C-12/78

JUDGMENT OF THE COURT OF 10 MAY 1979<appnote>1</appnote>

Italian Republic v Commission of the European Communities

"Monetary compensatory amounts"

Case 12/78

Agriculture — Processed products — Monetary compensatory amounts — Application — Condition — Incidence of compensatory amounts applicable to basic products on price of processed product — Commission — Determination — Criteria (Regulation No 974/71 of the Council, Art. 2 (2))

It follows from Article 2 (2) of Regu­ products. In order to determine whether lation No 974/71 that in order to justify such is the case the Commission must

bourg at the office of its Legal Adviser, Mario Cervino, Jean Monnet Building, Kirchberg, defendant,

APPLICATION for the annulment of:

— Commission Regulation (EEC) No 2604/77 of 25 November 1977 intro­ ducing monetary compensatory amounts in respect of durum wheat and the products derived therefrom (Official Journal 1977, L 302, p. 40); and consequently of:

— Commission Regulation No 2792/77 of 15 December 1977 amending Regulation (EEC) No 2604/77 (Official Journal 1977, L 321, p. 29); and

— Commission Regulation (EEC) No 2917/77 of 28 December 1977 on transitional measures concerning the application of monetary compensatory amounts to certain products in the cereals sector (Official Journal 1977, L 340, p. 37);

THE COURT

The facts of the case and the arguments would lead to disturbances in trade in put forward by the parties in the written agricultural products". <apnote>1<apnote> procedure may be summarized as follows: Article 4 of Regulation No 974/71 provides that: "No compensatory amount shall be fixed where, in any Member State, the I — Facts and written procedure percentage referred to in Article 2 (1) does not exceed 2.5%" (this percentage represents the difference between the Article 1 (1) of Regulation No 974/71 of official conversion rate of the currency the Council of 12 May 1971 on certain concerned and the so-called green rate). measures of conjunctural policy to be taken in agriculture following the The monetary compensatory amounts temporary widening of the margins of system was applied to durum wheat and fluctuation for the currencies of certain the products derived from it until 12 Member States (Official Journal, English August 1974. The said amounts were Special Edition 1971 (I), p. 257) auth­ then abolished, because the price of durum wheat had risen on the world orizes the Member States to charge and grant monetary compensatory amounts market above the threshold price and in addition the difference between the on imports and exports of the products actual rate of the Italian lira and the rate described in Article 1 (2): of the green lira had fallen to 2.5%. "… products covered by intervention The price of durum wheat on the world arrangements under the common organi­ market fell in 1975 and 1976, and the zation of agricultural markets; Commission introduced a levy on imports from non-member countries. In the monetary field, the lira continued to … products whose price depends on the depreciate and the difference between price of the products referred to [above] the green lira and its actual value and which are governed by the common reached 21.6% in March 1976. organization of market or are the subject Complaints were received in Brussels of a specific arrangement under Article from traders, in particular Italian traders 235 of the Treaty". (importers, associations of millers and manufacturers of pasta products), and in Article 1 (3) of the regulation as April 1976 a proposal to reintroduce amended by Regulation No 2746/72 of monetary compensatory amounts in the Council of 19 December 1972 respect of the products in question was (Official Journal, English Special Edition 1972 (28-30 December), p. 64) provides that paragraph 1 1 — Translator's note: This is a corrected version of the text appearing in the Official Journal, which is defective; "… shall apply only where application cf. Mr Advocate General Warner's comments in Case of the monetary measures referred to … 29/77 Roquette [1977] ECR 1835, at p. 1847.

submitted to the competent Management application was lodged prior to 26 Committee. The proposal not having November 1977". been adopted, a number of further rep­ resentations were received (in particular By Regulation No 2917/77 the from the Belgian, Luxembourg and Commission decided that during the German Governments) protesting against period from 2 January to 28 February the failure to introduce monetary 1978 the monetary compensatory compensatory amounts for durum wheat amounts fixed for the products falling and/or pasta products. within subheadings 10.01 B and 11.02 A I (a) were to be granted only Stating in the preamble to Regulation under certain specified terms. No 2604/77 that the absence of monetary compensatory amounts had in Taking the view that the aforesaid regu­ recent months (that is, during summer lations were unlawful, the Italian 1977) caused difficulties as regards both Government brought an action under the durum wheat and the products derived first paragraph of Article 173 of the therefrom, that deflections of trade in Treaty. Its application, dated 25 January the case of durum wheat and distortions 1978, was lodged at the Court Registry of competition in the case of some of the on 2 February 1978. products in question had been noted, and that this state of affairs was fur­ After hearing the report of the Judge- thermore worsened by the sharp drop in Rapporteur and the views of the supplies of home-grown durum wheat Advocate General, the Court decided to and the increased need for imports from open the oral procedure without any non-member countries, the Commission preparatory inquiry. in that regulation introduced monetary compensatory amounts in respect of products under in particular tariff sub- headings 10.01 B (durum wheat), II — Conclusions of the parties 11.02 A I (a) (groats and meal of durum wheat), 19.03 A (macaroni, spaghetti and The Italian Republic claims that the similar products containing eggs), Court should: 19.03 B I (macaroni, spaghetti and similar products containing no common (a) Annul Commission Regulation No wheat flour or meal) and 19.03 B II 2604/77 of 25 November 1977; (other macaroni, spaghetti and similar products). This regulation was adopted (b) And consequently annul Commission without the competent Management Regulations No 2792/77 of 15 Committees having delivered opinions December 1977 and No 2917/77 of within the time-limits set by their 28 December 1977; chairmen. It applied with effect from 2 January 1978. (c) Order the Commission to pay the costs.

III — Submissions and argu­ noteworthy that in spite of the ments of the parties considerable rise in the value of the currencies of certain Member States no offers for intervention buying of goods from the areas of production, that is to say Italy and France, have been noted in A — Regulation No 2604/77: those countries since 1974, but on the infringement of Article 1 (3) of contrary precisely in Italy and France Regulation No 974/71 of the there have been heavy offers for Council of 12 May 1971 as intervention buying owing to the low amended; manifest error in the level of prices following large surpluses. assessment of the conditions and distortion of the facts The regulation is therefore vitiated in toto, if only because it has not been proved that in the absence of distur­ bances in the market in durum wheat the 1. Application same measures would have been necessary and would have been adopted if the condition of disturbances in the market in the derived product (pasta) The Italian Government submits that, alone had remained fulfilled. contrary to what emerges from the preamble to Regulation No 2604/77, there was and is no disturbance in trade 2. Defence in durum wheat (and meal), the market in which is not on a Community scale The Commission replies that it was right but a regional one owing both to the in fearing disturbances in trade inadequacy of production in relation to (difficulties and deflections of trade) due total demand and to the concentration of to the level of prices expressed in the processing industries in and around national currency, which differed widely the areas of production. On the other from one Member State to another. The hand the market in pasta products alone existence of those disturbances is proved is on an intra-Community scale because, by the following considerations: owing to the distance between the areas of production of durum wheat and — Imports of durum wheat by traders Community territory as a whole, it into Italy were meeting with ever-in­ would not be economically profitable to creasing difficulties. The c.i.f. price of carry out the processing of the basic durum wheat was 9.3% higher than product in places very far from the area the threshold price; owing probably of production. The regions in the south to the moderating effect on prices of of the Community produce and process the sales carried out by the public wheat, and the regions in the north authorities (the AIMA <appnote>1</appnote>), durum obtain their supplies not from the south wheat was sold in Italy at a price of the Community but from non-member close to the intervention price and countries: the two markets are completely independent and not capable of interfering with one another.

hence much lower than the target October 1977. The absence of price. monetary compensatory amounts went so far as to cause durum wheat from producer Member States to be offered for intervention buying in the north of the Community (it was a question of 3 500 tonnes of wheat — Regardless of their destination within from Italy warehoused in Ghent). the Community, imports of durum wheat were passing through the United Kingdom. Belgian, Nether­ lands and German importers in 3. Reply particular made substantial profits by means of these deflections of trade, because the levy expressed in units of Bearing in mind that imports of durum account and converted into pounds wheat into Italy were never on a large sterling at the so-called green rate scale (hundreds of thousands of tonnes allowed a profit of approximately in comparison with a production of some 30% to be made, having regard to 3 million tonnes), it can be noted that the charge for which Belgian, from March to September 1977 imports had risen to some 245 000 tonnes, which Netherlands and German importers would have been liable if the imports is an appreciably higher amount than for had been carried out directly. In this the corresponding period of the way imports of durum wheat from preceding year, which was 205 000 tonnes. France were penalized. Information supplied by the United Kingdom reveals that from January to As regards the price at which the AIMA November 1977 some 112 000 tonnes sold durum wheat in Italy, the of durum wheat had been imported Commission's observations are inade­ into that State, of which some 53 000 quate and incorrect: the difficulties for were re-exported to other Member imports were not due to measures by the States. In the preceding year there national authorities, and if such measures had been no such re-exports. were contrary to the provisions and aims of the Community, they should have been examined and eliminated by other means and not by the adoption of a measure (monetary compensatory amounts) the only aim of which is to — Italy was in a special situation: On "obviate the difficulties which monetary the one hand, imports of durum instability may create" (judgment in Case wheat suffered from the absence of 97/76 Merkur v Commission [1977] ECR monetary compensatory amounts, 1063, at p. 1077). Furthermore, the fact and importers had no choice but to is that after the first months the Italian give up imports or make them at a Administration increased prices so that loss. On the other hand, the AIMA's even as regards their "minimum" they sales of durum wheat imported from reached a level equal to and then non-member countries amounted to markedly higher than that of the target almost 200 000 tonnes in the first half price. of 1977. The Italian Government also bought 300 000 tonnes of durum In Italy neither the market price nor the wheat in July 1977 on the world selling price charged by the national auth­ market and 200 000 tonnes in orities were at the low levels stated by

from France, they in fact increased in the compensatory amounts serves only to Member States during the period in reduce that difference to a small extent is

question in spite of the difficulties due to unconvincing. In the long term no trader commercial factors unfavourable to can pursue an activity which necessarily French durum wheat. Even if it is results in losses.

accepted that there was a deflection of trade, and even assuming that it was on the scale stated by the Commission, it was none the less a peripheral phenomenon of no major significance. As regards deflection of trade, the press itself gave its attention to it, and an inquiry was opened by the European Parliament. That deflection concerns approximately 57 000 tonnes, that is to say a significant amount. If traders had not feared the reintroduction of As regards the 3 500 tonnes coming from monetary compensatory amounts, it is Italy and warehoused in Ghent, such a probable that all imports of durum wheat small quantity is immaterial compared intended for the Benelux countries and with the quantity of some 400 000 tonnes the Federal Republic of Germany would offered for intervention buying during have passed through the United the same period in the producer Kingdom. The profit derived from such

JUDGMENT OF 10. 5. 1979 — CASE 12/78

a practice was so large that no trader market in pasta. In 1976 Italian exports could reasonably have foregone it. increased by 50% over 1975, and would have increased even more in 1977. A crisis would thus have been provoked in B — Regulation No 2604/77: infringe­ the competing sectors of the other Member States. ment of Article 1 (3) of Regulation No 974/71 (as amended)

As appears from the second recital in the The Italian Government wonders preamble to the contested regulation, the whether the Commission did not Commission took account of distur­ bances in trade in a non-agricultural reintroduce compensatory amounts more product derived from an agricultural for the alleged disturbances in the pasta market than because of disturbances in product. The Commission regulation therefore infringed the Council regu­ the durum wheat market. Consequently lation. Apart from there being no it considers that for determining the Community trade in durum wheat and existence of the illegality against which hence no disturbances in such trade, the the second submission in the application fact of basing the regulation on is directed, no purpose is served by conditions which should not have been examining whether distortion of taken into account makes the regulation competition in the pasta market occurred and whether the causes attributed to illegal in toto, if only because it has not been shown that in the absence of those such distortion by the Commission are correct. conditions, the same measures would have been necessary and would have been adopted. 4. Rejoinder

2. Defence

The Commission considers that the The circumstances described as regards Italian Government's argument is invalid durum wheat had consequences on the for the following reasons:

ITALY v COMMISSION

— Regulation No 974/71 is also based C — Regulation No 2604/77: misuse of on Article 235, and its provisions powers apply "to products … which … are the subject of a specific arrangement under Article 235 of the Treaty".

The introduction of a monetary compensation instrument is therefore not — or to miss the opportunity of intended to equalize the agricultural automatic extension at the time markets but is a measure for limiting and when monetary compensatory opposing competition which is explained amounts are introduced on the by the level of the non-agricultural basic agricultural products and components of the production cost. Such never again be able to apply them. a measure is a distortion of the aims of

JUDGMENT OF 10. 5. 1979 — CASE 12/78

The Commission points out that the re Therefore there was no unexpected and introduction of monetary compensatory amounts in the sector at issue was not unjustified boom in the last months preceding the regulation. Secondly, the decided lightly, but on the contrary as the result of extensive examination and value of pasta is not "primarily determined by the cost of the wheat used thorough discussions, as is shown by the laborious evolution of the contested in its manufacture", but by the normal measure. components of any operation of processing (amortization, salary, capital) and marketing (publicity, distribution The distortions of competition which network). affected the market in pasta within the Community were caused: The increased competitive capacity of Italian pasta is largely and primarily due — By the considerable depreciation of to factors pertaining to the cost of the lira, making pasta producers in the other Member States unable to industrial processing, reduction of profits, quality and tradition, to the contend with competition from greater opportunity for the orientation of Italian producers; tastes at the consumer stage and, occasi­ onally, to shortages and nigh prices of — By the low level of the price of other foodstuffs which normally compete durum wheat in Italy, which was with pasta: potatoes and rice. close to the intervention price. When production of that product within the Community is in deficit, prices ought The distortion of aims of which the to be close to the target price. The Commission was guilty in reintroducing decision to intervene in the durum compensatory amounts and the existence wheat market was determined by the of a misuse of powers are evident from Italian authorities' intention to freeze the Commission's very statements: "… the maximum retail selling price of made pasta producers in the other pasta; Member States unable to contend with

As to Regulations Nos 2792/77 and — common wheat, which has always 2917/77, their existence is closely enjoyed monetary compensatory connected with that of Regulation No 2604/77, which would entail their amounts upon importation into Italy, whereas until 2 January 1978 pasta illegality if it were declared illegal. Discrimination was created between manufactured from that product and exported from Italy was exempt exports to non-member countries subject therefrom; to an export licence and exemption from compensatory amounts, and exports to Community countries for which there are only contracts and which therefore — durum wheat, in respect of which the do not benefit from exemption. Once re-introduction of monetary com­ again the disadvantage is essentially pensatory amounts was justified, and suffered by Italian exports of pasta. As indeed required, for the reasons regards Regulation No 2917/77, the already stated. Italian request for a similar measure in

JUDGMENT OF 10. 5. 1979 — CASE 12/78

— There is also a mandatory requirement of supervision: in order not to leave too much scope for fraud, the measure was not made applicable to intra-Community trade, 3. Reply in respect of which, in the absence of refunds or levies, there is no advance fixing. The Commission's argument to the effect that its intention was known is irrelevant, because it does not justify the disparity — Since no advance fixing certificates of treatment applied. On the contrary, it could be obtained, it would be giving should be observed that the an unjustified advantage to derogate Commission's tergiversations went on for from the application of compensatory three years, which could legitimately give amounts, for example in respect of rise to the assumption that compensatory pasta manufactured from common amounts would no longer be re­ wheat, which has always benefited introduced. from compensatory amounts upon importation. As regards the difficulties of carrying out supervision to prevent irregularities, it — Exemption from the payment of suffices to point out that non-discrimi­ compensatory amounts would not nation takes priority over the risk of have been justified where the possible irregularities. products were exported to a Member State with a weak currency which was obliged to grant compensatory As to Regulation No 2917/77, the amounts on imports. Commission's remarks are inconsistent.

ITALY v COMMISSION

JUDGMENT OF 10. 5. 1979 — CASE 12/78

Decision

1 By an application lodged on 25 January 1978, the Italian Republic, pursuant to the first paragraph of Article 173 of the EEC Treaty, claimed the annulment of Commission Regulation (EEC) No 2604/77 of 25 November 1977 introducing monetary compensatory amounts in respect of durum wheat and the products derived therefrom (Official Journal 1977, L 302, p. 40) and consequently of Commission Regulation (EEC) No 2792/77 of 15 December 1977 amending Regulation (EEC) No 2604/77 (Official Journal 1977, L 321, p. 29) and Commission Regulation (EEC) No 2917/77 of 28 December 1977 on transitional measures concerning the application of monetary compensatory amounts to certain products in the cereals sector (Official Journal 1977, L 340, p. 37).

2 The dispute concerns the application of the monetary compensatory amounts system to durum wheat and certain of the products derived therefrom which are not covered by Annex II to the Treaty and are the subject of a specific arrangement under Article 235 of the Treaty according to the terms of Article 1 (2) (b) of Regulation No 974/71 of the Council of 12 May 1971 on certain measures of conjunctural policy to be taken in agriculture following the temporary widening of the margins of fluctuation for the currencies of certain Member States (Official Journal, English Special Edition 1971 (I), p. 257).

3 The Commission considered that the absence of monetary compensatory amounts had in summer 1977 caused difficulties as regards both durum wheat and the products derived therefrom, that deflections of trade in the case of durum wheat and distortions of competition in the case of some of the products in question had been noted, and that this state of affairs was furthermore worsened by the sharp drop in supplies of home-grown durum wheat and the increased need for imports from non-member countries.

8 The Italian Government states that under Article 1 (2) of Regulation No 974/71 monetary compensatory amounts may be applied:

(a) to products covered by intervention arrangements under the common organization of agricultural markets;

(b) to products whose price depends on the price of the products referred to under (a) and which are governed by the common organization of market or are the subject of a specific arrangement under Article 235 of the Treaty.

9 It also pleads an infringement of Article 1 (3) of that regulation as amended by Regulation No 2746/72 of the Council of 19 December 1972 (Official Journal, English Special Edition 1972 (28-30 December), p. 64) according to which monetary compensatory amounts shall apply where there are distur­ bances in trade in agricultural products.

JUDGMENT OF 10. 5. 1979 — CASE 12/78

10 It points out that the second recital in the preamble to Regulation No 2604/77 states that "the absence of monetary compensatory amounts has in recent months caused difficulties as regards both durum wheat and the products derived therefrom" and that "deflections of trade in the case of durum wheat and distortions of competition in the case of some of the products in question have been noted".

ITALY v COMMISSION

17 The Commission did not exceed its acknowledged margin of discretion by finding in the light of the circumstances that there was a risk of deflection of trade and disturbances in intra-Community trade in those products.

18 Accordingly, this submission cannot be upheld.

Second and third submissions: infringement of Article 1 (3) of Regulation No 974/71 of the Council and misuse of powers

19 These submissions concern the application of compensatory amounts to pasta, and they are to be dealt with together.

20 According to the Italian Government:

— The increase in exports of Italian pasta is due to the availability of the raw material in loco and to the particularly high value attached to the by-products of durum wheat in Italy, which allows durum wheat to be bought at a lower price.

— The increased competitive capacity of Italian pasta is largely and primarily due to factors pertaining to the cost of industrial processing, reduction of profits, quality and industrial tradition, which leaves more opportunity for the orientation of tastes at the consumer stage and, occasionally, to shortages and high prices of other foodstuffs which normally compete with pasta: potatoes and rice.

21 The Commission argues that the distortions of competition which affected the market in pasta within the Community were caused by:

— the considerable depreciation of the lira, making pasta producers in the other Member States unable to contend with the competition from Italian producers;

— the low level of the price of durum wheat in Italy, which was close to the intervention price: when production of that product within the Community is in deficit, prices ought to be close to the target price;

— the particularly favourable conditions enjoyed by exports, from Member States with a weak currency, of pasta manufactured from common wheat and not subject to compensatory amounts, when imports of the basic product benefited from those amounts.

27 The Commission stated that the basic product used for the manufacture of pasta represents more than half the final value of the processed product.

28 The Italian Government's arguments emphasize the existence of a more favourable structure of production costs in Italy, but do not call in question the Commission's assessment, which concerns the Community as a whole.

29 In fact, the Commission not only had to take account of the incidence of the monetary measures on exports from Italy but also had to take account of the incidence of the compensatory amounts on the basic product in trade in the processed product between the other Member States.

30 In view of this, having regard to the close connexion between durum wheat and the products of first-stage and further processing derived therefrom

JUDGMENT OF 10. 5. 1979 — CASE 12/78

which is acknowledged in Regulation No 1059/69 of the Council of 28 May 1969 laying down the trade arrangements applicable to certain goods resulting from the processing of agricultural products (Official Journal, English Special Edition 1969 (I), p. 240), the extent of the effect on pasta prices of the incidence of the monetary compensatory amounts on the basic product from which the pasta is derived was reasonably acceptable.

On those grounds,

THE COURT

hereby:

1. Dismisses the application.

ITALY v COMMISSION

2. Orders the Italian Republic to pay the costs.

My Lords, Such m.c.a.'s were reintroduced as from 2 January 1978 by Commission Regu­ lation (EEC) No 2604/77 which was Monetary compensatory amounts ("m.c.a.'s") on durum wheat and on adopted on 25 November 1977 and products derived therefrom were published in the Official Journal on the abolished as from 12 August 1974 by following day (OJ L 302 of 26. 11. Commission Regulation (EEC) No 1977). It is common ground that in the 2119/74. The reason for their abolition meantime world market prices for durum wheat had fallen below Community as stated in the preamble to that Regu­ lation was that "prices on the market in prices. durum wheat are appreciably higher than the threshold price" so that the "monetary measures" referred to in Article 1 of Council Regulation (EEC) The reasons given in the preamble to No 974/71 "are unlikely to disturb trade Regulation No 2604/77 for the reintro­ in durum wheat". duction of the m.c.a.'s were that: