REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT - ON THE AGRI-MONETARY SYSTEM FOR THE SINGLE MARKET - 1 JULY 1995 TO 30 JUNE 1996
Date: 1996-12-06
Institutions: European Commission
Subjects: agri-monetary policy, report, single market

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

Brussels,  06.12.1996 
COM(96) 636  final 

REPORT  FROM  THE  COMMISSION  TO  THE  COUNCIL 
AND  THE  EUROPEAN  PARLIAMENT 

ON THE AGRI-MONETARY  SYSTEM  FOR  THE SINGLE  MARKET 

1  JULY  1995  TO  30  JUNE  1996 

•N 

Introduction 

I. 

MAIN  REPORT 

CONTENTS 

A. 

B. 

Summary  of  agri-monetary  effects  observed 

Analysis, outlook  and  proposals 

II. 

ANALYSIS  OF  AGRI-MONETARY  EFFECTS  IN  1995/96 

A. 

B. 

- 

- 

C. 

Representative  market  rates 
Agricultural  conversion  rates 

Currency  developments 
1. 
2. 
Agri-monetary  mechanisms 
1. 
2. 

Regulatory  provisions 
Compensatory  aid 

Economic  impact 
1. 
2. 
3. 

Prices 
Trade 
Incomes 

D. 

Financial  impact 
1. 
2. 

Methodological  aspects 
Results of  estimates 

Abbreviations  for  national  currencies: 

BLF:  Belgian  and  Luxembourg  franc 
DKR  Danish  krone 
DM:  German  mark 
DRA:  Greek  drachma 
ESC:  Portuguese  escudo 
FF: 
French  franc 
FMK:  Finnish  markka 

Other  specific  abbreviations: 

HFL:  Netherlands  guilder 
Irish pound 
IRL: 
LIT: 
Italian  lira 
OS:  Austrian  schilling 
PTA:  Spanish  peseta 
SKR:  Swedish  krona 
UKL:  Pound  sterling 
dollar 
$: 

preliminary  draft  budget  for  1997 

PDB  97: 
PDSAB  96:  preliminary  draft  supplementary  and  amending  budget  for  1996 
ACR: 
RMR: 

agricultural  conversion  rate 
representative  market  rate 

REPORT  TO  THE  COUNCIL  OF THE EUROPEAN  UNION 
ON THE  AGRI-MONETARY  SYSTEM FOR  THE SINGLE  MARKET 

1  JULY  1995  TO  30  JUNE  1996 

Introduction 

This report by the European  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  which  "calls on  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  1995  to 
30 June  1996 (1995/96). It comprises a main report summarizing and commenting on the 
result  of  the  investigations  carried  out,  and  indicates  the  proposed  solutions  to  the 
problems identified.  The main  report is followed  by a description of the analysis of agri-
monetary .events  in  1995/96,  and  their  effects. 

The  first  and second parts of the analysis, parts A and B, describe the currency  and agri-
the  granting  of 
monetary  developments  of  the  period  under  review,  including 
compensatory  aid.  As  an earlier  report  was produced  in a similar  manner  for  the  period 
1  January  1993  to  30  June  1994,3 developments  in  the  latter  half  of  1994  and  the  first 
half  of  1995  are  referred  to,  so  as  to  give  an  uninterrupted  picture  of  agri-monetary 
developments  since the  single  market  was completed  on  1 January  1993. 

Part  C is an approach  to the  economic  consequences at the  level  of agricultural  markets 
and  farm  incomes. In view of the available  statistics, the most convenient  approach  is to 
compare results for twelve-month periods from  July to June for the analysis of prices, by 
calendar  year  for  trade  and  by  notional  year  for  incomes. 

Joint  resolution  under  Article  40(5)  of  Parliament's  Rules  of  Procedure,  No  PE  193.731, of  19 
September  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  Regulation  (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  granted  in  compensation  for  losses  of  agricultural  income  caused  by  monetary 
movements  in  other  Member  States  (OJ  L 268,  10.11.1995, p.3). 
COM(94)498  final. 

Part  D assesses the effects  of the agri-monetary  system on Community  expenditure.  The 
impact  is estimated  on the  basis  of the  1996 budget  in the course  of  execution,  and  the 
preliminary  draft  budget for  1997 as it stood at 30 June  1996. 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. 

I. 

MAIN  REPORT 

A. 

Agri-monetary  effects  observed 

1. 

Conversion  rates 

Although there were no major  currency  fluctuations  in the period July  1995 to June  1996 
(referred  to as  1995/96), at least half the Community currencies did behave in remarkably 
atypical  ways:  traditionally  strong  currencies  were  devalued,  and  currencies  that  had 
undergone  numerous  depreciations  were  revalued. 

Since  the  switch-over  mechanism  was discontinued  on  1 February  1995, all  agricultural 
conversion  rates  (ACRs)  move  up  and  down  in  line  with  representative  market  rates 
(RMRs).  However,  the  mechanism  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  appreciated4  (i.e.  after  a decline  in 
institutional prices in national currency) than to trigger an increase in the ACR  following 
depreciation. 

In  general,  monetary  gaps  remained  positive  for  all  the  currencies  over  the  period.  As 
there  was  always  at  least  one  currency  (either  the  LIT  or  the  SKR)  with  a  positive 
monetary  gap in excess of 4 points, the permitted  margin ("franchise")  for  negative  gaps 
was very  small, at less than  one point, throughout the period.5 This situation led to many 
minor devaluations - often  very  small indeed, with 82% of the adjustments  amounting to 
less than 0.5%. 

Shortly after  the Council's agri-monetary decisions of June 1995, "appreciable" reductions 
were  made to the  ACRs of  five  currencies.6 The  "appreciable" part  of the reduction  was 
0.496%  for  the  DKR,  and  ranged  from  2.193%  to  2.572%  for  the  BLF,  DM,  OS  and 
HFL. 

The  other  currencies  that  revalued  were the  PTA, the  LIT  and the  SKR.  The  monetary 
gap  for  the  PTA  stabilized  after  a  non-appreciable  revaluation  of  2.9%  in  July  1995. 
There were  four  non-appreciable  reductions in the ACR for  the LIT  in  1995/96, making 
a total decline of  12.1%. There were three reductions in that for the SKR, totalling 9.9%, 

Under  the  agri-monetary  arrangements,  the  conversion  rates  express  the  value  of  one  ecu  in 
national currency. A devaluation against the ecu therefore corresponds to an increase in those rates, 
while  a revaluation  is  equivalent  to  a  reduction. 
Where  the  "aggregate"  gap  made  up  of  the  largest  positive  gap  and  the  largest  negative  gap 
exceeds 5 points over a certain number of reference periods, ACRs must be adjusted  to reduce the 
monetary  gaps. 
An  "appreciable"  reduction  in  the  ACR  is  one  leading  to  a  reduction  in  institutional  prices  in 
national  currency  that  is  greater  than  the  effects  of  any  devaluation  occurring  during  the  three 
preceding years. These effects  are estimated as two thirds of the increase in institutional prices due 
to  changes  in  the  ACR  occurring  between  12 and  24  months  previously,  and  one  third  of  the 
increase  between  24  and  36 months  previously. 

including  one  "appreciable"  reduction  of  1.734%.  A  further  appreciable  reduction  was 
made just  after  the  end  of the  period,  on  7 July  1996. 

Only  two  currencies  were  significantly  devalued:  the  ACR  for  the  DRA  increased  by 
3.1%,  that  for  the FMK  by 3.5%. 

2. 

Ad  hoc  Council  measures  for  appreciable  revaluations 

In view  of the risk of an appreciable  revaluation  for  the BLF, DKR, DM, HFL  and OS, 
Council  Regulation  (EC) No  1527/95 was adopted at the end of June  1995, to  lay  down 
ad  hoc  measures.  When  the  FMK  and  SKR  were  seen  to  be  at  risk  at  the  end  of 
December  1995, Council  Regulation  (EC)  No  2990/957 provided  for  similar  measures, 
later  extended  to  31  December  1996. 

These  measures  suspend  the  application  of  Articles  7 and  8 of  the  basic  agri-monetary 
Regulation;8 they introduce  flat-rate  compensatory  payments and a freeze  on agricultural 
conversion  rates. Article  7 provides,  in  cases of  revaluation  exceeding  the  devaluations 
of the two preceding years, for  an increase in ecus in most direct aid to producers9 so as 
to  avoid  any  decline  in  its value  in national  currency.  In view  of the  scale  of  the  aid  in 
terms of the budget (almost 60% of EAGGF Guarantee Section expenditure), this measure 
would cost approximately  ECU 250 million a year for each percentage point  revaluation. 
Article  8 of Regulation  (EEC) No  3813/92 provides  for  aid to offset  the  loss of  income 
occasioned  by the impact on prices of reductions in ACRs. The aid may  be granted  only 
after  a  twelve-month  reference  period,  on  the  basis  of  the  actual  reduction  in  farm 
incomes.. 

3. 

Freezing  of ACRs 

ACRs  for  the  aid  referred  to  in  Article  7  of  the  basic  agri-monetary  Regulation  are 
frozen  at the rate  in force  on 23 June  1995, or  11 January  1996 in the  case of the  SKR. 
The  freeze  applies  until  1 January  1999,  the  date  planned  for  the  introduction  of  the 
single currency. Obviously, this temporarily affects  the level of Community support  from 
one  Member  State  to  another.  In  view  of  the  operative  events  determining  the  ACRs 
applied to the aid concerned,10 several rates will remain frozen  until 30 June  1999. As the 
aid  was  established  in  ecus,  the  balance  between  different  agricultural  sectors  thus 
changes  in  national  currency,  particularly  in  Sweden. 

OJ No  L 312, 23.12.1995, p.7. Amended by  Regulation  (EC) No  1451/96 (OJ  L  187, 26.7.1996, 
p.l). 
Regulation (EEC) No 3813/92 (OJ L 387, 31.12.1992, p.l). Last amended by Regulation (EC) No 
150/95 (OJL  22, 31.1.1995, p.l). 
Flat-rate  aid  expressed  in  ecus  per  hectare  or  per  livestock  unit  and  aid  of  a  structural  or 
environmental  nature. 
The  ACR  as it stands on the date of the operative event  is applied  to the amount  concerned. For 
aid per hectare established  in the  framework  of the reform  of the CAP, the date  of the  operative 
event  is  1 July;  for  most  of the  other  aid  referred  to  in Article 7  of Regulation  3813/92,  it  is 1 
January. 

10 

Gaps  between  frozen  ACRs and  RMRs are  fairly  small  for  the currencies  that  revalued 
in June and  July  1995. However,  the gap between  the frozen  ACR and  the RMR for  the 
SKR has become  quite  considerable  in the case of per hectare aid:  for  the  1996/97  crop 
year,  aid  in  Sweden  will  be  11%  higher  than the level  of the current  ACR. 

4. 

Compensatory  aid  for  appreciable  declines  in  ACRs 

The  compensatory  aid  that  can  be  granted  under  Regulations  (EC)  No  1527/95  and 
No  2990/95  is  limited  by  a  ceiling  established  on  the  basis  of  the  effects  expected  to 
ensue  from  appreciable  declines  in ACRs and  on that of the latest figures  for  disposable 
incomes.  The  aid  comprises  three  twelve-month  degressive  tranches,  50%  of  which  is 
financed  by the  Union  irrespective  of the national  contribution  in the  form  of  additional 
financing  by the  Member  State. 

By the end of  1995/96, the six Member States concerned by Regulation (EC) No  1527/95 
had  notified  plans  for  compensatory  aid.  The  Commission  raised  no  objections  to  these 
plans.  ~ 

Sweden, which has a further  six months to notify  aid under Regulation (EC) No 2990/95, 
did  not  submit  plans  for  a  scheme  during  the period  under  review. 

Luxembourg  and  Germany  decided  to  grant  the  maximum  possible  aid,  using  national 
funds  to  double  the  compensation  financed  by  the  EAGGF.  Belgium  plans  to  provide 
additional  aid  equal  to  15%  of the maximum  authorized,  on top of the  50% supplied by 
the  EU.  Denmark,  the Netherlands  and  Austria  are not providing  additional  aid. 

Unlike the other  Member States, which allocate aid direct to farmers  on the basis of past 
output, Denmark,  Germany and the Netherlands have opted for flat-rate  allocation for the 
third  tranche,  since  amounts  would  have  been  less than  ECU 400  per  holding. 

5. 

Compensation  for  effects  of  devaluations  by  other  Member  States 

In view of the consequences of the major  devaluations early in  1995, the Council adopted 
Regulation  (EC)  No  2611/95,  authorizing  the  Member  States  to  grant  national  aid  in 
compensation  for  losses of agricultural  income caused by devaluations by other  Member 
States  before  31  December  1995. The  aid  is subject  to the  Commission's approval,  and 
it must be degressive over a maximum of three years. It should not encourage  production 
of  any  particular  product  in  relation  to  the  situation  that  would  have  obtained  had  the 
devaluation  not  occurred. 

France  and  Belgium  notified  planned  aid  schemes before  the deadline  of  30 June  1996. 
The  schemes comprise  a single  annual  tranche  to offset  the  effects  in the  beef  and  veal 
sector  of  the  devaluation  of  the  LIT.  The  Commission raised  no  objections,  since  both 
national  markets  were  directly  or  indirectly  heavily  dependent  on the  Italian  market. 

Summary  of  agri-monetary  compensatory  aid 

The  following  table  summarizes  aid  notified  and  authorized.  All  amounts  are  expressed 
in  millions  of  ecus  on  the  basis  of  the  RMR  on  1 July  1996.  The  second  and  third 
tranches  of  compensation  for  appreciable  decline  in  ACRs amount  respectively  to  two 
thirds  and  one third  of the  first  tranche, which  is shown  in the table. 

Member  State 

Appreciable 
decline  in 
ACR  (%) 

Ceiling 
(ECU 
million) 

Notified  EU 
financing 
(ECU  million) 

Regulation  (EC) 

No  1527/95 

Belginm 

Luxembourg 

Denmark 

Germany 

Netherlands 

Austria 
Regulation  (EC) 
No  2990/95 

2.193 

2.193 

0.496 

2.229 

2.572 

2.264 

40.2 

3.2 

8.0 

216.7 

101.4 

38.7 

20.5 

1.6 

4.0 

108.3 

50.7 

19.4 

Notified 
national 
financing 
(ECU 
million) 

6.1 

1.6 

0.0 

108.3 

0 

0 

Sweden 

1.734 

20.8 

Regulation  (EC) 
No  2611/95 

Belgium 

France 

0 

0 

3.3 

17.3 

Conversion  rates for  import  charges 

introduces 

transitional  measures  for 
Commission  Regulation  (EC)  No  1482/95 
determining the conversion rate to be applied to import charges defined  in ecus.  This rate 
is  fixed  once a month  in cases where the annual  rate provided  for  in the  Customs  Code 
should  have  applied.  The  Commission  subsequently  extended  the  application  of  the 
transitional  monthly rate for a further  year, since the Council and Parliament had not yet 
completed consideration of the Commission's proposal to amend the annual rate provided 
for  in the  Customs Code by  30 June  1996. 

However,  this transitional  monthly  rate  is applicable only to the import  charges that  are 
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 rate is applied.  The 
use of two different  conversion rates has led to certain economic  inconsistencies and has 
greatly  complicated  administration,  with  concomitant  scope  for  errors  and  legal 
uncertainty.  In February  1996 the  Commission accordingly  proposed  to amend  the agri-
monetary  arrangements  in  such  a  way  as  to  eliminate  the  use  of  the  agricultural 
conversion rate, and to use only one rate for  import charges on agricultural  products. By 
30 June  1996, the  Council  had  not  yet  reached  a decision on this  proposal. 

8. 

General  remarks  on  economic  effects 

In  theory,  the  ACR  will  affect  only  those  market  prices  that  are  closely  linked  to  an 
intervention mechanism (mainly  in the sectors of cereals, sugar, milk and beef/veal).  The 
development  of ACRs may  thus  have  an impact  on  farm  incomes through  the  prices of 
those  products.  Moreover,  problems  in trade  may  arise  when  divergences  appear  either 
between  ACRs and 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. 

9. 

Effects  on  market  prices 

As there were no major  devaluations, the movements in ACRs with the greatest potential 
repercussions  in  1995/96  were: 

substantial  steady  revaluation  of  the  LIT  (12.1%)  and the  SKR (9.9%); 
appreciable  revaluation  of  the  BLF,  DKR,  DM,  HFL  and  OS  in  June  and  July 
1995,  and  of the  SKR  in  January  1996. 

For  products  with  no  intervention  mechanism  influencing  market  prices,  there  is,  as 
expected, no observable link between movement of those prices and movements of ACRs. 
For  other  products,  observation  of  prices  has  concentrated  on  sectors  where  there  are 
usable figures,  pinpointing  one representative  market for each Member  State  concerned. 

During  the  period  under  review,  the  market  prices  of  cereals  were  substantially  higher 
than  intervention prices in national currency. At this unusual level, markets react hardly 
at  all  to  small  agri-monetary  fluctuations.  However,  despite  very  wide  variations, there 
is no  contradiction  on the whole between  the general  trend  of market  prices and that  of 
intervention  prices  in  national  currency.  The  tendency  is  broadly  similar,  even  if 
correlations are very loose and calling in question the existence of a relationship between 
cause and effect.  Despite slight uncertainty, in the  1995/96 context of high market prices, 
revaluations  do  not  seem  to  have  been  passed  on  in  agri-monetary  declines  in  cereal 
prices. 

Market  prices  for  skimmed-milk powder  and  for  butter  remained  exceptionally  high  in 
the  first  half  of  the  1995/96  marketing  year.  No  link  is  observable  between  the 
revaluations of the LIT and the SKR on the one hand, and market prices on the other. For 
those currencies whose value  increased appreciably  in June and July  1995, market  prices 
clearly  did  not  follow  ACRs  downwards.  Had  there  been  no  appreciable  revaluation,  it 
is  hardly  likely  that  prices  in  the  currencies  in  question  would  have  increased,  or  have 
increased  more than  they  did. 

Prices  for  the  meat  of  young  bovine  animals  declined  sharply  early  in  1995, nearing  or 
even  reaching  the  level  for  triggering  intervention.  Towards  the  end  of  1995,  prices 
recovered strongly up to the time the bovine spongiform encephalopathy crisis broke. Just 
before  the  period  under  review,  between  March  and  July  1995, the  decline  in  prices  in 
certain  Member  States  was  probably  partly  influenced  by  prices  in  LIT,  which  did  not 
increase as fast as ACRs. After  July  1995, low prices in LIT remained  stable, and as they 
had not increased earlier, they did not follow the downward  movement to keep pace with 
ACRs.  Market  prices  in  SKR,  another  currency  that  appreciated  strongly  during  the 
1995/96  marketing  year,  followed  the  decline  in  the  ACR  fairly  closely.  For  the 
currencies that revalued appreciably early in the marketing year, the downward  movement 
in  ACRs  most  probably  affected  the  development  of  market  prices  for  bovines,  unlike 
those  for  cereals  and  milk  products. 

10. 

Effects  on  trade 

Any  monetary  effects  on  trade  are  masked,  in  the  short  term,  by  wide  variations  in  the 
monthly  value  of  exports.  For  the  Member  States  trading  with  those  whose  currencies 
have depreciated  strongly, the figures  do not show significant  links between total  exports 
of  any  particular  product  group  and  short-term  currency  movements. 

Among other possible short-term agri-monetary  effects,  deflection  of trade may in theory 
occur  for  products  attracting  export  refunds  when  the  aggregate  monetary  gap  widens. 
However,  export  figures  do  not  show  any  development  that  could  be  attributed  to 
monetary  gaps. This does not mean that there have not been  isolated instances, but even 
where aggregate  gaps have  been very  wide over  two months, as happened  at the end  of 
1995, no systematically organized network was set up, since there is no certainty that the 
situation  will  last. 

Over  longer  periods,  the  figures  do  however  show  certain  links.  From  1992  to  1995, 
indices  of competitiveness, which reflect  currency  trends and the development  of costs, 
were  progressing  in  line  with  exports  expressed  in  deflated  national  currencies,  i.e. 
constant  in terms of purchasing power. However, the impact of competitiveness  appears 
only  in increased profits  on exports. It is not  apparent  in terms of quantities exported  or 
market  shares. 

11. 

Effects  on  incomes 

A number of  assumptions and approximations  were adopted  in order to circumscribe  an 
order  of  magnitude  for  the  effects  of ACRs in  1995/96 on twelve  months  of  income. 

10 

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. 

The  impact  of  the  year-on-year  change  in  ACRs  from  1994/95  to  1995/96  was  fairly 
limited,  and  did  not  exceed  2%  for  most  of  the  Member  States.  However,  in  three 
Member  States the positive  impact  was  significant: 
- 
- 

+  7.2%  in  Sweden,  owing  to the  increase  in per  hectare  aid; 
+ 4.1%) in Italy  and  + 4.5% in the United  Kingdom, owing to  increases in prices 
and in aid, the latter accounting for two thirds of the effect  in Italy and half in the 
UK. 

Altogether,  the impact  on net income  from  farming  is estimated  at  1.7%, or ECU  1 559 
million. 

All  the  Member  States  benefited  from  the  effect  of  the  agri-monetary  arrangements  by 
comparison  with  the  situation  that  would  have  obtained  had  the  RMR  been  applied 
directly in place  of  the  ACR  in  1995/96. 

The  largest  benefit  in  terms  of  incomes  was  once  again  recorded  in  Sweden  (+  8.8%). 
Significant benefits were also felt in Luxembourg (+  5.6%), Germany (+ 4.6%), Belgium 
and  Denmark  (+  3.8%). The benefit  was less marked  in Austria (+ 2.5%), since national 
aid,  which  constitutes  a major  component  of  incomes, was not  affected. 

Farm incomes in the Netherlands, Ireland, Italy and Spain were about 2% better than they 
would  otherwise  have  been,  and  the  benefit  was smaller  in the  other  Member  States, at 
around  1% or  less  in  Greece  and  Portugal.  Altogether,  the  impact  on  net  income  from 
farming  is estimated  at  1.9%,  or  ECU  1 718  million. 

12. 

The  budget  and  the  legacy  of  earlier  periods 

In  the  agri-monetary  area,  the  Community  budget  is  strongly  affected  by  the  legacy  of 
the  switch-over  mechanism  (or  "green ecu"). This mechanism,  introduced  in  1984, was 
discontinued  from  1 February  1995.  It resulted  in  a  general  increase of  almost  20%  of 
prices  and  amounts  expressed  in  ecus,  which  cancelled  out  the  effects  of  bringing  the 
conversion  rates  used  in  agriculture  back  to  a realistic level. 

The  effects  of  the  green  ecu  mechanism,  reflected  in  the  increase  in  prices  in  ecus, 
involve  expenditure  of ECU  6 800 million  for  the  1996 budget and  ECU  6 920  million 
for  the  1997 budget. 

The  effects  of  the  green  ecu,  passed  on  through  world  market  prices,  are  estimated  to 
result  in  an additional  cost of  ECU  1 320 million  a year. 

Price reductions due to agri-monetary  causes in  1990 and  1993, accounting  for  1.46%  of 
the  total, brought  about  further  savings of  around  ECU  340 million  a year. 

11 

Altogether,  the  residual  effects  of  past  agri-monetary  problems  involve  a  cost  of  about 
ECU  7  800  to  7 900  million  a  year,  almost  20%  of  EAGGF  Guarantee  section 
expenditure. 

13. 

The  cost  of  agri-monetary  developments  in  1995/96 

The figures  in the table below show an annual cost of about ECU  1 200 to  1 300 million. 
This  cost  is  in  addition  to  that  of the  residual  effects  from  earlier  periods. 

Almost  two thirds  of the  cost  of developments  in  1995/96  (ECU  800 to  900  million)  is 
due  to  the  effects  of  permitted  margins.  The  reason  margins  entail  a  cost  is  basically 
attributable to the asymmetry of the mechanism, 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, like that obtaining in  1995/96, 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  about  ECU  100  million  a  year.  Independently  of  any  ACR,  this  cost  is  due  to  the 
monetary  development  between  the  date  of  the  operative  event  (event  by  which  the 
objective  of  the  operation  is  reached) 
for  the  amount  in  question  and  the  date  of 
comptabilisation  of  the  expense  in  the  budget  execution.  This  result  is  unusually  high 
because there was no offsetting,  in 1995/96, between currencies that appreciated and those 
that  depreciated. 
The  cost  due  to  freezing  ACRs  gradually  rises, because  of  operative  events,  eventually 
reaching  ECU  185  million.  As  the  freeze  will  continue  until  1 January  1999,  it  also 
affects  the  budget  for  2000. 

The  cost  of  compensatory  aids  could  be  reduced  as  from  1997  in  order  to  take  into 
account the devaluations occurred after the appreciable revaluations which justified  these 
aids. 

Cost  of  agri-monetary 
developments  1995/96 

ACR  freeze 

Compensatory  aid 

Permitted  margins 

Operative  events 

Total 

1996 

1997 

1998 

1999 

(ECU million) 

111 

201 

817 

107 

180 

141 

890 

104 

185 

70 

916 

-

185 

2 

913 

-

1236 

1315 

1  171 

1  100 

12 

In  1996, the  main  beneficiary  under  the  agri-monetary  arrangements  was  Sweden,  with 
increased  expenditure  in  SKR  of  11.2%.  This  is the result  of the  effects  of  the  margins 
and  operative  events  in  a context  of  strong  currency  appreciation.  In the  future,  even  if 
these effects  disappear, Sweden would still be a major beneficiary  under the arrangements 
owing  to  the  freeze  on ACRs, whose effects  will  become  significant  from  1997. 

The  second  beneficiary  under  the  arrangements  in  1996  is  Italy,  where  Community 
expenditure  has  increased  by  5.6%.  This  is linked  to the  appreciation  of  the  LIT  in  the 
period  under  review,  and  will  not  necessarily  be lasting. 

Expenditure  increased  by  3.8% to 4.7% in  the  States where  ACRs were  frozen  in  June 
and  July  1995,  where  the  currency  situation  has  moderated  the  effects  of  permitted 
margins; this  could  change. 

The  impact  of the Council  Decisions of June  1995, i.e. the freeze  on ACRs and the  flat-
rate compensatory  aid in place of Articles 7 and 8 of Regulation (EEC) No  3813/92, can 
be assessed by estimating the cost that would have been incurred under the agri-monetary 
arrangements  had  those  Decisions  not  been  adopted.  The  savings  amount  to  almost 
ECU  8 900  million  over  four  years, or  on average  over  ECU  2 200  a year. 

The  enormous  cost  of  Articles  7 and  8  of  Regulation  (EEC)  No  3813/92  seems  to  be 
mainly  due  to  the  level  of per  hectare  aid  in  SKR  (which  would  have  been  10%  higher 
in  ecus  if  maintained  in  SKR).  Supposing  Article  7  to  have  been  applied  only  to  the 
appreciable  revaluations  of  June  and  July  1995, the  extra  cost,  in  relation  to  the  actual 
situation,-would  still  have  been  almost  ECU  2 500  for  the  four  years  1996 to  1999. 

B. 

1. 

Analysis, outlook  and  proposals 

General  view 

Observation  of  the  agri-monetary  arrangements  over  the  period  1995/96  reveals 
difficulties  with technical, economic and financial aspects. Some of these difficulties  may 
become  serious problems, depending  on how the  situation  develops. 

Three major  developments need to be taken into account: economic and monetary union, 
enlargement of the European Union, and the future of the CAP. 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  options  and  timing  resulting  from  these three  developments. 

2. 

Financial  difficulties 

In  the  financial  context  there  is no  escaping  the  legacy  of  the past;  recent  events  show 
how the agri-monetary arrangements can assume considerable importance over a very  few 
years.  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  Council's  ad  hoc  decisions  on 
compensatory aid and the freezing  of certain ACRs. The costs of the ad hoc measures can 

13 

be  seen  to  be  fairly  moderate,  even  though  some  of  them  could  have  been  further 
compressed, since the economic necessity of certain measures is not clear: particular,  flat-
rate  compensation  for  loss of  income  for  price  reductions  that  did  not  actually  occur. 

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  sensitive  system  based  on  fragile  equilibria,  it  would 
be  dangerous  to  tamper  with  single  components  in  isolation  from  the  whole.  But  the 
system  of  permitted  margins  as  a  whole  is  in  fact  the  mainstay  of  the  present  agri-
monetary  arrangements. 

3. 

Economic  difficulties 

Almost all  farmers  benefit  economically  from  the agri-monetary  arrangements,  although 
the  extent  of  their  benefit  varies  according  to  the  relative  currency  situation  and,  for 
different  reasons, to the stability of the national currencies concerned. Effects  on markets 
vary  with  the  products  concerned  and,  for  the  most  sensitive,  with  the  level  of  prices 
recorded  in  relation  to  guaranteed  institutional  prices. In  the  longer  term,  trade  may  be 
affected,  at  least  in  value,  by  the  index  of  competitiveness  which  reflects  currency 
developments,  adjusted  for  prices. 

Thus,  while  the  economic  effects  of  the  agri-monetary  arrangements  are  usually 
acceptable, they  may  occasionally  lead to substantial distortion  between  Member  States. 

To  some  extent,  these  potential  problems  also  result  from  the  system  of  permitted 
margins. 

When currency developments are not passed on, which happens with the freeze  on certain 
ACRs applicable  to direct  aid  to producers, there  is a possibility  of  long-term  structural 
divergence,  either  between  Member  States,  or  between  agricultural  sectors  in  the  same 
Member  State.  Moreover,  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 
general  development  of prices 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 

14 

fixed for  ever,  but one that  can be adapted  to the agricultural  and  monetary  background 
and  to  the  risks most  likely  to  materialize. 

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  the timing  of  changes to ACRs. 

Some  measure of the impact  of currency  revaluation and  decline in ACRs is required:  it 
enables past currency  developments to be taken into account when assessing the possible 
consequences  of  the  present  currency  revaluation.  However,  experience  has  shown  the 
present approach based on the definition  of "appreciable" revaluations to be unsatisfactory 
and  excessively  complex. 

Currency  developments  causing  the  same  "appreciable"  decline  in  the  ACR  may  have 
quite different  effects  on incomes, i.e. their practical impact may be totally different.  For 
example,  two  currencies  which  have been  stable for  two years are treated  the same way 
if the  level  of the ACR at the end of the third year  is below  its initial  level. However,  it 
is  perfectly  conceivable  that  one  of  the  currencies  might  have  been  15%  down  for  11 
months  of  the  third  year,  and  the  other  for  only  one  month,  prior  to  appreciable 
revaluation:  the  agri-monetary  benefit  to  farmers  during  the  third  year  is  consequently 
very  different. 

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.  Clearly,  a  decline  in  the  ACR 
lasting,  for  example,  two  months  would  not  have  the  same effects  as the  same  decline 
lasting  a  full  year.  In  this  context,  the  duration  of the  reference  periods, about  10 days, 
is  a vital  factor  in the  equilibrium  of the  system as a whole. 

The  use of the twofold  conversion system for  import charges on agricultural  products is 
unnecessarily  complicated,  leading  to  economic  inconsistency  and  to  disputes.  As  this 
twofold  system does not make any practical difference  to the Community preferences,  it 
should  be  abandoned,  as proposed  by the  Commission. 

The  rules  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  triggered 
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,  on  which  operators  base  their  expectations.  This  rule  has  been 
criticized  for  its  shortcomings. 

The rule was introduced by the Commission for the practical  implementation of the agri-
monetary  arrangements  in  order  to  avoid  a  delay  of  10 days, or  safeguard  measures, in 

15 

cases of sudden major  currency  movements. Experience of long reference  periods  before 
an appreciable revaluation has called into question the economic justification  for this rule. 
But  the  rule  does  sometimes  contribute  to  shortening  the  overall  confirmation  period 
before  appreciable  revaluation.  It  would  once  again  be  economically  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  monetary  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, since fixed amounts will be paid direct in euros. 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. For prices 
and  amounts  linked  to the markets, these gaps may  not exceed  a lower  limit  of  -2 or an 
upper  limit  of+5,  nor  may  the  sum of the  gaps for  any two currencies  exceed  5 points. 
However,  in  view  of  the  freeze  on  certain  ACRs, gaps  are  not  limited  for  most  of  the 
direct  aid  to  producers. 

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 to  settle 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.  However,  the  currency  situation  and  perhaps  the  agricultural  situation  as 
well  may  be quite  different  from  that obtaining  at present. 

The agri-monetary  arrangements need to be adapted to the new situation. Even  if it were 
possible to conserve the same principles, the arrangements  themselves would  need to be 
reviewed.  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 
of  the possible role  of  new  accessions. 

Secondly, the arrangements must  be adaptable to possible developments  of the CAP, in 
particular  in  terms  of  the  prospects  of  enlargement  of  the  European  Union.  The  key 
factors  here will be the level of guaranteed prices, and the level and uniformity  of direct 
aid  to producers. 

16 

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. Relevant  Commission proposals must 
be  presented  by  early  1998, at the latest,  for  a Council decision  in the  light  of the  most 
recent  available  information  on the  monetary  and  agricultural  situation. 

With the prospect of major  and imminent  revision of the agri-monetary  arrangements, it 
is not a very good idea, at the end of  1996, to consider any significant  changes other than 
the strictly essential, which will in any case need to be reconsidered after  1997. However, 
in view of the problems that will  arise for  the transition between national  currencies and 
the  euro,  it  is best  not  to  aggravate  situations  and  risks  created  by  the  freeze  on  ACRs 
when  appreciable  revaluations  take place. 

For  cases  similar  to  those  of  appreciable  revaluations  in  1995/96,  care  should  be  taken 
to  ensure  similar treatment,  that  does not create  discrimination  between  Member  States. 
However,  agreement  not  to  reduce  the  ACRs should  be  limited  at  least  by  the  maxima 
reached  by  the  SKR,  i.e.  12.8% in  the  case  of  aid  where  the  operative  event  occurs  on 
1  July,  and  6.9%  in other  cases. To keep  potential  problems  even  smaller  and  to  avoid 
reproducing  the  differences  in support  between  different  sectors that  arose for  the  SKR, 
the  ACR  should  never  be  frozen  for  reductions  in  excess  of  6.9%.  If  this  limit  were  to 
mean  cutting  some  aid  in  national  currency,  the  effects  could  be  offset  by  degressive 
compensatory  aid  to  cover  any  loss of  income  due to  appreciable  revaluations. 

According  to present  rules, if there  is no devaluation, the  appreciable  revaluation  of  the 
LIT will not be of the same type as those which occurred  in  1995/96. If the ACR for  the 
LIT  remains unchanged, the conditions for  applying compensatory  aid retrospectively  as 
laid  down  in  Article  8  of  the  basic  agri-monetary  Regulation  will  be  realized  in  May 
1997.  If  there  is a further  decline  in  the  ACR  for  the  LIT  meanwhile,  even  if  it  is  not 
deemed  to be an appreciable  decline  in the ACR within the meaning  of  Article  1 of  the 
basic Regulation, this may  lead to the application of Article  8 before  May  1997, or even 
trigger the conditipns for a general rise in most direct aid to producers, expressed in ecus, 
in  accordance  with  Article  7. 

In  all  cases,  appreciable  revaluations  may  be  dealt  with  by  means  of  ad  hoc  measures 
decided by the Council pursuant to Articled  of Regulation (EEC) No 3813/92 and in the 
light  of  the  actual  circumstances  arising.  In this  framework  the  Commission will  make 
appropriate  proposals  for  cases  arising  for  the  LIT,  or  according  to  the  guidelines 
described  above  for  similar  cases of  appreciable  revaluations  in the period  1995/96. 

Altogether,  the conclusions  can  be  summarized  in four  points: 

- 

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; 

17 

- 

- 

- 

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 the  Council; 

future  appreciable 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  future  approaches  should  continue, 
especially  among the  experts  of the  agri-monetary  management  committee. 

Consequently, there  is no  immediate  call  for  the Commission to present  a new  proposal 
for  a  Council  regulation  to  adapt  the  agri-monetary  arrangements. 

18 

II. 

A. 

1. 

ANALYSIS  OF  AGRI-MONETARY  EFFECTS  IN  1995/96 

Currency  developments 

Representative  market  rates 

Unlike the preceding  12 months, the period July 1995 to June 1996 (1995/96) saw 
no dramatic  currency  fluctuations1,  movements remaining  fairly  even, except  for 
the  FMK  and  DRA,  and  relatively  moderate,  except  for  the  LIT  and  SKR. 
Nevertheless,  such  movements  are  by  no  means  typical  for  at  least  half  the 
Community  currencies.  Taking  the  possible  over-reactions  to  the  change  in  the 
dollar  in  early  1995  into  account,  the  traditionally  strong  currencies  declined  in 
value  while  those  with  a history  of  depreciation  strengthened. 

During  the  period  under  review,  the  dollar  rose  against  the  ecu  to  reverse  the 
*rend over the previous  18 months from early  1994. The representative market rate 
(RMR) for  the  dollar  thus  fell  by  6.8%,  after  rising  by  16.7%2. 

Generally  speaking, this change in the trend for the dollar was reflected  in similar 
movements  for  the  LIT,  PTA  and  SKR,  with  inverse  movements  for  the  BLF, 
DM,  FMK,  OS  and  HFL. 

The  RMRs  for  the  BLF, DM, OS  and  HFL  rose by  nearly  2.5%, insufficient  to 
offset  their  falls  of  around  4%  over  the  preceding  18 months  but  bringing  them 
back  to  their  approximate  levels  of  early  1995. 

Depreciation  of  the  FMK  began  late,  in  December  1995,  but  despite  its  scale 
(7%),  it  did  not  cancel  out  the  revaluation  of  nearly  13%)  over  the  period 
January  1994 to November  1995. However,  since March  1996  the  RMR  for  the 
FMK  has reached  the  level  applying  on  Finland's  accession  on  1 January  1995. 

The  LIT  and  PTA  have  fallen  back  below  their  levels  of  early  1995  despite 
devaluations of around  14% and 5% respectively between January and April  1995. 
The RMRs for  those currencies fell  by  11.5% and  1.5%  during the twelve-month 
period  under  consideration. 

A 6% depreciation  in the SKR over the first five months of  1995 was made good 
by October of that year. In June  1996, the RMR for the SKR stood 7% below the 
level  obtaining  on  Sweden's  accession. 

See Tables  and  Graphs  Al  to  A4  in  Working  Paper on Basic  Information. 
Under  the  agri-monetary  arrangements,  the  conversion  rates  express  the  value  of  one  ecu  in 
national currency. A devaluation against the ecu therefore corresponds to an increase in those rates, 
while  a revaluation  is equivalent  to  a reduction. 

19 

During the  12 months under examination, the RMR for the DRA continued to rise 
fairly  steadily,  but  there has been a reversal  in this trend  since March  1996. The 
DKR and  the ESC  have remained  more or  less stable. The previous  tendency  of 
the IRL and the UKL to depreciate  switched to relative stability and  even tended 
towards  appreciation  in  May  and  June  1996.  The  FF  has  continued  to  show  a 
constant,  albeit  very  slight, tendency  to  appreciate  against the  ecu. 

2. 

Agricultural  conversion  rates 

in 

Since  the  switch-over  mechanism  was  discontinued  on  1  February  1995,  all 
agricultural  conversion  rates  (ACRs)  move  up  and  down 
line  with 
representative market rates (RMRs).3 However, the mechanism 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  BLF,  ESC,  FF  and  IRL  remained  unchanged  during  the  period  under 
consideration,  which  is  also  true  for  the  DKR  and  the  PTA  following  their 
July  1995  revaluation.  Apart  from  those  for  the  LIT  and  the  SKR,  which 
underwent  a  substantial  revaluation,  the  other  ACRs  rose  fairly  slightly  but 
sometimes  rather  frequently. 

Generally  speaking,  the  monetary  gaps  for  all  currencies  remained  positive  or 
close to zero. Given their tendency  to revalue substantially, the LIT and the  SKR 
alternately  maintained  positive  monetary  gaps  in  excess  of  four  points.  The 
available  margin  for  negative  gaps  was  thus  always  very  small  at  below  one 
point4, triggering  a large number of small or very  small devaluations of  less than 
0.5%  in  82% of  cases. 

Shortly  after  the Council's agri-monetary  decisions of June  1995, five currencies 
underwent  "appreciable"  falls5  in  their  ACRs.  In  the  case  of  the  currencies  in 
question,  this  terminated  five  months  of  positive  monetary  gaps  standing 
constantly  or  intermittently  at above five points. 

The  "appreciable"  part  of  the  reduction  in  the  ACR  for  the  BLF  amounted  to 
2.193%  at  24  June  1995.  The  figures  for  the  DM,  the  OS  and  the  HFL  were 

See Tables  and  Graphs  A4 to  A5  in 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 certain number of reference periods, ACRs must be adjusted  to reduce the 
monetary  gaps. 
An  "appreciable"  reduction  in  the  ACR  is  one  leading  to  a  reduction  in  institutional  prices  in 
national currency that is greater than the effects  of any devaluation occurring during the preceding 
three years. These  effects  are estimated  as two thirds of the increase in institutional  prices due to 
changes in the ACR occurring between  12 and 24 months previously, and one third of the increase 
between  24  and  36 months  previously. 

20 

2.229%, 2.264% and 2.572% respectively at  1 July  1995. Subsequently, the ACR 
for  the  DKR  underwent  an  "appreciable"  of  0.496%  on  24 July  1995.  In  the 
following  months  the positive monetary  gaps  for  those currencies declined,  with 
those for  the  DM, HFL  and  OS even becoming negative  in May  and  June  1996, 
calling  for  slight  increases  in the  ACR. 

Of the other currencies, those with stable or practically stable ACRs had monetary 
gaps  of  around  +  1 (ESC)  or  around  + 2  (FF).  The  gap  for  the  IRL  generally 
remained  below  +  2, before  rising  swiftly  to + 4 from  May to June  1996. There 
was a "non-appreciable" revaluation of 2.9% in the PTA at the end of July  1995. 
Subsequently,  the  monetary  gap  for  the PTA  stabilized  at  somewhat  below  four 
points. 

The ACR for  the LIT underwent four  "non-appreciable" reductions, amounting to 
12.1%) in total, during  the period  concerned, though  the monetary  gaps remained 
positive  and  large. 

The ACR for the SKR fell three times, the total reduction amounting to 9.9%. The 
fall  of  11 January  1996  was  "appreciable"  in  respect  of  1.734%.  The  rather 
variable monetary  gaps generally  remained very high at above  four  points, while 
a  further  appreciable  fall  in the  ACR took place on  7 July  1996. 

The ACRs were devalued  substantially for two currencies only, namely  the DRA 
and  the  FMK.  The  rise  was  3.1%  in  the  case  of  the  DRA,  where  the  gap 
nonetheless  became  positive  at  the  end  of  the  period  under  review.  After 
maintaining  gaps  of  close  to  5%  for  five  to  six  months,  the  FMK  finally 
depreciated, with a resulting increase of 3.5% in the ACR. Variations in the UKL 
resulted  in a rise of  1.9%  in the corresponding ACR for  over  six months, but in 
late June  1996 that  rate  eventually  stood  0.8% below  its original  level. 

B. 

1. 

Agri-monetary  mechanisms 

Regulatory  provisions 

In  late  June  1995  when  a  risk  of  "appreciable"  revaluation  arose  for  the  BLF, 
DKR,  DM,  HFL  and  OS,  Council  Regulation  (EC)  No  1527/95  provided  for 
specific  measures  covering  such  revaluations  between  23 June  1995  and 
1  January  1996.  In  late  December  1995,  when  further  risks  of  "appreciable" 
revaluations  arose  for  the  FMK  and  the  SKR,  Council  Regulation  (EC) 
No  2990/956 provided for measures similar to those laid down by Regulation (EC) 
No  1527/95, 
until 
31  December  1996. 

30 June  1996 

subsequently 

apply 

until 

and 

to 

OJ  No  L  312,  23.12.1995,  p.7.  Last  amended  by  Regulation  (EC)  No  1451/96  (OJ  No  L  187, 
26.7.1996,  p.l). 

21 

(a) 

These  measures,  which  were  deemed  necessary  in  particular  with  a  view  to 
compliance with obligations under the GATT agreement and budgetary discipline, 
suspend the application of Articles  7 and 8 of the basic agri-monetary Regulation7. 
• Article  7 provides for an increase in ecus in most types of direct aid to producers8 
in  the  event  of  a  revaluation  of  a  greater  size  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  ECU  250 million  a  year  for  each  percentage  point  revaluation. 
Article  8 of Regulation  (EC) No  3813/92 also provides  for  compensatory  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 latter  is established, where necessary, on the  basis 
of  the  fall  in  farm  incomes incurred  and  which  can  in principle  be  observed. 

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 
compensatory  aid  and  a freeze  on the  agricultural  conversion  rates  applicable  to 
direct  aid  covered  by  abovementioned  Article 7. 

Compensatory  aid  provided  for  under  Regulations  (EEC)  No  1527/95  and 
No  2990/95 is subject  to a ceiling  for the Member  States at risk of  "appreciable" 
reductions  in  their  ACRs.  These  ceilings  were  calculated  on  the  basis  of  the 
anticipated effects  of appreciable reductions in ACRs, using the latest statistics of 
incomes available, regarding  1994 and expressed as a percentage  appreciable  fall 
in  the  ACR.  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 not 
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.  In principle  the  aid  can  be  granted  from 
the  month  following  the  revaluation  in  question,  unlike  the  aid  provided  for  in 
Article  8 of Regulation  (EEC) No  3813/92, which requires  at least  12 months to 
elapse.  The  detailed  rules  for  the  application  of  the  aid  are  laid  down  in 
Commission Regulation  (EC) No 2921/959. 

In  accordance  with  the  detailed  rules  of  application,  the  aid  must  be  granted  to 
agricultural  holdings  in annual payments. It must vary  with the  size of the  latter 
over  a period  in the past and must be in line with the macro-economic  spread  of 
the  income  loss  between  the  various  sectors  of  production  affected.  However, 

Council  Regulation  (EEC) No 3813/92  (OJ No L 387, 31.12.1992).  Last amended  by Regulation 
(EC) No  150/95  (OJ No  L 22, 31.7.1995,  p.l). 
Flat-rate  aid  expressed  in  ecus  per  hectare  or  per  livestock  unit  and  aid  of  a  structural  or 
environmental  nature. 
OJ  No  L  305,  19.12.1995,  p.60.  Last  amended  by  Regulation  (EC)  No  1481/96  (OJ No  L  188, 
27.6.1996, p. 21). 

22 

where  annual  payments  per  holding  are  less  than  ECU 400,  the  aid  may  be 
granted  for  measures  in the collective  and general interest  or those for  which  the 
Community  provisions  authorize  national  aid. 

•  The  compensatory  aid  measures  notified  by  the  Member  States  are  outlined  in 

point  2  below. 

(b) 

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  23  June  1995  (or 
11 January  1996 in the case of the SKR) and valid until  1 January  1999 when the 
single currency  comes into force.  Naturally,  this entails a temporary  variation  in 
the  level  of  Community  support  between the various  Member  States. In  view of 
the  operative  events10  for  the  ACRs  for  the  aid  measures  in  question,  several 
ACRs  are  frozen  until  30 June  1999".  In  national  currency,  in  particular  in 
Sweden,  this  affects  the  balance  in  aid  expressed  in  ecus  between  the  various 
sectors  of  agriculture. 

The gaps between the frozen  ACRs and the RMRs have diminished somewhat  for 
the  currencies  which  revalued  in  June  and  July  1995.  One  year  after  those 
revaluations, they  stand at 5.0 for the DKR, 3.7 for the BLF, 2.4 for the HFL and 
1.9  for  the  DM and  the OS. However,  the monetary  gap for  the  frozen  ACR  for 
the SKR has become quite sizeable in the case of aid per hectare: for  1996/97, aid 
in  Sweden  will  be  11%  higher  than  the  current  ACR  and  19% higher  than  the 
common  level  defined  by  the  RMR.  Should  the  SKR  remain  steady  against  the 
ecu,  the  alignment  of  the  frozen  ACR  on  the  current  ACR  in  July  1999  would 
entail  a  fall  of  around  10% in  aid  per  hectare  expressed  in  national  currency12. 
These  large  gaps  stem  in  particular  from  the  fact  that  the  freeze  relates  to  the 
ACR applicable  at  the  time  of  the  appreciable  revaluation  and  not  the  threshold 
from  which  the  fall  in the  ACR becomes appreciable. This  allows  any  reduction 
in  the  aid  concerned  in  national  currency  to  be  avoided  at  the  time  of  an 
appreciable revaluation.  Thus the ACRs for the BLF, the DKR and especially  the 
SKR,  which  plummeted  before  appreciating,  were  frozen  at  a  particularly  high 
level. 

Furthermore,  in response to the significant  devaluations in the first half  of  1995, 
in October  1995 the Council adopted Regulation (EC) No  2611/95 authorizing the 
Member  States to  grant  national  aid  to  compensate  for  the effects  on  some  farm 
incomes  of  devaluations  occurring  prior  to 31 December  1995 in  other  Member 
States. The  aid  in question  must be approved  by the  Commission, be  degressive 
and  be  applicable  for  three  years  at  most.  It  must  not  encourage  any  particular 

The  ACR  on  the  date  the  operative  event  occurs  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  other 
aid  measures  referred  to  in Article  7 of  Regulation  (EEC) No  3813/92,  it  occurs  on  1 January. 
See Table  A7  of  Working  Paper  on  Basic  Information. 
On  7 July  1996 there was  a further  appreciable  reduction  of  3.280%  in the  ACR. 

23 

(c) 

10 

type of production  having regard to the situation which would  have obtained  had 
no  devaluation  occurred.  France  and  Belgium  notified  draft  aid  schemes  under 
Regulation (EC) No  2611/95 before the time limit (30 June  1996). Those draft aid 
schemes  will  be  described  in point  2. 

(d)  With  regard  to  the  conversion  rates  applicable  to  import  charges  fixed  in  ecus, 
Commission  Regulation  (EEC)  No  1482/9513 provides  for  the  application,  as  a 
transitional  measure, of a monthly  rate where the annual  rate  provided  for  in the 
Customs Code14 should have applied. The Commission subsequently extended the 
application  of  the  transitional  monthly  rate  for  a further  year,  since  the  Council 
and the Parliament had not yet completed their consideration of the  Commission's 
proposal  to  amend  the  annual  rate  provided  for  in  the  Customs  Code15  by 
30 June  1996. 

However,  the  transitional  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 different  conversion rates has resulted in certain  economic 
inconsistencies and has very greatly complicated administration, with concomitant 
scope  for  errors  and  legal  insecurity.  In  February  1996  the  Commission 
accordingly  proposed to amend the agri-monetary  arrangements  in such a way  as 
to  eliminate  the  use  of  the  agricultural  conversion  rate  and  to  use  only  one  rate 
for  import  charges  on  agricultural  products16. By  30 June  1996  the  Council  had 
still  not  taken  a decision  on this  point. 

(e) 

The  concept  of  appreciable  revaluation  was  introduced  in  February  1995  by 
Article  9 of Regulation (EC) No  3813/92 to describe currency appreciations which 
may  have  significant  short-term  consequences,  in  particular  having  regard  to 
international  commitments  under the  GATT agreement  and budgetary  discipline. 

In origin, the concept was associated with that of an appreciable  reduction  in the 
ACR as defined  by Article  1 of Regulation  (EEC) No  3813/92.  Subsequently,  it 
appeared  that  other  reductions  in  the  ACR  fell  within  the  scope  of  appreciable 
revaluations, in particular those which could trigger Articles  7 and 8 of Regulation 
(EEC) No  3813/92. In July 1996, Article  8ofRegulation(EEC)No  1068/93,7was 
amended so such cases were covered by the definition of appreciable revaluations. 

2. 

Compensatory  aid 

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). 
Article  18 of  Council  Regulation  (EEC)  No  2913/92  (OJ No  L 302,  19.10.1992,  p.  1). 
COM(95)335  final. 
COM(96)40  final. 
OJ  No  L  108,  1.5.1993,  p.  106. Last  amended  by  Regulation  (EC) No  1482/96  (OJ  No  L  188, 
27.7.1996). 

24 

At the end of  1995/96, the six Member  States affected  by appreciable  reductions 
in  their  ACRs  in  June  or  July  1995  had  notified  draft  aid  schemes  under 
Regulation (EC) No  1527/95. The Commission raised no objection to those plans. 

Sweden,  which  has  a  further  six  months  to  notify  aid  under  Regulation  (EC) 
No  2990/95, put  forward  no plans for  schemes during the period  under  review. 

France  and  Belgium  presented  draft  national  aid  schemes  before  the  deadline  of 
30 June  1996  to  compensate  for  the  effects  of  devaluations  in  other  Member 
States in accordance with Regulation (EEC) No 2611/95. The Commission raised 
no  objections  to  such plans. 

The  following  table  summarizes  aid  authorized  and  notified.  All  amounts  are 
expressed  in  millions  of  ecus  on  the  basis  of  the  RMRs  at  1 July  1996.  The 
second  and  third  tranches  of  compensation  for  appreciable  reductions  in  ACRs 
amount  respectively  to  two  thirds  and  one  third  of  the  first  tranche,  which  is 
shown  in  the table. 

25 

Member  State 

Appreciable 
decline  in 
ACR  (%) 

Ceiling 
(ECU  million) 

Notified  EU 
financing 
(ECU  million) 

Notified 
national 
financing 
(ECU  million) 

Regulation  (EC) 
No  1527/95 

Belgium 
Luxembourg 
Denmark 
Germany 
Netherlands 
Austria 

Regulation  (EC) 
No  2990/95 

2.193 
2.193 
0.496 
2.229 
2.572 
2.264 

40.2 
3.2 
8.0 
216.7 
101.4 
38.7 

20.5 
1.6 
4.0 
108.3 
50.7 
19.4 

6.1 
1.6 
0.0 
108.3 
0.0 
0.0 

Sweden 

1.734 

20.8 

Regulation  (EC) 
No  2611/95 

Belgium 
France 

0 

3.3 
17.3 

(a) 

Compensation for  appreciable reductions in ACRs (Regulation (EC) No  1527/95) 

Luxembourg  and  Germany  decided  to  grant  the  maximum  possible  aid,  using 
national  funds  to  double  the  compensation  financed  by  the  EAGGF.  Belgium 
intends providing additional aid equal to  15% of the maximum authorized, on top 
of  the  50%  financed  by  the  EU.  Denmark,  the Netherlands  and  Austria  are  not 
providing  additional  aid. 

Unlike the other Member States, which allocated aid direct to farmers on the basis 
of  past  output,  Denmark,  Germany  and  the Netherlands  have  opted  for  flat-rate 
allocation  for  the  third  tranche,  since  amounts  would  have  been  less  than 
ECU  400 per  holding. 

In order to avoid overcompensation by sector, consideration was given to ceilings 
on aid per product group. The ceilings were established on the basis of hypotheses 
for  income  losses used  by the Council when  determining the total  maximum  aid 
authorized.  Accordingly,  a  significant  loss  of  income  was  anticipated  solely  in 
sectors with  institutional  prices  directly  affecting  prices  received  by  farmers.  In 
the  light  of past experience, the major  sectors concerned  are  cereals, sugar  beet, 

26 

milk  and  beef/veal.  In  view  of  the  Council's decision  to  grant  the  aid  on  an  ex-
ante  and  flat-rate  basis, real  losses by  sector  in the  light  of  the  actual  change  in 
prices  after  July  1995  were  not  taken  into  account  with  a  view  to  adjusting  the 
ceilings  by  sector  or  the total  amount  of aid. 

In  the  case  of  Belgium  and  Austria,  the  aid  allocated  to  individual  sectors  of 
production  is not proportional  to the ceilings though it falls below the latter in all 
cases.  As  a  result  the  aid  granted  does  not  result  in  overcompensation  of  losses 
per  sector  in  accordance  with  the  regulations  but  undercompensation  spread 
unevenly  at  sector  level.  No  sector  can  be  deemed  overcompensated  for  the 
income  loss as estimated  by  the  Council. 

Belgium decided to grant the following  amounts in compensation in respect of the 
1996 tranche. For  1997 and  1998, those amounts will be reduced by one third and 
two  thirds  respectively. 

Product  group 

Cereals 
excluding 
maize 

Sugar  beet 

Milk 

Beef/veal 

Value  of  production  as 
percentage  of  total  (4  product 
groups) 

Maximum  aid,for  product  group 
(ECU  million) 

Total  aid  authorized 
(ECU  million) 

Aid  authorized  as  percentage  of 
ceiling 

Aid  authorized  as  percentage  of 
total  (4  product  groups) 

8.15% 

10.41% 

38.51% 

42.93% 

4.26 

15.75 

17.56 

1.53 

1.96 

7.24 

15.84 

45.95% 

46.01% 

45.97% 

90.21% 

5.76% 

7.38% 

27.25% 

59.62% 

Approximate  unit  aid  (ECU) 

10.9/ha 

37.6/ha 

0.43/hl 

54.47/LU 

The aid allocation shows that almost the maximum is granted for beef/veal  while 
the  other  product  groups  receive  less. 

The  unit  amounts  of  the  three  tranches  of  the  aid  for  cereals,  sugar  beet  and 
beef/veal  are based  on declarations by farmers  in connection with  compensatory 
payments paid under the reform  of the  CAP in 1994. In the case of cereals, there 
is  provision  for  an  adjustment  on  the  basis  of  the  regional  yield,  while  in the 
beef/veal  sector,  the  aid  is granted  on .the basis of the male bovine  animals  and 
suckler  cows  on  which  the  premium  was  paid  in  1994.  Quantities  of  milk 

27 

compensated  for relate to deliveries from  1 April  1994 to 31 March  1995  subject 
to a ceiling  equal  to the quota.  Since the amounts granted  depend'on  production 
prior to  1 July  1995, they are not deemed to constitute an incentive to  increasing 
production. 

Luxembourg  apportioned  all  aid  which  may  be granted  in  accordance  with  the 
following  table relating to the  1996 tranche. The following  two tranches  will  be 
reduced  in accordance  with the regulations. The breakdown  by product  group  is 
the same as that for  the production  concerned.  The unit amounts are allocated  to 
farmers  on  the  basis  of  quantities  declared  under  the  system  of  compensatory 
allowances  for  less-favoured  areas  (Regulation  (EEC) No  2328/91). 

Product  group 

Cereals 

Sugar  beet 

Milk 

Beef/veal 

Value  of  production  as 
percentage  of  total  (4  product 
groups) 

Maximum  aid  per  product  group 
(ECU  '000) 

Total  aid  authorized 
(ECU  '000) 

Aid  authorized  as  percentage  of 
ceiling 

Aid  authorized  as  percentage  of 
total  (4  product  groups) 

11.82% 

pm 

53.18% 

35.00% 

376 

376 

0 

0 

1693 

1115 

1693 

1115 

100% 

100% 

100% 

100% 

11.81% 

-

53.17% 

35.01% 

Approximate  unit  aid  (ECU) 

13.1/ha 

0 

34.67/cow 

10.92/LU 

Since Denmark  could  not  grant  less than  ECU  70 per holding,  it decided  to  use 
the  aid  for  measures  in  the  collective  and  general  interest.  EAGGF  finance  will 
be allocated equally to two funds for measures not entailing production incentives, 
namely  PMF (Promille  for  agriculture) and DAF (project  for  the development  of 
agricultural  products),  which  contribute  towards  measures  involving  research, 
advisory  services, training,  promotion,  etc. In principle  these  funds  are  financed 
by compulsory contributions levied on producers. The agri-monetary  compensation 
will  be  allocated  to  special  measures and will therefore  lead  to new measures or 
a  reduction  in contributions  allocated  to  measures under  way. 

Germany  grants the maximum  amount of aid, which  is, however,  slightly  below 
ECU  400  per  holding.  Accordingly  Germany  opted  for  a  simplified  form  of 
allocation  to  farmers,  not taking  account  of  income  losses per  sector. 

28 

The  aid  entails  a  subsidy  on  farmers'  contributions  to  insurance  against  farm 
accidents. Since  1963, such insurance is subsidized by the State to reduce  farmers' 
contributions.  Between  1994  and  1998,  these  subsidies  amounted  to  around 
ECU  320  million,  currently  accounting  for  35% of  the total. The farmers'  share, 
which is around ECU  600 million, will be reduced in  1996,  1997 and  1998 by the 
degressive  compensatory  aid,  amounting  to  ECU  216.7  million  in  1996,  and 
ECU  144.5  million  and  ECU  72.2  million  in  subsequent years. 

The Netherlands  apportion the  1996 tranche of the aid as set out in the  following 
table.  The  following  tranche  will  be  two  thirds  of  the  first.  The  third  tranche, 
amounting  to  around  ECU  225  per  holding,  will  be  allocated  in  the  form  of 
measures  in the  collective  and  general  interest. 

Product  group 

Cereals 

Sugar  beet 

Potatoes  for 
starchmaking 

Milk 

Beef/veal 

Value  of  production  as 
percentage  of  total  (5 
product  groups) 

Maximum  aid  per 
product  group 
(ECU  million) 

Total  aid  authorized 
(ECU  million) ' 

Aid  authorized  as 
percentage  of  ceiling 

Aid  authorized  as 
percentage  of  total  (5 
product  groups) 

Approximate  unit  aid 
(ECU) 

3.75% 

6.46% 

3.32% 

64.13% 

22.34% 

3.80 

6.55 

3.37 

65.07 

22.67 

1.90 

3.28 

1.68 

32.54 

11.23 

50% 

50% 

50% 

50% 

50% 

3.75% 

6.46% 

3.32% 

64.13% 

22.34% 

10.56/ha 
(winter 
wheat) 

28.17/ha 

27.44/ha 

19.08/cow 

20.10/bovine 
animal 
1-2  years 

The apportionment of the aid among the sectors concerned follows the breakdown 
in  production.  The  aid  is  granted  to  farmers  on  the  basis  of  the  May  1995 
agricultural  census data. For cereals and beef/veal,  many  categories were used to 
split up the aid on the basis of the standard gross margin by category, the amount 
granted  differing  by  type  of cereals and  beef/veal. 

The  third  tranche  will  be  used  for  the prevention  and  monitoring  of  animal  and 
plant  diseases  where  the  public  interest  is  at  stake  and  to  compensate  for  any 
damage due to  such  diseases or the  weather. 

29 

As  far  as  compensating  for  damage  is concerned,  the aid  will  be  used  by the 
producer  organisations to subsidize  insurance premiums or contributions  paid  to 
that end by  farmers. 

Austria  intends  reducing  the  first  tranche  of  aid  in  accordance  with  the 
regulations  as set out below. 

Product  group 

Cereals 

Sugar  beet 

Potatoes  for 
starchmaking 

Milk 

Beef/veal 

Value  of production  as 
percentage  of total  (5 
product  group) 

Maximum  aid per 
product  group 
(ECU  million) 

Total  aid  authorized 
(ECU  million) 

Aid  authorized  as 
percentage  of  ceiling 

Aid  authorized  as 
percentage  of total  (5 
product  groups) 

Approximate  unit  aid 
(ECU) 

15.47% 

6.27% 

0.45% 

44.06% 

33.75% 

5.99 

2.43 

0.17 

17.07 

13.08 

0 

0 

0 

0 

0.94 

0.17 

10.34 

7.91 

38.68% 

100.00% 

60.57% 

60.47% 

4.85% 

0.88% 

53.41% 

40.86% 

1.08/t 
(A  quota) 

1.77/t 

41.66/cow 

27.18/head 

Thus apportioned, the aid provides compensation equal to 100% of the ceiling for 
potatoes for starchmaking, approximately  (?0% for milk and bovines, almost 40% 
for  sugar  beet  and zero for cereals. 

The  unit  amounts  for  beet  and potatoes  are based  on the quantities  covered by 
contracts  between  producers  and  processors  at  1  July  and  31  May  1995 
respectively.  For milk  and bovines, they  are calculated  and granted  on the basis 
of  livestock  held  at  1 April  1995 and declared  under  aid schemes to protect the 
environment and maintain  the countryside  (Regulation  (EEC) No 2078/92). 

(b) 

Compensation  for  the  impact  of  devaluations 
(Regulation (EC) No 2611/95) 

in  other  Member  States 

France and Belgium granted nationally funded  aid in single annual instalments to 
offset  the effects  of the devaluation  of the LIT on the beef  industry. 

30 

In  both  cases, the national markets were highly  dependent,  directly  or  indirectly, 
on  the  Italian  market.  In  France,  around  50% of  exports  of  live  bovine  animals 
and  fresh  beef/veal,  accounting  for  around 25% of production,  is sent to Italy.  In 
- Belgium, 50% of exports, i.e. around 20% of production, generally goes to France 
and  Italy.  In  the  three  Member  States  in question,  prices  fell  steeply  in  national 
currency and in ecus from  March  1995, coinciding with the beginning of the sharp 
devaluation  of  the  LIT.  To  take  account  of  seasonal  changes  in  prices  and 
reductions  in  intervention  prices, the average  weekly  prices, minus  10%, for  the 
last  three  years  were  calculated  by  way  of  a  reference.  A  comparison  of  the 
weekly prices recorded  in  1995 with these reference  averages shows an additional 
fall  in  prices,  significantly  between  March  and  August  1995.  Depending  on  the 
method  applied,  the  fall  in  prices  attributed  to  the  devaluation  of  the  LIT  was 
3.8% on average, with a maximum  of 5%, in France. In Belgium  it was  1.7%  on 
average,  with  a maximum  of 3%. 

Given the absence of other significant  factors  and since the period coincided  with 
the  devaluation  of  the  LIT,  these  additional  price  falls  were  considered  to  be 
consequences of that devaluation. The income loss concerned was thus estimated, 
with a possible fluctuation  margin,  at around ECU  17 million in France and ECU 
5.6  million  in  Belgium. 

In  accordance  with  the above,  France  calculated  the flat-rate  aid  per  category  of 
bovine  animals  and per  marketing  week,  granting  the aid to farmers on the  basis 
of  animals  sold  during  the  weeks  under  consideration.  In  Belgium  the  aid 
allocated  to the Wallonia region amounted to ECU 3.3 million.  Given the lack of 
detailed,  reliable  information,  as  far  as  indidivual  operators  are  concerned,  on 
quantities  marketed  each week during the period  in question, ECU  10.16 per LU 
was allocated  on the basis of the premiums paid  in  1994 on male bovine  animals 
and  suckler  cows. 

C. 

Economic  impact 

Theoretically,  market  prices,  which  are  closely  linked  to  an  intervention  mechanism 
(cereals, sugar, milk and beef/veal),  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. 

31 

1. 

Prices 

The  analysis  relates  mainly  to  monthly  movements  during  the  period  1995/96. 

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. Even in the case of the LIT, which revalued  significantly 
from  July  1995 to June  1996, the market prices for wine, olive oil, sheepmeat and 
pigmeat rose or varied to an extent out of all proportion with the reductions 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  concerned18. 

In the absence of significant  devaluations, movements in the ACRs likely to have 
had  most  repercussions  in  1995/96 are: 

- 

the  continual,  significant  revaluations  of  the  LIT  (12.1%)  and  the  SKR 
(9.9%); 
the  "appreciable"  revaluations  of  the  BLF,  DKR,  DM,  HFL  and  OS  in 
June  and  July  1995 and  of the  SKR  in January  1996. 

(a) 

Cereals 19 

The market prices for common wheat are substantially higher than the intervention 
prices in national currency. During the  1995/96 marketing year from  August  1995 
to  April  1996,  the  market  prices  in  the  three  main  producer  Member  States 
(Germany,  France  and  the  United  Kingdom)  stood  an  average  22%  above  the 
intervention  price.  As  in  the  previous  year  (when  they  stood  12%  above  the 
intervention  price), at this exceptional  level market  prices are  hardly  affected  by 
small  fluctuations  in the  intervention  price  in national  currency. 

However, despite the very wide variations in 1995/96, viewed globally the general 
trends  in such prices are not contradictory.  Thus market prices (like  intervention 
prices,  to  which  monthly  increases  apply)  in  most  Member  States  tend  to  rise 
during the marketing year. In the case of the two Member States whose ACRs fell 
significantly  in  1995/96 (Italy and Sweden), market prices as well as intervention 
prices almost remained  on the same level in terms of national  currency,  whereas 
the  market  prices  rather  fell  down  in LIT  and remained  steady  in  SKR. 

As  regards  appreciable  revaluations  covered  by  compensatory  aid,  reductions  in 
market  prices, where  they  exist,  are difficult  to  highlight  since reductions  in  the 

See  Graphs  B 2 to  B  15 in Working Paper on  Basic  Information. 
See  Graph  B  1 a  in  Working  Paper on  Basic  Information. 

32 

ACRs for  the BLF, DM, HFL  and  OS occur at the  same time as the reduction  in 
the  intervention  prices  in  ecus  at  the  beginning  of  the  marketing  year.  Between 
June and July  1995, that reduction  was around  15% taking monthly increases into 
account. 

the 
Between  March-April  and  August-September  1995  (before  and  after 
disturbance accompanying changes from  one marketing year to the next), national 
prices  fell  in  the  currencies  in  question,  though  prices  in  FF  and  UKL  were 
practically  unchanged  between  the  two  periods  in  question.  However,  where 
reductions  in prices  are  linked  with  falls  in the ACRs, other  factors  have  played 
a  part  since  these  falls  are not  proportional:  appreciable  reductions  in  the  ACRs 
were  around  3%, the smallest being  for  the DM and the OS, while reductions in 
prices were around  4% to 5% for  the BLF and the  HFL, 7% to  8% for  the DKR 
and  the  DM, and  11%  for  the OS. 

Among  the  factors  affecting  these  differences  in  price  movements  between  the 
Member  States, the impact of national  harvests is clearly decisive.  French output 
in  1995/96 was close to the average  for  the previous three years and  explains the 
firmer  prices in FF than in the Member States which revalued, where output  rose 
by nearly  10%. The case of the United  Kingdom, where prices remained more or 
less stable despite an increase  in production,  can be explained  to some extent by 
the  difference  in the  varieties  of  wheat  covered. 

There were appreciable  reductions in the ACRs for the DKR and the SKR in late 
July  1995 and January  1996 respectively. They were accompanied  by  significant 
price stability over the period in question and thereafter.  At the end of June 1995, 
a  price  reduction,  applied  in  anticipation  and  subsequently  wiped  out  in  the 
turmoil  at  the  beginning  of  the  marketing  year,  was  in  theory  possible  for  the 
DKR,  but  not  for  the  SKR,  since the  latter  was revalued  much  later. 

Lastly, despite some uncertainty  and the need for caution due to the many  factors 
coming  into  play  but  not  covered  here  (such  as differences  between  the  various 
types of cereals), agri-monetary  reductions  in prices due to revaluations probably 
did  not  take place  given  the context  of  high market  prices  in  1995/96. 

(b)  Milk  products 20 

During the first half of the  1995/96 marketing year, the market price for  skimmed-
milk powder  (SMP) and butter remained  exceptionally  high (approximately  10% 
and  5% up)  compared  with  the  intervention  prices. 

As the  intervention  prices in ecus did  not change between  1994/95 and  1995/96, 
variations  in  the  latter  in  terms  of  national  currency  are  due  to  changes  in  the 
ACRs, which  makes  it easier to  highlight  any  effects. 

20 

See  Graphs  B  1 b  and  B  1 c  in  Working  Paper  on Basic  Information. 

33 

However,  no  link  can  be  detected  between  the  revaluations  of  the  LIT  and  the 
SKR  and  movements  in market  prices. In Italy,  butter  prices  soared  in  line  with 
the  EU  market  despite  the  fall  in  the  ACRs  in  the  latter  half  of  1995; 
subsequently,  they  plummeted  like  everywhere  else. In  Sweden,  prices  for  SMP 
and  butter  remained  high,  despite large  fluctuations,  resisting the downward  pull 
of  the  reduction  in  intervention  prices  in  SKR. 

Market  prices  in  the  currencies  which  underwent  an  appreciable  revaluation  in 
June and July  1995 clearly did not follow the downward movement  in the ACRs. 
In the absence of an appreciable  revaluation,  it is very  unlikely  that prices  in the 
currencies in question would have increased or, if so, have risen further.  Changes 
in the latter generally follow trends over several months, which differ  only slightly 
from  those  recorded  in  FF  and  UKL,  the  ACRs  for  which  did  not  fall  at  the 
beginning  of  the  marketing  year. 

(c) 

Beef/veal21 

Prices  for  meat of  young  bovine  animals  fell  sharply  in early  1995, approaching 
or  even attaining  the conditions which  trigger  intervention.  Subsequently,  in  late 
1995  and  until  the  bovine  spongiform  encephalopathy  crisis  broke,  prices  were 
much  firmer. 

In  some  Member  States,  the  fall  in  prices  between  March  and  July  1995  was 
probably  partly  influenced  by  prices  in  LIT, which  did  not  rise  in pace  with  the 
ACRs.  Such  relatively  low  prices  affected  the  French  market,  which  is  heavily 
dependent  on trade  with  Italy,  and  subsequently  other  Member  States. 

After  July  1995, the  low  prices  in LIT  remained  stable; since they  had  not  risen 
beforehand,  they  did  not  follow  the  downward  slide in the ACRs. Market  prices 
in  SKR,  another  currency  which  appreciated  significantly  during  the  1995/96 
marketing  year,  followed  the  downward  movement  in the  ACRs fairly  closely. 

In  the  case  of  the  currencies  which  underwent  an  appreciable  revaluation  at  the 
beginning of the marketing year, the downward movement of market prices seems 
to  be  linked  with  that  of the ACRs. Thus despite a smaller  fall  in  June  and  July 
1995 than that recorded  for the FF (which was relatively  strongly affected  by the 
Italian market), the price recovery  of the  second half of  1995 was not  as firm in 
the Member  States which  revalued  as it was in France and the  United  Kingdom. 
Furthermore, the change in market prices in BLF, DKR, DM, HFL and OS tended 
to follow  on the heels of the movement in intervention prices in national  currency 
between the beginning of  1995 and the beginning of the  1995/96 marketing  year. 

21 

See Graph  B  1 d of  Working  Paper  on  Basic  Information. 

34 

2. 

Trade 

Monthly  variations  from  1992  to  1995  in exports  with  the  other  Member  States 
and  non-member  countries  are  analysed.  On  average,  the  period  is  marked  in 
particular  by  the  devaluations  in the  LIT, the PTA and the  DRA. 

(a) 

In  the  short  term,  in  almost  all  cases  the  scale  of  the  monthly  variations  in  the 
value  of  exports  masks the effects  of  any  currency  variations22. 

In the case of  certain  substantial devaluations  like that  in the LIT  in spring  1995 
or  the  UKL  in  late  1992,  the  months  concerned  show  a  brief  surge  in  exports. 
Nonetheless,  the  sharp  devaluations  in  the  LIT  in  late  1992  and  in  the  PTA  in 
early summer  1993 were not accompanied by any rise in exports. Furthermore, the 
very substantial rises in exports of products like sugar and milk products in Spain 
in  1994 and  1995 clearly  have no link with currency movements. Conversely, the 
appreciation  of  the  LIT  at the  end  of  1995 had no significant  impact  on  general 
trends  in  Italian  exports  of the  various  agricultural  product  groups. 

Statistics  of  Member  States' trade  with  those whose  currencies  devalued  sharply 
did  not  indicate  significant  links  between  the total  exports  of  any  product  group 
and  short-term  currency  movements. 

Among  other  possible  short-term  agri-monetary  effects,  deflection  of  trade  may 
in. theory  occur  for  products  attracting  export  refunds  when  the  aggregate 
monetary  gap widens23. The scale of such aggregate gaps depends in particular on 
transport  costs  from  one  Member  State  to  another,  and  therefore  on  their 
geographical  remoteness  and  the type  of  products  concerned. 

In  this respect,  the  main risks  incurred  in  1995/96 were due to positive  gaps  for 
the  LIT  and  SKR,  which  exceeded  five  points  during  the  confirmation  periods. 
For the LIT, aggregate gaps in excess of five points arose with the DRA, DM and 
OS and recurred  often  in excess of four  points with the DRA and OS. Aggregate 
gaps  for  the  SKR,  which  exceeded  six  points  against  the  IRL,  UKL  and  in 
particular  FMK, or five points with the DM and HFL, and up to four  points with 
the  DKR,  afforded  opportunities  for  deflection  of  trade  flows.  Such  risks  were 
high  prior  to  January  1996 when  large  aggregate  gaps  persisted. 

Nevertheless, export statistics show no movement which can be put down to such 
agri-monetary  gaps. Any  cases of  deflection  of trade due to differences  between 

22 

23 

See Graphs  C3 to  CI  of  Working  Paper  on  Basic  Information. 

See Graph  A 6 of  Working  Paper  on  Basic  Information. 

35 

export  refunds  in  national  currency  occur  only  sporadically.  Even  where  the 
aggregate  gaps  over  two  months  are  significant,  as  was  the  case  at  the  end  of 
1995,  no  systematically  organized  network  is  set  up  on  account  of  uncertainty 
- about  the  time  the  situation  will  last.  Naturally,  this  does  not  rule  out  the 
possibility  that  isolated  cases  of  financial  significance  to  the  individual  operator 
may  arise. 

(b) 

Over  longer  periods,  an  analysis  of  the  impact  of  currency  fluctuations  on  the 
single  market24  shows  that,  generally  speaking,  exports  can  be  influenced  by 
competition.  However,  that  impact  vies with  internal  demand,  exporters' attitude 
vis-à-vis 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. 

Competitiveness can be gauged by the actual exchange  rate, which takes account 
of  the  currency  developments  in  each  Member  State,  depending  on  the  relative 
importance  of  its  economic  partners,  and  the  movement  of  production  costs. 
According  to  that  indicator,  from  1992  to  1995  the  trend  in  Member  States' 
competitiveness  was: 

- 

- 

- 

fairly  negative  in  Germany,  Belgium,  Greece  and  the Netherlands; 

moderately  negative  in  France,  Denmark  and  Portugal  and  moderately 
positive  in  Ireland; 

fairly  positive in Spain and the United Kingdom and very positive in Italy. 

Other  indicators  of  competitiveness  provide  approximately  the  same  grading  for 
the  period  in  question. 

A  statistical  examination25  shows  an  overall  link  between  an  increase  in 
competitiveness and a rise in value  in national currency. That overall  link is still 
apparent  when  exports  are  expressed  in  national  currency  deflated  using  the 
consumer  price  index. 

However, it is not apparent when exports are considered in terms of value in ecus 
or  in quantity  in tonnes. 

24 

25 

Report  of  the  Directorate-General  for  Economic  and  Financial  Affairs  published  in  "European 
Economy",  Reports  and  Studies No 4-1995. 

See Tables  and  Graphs  CI  and  C2 of  Working  Paper on Basic  Information. 

36 

In general, the development of competitiveness was therefore  followed  by that of 
profits  on  exports  but  not  by  shifts  in  market  shares.  Thus  while  quantities 
exported increased overall by around 5% per year in both Italy and Germany, unit 
- prices rose in the former  case and fell  in the latter in terms of constant purchasing 
power. 

The main characteristics highlighted by the overall analysis are found  in the group 
of products not affected  by major  intervention mechanisms. They remain present, 
to  a  lesser  degree,  in  the  case  of  other  products  (cereals,  sugar,  milk  and 
beef/veal).  The  impact  of  currency  movements  on  these  products  subject  to 
intervention  should  not  have  occurred  where  the differences  in  price  in  national 
currency had simply reflected  the agri-monetary  gaps. Some explanation  for  their 
existence  lies  in  the  disparities  outlined  in point  C.l  between  the  movements  in 
market  prices  and  in  intervention  prices  in national  currency.  The  disparities  are 
even  larger  than  those  described  (e.g.  in  the  case  of  common  wheat)  where  the 
products  in question  are  derived  from  others directly  affected  by  intervention.  A 
more  refined  and  highly  specific  analysis  by  product  group  provides  different, 
confused  results, which are strongly affected  by factors peculiar to the markets in 
question. 

Compared with the general trend, the situation in certain Member States is highly 
specific.  Thus  the  improvement  in  competitiveness  in  Spain  is  only  half  that  in 
Italy,  while  the  rise  in  Spain's  exports  is  almost  as  great  in  terms  of  value  and 
much  greater  in  terms  of  quantity.  Accordingly,  results  for  Spain  essentially 
reflect  the consequences of the reorganization  of production and marketing  in the 
sugar and  dairy  industries within  the  European  Union. 

Other examples of note are Belgium, whose performance  outstripped expectations 
having  regard  to  the  index  of competitiveness  adopted,  in particular  in  fruit  and 
vegetables, and the United Kingdom, whose performance  was poor, mainly owing 
to  the  decline  in  quantities  of cereals  exported. 

3. 

Incomes 

The  latest  statistics of  farm  incomes relate  to  1995.  In  detail,  the  effects  of  the 
agri-monetary  arrangements on incomes in  1995 are very difficult  to gauge  since 
they depend in particular on the actual impact of the agricultural  conversion rates 
on market prices, on the operative events for ACRs, and on the terms of payment 
for  purchases, sales and  aid to  farmers.  As a result  some  effects  visible in  1995 
are  due  to  movements  in  ACRs  in  1994,  whereas  the  consequences  of  certain 
changes  in the ACRs for  1995 will  only  be felt  in  1996 or  even  later. 

To  assess  the  effects  of  the  ACRs  in  the  period  1995/96  on  income  over  12 
months, certain  approximations  and  assumptions were nonetheless  needed: 

- 

prices received by farmers  in  1995/96 are deemed to be the same as those 
recorded  in  1995 and to mirror  the change in the ACRs for  producers of 

37 

- 

- 

- 

- 

sugar  beet  and  beef/veal.  In  other  production  sectors,  the  impact  of  the 
ACRs is considered nil, in accordance with results set out in point C.l  and 
the  relatively  negligible  overall  income  affected  by  the  minimum  prices 
(potato  starch, processed  fruit  and vegetables, etc.); 

agri-monetary  compensatory  aid  notified  or provided  for  by the  Member 
States is assumed to have been paid in  1995/96 in order to balance out the 
effects  of appreciable revaluations on prices. In the case of Sweden, where 
an  appreciable  revaluation  occurred  in  January  1996,  only  half  the 
maximum  aid  payable  was taken  into  account; 

amounts  of  direct  aid  to producers, expressed per  hectare  cultivated,  and 
aid per tonne of  seed produced  are those for  the  1995/96 marketing year, 
to  which  the ACR  for  1 July  1955 is applied26; 

the  ACR  for  1 January  1996  is  applied  to  the  1995  sheep  premium;  to 
group  the  whole  impact  of  the  ACR  for  1 January  1996  on  incomes  in 
1995, the balance of the  1994 premiums, which was actually paid in 1995, 
is replaced  by  the  balance  of  the  1995 premiums,  which  is actually  paid 
in  1996; 

the  ACRs  for  early  1995,  or  even  early  1994  in  the  case  of  olive  oil, 
actually  apply to beef premiums, structural  aid, the tobacco  premium  and 
aid to olive-oil producers, which is paid in 1995. In order to assess the  full 
impact  on  12 months of the  ACRs for  1995/96, it has been  assumed  that 
those  premiums  and  aid  are  determined  by  the  ACRs  valid  at  the 
beginning  of  1996.  Aid  to  major  olive-oil  producers  is  deemed  to  have 
been  affected  by  the  average  ACRs  from  November  1995  to  February 
1996 and  the other  amounts  by the ACR for  1 January  1996. 

Using this theoretical  model, which  groups the full  impact of the  1995/96  ACRs 
over  12 months, the  following  were  assessed: 

- 

- 

the  effect  of  the  annual  movement  of  the  ACRs  between  1994/95  and 
1995/96,  by  multiplying  the  income  components  affected  by  the  agri-
monetary arrangements by the gap between the ACRs applied during those 
two  periods; 
the  annual  effect  of  the  agri-monetary  arrangements  in  1995/96,  by 
multiplying those components by the gap between the ACRs applied  and 
the  corresponding  RMRs. 

26 

For the sake of simplification, the small number of cases where the operative event takes place on 
1 August have been dealt with in the same way as the majority of cases where the operative event 
for the ACR takes place on  1  July. 

38 

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 States27. 

The effect  of the movement  in ACRs compared with the preceding year turns out 
to  be  fairly  small,  generally  below  2% in most  Member  States, and  is: 

- 

- 
- 

fairly  positive  in  Luxembourg,  Germany,  Greece,  Finland,  Ireland  and 
Spain, 
fairly  negative  in  Belgium  and  Denmark, 
fairly  neutral  in Portugal,  France, the Netherlands  and  Austria. 

These  slight differences  in movement  are mainly  the result of  a balance,  or  lack 
thereof,  between  the  effects  of  the  ACRs  on  prices  and  the  effects  of 
compensatory  aid  in the  Member States concerned; they  are due to the effects  of 
devaluations  on  aid  in the  case of  Greece,  Ireland  and  Spain. 

The  impact  of  the  year-on-year  change  is particularly  positive  in  three  Member 
States, namely: 

- 
- 

Sweden  (+  7.2%),  owing  to  the  increase  in aid  per  hectare, 
Italy  and  the  United  Kingdom  (+4.1%  and  + 4.5% respectively),  owing 
to  increases  in  prices  and  aid,  the  latter  accounting  for  two  thirds  of  the 
effect  in  Italy  and  half  in the United  Kingdom. 

The overall  impact  on net  income  from  farming  is  1.7%  or ECU  1 559  million. 
Of  that  amount,  71%  can  be  put  down  to  the  impact  on  aid  while  of  the 
remainder,  21% of the total is due to compensatory aid and only  8% to the impact 
on prices. 

The  annual  impact  of  the  agri-monetary  arrangements,  by  comparison  with  the 
situation that would have obtained had the RMR been applied directly  in place of 
the ACR  in  1995/96,  is beneficial  for  all the Member  States. 

The  major  benefit  in terms  of  incomes occurred  in  Sweden  (+  8.8%). 

The  other  Member  States  where  incomes  rose  substantially  are  Luxembourg 
(+  5.6%),  Germany  (+  4.6%),  Belgium  and  Denmark  (+  3.8%).  The  rise  was 
smaller  in  Austria  (+ 2.5%)  as the  large proportion  of  income  accounted  for  by 
national  aid  is not  affected. 

Farmers  in  the  Netherlands,  Ireland,  Italy  and  Spain  saw their  incomes  rise  by 
around 2%. The other Member States saw smaller rises of around  1% or even less 
in the case of  Greece  and  Portugal. 

27 

See Tables  D  1, D 2  and  D 3 of  Working  Paper  on Basic  Information. 

39 

In total, the effect  on net income from  farming  is  1.9%  or ECU  1718 million, the 
proportion  due  to  aid  being  lower  in  this  case,  at  only  45%. Compensatory  aid 
accounts  for  19% and  prices  for  36% of  the total  impact  on  income. 

D. 

1. 

Financial  impact 

Methodological  aspects 

(a) 

Classification  of  agri-monetary  effects 

In the agri-monetary  area, the legacy of the switch-over (or green ecu) mechanism 
weighs heavy on the Community budget. Introduced  in  1984, the mechanism was 
discontinued  from  1 February  1995.  It  resulted  in  a  general  increase  of  around 
20%  in prices and amounts expressed  in ecus, which cancelled  out the  effects  of 
bringing  the  conversion  rates  used  in  agriculture  back  to  a  realistic  level. 
Previously, from  1990 to  1993 it also brought about a fall totalling  1.46%) in most 
prices  and  amounts  under  the CAP. 

It  would  be  wrong  to  ascribe  the  costs  in  question  to  the  green  ecu  mechanism 
itself. It is unlikely that, had it not existed, prices and amounts in ecus would have 
developed  as they  did. However,  in one way or another, those costs represent the 
financial  legacy of the agri-monetary  problems existing before the abolition of the 
green  ecu. 

This  legacy  of  past  costs  does  not  stem  from  the  present  agri-monetary 
mechanisms  but  rather  from  the  final  value  of  the  switch-over  coefficient,  i.e. 
1.207509,  and  the  structure  of  annual  expenditure  in ecus. 

Firstly, they  include the effects  of the general  rise in prices and  amounts  in  ecus 
in  early  February  1995.  Those  effects  can  be  determined  on  the  basis, of  the 
difference  between  total  EAGGF  Guarantee  Section  expenditure  minus the  agri-
monetary  effects  relating to the events of  1995/96 and the same total  so reduced, 
divided  by  1.207509. 

Calculated  as above, the financial  impact of this rise in prices has to be corrected 
as  far  as  the  expenses  connected  to  the  world  market  price  are  concerned,  i.e. 
certain  export refunds  and certain aids28. For the amounts concerned,  the  method 
indicated  in the above paragraphe  affects  the difference  between the level  of  the 
prices of the European Union and the world market level, whereas only  common 
prices  are  modified. 

Moreover,  the  agri-monetary  reduction  in prices  in ecus  was  0.17%  in  1990, or 
11% of the total fall, but was applied to more than 90% of the EAGGF Guarantee 

28 

These  effects  are  illustrated  in Table  E  1 of  the  Working  Paper  on  Basic  Information 

40 

Section.  The  1993  reduction  amounted  to  1.29%  but  it  was  not  applied  to 
compensatory payments under the reform. On average, an agri-monetary  reduction 
of  1% in  prices  results  in a 0.7% reduction  in EAGGF  expenditure29. 

Furthermore,  the  financial  impact  of  developments  in  1995/96  stem  from  four 
mechanisms  or  measures,  namely  thresholds,  operative  events,  the  freezing  of 
ACRs and  compensatory  aid. 

The cost of  agri-monetary  compensatory  aid  is identified  in the  1996 budget  and 
the  1997 preliminary  draft  budget. The fact  that these costs are degressive is  laid 
down  in  the  regulations  and  the  granting  of  the  last  tranches  of  aid  decided  in 
1995/96  should  affect  the  budget  for  1998  and,  to  a very  slight  extent,  that  for 
1999. 

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 budget  as 
regards all  the aid measures concerned  and that for  the year 2000 as regards beef 
premiums  only. 

The  financial  effects  of  the  thresholds  and  operative  events  stem-from  the 
difference  between: 

and 
- 

the agricultural  conversion rate  on the date of the operative  event  for  the 
amount  concerned, 

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  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  thresholds  is  due  to  the  difference  between  the  agricultural 
conversion  rate  and  the  accounting  rate  on  the  date  of  the  operative  event.  The 
effect  of the operative events relates to the difference  between the accounting rate 
on the date  of  the  operative  event  and  the  same rate  on the  date of  the  booking 
of  the  expenditure  in  ecus.  Irrespective  of  the  system  of  ACR  selected  (and 
therefore  of  no  use  in  comparing  such  systems), this  effect  was  omitted  in  the 
previous  agri-monetary  report  relating  to  1993 and  1994. 

29 

The  percentage  0.7%  comes  from  annual  Commission  reports  in  1994,  1995  and  1996  on  the 
impact  on  EAGGF  Guarantee  Section  expenditure  of: 
-  movements  in the dollar/ecu  parity, 
-  rises  in the  correcting  factor  as a result  of  monetary  realignment  within  the EMS. 

41 

(b)  Method  for  estimating  the  costs of  developments  in  1995/96 

Agri-monetary events and decisions in 1995/96 mainly affect  the budgets for  1996 
to  1999. 

When estimating the agri-monetary effects  on the 1996 budget, account was taken 
of  the preliminary  draft  supplementary  and  amending  budget  for  1996  (PDSAB 
96) as at 30 June  1996, drawn  up on the basis of conversion  rates available  on 6 
May  1996. 

For the effects  from  1997 to  1999, calculations are based on the  1997 preliminary 
draft  budget  (PDB  97)  as  at  30 June  1996, drawn  up  using the  conversion  rates 
available  on 21  March  1996. 

The bases (PDSAB  96 and  PDB 97) were corrected  by replacing  the ACRs used 
to  draw  them  up  by  the  ACRs  available  on  1 July  199630.  The  accounting  rate 
used  was  not  adjusted  as  it  is  of  minor  significance  among  the  agri-monetary 
effects  due  to  variations  in  the ACRs. 

The  PDSAB  96  and  PDB  97  as  corrected  on  1  July  1996  show  the 
situation  as provided  by the  latest  ACRs available  at the  end  of  1995/96. 
Expenditure  is broken  down  on  the one  hand  on  the basis  of  the  various 
operative events for the ACRs affecting  them and on the other hand on the 
basis  of  past  expenditure  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  PDSAB  96 
and  the  PDB  97 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 a wide variations  . 
The  RMRs for  1 July  1996 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  PDSAB  96  and  the 
PDB  97 by the current ACRs applying on the date of the operative  events 
for  such  aid. 

30 

31 

See Tables  E  3 to  E  6 of the  Working Paper  on  Basic  Information. 
See Table  E  3 of  Working  Paper  on  Basic  Information. 

42 

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 
outcome  of  a similar  simulation using the  RMRs applying  on  the  date of 
the  operative  events  for  the  ACRs  actually  applied.  Given  reservations 
regarding  the  identification  of  the  month  of  entry  in  the  accounts,  that 
assessment is rather imprecise and it becomes impossible after  1997 as all 
the  conversion  rates  applicable  after  1 July  1996  are  replaced  by  those 
available  and  applicable  on  1 July  1996. 

- 

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  1995/96  affect  75%  of  expenditure  in  the  PDSAB  96.  The 
conversion  rates  valid  on  1  July  1996  are  applied  to  3%  of  the  expenditure 
actually  stemming  from  an  operative  event  on  that  date  but  also  to  the  10% 
covered  by  operative  events  occurring  subsequently,  from  2  July  to  15  October 
1996. The conversion  rates valid  on the dates of operative events  prior  to  1 July 
1995, but not prior to November  1994, are applied to almost all other  expenditure 
in  the  1996  budget.  Overall,  barely  1%  of  the  expenditure  is  deemed  to  be 
unaffected  by  the ACRs. 

Only  2% of  expenditure  in  the  PDB  97  is affected  by  the  ACRs with  operative 
events  occurring  prior  to  the  period  under  review.  11%  of  the  expenditure  is 
affected  by  the  ACRs  for  early  1996  and  37%  by  those  for  1  July  1996. 
Accordingly, almost 50% of the PDB 97 hinges on the conversion rate  applicable 
from  2 July  1996 to  15 October  1997. Those rates, which were not available when 
this report  was  drafted,  are  replaced  by  the  conversion  rates for  1 July  1996. 

As regards  figures  in the  1998 and  1999 budgets carried  over  from  the  PDB 97, 
almost all  the relevant  operative  events will take place after  1 July  1996 and  the 
ACRs are  replaced  by  those  for  1 July  1996. 

Overall,  the  agri-monetary  situation  at  1 July  1996  is  of  great  importance  in 
estimates  for  1997,  1998  and  1999.  Highly  short-term  in  scope,  this  situation 
shows  a  very  large  monetary  gap  for  the  SKR  (+ 6.779),  which,  in  accordance 
with  the agri-monetary  rules, cannot  be maintained  for  long.  The  LIT  (+  4.986) 
and the IRL (+ 4.603)  also have large monetary gaps, while the gaps for  the DM, 
the  HFL  and  the  OS are  close to zero. 

The  gaps  will  no  doubt  evolve,  which  will  have  a  big  effect  on  the. results 
calculated  here.  However,  it  should  be  noted  that  the  average  weighted  gap 
according  to  the  breakdown  by  currency  in  the  1996  budget  is  2.2%  at  1 July 
1996 while the  average  for  1995/96  is  2.1%. 

43 

2. 

Results  of  estimates 

(a) 

The  legacy  of  the  past 

In the  light  of  estimates  for  costs relating to developments  in  1995/96  (see point 
(b)  below),  the  effects  of  the  green  ecu  mechanism  highlighted  by  the  rise  in 
prices  in ecus entail  expenditure  of  ECU 6 800 million  for  the  1996 budget  and 
ECU  6 920  million  for  1997. 

The effects  of the green ecu, passed on through world market prices, are estimated 
to  result  in  an  extra  cost  of  ECU  1 320  million  per  year32. 

Agri-monetary  reductions  in  prices,  which  amount  to  1.46%  in  total,  result  in 
savings of  around  ECU  340  million  per  year. 

Altogether,  the  residual  effects  of past  agri-monetary  problems  involve  a cost  of 
around  ECU  7  800  to  7 900  million  each  year. 

(b) 

Developments  in  1995/96 

The results set out  in the table below  show an annual  cost of around  ECU  1 200 
to  1 300  million  per  year. 

Around  two thirds  of that  cost  is due to the effects  of the margins. However,  the 
cost of the  margins  depends on future  currency  movement,  in entirety  as  regards 
1998 and  1999  and  half  thereof  in  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  1995/96, 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  100  million  per  year.  This  result  is  unusually  high 
because  there  was  no  offsetting  in  1995/96  between  currencies  that  appreciated 
and  those that  depreciated.  It  cannot  be estimated  at présent for  1998 or  1999. 

The  cost  due  to  freezing  ACRs  gradually  rises,  because  of  operative  events, 
eventually  reaching  ECU  185 million. As the freeze  will continue until  1 January 
1999,  it  also affects  the  budget  for  the  year 2000. 

32 

See  Table  E 2  of  Working  Paper  on  Basic  Information. 

44 

The  cost  of  compensatory  aids  could  be  reduced  as  from  1997  in  order  to  take 
into  account  the  devaluation  occurred  after  the  appreciable  revaluations  which 
justified  these  aids.  The  incidence  of  these  devaluations  on  the  amount  of  the 
tranches  of  the  aids which  have  not  yet  been  granted  has to be  examined  by  the 
Commission  following  the management  committee  procedure. 

Costs  of  agri-monetary  events  in  1995/96 

1996 

1997 

1998 

1999 

A  -  Mechanisms  actually  applied 

(ECU  million) 

ACR  freeze 

Compensatory  aid 

Permitted  margins 

Operative  events 

TOTAL 

111 

201 

817 

107 

180 

141 

890 

104 

185 

70 

916 

-

185 

2 

913 

-

1  236 

1  315 

1  171 

1  100 

B - Hvpothetical  application  of  Articles  7 and  8 of  Regulation  (EEC) No  3813/92 

Increase  in  aid  (Article  7) 

Compensatory  aid  (Article  8) 

Permitted  margins 

Operative  events 

TOTAL 

653 

2  812 

2  932 

2  932 

0 

823 

117 

201 

953 

104 

138 

983 

-

70 

979 

-

1  593 

4 070 

4 053 

3  981 

As  compared  with  the  allocations  per  Member  State  in  the  PDSAB  96,  the  main 
beneficiary  under  the agri-monetary  arrangements  is Sweden  with an  increase of  11.2% 
in expenditure  in SKR. This  is the result of the effects  of the margins and the  operative 
events  in  a  climate  of  high  currency  appreciation.  In  the  future,  even  if  those  effects 
disappear, Sweden will continue to be a major  beneficiary  under the arrangements thanks 
to the  freeze  on the  ACRs, the  effects  of  which  will  be felt  from  1997. 

The  second beneficiary  under  the  arrangements  in  1996 is Italy  with a 5.6%  increase  in 
the Community expenditure concerned. This result, which is linked with the  appreciation 
of the LIT  during  the  period  under  review,  could  be called  into question  in the  future. 

Thereafter,  with  increases of  4.7% to  3.8% in the Community  expenditure  involved  are 
the  Member  States  with  ACRs  frozen  in  June  and  July  1995.  The  currency  situation 
affecting  those  Member  States  has  tempered  the  impact  of  the  margins  but  this  could 
change  in the  future. 

45 

The  impact  of the Council  Decisions of June  1995, i.e. the  freeze  on ACRs and  the  flat-
rate  compensatory  aid  introduced  in  place  of  Articles  7 and  8 of  Regulation  (EEC)  No 
3813/92, can be assessed by estimating the cost that would have been  incurred  under the 
agri-monetary  arrangements  had  those  Decisions  not  been  adopted.  Savings  turn  out  to 
be close to ECU 360 million  in  1996, ECU 2 750 million in  1997 and almost ECU 8 900 
million  over  four  years. 

The  enormous  cost  of  Articles  7  and  8  of  Regulation  (EEC)  No  3813/92  seems  to  be 
mainly  due to the  level of  per  hectare  aid  in  SKR (which would  have  been  10%  higher 
in  ecus  if  maintained  in  SKR).  Supposing  Article  7  to  have  been  applied  only  to  the 
appreciable revaluations  of June and July  1995, costs would have been the same in  1996 
as they actually were, but nearly ECU  700 million higher in  1997 and almost ECU 2 500 
million  higher  over  four  years  (1996  to  1999). 

46 

ISSN 0254-1475 

COM(96) 636  final 

DOCUMENTS 

EN 

01  09  03 

Catalogue  number  :  CB-CO-96-633-EN-C 

ISBN  92-78-12921-6 

Office  for  Official  Publications of the European  Communities 

L-2985  Luxembourg