Beyond CAP: Why the EU budget needs reform

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

This article is part of our special report Greening the CAP.

'Root and branch' reform to the Common Agricultural Policy will be needed to equip the EU for the challenges of the 21st century, writes Philippe Legrain, senior fellow for economics at the Lisbon Council and author of 'Aftershock: Reshaping the world economy after the crisis'.

The following contribution is authored by Philippe Legrain, senior fellow for economics at the Lisbon Council and author of 'Aftershock: Reshaping the world economy after the crisis'.

"The CAP purports to help poor, small farmers, yet the richest 20% reap roughly 80% of the direct income support. The biggest handouts go to large (often hereditary) landowners and big agri-businesses. In effect, the masses of middle and working-class taxpayers keep the lords of the manor in clover on the pretence of helping the peasants.

Shamefully, many European countries still keep the names of CAP recipients shrouded in mystery. But according to Farmsubsidy.org, a transparency group, the biggest beneficiaries are sugar companies such as France's Tereos, which received €178 million last year, and Poland's Krajowa Spó?ka Cukrowa (€135 million). At a time when most Europeans are tightening their belts, the number of CAP millionaires – people or companies receiving at least one million euros in CAP subsidies – rose by more than 20% to 1,212 in 2009. Together, this charmed circle pocketed €4.9 billion.

According to the Organisation for Economic Co-operation and Development (OECD), the CAP cost Europeans €79.5 billion in higher taxes in 2008 and a further €36.2 billion in higher food prices – a total of €114.6 billion a year, or 0.91% of EU GDP. That works out at nearly €1,000 a year for a typical family of four. And since the poor spend a bigger share of their income on food, the CAP is particularly regressive.

The CAP's other victims are poor farmers in developing countries. Their exports to the EU are limited by high import tariffs; their sales in domestic and third markets are undercut by EU export subsidies; and the excess EU production that the CAP encourages depresses prices for their products more generally. This is immoral– and it works counter to the EU's efforts and stated commitment to promote international development and help the world’s poor. The CAP costs poor countries more than they receive in overseas aid from the EU. No wonder so many African farmers who cannot sell their produce in Europe risk their lives trying to come and work in the EU instead. The broader costs to Europeans – and to the EU itself – are huge.

By skewing the EU economy towards uncompetitive agriculture, the CAP acts as a tax on competitive industrial and service-sector exports, crimping economic growth.

Why reform the CAP – and how

Among the CAP's purported aims are promoting a competitive agricultural sector; supporting farmers' and rural incomes; promoting rural development more generally; ensuring 'food security;' and delivering public goods, such as food safety, animal welfare, biodiversity, environmental protection and mitigating climate change.

Let's consider each goal in turn. The CAP has scarcely been successful at promoting a competitive agricultural sector; otherwise, why are farms still deemed to need EU support? On the contrary, the CAP deadens farmers' incentives to compete and innovate to satisfy consumers' changing demands, since their true paymasters are EU bureaucrats. EU agriculture ought to be modernised. Recent proposals for managed markets in which 'producer organisations' fix maximum and minimum prices would only distort markets and violate EU competition rules.

Instead, the first pillar of the CAP – market interventions, coupled subsidies and direct income support – should be phased out. All tariffs, quotas and other trade barriers should be abolished. Axis 1 of the CAP's second pillar – improving the competitiveness of the agricultural and forestry sector – should be limited to non-discriminatory investment in areas such as infrastructure. EU funding for agricultural research and development should be integrated into broader R&D initiatives.

According to a recent high-level study commissioned by the European Commission, liberalising would strengthen EU agriculture, not destroy it. Scenar 2020-II, a study commissioned by the European Commission, concludes that 'the impact of trade liberalisation and reducing domestic support is in general moderate; even with liberalisation agriculture will still be an important sector in Europe.' Crop production would rise slightly and the livestock sector would shrink a bit. Farmers' incomes would fall, but so would their costs – because farms would reap economies of scale and other productivity gains, but mainly because land prices would fall by 30%.

Worries about 'food security' evoke memories of wartime deprivation and tap into a broader insecurity about the future. But at a time when so many Europeans overeat and so much food goes to waste, such fears are clearly overblown. When food prices spiked in 2007–8, there was never any prospect of Europeans starving. Besides, diversity of supply, rather than self-sufficiency, is the best guarantor that food will not run short. If prices rise, farmers will produce more – and the poor could be compensated through national welfare systems. And without the CAP, food prices in the EU would be permanently lower.

Food safety is an imperative. Unfortunately, the EU's food-safety standards are often a form of covert protectionism.And despite these ostensibly high standards, EU policies have not protected Europeans from one food-safety scandal after another: BSE, foot-and-mouth disease, listeria in Italian cheese, dioxin in Irish pork, nitrofen in German poultry, salmonella in British eggs, to name only six. Arguably, the CAP makes European food less safe, since by raising land prices, it encourages farmers to cut corners to economise on space.

The presumption that imported food is more damaging to the planet is often false. According to a study by Britain's Department for Environment, Food and Rural Affairs (Defra), 85% of the environmental cost of food transport is incurred within Britain, not least when lorries are stuck in traffic, so road pricing and improving food distribution would bring the biggest benefits. And while it is true that flying in food generates greenhouse-gas emissions (although shipping it much less so), EU production methods often generate higher emissions that more than offset the lower transport-related ones.

The best way to limit climate change is to tax greenhouse-gas emissions so that food prices reflect their full environmental cost. If EU governments are serious about tackling climate change, agriculture, a big source of emissions, should be included in Europe's emissions trading scheme.

Conclusion

The CAP is fundamentally flawed – and in an age of budgetary constraints, it has become an unaffordable folly. Instead of trying to justify a fiscally regressive, protectionist racket by cloaking it with other, more modern objectives, it would be better to pursue desirable social and economic goals in other ways. The EU should not allow its future to be hijacked by special interests.

True Europeans should be willing to slay sacred cows such as the CAP to equip the EU for the challenges of the 21st century. Only if the Commission tries a fresh approach, making its oft-proclaimed 'strategic priorities' into fiscal and budgetary priorities as well, will the Europe 2020 strategy prove successful."

To read the full e-brief, please click here.

Published in partnership with the Lisbon Council.

Subscribe to our newsletters

Subscribe