4.1.4.     EAGGF - Guarantee section

LEGAL BASIS

Article 34 (40) (3) of the EC Treaty.

OBJECTIVES

The European Agricultural Guidance and Guarantee Fund finances the common agricultural policy or CAP. Set up in January 1962, it split in 1964 into two sections: the Guarantee Section, much larger than the Guidance Section, has the purpose of funding expenditure resulting from application of the markets and price policy. Under Articles 2 and 3 of Regulation 729/70 such expenditure consists partly of refunds for exports to third countries granted under the common organisation of the market and partly of intervention payments to regularise agricultural markets. However, following reform of the CAP the Guarantee Section of the EAGGF has since 1993 had to finance all or part of measures which are not strictly speaking to do with the management of agricultural markets, such as set-aside of land, income support, environmental protection, action to combat fraud etc. The Agenda 2000 decisions, transferring to the EAGGF Guarantee Section all structural and rural measures at present in force outside Objective 1 regions, are the latest development in this direction.

ACHIEVEMENTS

The EAGGF forms an integral part of the Community budget, so the budget procedure determines its funds in the same way as other Community expenditure.

1.     Development and distribution of the Fund

• The volume of payments made by the Guarantee Section rose from ECU 8.7 billion in 1978 to 38.7 billion in 1998, as shown in Table II (*4.1.9.). It has thus quadrupled over the past 20 years, as much for internal reasons, such as the accession of new Member States, as for external ones such as the saturation of world markets. In spite of this growth, Guarantee Section expenditure only accounts for 0.5% of the EU's GDP. From 1988 to 1996 the budget generally complied with the 'agricultural guideline'- see point 3(a) below - each financial year, enabling savings of approximately ECU 27 billion over the same period. In 1998 expenditure was actually very much below the guideline, with a margin of ECU 4.5 billion.
• From 1988, the CAP adopted substantial restrictions to curb the increase in farm spending. At the same time it developed plans under the farm structures and rural development policy for set-aside of land, conversion to other sectors, programmes for extensive production etc, most of them financed by the EAGGF Guarantee Section. Hence in real terms the reduction in EAGGF Guarantee Section spending appears even greater.

Tables I.4 and II (*4.1.9.) show that France is the largest beneficiary of the EAGGF Guarantee Section, followed by Germany, Spain and the United Kingdom. From Table 1 (*4.1.9.) it is clear that the agricultural sectors in Sweden, the UK and Ireland receive the greatest support from the EU, since EAGGF Guarantee spending accounted for between 59 and 86% of their net value added or NVA in 1998. But in terms of Guarantee Section spending per agricultural work unit or AWU, Denmark heads the list, followed by Belgium and the UK (Table I.6, *4.1.9.).

Table III (*4.1.9.) shows the distribution of Guarantee Section spending by sector in 1998, broken down by type of expenditure (refunds, intervention payments through prices and direct aids). The first three areas of expenditure are arable crops (cereals, oil-seed and proteins), beef and milk products.

The results obtained by implementing budgetary discipline have been spectacular. This trend was in line with the financial perspective, under the Delors I and II packages, which required agriculture to take a steadily decreasing slice of the Community budget. Thus the percentage of this section fell from 67% of the Community budget in 1988 to 45.1% in 1999. The financial perspective for Agenda 2000 has practically frozen this percentage. For the period 2000-2006 the agricultural guideline will account for 44.1% of Community spending.

Table III (*4.1.9.) also shows the trend in Guarantee Section spending by type of spending and by Member State. All Member States now obtain most of their benefits from direct aids. France benefits most from refunds, followed by the Netherlands and Germany. The countries that benefit least from refunds are Portugal, Greece, Austria and Sweden.

2.     Nature of EAGGF Guarantee Section expenditure

a. Spending in this section under the common organisations of the market (COMs) has the following characteristics:

• It falls into the compulsory category (under Article 272 (203) of the Treaty of Rome). This means that it arises from the content of the relevant regulations — hence the importance of this section for agricultural incomes.
• It is difficult to predict as its volume depends on a number of variables: production levels, international prices, etc.
• Its purpose is to make adjustments during a marketing year to bring appropriations into line with requirements by adopting supplementary and/or amending budgets.

b. In addition to these characteristics such spending may be classified in terms of the economic nature of the measures put in place for the COMs.

• Export refunds: as a result of the trend in world prices and the 1993 GATT agreements they have dropped considerably, amounting in 1998 to just under 12% of appropriations (Table III, * 4.1.9.).
• Intervention payments through prices (aid for public or private storage) amounted in 1998 to 6% of appropriations (Table III, * 4.1.9.).
• Direct aids to producers or industries amounted in 1998 to 82% of appropriations (Table III, * 4.1.9.).

To carry out the Fund's activities the Commission receives assistance from the EAGGF Committee comprising the representatives of the Member States. The Court of Auditors and Parliament's Committee on Budgetary Control provide a retrospective review. The Brussels European Council of February 1988 was of major importance in reaching agreement on a number of significant measures, including the following.

a.     Budgetary discipline

• To curb farm spending the funds available were subject to 'budgetary discipline', which meant complying with a financial or agricultural guideline laid down for the period 1988-1992 and set at ECU 27.5 billion in 1988, with an annual growth rate of 74% of the EU's annual growth rate of GNP. The annual reduction in farm spending took the form of a percentage farm budget growth rate lower than that of GNP; this, together with a higher own resources ceiling, made it possible to double the amount allotted to the Structural Funds.
• The December 1992 Edinburgh European Council extended this financial guideline until 1999.
• On 31 October 1994 the Council adopted a new decision on budgetary discipline involving some changes in compliance with payment deadlines, the quality of data provided by the Member States and other measures. These new provisions took effect in 1995.
• As already mentioned, Agenda 2000 has confirmed the budgetary discipline policy and the agricultural guideline for the period 2000-2006.

b.     Early warning system
Each month the Commission presents a working document on the budgetary situation, to improve the information available to the budgetary authority. This makes it possible to monitor Guarantee Section expenditure month by month and chapter by chapter for each COM to ensure that spending does not exceed the funds available.

c.     Monetary reserve
This is a budgetary mechanism to amortise exchange-rate fluctuations in the market between the ECU and the US dollar in relation to the exchange rate used for implementing the budget. The reserve receives funds from the Guarantee Section when the dollar goes up and finances Guarantee Section expenditure arising from devaluations of the dollar.

• The reserve is not included in the financial guideline. Its initial value is ECU 500 million; funds are not transferred to or from the reserve below a threshold of ECU 200 million.
• Under decisions taken at the Edinburgh European Council the reserve may also cover possible cost increases of agri-monetary origin, even if this increases the risk of its depletion, in which case the Council has to take special measures to reprovision the EAGGF Guarantee Section.

d.     Obligatory scheme to finance the depreciation of surplus stocks
The EU is required to depreciate stocks at the time of purchase or twice a year, and not at the time of sale as used to be the practice.

e.     Fraud
There has been a significant increase in fraud in recent years. The number of infringements has risen steadily and the Commission has taken a series of measures to deal with the situation. In addition to action to increase administrative penalties and a policy to increase the penalisation of fraud it has stepped up its action to combat fraud, centred on three main areas:

• new laws to review and improve the regulatory framework and methodology;
• tougher investigations and inspections, stepping up on-the-spot operations;
• special inspection mechanisms under its supervision.

ROLE OF THE EUROPEAN PARLIAMENT

The October 1993 interinstitutional agreement enabled Parliament to somewhat increase its impact on compulsory expenditure. Parliament decides on the total amount of EAGGF appropriations and how they are allocated by product and activity, though the Council has the final word. Parliament's main contributions to the operation of the EAGGF include its firm support for the amendment of Regulation 729/70 on the funding of the CAP, as a way of preventing the disputes arising from dialogue exclusively between the Member States' national departments and those of the regions concerned ^[1].Parliament's Committee on Agriculture and Rural Development argues that there is a need to set up a conciliation body in each Member State, with representatives of the regions on it, to facilitate dialogue between the regions and the Member State. Parliament takes the view that the Commission's estimates of expenditure for the budget are not precise enough, and it therefore intends to take a closer look at this area of the EAGGF Guarantee Section to monitor the level of discrepancy between estimated and actual spending. In this connection the debates on the agricultural section of Agenda 2000 have had a major impact on the future of the CAP, stabilising agricultural spending and, at the same time, reducing the Commission's margin for manoeuvre within the guideline.

PROCEDURE REFERENCES

[1] Consultation procedures: CNS94143 and CNS94144

20/10/2000