Report from the Commission to the budget authority on the impact on EAGGF Guarantee Section expenditure in 2002 of movements in the euro/dollar exchange rate
Date: 2002-11-22
Institutions: European Commission
Subjects: Community budget, EAGGF Guarantee Section, budgetary discipline (EU), budgetary reserve (EU), common price policy, exchange rate, export refund, foreign currency, impact study

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 22.11.2002
COM(2002) 648 final

REPORT FROM THE COMMISSION TO THE BUDGET AUTHORITY

on the impact on EAGGF Guarantee Section expenditure in 2002
of movements in the euro/dollar exchange rate

2002 FINANCIAL YEAR

I.

INTRODUCTION

The value of the dollar affects an important proportion of EAGGF Guarantee Section
expenditure.

The budget appropriations for a significant number of export refunds for agricultural
products, notably cereals, rice and sugar and for some Community aids such as aid for
the production of starch, aid for the use of sugar by the chemical industry and aid for
cotton, are fixed on the basis of the gap existing between Community prices, expressed
in euro, and world prices, generally expressed in dollars.

Other things being equal, a change in the value of the dollar in relation to the euro
automatically implies a change in the gap in euro between Community prices and world
prices and consequently a change in the production aids and export refunds concerned.
If the dollar rises, the gap diminishes, leading to a reduction in expenditure; if the dollar
falls, the gap widens, raising expenditure.

The European Council of 11 and 12 February 1988, in its conclusions, expressed the
will to take explicit account of the impact of the change in the dollar on agricultural
expenditure.

On that basis, by its Decision of 24 June 1988 concerning budgetary discipline1 the
Council provided for the inclusion of ECU 1 000 million in a reserve of the general
budget of the European Communities "as a provision for covering developments caused
by significant and unforeseen movements in the dollar/ecu market rate compared to the
dollar/ecu rate used in the budget”2.

to ECU 500 million from 1995 onwards. Under

The Edinburgh European Council of 11 and 12 December 1992 confirmed that the
monetary reserve would remain in place for the period 1993-99 but decided that the
the
amount should be cut
Interinstitutional Agreement between the Parliament, the Council and the Commission
of 29 October 1993 on budgetary discipline and improvement of the budgetary
procedure3 the monetary reserve is intended to cover the financial impact on budgetary
expenditure of substantial and unforeseen divergences in the dollar exchange rate as
compared with that used in the budget. On 31 October 1994 the Council adopted a new
Decision on budgetary discipline4 which took account of the conclusions of the
Edinburgh European Council and the Interinstitutional agreement of 1993. As was
already the case under the Decision of 1988, this new Decision laid down that the
dollar/ECU rate used to draw up the budget is equal to the average market rate over the
first three months of the year preceding the budget year.

For the period after 1999, the Berlin European Council of 24 and 25 March 1999
concluded that the monetary reserve would be phased out by the end of 2002. It would
remain at EUR 500 million for 2000 and 2001 and be reduced to 250 million for 2002.

1

2

3

4

OJ L 185, 15.7.1988, p. 29
Following the introduction of the single currency on 1 January 1999, the legislative references to the term “ECU”
are replaced by the term “EUR”
OJ C 331, 7.12.1993, p.1
OJ L 293, 12.11.1994, p. 14

2

as

applicable

These conclusions were confirmed in the Interinstitutional Agreement of 6 May 19995.
Subsequently Council Regulation (EC) N° 2040/2000 of 26 September 2000 on
budgetary discipline6
from
replaced the Decision of 1994,
1 October 2000. Articles 8 to 13 of that Regulation contain the provisions relating to
consideration of the euro/dollar exchange rate, in accordance with the conclusions of
the Berlin European Council. This Regulation provides that the monetary reserve
remains at EUR 500 million for 2000 and 2001, is reduced to EUR 250 million for
2002 and then abolished with effect from 2003. If the dollar strengthens against the euro
compared with the rate used in the budget, savings in the Guarantee Section of up to
EUR 500 million (EUR 250 million for 2002) shall be transferred to the monetary
reserve. Where a fall in the dollar compared to the rate used in the budget leads to
additional costs and these costs cannot be met from within the budgetary appropriations
for Titles 1 to 3 of the EAGGF Guarantee section, the monetary reserve is drawn on and
transfers made to the headings of the Guarantee Section affected by the fall in the
dollar. Recourse is to be had to the monetary reserve when the said savings (or, as the
the additional costs) exceed a neutral margin of EUR 200 million
case may be,
(EUR 100 million for 2002).

In accordance with Article 10 of Regulation (EC) N° 2040/2000, the Commission is
presenting the budgetary authority with this report for the 2002 financial year on the
impact on expenditure under Titles 1 to 3 of the EAGGF Guarantee Section of
movements in the average euro/dollar exchange rate in the period 1 August 2001 to
31 July 2002 in relation to the rate used in the budget. The report contains information
used to assess whether, on account of the impact of these changes, a transfer should be
proposed to or from the monetary reserve and, if so, the relevant amount.

II.

IMPACT OF THE DOLLAR ON EAGGF GUARANTEE SECTION
EXPENDITURE IN 2002

To gauge the impact of movements in the euro/dollar rate on the 2002 financial year,
consideration must be given, under Article 8 of Regulation (EC) N° 2040/2000, to the
gap between the average euro/dollar rate recorded between 1 August 2001 and 31 July
2002 and the rate used in the 2002 budget.

When the preliminary draft budget was established in April 2001, the rate initially used
to draw up the budget estimates for 2002 was fixed at 1 EUR = $ 0.92 (average rate for
January, February and March 2001, in accordance with Article 8 (1) of Regulation (EC)
No 2040/2000). Subsequently, when the Commission adopted an amending letter to the
preliminary draft budget at the end of October 2001 which concerned agricultural
expenditure, the rate was revised to 1 EUR = $ 0.89 (average for July, August and
September 2001). The rate of 1 EUR = $ 0.89 became the definitive budget rate used in
drawing up the budget estimates for 2002.

The following table gives the monthly exchange rate gaps recorded in the reference
period compared to the budget rate of 1 EUR = $ 0.89 :

5

6

OJ C 172, 18.6.1999, p.1
OJ L 244, 29.9.2000, p. 27

3

a

August

September

October

November

December

January

February

March

April

May

June

July

Recorded rate

Budget rate

EUR 1 = $…

EUR 1 = $…

Gap

in $

Gap

in %

b

0.9005

0.9111

0.9059

0.8883

0.8924

0.8833

0.8700

0.8758

0.8858

0.9170

0.9554

0.9922

c

d = b – c

e = b/c

0.8900

0.8900

0.8900

0.8900

0.8900

0.8900

0.8900

0.8900

0.8900

0.8900

0.8900

0.8900

+ 0.0105

+ 0.0211

+ 0.0159

- 0.0017

+ 0.0024

- 0.0067

- 0.0200

- 0.0142

- 0.0042

+ 0.0270

+ 0.0654

+ 1.2

+ 2.4

+ 1.8

- 0.2

+ 0.3

- 0.8

- 2.2

- 1.6

- 0.5

+ 3.0

+ 7.3

+ 0.1022

+ 11.5

Average
1.8.2001-31.7.2002

0.9072

0.8900

+ 0.0172

+ 1.9

Over the period under consideration the average recorded rate, rounded off, was
EUR 1 = $ 0.91,
i.e. 2.2 % above the budget rate and also corresponding to a
depreciation of the dollar of 2.2 %. That depreciation in the value of the dollar
involved additional expenditure for the EAGGF Guarantee Section.

The recorded average rate of EUR 1 = $ 0.91 is the arithmetical mean of the daily
rates for the twelve-month period in question. For the first nine months of the period
(ie. August 2001 – April 2002), the average monthly rates remained within – 2.5% of
the budget rate and the average rate for the whole of this nine-month period was
almost
identical to the budget rate. However, after April the dollar depreciated
significantly and as a consequence, the rate for July 2002 reached an average of
€
1

= $ 0.99 or about 11% higher than the budget parity.

To make an accurate assessment of
the additional expenditures due to the
depreciation of the dollar during a period when the gaps compared to the budget rate
were variable, it is necessary to establish, over the period concerned, a weighted
average exchange rate for every agricultural product for which expenditure in euros
is affected by the dollar, taking account of the seasonal variation in the quantities
exported with a refund or in quantities eligible for Community aid. For 2002, this
weighted average for all the products and measures concerned was EUR 1 = $ 0.906.

4

On that basis, the additional expenditures for the EAGGF Guarantee Section as a
result of the depreciation of the dollar in relation to the budget rate are estimated at
EUR 33 million for the 2002 financial year. The relatively small impact of this
depreciation on expenditures for 2002 reflects not only the narrowness of the
variation between the recorded rate and the budget rate but also the fact that the
quantities of cereals subject to export refunds were much lower than in previous
years, a consequence of the closeness of EU prices and world market prices for most
of 2001/2002.

The Annex gives a detailed calculation of the additional expenditures, which break
down by chapter as follows:

B1-10 : Arable crops (cereals)
B1-11 : Sugar
B1-13 : Cotton
B1-18 : Other plant sectors (rice)
B1-30 : Non-Annex I products (cereals, sugar, rice)
B1-32 : Islands and most remote regions

TOTAL

EUR 8 million
EUR 15 million
EUR 3 million
-
EUR 6 million
EUR 1 million
EUR 33 million 7

For other sectors, livestock products in particular, it should be noted that, like last
year, the world prices expressed in dollars were not used to establish the budget.
There was therefore no need to evaluate the impact of changes in the value of the
dollar on refunds or aid to those sectors.

As the additional expenditures in 2002 of EUR 33 million are below the neutral margin
of EUR 100 million referred to in Article 11 (2) of Regulation (EC) N° 2040/2000, no
the additional
transfer may be made from the monetary reserve. In any case,
expenditures can be met from the budget appropriations for Titles 1 to 3 of the EAGGF
Guarantee for 2002.

7

Due to rounding, individual items may not add to the total

5

ANNEX - Calculation of the impact on EAGGF Guarantee Section expenditure of changes in the euro/dollar rate: 2002 financial year

Average world
price recorded

Technical
adjustment
coefficient

Average world
price used

Weighted
average rate

World price converted into EUR

At rate
the parity
1 EUR = $ 0.89

At average
weighted rate
recorded

Unit impact of
gap in rates

Quantities
concerned

Total budget
impact

($ / t)

b

c

($ / t)

d = b x c

(1 EUR = .. $)

(EUR / t)

e

f = d /0.89

(EUR / t)

g = d x e

(EUR / t)

h = f – g

(1.000 t)

EUR million

i

j = h x I

101
90
167
90
254

212

101
90
167
93
254
212

113
100
69

93
212
800

101
90
167
90
254
212

1.00
1.00
1.00
1.00
1.00

1.00

1.00
1.00
1.00
1.00
1.00
1.00

1.00
1.00
1.00

1.60
1.00
0.206

1.00
1.00
1.00
1.00
1.00
1.00

101
90
167
90
254

212

101
90
167
93
254
212

113
100
69

149
212
165

101
90
167
90
254
212

0.93
0.93
0.89
0.90
0.89

0.91

0.93
0.93
0.89
0.90
0.89
0.91

0.88
0.89
0.88

0.90
0.91
0.90

0.93
0.93
0.89
0.90
0.89
0.91

(0.906)

113.5
101.1
187.6
101.1
285.4

238.2

113.5
101.1
187.6
104.5
285.4
238.2

127.0
112.4
77.5

167.4
238.2
185.2

113.5
101,1
187.6
101.1
285.4
238.2

108.6
97.1
187.6
100.0
285.4

233.0

108.6
97.1
187.6
103.3
285.4
233.0

128.4
112.4
78.4

165.6
233.0
183.1

108.6
97.1
187.6
100.0
285.4
233.0

4.9
4.0
0.0
1.1
0.0

5.2

4.9
4.0
0.0
1.2
0.0
5.2

-1.4
0.0
-0.9

1.8
5.2
2.1

4.9
4.0
0.0
1.1
0.0
5.2

(1)
(1)
(1)
(1)

(1)
(1)
(1)
(1)

624
166
0
2.830
133

2.508

200
50
0
1.617
12
470

180
1 350
285

760
400
1.575

126
40
3
265
7
3

3.1
0.7
0.0
3.1
0.0

13.0

1.0
0.2
0.0
1,9
0.0
2.4

-0.3
0.0
-0.3

1.4
2.1
3.3

0.6
0.2
0.0
0.3
0.0
0.0

32.7

a

A. EXPORT REFUNDS
Cereals and rice
- Common wheat
- Barley
- Durum wheat
- Other cereals
- Rice (milled equivalent)

Sugar

Non-Annex I products
- Common wheat
- Barley
- Durum wheat
- Other cereals
- Rice
- Sugar

B. EXPORTS FROM PUBLIC
STORAGE
- Common wheat
- Barley
- Rye

C. AIDS
Starch (production refunds)
Sugar for chemical industry
Fibre plants (cotton)

Islands and most-remote regions
- Common wheat
- Barley
- Durum wheat
- Other cereals
- Rice (milled equivalent)
- Sugar

TOTAL A + B + C

N.B.:
(1)

On the basis of the figures in the table, a change in the euro/dollar rate of 10% would lead to a change in expenditure of EUR 185 million.
Excluding quantities exported subject to charge or with zero refund.

6

EXPLANATORY REMARKS TO THE ANNEX

Column (a) of the tables gives all the budget headings which are affected explicitly and directly
by movements in the value of the dollar as against the exchange rate used in the budget.

Column (b) gives estimated average world prices in dollars for the period concerned.

They correspond either to the average selling prices of Community products when exported or to
prices used for the calculation of the various aids.

These prices are multiplied by an adjusting coefficient [column (c)] indicating the weighting of
the world price used to determine an aid or refund. For example, 1.6 times the world price for
maize is used in determining the production refund for starch.

Column (d) gives average world prices in dollars corrected by the adjusting coefficient.

Column (e) gives the average euro/dollar exchange rates recorded, established per heading on the
basis of a weighting taking account of the seasonal nature of the quantities eligible for export
refunds or Community aids.

Columns (f) and (g) give the corrected average world prices converted into euro using the
exchange rate adopted in the budget of EUR 1 = $ 0.89 and the recorded weighted average rates
in column (e).

The unit impact of the variation in the rates is given is column (h) in EUR per tonne.

This unit amount multiplied by the estimated quantities [column (i)] qualifying for aids and/or
refunds during the period under review provides the impact expressed in EUR [column (j)].

7