PRELIMINARY DRAFT SUPPLEMENTARY AND AMENDING BUDGET n°1 TO THE BUDGET FOR 2001 SECTION III - COMMISSION

(presented by the Commission)

Having regard to:

- Article 78 of the Treaty establishing the European Coal and Steel Community,

- Article 272 of the Treaty establishing the European Community,

- Article 177 of the Treaty establishing the European Atomic Energy Community,

- Article 15 of the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities, [1] as last amended by Regulation No 2673/1999 [2] of 13 December 1999,

[1] OJ L 356, 31.12.1977, p. 1.

[2] OJ L 326, 18.12.1999, p. 1.

The European Commission hereby presents to the budgetary authority the draft supplementary and amending budget N°1 to the 2001 budget for the reasons set out in the explanatory memorandum.

***

A technical annex regarding the financing of the present supplementary and amending budget is being drawn up separately.

TABLE OF CONTENTS

I. EXPLANATORY MEMORANDUM

1. Summary table

II. EXPENDITURE

1. SUBHEADING 1a: MARKET ORGANISATIONS AND RELATED MEASURES

1.1. The BSE crisis in the beef sector

1.2. The EUR/$ exchange rate

1.2.1. The update

1.2.2. Budgetary risks linked to the update of the exchange rate

2. CHANGES IN THE NOMENCLATURE AND IN THE BUDGET REMARKS - DELETION OF ITEMS

2.1. HEADING IA - AGRICULTURAL EXPENDITURES

2.2. HEADING 4 - EXTERNAL ACTION

I. EXPLANATORY MEMORANDUM

(1) Already in December, the Commission announced that it would present a SAB in early 2001 to cater for the additional costs of the BSE crisis. The Nice European Council has noted that the measures to be proposed by the Commission should be 'in strict compliance with the financial perspective'. The present is a very urgent and targeted SAB, which cannot therefore include an updating of the agro-economical assumptions for the common agricultural policy. The BSE crisis erupted too late last year to be incorporated into the then ongoing budget procedure. The budget 2001 as adopted leaves a margin of EUR 1.232,3 million below the ceiling for heading 1a, which it is now proposed to use.

The main items covered by the present proposal are: the additional costs decided in December by the agriculture Council and related to the destruction scheme for animals older than 30 months (EUR 700 million), market intervention in the beef meat market (EUR 238 million) and the co-financing of the BSE tests (EUR 33 million ). This BSE related costs total EUR 971 million .

The present SAB also proposes to update the EUR/USD exchange rate. In line with the new Regulation on budgetary discipline [3] in force since 1 October 2000 (art. 8), the Amending Letter 2/2001 had the exchange rate to 0.91, which entailed substantial savings due the depreciation of the euro as compared to the PDB rate. The budgetary discipline regulation also requires that the Commission updates the exchange rate at the occasion of a SAB affecting heading 1 of the financial perspectives. For the relevant reference period the exchange rate is 0.87. On this basis the existing appropriations have to be reduced by EUR 245 million, to take into account the smaller gap between EU and world market prices. With these assumptions for the year 2001 the biggest reductions are occurring for arable crops (EUR 178 million ), followed by much smaller decreases for sugar, textile plants and other plant sectors and products (EUR 22, 24 and 16 million respectively). Minor adjustments can be operated for Food aid and POSEI.

[3] Council Regulation (EC) N°2040/2000 from 26 September 2000

(2) An additional technical element of the present preliminary draft SAB is the proposed modification of a budgetary remark in heading 4: external actions. The remark for B7-541 for the Western Balkans, would be completed in order to allow the reconstruction Agency, currently operating in Kosovo and Serbia to extend its activity to Montenegro, the third part of the Yugoslav Federation. In order for this to be possible, and in accordance with what is presently foreseen on B7-542 and B7-546, the Agency has to be allowed to cover its administrative costs with a maximum of 8% of the total funds managed for the programme.

The additional appropriations can be financed by an increase of the surplus available from the 2000 financial year, stemming from both surplus in the revenues and under-implementation of the expenditures, in particular in the area of Structural Funds. The call for own resources will therefore not change.

1. Summary table

Effect of the SAB on the financial perspective

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(*) Including EUR163 million for staff contributions to the pension scheme, in accordance with footnote 2 to the financial perspective and the financial framework for the EU21 attached to the IIA of 6 May 1999.

(**) Taking into account the mobilisation of the flexibility instrument for Serbia for EUR 200 million.

II. EXPENDITURE

1. SUBHEADING 1a: MARKET ORGANISATIONS AND RELATED MEASURES

For Agriculture, this SAB aims at providing the additional funds to cope with the BSE crisis in the beef sector, and more particularly, to implement the conclusions of the Council of Agriculture Ministers of 4 December 2000. Furthermore, it provides an update of the euro/dollar exchange rate, as foreseen by the new regulation on budgetary discipline. These changes only concern Sub-Heading 1a, which deals with the Common Market Organisations, and not Sub-Heading 1b, Rural Development.

As a result of the incorporation of the Agriculture Council conclusions in the budget, the margin under the ceiling of the Financial Perspectives for Sub-Heading 1a, (EUR 40 035 million) is reduced from EUR 1 232.3 million to EUR 261.3 million. Taking into account the new euro/dollar exchange rate, the margin finally rises to EUR 506.3 million.

1.1. The BSE crisis in the beef sector

The beef crisis emerged very late in the course of the budgetary procedure 2001 and made it virtually impossible to properly adapt the appropriations at the decisions taken in December 2000.

On 4 December 2000, the Agriculture Council agreed on a package of measures, 2 of which have a direct impact on the community budget and require additional financial resources.

The first was formally put in force by the Commission (Commission Regulation N° 2777/2000 of 18.12.2000), after consultation with the management committee, and contains 2 elements:

- A destruction scheme, designed to buy up and destroy cattle over 30 months not tested for BSE, and presented for slaughter. This scheme, which aims at keeping non-tested meat out of the human food chain, is applicable from 1 January till 30 June 2001. Under certain circumstances, also tested cattle may benefit from this facility. 70% of the purchase price is funded by the community budget. The remaining 30% and all costs (storage, destruction, etc.) are taken in charge by the Member States. Expenditure is estimated at EUR 700 million (530 000t at an average cost of 1 321 EUR/t).

- The obligation to test from 1 January 2001, instead of from 1 July 2001 as previously decided, all cattle over 30 months presented for human consumption. The EU budget finances 15 EUR/test at the maximum. This gives rise to additional needs, not covered by the EU budget, of EUR 33 million (2.2 million tests). It is recalled that the EU budget already foresees the funds for BSE testing, as veterinary measures, for all animals at risk (between 1 January and 30 June 2001), and for all cattle over 30 months slaughtered from 1 July 2001.

- The second measure is in fact the application of the existing public intervention scheme, which allows the Commission to buy up when market prices fall under certain levels. The objective being to avoid that market prices continue to fall to the level where the buying-in safety net is triggered. Under the safety net, the Commission is obliged to buy up any volume offered. Expenditure expected under the public intervention scheme is EUR 238 million (125 000t at an average cost of 1 900 EUR /t).

- As a consequence, the additional needs for the 2 measures are EUR 971 million. It is recalled that the increase of the advance on some beef premiums from 60 to 80%, agreed by the Council and formally decided by the Commission, is neutral for the community budget, as the payment of the advance, as well as of the remainder, takes place within the same budget year.

The Commission is taking the opportunity of the SAB to propose to the Budget Authority the transfer of the EUR 60 million from chapter B0-40 to line B1-330 "Animal disease eradication and monitoring programmes and monitoring of the physical conditions of animals that could pose a public-health risk linked to an external factor" for BSE testing. In fact, the Commission has provided the legal base of these tests (Commission Decision of 30.11.2000 approving the programmes for the monitoring of BSE presented for 2001 by the Member States and fixing the level of the Community's financial contribution (OJ L 308, 08/12/2000, p. 35 to 38)).

1.2. The EUR/$ exchange rate

1.2.1. The update

Whereas, until last year, the euro/dollar exchange rate, used to estimate agricultural expenditure, had to be kept constant during the whole budgetary exercise, the new Council Regulation (EC) No 2040/2000 of 26 September 2000 on budgetary discipline obliges the Commission to update the exchange rate at the occasion of a SAB. In fact, according to article 8 of the Regulation, the Commission has to use:

- for the past, the rate recorded from 1 August of the previous financial year to the end of the most recent three-month period ending at least 20 days before adoption by the Commission of the budget document. The average rate, observed during the period concerned (1 August 2000 till 31 December 2000, i.e. 5 months) is 1EUR = 0.877$.

- as a forecast for the remainder of the year, the average rate recorded over the most recent three-month period ending at least 20 days before adoption by the Commission of the budget document. The three-month period being 1 October 2000 to 31 December 2000, the observed average exchange rate, to be used for the remaining 7 months, is 1EUR = 0.868$.

While the budget 2001 is based on a parity of 1EUR = 0.91$, the new exchange rate to take for the SAB is thus 0.87 which translates as a strengthening of the dollar against the euro. From an economical point of view, a stronger dollar reduces the gap between EU market prices and world market prices expressed in euro and leads to a reduction of export refunds and certain aids based on worlds market prices.

On the basis of the agro-economical assumptions of the budget 2001, the new parity of 0.87 leads to a reduction of appropriations of EUR 245 million, of which:

- Chapter B1-10 Arable Crops: EUR 178 million

- Chapter B1-11 Sugar: EUR 22 million

- Chapter B1-14 Textile Plants (i.e. cotton): EUR 24 million

- Chapter B1-18 Other Plant Sectors and Products (i.e. rice): EUR 16 million

- Chapter B1-31 Food Programmes (i.e. food aid): EUR 4 million

- Chapter B1-32 POSEI: EUR 1 million

1.2.2. Budgetary risks linked to the update of the exchange rate

The new rate of 0.87 compared to the budget rate of 0.91 is due to the weakening of the euro against the dollar which existed until the end of November 2000. However, since then, the euro strengthened significantly. Therefore, there is a considerable risk that the real average rate will be less favourable, from a budgetary point of view, and will give rise to additional expenditure. According to the Regulation on budgetary discipline, the first EUR 200 million of additional costs, due to the evolution of the exchange rate compared with the budgetary rate, have to be met by the EAGGF-Guarantee (expenditure above EUR 200 million may be covered by a transfer from the monetary reserve).

2. CHANGES IN THE NOMENCLATURE AND IN THE BUDGET REMARKS - DELETION OF ITEMS

2.1. HEADING IA - AGRICULTURAL EXPENDITURE

The different measures decided in the framework of the BSE crisis fall under the basic regulation governing the Common Market Organisation of Beef Meat (Regulation (CE) n° 1254/1999 of the Council of 17 May 1999). In order to guarantee the optimal transparency of the budget, the Commission proposes to complete the current comment on line B1-2129 Other Intervention (Beef/Veal) "This item is intended to cover other forms of intervention, particularly those in accordance with Article 38 of Regulation (CE) N)1254/1999" with:

"such as the exceptional measures taken to face the situation in the beef market as a consequence of the BSE crisis which emerged in October 2000."

2.2. HEADING 4 - EXTERNAL ACTION

Cooperation with the countries of the Western Balkans

Already in the budget 1999 a budget line (B7-546) had been created for the reconstruction of Kosovo, to be managed by the European Agency for Reconstruction created for this purpose. In the course of the budgetary procedure 2001 and as rapid reaction to the democratic change a new budget line B7-542 has been created for assistance to Serbia, also to be managed by the reconstruction agency. As a consequence, the mandate of the Agency was enlarged to cover whole of the Federal Yugoslav Republic. At present, however, Montenegro, also part of the Yugoslav federation, is covered by article B7-541. This item does not foresee to reimburse the Agency for the implementation of the programme in the countries covered. It is therefore proposed to add the same comment as exists for lines B7-542 and B7-546 with respect to the Agency, to article B7-541 at the benefit of Montenegro.

GENERAL STATEMENT OF REVENUE

TITLE 3

SURPLUSES AVAILABLE

CHAPTER 30 - SURPLUS AVAILABLE FROM THE PRECEDING FINANCIAL YEAR

300 - SURPLUS AVAILABLE FROM THE PRECEDING FINANCIAL YEAR

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Remarks: unchanged

STATEMENT OF EXPENDITURE

SECTION III - COMMISSION

Summary of the appropriations (in Mio Euros)

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Changes in the nomenclature and in the budget remarks

Articles B7-541 - Assistance for the countries of the Western Balkans:

- Add (after ...- the development of closer ties between the beneficiary countries and ...): "regional co-operation, trans-national, cross-border and inter-regional co-operation."

- Delete: "In the event of the extension of the European Agency for Reconstruction....regions concerned."

- Add : "For the Republic of Montenegro and for other regions covered by this article to which the mandate of the European Agency for Reconstruction may be extended, the appropriations are also intended to cover the grant to the European Agency for reconstruction for the operational programmes entrusted to it and its operating expenditures. The latter will be funded by an amount equivalent to not more than 8% of the overall multiannual budget fixed for the measures."