risk of extreme concentration of distribution in Europe, resulting in a mere handful of big chains dominating the entire retail market. [...] In the distribution sector, concentration of this kind could ultimately lead to a reduction in the range of products on offer, the variety of selling systems and the number of shops - particularly in city centres and rural areas and it would alter the relationship between small producers and retailers." Over the past few years, major commercial chains have come to wield a great deal of market power. This has led to major concentration in the processing industry, which purchases agricultural raw materials in ever-greater quantities from whatever the source and requires that the products it buys be suitable for further processing. The result is often standardisation, which undermines the agricultural and regional diversity found in the past.

5.3.4. The CAP and regional policy must actively counter this trend in order to prevent a full-blown exodus from structurally weak rural areas. In particular, they must have a lasting impact on rural jobs. In structurally weak regions, the sustainable use of regional resources in line with endogenous development strategies must be supplemented by solidarity-based regional compensation arrangements.

5.3.5. The second pillar of the CAP is designed (i) to pay for the various services provided by the agricultural industry within the framework of multifunctionality by means of a coordinated package of compensation payments, (ii) to support the diversification of farming activities in order to broaden the income base and (iii) to use investment aid to foster regional competitiveness. Because of the specific functions of the various rural development tools (second pillar), these cannot replace CAP tools, but they must be a substantive and essential adjunct to them. EU environmental, health and animal welfare standards - especially those brought in under the most recent agricultural policy reform - require EU-wide coordination and coherence in order to ensure equivalent conditions and a level playing field. However, these standards must also be examined to check whether all the measures taken, some of which have proved to have a dampening effect on certain sectors, are in fact necessary.

5.3.6. The EAGGF rural development programme undoubtedly has a key role. However, the Committee would stress that in order to bring about overall progress in rural areas, Structural Fund measures must also be applied. Forward-looking rural strategies also require sweeping innovation. It is therefore essential to continue to develop the EU Community initiatives, especially Leader+ and Interreg, and to reflect these experiences in rural policy.

5.4. Supply-side management/market organisation

5.4.1. Opinions on supply-side management sometimes differ very considerably, as has been shown in the debate on the rules governing milk quotas. In the context of globalisation - and, in particular in connection with EU enlargement - quantity regulation measures are regarded as having a detrimental effect and are being called into question not only by agricultural economists, individual governments and EU Member States but also by some farmers.

5.4.2. Relatively stable markets are an essential prerequisite for ensuring that agricultural enterprises can also meet production criteria to a satisfactory degree. An agricultural sector geared solely to meeting competition will certainly not be able to fulfil its multifunctional role.

5.4.3. As agricultural markets are intrinsically unstable and extremely susceptible to price fluctuations, and bearing in mind that farmers have little influence on the market in bringing about quantitative adjustments, supply-side restrictions or incentives, in the form of quantity-regulation measures, clearly have an important role to play in bringing about sustained, stable agricultural production.

5.4.4. This is particularly obvious if we take the example of milk production. If the milk quota provisions were to expire and not be replaced - as some Member State governments are demanding - this would doubtless result in the concentration of milk production in favourable locations, with the attendant consequences not only for the environment, but also for the economic clout of regions with unfavourable conditions. Grasslands, in particular, which are especially valuable to nature conservation, need to be grazed on an on-going basis by ruminants.

5.4.5. If the quota provisions were to expire without replacement, this could be in blatant contradiction to all the observations made with regard to the multifunctional role of agriculture, the European Agricultural Model and broad-based farming.

5.4.6. To facilitate an informed discussion during the mid-term review, the Committee therefore considers it essential that research be conducted into (i) the impact of the abolition of milk quotas and other quota systems on regional economies, (ii) possible compensation (with what justification acceptable to society?), (iii) how expensive that would be and (iv) generally how to maintain broad-based grassland farming in the long term.

5.5. External protection/exports

5.5.1. The EU is the world's leading importer of agricultural products. Although the EU's share of the overall world population is about 6 %, it accounts for some 20 % of overall imports of agricultural products (excluding intra-Community trade).

5.5.2. The Committee recognises that in the forthcoming WTO negotiations the EU will have to face demands by a number of individual states and groups of states for the EU's import duties to be substantially reduced or completely abolished and for its borders to be fully opened up to imports.

5.5.3. Under the current conditions prevailing upon the world market, it is not possible to guarantee the continued existence of an agricultural sector based on family-run farms and with a multifunctional role, as desired by every sector of society.

5.5.4. In principle, the Committee therefore expects that world trade policy must enable societies or economic areas to protect their producers and customers against products which were either not produced in accordance with the sustainable production rules recognised and practised in their areas or which do not meet imposed standards (e.g. meat containing hormones, battery farming, genetically modified products and BST in milk production).

5.5.5. The Committee would point out that corresponding rules are accepted in other sectors of the economy as a matter of course; no one would propose, for example, to allow motor vehicles without exhaust systems including catalytic converters to be imported into the EU.

5.5.6. It is essential that this form of external protection, which also safeguards "Community preference" in the case of products deemed "sensitive" for the EU agricultural sector, forms part of the underlying provisions of the CAP. The removal of such protection as a result of WTO obligations or de facto removal as a result of free trade area rules would have the overall effect of calling into question vital elements of the CAP and therefore, in the final analysis, also challenging the multifunctional role of European agriculture.

5.5.7. The Committee therefore calls for:

- negotiations to be entered into not only on the question of further reductions in external protection but also, with a view to establishing fair conditions of competition, on the introduction of binding minimum environmental standards and labour law standards in all WTO member states;

- a differentiated approach to be adopted, reflecting the different situations and requirements of the respective product areas, when further market liberalisation measures are undertaken;

- "non-trade concerns" to be covered by the WTO negotiations, as demanded by the EU with a view to safeguarding the multifunctional role of agriculture;

- steps to be taken to ensure that WTO rules cannot be used to make it obligatory to grant market access to products which give rise to justified doubts to their safety (it is therefore essential to include a corresponding clarification in the Sanitary and Phytosanitary (SPS) Agreement);

- negotiations to be held on the introduction of provisions to prevent strict EU rules, in fields such as the new green technology (genetic engineering) or animal welfare, from being rendered absurd by the introduction of products from non-EU states which do not have correspondingly strict rules. The danger of confusing and possibly misleading consumers should be avoided through the use of clear definitions and the application of clear labelling provisions.

5.5.8. US Agriculture Secretary Ann Venemann has said, "The Doha agreement closed the door on the use of (European) environmental measures as unfair trade practices and we kept the precautionary principle at bay." These comments highlight the fundamental nature of the differences not only in how Doha is assessed, but also in the overall approach to the issue. This points to difficult negotiations. The Committee however expects the Commission to take a consistent negotiating position, not least because culture and the countryside - as products of the European agricultural model - are not tradable goods but part of society's heritage that policymakers have to defend. This heritage must be protected at least as vigorously as, for instance, the USA protects the export interests of its major companies such as Microsoft.

5.6. Export refunds

5.6.1. In its opinion on the strengthening of the European Agricultural Model, the Committee has already set out a number of fundamental observations on the question of agricultural exports; these observations do, of course, remain valid.

5.6.2. The Committee emphasised, in particular, that the aim should be to make the greatest possible reductions in all forms of export support. The Committee made it clear that the export credits and export credit guarantees, employed, in particular, by the USA, should also be regarded as export support measures, in accordance with Article 10(2) of the WTO Agreement on Agriculture; no rules had, however, been set out in this respect. This represents a fundamental problem for the international competitiveness of EU agriculture and a solution needs to be found.

5.6.3. EU farmers, who in future are even more assiduous in producing their products in accordance with the principles of a sustainable, multifunctional agricultural sector, will of course not only come under pressure as a result of the potential importing of products which do not meet the above-mentioned criteria but will, as a result, clearly have to contend with additional difficulties in particular sectors in selling their more expensive products on the world markets.

5.6.4. It must at the same time be clearly recognised that (good) returns can be made by selling quality products (e.g. cheese, wine, etc.) on the world markets, too, even without export refunds.

5.6.5. Every farmer is, and continues to be, free to decide how and what he produces and which markets he targets, within the framework of the existing laws and rules. But the growing shortage of funds, together with the WTO rules which are likely to be introduced in future, will undoubtedly make it necessary to review EU policy on agricultural exports at a later stage. The tapping of "markets for quality products" (without the use of export support measures) rather than markets for mass-produced products (e.g. the sale of cut-price cereals to China on the back of export support schemes), will play an increasingly important role in this respect and this is likely to have an impact on all aid and other provisions of agricultural policy.

Brussels, 21 March 2002.

The President

of the European Economic and Social Committee

Göke Frerichs

(1) The term used by the rapporteur (bäuerlich) does not refer to farm size, but describes how the farmer works and thinks. It denotes an approach that (i) is geared towards preserving the farm and maintaining multi-skilled jobs (ii) considers the needs of future generations, (iii) ties in closely with the local and regional community, (iv) operates within interconnected and mutually reinforcing "cycles" as close to the farm as possible and (v) takes responsibility for the natural environment and animal welfare.

(2) Economic and Social Committee opinion on a policy to consolidate the European agricultural model, OJ C 368, 20.12.1999, pp. 76-86.

(3) At national level, operational investment incentives and changes in the structure of agriculture were often also introduced to optimise production (e.g. land consolidation).

(4) The Committee would emphasise that "reasonable prices" must not be taken to mean "cheap".

(5) These are figures for the EU 15. Some Member States have seen much higher than average increases.

(6) Although production costs have fallen, this has not led to lower consumer prices.

(7) A total of 70 % in 2001.

(8) In the crop sector, which today accounts for some 40 % of all EAGGF expenditure, from 63.4 % of total expenditure in 1991 to 5.1 % in 1999.

(9) In the crop sector, from 38.9 % of total expenditure in 1991 to 4.9 % in 1999.

(10) In 1991, 91 % of EAGGF guarantee expenditure still went on refunds and storage measures; in 2001, only 21 % went on the traditional market support measures.

(11) In the crop sector, the share of price compensation payments (including set-aside) rose from 0.8 % in 1991 to 89.3 % in 1999.

(12) Direct aid was calculated on the basis of each country's productivity in the past.

(13) 1996 annual report of the European Court of Auditors, OJ C 348, 18.11.1997, point 3.30.

(14) It makes no difference that the second pillar, which makes up some 10 % of agricultural expenditure, gave a boost to rural development.

(15) The European Court of Auditors has criticised this support scheme on environmental grounds - see European Court of Auditors' special report No. 3/98 concerning the implementation by the Commission of EU policy and action as regards water pollution, OJ C 191, 18.6.1998.

(16) In the crop sector, around 40 % of all direct payments go to just 3 % of farms.

(17) In the EU-15, one farming job is currently lost approximately every two minutes.

(18) For example, 40 % of EAGGF guarantee expenditure goes to field crops, 4 % to fruit and vegetables.

(19) For example, would it not be appropriate in future to reward regional producers who join forces to devote their efforts to particular species that, while less "productive", are suited to the region concerned?

(20) For example, almost half of all resources awarded to the Austrian and Finnish farming sectors from the EU agriculture budget come under the second pillar. In Belgium and the Netherlands, that figure is less than 5 %. In Germany, there are considerable north-south disparities in the application of the rural development schemes.

(21) A Brazilian farmhand earns perhaps 50 EUR a month.

(22) Opinion of the Economic and Social Committee on New economy, knowledge society and rural development: what prospects for young farmers? OJ C 36, 8.2.2002, p. 29.

(23) The Committee would, for instance, draw attention to its opinion on New impetus for a plan for plant protein crops in the Community OJ C 80, 3.4.2002.

(24) In some European regions, stocks are kept independently of per-hectare limits in line with "good agricultural practice". The bull premium still remains limited at 2 livestock units (LU) per hectare of forage area. Thus, support for such farms is already reduced to 2 LU; (in 2002 to 1.9 and later even to 1.8 LU/ha) generally speaking, however, such farms, which certainly cannot be described as "multifunctional", are not thereby excluded from support.

(25) This could possibly solve the problem of the current system penalising grassland farming, for example, or the cultivation of "cleaning crops", e.g. pulses and grass-clover.

(26) Examples of such criteria are: stock-keeping in accordance with per hectare limits (maximum 2 livestock units (LU) per hectare), observance of a set crop-rotation, maintenance/establishment of landscape features or the presentation of a particular percentage area (to be specified) of landscape elements or "extensive" forms of cultivation, as defined on a regional basis.

(27) OJ C 279, 1.10.1999, p. 74.