1. THE COMMON AGRICULTURAL POLICY (CAP)

2. The significance of the CAP
20 years ago, The Economist Magazine (29 Sept 1990) said:
The Common Agricultural Policy is the single most idiotic system of economic mismanagement that the rich western countries ever devised.
Still second-most expensive EU policy (although much less than it used to be as % of EU budget)
Central to acquiscommunitaire
Political implications
Budgetary bargaining (recall: net contributor debate)
Enlargement (2004 but also previous espec 1980s)
World Trade Policy
3. How is the money spent?
4. Origin of the CAP
Communitys founding bargain
Agriculture then core industry in Europe (next slide)
Objectives of the CAP (Art. 33 TEC)
1. Raise agricultural productivity
2. Ensure fair standard of living for farmers
3. Stabilize markets
4. Secure independence of food supplies
5. Ensure reasonable prices for consumers
Theory: allocation of resources; Redistribution through public intervention (welfare state policy). Fusion of production and income related goals. But nowadays more reliance on regulatory approach.
5. The proportion ofthe work force employed in agriculture and the agricultural sectors share of GDP in individual European countries have greatly decreased since the creation of the European Community and in comparison with the US (bottom row).
6. Why is agriculture different?{i.e. why public intervention?}
Continuous demand
food availability indispensable on a daily basis
total food demand is income and price inelastic
Discontinuous supply
land and farm labour are fixed in time & space
weather-induced major uncertainties
biological cycles in production (e.g., beef, olive oil)
unexpected shocks (diseases, natural disasters etc)
Result: volatility of prices (and consequently of farmers income)
7. Functioning of the CAP
Public intervention and protection through a guaranteed price system(EAGGF)
According to 3 fundamental principles: unity of market, Community preference, financial solidarity.
Intervention and protection:

EU agencies buy when prices fall below the intervention price (see handout Box 24.1 for how the price support system of the CAP works)

8. Production quotas (e.g. sugar) 9. Subsidies for storage 10. Tariffs and export subsidies Consequences:
Artificial pricing system rewards high production
Farmers become rent seekers (seek rent instead of profit)
11. 12. Recall: Community Expenditure 1960-2000
NB: decreasing share of agricultural spending as % of total expenditures.
13. What the Commission proposed
(for the entire 2007-13 perspective - not annualised!)
14. What the Council agreed
In Dec 2005 under UK rotating presidency
15. Source: Susan Senior Nello (2009) The European Union: Economics, Politics, and History 2nded Ch.12
16. Source: Susan Senior Nello (2009) The European Union: Economics, Politics, and History 2nded Ch.12
17. Source: Susan Senior Nello (2009) The European Union: Economics, Politics, and History 2nded Ch.12
18. 19. CAP spending per capita,1998
Source: The Economist, February 3, 2001, p. 51
20. 21. EU and US direct payments
22. 23. General critique of the CAP
Costly in terms of EU budget
Discrimination against more efficient producers on the world market (US, developing world)
Over-production: butter mountains, wine lakes...
Big, northern Europeanfarmers have benefited disproportionately
Expensive for consumers
Expensive for taxpayers
Detrimental for the environment
Distortions of EU budgetary contributions
24. Reform Attempts (1)
Mansholt Plan, 1968 (Agriculture 1980)
Controversial and radical review to restructure sector and resolve problems of farm surpluses and inadequate incomes. How?
By restructuring the guidance part of European Agricultural and Guidance and Guarantee Fund (EAGGF)
But structural reform rejected by Council due to national politics, economic considerations & international economic developments.
1980s: Internal pressure due to inability to control CAP budget
Hence, limit production volume (eg. milk quotas) instead of reforming price policy. But legal limit put on agricultural price support in 1988 (capping) ; introduction of set-aside scheme
MacSharry 1991-92 (EU Agriculture Commissioner)
New urgency of GATT: avoid collapse of Uruguay Round (CAP is market distorting)
Compensation by direct aid payments to farmers
Big farms required to reduce production areas
1999 Berlin Agreement on Agenda 2000 multifunctionality
25. Attempt to replace structural measures by sustainable rural development policies (pillarisation) but failure of Cork Declaration in 1995 to meaningfully redirect financing towards Pillar 2
26. Reform Attempts (2)
Agenda 2000 and Mid-term Review 2003(also called the Fischler Reform)
Internal pressures: enlargement, WTO negotiations
Increased direct compensation, set-asides
Sustainability and multi-functionality
Limited price reductions: inter-state bargain (Shroeder-Chirac)
27. Reform Attempts (3)
On-going reforms
More de-coupling of subsidies and production to force farmers to respond to market forces. How?
Capping:
Single Farm Payment: to reduce inequity (subsidies for biggest farmers: receiving more than 100,000 annually) and WTO litigation (Doha)
Total farming budget capped at 40bn until 2013 (EU-27) and direct aids phased in for new entrants
Aid to farmers becomes conditional: multifunctionality and cross-compliance
min. size of smallholding to eliminate hobby farmers
End state buying of all cereals except wheat for bread to eliminate food mountain
Abolishrequirement to leave 10% of land uncultivated
For 2008/9 health check of the CAP see summary in lecture handout(ch 12 Susan Senior Nello)
28. Source: Susan Senior Nello (2009) The European Union: Economics, Politics, and History 2nded Ch.12
29. 30. Financial Times
21 Nov 2007
31. 32. Enlargement Challenge
New MS (2004) possessed twice as much arable land and 50% more farmland per inhabitant than EU-15
Giving farmers in new MS full direct payments immediately meant disincentive to modernization.
Commission decided on gradual introduction of direct payments by 2013 (10 years transition period)
Increasing resistance in Germany and other net payers to pick up the CAP bill (net contributor debate)
EU budget increase estimate: 8-11bn (20% of CAP budget) but EU GDP predicted to grow by much less than 5% !
Politics of bargaining especially France -Germany
33. Source: Susan Senior Nello (2009) The European Union: Economics, Politics, and History 2nded Ch.12
34. Why so difficult to reform?
Part of European welfare policy
Electoral politics: strength of concentrated agricultural interests, powerful farm lobbies
Fusion of production & income related goals
National protectionism throughout Europe
Commissions influence constrained by institutional design: management committees made up of civil servants from MS
implementation rests with MS who manage national envelopes according to own criteria & requirements
Institutional insulation of CAP within Council
Subsidiarity principle difficult to apply to a common policy totally funded by the EU
35. Evaluation and outlook
Developments that influence the pace and shape of CAP reform (Senior Nello, 2009: 306-7)
=> Partial re-nationalization of agriculture?
36. Conclusion
Despitemajor reforms (de-coupling; sustainable development) the CAP remains the 2nd largest (albeit decreasing) itemof EU expenditures and it is still a source of political disputes (and grand bargains).
Shape of CAP reforms influenced by weight of agricultural spending in the Community budget; GATT/WTO commitments, and public concern for safer food and more environmentally friendly agriculture
Health check of EU farm policy favours more targeted pay-outs & suggests changes to take a/c of new priorities.
But will these new priorities (due to public support) mean less spending?
Solution: partial re-nationalization of the CAP?
37. GMOs
In Feb 2006 the WTO ruled in a long-standing trade complaint brought against the EU by the US, Canada and Argentinathat the EU had applied a de facto moratorium on approval ofGM foods and crops btw June 1999 and Aug 2003 contradicting the Brussels claim that no such moratorium existed which effectively constitutes an unfair trade barrier.
38. 39. Farmland in International Comparison
Source: European Commission, The Agricultural Situation in the European Union, 1998 Report, p. T/24.
40. Number of farms
Source: European Commission, The Agricultural Situation in the European Union, 1998 Report, p. T/24.
41. Average farm size
Source: European Commission, The Agricultural Situation in the European Union, 1998 Report, p. T/24.
42. Average farm size in EU 15
Source: European Commission, The Agricultural Situation in the European Union, 1998 Report, p. T/24.