External convergence debate continues to simmer

External convergence debate continues to simmer

One of the many issues that will need to be resolved when Heads of State and Government get around to once again considering the Multi-annual Financial Framework (MFF) 2021-2027 is what position to take on the external convergence of CAP direct payments.

The Commission has proposed a further narrowing of the differences in the average value of direct payments per hectare between Member States in the post-2020 CAP framework. For a number of countries from Central and Eastern Europe nothing less than full equality by the end of the MFF period will be acceptable. There is equally strong push-back from another group of Member States that argue there should be no further reductions in the CAP joint pillar allocations for the purpose of redistribution among Member States.

The call for the harmonisation of payments per hectare across Member States (external convergence) began in the run-up to the 2013 CAP reform. The phasing-in of direct payments following the enlargement to include 10 Central and Eastern European countries in 2004 was completed for these countries in 2013, yet significant differences in average payment levels per hectare persisted. The adopted reform in 2013 narrowed these differences somewhat but significant disparities still remain.

In this post I track the background to this debate and set out the competing arguments of the two sides on the external convergence issue. Even for those of us who argue that direct payments should increasingly be coupled to the delivery of public goods rather than income support the question of how to distribute these payments across Member States is an important one. The failure until now to find a suitable ‘objective basis’ for the distribution of Pillar 2 rural development allocations demonstrates that there is no easy answer to this question. For this reason, it is important to engage with this debate.

External convergence in the 2013 reform

We first set the scene by summarising the external convergence debate in the last CAP reform.

The Commission’s proposal. The Commission Communication The CAP towards 2020: Meeting the food, natural resources and territorial challenges of the future was published in November 2010 as its response to the public debate on the future CAP that the then Agriculture Commissioner Dacian Ciolos had launched the previous April. It set out the Commission’s thinking on the challenges that the 2013 reform should address and possible reform orientations: It included among the arguments for reform:

to make CAP support equitable and balanced between Member States and farmers by reducing disparities between Member States taking into account that a flat rate is not a feasible solution, and better targeted to active farmers (bolding in original).

This argument was elaborated later in the document as follows:

The use of a single, flat rate direct payment was one of the proposals floated in the public debate. However, agricultural producers face very different economic and natural conditions across the EU which advocates for an equitable distribution of direct aids.

Thus the question is how to reach an equitable distribution that reflects, in a pragmatic, economically and politically feasible manner, the declared objectives of this support, while avoiding major disruptive changes which could have far reaching economic and social consequences in some regions and/or production systems. A possible route could be a system that limits the gains and losses of Member States by guaranteeing that farmers in all Member States receive on average a minimum share of the EU-wide average level of direct payments.

The Commission’s argument that an equitable distribution is not necessarily a single flat-rate in each Member State and that this was anyway not a (politically) feasible solution was followed by a specific proposal in the Commission’s draft 2014-2020 MFF published in June 2011:

Convergence of payments: to ensure a more equal distribution of direct support, while taking account of the differences that still exist in wage levels and input costs, the levels of direct support per hectare will be progressively adjusted. This will be achieved in the following way: over the period, all Member States with direct payments below the level of 90% of the average will close one third of the gap between their current level and this level. This convergence will be financed proportionally by all Member States with direct payments above the EU average.

Various external (and internal) convergence options were considered in the Commission’s impact assessment that accompanied its presentation of the draft CAP regulations in October 2011.

  • An “EU flat rate”: direct payments are distributed equally on the total potentially eligible hectares across Member States;    
  • A pragmatic approach: limited adjustment of the existing distribution in order to avoid major disruptions to current DP levels, while setting an EU wide minimum level of per ha payment based on a share of the EU average.
  • The use of objective criteria: the EU flat rate is adjusted by objective criteria based on economic, physical and/or or environmental indicators.
  • A combination of a pragmatic approach and objective criteria.

The Commission’s impact assessment of these different options was extremely thorough. It analysed the extent of the redistribution across Member States that would result in each case. It made use of the FADN Farm Accountancy Data Network to simulate the impacts on average farm incomes, on different farm types as well as on production and prices. However, regardless of this analytical work, the Commission’s legal proposals published in October 2011 were based on the option put forward in its MFF proposal published the previous June.

The impact of this option as compared to the distribution between Member States foreseen under a continuation of the Health Check (with full phasing in of payments in all 12 new Member States, modulation of direct payments to rural development as projected for 2013, and excluding direct payments to the outermost regions (POSEI) and the smaller Aegean islands (SAI) as well as cotton payments) is shown in the following chart. The base area used for each country was its Potentially Eligible Area (PEA) in 2009.

Chart 1. Source:  DG AGRI, The CAP towards 2020, Legal proposals, 2011

The impact of the Commission’s external convergence formula is seen by comparing the difference between the blue bars and the crosses on the dotted line. Leaving aside Malta which is clearly a special case, the narrowing of the disparities seems rather limited. The range of payments per hectare would continue to vary from €400/ha or more in Netherlands and Belgium to €160/ha or less in Estonia and Latvia.

European Council MFF conclusions. In February 2013 the European Council finally agreed on the MFF figures for the 2013-2020 period, including the external convergence formula. These figures were incorporated into the final CAP legislative text on direct payments. The main change the European Council made to the Commission’s proposal was to insert a minimum payment level of €196/hectare by 2020 which, from the chart above, benefited the three Baltic countries that had the lowest payment levels under the Commission’s proposal.

Direct support will be more equitably distributed between Member States, while taking account of the differences that still exist in wage levels, purchasing power, output of the agricultural industry and input costs, by stepwise reducing the link to historical references and having regard to the overall context of Common Agricultural Policy and the Union budget.

All Member States with direct payments per hectare below 90% of the EU average will close one third of the gap between their current direct payments level and 90% of the EU average in the course of the next period. However, all Member States should attain at least the level of EUR 196 per hectare in current prices by 2020. This convergence will be financed by all Member States with direct payments above the EU average, proportionally to their distance from the EU average. This process will be implemented progressively over 6 years from financial year 2015 to financial year 2020.

The impact of the European Council conclusions is shown in the following chart which compares the projected distribution of average national payments per hectare by 2020 compared to the status quo (“baseline”).  The projected distribution takes account of the budget cut and external convergence and is based on potential eligible land in 2009. The baseline is where Member States would have been in 2020, had there been no external convergence and no budget cut based on the Commission’s MFF proposal.  Leaving aside Malta which is a special case, the disparities were expected to vary from €400/hectare in the Netherlands to €196/hectare in the three Baltic countries.

Chart 2. Source:  DG AGRI, Overview of CAP Reform 2014-2020, Agricultural Policy Perspectives Brief No. 5, 2013

The following chart, prepared by a number of Member States led by Italy that oppose any further external convergence, shows the extent of the redistribution brought about by the final external convergence formula. The different colours reflect the different amounts phased in each year over the six-year period. According to these calculations, Italy was the largest contributor to external convergence and ultimately lost over €1 billion annually, which explains its leadership role in the group of countries opposing further moves in this direction.

Chart 3. Source:  AGRIFISH Council, Non-paper on external convergence of CAP direct payments, 30 April 2018

Romania was the largest beneficiary in absolute terms, although Poland and the Baltic States were also beneficiaries. In percentage terms, of course, the ranking of gains and losses would look somewhat different, and given the formula used, it follows exactly the ranking of countries shown in Chart 2 above. My own previous calculations, set out in this 2013 blog post, came to very similar conclusions and also present the percentage changes.

Some ‘older’ Member States were also among the beneficiaries, including the United Kingdom. The low average UK payment per hectare was mainly due to lots of unproductive land in Scotland. However, the UK decided in 2013 to spread out this convergence bonus among all UK farmers. This gave rise to an unholy row in the UK as Scotland, not unreasonably, argued that its farmers should be the ones to benefit from this ‘uplift’. This controversy was only resolved following an intra-UK allocations review chaired by Lord Paul Bew that reported in September 2019 and whose recommendations were subsequently accepted by the UK government. It agreed to pay to Scottish farmers all the convergence funding they should have received between 2014 and 2020, based on the shares of land in each UK country that received less than 90% of the EU average. The money to do this was added to the agricultural budget to ensure no farmer in the other UK countries lost out.

External convergence in the CAP post 2020 framework

The Commission initiated the debate on the CAP framework post-2020 by launching a public consultation in February 2017. In its Communication The Future of Food and Farming (consciously or unconsciously echoing the title of a widely-quoted UK government report published in 2011 that looked at global sustainability issues) responding to this debate and setting out the principles of the approach it intended to follow, the Commission took a more emollient approach to the external convergence issue though without committing to full harmonisation within the next MFF period:

At the same time, the CAP needs to play its role in following the principles of “Equality between its Members, big or small, East or West, North or South”, which were recalled by President Juncker in his State of the Union address of 2017. In this sense, it should reduce differences between Member States in CAP support. Even if the wide diversity of relative costs of labour and land as well as the different agronomic potentials across the EU should be acknowledged, all EU farmers face similar challenges.

When the Commission presented its draft MFF for the 2021-2027 period in May 2018, it set out its proposal that “Direct payment levels per hectare between Member States will continue to converge towards the EU average” (bolding in the original). In the Agriculture and Maritime Policy fiche, it set out its precise proposal:

Direct payment levels per hectare between Member States will continue to converge (external convergence). For all Member States with direct payments below 90% of the EU-27 average, the gap between their current level and 90% of the EU average direct payments will be closed by 50%. This convergence will be financed by all Member States.

This formula then became the basis for the Commission’s draft legislative proposal on CAP direct payments in the post-2020 framework and, in particular, the Annex setting out individual Member State national ceilings.

As regards distribution of the direct payments among Member States, it is proposed that all Member States with direct payments below 90% of the EU average will see a continuation of the process started in the period of 2014-2020 and will close 50% of the existing gap to 90%. All Member States will contribute to financing this external convergence of direct payments levels. The Member States’ allocations for direct payments in the CAP Strategic Plan regulation are calculated on this basis.

This convergence formula was taken over by the Finnish Presidency when it presented its first ‘negotiating box with numbers’ to the European Council meeting in December 2019. However, it opened the possibility to also include a commitment to a minimum payment per hectare, as in the 2014-2020 MFF conclusions. Importantly, it specified the use of the Potentially Eligible Area (PEA) in 2016 to make this calculation. Its text reads (keep in mind that text in square brackets means that it is still a proposal under discussion):

The external convergence of direct payments will continue. All Member States with direct payments per hectare below 90% of the EU average will close 50% of the gap between their current average direct payments level and 90% of the EU average in six equal steps starting in 2022. This convergence will be financed proportionately by all Member States. [All Member States will be guaranteed to reach a level of EUR [X]/ha in direct payments by 2027 based on potentially eligible area of 2016, before the changes due to the transferred amount between the two CAP Pillars].

In the European Council President Charles Michel’s draft conclusions prepared for the February 2020 meeting of the European Council, the text in square brackets committing to a minimum level of payment per hectare by 2027 was omitted, testifying to the continuing conflicts between Member States on this issue.

Impact of the Commission proposal

The Commission has not published a formal update giving its estimate of the distribution of average direct payments per hectare across Member States based on a continuation of the current distribution but allowing for the full phasing in direct payments in Croatia in 2022, and how this distribution might be affected by the application of its new external convergence formula. The Commission’s impact assessment notes that “External convergence is tested by assessing the potential consequences of an EU flat rate payment” but, unlike for the 2013 CAP proposal impact assessment, no details or results of a simulation of this option were presented.

In its report on the implementation of direct payments in Member States in 2016, DG AGRI presents a chart on direct payments expenditure per hectare of PEA by Member State for claim year 2016 (financial year 2017, see chart below). However, as DG AGRI itself notes, conclusions about the state of external convergence based on this graph need to be drawn with care. The amounts shown are after transfers that Member States have made between Pillars (the footnote to the chart states that the amounts do not take into account transfers to rural development programmes but do take into account transfers from rural development to direct payments, but this does not seem to be correct and is contradicted in the accompanying text).

What may appear striking in this graph is the continuing low average level of payments per hectare in Latvia and Estonia (to the far right of the graph) in 2016. Part of the reason is that the convergence proposed in the MFF is implemented over a six-year period and will only be fully phased in in financial year 2020. Another part of the explanation is that both Latvia and especially Estonia have transferred a significant share of their direct payments (7.5% in the case of Latvia and 14.3% in the case of Estonia in financial year 2017) to rural development, something which is highlighted by DG AGRI in the accompanying text. Nonetheless, even with these caveats average payments per hectare seem well below the target €196/hectare minimum by 2020 that was introduced in the CAP legislation.

Chart 4. Source:  DG AGRI, Summary report on the implementation of direct payments in Member States in 2016.

Consequences of the Commission proposal

As the Commission has not presented (publicly) any estimates of the impact of the external convergence formula that lie behind the national ceiling allocations in the Annex to the draft CAP Strategic Plans Regulation, I have calculated what the distribution of average payments per hectare by Member State would look like in 2027 under its formula. Before I discuss the chart, let us recall four reasons why we would expect differences between the 2027 distribution (at the end of the next MFF) and the 2020 distribution (being the end of the current MFF).

  • The first is the impact of continued harmonisation of the level of direct payments per hectare under the slightly more aggressive convergence formula proposed by the Commission. Although the benchmark is still taken to the 90% of the EU average, the new formula proposes to close 50% of any gap with the benchmark over the coming MFF period compared to one-third of the gap in the current MFF. However, in the 2013 CAP reform the uplift for Member States with below-the-90%-average payments was financed only by Member States that had payments above the Union average level. For the next MFF, the Commission has proposed, and this proposal has so far been incorporated into the draft MFF conclusions, that all Member States and not only those with above-average payments should contribute to convergence. As this implies that Member States with below-the-90%-average payments make a contribution to financing the transfer that they receive, this will dilute the real impact of the external convergence formula.
  • The overall average EU direct payment per hectare will fall slightly by just under 2% due to the reduction in the overall allocation to direct payments in the Commission’s MFF proposal compared to the current MFF.
  • The average for individual Member States is affected not only by the numerator (the change in its national direct payments envelope between the two MFF periods) but also by any changes in the denominator (the size of the Potentially Eligible Areas). I examine this in further detail below.
  • The EU average is different because the UK is no longer a Member State. As previously noted, the UK (because of large areas of relatively unproductive land in Scotland) also had an average payment per hectare below the EU average in the 2014-2020 MFF period. Its exit thus raises the average EU27 level of per hectare payments compared to the previous average EU28 level, if all other things remained equal.

The Potentially Eligible Area (PEA) is the total area declared by beneficiaries of direct payments and potentially eligible for payment. It differs from a country’s Utilised Agricultural Area (UAA) which is the total area farmed because some farmers can be below the minimum area requirements for being granted direct payments, farmers may not apply for direct payments or farmers may not be eligible for direct payments. On average, the PEA is about 90% of the UAA in the EU as a whole.

The Commission provided data on PEA by Member State for the 2009 claim year in this note prepared for the AGRIFISH Council in July 2011. Although it was not specified in the MFF 2014-2020 conclusions, it seems this was the base year used to implement the external convergence formula in the current MFF (see also Chart 2).  For the next MFF, I have assumed based on the Finnish Presidency draft of the negotiating box that the PEA will be based on figures for 2016 (although not stated, I assume this will also be for claim year 2016).

The following table shows the change in PEA by Member State between 2009 and 2016 (excluding the UK). Even with the absence of a figure for Croatia in 2009, it is clear that there has been a gradual reduction in the PEA over the period.

However, some changes at Member State level have been dramatic, notably the reduction in the Greek PEA by one-third during this period. Interestingly, the three Baltic countries are among top four countries with the largest increases in PEA over the period. A larger PEA reduces a country’s average direct payments per hectare, so this could be an additional contributory factor to the relatively low average payments in these countries shown in Chart 4. It also strengthens the case of these countries for an uplift in the coming MFF period.

Chart 5. Sources:  2009 data: AGRIFISH Council ‘Information from the Commission – Average direct payments for the year 2017, Document 12734/1, 11 July 2011. 2016 data: DG AGRI, Summary report on the implementation of direct payments [except greening], Claim year 2016, June 2018. Note that DG AGRI published an earlier version of this report in February 2018 that contained slightly different PEA figures for some countries for 2016.

The Commission approach when calculating average direct payments per hectare by Member State has been to ignore payments for POSEI and SAI as well as cotton payments as these are considered to fall outside the support schemes funded by these payments. The annual envelopes for the POSEI and SAI programmes set out in the Commission’s draft amendments to the CMO Regulation are in any case not included in the CAP Strategic Plan ceilings (as set out in Recital 89 of the draft CAP Strategic Plans Regulation). For cotton payments, as also explained in the recitals of the draft CAP Strategic Plan Regulation, “since the budgetary allocation for cotton is fixed and cannot be used for other purposes and because the implementation of this program has a Treaty law basis, the payment for cotton should not be part of the interventions approved in the CAP Strategic Plan”. For this reason, I have based the calculations on Annex VII which gives the national ceilings excluding cotton payments. My assumption is that this is the approach that has been used by the Commission when applying its proposed external convergence formula for the next MFF.

Chart 6.  Sources: Based on 2027 direct payments envelope from Commission draft CAP Strategic Plans Regulation, Annex VII and 2016 PEA figures as in Chart 5.

The EU average direct payments per hectare in 2027 will be €264 before any redistribution between Pillars. There will still be disparities between Member States ranging from €501 in Greece (with Malta at €563 as an outlier for its 8,000 hectares of PEA) to €202 per hectare in the three Baltic countries (€204 in Lithuania). Greece has shifted more to the left and increased its average payment per hectare given the dramatic fall in its PEA highlighted earlier as compared to the rankings in Chart 2.

It is interesting that the three Baltic countries will  have virtually the same average payment levels in 2027 (based on their 2016 PEA) given that they were each brought to the same minimum payment level of €196 per hectare in 2020 (which I assume was based on their 2009 PEA), even though their PEA has increased by different percentages over that period. Other countries that will continue to have relatively low average payment levels per hectare even after applying the Commission’s convergence formula will be Poland, Bulgaria, Slovakia, Romania and Portugal. Not surprisingly, some of these countries are the most active in pursuing full harmonisation.

As a final thought experiment, I ask which countries would be biggest winners and losers in absolute terms if it were agreed to move to full convergence of average direct payments per hectare by 2027. The results are shown in Chart 7 following.

In absolute terms, moving to full convergence would imply a significant transfer from Greece, Italy and Germany, in that order, to Spain, Poland and Romania, in that order. Not surprisingly, Italy and Poland are the two main protagonists in the external convergence debate.

Chart 7. Sources: As for Chart 6.

Reactions to the Commission external convergence formula

The protagonists were quick to enter battle once the Commission revealed that it intended only to propose further convergence but not full convergence in its November 2017 Communication on The Future of Food and Farming. A Joint Statement by the Visegrad Group plus Croatia on the Commission’s Communication in January 2018 noted:

In addition to the above points shared by all delegations—Poland and Slovakia POINT OUT that differences in direct payments per hectare persist yet among Member States, therefore CALL to complete the process of their full convergence. UNDERLINE that all EU farmers have to meet the same standards and requirements and face the same challenges.”

This was followed up by a Joint Statement by the Baltic Countries and Poland in March 2018 restating their position in the following terms:

CALL for fairness and equality between Member States and URGE to complete the process of full convergence of direct payments between Member States. UNDERLINE that all EU farmers have to meet the same standards and requirements and face the same challenges;

At the March 2018 AGRIFISH Council when the Bulgarian Presidency tried to get agreement on Council conclusions on the Commission’s Communication, its conclusions were supported by 23 of 28 Member States. Five Member States – Estonia, Latvia, Lithuania, Poland and Slovakia – calling for full external convergence refused to sign up. The Presidency conclusions noted:

“RECOGNISES the different views of Member States on the subject of external convergence of direct payments. ACKNOWLEDGES that further discussions will be needed in the framework of the negotiations on the MFF package;

Italy and six other Member States – Belgium, Cyprus, Denmark, Greece, the Netherlands and Slovenia, all countries to the left of Chart 7 –  responded the following month in a non-paper in which they set out their arguments why no further external convergence beyond that agreed in the current MFF should take place. According to this group, the external convergence mechanism based on eligible area should not be applied anymore post 2020 for the following reasons:

  • it increases the gap between agricultural income and income in the whole economy in the contributing Member States, while overcompensating at the same time the beneficiary countries;
  • it transfers financial resources from small farms with low average income towards bigger farms with a high average income (as described in Figure 11 pag. 27 of the Commission background document on Economic challenges facing EU agriculture);
  • not taking into account the different level of prices among countries in the convergence towards the EU average, will lead to a different treatment of farmers throughout Europe and a distortion of the well-functioning of the internal market;
  • it does not take into account the differences among MS in land prices, in the cost of labour, in the agronomic conditions among MS and moreover it thus increases the speculation on agricultural land in beneficiary countries as the capitalisation of CAP support on land value is increased.

The Polish-led group returned to the argument in a Joint Declaration of Baltic countries and Poland in September 2019 which included the following passage:

II. Ensuring equal conditions of competition by leveling direct payments

WE CONSIDER that leveling of direct payments among Member States is necessary as our farms are operating on single market, which should be based on fair competition and have to fulfil similar additional obligatory requirements imposed on all EU farmers. It is unacceptable that direct payments within the EU differ up to 3 times, while burden of fulfilling the societal and political ambition is imposed on all the EU farmers equally.

WE BELIEVE therefore, that there is no justification for further continuation of differences in the level of direct payments resulting from their historical reference calculation parameters. WE EXPECT the alignment process of direct payments to be completed in 2021-2027 perspective.

According to Euractiv in this report, the Italian-led group underlined their dissatisfaction with the Finnish Presidency’s external convergence proposal in its ‘negotiating box with numbers’ in a further non-paper to the AGRIFISH Council in December 2019, though this does not appear to have surfaced on the internet.  It appears to have reiterated the arguments made in the April 2018 non-paper.

However, the AGRIFISH Council does not itself intend to take a position on this issue, noting that (in the words of the Finnish Presidency’s progress report on the state of work in preparing the Council’s general position in December 2019) “some elements of the three proposed Regulations are part of the horizontal MFF negotiations, and thus an agreement on the MFF is needed for the Council to establish its overall position on the post-2020 CAP reform”.

The same divisions are of course at work in COMAGRI and the European Parliament. While numerous amendments were offered to Recital (48) of the draft CAP Strategic Plans Regulation which sets out the Commission’s formula for external convergence, including amendments that would introduce full convergence by 2024, the report finally adopted by the Committee in May 2019 does not propose any change to the Commission’s recital. It remains to be seen whether the full Parliament in plenary will support this position or not.  

Commissioner Wojciechowski has indicated his preference for full convergence. Based on his comments after the March 2019 AGRIFISH Council, his hope is that a sufficient increase in the CAP budget in the MFF would allow full harmonisation of payments to take place without, however, requiring a cut in payments in countries with above-average payments. As we have seen, this was the way the UK government eventually dealt with Scotland’s complaint that it had lost out in terms of convergence within the UK during the 2014-2020 MFF period and would continue to do so in the years 2020-2022 unless the funding formula was changed. By putting more money into the agricultural budget it gave more money to Scottish farmers without reducing payments to farmers elsewhere in the UK.

In the background to this debate are differing interpretations of the European Council conclusions in October 2002 setting out the conditions for accession for the new Member States from Central and Eastern Europe. These conclusions proposed that direct payments would be introduced in the new Member States according to a schedule over a ten-year period “expressed as a percentage of the level of such payments in the Union… so as to ensure that the new Member States reach in 2013 the support level then applicable in the current European Union”. While there has never been a common support level in the EU-15 that could act as a benchmark for this ambition, it could certainly be interpreted to mean that there would be full convergence of direct payments per hectare after the end of the transition period.

Conclusions

Jo Swinnen, in his introductory chapter to the definitive academic account of the 2013 CAP reform The Political Economy of the 2014-2020 Common Agricultural Policy: An Imperfect Storm (2015), notes that the external convergence issue played less of a role in the debates around that reform than one might have expected. He puts forward a number of hypotheses to explain this:

  • The older Member States realised that the distribution of 2003 was unfair for the newer Member States and indefensible, and it was more of an issue of “how much” than “if”.
  • Several newer Member States were more worried that they would lose more from an overall cut in the direct payments budget than they would gain from pursuing greater convergence, so put their energies into the former.
  • In some other newer Member States, their greater concern was the capping proposal, so these governments spent their political capital more on lobbying for maintaining the amount of direct payments and for avoiding capping.
  • If direct payment transfers were expressed relative to agricultural value added rather than land area, the share in the newer Member States was anyway close to that in the older Member States. Factoring in the more generous rural development and cohesion fund transfers gave a very different picture to looking at a comparison of direct payments per hectare alone.

In the end, countries such as Bulgaria, Estonia, Latvia, Lithuania and Romania saw their national DP ceilings increase significantly, while the other NMS either had no significant change or a small decline.

Based on the review of the debate on external convergence in this post, it seems clear that the external convergence issue is playing a larger role in the MFF debate on this occasion. We can speculate on the reasons for this. One might be a growing impatience and unwillingness to accept the historic distribution of payments between Member States, the further we are from the date (2003) when those decisions were made.

A second reason might be that the disparity in payments per hectare feeds into a narrative supported by a rising tide of nationalist feeling in the Member States of the Union. In Poland, for example, the Law and Justice Party (PiS) made the promise of equalising payments per hectare in Poland with the levels in France and Germany a key demand in its attempt to rally the rural vote prior to its October 2019 general election.

At the same time, the opposition to external convergence has also hardened. The group of countries publicly opposed for further external convergence of direct payments now ask for the whole concept to be dropped and not just the figures revised.

One might try to resolve the conflicting positions by appealing to a set of general principles that should underlie the allocation of CAP funds across Member States (the same issues remain unresolved with the distribution of rural development funding). Examples of principles that might be considered include:

  • Fairness. While support for any funding formula depends on general acceptance that it is fair and reasonable, the perception of fairness often depends on the standpoint of the observer. For some, equal payments per hectare is the only fair outcome. Others will argue that fairness implies an equal contribution to farm income, or a distribution in line with agricultural output.
  • Base allocations on contribution to objectives. One problem here is that there is no settled agreement on what direct payments are designed to achieve. Some argue they are meant to reduce disparities between farm and non-farm income. Others that they are intended to maintain a wide geographical spread of agricultural production and therefore should focus on compensating farmers for production disadvantages. Yet others argue that direct payments should be linked to the production of public goods. Even if we were to agree on the objectives, there would still be tensions in how these would be measured and translated into indicators. For example, allocating according to the extent of income disparities would arguably disadvantage those countries that have already addressed this problem through productivity improvement and structural change. Allocating budget resources according to environmental needs or pressures would disadvantage those countries that have been ‘first-movers’ and have already cleaned up some of their worst pollution. Another factor is that, even where a formula could be designed to allocate resources to countries based on a set of objective criteria, there is no requirement for Member States to use their funds in this way under the Strategic Plans concept. Finally, the Commission’s 2011 impact assessment accompanying the 2013 CAP reform proposal showed that any move to base the distribution of direct payments on objective criteria would lead to significant and disruptive shifts in existing Member State allocations.
  • Coherence with other budget instruments. The distribution of direct payments across Member States cannot be seen in isolation from the variation in receipts of rural development funding.
  • Simplicity versus complexity. A factor-based formula may give an illusion of objectivity, but in reality the weights assigned to the different factors will be politically determined. A highly complex formula can make it difficult for beneficiaries to understand how the payments they receive are determined. There is a lot to be said for keeping it simple.
  • Limit uncertainty. Any move to a new funding formula needs to be phased in over time, to give farmers time to adjust. The need for a transition period would be generally accepted, but should not mean that the status quo cannot be changed. On the other hand, major changes from historical outcomes are likely to prove very disruptive and to be seen as politically infeasible.

In contrast to my usual practice, I am not going to end this post with a recommendation on what the appropriate external convergence formula should be, or if indeed there should be one. My one observation is that it would be highly desirable if any uplift in payments as a result of external convergence in any country was mandated to be used to pursue the CAP’s environmental and climate objectives. Using the uplift to increase coupled payments would surely rub salt in the wounds of those countries that are required to contribute to the convergence pot.

The Bew Review in the UK also considered a number of options for how a future UK agricultural budget should be allocated across the four UK countries. It also could make no satisfactory recommendation. It sought the advice of nine leading UK agricultural economists (a summary is included in the Review) but I admit to being underwhelmed by the advice they gave. This is an area where the profession should strive to do better in the future.

This post was written by Alan Matthews

Picture credit. stevepb on pixabay, image free for non-commercial use

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