Committee Reports > List of Committees > Joint > 1978 > Committee on the Secondary Legislation of the European Communities > Report No. 06 - Fixing of Representative Conversion Rates in Agriculture and Use of the European Unit of Account in Common Agricultural Policy

REPORT

A. INTRODUCTION

Proposals Examined

1. The Joint Committee has examined the Commission’s proposal for a Council Regulation relating to the fixing of representative conversion rates in agriculture (R/260I/77) and in the course of its examination it also considered the Commission’s report on the use of the European unit of account in the common agricultural policy (R/2651/77).

2. In November, 1976, the Commission presented a draft Regulation relating to the adjustment of conversion rates and dismantling of monetary compensatory allowances which was not accepted by the Council. Accordingly, the proposal was replaced in November, 1977 by the proposal contained in document R/2601/77. The new proposal has been discussed by the Council on a number of occasions but it has not proved acceptable to the Federal Republic of Germany and the United Kingdom.

3. In regard to the European unit of account the Commission indicates in its report that, while it favours its use in the common agricultural policy in principle, the matter raises fundamental questions which require further study. Until the Commission submits a formal proposal the Joint Committee considers that it would be premature to formulate a definite opinion. Accordingly, this report deals merely with the Commission’s conclusions and some possible consequences of the change-over if it were made.

Bodies Consulted

4. The Joint Committee has had the opportunity of studying memoranda from the Irish Farmers’ Association on both the matters dealt with in this report. Members of the Joint Committee also discussed the subject with representatives of the Association. A meeting was arranged with the Irish Creamery Milk Suppliers’ Association but could not be held when other urgent commitments of that Association unexpectedly intervened. The Joint Committee wishes once again to acknowledge with thanks the help it has been receiving from these bodies.

5. Members of the Joint Committee who visited Brussels at the Commission’s invitation from 19th to 21st March, 1978 availed themselves of the opportunity to discuss in general measures in the agri-monetary field with an official of the Commission. The Joint Committee is extremely grateful to the Commission for the benefit its members received from a wide-ranging and informative discussion.

Operation of the Agri-Monetary System

6. Both Commission documents deal with the agri-monetary system which operates for the purposes of the common agricultural policy. The main features of that system are described in the following two paragraphs.

7. Under the common agricultural policy (CAP), prices and aids are fixed for the Community as a whole in units of account. These are converted into national currencies at the representative exchange rate which is fixed by Council Regulation for each Member State and which expresses for CAP purposes the value of the unit of account in the national currency (green pound, green lira, etc.). These representative rates, of course, differ from the market exchange rates of Community currencies. To compensate for the difference, monetary compensatory amounts (MCAs) are applied at the frontiers of Member States which, in principle, offset the effect of the divergence. For Member States with currencies whose market rates of exchange have appreciated vis-a-vis their representative exchange rates (Germany, Holland, Belgium and Luxembourg), MCAs are applied as a tax on imports and a subsidy on exports. Conversely, for Member States whose market rates of exchange have depreciated relative to their green rates (Ireland, U.K., France and Italy), MCAs are applied as a tax on exports and a subsidy on imports.

8. Some Member States (Germany, Benelux, Denmark) are members of the “joint float” or “snake” i.e. they maintain fixed margins between their own currencies while floating (i.e. allowing currency to find its own market value in terms of other currencies) as a group against other currencies. For these currencies MCAs are fixed (as long as prices and the central rate remain unchanged) and represent the difference between the agricultural exchange rate and the central rate of the currency in question. The currencies of the other Member States (Ireland, U.K., France and Italy) are floating independently and the MCAs are variable. They reflect the difference between the market exchange rate as measured against the central rates of the snake currencies and the relevant agricultural exchange rate. Appendix I to this report shows how the Irish MCA was calculated in January, 1978.

B. FIXING OF REPRESENTATIVE CONVERSION RATES IN AGRICULTURE

Proposed Regulation

9. The Commission’s proposals provide for the elimination (i) in equal stages over seven years of MCAs in force when the Regulation comes into effect and (ii) annually of any new MCAs which come into existence thereafter. This would be achieved by a single annual adjustment in each Member State’s representative rate at the beginning of the marketing year, for products which have a marketing year and, on a date to be fixed, in the case of other products. The adjustment of a representative rate in any year would be subject to a limit of 5 per cent; if the limit applied in any one year the balance of any adjustment required would be deferred to the following year.

Views of the Joint Committee

10. MCAs were introduced as a temporary device to prevent distortion of trade but have continued because some Member States have been unwilling to adjust their representative rates on a regular basis in line with market exchange rates. The cost to the Community of financing MCAs runs to about £600 million annually. Moreover, MCAs distort trade and competition, form a barrier to trade and disrupt the unity of the common market. Ireland has pursued a general policy of adjusting her representative rate in line with developments in the market exchange rate and the Joint Committee would welcome the elimination of MCAs in accordance with some plan such as the Commission has proposed. However, its enquiries do not lead it to be optimistic about the prospects of the automatic elimination of MCAs. It understands that while the Commission intends to leave its proposals on the table, any adjustment of representative rates is more likely to take place as part of the annual review of agricultural prices.

C. USE OF THE EUROPEAN UNIT OF ACCOUNT IN THE COMMON AGRICULTURAL POLICY

European Unit of Account

11. Since 1975 the Community has been gradually extending the use of the European Unit of Account which was first used for the purposes of the European Development Fund. The EUA is calculated against a weighted average of all Community currencies. The basket of currencies used in the calculation is set out in Appendix II to this report as is an example of the calculation of the EUA rate for the £ based on the exchange rates operative in Dublin on 10th January, 1978. Since the calculation of the EUA includes all Community currencies (i.e. the weaker as well as the snake currencies), its value is less than the present Unit of Account (UA) and, therefore, if prices were expressed in EUA their value in sterling would be less (by 17·4%) than prices expressed in UA. The value of the EUA for 10th January, 1978 was £1 = 1·5787 EUA while the market rate for the UA based on the five days ending 10th January was £1 = 1·30457 UA.

Consequences of a Changeover to EUA

12. If it were decided to adopt the EUA for CAP purposes, common prices and amounts would be expressed in EUA. The differences in national money values between the UA and EUA would necessitate a decision on the conversion rate to be used for the purpose of the changeover and this raises the question of the level of the common price to which Member States would converge as MCAs were eliminated in the future. The Commission has developed three hypotheses on the basis of different conversion rates and the results of these are summarised in Appendix III to this report. The Commission acknowledges that there is no single economic relationship between the two units of account that is applicable to the whole Community and that the choice of conversion rate would be a matter for political decision.

13. The Commission appears to accept that the prices in national currencies should not be immediately affected no matter what conversion rate were used. This would be done by the adoption of appropriate representative rates so that the initial effect of the change would be confined to a redistribution of MCAs.

14. Under whatever changeover method were used all MCAs would thereafter be variable. At present only the MCAs for depreciated currencies vary. While this would be a fairer arrangement in that it would spread the effects of currency fluctuations more evenly (see Appendix IV to this report), it would make the operation of the MCA system even more complex than it is. The effect on MCAs depending on what conversion rate were chosen is summarised in Appendix III to this report.

15. The effect on prices of the different conversion rates is also referred to in Appendix III. The overall conclusion to be drawn is that a switchover to the EUA would result in agricultural prices tending to be lower in real terms. The degree to which they would be lower would depend on the method of the changeover and the frequency of green rate adjustments.

(Signed) MARK CLINTON,

Chairman of the Joint Committee.

19th April, 1978.