EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

The Treaty on the Functioning of the European Union lays down the fundamental rule governing Union financing that the annual budget of the Union must comply with the Multiannual Financial Framework (MFF).

In order to support the agricultural sector in case of major crises affecting the agricultural production or distribution, a reserve for crises should be established by applying, at the beginning of each year, a reduction to direct payments through a financial discipline mechanism which is provided for in Article 26 of Regulation (EU) No 1306/2013 of 17 December 2013 of the European Parliament and of the Council on the financing, management and monitoring of the common agricultural policy. Article 25 of this regulation determines that the total amount of the reserve for crises in agricultural sector shall be EUR 2 800 million with equal annual instalments of EUR 400 million (at 2011 prices) for the period 2014-2020 and shall be included under Heading 2 of the Multiannual Financial Framework. The amount of the reserve to be included in the Commission 2018 Draft Budget amounts to EUR 459.5 million in current prices, covered via a reduction to direct payments listed in Annex I of Regulation (EU) No 1307/2013 of the European Parliament and of the Council of 17 December 2013 establishing rules for direct payments to farmers under support schemes within the framework of the common agricultural policy.

Moreover, with a view to ensuring that the amounts for the financing of the Common Agricultural Policy (CAP) comply with the annual sub-ceilings for market related expenditure and direct payments under heading 2 laid down in Council Regulation (EU, EURATOM) No 1311/2013 of 2 December 2013 laying down the multiannual financial framework for the years 2014-2020, the financial discipline mechanism has to be applied when the forecasts for the financing of direct payments and market related expenditure indicate that the annual sub-ceiling under heading 2 set out in the Multiannual Financial Framework adjusted by any financial transfers between the European Agricultural Guarantee Fund (EAGF) and the European Agricultural Fund for Rural Development (EAFRD) will be exceeded. This net balance available for EAGF expenditure for 2018 is set by Commission Implementing Regulation (EU) 2016/257 in accordance with Article 16 of Regulation (EU) No 1306/2013 and amounts to EUR 44 162 million.

In drawing up the 2018 Draft Budget, the first budgetary estimates for direct payments and market related expenditure showed that the net balance available for EAGF expenditure for 2018 is not likely to be exceeded and thus there is no need for further financial discipline.

On the basis of the above, the Commission presents a proposal for setting the adjustment rate for direct payments in respect of calendar year 2017, which in accordance with Article 26(3) of Regulation (EU) No 1306/2013 is to be adopted by the European Parliament and the Council by 30 June 2017. If this adjustment rate has not been set by 30 June 2017, pursuant to the same Article the Commission will set that rate.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

This proposal sets the percentage rate of the financial discipline adjustment rate in respect of calendar year 2017.

Considering that Member States have the possibility to make late payments to farmers outside the regulatory payment period applicable to direct payments and that the financial discipline adjustment rate varies from one calendar year to another, the amounts of direct payments to be granted to farmers should not be affected by the financial discipline differently, depending on when the payment is made to farmers by the Member States. Therefore, in order to ensure equal treatment between farmers, the adjustment rate should be applied to amounts of direct payments to be granted to farmers for aid applications lodged in calendar year 2017 only, independently of when the payment will actually be made to the farmer.

Article 8(1) of Regulation (EU) No 1307/2013 lays down that the adjustment rate applied to direct payments should only apply to direct payments in excess of EUR 2 000. Croatia is in the process of phasing-in of direct payments in calendar year 2017. As a consequence, the financial discipline will not apply in this Member State.

3.RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

This proposal implements the rules provided for in Article 26 of Regulation (EU) No 1306/2013 and Article 8 of Regulation (EU) No 1307/2013. Prior consultation with the interested parties and preparation of an impact assessment were not applicable.

4.BUDGETARY IMPLICATIONS

The calculation of the financial discipline adjustment rate is part of the preparation of the 2018 Draft Budget.

The amount of the reserve for crises in the agricultural sector, foreseen to be included in the Commission 2018 Draft Budget, amounts to EUR 459.5 million in current prices. The first estimates of budget appropriations for direct payments and market related expenditure showed that the net balance available for EAGF expenditure for 2018 is not likely to be exceeded.

Thus the total reduction resulting from the application of financial discipline amounts to EUR 459.5 million. The percentage of the financial discipline adjustment rate is 1.388149%. It has been calculated taking into account that it is to be applied only to amounts of direct payments per farmer in excess of EUR 2 000 and not in Croatia.

The application of this adjustment rate will result in the reduction of the amounts of direct payments for budget lines covering expenditure relating to aid applications submitted by farmers in respect of calendar year 2017 (financial year 2018).

5.OTHER ELEMENTS