Common Agricultural Policy

David R. Stead, University of York

Europe's Common Agricultural Policy (CAP) has been one of the most controversial farm policies of all time. The CAP was a cornerstone of the European Economic Community (EEC) created by the 1957 Treaty of Rome, which aimed to progressively create a common market and harmonize the economic policies of the member states. France, West Germany, Italy, the Netherlands, Belgium and Luxembourg were the original signatories. The objectives of the CAP as stated in Article 39 of the Rome 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 supplies reached consumers at reasonable prices. To attempt to achieve these aims, an EEC-wide target price was set for most farm products. Two main mechanisms were used to maintain this price. First, foodstuffs entering the EEC from non-member countries were subject to variable levies, thereby preventing target prices from being undercut by imports. Second, if a commodity's price within the Community fell to an appointed "intervention price" - usually set five to ten per cent below its target price - then national intervention agencies would purchase and store the surplus produce, artificially reducing supply and thus preventing a further fall in price. A number of other countries subsequently adopted the CAP when they joined what became the European Community (EC) and later the European Union (EU), beginning with Denmark, Ireland and the United Kingdom in 1973.

Over the period of its operation, 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 annual budget. European taxpayers have paid higher taxes than would have been the case in the absence of farm support, while the setting of target prices above the world market level has raised the cost of food for EC consumers. Estimates of the CAP's total expense vary widely due to differences in the methods employed and movements in world food prices; one ballpark figure is that it costs each EU citizen about £250 a year. The key problem has been that stabilizing agricultural prices at high levels encouraged European farmers to increase output. This met a number of the CAP's original objectives, but by the early 1980s as production consistently ran ahead of consumption the EC was compelled to purchase large amounts of surplus food, producing the "butter mountains" and "wine lakes," which often had to be resold at a loss on world markets. Moreover, the linking of subsidies to production ensured that the largest producers received most of the support payments (in 1991 an EC Commission document said that eighty percent of subsidies went to just twenty percent of farmers), and also contributed to environmental damage by encouraging farmers to increase output through intensive farming practices such as the application of 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 sale of surplus European produce on world markets.

Radical proposals for the reform of the CAP were made as early as 1968 under the Mansholt Plan, but this and subsequent attempts were substantially watered down. Thus today the CAP still absorbs nearly half of the EU's annual budget. The failure of these radical reform packages can be principally attributed to the powerful agricultural lobby, particularly in France. While the costs of the CAP have been 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 financial incentive to apply political pressure for the continuation of agricultural support, while the individual taxpayer/consumer had a far weaker pecuniary incentive to lobby for its abolition. Hence to date only largely incremental adjustments have been made to the CAP to reduce its cost and curb the problem of overproduction. Milk quotas, for example, were introduced in 1984, and from 1988 arable farmers were given money if they "set-aside" from production part of their farmland. International complaints about the CAP in the Uruguay trade round triggered the MacSharry reforms of 1992. Again representing a compromise from originally more radical proposals, the changes made included the extension of milk quotas and set-aside and reductions in the level of target and intervention prices, with farmers being given direct income payments in compensation for the cutbacks in price support.

The Agenda 2000 program (agreed in 1999) and the subsequent policy reviews have continued the reform process, with direct payments increasingly replacing high institutional prices as the chief means of subsidizing farmers. Direct aid can be regarded as a less unsatisfactory type of subsidy because, unlike price support, it is partially "decoupled" from production, thereby reducing the farmer's incentive to overproduce. The various changes implemented over the years, however, have produced a system of great complexity that is open to fraud. In line with growing public concerns about the environment and food safety, a new consensus appears to have emerged around giving farmers financial support for undertaking rural stewardship activities (such as environmentally-friendly agriculture), instead of subsidizing food production. Another recent major challenge to the CAP has been the agreed entry to the EU in 2004 of ten central and eastern European countries with large farming sectors. Since under the existing arrangements these nations would be due substantial amounts of direct payments, the EU decided that the new members would initially be granted only a proportion of their full entitlement, once again postponing more fundamental reform of the CAP.

Bibliography

Ackrill, Robert.The Common Agricultural Policy. Sheffield: Sheffield Academic Press, 2000.

Fennell, Rosemary. The Common Agricultural Policy: Continuity and Change. Oxford: Clarendon Press, 1997.

Grant, Wyn.The Common Agricultural Policy. Basingstoke: Macmillan, 1997.

Martin, John. The Development of Modern Agriculture: British Farming since 1931. Basingstoke: Macmillan, 2000.

"Reforming the CAP." Symposium in Economic Affairs 20 (June 2000): 2-48.

EUROPA [European Union's web site] - CAP reform http://europa.eu.int/comm/agriculture/capreform/index_en.htm

Citation: Stead, David. "Common Agricultural Policy". EH.Net Encyclopedia, edited by Robert Whaples. June 21, 2007. URL http://eh.net/encyclopedia/article/Stead.CAP