Report from the Commission to the Council and the European Parliament on the agri-monetary system for the single market - 1 July 1996 to 30 June 1997
Date: 1998-01-22
Institutions: European Commission
Subjects: agri-monetary policy, common agricultural policy, financial year, report, single market

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels,  22.01.1998 
COM(1998) 20 final 

REPORT FROM THE COMMISSION TO THE COUNCIL 
AND THE EUROPEAN PARLIAMENT 
ON THE AGRI-MONETARY SYSTEM FOR THE SINGLE MARKET 

1 July 1996 to 30 JuneÏ997 

•irW^m. 

CONTENTS 

Introduction 

I 

MAINRIPORT 

A 

B 

Summary ofugri-inonelary  cfl'ects observed 

Analysis, outlook  and proposals 

II. 

ANAI .YSIS OF AGRI-MONKTAR Y EFFRCTS IN  1996/97 

A. 

Currency developments 

Representative  market rates 
Agricultural conversion rates 

1. 
2. 
Agri-monetary  mechanisms 

B. 

1. 
2. 
3. 
4. 
5 

Conversion rate for import charges 
Regulations governing appreciable  revaluations 
The freeze on agricultural  conversion rates 
Rules on compensation 
Compensatory aid 

C. 

liconomic impact 

Prices 
Trade 
Incomes 

D. 

Financial impact 

1. 
2. 

Methodological  aspects 
Results of estimates 

Abbrcviations for national currcncics: 

BLF:  Bclgian and  Luxcmbourg franc 
DKR  Danish kronc 
DM:  Gcrman  mark 
DRA:  Grcck drachma 
LSC: 
FF: 
FMK:  Finnish markka 

Portugucsc cscudo 
Frcnch  franc 

Other specific abbreviations: 

1998 PDB: 
ACR: 
RMR: 

preliminary draft budget for  1998 
agricultural conversion rate 
representative market rate 

HFL:  Ncthcrlands guildcr 
Irish pound 
IRL: 
Italian lira 
LIT: 
Austrian  schilling 
OS: 
PTA: 
Spanish pcscta 
UK.L:  Pound stcrling 
dollar 
$: 

2-

REPORT FROM THE COMMISSION TO THE COUNCIL 
AND THE EUROPEAN  PARLIAMENT 
ON THE AGRI-MONETARY SYSTEM FOR THE SINGLE MARKET 

U u ly  1996 to 30 June  1997 

lnhodnclion 

This  report  by  the  Commission  has been  drawn up  pursuant  to  the  commitment  entered 
into  at  the  Council  meeting  (Agriculture)  of  19 to  22  June  1995,  when  the  Commission 
undertook  to  draw  up  a  report  each  year  analysing  the  consequences  for  the  common 
agricultural  policy  and the  single market of  monetary fluctuations and  the agri-monetary 
system in force,  accompanied by proposals for appropriate remedies to  the problems that 
might ensue. 

It  also  constitutes  a  response  to  the  own-initiative  resolutions  of  Parliament  of  19 
September  1995  on  the  agri-monetary  system,1  calling  6n  the  Commission  "to  make  a 
detailed assessment of all implications of the Council Decision2 and its financial impact." 

This report relates to the economic sector of agriculture over the period  1 July  1996 to  30 
June  1997  (1996/97).  It  comprises  a  main  report  summarising  and  commenting  on  the 
result  of  thc  investigations  carried  out,  and  indicates  the  proposed  solutions  to  the 
problcms  idcntificd.  The  main  report  is followed  by  a description  of the  analysis  of  agri-
monetary  cvents  in  1996/97,  and  their  effects.  It  is  a  sequel  to  the  annual  report  for 
I995/96.3 

The first  and second  parts of the analysis, parts A  and B,  describe the currency and agri-
including  the  granting  of 
monetary  developments  of  the  period  under  review, 
compensatory aid. 

Part  C is  an approach to  the  economic  cohsequences  at the level  of  agricultural  markets 
and farm incomes.  In view  of the  available statistics, the most  convenient  apprpach is  to 
compare results for twelve-month periods from July to June for the analysis of prices and 
by  notional  year  for  incomes.  The  analysis  of  trade  has  been  shortened,  in  view  of  the 
results described in the previous report. 

Joint  rcsolution  undcr  Arliclc  40(5)  of  Parliament's  Rules  of  Procedure,  No  PE  193.731,  of  19 
Scptcmbcr 1995 on the agri-monetary system. 

Decision of Council  meeting of  19 to 22 June  1995, on the basis of which two Council  Regulations 
were  adopted,  namely  Rcgulation  (EC)  No  1527/95  of 29  June  1995  regulating  compensation  for 
reductions  in the  agricultural  conversion  rates of certain  national  currencies  (OJ  L  148, 30.6.1995, 
p.  1) and  Regulation (EC) No 2611/95 of 25 October  1995 establishing the possibility of national  aid 
being  gxanted in  compensation for  losses of agricultural  income caused by  monetary  movements  in 
otherMember States (OJL 268, 10.11.1995, p.3) 

COM(96) 636 final 

3-

Part  I)  assesscs  the  effects  of  the  agri-monetary  system  on  Community  expenditure.  The 
impact  is  cslimatcd  on  the  basis  of  the  1997  budget  in  the  course  of  execution,  and  the 
preliminary draft  budget  for  1998. Budget years cover twelve-month periods running from 
16 October. 

The  basic  data  for  this  report  are  presented  in  tables  and  graphs  appearing  in  a 
Commission  staff  working  paper  : document  SEC( 1998)87  available  in french, german 
and english version. 

4-

I. 

A. 

1. 

MAIN REPORT 

Agri-monetarv effects  observed 

Conversion rates 

Like the previous year, the period July 1996 to June  1997 (referred  to as  1996/97) 
was  relatively  stable  for  most  currencies.  The  salient  feature  was  the  strong 
revaluation  of  the  UKL,  partly  followed  by  the  IRL.  Once  again,  traditionally 
strong currencies were slightly devalued. 

The dollar appreciated by 7-89 % against the ecu, following the trend of the earlier 
period, during which it had appreciated by 6-8%. 

In  general,  monetary  gaps  remained  positive  over  the  period,  i.e.  ACRs  were 
higher  than  RMRs.  The  positive  gap  for  the  UKL  was  particu|arly  wide  from 
October  1996, regularly exceeding 6 points during the periods when the trend was 
confirmed.  Except for  one ten-day period, there was always at least  one currency 
with  a  positive  monetary  gap  of  over  4  points.  This  meant  that  the  permitted 
margin ("franchise")  for negative gaps was very small, at less than  1 point. In this 
situation, no currency showed a constant negative gap. 

Three "appreciable" reductions were made to the ACRs of the IRL and the UKL. 
The reductions in the ACR for the IRL had to be adjusted  by a devaluation  of the 
ACR on 26 May 1997. The ACR of the LIT was reduced once more on  1 October 
1996 aftcr  four  non-appreciable reductions in the previous period.  These  repeated 
reductions  lcd  thc  Council  to  consider  that  the  conditions  for  an  appreciable 
revaluation of 3-08% had been fulfilled  on  1  March 1997. 

The  appreciable  reduction  in  the  ACR  of  the  SKR  on  11  January  1996  was 
followed  by a further  reduction of 3-280% on 7 July  1996. The second  appreciable 
reduction was partly offset  by an increase in the ACR of 2-78% altogether. 

Increases in the  ACRs for  the BLF, DM, HFL,  and  OS  from  June  1996 to  May 
1997 completely ofFset the appreciable reductions recorded in 1995. 

2. 

Ad hoc Council measures for appreciable revaluatioris 

The Council adopted ad hoc measures for the period from June  1995 to December 
1996,  to  deal  with  any  appreciable  revaluations.  The  measures  in  the  basic 
regulation are replaced by compensatory aid on a flat-rate basis and a freeze  on the 
agricultural  conversion rates applicable to direct aid. Council Regulation  (EC) No 
724/97  renewed  these  arrangements  until  30  April  1998,  and  extended  their 
application to other cases of reduction in the agricultural conversion  rate, so as to 
deal  with  all  cases  that  might  require  the  application  of  Articles  7  and  8  of 
Regulation (EEC) No 3813/92. 

3. 

Freezing of ACRs 

ACRs for the aid referred  to in Article 7 of the basic agri-monetary Regulation are 
frozen at the value actually applied at the time of the appreciable revaluation.  The 

frcczc  appiics  untii  1 January  Î999.  In  view  of  thc  operative  events  determining 
ihe  ACRs  applicd  to  the  aid  concerned,  scvcral  ratcs  will  remain  frozen  until  30 
June  1999. 

On  30  June  1997,  ACRs  wcre  frozen  for  all  but  iivc  currcncies  (the  exceptions 
bcing  the  DRA,  ESC,  FF,  FMK  and  PTA).  The  Council  has  decided  that  the 
difference  between  the  frozen  ACR  and  the  ACR  that  would  have  obtained had 
there been no freeze should  be limited to  11-5%, so that the ACRs applied  to  the 
aid  concerned  do not diverge too far from the conversion rates for the euro to be 
introduced  on  1 January  1999. When the difference  between the frozen  ACR and 
the current ACR exceeds the limit, the frozen  ACR is reduced  to  a leveî equal  to 
the current ACR increased by a margin of  11*5%. As a result  of this decision,  the 
frozen  ACRs  for  the  SKR  and  the  UKL  had  to  be  reduced  on  1 July  1997, by 
0-11% and 3-61% respectively. 

4, 

Compensatory aid for appreciable declines in ACRs 

The aid compriscs threc degressivc tranches, the first of which may consist in up to 
100% of the ceiling, while thc second and third arc limited, respectivcly, to 2/3 and 
1/3 of the ceiling. The European Union finances 50% of the maximum,  irrespective 
of  the  national  contribution  in  the  form  of  additional financing by  the  Member 
State. 

In cases of reduction  of the frozen  ACR, complementary aid corresponding  to  the 
consequent  ioss of annual  income may be granted  to  the farmers  concerned.  This 
aid  is also made up  of three twelve-month  degressive  tranches,  50% of which  is 
financed  by the European LTnion irrespective of the national contribution. 

The  second  tranche  of aid  to  offset  the appreciable  revaluations  of June  and  July 
1995 was activated in Belgium, Luxembourg, Germany, Denmark, the Netherlands 
and  Austria.  Almost  ECU 210 million  was  granted  uhder  the  second  tranche, 
including  ECU  135  million  financed  by  the  Community.  In  view  of  currency 
developments, the planned third tranche has been  cancelled  for  the Member  Slates 
in question. 

Fuither  aid  may  now  be  granted  in  view  of  the  appreciable  revaluations  of  the 
SKR, IRL, UKL and LÎT; the first tranche wili total almost ECU 993 million, half 
of which can be financed by the EAGGF. 

Sweden  has  paid  the  first  two  tranches  of  compènsàtion  for  the  appreciable 
revaluation of 11 January  1996. The authorities have also riotified their intention of 
granîing aid to offset  the effects  of the appreciable revaluation of July  1996, which 
has been  authorised,  The  second  tranche  of this  aid was  cancelled  in view  of the 
devaluations occurring after the appreciable revaluation. 

Ireland  granted  the European  Union's  share  of the first tranche  of compensatiôn 
for the appreciable revaluations of November  1996 and January  1997, which came 
to  ECU 56-7  million.  Moreover,  in  June  1997  Ireland  notified  its  intention  of 
granting  the  Community  share  of  aid  for  the  revaluation  of  March  1997.  The 
maximum for the first tranche of that aid was fixed at ECU 57*5 million. 

By  30  June  1997,  Italy had not yet  notified  any plans for  the  amount  of ECU  247 
million  available  for  granting  under  the  first  tranche  of  compensation  for  the 
appreciable revaluation of the LIT in March  1997. 

By  the  same  date,  the  United  Kingdom  had  notified  no  plans  for  the  ECU 454-4 
million  available  under  the  first  tranche  of  compensationi  for  the  revaluations  of 
January,  March  and  June  1997,  or  for  the  ECU 66-7  milliori  to  compensate. for 
declines in area aid for arable crops in national currency on  1 July  1997. 

5. 

General  remarks on  economic  eflects 

In theory, the ACR will affcct  only those market prices that are closely linked to an 
intcrvention  mcchanism  (mainly  in  thc  sectors  of  cereals,  sugar,  milk  and 
beef/veal).  Thc  development  of  ACRs  may thus  have  an impact  on  farm  incomes 
through thc prices of thosc  products.  Moreover,  problems in trade'may  arise when 
divergences  appear  either  between  ACRs  ahd  RMRs,  or  between  market  prices 
and intervention prices in national currency. 

The  prices  of  other  products,  on  the  other  hand,  are  not  affected  by  ACRs. 
However,  trade in those products may be distorted by sudden major changes in the 
RMRs. This happens, in particular, when market prices in national  currency do not 
follow  currency movements. 

As well as the impact  of currency movements  on prices,  farm  incomes  are  subject 
to the direct effects  of the ACRs applicable to direct aid to producers. 

6. 

Effects  on  markct  prices 

As  there  were  no  major  devaluations,  the  movements  in  ACRs  with  the  greatest 
potential rcpcrcussions in  1996/97 were substantial  steady revaluations of the  UKL 
(13-5%) and the 1RL (8-5%). 

, 

For products with no intervcntion mechanism, there is, as expected,  no  observable 
link between movements of prices and movements of ACRs. 

For  the  third  consecutive  marketing  year,  it  is  quite  clear  that  market  prices  for 
cereals standing at over  10% higher than the intervention lsvel  are not  affected  by 
ordinary movements  in  ACRs.  It  is  not  possible,  using  available  observations,  to 
predict  what  agri-monetary  effects  might  occur  if  market  prices  were  closer  tb 
intervention  prices.  However,  it  seems  likely  that  major  changes  in  ACRs  would 
lead  to  agri-monetary  effects  against  a  background  of  high  market  prices.  In  the 
wake  of  the  reduction  in  the  ACR  for  the  UKL,  8%  between  July  1996  and 
February  1997,  the  gap  between  market  prices  and  the  intervention  level 
developed  on broadly the  same lines in the United Kingdom  and  in the  rest  of  the 
market. 

Dcspite  the  fact  that  prices  cluster  around  the  intervention  level  in  the  milk 
products  sector,  agri-monetary  eflfects  do  not  appear  systematically.  The 
predominant trendfi on the market are usually foUowed  by- national  prices, wkhin a 
margtn of 5% on ekher side, but movements of ACRs  of less than 2% or 3% have 

-7 

no clear impact. Very sizeable price variations may occur for  reasons unconnected 
with monetary cohsiderations, and they may be confmed  to a single Member State. 
Wider movements of ACRs may be passed on accurately into national prices, as in 
the United Kingdom; but the example of Ireland shows that substantial  interference 
from the parties concerned is also possible. 

Prices  for  the  meat  of  young  bovine  animals  were  especially  low  early  in  the 
period, generally some 60% to 75% of the intervention price, owing to the bovine 
spongiform  encephalopathy crisis. In virtually all the Member States, market prices 
expressed  as a percentage  of intervention  prices followed  the  same general  trend. 
This means that the major  changes in ACRs, especially for the UKL and the IRL, 
were on the whole passed on to national markets. 

7. 

Effects  on trade 

Any monetary effects  on trade are masked, in the short term, by wide variations in 
the  monthly  value  of  exports.  Over  longer  periods,  exports  may  be  affected  by 
competitiveness;  this  impact  is  countered  by  the  impact  of  domestic  demand, 
exporters'  attitudes  to  their  profit  margins,  and  structural  factors  on  both  a 
sectoral  and  a wider  scale; all these factors  are  so  closely  entangled  in a complex 
web  of reciprocal  effects  that  it  is virtually  impossible  to  identify  their  individual 
impact. 

8. 

EfTects on  incomcs 

According  to  calculations  based  on  a  theoretical  model  grouping  all  the 
consequences  of ACRs over twelve  months,  it would  appear  that  their  impact  on 
incomes was significant,  and unevenly spread over the Member States. 

Altogether,  the effect  on gross value added  at factor  cost  apparently  amounted  to 
some 1-3%, or ECU  1 884 million, or almost 10% more than in 1995/96. 

, The incomes that have been increased most by the agri-monetary arrangements are 
those  which  would  have  declined  following  a  currency  appreciatfon  if  the 
arrangements  had  not  existed.  The  arrangements  have not  made  much  difference 
to  incomes in currencies that  remained  fairly  stable over the  period  under  review, 
since the agri-morietary loss was virtually nil. 

In  1996/97,  the  Member  States  that  benefited  most  from  the  effect  of  the  agri-
monetary arrangements by comparison with the situation that would have obtained 
without  such  arrangements  were:  Ireland  (8%),  Sweden  (7-4%),  the  United 
Kingdom, Iialy, Finland and to a lesser extent Denmark. 

9. 

The cost of agri-monetarv  developments 

The figures in the table below show an annual cost  of about ECU  1  200 to  1  300 
million (of the same order of magnitude as 1995/96). 

Almost  60 %  of  this  cost  is due to  the  effects  of permitted  margins.  The  reason 
margins entail  a cost  is basically  attributable to  the asymmetry  of the  mechanism, 

where'oy  positive  monetary  gaps  ean  rise  to  5  points  while  negative  gaps  are 
usually  limited  by  a  variable  thieshold  determined  by  the  maximum  positive  gap 
minus  5  points.  Moreover,  in  situations  of  steady  and  significant  appreciation  for 
sevcral  currencies,  the  duration  of  confirmalion  periods  plays  an  important  role  in 
keeping the largest  positive gaps  in existence  over  time. 

The  cost  of  operative  events  is  about  ECU  160  million,  or  ECU  60  miilicn  more 
than  in  1996.  Irrespective  of  any  ACR,  this  cost  is  due  tc  currency  mcvements 
between  the  date  of  the  operative  event  and  the  accounting  date  for 
the 
expenditure.  This  result  is  unusually  high  because  Hhere  was  no  offsetiing,  in 
1996/97, between  currencies that  appreciated  and those that  depreciated. 

The cost of the  freeze  on ACRs in  1997 is deferred  to  1998 because  of operative  events. 
It  will  amounl  to  ECU  500  million  in  1998,  As  the  freeze  will  continue  until  1 January 
1999, it also affects  the budget  for  2000. 

Cost 

of 

agri-monetary 

1997 

1998 

(ECU  million) 

developments  1996/97 

ACR  freeze 

Compensatory  aid 

Permitted  margins 

Operative  events 

Total 

499 

382 

312 

160 

214 

772 

160 

1306 

1193 

In  1997,  the  main  beneficiary  under  the  agri-monetary  arrangements  was  the  United 
Kingdom,  with  increased  expenditure  in  UKL  of  30-7%.  There  was  also  a  significant 
increase in the agri-monetary  cost  of Ireland  in relation to  1996.  This  is the  result  of the 
effects  of the margins and  operative events in a context  of strong currency  appreciation. 

9-

». 

1. 

A1NALYS1S. (HJTLOOK  AN1)  PROI'OSALS 

Gcneral  view 

As in the previous period,  observation  of the agri-monetary arrangements over the 
period  1996/97  reveals  difficulties  with technical,  economic  and financial aspects. 
Some of these difficulties  may become serious problems, although this will depend 
on how the situation develops. In general, the conclusions and recommendations in 
the previous report are still valid. 

Three major developments need to be taken into account:  economic  and monetary 
union,  enlargement  of  the  European  Union,  and  the  fiiture  of  the  CAP,  in 
particular Agenda 2000. The proposals to be made depend not only on the urgency 
and  seriousness  of  the  agri-monetary  problems  to  be  dealt  with,  but  also  on  the 
oplions and timing resulting from these three developments. 

2. 

Financial  difficultics 

In financial  terms,  the costs of the present arrangements are high,  but  considerably 
less  than  they  would  have  been  if  the  mechanisms  originally  planned  for 
appreciable  revaluations  had  been  applied.  This  consideration  fully  vindicates  the 
CounciPs ad hoc decisions  on compensatory aid and the freezing  of certain ACRs. 
The  costs  of the  ad hoc  measures  can be  seen to  be  fairly  moderate,  even  though 
some  of  them  could  have  been  further  compressed,  since  there  is  no  clear 
economic  necessity  for  flat-rate  compensation  for  loss  of  income  for  price 
reductions  that  did  not  actually  occur.  This  problem  could  be  solved  by  a 
verification  period,  but that would  mean deferring  compensation  for  loss  incurred 
immediately. 

The costs linked to  operative events are unavoidable  in relation to the operation  of 
the CAP, but the main costs,  linked to permitted  margins, depend  on the choice  of 
mechanisms  under  the  agri-monetary  arrangements.  However,  as  margins 
constitute  a sensitivc  system  based  on  fragile  cquilibria,  it  would  be  dangerous  to 
tampcr  wilh  singlc  components  in  isolation  from  thc  whole.  But  thc  system  of 
pcrmittcd  margins  as  a wholc  is  in fact  thc  mainstay  of  the  present  agri-monetary 
arrangements. 

3. 

Economic  difficulties 

Almost  all  farmers  benefit  economically  from  the  agri-monetary  arrangements, 
although  the  extent  of  the  benefit  varies  according  to  the  currency  situation  and 
the  reasons  for  it  differ  depending  on  the  stability  of  the  national  currency 
concerned. Effects  on markets vary from one product to another,  and, for the most 
sensitive products, with the price level in relation to guaranteed institutional prices. 

When currency developments  are not passed  on, which happens with the freeze  on 
certain  ACRs  applicable  to  direct  aid  to  producers,  there  is  a  risk  of  long-term 
structural  divergence,  either  between  Member  States,  or  between  agricultural 

10 

sectors in the same Member State. Mpreover, it may become increasingly  difficult 
to envisage return to equilibrium at a common level in ecus. 

When  currency  developments  are  passed  on  only  partially  and  with  some delay, 
which  happens  with  products  for  which  there  is  no  intervention  mechanism, 
divergences  may  emerge  in  the  medium  to  long  term,  either  between  prices 
recorded in the different  Member States or within overall trade. 

When currency  developments  are fully  passed  on, through  guaranteed  prices, the 
movement in incomes and prices for the products concerned may diverge from the 
gencral dcvclopmcnt of priccs and incomes. 

In  all  cases,  depending  on  the  economic  situation  and  circumstances,  major 
difficulties  may occur, mainly in the long term. This means that the best  system is 
not one that is fixed for  ever, but one that  can be adapted  to the agricultural and 
monetary background and to the risks most likely to materialise. 

4. 

Technical  difficulties 

From the technical  point  of view, certain  aspects of the present  arrangements  are 
somewhat  incoherent  and  sometimes  contribute  to  the  economic  and financial 
difficulties  described  above.  They mainly relate  to  the  impact  of  the  revaluation, 
the conversion rate used for import charges and thetiming of changes to ACRs. 

Some  mcasure  of  the  impact  of  currency  revaluatiori  and  decline  in  ACRs  is 
rcquired:  it  enables  past  currency  developments  to  be  taken  into  account  when 
assessing the possible conscquences of the present currency revaluation. However, 
cxpcrience  has  shown  thc  prcscnt  approach  bascd  on  thc  delinition  of 
"apprcciablc" revaluations to be unsatisfactory  and excessively complex. 

An appreciable decline in the ACR is based on the confirmation  of monetary gaps 
over five reference  periods. It  is important to  set a limit on the  period,  given  the 
risk  of  deflection  of  trade  flows;  but  steps  must  be  taken  to  prevent  currency 
movements in the opposite direction just after the appreciable revaluation. 

The  use  of  the  twofold  conversion  system  for  import  charges  on  agricultural 
products  is unnecessarily  complicated,  leading  to  economic  inconsistency  and  to 
disputes.  The  Commission  still  considers  valid*the  main  idea  in  its  proposal  of 
February  1996 [COM (96) 40 final], i.e. the application of a single rate for import 
charges. 

The rulcs for changing ACRs make up the fragile system of permitted margins. For 
example,  under  one  of  the  rules,  an  exceptional  three-day  reference  period  is 
triggercd  when  any  aggregate  bilateral  monetary  gap  exceeds  six  points.  Where 
this rule is applied, it contributes to the instability of ACRs: in particular,  it upsets 
the  established  calendar  for  changes  in rates.  This  rule  has been  criticised  for  its 
shortcomings.  The  rule  was  introduced  for  the  practical  implementation  of  the 
agri-monetary  arrangements  in  order  to  avoid  a  delay  of  10  days,  or  safeguard 
measures,  in  cases  of  sudden  major  currency  movements.  Experience  of  long 
reference  periods  before  an  appreciable  revaluation  has  called  into  question  the 

- 1 1-

economic  justification  for  this  rule.  But  the  rule  does  sometimes  contribute  to 
shortening the overall confirmation  period before appreciable revaluation. It would 
oncc again be cconomically justifiable  if a sudden and very substantial  devaluation 
occurred,  creating gaps even  larger than those recorded  in  1995. This rule  too is 
very  closely  tied  in with  the  whole  system  of  permitted  margins,  on  which  the 
present agri-monetary arrangements are based. 

5. 

Impact of monetarv and agricultural outlook 

The third  stage  of  economic  and  monetary  union,  from  1 January  1999,  is quite 
exceptionally important for the future  of the agri-monetary arrangements. 

Among the Member  States  that  adopt  the euro,  agri-monetary  arrangements will 
no longer be needed. However,  the transition from the present arrangements to a 
system of direct payments in euros implies that monetary gaps between agricultural 
conversion rates and market rates will be eliminated. 

The extent  of the effort  needed will depend,  at the  end  of  1998, on  the  currency 
situation  and  the  market  prices  of  the  products  with  a  guaranteed  institutional 
price. 

For  the  other  Member  States,  those  which  do  not  adopt  the  euro  on  1 January 
1999, agri-monetary  arrangements will still be needed,  if only so that  payments of 
prices  and  amounts  fixed  in  euros  can  be  made  in  national  currencies  without 
distortion  of the markets.  The arrangements  will also affect  relations  between  the 
Member States which have kept their national currency on the one hand, and those 
which have adopted the euro on the other. 

The agri-monetary arrangements need to be adapted  to the new situation. First, as 
the  new  arrangements  must  take  account  of  the  risk  of  variations  in  national 
currencies  against  the  euro,  they  must  also  allow  for  the  relations  that  will  be 
established between the Member States that do and those that do not use the euro, 
and for  the possible role of new accessions.  Secondly, the arrangements  must  be 
adaptable to  possible developments of the CAP, in particular  in terms of Agenda 
2000 . The key factors here will be the level of guaranteed prices, and the level and 
uniformity of direct aid to producers. 

6. 

Proposals 

According to  the calendar  for  economic  and  monetary union,  the use  of the  euro 
by the Member States that qualify will be introduced  on  1  January  1999. This date 
sets a time limit on revising the agri-monetary arrangements. An informed  decision 
on  adjustments  to  the  agri-monetary  arrangements  and  the  requisite  transitional 
measures cannot be taken until it is known which Member  States will be adopting 
the- euro,  and  a more accurate  assessment  of the gaps to  be  dismantled  has been 
established.  The decision  on which Member  States  adopt  the  euro  is planned  for 
May  1998. Relevant  Commission proposals must be presented  towards the end of 
the first half of  1998 at the latest,  for  a Council  decision  in the  light  of the most 
recent available information  on the monetary and agricultural  situation. 

12 

With  the  prospect  of  major  and  imminent  revision  of  the  agri-monetary 
arrangements,  it  is  not  a  very  good  idea,  at  the  end  of  1997,  to  consider  any 
significant  changes  other than the  strictly  essential,  which will  in any case  need  to 
be reconsidered  in the course  of  1998. However,  in view  of the problems that will 
arise for  the transition  between  national  currencies  arid  the  euro,  it  is  best  not  to 
aggravatc  situations  and  risks  created  by  the  freeze  on  ACRs  when  appreciable 
rcvaluations take place,  in particular owing  to the gap between  the  frozen  and the 
current ACR. 

Regulation  (EC)  No  724/97  dcaling  with  mcasurcs  to  be  laken  in  the  event  of 
appreciable revaluations  applies until 30  April  1998 and will  probably be extended 
until the introduction  of the euro. For  cases  similar to  appreciable  revaluations  in 
1996/97,  care  should  be  taken  to  ensure  similar  treatment,  that  does  not  create 
discrimination between Member States. 

Altogether, the conclusions can be summarized in four poihts: 

- 

- 

- 

no  change  should  be  made to  the general  way  the  present  agri-monetary 
arrangements function pending their revision with a view to the third  stage 
of economic and monetary union on  1 January  1999; 

where  possible  and  necessary,  rules  should  be  simplified  without 
compromising  the  system  as  a whole,  which  means  discontinuing  the  use 
of the agricultural  conversion  rate for import charges,  as already  proposed 
to thc Council; 

fulurc  appreciablc  revaluations  should  be  dealt  with,  but  disparities 
resulting  from  freezing  ACRs  should  not  be  aggravated,  for  they  would 
interfere with the changeover to the euro; 

without prejudice to the Commission's proposals,  study and analysis of the 
present agri-monetary arrangements and possible fiiture approaches  should 
continue. 

Consequently,  there  is  no  immediate  call  for  the  Commission  to  present  a  new 
proposal  for  a  Council  regulation  to  adapt  substantially  the  agri-monetary 
arrangements.  The  Commission  will,  however,  need  to  present  a  proposal  on 
measures to be taken in the event of appreciable revaluation in the period  1 May to 
31 December 1998. 

- 1 3-

II-  ANALYSIS OP ACRI-MONETARY  EFFECTS  IN  1996/97 

A.  Currcncv  dcvclopmcnls 

I.  Rcprcscntalivc market  raies  (RMRs) 

Like the preceding twelve  months, the period from July  1996 to June  1997 (1996/97) 
was  relatively  stable1  for  most  currencies.  The  main  development  was  the  strong 
revaluation  of the UKL,  partly followed  by the IRL.  Once  again,  traditionally  strong 
currencies depreciated slightly. 

During the period under review,  the dollar rose by 7*89% against the ecu,  continuing 
the trend of the previous period, during which it had appreciated by 6-8%2.  ' 

Generally  speaking,  this  stronger  trend  for  the  dollar  was  reflected  in  similar 
movements  for  the  UKL  and  the  IRL,  with  inverse  movements  for  the  other 
currencies,  except  the  ESC,  LIT  and FMK,  which  were  either  more  stable  or  more 
volatile. 

The  RMRs  for  the  BLF,  DM,  HFL  and  OS  rose  by  about  2-5%,  a  devaluation 
comparable to that of  1995/96, bringing the RMRs for these currencies back to within 
1% of their levels  of January  1993.  The  increase  in RMRs  for  the  FF  and the DKR, 
1-68% and  1-19% respectively,  also brings them to within  1% of the RMR of January 
1993. 

After a few months of stability, the RMR of the DRA gradually increased by a total  of 
3-02%. The PTA followed  a similar trend, depreciating by 2-33%. 

Following  appreciation  of  12-6  % in  1995/96,  the  RMR  of  the  SKR  depreciated  in 
1996/97 by 5-08%, more than any other currency in the period under review. 

The  RMR  of  the  UKL  appreciated  by  13-46%  in  1996/97  thus  continuing  and 
accentuating  the trend that began in January  1996,  after  a series of devaluations.  The 
RMR of the UKL has now returned to the central rate of early September  1992. 

Until  March  1997,  the IRL was developing  in parallel with  the UKL  (appreciation  of 
7-24%),  although at a certain distance; however,  it fell back  thereafter,  and aggregate 
appreciation from the beginning to the end of the period  1996/97 was 406%. 

The  RMR  of  the  ESC  remained  stable  at  the  same  level  as  during  the  preceding 
period.  The RMR  of the LIT  remained virtually  stable  at the  level  it  had  reached  by 
the end of the preceding period, during which it had declined by  11 -42%. 

The  RMR  of  the  FMK  appreciated  steadily  until  February.  The  trend  subsequently 
reversed,  and by the  end  of the  period  the FMK  had  depreciated  by  1-32% from its 
initial level. 

Scc tables and graphs Al  to A4 in thc Working Papcr on Basic Information,. 

Undcr Ihc agri-monclary arrangcmcnls, thc convcrsion ratcs cxpress thc valuc of onc ccu in national 
currcncy.  A dcvaluation against thc ecu thcrcforc corrcsponds to an incrcasc  in thosc ratcs, whilc a 
rcvalualion is cquivalcnt to a rcduction. 

-  A 4  -

2.  Agricullural  conversion  ratcs 

Sincc  the  swilch-over  mcchanism  was  discontinucd  on  1  Fcbruary  1995,  all 
agricullural  conversion  ratcs  (ACRs)  movc  up  and  down  in  line  with  rcprescntativc 
niarkcl  rates  (RMRs)3.  Howevcr,  the  mcchanism  for  aligning  ACRs  on  RMRs  is not 
their 
symmetrical.  Larger  monetary  gaps,  and 
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. 

longer  reference  periods  for 

In  accordance  with  those  mechanisms  and  movements  in  currencies,  the  ACRs  for 
the FF, DKR,  ESC,  and  FMK  remained  unchanged  during  the  period  under  review. 
Apart  from  the  discontinuation  of  switch-over  on  1 February  1995, the  last  changes 
in the  ACRs  of the FF  and  the ESC  date back  respectively  to  21  August  1993  and  1 
June  1994.  The  DRA  and  PTA  are  close  to  this  group  of  stable  currencies,  with 
slight  increases  at  the  end  of the  period  under  review  (0-08%  et  0-23%).  The  ACRs 
of  the  UKL  and  1RL  declined  substantially,  respectively  by  13-55%  and  8-48%. 
Foilowing  confirmation  of the  earlier  apprcciation  of  the  RMR,  the  ACR  of  the  LIT 
was  rcvalued  by  2-78%  at  the  beginning  of  the  period  1996/97,  rcmaining  stable 
thcreafter.  The  SKR  declined  by  3-28  %,  but  the  revaluation  had  been  virtually 
cancelled  out  by  the  end  of  the  period,  owing  to  numerous  small  increases  in  the 
ACR.  The  remaining  currencies  (BLF,  DM,  HFL,  OS)  increased  by  about  2-5%  in 
various stages. 

Monetary  gaps  were  positive  for  the  DKR,  UKL,  LIT  and  FMK  throughout  the 
period  under review,  and  for  the  SKR, DRA, ESC, FF, IRL  and  PTA  for  most  of  the 
period,  except  towards  the  end.  The  positive  gap  for  the  UKL  was  especially  wide 
from  October  1996,  regularly  ih  excess  of  6  points  during  the  confirmation  periods 
that  must  precede  revaluation.  With  the  exception  of  one  ten-day  period,  there  was 
always  at  least  one  currency  throughout  1996/97  with  a  positive  gap  in  excess  of  4 
points.  At  the  beginning  it  was  the  FMK,  IRL  and  LIT,  with  the  UKL  taking  over 
from  October.  The  available  margin  for  negative  gaps  was  thus  always  very  small  at 
below  onc  point4.  In  the  circumstances,  no  currency  showed  a  negativc  gap 
throughout  the  period. 

three 
In  the  period  1996/97,  the  ACRs  of  the  IRL  and  the  UKL  underwent 
appreciable  falls5:  that  of the IRL  declined  by 0-328%  on  8 November  1996,  4-259% 

See graphs A4 to A5 in the Working Paper on Basic Information. 

Where the "aggregate" gap made up of the largest positive gap and the largest negative gap exceeds 5 
points over a certaiio number of reference periods, ACRs must be adjusted  to reduce the monetary 
gaps. 

5 

An "appreciable" reduction ir« the ACR is one leading to a reduction in institutional priccs in nalional 
currcncy that is greater than the effects of any devaluation occurring during thc prcccding ihrec years. 
Thesc cfFects arc cstimatcd as two thirds of the increase in institutional priccs due to changcs in the 
ACR occurring bctween 12 and 24 months previously, and one third of the incrcasc between 24 and 
36 months previously 

-15 

on  11  January  1997  and  2-638%  on  29  March  1997;  that  of  the  UKL  declined  by 
3-274% on 21  January  1997, 3-256% on 29 March  1997 and 2-706% on  5 June  1997. 
The  falls  in  thc  ACR  of  the  IRL had  lo  bc adjustcd  by  a devaluation  of  the  ACR  on 
26May  1997. 

Aller  four  non-apprcciablc  reductions  in  the  preceding  period,  the  ACR  of  the  L1T 
declined  once more on  1 October  1996,  remaining  stable thereafter.  As the  effects  of 
earlier  devaluations  of  the  LIT  grew  weaker,  the  Council  felt  that  in  view  of  the 
aggregate  declines  in  the  ACR,  the  conditions  for  an  appreciable  revaluation  of 
3-08% had been met on  1 March  1997. 

The  appreciable  fall  in the  ACR  of the  SKR  on  11  January  1996  was  followed  by  a 
further fall  of 3-280% on 7 July 1996. The second  appreciable fall was partially  offset 
by the aggregate rise of 2-78% in the ACR over the rest of the period  1996/97. 

Increases  in the  ACRs  of the BLF, DM,  HFL  and  OS  from  June  1996  to  May  1997 
fully oiTset the appreciable declines recorded in  1995. 

\i. 

Agri-monctary  iucclianisiiis 

The  currency  dcvelopments  obscrvcd  in  thc  pcriod  1996/97  werc  such  as  to  enable  the 
managcmcnt  of  agri-monetary  mechanisms  to  conccntrale  on  maintaining  the  general 
functioning  of  cxisting  provisions  and  policy  approaches,  as  recommended  in  the 
conclusions  of the previous report on agri-monetary arrangements in the single market. 

Measures  in  the  period  1996/97  related  to  the  conversion  rates  applicable  to  import 
charges, and also, more importantly, to the consequences of appreciable revaluations.  i 

1. CONVERSION RATE FOR IMPORT CHARGES 

Owing  to the GATT agreements,  many import  charges have been fixed  in ecus  since 
1  July  1995.  Most  of  these  charges  were  previously  levies  subject  to  agricultural 
conversion  rates,  or  percentagcs  of  the  value  of  the  product  expressed  in  national 
currcncy. 

Commission  Regulalion  (BC)  No  1482/956  provided  for  the  application,  as  a 
transitional  mcasure,  of  a  monthly  rate  where  thc  annual  rate  provided  for  in  the 
Customs  Code  should  have  applied7.  From  1  January  1997,  Regulation  (EC)  No 
82/97  amending the Customs Code provides for the use of a monthly conversion rate 
generally.  It  was  therefore  possible  to  repeal  Regulation  (EC)  No  1482/95  from  1 
March  1997. 

6  OJ No L  145, 29.6.1995, p. 43. Amended by Regulation  (EC) No  1224/96  (OJ No L  161, 29.6.1996, 

p. 70) and repealed by Regulation  (EC) No 259/97 (OJ No. L 43, 14.2.1997, p. 8). 

7 

Article  18 of Council  Rcgulation  (EEC)  No 2913/92  (OJ No L  302,  19.10.1992,  p.  1), amended  by 
Rcgulation  (EC) No 82/97 (OJ No. L  17, 21.1.1997, p. 1). 

16 

However,  the  monthly  rate  is  applicable  only  to  import  charges  not  fixed  by  an 
instrument  under the CAP within  the  meaning  of  Article  1 of the basic  agri-monetary 
Regulation.  In  other  cases,  the  agricultural  conversion  rates  are  applied.  The  use  of 
dillerent  conversion  rates  has  resulted  in  certain  economic  inconsistcncics  and  has 
vcry greally  complicated  administration,  with  concomitant  scope  for  errors  and  legal 
unccrtainty.  In  Fcbruary  1996  the  Commission  accordingly  proposed  amending  the 
agri-monetary  arrangements  so  as  to  eliminate  the  use  of the  agricultural  conversion 
rate and to use only one rate for  import  charges  on agricultural  products8.  Parliament 
expressed  a  favourable  opinion  on  the  Commission  proposal,  and  suggested  no 
amendments;  but  the  Council  was  not  able  to  reach  a  qualified  majority  on  the 
matter. 

2.  R E G U L A T I O N S G O V E R N I N G A P P R E C I A B L E R E V A L U A T I O NS 

Ad  hoc  measures  in  the  event  of  appreciable  revaluations  were  in  force  firom  June 
1995  to  December  1996  under  Council  Regulation  (EC)  No  1527/959  and,  later, 
Council Regulation  (EC) No 2990/9510. 

Thesc  measures,  which  were  deemed  necessary  in  particular  with  a  view 
to 
compliance  with  obligations  under  the  GATT  agrecnient  and  budgetary  disciplinc, 
suspend  the  application  of  Arlicles 7  and  8  of  the  basic  agri-monetary  Regulation" 
Article 7 provides for  an increase in ecus in most types  of direct  aid  to  producers12 in 
the event of a revaluation which  is greater than the devaluations of the two  preceding 
years, with a view to avoiding  any reduction  in the value of the  aid  in the currency  in 
question.  In view of the  scale of the aid  concerned  in terms of the  budget  (over  60% 
of  the  EAGGF  Guarantee  Section),  such  a  measure  would  cost  approximately 
ECU250  million  a  year  for  each  percentage  point  revaluation.  Article  8  of 
Regulation  (EC)  No  3813/92  also  provides  for  compensatôry  aid  for  income  losses 
due to  the  effects  on  prices  of reductions  in the  ACRs.  The  aid  in, question  can  only 
be  granted  after  12  months'  observation  showing  that  there  is  a  lasting  fall  in  the 
ACR.  The  amount  of  aid  is  established,  where  necessary,  on  the  basis  of  the  fall  in 
farm incomes incurred, which  is in principle an observable  magnitude. 

In  place  of  the  measures  laid  down  in  Articles  7  and  8  of  the  basic  agri-monetary 
Regulation,  Regulations  (EEC)  No  1527/95  and  No  2990/95  introduce  flat-rate 

8  COM(96) 40 final. 

9  OJ NoL  148, 39.6.1995, p. 1 

, 

10  OJ No L 312, 23.12.1995, p.  7. Amended by Regulation  (EC) No  1451/96 (OJ No L  187, 26.7.1996, 

p. 1). 

11  CotMwti Ttntfjintwm  QfflC) No 3813/92 (OJ No L 387, 31.12.1992). Last amended by Regulation (EC) 

N* 150/93 (OJ No L 22,31.7.1995, p.l). 

12  Flat-EHe  aid  mç&as&â in  ecus  per  hestare  ©r  per  livestock  unit  and  aid  of  a  structural  er 

envvromwwital nature. 

17 

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

Under Council  Regulation  (EC) No  724/9713  the  application  of  these  principles  was 
prolonged  until  30  April  1998,  and  extended  to  reductions  in  the  agricultural 
conversion  rate  other  than  those  defined  in  Article  1 (e)  of  the  basic  agri-monetary 
Regulation,  to  ensure that they would catch all cases of application  of Articles 7_and 
8  of Regulation (EEC) No  3813/92.  The detailed  rules for  applying  these  provisions 
were laid down in Commission Regulation (EC) No  805/9714. 

3.  TlIE FREEZE ON ACRS 

The freeze  on the ACRs for  aid provided  for in Article 7  of the  basic  agri-monetary 
Regulation  relates  to  the  ACRs  actually  applied  on  the  date  of  the  appreciable 
revaluation  and  is  valid  until  1 January  1999  when  the  single  currency  comes  into 
force.  In  view  of  the  operative  events15  for  the  ACRs  for  the  aid  measures  in 
question,  several  ACRs  are frozen  until  31  December  1999.  Naturally,  this  entails a 
temporary variation in the level of Community  support between the various Member 
States.  In  national  currency,  this  may  affect  the  balance  of  aid  expressed  in  ecus 
between the various sectors of agriculture. 

To  avoid  excessive  monetary  gaps  between  the  ACRs  applied  to  this  aid  and  the 
conversion rate adopted for the euro on  1 January  1999, in view of existing gaps, the 
Council  decided  to  limit  the  difference  between  the  frozen  ACR  and  the  ACR  that 
would have applied had there been no freeze to  11*5%. When the difference  between 
the rates exceeds  this threshold  for  certain types  of aid,  f he frozen  ACR  for  that aid 
is cut to  the level  of the current  ACR  increased  by  11-5%.  On  1 July  1997,  the only 
ACRs  that  were  not  frozen  for  the  relevant  types  of  aid  were  those  of  the  DRA, 
ESC, FF, FMK and PTA16. 

Currency  developments  following  the freeze  on the  ACRs  of  the  DM,  HFL  and  OS 
in June and July  1995  have led to  current  ACRs almost  0-5% higher than the  frozen 
ACRs. The current ACR of the BLF is about  1% below the ACR frozen  in  1995, but 
higher  than  the  ACR  regarded  as  appreciable,  which, opens  the  possibility  of 
compensatory aid. 

The ACR of the DKR,  frozen in  1995,  and that of the LIT,  frozen  on  1 March  1997 
for  livestock  or  structural  aid,  are both  almost  3% higher  than  the  RMRs  of  1 July 

13  OJ No L 108, 25.4.1997, p. 9. 

14  OJ NoL 115, 3.5.1997, p. 13. 

15  The ACR on the date the operative event pccurs is that applied to the amount in question. The 

operative event for aid per hectare under the reform of the CAP occurs on 1  July. For most olher aid 
measures referred to in Article 7 of Regulation (EEC) No 3813/92, it occurs on 1 January 

16  See Table A7 in the Working Paper on Basic Information. 

18-

1997:  The  disparities for  area  aid for  arable  crops  in LIT,  and  for  livestock  aid and 
structural aid in SKR, are almost 5%. 

The frozen  ACRs showing the widest gaps in relation to RMRs on  I July  1997 were: 

-  thc ACR of the IRL, frozcn in Novembcr  1996, a gap of about 9%, 

thc ACR  of thc  SKR  for  arca aid  for  arablc crops,  frozen  in January  1996,  a gap 
of almost  11-5%, 

- 

the ACR of the UKL, frozcn in January  1997, a gap of almost  15%. 

In view  of  the  gaps  between  the  ACRs  previously  applicable  to  area  aid  for  arable 
crops on the one hand, and the current ACRs on  1 July  1997 on the other,  the frozen 
ACRs of the SKR and UKL had to.be reduced in order to obtain a difference  of only 
11*5%  in  relation  to  the  ACR  that  would  have  applied  without  a  freeze.  The 
reductions required were 0-11% for the SKR and 3-61% for the UKL. 

4.  RULES ON COMPENSATION 

Aid to  compensate  farmers for  agri-monetary  losses  due  to  appreciable  revaluations 
prior  to  1  January  1997  is  subject  to  ceilings  fixed  by  the  Council.  For  later 
revaluations,  the  ceilings  arc  fixed  by  the  Commission  in  accordance  with  the 
managemcnt committee  proccdure,  following  a very  precise  methodology  and  based 
on  the  latcst  availablc  data.  The  ccilings  must  take  account  of  the  likclihood  of 
devaluations occurring after the appreciable revaluation. 

The  aid  comprises  three  degressive  tranches,  the  first  of  which  (covering  the  12 
months following  that of the revaluation  in question)  may amount to  up to  100%  of 
the  ceiling.  The  following  two  annual  tranches  may nof  exceed  two  thirds  and  one 
third  of  the  ceiling  respectively.  The  European  Union  finances  50%  of  the  ceiling 
irrespective  of  the  national  contribution  which  the  Member  State  may  supply  in 
addition. 

The  aid  must  be  granted  to  agricultural  holdings  in  annual  payments.  It  must  vary 
with the size of the holding at a given past period and must be in line with the macro-
economic  distribution  of  income  loss  between  the  various  sectors  of  production 
affected.  However, where annual payments per holding would be less than ECU 400, 
the aid may be granted for measures in the collective and general  interest  or those for 
which the Community provisions authorise national aid.  • 

In  the  event  of  a  reduction  in  the  frozen  ACR  for  aid  covered  by  Article  7  of  the 
basic  agri-monetary  Regulation,  supplementary  aid corresponding  to  the  consequent 
shortfall  in  annual  income  may  be  granted  to  the  farmers  affected.  This  aid  is  also 
subject  to  a  ceiling  fixed  by  the  Commission  in  accordance  with  the  management 
committee  procedure,  and  comprises  three  degressive  annual  tranches,  of  which  the 
EU finances 50% irrespective of the national contribution. 

19 

5.  COMPENSATORYAII)17 

The  second  tranche  of  compensation  for  the  appreciable  revaluations  of  June  and 
July  1995 was applicable from  1 July  1996 forBelgium  and Luxembourg,  and from 1 
August  1996 for Germany, Denmark, the Netherlands  and Austria.  As planned, these 
tranches  represented  1/3  less  than  the  first  annual  tranche.  Altogether,  almost 
ECU 210 million was granted under this tranche, including ECU  135  million  financed 
by the EU. In view of currency developments in 1996/97, the third tranche of aid was 
cancelled  for  all  the  Member  States  except  Denmark  by  Commission  Regulation 
(EC)  No  1137/9718,  and  for  Denmark  in  July  1997  by  Regulation  (EC)  No 
1473/97'9. 

Appreciablc revalualions in January  1996 for the SKR and in the course of the period 
1996/97  for  thc JRL,  UKL and LIT led  to  the possibility  of granting  further aid,  the 
first  tranchcs of which total almost ECU 945  million, half financcd by the EAGGF. 

Sweden20  granted  the  first  two  tranches  of  compensation  for  the  appreciable 
revaluation  of  11  January  1996.  This  aid  was  notified  in  November  1996  and 
authorised by the Commission in December  1996. 

Only  the  EAGGF  financing  of  ECU 9-8  million  under  the  first  tranche  has  been 
granted.  As  this  amount  corresponds  to  just  under  ECU  100  per  holding,  it  was 
allocated  through collective  measures,  for which financing is not  provided  for  in the 
national budget. 

Most  of the  aid,  about  63%, is for  work  managed  by  the  Agricultural  and  Forestry 
Research  Council  into  organic  farming  and the  links between  the  agricultural  sector 
and  research.  A  furthcr  21%  is  entrusted  to  the  Foundation  for  Research  in 
Agriculture,  for  research  and  dcvelopmcnt  work  and  improvement  of  markets.  The 
remaindcr,  lcss  than  2%  of  the  aid,  is  for  machinery  syndicates,  for  outreach  and 
training scrviccs. 

A  second  aid  schcme  for  the  appreciable  revaluation  of  7  July  1996  was  notified  to 
the  Commission  in  Junc  1997  and  authorised  the  following  month.  The  second 
tranche  of  the  aid  was  cancelled  by Regulation  (EC)  No.  1137/97  to  allow  for  the 
devaluations  that  occurred  after  the  appreciable  revaluation;  a  decision  on  the  third 
tranche will be taken in July  1998.  Sweden plans to  distribute EU financing under the 
first  tranche  of  aid  to  farmers  in the  milk,  beef  and  veal,  cereals,  sugar  and  potato 
starch  sectors.  The  cereals  and  sugar  sectors  do  better  than the  rest  in the  sectoral 
allocation  of  aid,  but  no  sector  is  overcompensated  for  the  losses  taken  into 
consideration on aflat-rate basis by the Council. 

17  Sec Tablc A8 in the Working Paper on Basic Information. 

18  OJNoL  164, 21.6.1997, p. 15. 

19  OJNoL200, 29.7.1997, p. 22. 

20  Scc Tables A8 and A9 in thc Working Papcr on Basic Information. 

- 2 0-

Individual  allocation  of  aid  dcpends  on  output  levels  prior  to  30  June  1996.  For 
ccrcals and bccf/veal,  aid is based on thc compcnsatory payments under the reform  of 
the CAP.  For milk, sugar bcet and starch potatoes,  aid is based on quantities  supplied 
to processors. 

Ireland21  has  granted  the  EU's  share  of  financing  under  the  first  tranche  of 
compensation for the appreciable revaluations  of  11 November  1996  and  11 January 
1997,  i.e.  ECU 56-7  million22.  This  aid  was  authorised  by  the  Commission  in  May 
1997. 

The  sectoral  breakdown  is proportional  to  the figures for  output  of  milk,  beef/veal, 
cereals  and  sugar  taken  into  account  to  determine  incpme  loss.  At  individual  level, 
aid for beef/veal  is allocated  as a function  of  premiums for  male bovine  animals and 
suckler  cow  premiums  for  1996  and  deseasonalisation  premiums  from  1 January  to 
10 June  1997  for  animals present  on the recipient's holding  on  31  March  1997.  For 
milk  and sugar beet,  the allocation  between  farmers  is based  on  amounts  supplied  in 
thc  year  up  to  31  March  1997.  For  cereals,  it  is  based  on  the  allocation  of 
compcnsatory payments undcr the reform of the CAP paid in  1996. 

In June  1997,  Ireland  notified  the  Commission  of  its  intention  of  adding  a  national 
contribution  of  ECU 30  million  to  supplement  the  above  allocation  financed  by  the 
European Union.  The  Commission  had not  yet  responded  to  this  request  at the  end 
of July 1997. 

In  June  1997,  Ireland  also  notified  its  intention  of  granting  the  Community 
contribution to  aid for the revaluation of 29 March  1997.  The maximum for the  first 
tranche of this aid was cut by the Commission  from ECU 65-16 million  to  ECU 57-5 
million,  including  ECU 28-75  financed  by  the  EAGGF  to  take  account  of  the 
devaluations  of  the  ACR  of  the  IRL  in  May  1997.  The  planned  breakdown  of  aid 
notified  by  Ireland  is  close  to  that  planned  for  the  compensation  financed  by  the 
European  Union  for  the  revaluations  of  November  1996  and  January  1997.  In  this 
case,  descasonalisation  premiums  are  not  taken  into  account,  but  the  sectoral 
breakdown  is  again  proportional  to  the  output  taken  into  account  for  calculating 
income losses. Consequcntly, the Commission authorised this aid in July  1997. 

On  30  June  1997,  Italy  had  not  notified  any  plans  concerning  the  amount  of  up  to 
ECU 247  million  available  for  the first tranche  of  compensation  for  the  appreciable 
revaluation of the LIT on  1 March  1997. 

By the same date, the United Kingdom had not notified  any plans, either for the sum 
of ECU 454-4 million under the first tranches of compensation  for the revaluations  of 
11  January,  29  March  and  5  June  1997,  or  for  the  sum  of  ECU 66-7  million  to 
compensate  for  the  fall  in  area  aid  for  arable  crops  in  national  currency  on  1 July 
1997. 

21  Sec Tablcs A8 and A9 in the Working Paper on Basic Information. 

22  Maximum sum fixed by Commission Regulation (EC) No 1129/97 (OJ No L  115, 3.5.1997, p.  16), as 

amcnded by Regulation (EC) No 1219/97 (OJ No L  170, 28.6.97, p. 56). 

21 

Both Italy and the United Kingdom may yet notify  decisions to grant aid, up to the 
end of the twelfth month foliowing that of the relevant revaluation. 

22-

C. 

Economic impact 

Theoretically,  market  prices  which  are  closely  linked  to  an  intervention  mechanism 
(cereals, sugar, milk and beefiVeal) may be affected  by the ACRs. Through the prices for 
certain of the products  concerned, the change in ACRs may therefore  have repercussions 
on  farmers'  incomes.  Furthermore,  difficulties  may  arise  in  trade  in  the  event  of 
divergence between the ACRs and the RMRs  or between  market  prices and  intervention 
prices in national currency. 

However,  the  prices  of  other  products  for  which  no. intervention  mechanism  exists  to 
provide  market  guidance  are  not  afFected  by  the  ACRs.  Nonetheless  a  sharp,  sudden 
change  in  the  RMRs  may  distort  trade  in  such  products.  This  is the  case  in  particular 
where market prices do not follow currency fluctuations. 

Lastly,  in addition  to  the  impact  of monetary  repercussions  on  prices,  farm  incomes  are 
directly affected  by the ACRs applicable to direct aid to producers. 

1.  PRICES 

The analysis relates mainly to monthly movements during the period  1996/97. 

In the case of products with no intervention mechanism influencing  market  prices, as 
may  be  expected  no  link  is  observed  between  the  movements  of  such  prices  and 
those of the ACRs. For  example, variations in the market  prices of wine or olive oil 
are out of all proportion with the variations in the ACRs. 

For  other  products,  the  analysis focuses  on  sectors where usable  data  are  available 
and covers a single representative market per Member State concerned23. 

Movements in ACRs likely to have had most repercussions in 1996/97 correspond  to 
the strong and steady revaluations of the UKL (13-5%) and IRL (8-5%). 

For the other  currencies, we need to compare  prices in the context  of a stable ACR 
(FF, PTA,  ESC)  with  those  in the context  of  slight  revaluation  (LIT) or  slight  and 
repetitive devaluation (SKR, BLF, DM, OS, HFL). 

In  general  the  analysis  shows  that  when  market  prices  are very  high  in  relation  to 
intervention prices only major changes in ACRs are passed  on. When prices are low 
or  very  low,  small  changes  in  ACRs  have  no  clear  impact  on  prices.  The 
repercussions of ACRs on markets thus seem to be passed  on only beyond  a certain 
threshold,  which  will  be  the  higher  as  market  prices  are  higher  in  relation  to 
intervention.  However,  there  are  a  number  of factors  that  may  interfere  with  these 
mechanisms. 

1.1.  Cereals24 

23  See Graphs B2 to B15 in the Working Paper on Basic Information. 

24  See Graph Bl(a) in the Working Paper on Basic  Information. 

23 

Market  prices  for  common  wheat  are  substantially  higher  than  intervention 
prices  in national  currency.  During  the  1996/97  marketing year  from  August 
1996 to  April  1997,  market  prices  in the three  main producer  Member  States 
(Ciermany,  France and the United Kingdom) stood  on average 20% above the 
intervcntion price.  As in the previous two years (when  they stood  at  12% and 
22% above the intervention  price),  at this exceptional  level  market  prices are 
hardly  affected  by  small  fluctuations  in  the  intervention  price  in  national 
currency. 

In  the  period  from  July  1996  to  February  1997  market  prices  in  national 
currency fell,  or at best  remained  relatively  stable. Prices  recovered  in March 
and  April,  especially  in  France, just  before  the  upheavals  of  the  end  of  the 
marketing year.  Market  prices in FF  as  a percentage  of intervention  prices in 
national  currency,  to  which  monthly  increases  apply,  fluctuated  between 
110%  and  118%,  i.e.  within  a  margin  of  around  8  points,  without  being 
affected  by  the  ACR,  which  remained  stable.  Prices  in  PTA  varied  between 
125% and  135% of the intervention  level; the very  slight  increase in the ACR 
(+ 0-2%) had no impact. 

From  July  1996  to  January  1997,  the  gap  between  the  market  price  and  the 
intervention  level  narrowed  by  5%  in  FF  and  7%  in  PTA.  Over  the  same 
months,  the  gap  narrowed  by  11 %  in  Germany  and  6%  in  Sweden,  despite 
increases  in  the  ACRs  of  2%  and  3%  respectively.  Clearly,  these  levels  of 
devaluation  had no perceptible impact  on market prices. 

In  the  United  Kingdom  during  the  months  concerned,  the  gap  between 
market prices and the intervention  level  in UKL narrowed by 8%,  a reduction 
comparable to that  observed  in the other Member States.  The large reduction 
in the ACR of the UKL (8%) was thus passed  on,  so that the trend in relation 
to  intervention  prices  remained  broadly  the  same  as  in  the  other  major 
Member States. 

In  Italy,  the  decline  of  almost  3%  in  the  ACR  in  October  1996  was 
accompanied by a fall  of  1 -9% in prices in L1T from  September to November, 
compared  to  a decline  in prices of 2-6% in France,  where  the  ACR  remained 
constant.  Between  September  and  December  1996,  i.e.  during  a  period 
ending  two  months  afler  the  revaluation  of  the  ACR  of  the  LIT,  market 
prices in LIT and FF declined by the same percentage of 0-6%. 

For  the  third  marketing  year  in  succession,  it  is  clear  that  market  prices  for 
cereals  exceeding  intervention  levels  by  more  than  10% are  not  affected  by 
routine  movements  of  ACRs.  The  observations  made  do  not  enable  any 
conclusions to be drawn abouc possible  agri-monetary  effects  if market  prices 
were ciose to intervention levels. 

However, 
background of high market prices would lead to an agri-monetary impact. 

it  seems  plausible  that  major  changes 

in  ACRs  against  a 

As  mentioned  above,  the  effects  on  market  prices  in the  United  Kingdom  of 
the  decline  in  the  ACR  of  the  UKL,  8%  between  July  1996  and  February 
1997, were such that the gap in relation to the intervention  level  developed  in 
the  same way  as over  mosi  of  the  rest  of the  market.  Similarly,  in the  period 

24 

1995/96,  the  12% fall  in the  ACR  in  Italy was  accompanied  by  a  substantial 
fall in prices in LIT (5%), which was not matched in other Member States. 

From  Augusl  1994  to  April  1995,  the  major  devaluatioii  of  the  LIT  (23%) 
was accompanied  by  increases  in market prices  in Staly, which  meant  that  the 
gap  in  relatlon  to  intervention  levels  followed  the  sarne  trend  in  Italy  as 
clsewhere.  However,  the  impact  on  market  prices  of  sma!ler  devaluations, 
such as that of the PTA (+7%) and the UKL (+ 3%), was much less clear. 

1.2.  Milk products25 

Market  prices  for  skimmed-milk  powder  (SMP)  in  DM,  FF  and  HFL 
remained  fairly  closely  grouped.  From  a low  level  in  relation  to  intervention 
prices,  they  increased by almost  10% between  September  1996  and February 
1997  before  declining  slightly  again.  Similar developments  were  observed  in 
Bclgium,  Austria,  Spain and Sweden. 

In  relation  to  France  where  the  ACR  did  not  change,  prices  in  BLF,  DM, 
HFL  and  SKR  grew  about  3% to  5%  faster,  matching  the  devaluations  in 
ACRs.  For the  FMK  and  DKR,  on  the  other  hand,  which  did  not  follow  the 
general  movement,  agri-monetary  stability  was accompanied  by  variability  of 
about 6% in market prices. 

Prices  in  the  United  Kingdom  followed  the  revaluation,  declining  by  a 
matching  10%  in  1996/97.  The  general  trend  of  gaps  in  relation  to 
intervention prices in national currency is analogous to that of the other major 
Member States. 

The price of  SMP  in Ireland  at the beginning  of the period  1996/97 was  kept 
at an abnormal  level  about  5% higher than in the major Member  States.  The 
national  price  fell  suddenly  by  10%  in  October  1996,  before  the  first 
revaluation  of  the  ACR  of  the  IRL  (2%)  in  November  1996,  thereafter 
remaining  at about  the same level  until towards the end of  1996/97.  The other 
falls  in  the  ACR  of  the  IRL,  totalling  7  %,  were  not  passed  on  in  national 
currency.  These  revaluations  lowered  the  intervention  level  for  the  IRL, 
bringing  it  close  to  the  market  price,  which  remained  fixed  in  national 
currency  Finally,  as  a  percentage  of  the  intervention  price,  prices  in  IRL 
returned,  after  major  divergences,  to  a  more  usual  level,  almost  ten  points 
lower  than  UK  prices  and  almost  five  points  lower  than  those  of  the  other 
major Member States. 

Butter  prices  on  most  markets  settled  in  the  second  half  of  1996  within  a 
margin of 5 points  around a level  equal to  95% of the intervention  price.  The 
most  notable  exceptions  were  prices  in  IRL  and  UKL,  which  were  much 
lower,  and in LIT, PTA and SKR, which were much higher. 

From  November  1996  to  March  1997,  prices  rose  on  the  main  markets:  by 
6% in the case of the FF, whose ACR remained constant.  Prices in BLF, DM, 
FF,  FMK,  HFL  and  OS  converged  on  a level  equal  to  97% to  100% of  the 

25  Scc Graphs Bl(b) and Bl(c) in thc Working Papcr on Basic Information. 

25 

intervention  price,  irrespective  of  the  small  devaluations  affecting  some  of 
those currencies. 

Priccs  in  Italy  and  Spain  varicd  around  thcir  high  levcls,  while  those  in 
Swcden were reduced by  12% despite the rise in the ACR of the SKR. 

Market  prices  in the  United  Kingdom  systematically  followed  declines  in the 
ACR,  thus  keeping  at  almost  90% of  the  intervention  price,  and  decoupling 
from  prices  on  the  other  major  markets.  Butter  prices  in  IRL  developed  in 
parallel to  SMP prices in Ireland. 

Agri-monetary  effects  do  not  appear  systematically  in  the  milk  products 
sector,  despite  the  background  of  prices  grouped  around  the  intervention 
level.  Pronounced  trends  on  the  market  are  usually  followed  by  national 
prices  with  variations  in  a  margin  of  5%  above  and  below,  with  no  clear 
impact  when  movements  in  ACRs  are  less  than  2%  or  3%.  Very  large 
changes  in  prices  can  happen  irrespective  of  monetary  causes,  and  are 
sometimes  confined  to  one  country.  Wider  movements  in  ACRs  may  be 
passed  on  accurately  into  national  prices,  as  in the  United  Kingdom; but  the 
example  of  Ireland  shows  that  thc  parties  involved  may  interfere  with  this 
process. 

1.3. 

Beef/veal26 

Prices  for  meat  of  young  bovine  animals  at  the  beginning  of  the  period 
1996/97  were  especially  low,  generally  between  60%  and  75%  of  the 
intervention price, owing to the bovine spongiform  encephalopathy crisis. 

From  September  1996,  markets  in  Ireland  and  the  United  Kingdom  were 
decoupled from the others at a level  some  10 to  15 points lower. 

In  virtually  all  the  Member  States,  market  prices  followed  the  same  general 
development,  however,  expressed  as a percentage  of intervention  prices. This 
means  that  the  major  changes  in  ACRs,  in  particular  those  of  the  UKL  and 
IRL, were passed  on to national  markets on the whole. 

Nowever,  as  in  the  milk  products  sector,  markct  developmcnts  did  not  take 
account  of small changes in ACRs.  Prices in DM,  FF and HFL rose in parallel 
from  September  1996 to February  1997,  which  led to  a wider gap  in relation 
to  the  intervention  price for the FF, whose  ACR  did  not  increase  as much as 
those of the DM and HFL. 

2.  TRADE 

Analyses  of  agri-monetary  effects  on  trade  in the  two  previous  reports  on  the  agri-
monetary system for the single market27 show that: 

26  Scc Graphs Bl(d) in thc Working Papcr on Basic Information. 

26 

in  the  ?hort  term,  in  almost  all  cases  the  scale  of  the  monthly  variations  in  the 
value of exports m&sks the effects  of any currency variations; 

-  over  longer  periocs,  exports  can  be  influenced  by  competition;  however,  that 
impact  vies  with  internaî  demand,  exporters'  attitudes  to  their profit  margins and 
structural causes affecting  some product groups more than others; the interplay  of 
these  factors  is  such  that  distinguishing  the  effects  of  any  particular  one  is  very 
tricky. 

Available statistics for  1996/97 are not such as to affect  these conclusions. 

Deflections  of trade may occur for products attracting export refunds; in  1996/97 the 
main risks incurred in this respect were due to the positive gaps of the  UKL and IRL, 
which exceeded  5 points during the confirmation periods. 

The  risk  was  particularly  acute  in  the  case  of  the  UKL,  where  aggregate  gaps  in 
excess  of  seven  points,  and  momentarily  in  January  1997,  as  large  as  nine  points, 
arose  with,  e.g.,  the  BLF,  HFL  and  FF.  In  view  of  the  consequences  of  the  BSE 
crisis  and  the  high  level  of world  cereal  prices,  the  risks  mainly related  to  the  sugar 
sector. 

Nevertheless,  export  statistics  show  no  movement  which  can  be  put  down  to  such 
agri-monetary gaps. 

3. 

INCOMES 

The latest  statistics for farm incomes relate to  1996.  In detail, the effects  of the agri-
monetary  arrangements  on  incomes  in  1996  are  very  difficult  to  gauge  since  they 
depend  in  particular  on  the  actual  impact  of  the  agricultura!  conversion  rates  on 
market prices,  on  the operative  events  for  ACRs,  and on the  periods  for  payment  to 
farmers in respect  of purchases, sales and aid. As a result  some effects  visible  in  1996 
are  due  to  movements  in  ACRs  in  1995,  whereas  the  consequences  of  certain 
changes in the ACRs for  1996 will only be felt in  1997 or even later. 

27  Analyses  based  on  monthly  statistics  October  1991  to  December  1993  (COM(94)498  final)  and 

January  1992 to December  1995 (COM(96)636 final). 

27 

To  assess  the cffccts  of thc  ACRs in thc pcriod  1996/97  on income over  12 months, 
ccrtain appioximalions and assumptions werc nonetheless ncedcd: 

1996  incomc  arising  from  or  rclatcd  to  thc  markcting  of  products  is  assumed  to 
rellecl  income in the pcriod  1996/97; 

to  incorporate  the  findings  set  out  in  point  Cl,  the  value  of  total  outpyt  is 
assumed  to  be  affected  by ACRs for  sugar beet,  beefiVeal  and,  in Ireland  and the 
United Kingdom,  cereals and milk products; elsewhere,  the impact of the ACRs is 
considered nil for cereals, and 50% for milk products; 

income  taken  inio  account  for  fruit  and  vegetables,  starch  potatoes,  wine,  olive 
oil, tobacco  and seed  is that  arising from quantities for which there is a minimum 
price or aid per tonne of products put on the market; 

flat-rate aid to producers is as provided for in the  1997 budget,  and thus related  to 
the  1996/97  crop  year  for  arable  crops,  1996  livestock  premiums  for  cattle  and 
shecp,  1997  structural  aid  and  agri-monctary  compensation  due  for  payment  in 
1997;  agri-monctary  aid  in  Italy  and  the  United  Kingdom  has  been  adjusted  to 
take  account  of  the  fact  that  no  payment  was  made  during  the  period  under 
review; 

it is assumed  that the intermediate  consumption  affected  is equal  to  half the  value 
of  animal  feed  in  the  Member  States  where  the  ACR  is  regarded  as  having  an 
impact on cereal prices (Ireland and the United Kingdom); 

the  conversion rates assurned to  apply to the various components  of income taken 
into account are averages for  1996/97 with the following  exceptions: 

for aid per hectare cultivated and for seed: the rate obtaining on  1 July  199628; 

for  per  capita  livestock  premiums,  structural  aid  and  tobacco  premiums:  the  rate 
obtaining on  1 January  1997; 

for agri-monetary  compensation: the rate in force  prior to the  relevant  appreciable 
revaluation. 

- 

- 

- 

- 

- 

- 

- 

- 

This  theoretical  model,  which  groups  the  fiill  impact  of  the  1996/97  ACRs  over  12 
months,  was  used  to  measure the annual  effect  of the agri-monetary  arrangements in 
1996/97,  multiplying  the  components  of  income  by  the  gap  between  the  ACRs 
applied and the corresponding RMRs. 

Despite  its  abstract  nature,  this model  does  reveal  a significant  impact  of.the  ACRs 
on incomes,  and variation in that impact depending on the Member  States 29. 

28  For  the  sake  of  simplicity,  the  rare  cascs where  the  operative cvcnt  occurs  on  1 August  have bccn 

assimilaled to the general case whcre it occurs on  1  July. 

29  Scc Tablcs Cl  to C3 in the Working Paper on Basic Information. 

28 

The ovcralf  impacl on value added  at factor  cost  is  1-3%, or ECU  1 884  million,  i.e. 
almost  10% more than in  1995/96. 

The overall impact on farming incomes is made up of: 

monetary gaps relating to prices and market-related  amounts:  51%, 

-  monetary gaps reiating to flat-rate aid to producers: 38%, 

-  agri-monetary compensatory aid:  11%. 

On thc assumptions made, thc value of output and aid affected  by ACRs  corresponds 
to approximatcly half of gross value cdded at factor cost.  This proportion is a sign  of 
the  sensitivity  of  the  agri-monetary  arrangements;  it  is  particularly  large  in  Ireland 
and  Sweden,  and  quite  large  in  Belgium,  Luxembourg,  Germany  and  the  United 
Kingdom.  It is smaller in Portugal, Italy and Spain. 

Flat-rate  aid to  producers  accounts  on average for  almost 30% of that  share  of their 
income  affected  by  ACRs.  The  proportion  is  almost  40% ih  Portugal,  Austria  and 
Spain.  It  is  very  low  in the Netherlands  at  5%,  and  low  (14% to  20%)  in Belgium, 
Luxembourg and Greece. 

income  that  are 

The  components  of 
increased  most  by  the  agri-monetary 
arrangements arc, of course, those that would have contracted  as a result  of currency 
appreciations. For the currencies that were fairly stable over the period under review, 
the  arrangcments  did  not  lead  to  compensation,  since  there  was  virtually  no  agri-
monetary loss to  offsct. 

In  1996/97  the  Member  States  which  benefited  most  from  the  arrangements  in 
relation to gross value added were: 

-  Ireland  (8%),  because  of  the  structure  of  farm  incomes  and  the  sizeable  aid  to 

compensate for revaluations; 

-  Sweden  (7-4%),  mainly  because  the  ACR  was  frozen  at the  high  level  obtaining 

before the  1996 revaluations; 

- 

the United Kingdom  and Italy, because  currency revaluations were  not  taken  into 
account  straight away,  and there were large gaps before the appreciable  decline in 
the  ACRs; compensatory  aid  authorised  has not  been taken  into  account  because 
it was not actually granted; 

-  Finland  and  to  a  lesser  extent  Denmark,  which  benefited  from  the  system  of 
permitted  margins  and  a  permanently  large  monetary  gap,  without  undergoing  a 
decline in the ACR. 

29 

D. 

Fanancial  impact 

l.  METHODOLOGICALASPECTS 

1.1.  Classification  of agri-monetary  effects 

In  the  agri-monetary  area,  the  legacy  of  the  switch-over  (or  green  ecu) 
mechanisrn weighs heavy  oh the Community budget.  Introduccd  in  1984,  the 
mechanism was discontinued from  1 February  1995.  A detailcd dcscription of 
the  mechanism  and  its  cost  was  presented  in the  report  on  the  period  1 July 
1995 to  30 June  1996.  Its annual impact,  of the order of ECU 8 000  million, 
does not vary miich. 

The  fihancial  impact  of  developments 
in  1996/97  stems  from  four 
mechanisms  or  measures,  namely  permitted  margins,  operative  events,  the 
freezing of ACRs and compensatory aid. 

The  cost  of  agri-monetary  compensatory  aid is  identified  in the  1997  budget 
and the  1998  preliminary draft budget.  The fact  that this cost  is degressive  is 
laid  down  in  the  regulations  and  the  granting  of  the  last  tranches  of  aid 
decided in  1995/96  (Belgium, Luxembourg,  Denmark,  Germany  and Austria) 
should  affect  the budget  for  1997  only,  since the third tranche  of this aid has 
been  cancelled.  The  budgct  forecasts  for  1998  for  this  aid  are  therefore  not 
includcd in this report. 

By the end of the  period  1996/97,  Italy and the United  Kingdom  had still  not 
notified  any plans for  compensatory  aid related  to  the appreciable  declines in 
their ACRs in  1997; consequently,  the relevant budget forecasts  for  1997 are 
not  included  in this  report.  If the  compensatory  aid  is  granted,  it  will  affect 
not only the  1998 budget, but also the budgets for  1999 and 2000. 

The  freezing  of  ACRs  results  in  a  cost  equal,  in  national  currency,  to  the 
difference  between  the  frozen  ACR  and  that  known  on  the  date  of  the 
operative  event  concerned,  multiplied  by  the  amount  in  ecus  of  the  aid  to 
which it applies. As the ACRs are frozen until  1 January  1999, this will  affect 
the  1999 and 2000 budgets. 

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

- 

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

and 

- 

the  rate  applicable  for  the  booking  of  expenditure  in  ecus  (accounting 
rate), i.e. the rate for the  10th day of the month of entry in the accounts  of 

30 

'"' "r ' ifnMlhirT 

the expenditure  in national  currency; this is generally the  month  following 
that of payment to the recipient  by the Member State. 

The  effect  of  the  permitted  margins  is  due  to  the  difference  between  the 
agricultural  conversion  rate  and  the  accounting  rate  on  the  date  of  the 
operative  event.  The  effecj;  of  the, operative  events  relates  to  the  difference 
between  the accounting  rate on  the  date  of the  operative  event  and the sjame 
rate on the date of the booking of the expenditure in ecus. 

1.2.  Method for estimating the cost of developments in  1996/97 

Agri-monetary  events  and  decisions  in  1996/97  mainly affect  the  budgets  for 
1997 and  1998. 

When  estimating  the  agri-monetary  effects  on the  1997  budget,  account  was 
taken  of  the  cyclical  revision  of  February  1997,  established  on  the  basis  of 
conversion rates available on 24 February  1997. 

For the effects  in  1998,  calculations  are based  on  the  1998  preliminary draft 
budget  (PDB)  as  at  30  June  1997,  drawn  up  using  the  conversion  rates 
available on 30 April  1997. 

The  bases  (1997  budget  and  1998  PDB)  were  adjusted  by  replacing  the 
ACRs  used  to  draw  them up with  the  ACRs  available  on  1 July  19971.  The 
accounting rate used was not adjusted as it is of minbr significance  among the 
agri-monetary effects  due to variations in the ACRs. 

-  The  adjusted  1997  budget  and  1998  PDB  on  1  July  1997  show  the 
situation  resulting  from  the  latest  ACRs  available  at  the  end  of  1996/97. 
Expenditure  is  broken  down  on  the  one  hand  on  the  basis  of  the  various 
opcrative  events  for  the  ACRs  affecting  it,  and  on  the  other  hand  on  the 
basis  of  past  expcnditure,  between  the  various  currencies  of  the  Member 
States. 

-  An  estimate  of  Community  expenditure  irrespective  of  any  agri-monetary 
arrangements is arrived at by replacing the ACRs used  in the  1997  budget 
and  1998  PDB  by  the  RMRs  applying  at  the  beginning  of  the  month  of 
booking  of  such  expenditure  and  deducting  agri-monetary  compensation 
paid. 

Note that the estimate  for  the month  of booking  of  each type  of  expenditure 
is  a fairly  shaky  approximation,  subject  to  wide  variations.  The  RMRs  for  1 
July  1997 are used for all dates of entry in the accounts thereafter. 

-  The  overall  effect  of  freezing  the  ACRs  is  calculated  by  replacing  the 
ACRs  actually  used  for  the  aid  in  question  in  the  1997  budget  and  the 
1998  PDB  by  the  current  ACRs  applying  on  the  date  of  the  operative 
events for such aid. 

1 

See Tables D1 to D2 in the Working Paper on Basic Information 

31 

-  The effect  of the operative events is assessed  on the basis of the  difference 
between the results of the calculation  outlined  in the second  indent and the 
outcomc  of  a  similar  simulation  using  the  RMRs  applying  on  the  date  of 
the  operativc  evcnts  for  thc  ACRs  actually  applied.  (iivcn  rcscrvalions 
regarding  the  identilication  of  the  month  of  entry  in  the  accounts,  that 
assessmcnt  is  ralher  imprccisc  and  it  bccomcs  impossible  for  1998  as  all 
the  conversion  rates  applicable  after  1  July  1997  are  replaced  by  those 
available and applicable on  1 July  1997. 

-  The impact of the margins is gauged on the basis of the difference  between 
the  results  of  the  situation  with  the  current  (non-frozen)  ACRs  as 
described  in the third indent,  and the  outcome  of the  simulation  using  the 
RMRs valid on the  date of the  operative  events,  as outlined  in the  fourth 
indent. 

The  ACRs  for  1996/97  affect  77%  of  expenditure  in  the  1997  budget.  The 
conversion  rates  valid  on  1 July  1997  are  applied  to  the  3% Of expenditure 
actually  stemming  from  an  operative  event  on  that  date  but  also  to  the 
cxpcnditurc  covered  by opcrativc cvcnts occurring  subsequcntly,  from  2 July 
to  15  Octobcr  1997.  Thc  convcrsion  rates  valid  on  thc  datcs  of  operativc 
evenls  prior  lo  I July  1997,  but  not  prior  to  November  1994,  are  applied  lo 
virtually all othcr expenditure in the  1997 budget.. 

Only  1%  of  expenditure  in  the  1998  PDB  is  affected  by  the  ACRs  with 
operative  events  occurring  prior  to  the  period  under  review.  14%  of  the 
expenditure  is  affected  by the  ACRs  for  early  1997  and  37% by  those  for  1 
July  1997.  Accordingly,  almost  50%  of  the  1998  PDB  hinges  on  the 
conversion  rates  applicable  from  2  July  1997  to  15  September  1998.  Those 
rates, which were  not  available when this report was drafted,  are replaced by 
the conversion rates for  1 July  1997. 

Overall,  the  agri-monetary  situation  at  1 July  1997  is  of  great  importance  in 
estimates  for  1998.  The  salient  features  of  this  situation  are  the  very  large 
monetary  gaps  between  the  frozen  ACR  on  the  one  hand  and  the  current 
ACR  on  the  other  (11-5%)  for  the  SKR  and  the  UKL,  and  the  large  sums 
expccted to bc paid in compensation in the United Kingdom and Italy. 

2.  RESULTS OF  ESTIMATES 

The  results  set  out  in the table below  show  an annual cost  of  around  ECU  1 200  to 
1 300  million per year (a  comparable order of magnitude to  that  shown  for  1995/96 
in the previous report)2. 

Almost 60 % of that cost is due to the effects  of the margins. The cost  of margins in 
1998 will depend closely on future currency developments, ahd the estimate for  1998 

2  For details, see Table D4. 

32 

is  half  lliat  for  1997.  Ilowevcr,  thal  estimate  is  mainly  based  on  the  agri-monetary 
situation  as it stood  on  1 July  1997. 

The  reason  margins  entail  a  cost  is  basically  attributable  to  the  asymmetry  of  the 
mechanisms,  whereby  positive  monetary  gaps  can  rise'to  5  points  while  negative 
gaps  are usually  limited  by  a variable threshold  determined  by  the  maximum  positive 
gap  minus 5 points. Moreover,  in situations  of steady and  significant  appreciation  for 
several  currencies,  as  in  1996/97,  the  duration  of  confirmation  periods  plays  an 
important  role in keeping the largest positive gaps in existence over time. 

The  cost  of  operative  events,  which  is  difficult  to  compress  without  distorting 
markets,  is  around  ECU  160  million  in  1997,  ECU  60  million  more  than  in  1996. 
This  result  is  unusually  high  because  there  was  no  offsetting  in  1996/97  betwcen 
currcncics  that  apprcciated  and  those  that  depreciated.  It  cannot  be  cstimated  at 
present  for  1998,  as  wc  have  no  figurcs  for  the  differcncc  betwccn  the  RMR  on  the 
datc of the opcralive evcnt  and  that  in the month of entering in the  accounts. 

The  freeze  on  ACRs  in  1997  constitutes  a  cost  deferred  to  1998,  because  of 
operative  events.  It  will  eventually  reach  ECU  500  million  in  1998.  As  the  freeze 
will, in principle, continue until  1 January  1999, it also affects  the budget  for  the  year 
2000. 

Costs of monetary events in  1996/97 

ACR  freeze 

Compensalory aid 

Permitted margins 

Operative events 

Total (ECU mUlion) 

1997 

160 

214 

772 

160 

1306 

1998 

499 

382 

312 

1193 

The  Member  State  whose  allocation  under  the  agri-monetary  arrangements  has 
increased  most  in  1997 in relation to the  1996 budget  outturn  is the United  Kingdom 
with an increase  of 30-7%  in expenditure  in UKL.  The  agri-monetary  cost  of  Ireland 
also increases significantly from the  1996 level. These increases are due to  the  effects 
of  margins  and  operative  events  in  a  situation  where  the  relevant  currencies  are 
appreciating. 

On  the  whole,  the  agri-monetary  costs  of  the  other  currencies  are  much  lower  in 
1997, especially for  those currencies whose ACR had  declined  substantially  in  1995. 

Forecasts  for  1998  show  that  the  United  Kingdom's  share  of  agri-monetary 
the  planned 
expenditure  will 

increase  substantially, 

to  60%,  especially 

if 

33 

compensatory  aid  is  actually  granted.  The  other  main  beheficiaries  of  the  agri-
monetary arrangements will  be Italy, Ircland and  Swcden,  mainly owing  to  the frecze 
on  ACRs.  Costs  for  the  other  currencics,  on  the  other  hand,  will  decline,  and  may 
even  be  ncgativc  for  Gcrmany,  Bclgium,  Francc,  Luxembourg,  Spain,  Portugal,  the 
Nelhcrlands and Auslria. 

34 

1SSN 0254-1475 

:OM(98) 20 linal 

DOCUMENTS 

>N 

03  01  17 

Catalogue  number  :  CB-CO-98-015-EN-C 

ISBN  92-78-30147-7 

Office  for Official  Publications of the European Communities 

L-2985  Luxembourg 

3'-r