LUXEMBOURG, Sept 7: The EU's highest court ruled on Thursday that the European Union's cotton aid regime, drawn up after difficult negotiations in 2004, must be scrapped.

The Luxembourg-based European Court of Justice said in a statement that the current cotton subsidy regime could remain in place until a new system is drawn up “within a reasonable delay”.

Spain has been hit particularly hard by the amended regime and introduced the legal move to scrap the cotton regime as it was revised in 2004, largely decoupling subsidies from production.

Spain, the second-biggest producer in Europe, argued that the decoupling of subsidies from 65 per cent of cotton production was disproportionate.

“They challenged that the (remaining) 35-per cent figure was insufficient to maintain cotton production in Spain,” a European Commission spokesman said.

The commission is “pleased” that it can continue to apply the regime until such time as a new one can be adopted, a spokesman for EU agriculture commissioner Mariann Fischer Boel said.

The European Union's executive arm will immediately begin work to take the ruling into account, including an impact study.

“We are also pleased that the basic principle of decoupling has not been brought into question,” the spokesman Michael Mann said.

In April 2004, EU farm ministers agreed the deal on the bitterly divisive issue of reforming subsidies for tobacco, cotton and olive oil production, in the teeth of fierce Spanish opposition.

The reforms were brought in to comply with the EU's Common Agricultural Policy.

The move was also in response to EU partners' concerns within the World Trade Organisation, particularly amongst developing nations for whom the pre-existing subsidies distorted the world market.

The deal on so-called “Mediterranean” products was struck only after lengthy haggling and with Spain voting against the measure.

The reforms had been a subject of deep division between the EU's Mediterranean-rim members which benefit from the subsidies and northern European members.

France, Greece, Italy, Portugal and Spain had expressed concerns about the social impact of the reform, which had the backing of Britain, Denmark, Germany, the Netherlands and Sweden.

Round-the-clock talks at a WTO conference in Hong Kong last December yielded a deal in which the United States and other rich countries agreed to progressively remove subsidies to their cotton producers.

A key plank of the deal was that export subsidies for rich countries' cotton industries would be phased out by the end of this year.

The accord was part of the WTO's wider Doha Round negotiations which aim to give developing countries a much-needed economic boost by cutting global barriers to commerce.—AFP