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–/+ Common Agricultural PolicyDavid R. Stead, University College DublinEurope’s Common Agricultural Policy (CAP) has been one of
the most controversial, and complex, farm policies of all time. The
CAP was a cornerstone of the European Economic Community (EEC)
established by the 1957 Treaty of Rome, which aimed to
progressively create a common market and harmonize the economic
policies of the then six member states. France, West Germany,
Italy, the Netherlands, Belgium and Luxembourg were the original
signatories. The objectives of the CAP for ‘the six’ as
stated in Article 39 of the Treaty were to (i) increase
agricultural productivity; (ii) ensure a fair standard of living
for the agricultural community; (iii) stabilize markets; (iv)
provide certainty of food supplies; and (v) ensure that those
supplies reached consumers at reasonable prices. To attempt to achieve these objectives (some of which were
potentially conflicting), two main mechanisms were used. First, a
generous EEC-wide common ‘target price’ was set for
each of the major farm products. Foodstuffs entering the EEC from
non-member countries were subject to ‘variable levies’
(tariffs), which prevented target prices from being undercut by
cheaper imports. Second, if a commodity’s market price within
the Community fell to an appointed ‘intervention price’
– usually set ten to twenty percent below its target price
– then national intervention agencies would purchase all
produce that could not otherwise be sold at that price,
artificially removing supply and thereby preventing a further fall
in price. Thus the CAP effectively set a ‘price floor’
for agricultural commodities produced in the EEC. Other countries
subsequently adopted the CAP when they joined what became the
European Community (EC) and is now the European Union (EU),
beginning with Denmark, Ireland and the United Kingdom in 1973 and
Greece in 1981. Throughout its lifetime, the CAP has come under heavy criticism.
The policy’s financial cost has been very substantial. In the
1970s and 1980s, the CAP absorbed about two-thirds of the
EC’s entire annual budget on average. European taxpayers have
paid higher taxes than would have been the case in the absence of
farm support, whilst the setting of target and intervention prices
substantially above the prices prevailing on world markets raised
the cost of food for European consumers. Estimates of the
CAP’s total expense vary widely due to differences in the
methods employed and movements in world commodity prices; one
ballpark figure for the late 1990s was a cost to each EU citizen of
about 250 British pounds a year. The key problem was that stabilizing agricultural prices at high
levels encouraged Europe’s farmers to increase output.
Importantly, this met a number of the CAP’s original
objectives, but by the early 1980s as domestic production
consistently ran ahead of domestic consumption the EC was compelled
to purchase and store large amounts of surplus commodities,
producing so-called ‘butter mountains’ and ‘wine
lakes’ which often had to be resold at a loss on world
markets; or else the EC had to entice traders to sell overseas by
paying them export ‘refunds’ (export subsidies) equal
to the difference between the Community intervention prices and the
lower world prices. Moreover, the linking or ‘coupling’
of support to the farmer’s current volume of production
ensured that, inequitably, the largest producers received most of
the benefits (in 1991 a European Commission document said that
eighty percent of CAP assistance went to just twenty percent of
farmers), and also contributed to environmental damage by
encouraging farmers to increase output through intensive practices
such as the application of chemical pesticides and the removal of
hedgerows. Outside the EC, agricultural producers in developed and
developing nations have been denied commercial opportunities on
account of the EC’s import levies and the subsidized
‘dumping’ of excess European produce on world
markets. Radical proposals for policy reform were made as early as 1968
with the Mansholt Plan to provide financial incentives to encourage
about half of the farming population to leave the sector during the
1970s and to take at least five million hectares of land out of
production. But this and subsequent reform attempts were
substantially watered down by the politicians who make the policy
choices. Thus today the CAP still absorbs more than two-fifths of
the EU budget. The failure of these more radical reform
recommendations can be principally attributed to the influence of
the agricultural lobby, particularly in France. While the costs of
the CAP are widely dispersed among millions of EU taxpayers and
consumers, its sizeable benefits are concentrated on a relatively
small number of farmers. Europe’s agriculturists therefore
have had a strong economic incentive to apply political pressure
for the continuation of current policy, whilst the individual
taxpayer/consumer has a far weaker pecuniary incentive to lobby for
change. Hence there is a bias towards the status quo, and for many
years the challenges of solving the problem of overproduction and
curbing the CAP’s cost were only addressed through a number
of somewhat minor policy adjustments. For example, production
quotas in the milk sector were introduced in 1984, and since 1988
arable farmers have been given money if they
‘set-aside’ from production part of their land. International complaints about the CAP in the Uruguay Round of
world trade talks helped to trigger the MacSharry reforms of 1992,
named after the European Commissioner for Agriculture at the time.
Again representing a compromise from originally more far-reaching
proposals, the policy changes made included the extension of milk
quotas and set-aside, and much more importantly, for the first time
significant reductions in the level of institutional prices for
cereals and beef. In compensation for these cutbacks in price
support, farmers were given direct payments (‘cheques in the
post’) per head of livestock and hectare under crops,
more-or-less up to a maximum of their pre-reform quantities.
Economists regard these direct payments as a less unsatisfactory
type of subsidy than price support because they were partially
‘decoupled’ (partially independent) from the current
volume of the farmer’s production, thereby reducing his or
her incentive to overproduce using intensive methods. Funds were
also made available for programs to assist the development of rural
areas (such as subsidies for afforestation) and for schemes where
farmers pursue environmentally-friendly agricultural practices in
return for additional payments. This change in policy direction,
then, started to ameliorate the CAP’s impact on the
environment. The Agenda 2000 reform – agreed in 1999 –
extended the MacSharry reforms, with additional compensated cuts in
institutional prices and reinforced rural
development/agri-environmental schemes becoming the ‘second
pillar’ of the CAP. The latest major policy reform was the Mid-Term Review of Agenda
2000 (or Fischler reforms), agreed in 2003. (Subsequent CAP reforms
have been sector-specific, such as the changes to the hitherto
unreformed sugar regime in 2005 and the 2007 reform of the measures
operating in the fruit and vegetable sector.) Pressures arose from
the agreed entry to the EU of ten central and eastern European
countries with large farming industries (this enlargement occurred
in 2004), and especially from demands for further liberalization of
the protectionist CAP from Europe’s trading partners in the
World Trade Organization’s Doha Development Agenda
negotiations. The most fundamental alteration was the introduction
of the ‘single farm payment,’ an annual lump sum grant
which replaced the area and headage direct payments historically
received on each farm. Crucially, unlike the previous system, the
single farm payment can be claimed more-or-less regardless of
changes in the scale and type of farm production (although member
states were given limited flexibility over the extent to which they
undertook this additional ‘decoupling’). EU farmers,
then, should generally now be making their production decisions
based on market demand and production costs, rather than
‘farming for subsidies,’ and this should cause less
distortion to international trade. Receipt of the single farm
payment, though, is conditional on farmers meeting
‘cross-compliance’ requirements which ensure a high
standard of environmental protection and animal welfare. In short,
a consensus has now emerged in Europe around granting farmers
financial assistance in exchange for undertaking rural stewardship
activities such as environmentally-friendly farming, instead of
subsidizing commodity production. This ‘European model of
agriculture’ therefore aligns farm support with the
public’s concerns about the environment, food safety and
animal welfare. Yet many criticisms of the ‘new CAP’ remain, for
instance, over its continued inequity since the biggest single farm
payments are distributed to the largest (and typically richest)
farm owners. At the time of writing, further substantive reform is
being mooted in the Doha Development Round and in the lead up to
the CAP ‘Health Check’ in 2008. Probable reforms in the
latter include the abolition of arable set-aside to allow this land
to be utilized to produce biomass for biofuels, and additional
allocation of funds from the (now fixed) CAP budget to help to
finance rural development programs such as local tourism
initiatives. If a breakthrough is finally achieved, a Doha Round
Agreement on Agriculture is likely to include the elimination of
CAP export subsidies by c. 2013 and an overall average cut
in its import levies of a little over 50 percent, which would
further reduce the CAP’s adverse impact on non-EU
producers. References
Ackrill, Robert. The Common Agricultural Policy.
Sheffield: Sheffield Academic Press, 2000. Baldwin, Richard and Charles Wyplosz. The Economics of
European Integration. London: McGraw-Hill (second edition),
2006. Chapter 9 on “The Common Agricultural
Policy.” EuroChoices, passim. Fennell, Rosemary. The Common Agricultural Policy: Continuity
and Change. Oxford: Clarendon Press, 1997. “Reforming the CAP.” Symposium in Economic
Affairs 20 (June 2000): 2-48. Ritson, Christopher and David Harvey, editors. The Common
Agricultural Policy. Wallingford: CAB International (second
edition), 1997. Swinbank, Alan and Carsten Daugbjerg. “The 2003 CAP
Reform: Accommodating WTO Pressures.” Comparative European
Politics 4 (2006): 47-64. Websites
EUROPA [European Union’s web site] Agriculture and Rural
Development pages, http://ec.europa.eu/agriculture Wyn Grant’s CAP blog, http://commonagpolicy.blogspot Online Learning Center of Baldwin and Wyplosz (2006), http://highered.mcgraw-hill |