European leaders reached a deal last week on the EU's medium-term budget, the Multi-Annual Financial Framework (MFF), and on a European stimulus fund called Next Generation EU to address the catastrophic economic consequences of addressing the COVID-19 pandemic.
Given the very different positions of Member States going into these negotiations and the many complex issues at stake, reaching unanimous agreement after four days and nights of negotiations was an astounding political achievement.
Even before the coronavirus pandemic sent European economies into freefall, the political background to these negotiations was very difficult. The departure of the UK, which had been the second-largest net contributor to the EU budget, left a major budget hole.
Yet it was clear that the EU faced new challenges with respect to migration, security, the digital transformation, and the green transition, all of which would require additional expenditure.
At the same time, a group of mainly northern European countries and Austria were saying that EU budget contributions should not increase above the 1pc of Gross National Income (GNI) ceiling set in the current MFF, even though simply maintaining existing programmes would have required contributions to rise to 1.16pc of GNI.
The Commission tried to reconcile these conflicting positions in its first proposal for the next MFF in May 2018 by cutting proposed expenditure on 'traditional' programmes such as cohesion spending and agricultural policy. It proposed a CAP budget of €324 billion over seven years in constant 2018 prices. This represented a cut in the CAP budget by 15pc in constant price terms, and in the rural development budget by 28pc.
Some of this reduction has now been restored in the European Council conclusions, where a CAP budget of €344 billion in constant prices has been agreed. Thus €20 billion has been added to the CAP budget compared with the Commission's original proposal.
Constant and current prices
This still represents a reduction of around 10pc in constant price terms. However, what farmers will receive in payments is determined in current prices. These amounts are derived by multiplying the constant price figures by 2pc annually, so that in 2027, the final year of the next MFF, the current price amounts are almost 15pc higher than the constant price amounts.
When the CAP budget is shown in current prices, there is no cut in payments and there is even a small increase at the EU level. Some argue that this means that CAP payments are not index-linked to inflation and thus that their real value will decline.
But this will depend on what the rate of inflation will be over the MFF period 2021-2027. Inflation in Ireland right now is very subdued. Even if the fall in prices to June 2020 over the previous year is atypical due to the COVID-19 impact, expectations are that inflation will remain low for the foreseeable future.
The change in Ireland's receipts from the CAP budget can be different from the change in the overall CAP budget for two reasons.
First, the European Council conclusions envisage a continuation of the process of external convergence from 2022, whereby money is shifted from countries with higher-than-average payments per hectare to countries with payments per hectare less than 90pc of the EU average. This has minimal consequences for Ireland because our average payments per hectare are very close to the EU average.
Second, Ireland obtained an additional €300 million in its rural development envelope in the final negotiations.
Overall, Ireland expects to obtain €10.7 billion in current prices from the CAP budget over the MFF period. Minister Calleary has estimated this is an increase of €50 million in current prices over what Ireland obtained in the current MFF.
In addition, there is a change in the EU co-financing rate for CAP Pillar 2 rural development programmes from a maximum of 53pc to a maximum of 43pc in the next period. This means that the Irish government will have to put up additional national funding to draw down its Pillar 2 allocation. Higher co-financing rates will apply to certain rural development measures such as agri-environment-climate measures and payments to farmers in areas of natural constraints.
The precise impact of these changes in co-financing rates will depend on the measures that are eventually included in Ireland's CAP Strategic Plan.
From a farmer's perspective, these changes will likely increase the overall rural development budget beyond the changes that seem on the cards just by looking at the changes in the EU budget figures alone.
It will also be possible to use additional national funding to fund 'rural development-like measures' under EU state aid rules.
This refers to rural development measures like those listed in EU legislation but financed solely from national funds. This would be decided and ultimately approved by the Commission as part of the formulation of Ireland's CAP Strategic Plan.
The constraint here is that the extraordinary additional public expenditure on managing the COVID-19 crisis will severely limit the ability of the national exchequer to fund additional demands in future that are not strictly necessary to draw down EU funds.
The European Council also established a special Brexit adjustment reserve worth €5 billion in 2018 prices for countries and sectors that will be adversely affected after the end of the Brexit transition period next January. The Commission has been asked to come forward with proposals before November for how this money should be distributed, but it likely that the Irish agri-food sector will be a significant beneficiary.
The European Council conclusions require the consent of the European Parliament and (for the financing part of the budget) the unanimous approval of all national parliaments. The Parliament passed a resolution last week expressing its opposition to aspects of the MFF conclusions, but it is not likely to torpedo the whole deal.
Still farmers must live with the uncertainty that it will still be a few months before the final figures for CAP payments in the period 2021-2027 are confirmed.
Another source of uncertainty is when the new CAP will start. The Council and Parliament reached agreement on a common position at the end of June that the current CAP rules should continue for a further two years, so that the new CAP and the CAP Strategic Plans would start in January 2023. The Commission is still holding out for a one-year transition period although it may have lost the argument on this occasion.
There are also many important decisions that will need to be taken at the national level regarding how Ireland's CAP budget will be allocated within the country. The three most important decisions will be whether to shift resources between Pillar 1 and Pillar 2, what model of further internal convergence will be taken, and how much of the Pillar 1 envelope will be devoted to eco-schemes.
The European Council conclusions allow Member States to shift up to 25pc of their Pillar 1 direct payments allocation to rural development measures in Pillar 2 and vice versa.
A further 15pc of the Pillar 1 envelope can be transferred to Pillar 2 if used to address environmental and climate-related objectives, and a further 2pc for interventions supporting young farmers. Ireland has not made use of this flexibility in the past, but there should be a debate on the merits or otherwise of taking up this option.
The flattening of direct payments per hectare, otherwise known as internal convergence, will likely be the most contentious national decision. Minister Calleary has indicated his support for pursuing further internal convergence during the CAP transition period, but he has left open the precise model he will adopt pending examination of various options prepared by the Department.
Finally, the share of the Pillar 1 direct payments to be allocated to the new eco-schemes remains to be determined. Following the publication of the Farm to Fork Strategy, the Commission is now pushing for a minimum ring-fencing for eco-schemes in the legislation.
Minister Calleary spoke against this at the AGRIFISH Council meeting last week, citing fears that if there were a poor uptake of eco-schemes this could mean that payments due to farmers would be left unused.
The European Council conclusions on the EU budget last week were indeed historic. However, there are still many uncertainties around how farm payments will be designed in the coming years.
Alan Matthews is Professor Emeritus of European Agricultural Policy at Trinity College Dublin