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Common Agricultural Policy

David R. Stead, University College Dublin

Europe’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, while 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 British pounds 250 per 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, while 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 Organisation’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 about 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.

Bibliography

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/index_en.htm

Wyn Grant’s CAP blog,

http://commonagpolicy.blogspot.com/

Online Learning Center of Baldwin and Wyplosz (2006),

http://highered.mcgraw-hill.com/sites/0077111192/student_view0/chapter9/

Citation: Stead, David. “Common Agricultural Policy”. EH.Net Encyclopedia, edited by Robert Whaples. June 21, 2007. URL http://eh.net/encyclopedia/common-agricultural-policy/