The paper argues that the EU’s farm reform agreement represents a historic shift in the structure of the CAP, but it remains to be seen whether it can stimulate an adequate response at the WTO talks.
At a meeting of EU farm ministers in Luxembourg last week a deal was reached on the reform of the Common Agricultural Policy (CAP) which may have profound implications not only for EU farm policy but also for confidence in world trade generally.
EU ministers have now adopted what amounts to a fundamental reform of the CAP. The reform will completely change the way the EU supports its farm sector. The new CAP will be geared more towards consumers and taxpayers, while giving EU farmers the freedom to produce what the market wants. In future, the majority of subsidies will be paid independently of the volume of production, through a hectare-based ‘single farm payment’.
The new single farm payments will be linked to environmental, food safety and animal welfare standards rather than just to production. A single farm payment will replace most of the premia under different Common Market Organisations. Consequently, the vast majority of the EU direct payments will no longer be linked to production. Severing the link between subsidies and production will make EU farmers more competitive and market orientated, while the single farm payment will provide the necessary income stability. More money will be made available to all farmers for environmental, quality or animal welfare programmes. However, the receipt of the full single farm payment will also depend on the agricultural practice applied by each individual farmer, which will serve as a tool to encourage marginal farmers to stay on the land.
Although it must be hailed as a significant breakthrough, the Luxembourg agreement does have shortcomings, because the initial reform package was tabled with full decoupling for all supported commodities, except milk, in favour of a single farm payment.
In order to achieve agreement, the original proposals had to be diluted and member countries now have an opt-out, whereby they can extend the existing direct support for a further two years to 2007 at the latest, rather than the proposed 2005. Hence, in certain key areas there is only partial decoupling: 75% of all direct support will be decoupled in the cereal sector and 50% in the livestock sector. Unfortunately, this is seen by many as a worst case outcome, since it initially adds more administration and bureaucracy to the CAP. However, it remains to be seen what overall impact this will have on EU member states. If pro-reforming countries do not take the opt-out, it could mean that their agricultural production would be at a disadvantage in the EU domestic market since no production support would be given to their farmers.
The Council further decided to revise the milk, rice, cereals, durum wheat, dried fodder and nut sectors. In order to respect the tight budgetary ceiling which was set up for the EU-25 until 2013, agreed at the Brussels summit in 2002, ministers agreed to introduce a financial discipline mechanism from 2007. The different elements of the reform will enter into force in 2004 and 2005. The single farm payment will enter into force in 2005.
A much greater emphasis has been placed on reforms of food quality and safety and animal welfare, because for the first time farmers will be encouraged and supported if they comply with food safety and quality and animal welfare issues (cross-compliance), as often demanded by consumer groups. This cross-compliance will ensure better food quality and helps farmers to actually meet the standards required. Also agreed was a ‘modulation’ mechanism, whereby the direct payments paid to bigger farms are capped. Modulation is envisaged to save €1.2bn a year which will be channelled to rural areas to strengthen rural development within the member countries.
Prior to the Luxembourg reform discussions, France and Ireland were the biggest opponents to any reform. However it came as a surprise to many when Germany, since 1998 a CAP Reform advocate, lined up along-side France to oppose any changes. This was been seen as a tactical issue to gain French support for the forthcoming debate on the EU takeover directive. France, despite winning a clause allowing it to continue the current support system until 2007, may have lost out most since it is currently the biggest beneficiary of the CAP. However, by subscribing to the Luxembourg agreement, France has in effect acknowledged that the pre-reform CAP is no longer an option for the EU, in particular with the view to enlargement.
Those likely to make gains from reform are the traditional advocates of CAP reform such as the UK, Sweden, the Netherlands and Denmark, because with the more market orientated freedom to farm, their farmers are in a position to produce closer to market demands. But the agreement will also make farmers more cautious about investing, due to the uncertainty caused by the removal of subsidies. Also income levels will go down for many farmers, due to a shortfall in support. In other words, less competitive farms will be worse off. However, the transitional period up to 2007 may now allow some time for the worst affected to adjust.
The biggest winner of the CAP reform is probably the EU Commissioner for Agriculture, Franz Fischler. This reform will enable the Agriculture Commissioner to put a lasting stamp on the CAP. In 1999, running up to the Agenda 2000 reform, he was sidelined by Gerhard Schröder, the German Chancellor, and President Chirac, of France. He will no longer be EU Commissioner by the time the next CAP, in 2006, is due to be reformed. However, Fischler’s skill has been to split the Italian-Spanish bloc from the French resistance bloc by giving in to the olive regime of the Italian-Spanish bloc and accommodating the French with the opt-out clause for production-linked support. This ensured that the Italian-Spanish would not use their veto and the French could hardly argue against such a compromise. Fischler understood that by building in the financial ceiling discipline, Germany could be swayed not to veto against, because with that discipline the German contribution to the CAP will be getting smaller with an enlarged EU, and its budgetary resources will at least be no further stretched.
Finally, the Luxembourg agreement should enhance the EU’s negotiating power in the forthcoming WTO negotiations in Cancun, Mexico. While not a perfect reform, it long-term consequences may be of considerable significance. Both, the EU’s and the US’ farm support policies have long represented a major distortion to world agricultural and commodity markets. With the agreement in Luxembourg, the CAP will be less trade distorting than formerly and more liberal than the US Farm Bill. Many consider that the onus is now on Washington to make concessions if there is to be a successful conclusion of the WTO Cancun meeting.
Despite its shortcomings, the Luxembourg agreement does appear to represent a historic shift in the structure of the CAP, because it sets the CAP on an irreversible path towards decoupling production from support, an essential and long-awaited economic reform. However, it remains to be seen whether it can stimulate an adequate response at the WTO discussions in Geneva. Despite its shortcomings, the Luxembourg agreement does appear to represent a historic shift in the structure of the CAP, because it sets the CAP on an irreversible path towards decoupling production from support, an essential and long-awaited economic reform. However, it remains to be seen whether it can stimulate an adequate response at the WTO discussions in Geneva.
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