JUDGMENT OF 10. 5. 1979 — CASE 12/78 ITALY v COMMISSION

In Case 12/78

THE COURT composed of: J. Mertens de Wilmars, President of the First Chamber, acting as President, Lord Mackenzie Stuart (President of the Second Chamber), P. Pescatore, M. Sørensen, A. O'Keeffe, G. Bosco and A. Touffait, Judges, Advocate General: J.-P. Warner Registrar: A. Van Houtte

gives the following

JUDGMENT

Facts and Issues

The facts of the case and the arguments put forward by the parties in the written procedure may be summarized as follows:

I — Facts and written procedure

Article 1 (1) 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) authorizes the Member States to charge and grant monetary compensatory amounts on imports and exports of the products described in Article 1 (2):

‘… products covered by intervention arrangements under the common organization of agricultural markets; … products whose price depends on the price of the products referred to [above] and which are governed by the common organization of market or are the subject of a specific arrangement under Article 235 of the Treaty’.

Article 1 (3) of the 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) provides that paragraph 1

‘… shall apply only where application of the monetary measures referred to … would lead to disturbances in trade in agricultural products’.

Article 4 of Regulation No 974/71 provides that:

‘No compensatory amount shall be fixed where, in any Member State, the percentage referred to in Article 2 (1) does not exceed 2.5 %’ (this percentage represents the difference between the official conversion rate of the currency concerned and the so-called green rate).

The monetary compensatory amounts system was applied to durum wheat and the products derived from it until 12 August 1974. The said amounts were then abolished, because the price of durum wheat had risen on the world market above the threshold price and in addition the difference between the actual rate of the Italian lira and the rate of the green lira had fallen to 2.5 %.

The price of durum wheat on the world market fell in 1975 and 1976, and the Commission introduced a levy on imports from non-member countries. In the monetary field, the lira continued to depreciate and the difference between the green lira and its actual value reached 21.6 % in March 1976. Complaints were received in Brussels from traders, in particular Italian traders (importers, associations of millers and manufacturers of pasta products), and in April 1976 a proposal to reintroduce monetary compensatory amounts in respect of the products in question was submitted to the competent Management Committee. The proposal not having been adopted, a number of further representations were received (in particular from the Belgian, Luxembourg and German Governments) protesting against the failure to introduce monetary compensatory amounts for durum wheat and/or pasta products.

Stating in the preamble to Regulation No 2604/77 that the absence of monetary compensatory amounts had in recent months (that is, during 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, the Commission in that regulation introduced monetary compensatory amounts in respect of products under in particular tariff sub-headings 10.01 B (durum wheat), 11.02 A I (a) (groats and meal of durum wheat), 19.03 A (macaroni, spaghetti and similar products containing eggs), 19.03 B I (macaroni, spaghetti and similar products containing no common wheat flour or meal) and 19.03 B II (other macaroni, spaghetti and similar products). This regulation was adopted without the competent Management Committees having delivered opinions within the time-limits set by their chairmen. It applied with effect from 2 January 1978.

By the following Regulation No 2792/77 the Commission added a paragraph to Article 2 of the preceding regulation, according to which the compensatory amounts introduced by the latter shall not apply ‘to operations carried out under cover of a certificate fixing the export refund or the import levy in advance in respect of which the application was lodged prior to 26 November 1977’.

By Regulation No 2917/77 the Commission decided that during the period from 2 January to 28 February 1978 the monetary compensatory amounts fixed for the products falling within subheadings 10.01 B and 11.02 A I (a) were to be granted only under certain specified terms.

Taking the view that the aforesaid regulations were unlawful, the Italian Government brought an action under the first paragraph of Article 173 of the Treaty. Its application, dated 25 January 1978, was lodged at the Court Registry on 2 February 1978.

After hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry.

II — Conclusions of the parties

The Italian Republic claims that the Court should:

a) Annul Commission Regulation No 2604/77 of 25 November 1977;

b) And consequently annul Commission Regulations No 2792/77 of 15 December 1977 and No 2917/77 of 28 December 1977;

c) Order the Commission to pay the costs.

The Commission of the European Communities contends that the Court should:

a) Dismiss the application;

b) Order the applicant to pay the costs.

III — Submissions and arguments of the parties

A — Regulation No 2604/77: infringement of Article 1 (3) of Regulation No 974/71 of the Council of 12 May 1971 as amended; manifest error in the assessment of the conditions and distortion of the facts

1. Application

The Italian Government submits that, contrary to what emerges from the preamble to Regulation No 2604/77, there was and is no disturbance in trade in durum wheat (and meal), the market in which is not on a Community scale but a regional one owing both to the inadequacy of production in relation to total demand and to the concentration of the processing industries in and around the areas of production. On the other hand the market in pasta products alone is on an intra-Community scale because, owing to the distance between the areas of production of durum wheat and Community territory as a whole, it would not be economically profitable to carry out the processing of the basic product in places very far from the area of production. The regions in the south of the Community produce and process wheat, and the regions in the north obtain their supplies not from the south of the Community but from non-member countries: the two markets are completely independent and not capable of interfering with one another.

As evidence of the impermeability of the areas concerned by durum wheat, it is noteworthy that in spite of the 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 those countries since 1974, but on the contrary precisely in Italy and France there have been heavy offers for intervention buying owing to the low level of prices following large surpluses.

The regulation is therefore vitiated in toto, if only because it has not been proved that in the absence of disturbances in the market in durum wheat the same measures would have been necessary and would have been adopted if the condition of disturbances in the market in the derived product (pasta) alone had remained fulfilled.

2. Defence

The Commission replies that it was right in fearing disturbances in trade (difficulties and deflections of trade) due to the level of prices expressed in national currency, which differed widely from one Member State to another. The existence of those disturbances is proved by the following considerations:

Imports of durum wheat by traders into Italy were meeting with ever-increasing difficulties. The c.i.f. price of durum wheat was 9.3 % higher than the threshold price; owing probably to the moderating effect on prices of the sales carried out by the public authorities (the AIMA, durum wheat was sold in Italy at a price close to the intervention price and hence much lower than the target price.

Regardless of their destination within the Community, imports of durum wheat were passing through the United Kingdom. Belgian, Netherlands and German importers in particular made substantial profits by means of these deflections of trade, because the levy expressed in units of account and converted into pounds sterling at the so-called green rate allowed a profit of approximately 30 % to be made, having regard to the charge for which Belgian, Netherlands and German importers would have been liable if the imports had been carried out directly. In this way imports of durum wheat from France were penalized. Information supplied by the United Kingdom reveals that from January to November 1977 some 112000 tonnes of durum wheat had been imported into that State, of which some 53000 were re-exported to other Member States. In the preceding year there had been no such re-exports.

Italy was in a special situation: On the one hand, imports of durum wheat suffered from the absence of monetary compensatory amounts, and importers had no choice but to give up imports or make them at a loss. On the other hand, the AIMA's sales of durum wheat imported from non-member countries amounted to almost 200000 tonnes in the first half of 1977. The Italian Government also bought 300000 tonnes of durum wheat in July 1977 on the world market and 200000 tonnes in October 1977. The absence of 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 3500 tonnes of wheat from Italy warehoused in Ghent).

3. Reply

Bearing in mind that imports of durum wheat into Italy were never on a large scale (hundreds of thousands of tonnes in comparison with a production of some 3 million tonnes), it can be noted that from March to September 1977 imports had risen to some 245000 tonnes, which is an appreciably higher amount than for the corresponding period of the preceding year, which was 205000 tonnes.

As regards the price at which the AIMA sold durum wheat in Italy, the Commission's observations are inadequate and incorrect: the difficulties for imports were not due to measures by the national authorities, and if such measures 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 ‘obviate the difficulties which monetary instability may create’ (judgment in Case 97/76 Merkur v Commission [1977] ECR 1063, at p. 1077). Furthermore, the fact is that after the first months the Italian Administration increased prices so that even as regards their ‘minimum’ they reached a level equal to and then markedly higher than that of the target price.

In Italy neither the market price nor the selling price charged by the national authorities were at the low levels stated by the Commission. Hence the difficulties of Italian importers did not originate from the relationship between this low level of prices in Italy and the high level reached by the c.i.f. price in Italian currency, to which the levy was added and which was higher than the threshold price. Furthermore, it is well-known that when the taxed [nazionalizzato] c.i.f. price exceeds the threshold price this does not discourage import transactions, and the introduction of compensatory amounts serves only to reduce this excess to a small extent and not to eliminate it.

It emerges from the statistics drawn up by the Community institutions themselves that during the (longer) period from August 1976 to November 1977, the United Kingdom issued import licences only in respect of some 86000 tonnes, from which it may be inferred that the imports carried out during the period stated by the Commission did not exceed 50000 tonnes. As to imports from France, they in fact increased in the Member States during the period in question in spite of the difficulties due to commercial factors unfavourable to French durum wheat. Even if it is 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 the 3500 tonnes coming from Italy and warehoused in Ghent, such a small quantity is immaterial compared with the quantity of some 400000 tonnes offered for intervention buying during the same period in the producer countries with a weak currency (France and Italy).

4. Rejoinder

The Commission points out that when it speaks of difficulties encountered by importers of durum wheat in Italy, it is referring to private trade. Nothing prevents a State from carrying out transactions at a loss by selling products bought on the world market below their cost price. The mathematical proof of the difficulties in question is supplied by the fact that on the day when Regulation No 2604/77 was adopted, imports of durum wheat were arriving in Italy at a price higher than that on the Italian market. The Italian Government's assertion that when the c.i.f. price expressed in national currency exceeds the threshold price this does not discourage import transactions and that the introductionsof compensatory amounts serves only to reduce that difference to a small extent is unconvincing. In the long term no trader can pursue an activity which necessarily results in losses.

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 57000 tonnes, that is to say a significant amount. If traders had not feared the reintroduction of monetary compensatory amounts, it is probable that all imports of durum wheat intended for the Benelux countries and the Federal Republic of Germany would have passed through the United Kingdom. The profit derived from such a practice was so large that no trader could reasonably have foregone it.

B — Regulation No 2604/77: infringement of Article 1 (3) of Regulation No 974/71 (as amended)

1. Application

Article 1 (3) of Regulation No 974/71 (as laid down in Regulation No 2746/72) provides that in order for the compensatory amounts to be applied, the disturbances in trade must concern agricultural products, that is to say those referred to in Annex II to the Treaty. However, pasta is a product of further processing of the basic product, and constitutes a typical industrial product in which the cereal ingredient is not of preponderant importance (167 kg of durum wheat gives 107 kg of meal, which gives 100 kg of pasta).

As appears from the second recital in the preamble to the contested regulation, the Commission took account of disturbances in trade in a non-agricultural product derived from an agricultural product. The Commission regulation therefore infringed the Council regulation. Apart from there being no Community trade in durum wheat and hence no disturbances in such trade, the fact of basing the regulation on conditions which should not have been taken into account makes the regulation illegal in toto, if only because it has not been shown that in the absence of those conditions, the same measures would have been necessary and would have been adopted.

2. Defence

The circumstances described as regards durum wheat had consequences on the market in pasta. In 1976 Italian exports increased by 50 % over 1975, and would have increased even more in 1977. A crisis would thus have been provoked in the competing sectors of the other Member States.

Once the disturbances pertaining to the durum wheat market had been verified, the Commission was under a duty to turn its attention to the derived products, in particular pasta, whose value is primarily determined by the cost of the wheat used in their manufacture. This problem is not new and was examined in Case 29/77 Roquette [1977] ECR 1835, in which the Court held that ‘the Commission may assess the risks of disturbance either for trade in basic products or for trade in both basic and derived products’.

3. Reply

The Italian Government wonders whether the Commission did not reintroduce compensatory amounts more for the alleged disturbances in the pasta market than because of disturbances in the durum wheat market. Consequently it considers that for determining the existence of the illegality against which the second submission in the application is directed, no purpose is served by examining whether distortion of competition in the pasta market occurred and whether the causes attributed to such distortion by the Commission are correct.

4. Rejoinder

The Commission considers that the Italian Government's argument is invalid for the following reasons:

Regulation No 974/71 is also based on Article 235, and its provisions apply ‘to products … which … are the subject of a specific arrangement under Article 235 of the Treaty’.

Disturbances at the level of the basic product and of the derived agricultural products have a direct incidence on the products covered by 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). To maintain that as regards these latter products there is no need to take account of disturbances which affect them, even if trade in those products is actually disturbed by differences in the cost of the agricultural products from which they are made, leads to blind automatism. The following dilemma would then be posed:

to apply monetary compensatory amounts automatically to the products covered by Regulation No 1059/69 whenever the conditions justifying the application of those amounts to the basic agricultural products are fulfilled;

or to miss the opportunity of automatic extension at the time when monetary compensatory amounts are introduced on the basic agricultural products and never again be able to apply them.

C — Regulation No 2604/77: misuse of powers

1. Application

The absence of compensatory amounts put (industrial) processors of the product in different situations according to the position of the respective currency. The processor in a country with a weak currency, such as Italy, was placed at a disadvantage by the absence of import subsidies for wheat to compensate for the depreciation of the national currency, whereas the processor in a country with a strong currency benefited upon importation from exemption from the compensatory amounts which he would have had to bear in order to compensate for the rise in value of his currency. None the less exports of Italian pasta continued to grow. However, this was 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. Owing to certain Community measures adopted in the feed-grain sector as a whole, the price of bran (a by-product of wheat) is much higher in Italy than in other Member States, and this allows the meal which is to be processed into pasta to be obtained finally at a lower price.

The introduction of a monetary compensation instrument is therefore not intended to equalize the agricultural markets but is a measure for limiting and opposing competition which is explained by the level of the non-agricultural components of the production cost. Such a measure is a distortion of the aims of Regulation No 974/71, absolutely incompatible with the spirit and the letter of that regulation, which restricts the monetary compensation to the appearance of disturbances in trade in agricultural products.

Additional evidence of this misuse of powers is supplied by the adoption of Regulations Nos 2792/77 and 2917/77, the very terms of which justify the conviction that the Commission merely obviated certain difficulties encountered by non-Italian Community traders in the pasta industry.

2. Defence

The Commission points out that the re introduction of monetary compensatory amounts in the sector at issue was not decided lightly, but on the contrary as the result of extensive examination and thorough discussions, as is shown by the laborious evolution of the contested measure.

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 competition from Italian producers;

By 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 decision to intervene in the durum wheat market was determined by the Italian authorities' intention to freeze the maximum retail selling price of pasta;

By 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.

3. Reply

The Italian Government has no intention of denying that Italian exports of pasta increased, but wishes to state that such increase has been consistent from 1973 to the present day.

Therefore there was no unexpected and unjustified boom in the last months preceding the regulation. Secondly, the value of pasta is not ‘primarily determined by the cost of the wheat used in its manufacture’, but by the normal components of any operation of processing (amortization, salary, capital) and marketing (publicity, distribution network).

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 tradition, to the greater opportunity for the orientation of tastes at the consumer stage and, occasionally, to shortages and nigh prices of other foodstuffs which normally compete with pasta: potatoes and rice.

The distortion of aims of which the Commission was guilty in reintroducing compensatory amounts and the existence of a misuse of powers are evident from the Commission's very statements: ‘… made pasta producers in the other Member States unable to contend with competition from Italian producers’. In the present case, there was merely a problem of industrial competition which it was sought to resolve unlawfully, through the use of compensatory amounts, by giving them a protective function, instead of other measures suited to the. harmonization of economic and specifically industrial policies.

As regards the conditions enjoyed by exports, from countries with a weak currency, of pasta manufactured from common wheat, the Commission could have decided to apply compensatory amounts while at the same time providing that they could be withheld if actual exemption from the amounts upon departure from the exporting State were proved.

4. Rejoinder

According to the Commission, a distinction must be drawn between the two basic products used for the manufacture of pasta, which represent 55 to 60 % of the final value of the processed product:

common wheat, which has always enjoyed monetary compensatory amounts upon importation into Italy, whereas until 2 January 1978 pasta manufactured from that product and exported from Italy was exempt therefrom;

durum wheat, in respect of which the re-introduction of monetary compensatory amounts was justified, and indeed required, for the reasons already stated.

The factors emphasized by the Italian Government can continue to develop to the advantage of the Italian processing industry. Compensatory amounts have no effect on them. They are calculated solely in terms of the value of the raw material used for the manufacture of the pasta, and are confined to re-establishing a certain balance within the Community in that sector and to helping to approximate the conditions under which the processors in the different Member States operate. In other words, by reason of their very nature and the method used for calculating their amount, compensatory amounts are not intended to hinder competition but only to reduce an unjustified advantage.

D — Regulations Nos 2792/77 and 2917/77

1. Application

As to Regulations Nos 2792/77 and 2917/77, their existence is closely connected with that of Regulation No 2604/77, which would entail their illegality if it were declared illegal. Discrimination was created between exports to non-member countries subject to an export licence and exemption from compensatory amounts, and exports to Community countries for which there are only contracts and which therefore do not benefit from exemption. Once again the disadvantage is essentially suffered by Italian exports of pasta. As regards Regulation No 2917/77, the Italian request for a similar measure in respect of pasta exported from Italy to the other Member States was not accepted, which had the effect of prejudicing this intra-Community exportation once again.

2. Defence

As to the exemption provided in Regulation No 2792/77 in respect only of non-member countries, the Commission submits that it is explained by the following reasons:

The Commission's intention was well known to traders, who were not taken by surprise and were able to take adequate steps,

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, in respect of which, in the absence of refunds or levies, there is no advance fixing.

Since no advance fixing certificates could be obtained, it would be giving an unjustified advantage to derogate from the application of compensatory amounts, for example in respect of pasta manufactured from common wheat, which has always benefited from compensatory amounts upon importation.

Exemption from the payment of compensatory amounts would not have been justified where the products were exported to a Member State with a weak currency which was obliged to grant compensatory amounts on imports.

By Regulation No 2917/77, the Commission intended to prevent speculation, due to the long transitional period granted by Regulation No 2604/77, giving rise to deflection of trade and distortion of competition. During the transitional period, Italian pasta manufacturers could continue to work with the stocks which they held and accelerate their deliveries. As regards imports of durum wheat, they certainly waited until 2 January 1978. On the other hand, it would have been impossible to ensure administrative supervision of the measure sought by the Italian Government. For a single processed product such as pasta it would have been impossible to distinguish between pasta manufactured from durum wheat which had benefited from monetary compensatory amounts upon importation, and pasta manufactured from durum wheat not having benefited from such an advantage.

3. Reply

The Commission's argument to the effect that its intention was known is irrelevant, because it does not justify the disparity of treatment applied. On the contrary, it should be observed that the Commission's tergiversations went on for three years, which could legitimately give rise to the assumption that compensatory amounts would no longer be reintroduced.

As regards the difficulties of carrying out supervision to prevent irregularities, it suffices to point out that non-discrimination takes priority over the risk of possible irregularities.

As to Regulation No 2917/77, the Commission's remarks are inconsistent. First of all, a distribution network for food products requires long-term supplies as well as observance of manufacture and storage plans. The transitional period was so short that it left no opportunity to do what the Commission alleges. As to the possibility of distinguishing between different kinds of pasta it would have sufficed to adopt a longer transitional period and a certificate of correspondence between the quality exported and the product imported.

4. Rejoinder

The Commission states that traders followed the development of the work of its services from day to day.

The extension of the monetary compensatory amounts system had already been made foreseeable by Article 2 of Regulation No 974/71. The fact that it was necessary to adopt a general measure and to draw a distinction between internal trade and trade with non-member countries reveals no discrimination but only rules differentiated according to situations which are not comparable.

In conclusion, the Commission emphasizes that the two essential questions which arise are:

1) Whether or not there was a difference between the so-called green lira and the so-called actual lira when Regulation No 2604/76 was adopted. If so, was it material? The answer is that there was such a difference, and its size (17.8 %) is eloquent proof of its material character.

2) Whether or not, in the light of this situation, there was reason to fear disturbances in trade in durum wheat and the derived products. The difference between the actual rate and the green rate of a currency can give reason in itself to fear that, in the absence of compensatory amounts, unfavourable disturbances may arise in trade. This argument is supported by the Court's case-law as laid down in Case 29/77, cited above. Furthermore the Commission observed such disturbances in actual fact:

through the difficulties encountered by private importers of durum wheat in Italy;

through the deflections of trade confirmed by the authorities in the United Kingdom;

through the difficulties encountered by pasta producers in the other Member States.

The Italian Government, represented by O. Fiumara, Avvocato dello Stato, and the Commission of the European Communities, represented by its Legal Adviser, C. Maestripieri, acting as Agent, presented oral argument at the hearing on 13 December 1978.

The Advocate General delivered his opinion at the hearing on 31 January 1979.

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.

4. Consequently, by Regulation No 2604/77 it introduced monetary compensatory amounts in respect of products under in particular tariff subheadings 10.01 B (durum wheat), 11.02 A I (a) (groats and meal of durum wheat), 19.03 A (macaroni, spaghetti and similar products containing eggs), 19.03 B I. (macaroni, spaghetti and similar products containing no common wheat flour or meal) and 19.03 B II (other macaroni, spaghetti and similar products).

5. A few later, by Regulation No 2792/77 of 15 December 1977, the Commission added a paragraph to Article 2 of the preceding regulation, according to which the compensatory amounts introduced by the latter shall not apply ‘to operations carried out under cover of a certificate fixing the export refund or the import levy in advance in respect of which the application was lodged prior to 26 November 1977’.

6. Two weeks later, by Regulation No 2917/77, the Commission decided that during the period from 2 January 1978 to 28 February 1978 the compensatory amounts fixed for the products falling within tariff subheadings 10.01 B (durum wheat) and 11.02 A I (a) (groats and meal of durum wheat) were to be granted on certain exports and imports only under specified terms.

7. The Italian Government claims the annulment of the three regulations at issue, but considers that it has to put forward grounds for its claim only in respect of Regulation No 2604/77 as the fate of Regulations Nos 2792/77 and 2917/77 depends upon that of Regulation No 2604/77.

First submission: infringement of Article 1 (3) of Regulation No 974/71 of the Council of 12 May 1971 as amended; manifest error in the assessment of the conditions and distortion of the facts

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 disturbances in trade in agricultural products.

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’.

11. The Government submits that these considerations are manifestly mistaken and amount to actual distortion of the facts.

12. It submits that there was never any disturbance in trade in durum wheat and meal, the market in which is not on a Community but on a regional scale. The southern regions of the Community produce and process durum wheat, and the northern regions obtain their supplies not from the south of the Community but from non-member countries. The two markets are completely independent and not capable of interfering with one another.

13. It submits that because there is no intra-Community market in durum wheat but only in pasta, the Commission can speak at most of disturbances in the pasta market (which cannot fulfil the condition necessary for the introduction of compensatory amounts) but certainly not of disturbances in trade in wheat.

14. This submission concerns the application of compensatory amounts to durum wheat and meal.

15. The Commission has shown that there were large-scale imports of durum wheat from non-member countries into the United Kingdom, where owing to the weakness of the currency the levies expressed in units of account were much lower than in the countries with a strong currency, and that considerable quantities were re-exported to Belgium, the Netherlands and the Federal Republic of Germany, with the result that importers in those countries were able to make substantial profits by means of these deflections of trade.

16. Moreover, it is not disputed that a consignment of 3500 tonnes of durum wheat from Italy was offered for intervention buying in Belgium.

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: Pasta is a product of further processing of the basic product, and constitutes a typical industrial product in which the cereal ingredient is not of preponderant importance. Pasta does not appear in Annex II to the Treaty, which states and lists the products which are to be regarded as agricultural, but is the subject of a specific arrangement under Article 235 of the Treaty. It emerges from the second recital in the preamble to the contested regulation that the Commission took account of distortions of competition in trade in the non-agricultural product derived from the agricultural product. Article 1 (3) of the Council regulation provides precisely that compensatory amounts cannot be applied unless their absence would lead to disturbances in trade in agricultural products. The fact of having based the regulation on conditions which should not have been taken into account makes the regulation illegal in its entirety, if only because it has not been proved otherwise that the same measures would have been necessary and would have been adopted in the absence of those conditions. 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.

22. The wording of Article 1 (3) of Regulation No 974/71 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) requires that for the application of compensatory amounts to basic agricultural products, the monetary measures referred to in paragraph 1 (namely the fluctuation of the exchange rate of a Member State's currency) should lead to disturbances in trade in agricultural products.

23. As regards the processed products, it emerges from the provisions of Article 2 (2) of Regulation No 974/71 that the compensatory amounts applicable shall be equal to the incidence, on the price of the product concerned, of the application of the compensatory amount to the price of the basic product on which it depends.

24. Therefore, in order to justify the application of compensatory amounts to processed products, it is sufficient for the compensatory amounts applicable to the basic product to have a considerable incidence on the price of the processed products.

25. It follows from the foregoing that at the period under consideration the existence of a disturbance of the market cannot be disputed as regards durum wheat and the product of first-stage processing, namely durum wheat meal.

26. It was for the Commission to determine whether the compensatory amounts applicable to the basic product could have a considerable incidence on the price of the processed product.

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 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.

31. Therefore, the Commission cannot be accused of having exceeded the limits of its discretion in this field or of having used its powers for purposes outside the ambit of Regulation No 974/71.

32. The submissions based on the infringement of Article 1 (3) of Regulation No 974/71 and on the existence of misuse of powers must therefore be dismissed.

33. The application must be dismissed.

Costs

34. Under Article 69 (2) of the Rules of Procedure, the unsuccessful party shall be ordered to pay the costs.

35. The applicant has failed in its submissions.

On those grounds, THE COURT hereby:

1 Dismisses the application.

2 Orders the Italian Republic to pay the costs.

1 Translator's note: This is a corrected version of the text appearing in the Official Journal, which is defective; cf. Mr Advocate General Warner's comments in Case 29/77 Roquette [1977] ECR 1835, at p. 1847.

2 Translator's note: Abbreviation for ‘Azienda di Stato per gli lnterventi sul Mercato Agricolo’ [State Agency for Intervention on the Agricultural Market].