Opinion of the Advocate-General
1 By application lodged at the Court Registry on 13 March 1995, Italy brought an action under Article 173 of the EC Treaty for partial annulment of Commission Decision 94/871/EC of 21 December 1994 on the clearance of accounts presented by the Member States in respect of the expenditure for 1991 of the European Agricultural Guidance and Guarantee Fund (EAGGF), Guarantee Section. (1) Italy brought that action because in that decision the Commission disallowed an amount of LIT 103 161 493 560 in respect of expenditure incurred in the purchase of individual reference quantities under a Community milk production restructuring programme applied by the Italian authorities.
2 The pleas in law put forward by Italy in seeking the annulment of Decision 94/871 are failure to state reasons, misuse of powers, infringement of Articles 1, 3 and 5 of Regulation (EEC) No 729/70 (2) and Article 8 of Regulation (EEC) No 1723/72, (3) and infringement of the rules governing the milk sector [Article 4 of Regulation (EEC) No 857/84, (4) as amended, and Regulation (EEC) No 1546/88 (5)].
Before examining the pleas put forward by Italy in seeking the partial annulment of Decision 94/871, it is necessary to set out the relevant legislation.
Relevant legislation
3 Regulation (EEC) No 856/84 (6) amended the common organization of the market in milk and milk products by introducing an additional levy applicable from 2 April 1984. That mechanism for controlling milk production was formulated as follows:
- A total quantity was laid down for the Community as a whole, which was the guarantee threshold for milk production.
- That quantity was distributed among the Member States on the basis of the quantities of milk delivered on their territory during the 1981 calendar year, plus 1%, excluding the quantity intended for the Community reserve constituted in order to take into account the specific needs of some Member States and certain producers.
- Each Member State for its part distributed its guaranteed quantity among its producers, assigning them an individual reference quantity generally known as a `milk quota'.
- Producers who exceeded the reference quantity were required to pay an additional levy intended to finance the expenditure incurred in marketing those surpluses. Depending on the choice made by each Member State, the levy was payable by the producer (formula A) or by the purchaser of the milk who was entitled to pass it on to the producer (formula B). Italy opted for formula A.
4 The general rules for implementing that additional levy were laid down by the Council in Regulation No 857/84. That measure enabled Member States to adopt 1981, 1982 or 1983 as the reference period for the determination of producers' individual quotas and also provided that Member States could establish national reserves of reference quantities in order to take into account the special situations of some of their producers.
5 The additional levy was originally introduced for a period of five years beginning on 1 April 1984 and has been extended until the year 2000. The measures initially adopted were not sufficient to balance supply and demand for milk and milk products. Consequently, the Community institutions adopted further measures intended to tighten up the scheme, such as temporary reductions and suspensions of the guaranteed total quantities of milk or the payment of compensation for discontinuing production.
6 Article 4(1) of Regulation No 857/84 provided that Member States could use the payment of compensation for discontinuing production as a milk production restructuring measure. That type of action has also been used by the Community authorities as a means of reducing production.
7 In 1990, the Council amended Regulation No 857/84 by adopting Regulation (EEC) No 1183/90 (7) with the aim of establishing a programme for restructuring small holdings. The detailed rules for implementing that programme were laid down in Commission Regulation (EEC) No 2138/90 (8) amending Regulation No 1546/88.
8 The milk production restructuring programme provided for in Regulation No 1183/90 was intended to make additional reference quantities available to small holdings in order to bring them up to a level of production better adapted to market requirements. Specifically, producers whose available individual reference quantities were less than 60 000 kg (or 100 000 kg in mountain areas) at the beginning of the seventh 12-month period of application of the additional levy scheme could receive additional quotas. Those producers had to undertake not to seek to benefit under any programme for the cessation of milk production either as regards their original quotas or as regards the additional reference quantities received under the restructuring programme.
9 In view of the tight control on production established by the additional levy scheme within the common organization of the market in milk and milk products, the reference quantities needed in order to sustain the production restructuring programme could not be obtained either by means of the increase in the total quantity guaranteed by the Community or by means of the increase in the quantities assigned to each Member State. Consequently, Regulation No 1183/90 also established a new Community programme of financing the discontinuation of milk production, designed to release the reference quantities needed in order to implement the programme for restructuring small holdings' production.
The Community undertook to finance the release of quotas equivalent to a quantity of 500 000 tonnes, which the Commission allocated among the Member States on the basis of applications submitted by producers, Italy's share being 164 100 tonnes. Within that limit, producers who undertook before 1 November 1990 to discontinue milk production totally and definitively before 1 April 1991 would receive compensation of ECU 36 per 100 kg of milk or milk equivalent in the form of a single payment before 1 July 1991.
10 With regard to whether the expenditure generated by the milk production restructuring programme is chargeable to the Community, it should be borne in mind that Articles 2 and 3 of Regulation No 729/70 provide that the EAGGF Guarantee Section will finance refunds on exports to third countries and intervention intended to stabilize the agricultural markets, respectively granted or undertaken according to Community rules within the framework of the common organization of agricultural markets. By converse inference, expenditure incurred in financing intervention intended to stabilize the markets, undertaken without due regard for the provisions of Community law, will not be chargeable to the EAGGF Guarantee Section.
The subject-matter of the dispute
11 In the Summary Report for 1991, (9) the Commission states that, under the programme established by Regulation No 1183/90, Italy bought a total of 163 592 tonnes of quota at a total cost of LIT 103 161 493 560. In that report, the Commission refuses to allow Community financing of that expenditure because `Italy was not applying the milk quota arrangements and, in particular, had not allocated any reference quantities which would have given significance to the buy-back programme, and, moreover, has never reallocated the quantities in question to the producers specified in Article 3 of Regulation No 857/84'. (10)
Decision 94/871 on the clearance of the EAGGF accounts for 1991 definitively disallows Community financing for the restructuring programme implemented by Italy.
12 By the present application, the Italian Government seeks the partial annulment of Decision 94/871, contesting the two grounds put forward by the Commission for disallowing the expenditure incurred in implementing the milk production restructuring programme, namely, non-application of the additional levy scheme in Italy and non-reallocation of the quotas released.
Non-application by Italy of the additional levy scheme
13 Implementation of the additional levy scheme in Italy has been slow and very irregular. (11) Indeed, from 1984, the year when that mechanism for controlling milk production was introduced, to 1989, Italy did not adopt any measures aimed at applying the additional levy scheme on its territory and was declared by the Court to have failed to fulfil its obligations. (12)
The first attempt to apply the mechanism was made in the marketing year 1989/90 by allocating an overall quota to the national association of milk producers (UNALAT) and individual quotas to independent producers. However, the checks carried out by the Commission reveal that, until the year 1992/93, application of the additional levy scheme continued to be chaotic, as the Italian Government itself admits. Individual producers had in practice still not been allocated individual reference quantities, there was no supervision by the Italian authorities in order to ensure the collection of the additional levy on overproduction, data on milk production were not yet reliable, and so on.
14 The Italian Government considers that the non-application of the additional levy scheme during the period of operation of the milk production restructuring programme (1990 and 1991) is not relevant as regards charging the expenditure incurred in implementing that programme to the EAGGF. In support of this argument, the Italian Government cites the fact that the Commission did not raise the possible illegality of Italy's action during the implementation of the restructuring programme, since it fixed the quantity of quotas which Italy could purchase (164 100 tonnes) and did not object to Italy's supplementing the Community financing with national funds in order to grant all the applications for definitive discontinuation of production which had been submitted, amounting to 592 167 tonnes.
Moreover, the consequences of the incorrect application of the additional levy scheme in Italy were resolved by means of the increase in the overall quota assigned to that State and a substantial financial correction, which were applied as a result of the political agreement reached on this matter within the Council in 1994. (13) The Italian Government therefore considers that it would be unjust and disproportionate to draw further negative consequences from that non-compliance.
15 In my opinion, these arguments put forward by the Italian Government cannot be entertained.
16 The additional levy scheme is a mechanism established by the Community institutions for the purpose of controlling production surpluses which exist in the common organization of the market in milk and milk products. The basic components of the scheme, as mentioned above, are the following: guaranteed total quantity at Community level, maximum quantities assigned to each Member State, individual reference quantities allocated to each producer, and payment of an additional levy if the quota is exceeded.
That basic structure of the additional levy scheme is complemented by a further set of additional measures designed either to render it more flexible or to tighten control of production. It stands to reason that those additional measures make sense and can produce the desired effects only if the basic components of the mechanism have been put into practice.
17 The milk production restructuring programme established by Regulation No 1183/90 is a measure designed to temper the effects of the additional levy scheme on small producers. However, the application of that measure necessarily requires the application of the basic components of the scheme. Consequently, a Member State (in this case Italy) which was not applying the additional levy scheme properly, since it had not even carried out the allocation of individual reference quantities to producers, cannot make use of a complementary measure within the scheme, such as the production restructuring programme. Moreover, as the Commission points out in its defence, it would be an unjustified waste of Community funds to pay producers compensation in order to release their quotas if those quotas have not previously been allocated and if they do not fulfil the function of limiting milk production.
18 Initially the Commission did not object to the application of the production restructuring programme by the Italian authorities because it had not yet carried out the inspections necessary in order to determine whether Italy was correctly applying the basic components of the additional levy scheme. In any case, the attitude adopted by the Commission does not prevent it, once it has carried out the appropriate checks, from disallowing the charging of an amount of expenditure to the EAGGF if those checks show that the Community provisions have been infringed.
19 Finally, as the Commission states in its rejoinder, the compromise reached by the Council in 1994 in its political agreement on the additional levy (negative expenditure) not collected by Italy does not affect possible recognition of an amount of positive expenditure such as that incurred in the purchase of quotas under the production restructuring programme.
Italy did not reallocate the released quotas to other producers
20 The Italian Government expressly acknowledges that it did not reallocate the quotas released by the payment of compensation for the definitive discontinuation of production. Under Regulation No 2138/90, that reassignment of released quotas had to be carried out by the Member States before 1 June 1991.
21 However, Italy considers that non-reallocation of the quotas is not a sufficient ground for the Commission to disallow, under the procedure for clearance of the EAGGF accounts, the amount of LIT 103 161 493 560 paid by Italy to those producers who discontinued their production as a result of the application of the restructuring programme established by Regulation No 1183/90. The Italian authorities implemented the first measure provided for in that programme, that is, the release of quotas by the payment of compensation for definitive discontinuation of production, but suspended application of the second aspect of the programme, namely reassignment of the quotas in question to small producers. The Italian Government relies on three grounds to justify that action.
22 First, Regulation No 1183/90 favours the immediate redistribution of released quotas but does not make it essential since it allows quotas which cannot be reassigned in accordance with the criteria laid down in the Regulation to be retained within the national reserve.
23 Secondly, the situation in the Italian milk sector, which was giving rise to concern, did not allow the reallocation of the quotas. In 1991, milk production more than exceeded the quantity assigned to Italy, and reallocation of the quotas released under the restructuring programme would have aggravated the problem. Consequently, the Italian authorities suspended the measure in question pending the effective implementation of the additional levy scheme. In the Italian Government's opinion, that action was consistent with the objective of the scheme, especially bearing in mind that the compensation was paid to producers who did actually discontinue production.
24 Finally, the Commission later authorized Italy to suspend temporarily the reallocation to small producers of quotas which had been released under a subsequent production discontinuation programme established by Regulations (EEC) Nos 1637/91 (14) and 3950/92. (15)
25 The reasoning on which the Italian Government bases its argument cannot be accepted.
26 The production restructuring programme introduced by Regulation No 1183/90 was intended not to reduce milk production but to foster an improvement in the production structures of small holdings. Consequently, the programme included a mechanism for releasing quotas, payment of compensation for definitive discontinuation of production, and reallocation within a certain period of the quotas obtained to small producers. There can be no doubt that financing the discontinuation of production was envisaged solely with the aim of obtaining the additional quotas needed by small producers, since the strict limitation of production imposed by the additional levy scheme did not allow any increase in the guaranteed total quantity. The redistribution of quotas is the basic objective of the restructuring programme and financing the discontinuation of production is the means established for achieving that objective.
27 Other Community rules adopted under the additional levy scheme have established production discontinuation programmes with the sole aim of reducing milk production. However, that is not the case with the restructuring programme established by Regulation No 1183/90, which in principle has a neutral effect on the volume of milk production.
28 In the light of those considerations, it seems clear to me that Italy, by not reallocating the previously released quotas within the prescribed time-limit, infringed Article 3c of Regulation No 857/84 and Article 3b of Regulation No 1546/88.
29 The chaotic application of the additional levy scheme in Italy, which in 1991 caused the maximum milk production quantity assigned to that Member State by the Community authorities to be substantially exceeded, did not permit the Italian authorities to suspend unilaterally the reallocation of quotas released under the milk production restructuring programme established by Regulation No 1183/90. In any case, the Italian authorities should have informed the Commission of the severity of the problems in the milk sector on their territory and asked for permission to suspend reassignment of the released quotas, given that the time-limit for carrying out that operation had been laid down by the Commission in Regulation No 2138/90. Indeed, the Commission allowed such suspensions under subsequent milk production restructuring programmes.
30 Moreover, retention of the released quotas in the national reserve was provided for in Regulation No 1183/90 as an exceptional possibility in case all the quotas could not be reallocated. No Member State could therefore convert that exception into a general rule, as Italy did.
31 Furthermore, the correct application of the production restructuring programme was not aggravating the critical situation of the Italian milk sector: its effects were completely neutral as regards the total volume of milk production, since only quotas which had previously been released could be reallocated.
Clearance of the EAGGF accounts
32 The foregoing considerations clearly show that Italy paid producers who discontinued production compensation totalling LIT 103 161 493 560 without complying with the conditions laid down by the relevant Community legislation. Italy was not in fact applying the additional levy scheme of which the production restructuring programme in question formed part as a supplementary mechanism. Moreover, by not reassigning within the prescribed time-limit the quotas which had been released, the Italian authorities failed to comply with the specific provisions governing that programme.
33 There are many decisions of the Court of Justice on the principles governing the procedure for clearing the EAGGF accounts, (16) which establish that Articles 2 and 3 of Regulation No 729/70 `enable the Commission to charge to the EAGGF only sums paid in accordance with the rules laid down in the different agricultural sectors. In cases where Community rules authorize payment of aid only on condition that certain formalities relating to proof or supervision are observed, aid paid in disregard of that condition is not in accordance with Community law and the expenditure incurred therein may not therefore be charged to the EAGGF'. (17)
34 That strict interpretation of the conditions under which expenditure is to be borne by the EAGGF is necessary, moreover, in view of the objectives of Regulation No 729/70. In fact the management of the common agricultural policy in conditions of equality between traders in the Member States requires that the national authorities of a Member State should not, by the expedient of a wide interpretation of a given provision, favour traders in that State to the detriment of those in other States where a stricter interpretation is applied. (18)
35 Since Italy did not comply with the conditions laid down for the application of the milk production restructuring programme by Regulations Nos 1183/90 and 2138/90, the Commission rightly refused, in the light of the rules on clearance of the EAGGF accounts, to allow charging to the EAGGF of the LIT 103 161 493 560 paid by Italy to producers who undertook to discontinue their milk production definitively.
36 I accordingly propose that the Court should reject the pleas in law on the basis of which Italy seeks the partial annulment of Decision 94/871 and should therefore, under Article 69(2) of the Rules of Procedure, order that Member State to pay the costs.
Conclusion
37. In the light of the foregoing, I propose that the Court should:
(1) dismiss the application;
(2) order the Italian Republic to pay the costs.
(1) - OJ 1994 L 352, p. 82.
(2) - Regulation (EEC) No 729/70 of the Council of 21 April 1970 on the financing of the common agricultural policy (OJ, English Special Edition 1970 (I), p. 218).
(3) - Regulation (EEC) No 1723/72 of the Commission of 26 July 1972 on making up accounts for the European Agricultural Guidance and Guarantee Fund, Guarantee Section (OJ, English Special Edition 1972 (III), p. 109).
(4) - Council Regulation (EEC) No 857/84 of 31 March 1984 adopting general rules for the application of the levy referred to in Article 5c of Regulation (EEC) No 804/68 in the milk and milk products sector (OJ 1984 L 90, p. 13).
(5) - Commission Regulation (EEC) No 1546/88 of 3 June 1988 laying down detailed rules for the application of the additional levy referred to in Article 5c of Regulation (EEC) No 804/68 (OJ 1988 L 139, p. 12).
(6) - Council Regulation (EEC) No 856/84 of 31 March 1984 amending Regulation (EEC) No 804/68 (EEC) on the common organization of the market in milk and milk products (OJ 1984 L 90, p. 10).
(7) - Council Regulation (EEC) No 1183/90 of 7 May 1990 amending Regulation (EEC) No 857/84 adopting general rules for the application of the levy referred to in Article 5c of Regulation (EEC) No 804/68 on the common organization of the market in milk and milk products (OJ 1990 L 119, p. 27).
(8) - Commission Regulation (EEC) No 2138/90 of 25 July 1990 amending Regulation (EEC) No 1546/88 laying down detailed rules for the application of the additional levy referred to in Article 5c of Regulation (EEC) No 804/68 (OJ 1990 L 195, p. 23).
(9) - Summary Report concerning the clearance of the EAGGF Guarantee Section accounts for 1991, doc. VI/320/94-EN FINAL of 21 December 1994.
(10) - Ibid., p. 42.
(11) - See Special Report No 4/93 of the Court of Auditors on the implementation of the quota system intended to control milk production together with the Commission's reply (OJ 1994 C 12, p. 1).
(12) - Case 394/85 Commission v Italy [1987] ECR 2741.
(13) - See Petit, Y.: `Organisations Communes de Marchés', Répertoire Dalloz de Droit Communautaire, 1995, pp. 12 and 13.
(14) - Council Regulation (EEC) No 1637/91 of 13 June 1991 fixing compensation with regard to the reduction of the reference quantities referred to in Article 5c of Regulation (EEC) No 804/68 and compensation for the definitive discontinuation of milk production (OJ 1991 L 150, p. 30).
(15) - Council Regulation (EEC) No 3950/92 of 28 December 1992 establishing an additional levy in the milk and milk products sector (OJ 1992 L 405, p. 1).
(16) - See inter alia the judgments in Case 11/76 Netherlands v Commission [1979] ECR 245, Joined Cases 15/76 and 16/76 France v Commission [1979] ECR 321, Case 327/85 Netherlands v Commission [1988] ECR 1065, Case C-197/90 Italy v Commission [1992] ECR I-1 and Case C-49/94 Ireland v Commission [1995] ECR I-2683.
(17) - Judgment in Case C-197/90 Italy v Commission, cited in note 16, paragraph 38.
(18) - Judgment in Case 11/76 Netherlands v Commission, cited in note 16, paragraph 9.
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