EU agriculture and rural areas face significant medium-term challenges arising from existing and ‘new’ sources; as acknowledged in the EU2020 vision. The European Commission has placed emphasis upon innovation as a key element in achieving transformation, in the coming decade. Findings from a recent study for the European Parliament highlight the potential role of Pillar 2 rural development programmes as vehicles for enabling innovation. Key roles include supporting knowledge exchange; collaboration; and research-into-practice linkages. Effective knowledge exchange (KE) is a critical element, but innovation in KE itself is often needed. Collaboration can be valuable in fostering cross-sectoral linkages, and communities of learning show innovation potential. Integration of measures in tailored packages appears to increase the scope for innovation. Equally important, there is a vital need for innovation in policy design and delivery, to enable a cost-effective transformation of agriculture and rural areas. The CAP proposals 2014-2020 make a positive contribution to better promote innovation through Pillar 2, but there is room for improvement. Models for policy innovation adapted from experience in commercial organisations are suggested as worthy of further research.