Brand-new CAP regime or new wine in an old bottle?

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Brand-new CAP regime or new wine in an old bottle?

On Monday the European Union’s Agriculture Council dealt for the first time with the Commission’s proposals for a review of the Union’s common agricultural policy (CAP), but failed to reach consensus. After the member countries’ initial reactions to the Commission’s plans, agreement was not expected: France refuses point blank to discuss reforms ahead of the next financing period (2006-2013). Other member states, including Germany, find that the proposals do not go far enough. It is going to be difficult to reach political agreement, although the proposals may be formally adopted in the Council of Ministers on the basis of a qualified majority.

The mid-term review of the CAP was scheduled at the talks on the Agenda 2000 at the EU summit in Berlin in 1999. The enlargement of the EU, the assertion of the EU’s trade interests at the WTO, a series of food crises, and the sustainable development strategy agreed in Göteborg have heightened the need for a fundamental review of the CAP.

The essence of the proposals tabled by the European Commission on July 10 is that the link between production and direct payments to farmers should be cut. Income support should instead be conditional on adherence to stricter environmental, food safety and animal welfare standards. Direct aid is to be reduced by 3% p.a. for seven years from 2004 and the amounts saved are to be spent on rural development. It is also proposed that in certain market segments support prices and/or the scale of intervention be reduced.

How do the proposals rate in economic terms? In brief: long overdue, but unfortunately still not sufficient to allow a real reorientation of agricultural policy in the EU. They do not go far enough to alleviate the issue of financing in the Union following enlargement, nor are they likely to significantly improve the EU’s negotiating position in the current WTO round. But with its proposals the Commission has finally got things moving in the debate on a reform of the CAP.

CAP spending (roughly EUR 40 bn in the EU budget of EUR 95 bn) goes mainly on expenditure to bolster market prices and direct income support for farmers (the latter to reach 80% of CAP expenditure by the end of the current budget period). Market-related spending serves to redistribute consumer incomes to the farmers – according to OECD estimates food prices in the EU are up to 20% higher because of the CAP than they would be under normal market conditions. Despite the proposed corrections, there is still a long way to go before supported prices come close to world market levels.

But the Commission showed political courage in its proposal to decouple direct aid from production quantities and introduce a cap on payments per farm (EUR 300,000, with a franchise for employees taking the total for farms that employ large numbers to a maximum of EUR 450,000). This reduces the incentives to (over-)produce, creates scope for more sustainable use of agricultural land, and smoothes the path to a liberalisation of international agricultural trade. It does not alter the enormous costs for the European farm sector, though. Old subsidies are replaced by new. And there is virtually no sign that the old dirigistic ways are being abandoned. There is a chance, though, that the funds will be put to better use.

The direct aid has the effect of redistributing enormous amounts of income from the community of taxpayers to farmers. The scale of this redistribution is incomprehensible not only against the background of the farming sector’s low economic importance (2.1% of the GDP of the EU-15) and level of employment (roughly 5% of the EU-15 labour force). It is also difficult to see why this is organised as a cross-border income transfer, with German taxpayers, for example, sustaining the level of farm incomes in other EU countries. The burden of fiscal subsidisation should be borne by the respective member state itself.

It would thus make sense if direct payments were gradually reduced and co-financing by member states were increased (the income support to German farmers accounts for roughly three-quarters of the money that flows back to Germany under the CAP), as advocated by some member countries. The DIW economic research institute calculates that with decisive reforms (the complete decoupling of direct aid from production and its gradual, total removal) farm spending for the EU-27 in 2013 (end of the next financial period) could be about 40% lower than by adhering to the status quo (EUR 52 bn vs EUR 31 bn). Even with what would be moderate reforms by economic standards (50% co-financing of direct payments), expenditure could still be cut by about one-third.

The best solution would be to finally regard the agricultural sector as a real market and after a transition phase integrate agriculture into the normal internal market – applying the appropriate rules on competition and supervision of financial assistance. It is thus to be hoped that the Commission’s proposals mark the beginning of a brand-new regime far removed from the allegedly common, dirigistic agricultural policy still in place.

For more analysis see the

Deutsche Bank Research website.  

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