Modulation of Direct Payments: A crossed analysis of incremental schemes

The progressive attempt and implementation of direct payment limitations since the 1992 CAP reform has developed a “modulation mechanism” aiming to transfer funds from market support and direct payment schemes (CAP first pillar) towards rural development measures (CAP second pillar). Under the 2007-2013 European financial perspectives, the annual 5% rate of modulation is expected to increase. The paper focuses on the financial impacts of four scenarios together with corresponding political and institutional feasibilities. The paper imposes on itself three sound constraints: (i) expanding modulation should not jeopardise the future in-depth reform of the direct payment regime, (ii) modulation should be compulsory and consistent with rural development financial needs, and (iii) present direct payment per farm should not be capped or subject to complex and differentiated reduction rates. Then, the paper suggests adopting a dynamic and uniform modulation rate to be increased by 1 percent per year from 2009 and then by 2 percent during the final step reaching 10 percent in 2012 (2013 financial year). It would deliver certainty to farmers and contribute to an efficient use in European spending, with no need for a controversial equity instrument. Direct payment reductions raise subsidiarity and budgetary issues which should be discussed within the European budget review. Considering the modulation mechanism as a related past-policy tool, renewed European decision making process and actors should outline from 2009 a new paradigm in direct payment regime. Since farmers are increasingly becoming entrepreneurs, the sooner an agreement on the CAP beyond 2013 is reached, the better.