winners and losers from cap reform

8/8/2019 Winners and Losers From CAP Reform

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Public Money for Public Goods:Winners and Losers from CAPReform

Valentin Zahrnt

Valentin Zahrnt ([email protected]) is a Research Associate at ECIPE.

AbstrAct

To attain fundamental reorm o the post-2013 Common Agricultural Policy (CAP), a serious debate is need-ed in 2009/10 that prepares the decisions to be taken in 2011/12. The paper contributes to this debate, rst, byarguing that the Single Farm Payment should not become the mainstay o the uture CAP but be gradually phasedout. Second, it proposes that the existing two-pillar structure o the CAP should be replaced by a public goodspillar (containing all ecient policies to be preserved) and a discretionary pillar (encompassing all inecient

policies to be removed over time). This would give member states fexibility in how they phase out inecientpolicies, while the EU reorm agenda would not be clogged with the contentious details o their progressiveremoval. Third, the paper assesses the criteria likely to guide uture allocation o CAP payments, such as GDPper capita, agricultural and orest areas, and areas with Natura 2000 status. Fourth, it estimates member states’share in total CAP payments under dierent post-2013 scenarios. This reveals surprising dierences between thenegotiating positions that countries traditionally adopt and the payment receipts they can expect rom reorm.

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1. IntroductIon1

Europe’s Common Agricultural Policy (CAP) has improved considerably since its rst major reorm in 1992. Yet, it still distorts the economy, harms poor armers abroad, and hands outincome support to already wealthy recipients. It also ails to eectively address environmentalchallenges, such as the ght against climate change and the preservation o biodiversity. Studies by

the European Court o Auditors, consultancies, think tanks, universities, and international organi-zations have repeatedly revealed the weaknesses o the CAP. Civil society stakeholders – rangingrom environmentalists to pro-development campaigners, rom churches to industry ederations

– are almost univocal in their call or CAP reorm. 2 Only those who signicantly prot rom CAPpayments resist change: armers, landowners, and territories that are net-beneciaries, payingless or the CAP than they receive.

European agricultural policy will not change considerably beore 2014 when the next long-termramework or the EU budget will come into orce.3 But the CAP reorm debate cannot wait.Fundamental change will grow only on ertile ground. Now is the time to start considering thereorm alternatives or the next spending period.4

This paper contributes to the debate by examining how CAP reorm might aect the distributiono subsidies across member states. In the upcoming CAP negotiations, distributional issues will

be much more visible than in the past. Traditionally, national receipts o CAP subsidies were de-termined indirectly as member states proted dierently rom EU-wide intervention prices andproduction support. But now CAP payments are increasingly being distributed through nationalenvelopes, that is, entitlements to CAP unds which the member states can then spend with somediscretion.

The repartition o these national envelopes is heavily contested. First, many member states urgeor a thorough redistribution, and the Czech Republic put this issue ront and centre o its presi-dency. The European Commission has expressed understanding or these calls.5 Second, current

national envelopes are largely determined by past payment patterns rather than by rational crite-ria refecting the CAP’s objectives. As the reerence periods date urther and urther back, they

become ever harder to justiy. Third, the current distribution is shaped by the EU enlargementprocess.6 Ater 2013, a genuinely European approach that removes the old/new member statedivide is due.

Making distributional eects transparent in advance is important. It will help to turn potentialreorm winners into reorm promoters. And it will inspire a serious debate in countries whosesubsidy receipts will shrink. This may provoke a backslash at rst but oer reorm-oriented stake-holders the opportunity to convince the public that the eciency gains rom CAP reorm areworth the sacrice. Such an honest debate that concedes that subsidy receipts will all, while in-

sisting on the overall benets o reorm, can prevent populist detractors rom derailing the reormprocess with appeals to narrowly conceived national interests. Last but not least, bringing moreclarity into the uture distribution o CAP payments will help to address other European reormchallenges. In particular, reorm o EU budget nancing is contingent on uture EU spending: onlyi the distributional consequences o spending reorm are understood can politically acceptablenancing schemes be devised.7

* Te ECIPE Wri Paper series presets i researc a wr i prress. Tese Wri Papersit terere preset preliiar results tat ae t bee subject t te usual reiew prcess r ECIPEpublicatis. We welce eebac a rece u t se cets irectl t te autr(s).



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While the ultimate objective o the paper is to estimate national envelopes under dierent re-orm scenarios, several preparatory steps need to be taken rst. Section 2 gives an overview o the CAP. Section 3 tackles the Single Farm Payment (SFP). This payment is not linked to armers’current production but based on historic entitlements. Since opinions on the uture o this heavyweight in the CAP budget diverge strongly, its case needs to be examined beore any estimate o

uture payment allocations can be undertaken. Looking at economic, environmental, and socialconsequences, as well as armers’ possibly legitimate expectations on policy stability, the paperconcludes that the SFP lacks any justication and will be increasingly under pressure.

Section 4 looks at an alternative CAP structure that could replace the current two-pillar rame-work. This is an important issue because the overarching structure member states choose or theuture CAP is likely to have repercussions on the allocation o payments. The paper proposes todivide the CAP into one ‘discretionary pillar’ o inecient policies to be gradually phased out andone pillar or policies that eciently promote public goods.

Section 5 examines approaches to allocating the CAP ater 2013. A resh take on the issue is neces-sary because no clear guidance can be derived rom past practice. The paper makes the case or a

number o criteria, such as agricultural area, orest area, and area with Natura 2000 status.

Section 6 gauges how member states would are under dierent scenarios. It proposes allocationormulae drawing on the criteria elaborated beore and assesses the resulting distribution o CAPpayments across member states. Several scenarios are constructed – some where the current two-pillar ramework is upheld and others where an alternative structure is introduced.

The concluding section summarizes the arguments and highlights dierences between the ne-gotiating positions that countries traditionally adopt and the subsidy levels they can expect romreorm. Some reorm skeptics would be well advised to second-think their deensive posture,while some member states promoting reorm should acknowledge possible losses.

2. the current cAP

Before considering policy changes, the current CAP – its instruments, structure, and expen-ditures – shall be presented. The CAP encompasses a broad range o instruments. Table 1 presentsa brie description with some examples.

tAble 1: cAP instruments

instrument exAmPle

aret itereti ecaiss tat raise te price te Eurpea aret

public itereti bui, eprt subsiies

cuple subsiies tat rewar te pructi aspecic base utput r utilize area

sucler cw, at, a seep preia

irect ice supprt SFP, earl retireet scees

subsiies tat icrease ar pructiit ar erizati, traii

subsiies ecietl tarete at public s tat pr-te ariculture's serices t sciet

well-esie ari-eiretal paets, researcit sustaiable ari

subsiies tat prete t prte public s butwse pricipal eect is t cael ice supprt tarers

Least Fare Area paets, prl esie ari-eiretal paets

rural eelpet subsiies urelate t ariculture illae reati, ecic iersicati



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The CAP is not directly organized along these instruments but divided into two pillars. One di-erence between them is that expenses under the rst pillar are ully covered by the EU, whereasmember states have to co-nance second pillar programs. In addition, the pillars ocus on di-erent instruments. While almost any o the CAP instruments can be nanced under the rstpillar, its emphasis is clearly on market intervention, coupled subsidies, and the SFP. It can thus

be described as a arm-income-and-production pillar. Farm modernization, genuine and abusivepublic goods programs, and rural development are mostly supported through the second pillar.A urther distinction, besides the issue o co-nancing, can thus be drawn. The rst pillar tends toentail relatively blunt measures whose implementation is similar or identical across the EU. Thesecond pillar, by contrast, relies on member states’ micro-management (in cooperation with theEuropean Commission that controls programming and monitors implementation). Finally, it can

be noted that the second pillar contains more eective policies than the rst – but not all secondpillar policies are justiable and not all rst pillar policies are detrimental. Table 2 summarizesthe main characteristics o the two pillars.

tAble 2: chArActeristics of the cAP PillArs

first PillAr second PillAr

fa ull EU ace c-ace b eber states

ma aret itereti, cuple subsiies, SFPar erizati, euie a abusiepublic s prras, rural eelpet

saaza rater eeus acrss EU er etereeus acrss EU

eu a a stl er lw r er lw t er i

Table 3 shows the expenditures or key CAP instruments or the period 2006-2008. These aremarket intervention, coupled subsidies, decoupled direct aids (SFP and equivalent payments inthe new member states), and second pillar payments.

tAble 3: cAP exPenditures for key instruments (in € million)

2006 2007 2008

ma 8,148 4,867 4,159

cp 17,893 6,259 5,620

dp a 15,975 30,369 31,208

s pa 7,719 10,874 10,529

Source: Yearly Reports on Budgetary and Financial Management, DG BudgetData on second pillar payments reects the execution o payment appropriations

It can be seen that the SFP (used in the ollowing to reer to all decoupled direct aids) takes up thelion’s share in the budget. The 2008 Health Check reorm has urther strengthened the SFP bycutting back uture market intervention and coupled subsidies. For 2013, the rst pillar budgetis orecasted to be at €45.0 billion, to be dedicated mostly to the SFP, and the second pillar toamount to€14.8 billion.8 Any CAP reorm will thus have to start with a decision on the utureo the SFP.

3. the future of the sfP

The SFP has been introduced in 2003 as a compensation or the removal o previous subsidies



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coupled with production. What should be done with this compensation ater 2013 when it willhave been paid or an entire decade? Has the time come or immediate abolition or is some tran-sition more appropriate? Leaving the question o political easibility aside, three welare consid-erations – economic, environmental, and social – can inorm this choice. In addition, whetherarmers hold legitimate expectations that the SFP will be continued is an issue that needs to be

examined. Food (in)security, which is oten adduced to justiy the SFP, is not considered here because it is not a serious threat to the EU.9

3.1 EConomIC EFFECTS

Though the SFP is ormally decoupled rom production, it still distorts production throughseveral mechanisms.10 This prevents market signals rom directing the economy’s resources totheir most productive uses.

Credit: I armers do not have access to all the credit they would like to have, the SFP increasesoutput by easing capital constraints. First, armers can directly channel the payments into produc-tion. Second, armers gain better access to credit by reducing bankruptcy risks and driving upland values that can serve as collateral.11

Structure: Farms that would not be viable in a ree market may stay in business i part o theircosts can be nanced through support programs.12 This distorts the structure o production (inavor o less ecient producers, whether small or large) and keeps an excessive share o labor inagriculture. Another distortion is that young armers who do not inherit arm land nd it harderto set up a arm as the SFP drives up land values.

Cross compliance: The SFP obliges armers to maintain their land in good agricultural and en-vironmental conditions (see below). Some o these conditions, such as avoiding the encroachmento unwanted vegetation, are easiest to ulll by arming. The SFP thus pushes armers indirectly

to produce.Another issue is the administrative cost o doling out arm payments. Ministries and agencieshave to set detailed rules, veriy entitlements and compliance, decide on individual claims, andprocess payments.13 Farmers need to inorm themselves, engage consultants, le applications,and cooperate in ocial controls. The costs – or armers alone – have been estimated to be 6.7% o CAP payments disbursed in France, while administration costs amount to 8.5% in Italy and9.3% in Germany. Germany also stands out with €28 o administration costs or armers perhectare o arm land.14

Costs arise not only rom distributing but also rom raising public money. Some o these costs areevident, such as the cost o running nance ministries and lling in tax declarations. The more

insidious distortions brought about by taxes are less visible: citizens work less, save less, and investless in their education i taxes are high. Companies also invest less in high tax countries.

To be acceptable, the SFP would thereore have to produce highly desirable results in the envi-ronmental or social realm. These benets would have to outweigh the economic distortions theSFP produces as well as its administration and nancing costs.

3.2 EnvIRonmEnTAL EFFECTS

Agricultural production can preserve open spaces, enhance scenic variety, and maintaintraditional landscape characteristics that carry cultural signicance. Similarly, agriculture can



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promote biodiversity, or instance by oering a habitat to species that depend on (traditional)arming. But agriculture can also lead to water, air, and soil pollution; release o greenhouse gases;water and soil depletion; and the loss o biological diversity as a result o environmental degra-dation and monoculture.15 There is no reason to think that the SFP, to the extent that it simplystimulates agricultural production, does more harm than good to the environment.16

Admittedly, the SFP is subject to cross-compliance: armers need to adhere to statutory manage-ment requirements (SMR) and to maintain their land in good agricultural and environmentalcondition (GAEC). The European Court o Auditors has recently lambasted these provisions orthe ollowing reasons:17

their objectives are underspecied and neither the Commission nor the member states•

monitor their eectiveness,

they overlap with compulsory obligations (so that many armers do not have to under-•

take any action beyond respecting the law),

some member states have ailed to speciy the vague EU cross-compliance conditions•

so as to make them ully operational within their borders

member states control cross-compliance with insucient requency and excessive•

laxity (nding not a single inringement in thousands o controls or important condi-tions), and they impose ludicrous sanctions.

This makes it unreasonable to expect signicant environmental benets rom the SFP – despitethe cross-compliance mechanism.18 Even i one believes that the SFP brings a marginal net gain orthe environment, it would be much preerable to invest that money into targeted environmentalpayments. Such schemes can reward the maintenance o buer strips, hedges, and stone walls orset incentives or the reduction o ertilizer and crop protection chemicals.

3.3 SoCIAL EFFECTS

Farmers as a group are not a good target or income transers. In some countries, they haveabove-average incomes, and in most countries, their average incomes have been increasing inrecent years. This trend is likely to continue in the uture: output prices are orecasted to moveon a long-term upward trend and labor is leaving agriculture, raising the earnings o those whoremain in the sector.19

Moreover, armers are asset-rich: they own machinery, arm buildings, and above all land. It isdicult to justiy why people who own a lot should receive public money – even i they have low

incomes yet do not wish to sell any o their property. Do the working poor o other sectors nothave a better claim to public support as they are both income- and asset-poor?

Still another reason why the SFP does not make sense as a social policy is that poor households benet little. 20% o SFP recipients reap roughly 80% o the SFP.20 In the Czech Republic, theaverage beneciary receives almost€ 50,000.21Table 4 shows the distribution o the SFP in theEU-25 in 2007 according to the size o individual SFP receipts. It can be seen, or example, that13.66% o the total SFP goes to armers that receive between€50,000 and€100,000, and that27.41% cumulatively goes to armers with at least€50,000 SFP receipts.



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tAble 4: distribution of the sfP Across fArmers

IndIvIdUAL SFP RECEIPTS % oF ToTAL SFP CUmULATIvE % oF ToTAL SFP

≥ 0 a < 500 € 2.22 100,00

≥ 500 a < 1 250 € 3.45 97.79

≥ 1 250 a < 2 000 € 2.66 94.34≥ 2 000 a < 5 000 € 8.49 91.68

≥ 5 000 a < 10 000 € 11.31 83.19

≥ 10 000 a < 20 000 € 17.12 71.88

≥ 20 000 a < 50 000 € 27.35 54.76

≥ 50 000 a < 100 000 € 13.66 27.41

≥ 100 000 a < 200 000 € 6.55 13.75

≥ 200 000 a < 300 000 € 2.29 7.20

≥ 300 000 a < 500 000 € 2.17 4.91

≥ 500 000 € 2.74 2.74

Source: ec.europa.eu/agriculture/fn/directaid/2007/annex1_en.pd

I public aid is meant to minimize poverty, it should be directly linked to poverty and not be con-ditional on agricultural employment or land ownership.

3.4 LEgITImATE ExPECTATIonS

Farmers’ legitimate expectations about policy stability could in principle justiy an incre-mentalist approach to phasing out the SFP. However, any such argument is fawed under the par-ticular circumstances o the SFP. One major reason or this is that the SFP is ormally decoupledrom current production decisions. This means that armers’ long-term business decisions about

investing into arm buildings and machinery, and more generally about whether to stay in arm-ing, should be largely independent o the SFP (though not ully, as seen above). The SFP is notdesigned to change armers’ business behavior in order to attain societal objectives, so that theycould complain i the public changes its mind. The SFP cannot be compared to a policy commit-ment such as that o the creation o an EU carbon emission market that triggers massive specicinvestments. In the case o the SFP, there are no policy-induced long-term investments that wouldhave to be protected.

Besides, when armers were granted the SFP in 2003, they had to know that this subsidy wouldnot last orever. The preceding two decades had seen repeated reorm attempts, which had regu-larly allen short o the reormers’ ambitions, and the next CAP reorm had already been sched-uled or 2008. Both in 2003 and 2008, the Commission had tried to shit ar more money romthe SFP to rural development and environmental payments than what was nally agreed. Betweenthese two reorms waited another threat to the SFP: the negotiations o the nancial rameworkor 2007-2013 which could very well have led to drastic cuts in the CAP budget. More gener-ally, compensation payments necessary to acilitate reorm at one point in time usually have adeadline. The act that this deadline was not specied in the 2003 and 2008 reorms should notgive reason to believe that they would go on orever. In short, armers got a very attractive SFPin 2003 and the subsequent budget and CAP negotiations, surprisingly, extended this paymentalmost in ull until 2013. Farmers have no legitimate reason to complain i the SFP is discontinuedaterwards.



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4. the future structure of the cAP

One approach to CAP reorm is to take the existing two pillar structure or granted. This has been done by the 2008 Health Check reorm that has shited money rom the rst to the secondpillar, re-calibrated the rst pillar (reducing coupled subsidies and market intervention whileexpanding the SFP and public goods payments), and ocused the second pillar more strongly on

public goods (through the so-called ‘new challenges’). The alternative approach is to redene theentire structure beore setting spending priorities.

The current CAP structure is incoherent in several regards making it desirable to start romscratch when deciding on Europe’s long-term agricultural policies. As seen in Section 2, the pil-lars partially overlap in the policies they permit,22 and even the second pillar subsidizes programsthat do not create value or the EU. In addition, the ully EU-unded rst pillar is an anomaly thatcontradicts the principles o leveraging EU unds and improving spending discipline through co-nancing. Besides mending these substantive faws, a new beginning could also be a strategicallysmart choice: radical re-allocation to ecient uses may be easier in the more dynamic context o a new structure than within the boundaries o the existing ramework.

That radical changes are indeed necessary has been shown in Section 3. That old-ashioned marketintervention and coupled subsidies are counterproductive has long been accepted by most parties.But a switch to the SFP is not the right solution. Neither economic, environmental, and socialwelare considerations nor respect or legitimate expectations about policy stability can justiycontinuation o the SFP ater 2013. The SFP was created in 2003 to acilitate CAP reorm – it has

been a way to buy support rom arm lobbies or a policy that is economically less distorting thanits predecessor but still wastes public money. This initial and unique raison-d’être has lapsed.

The structure proposed below is only one o many conceivable alternatives to the status quo –albeit a particularly interesting one. The advantages o this structure suggest that the possibility o a new structure in one orm or another needs to be taken seriously. Even i a new structure will

dier in some aspects rom the one developed here, the basic principle o introducing one pillarthat is genuinely concerned with public goods may well impose itsel (and this is the element thatwill matter or the allocation criteria and the modeling in the subsequent sections).

4.1 dISCRETIonARy And PUBLIC goodS PILLAR

The proposed structure would divide the CAP into a discretionary and a public goods pillar.The discretionary pillar would be progressively phased out, while the public goods pillar would

be preserved. Member states would be ree to shit as much money as they want rom their dis-cretionary to their public goods envelope.23

Under the discretionary pillar, member states could nance all the inecient instruments aimedat supporting arm income and production: the SFP and other income support, coupled pay-ments, and payments or improving arm productivity. Member states would be ree to decidehow much o this money they use or what kind o subsidy as long as they stay within certain limits.One o the main challenges would be to think o such saeguards that prevent serious distortionswithout unduly restricting fexibility.24 Member states could also choose how they distributethe SFP and other income support among armers. Instruments that have been co-nanced bymember states under the second pillar in the past would continue to be co-nanced under thediscretionary pillar.25

The other pillar would be dedicated exclusively to public goods related to agriculture. It would



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thus be narrower than the current second pillar, excluding arm modernization (as long as it doesnot signicantly contribute to public goods), abusive public goods payments, and rural develop-ment programs without a clear link to agriculture. The latter two types o instruments would

be removed rom the CAP altogether. Payments that pretend to promote public goods but areactually designed to channel income support to armers would be eliminated – to the extent that

is practically possible – by enhancing EU oversight o programming and stricter EU monitoringo implementation. Rural development payments unrelated to agriculture would – to the extentthat their continuation is justied by a European interest – be merged into other EU policies.

4.2 AdvAnTAgES oF ThE nEW STRUCTURE

Such a solution would have several attractive eatures: it would ocus the reorm debate onthe central challenge – promoting public goods – and relegate quarrels over the treatment o specic inecient instruments to the sidelines; it would grant governments fexibility in tailoringincome support so as to make reorm politically easible; it would permit shiting a maximumo payments to public goods; and it would result in a clean public goods pillar rather than a dirty

second pillar.

Political ocus on public goods:The objectives o agricultural payments would play a greaterrole in the debate on uture CAP allocation i a new structure were introduced. This is, rst,

because past reorms have seen repeated ghting over the transer o money rom the rst to thesecond pillar. Any discussion within the old ramework will thus elicit deep-rooted support orresistance, while the merits o the nal use o the money would remain underappreciated. Second,diculties likely to arise over the reorm o specic inecient policy instruments could be side-stepped. I, or instance, the ew remaining coupled payments cannot easily be removed at thenext reorm step, it appears pragmatic not to wage a ght over this issue but to permit states tocontinue existing coupled payments drawing on their discretionary envelopes. Other examples in

the same vein are the Less Favored Area scheme and most arm modernization payments. Third,distributional conficts about the distribution o the SFP to armers could be shited to nationallevel. Past attempts by the Commission to change how member states allocate the SFP to armershave ared poorly. In 2003, the Commission ailed to introduce ‘progressive’ modulation (i.e. ashit rom the rst to the second pillar that hits large SFP recipients harder), and the progressivecomponent in the 2009 modulation alls ar short o the Commission’s initial proposals. It is pre-erable to eschew the complexity o European negotiations on increasing progressive modulationor on ending the historical model or SFP allocation to armers.26 Fourth, granting the memberstates a discretionary envelope avoids part o the pro-reorm energy being wasted on pushing oran allocation o the SFP that avors small and poor armers.27 It also ensures against the danger o some improvements in this sense being instrumentalized to hail a mediocre reorm as a victory.

Flexibility to target the discretionary envelope at political constraints: Governmentscould use the enhanced leeway in allocating the SFP, together with other income support andarm productivity programs, so as to best respond to the social and political circumstances on theground.28 In this way, they could direct the money to those armers whose losses rom reormare a binding constraint on reorm.

Flexibility to shit payments to public goods: Every country could shit as much moneyaway rom the SFP as is possible under its political constellation. First, more progressive coun-tries that want to make ecient use o public money can adopt bolder phase-out strategies. I,

by contrast, EU unds were to be dedicated to a rst pillar with a limited scope or public goodpolicies, more money would go to the SFP than necessary: even those countries that would preer



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to promote public goods would attempt to get as much EU-unded rst pillar money as possible.Second, a discretionary envelope permits fexibility over time. Countries can thus transer ad-ditional money to public good policies, or instance as water shortages call or investments inwater-saving arming practices.

Clean public goods pillar instead o dirty second pillar: Introducing a new public goodspillar instead o attempting to prune the existing second pillar is likely to produce better results.The current array o permissible second pillar payments is excessively broad and the quality o spending deplorable.29 In the uture, the second pillar would run the risk o being abused evenmore blatantly as the ocial arm income support instruments are being curtailed. The resultcould be worse than the SFP, with higher transaction costs in administration and greater distor-tions.30 The necessary resh start would be easier with a ormal transition to a new public goodspillar requiring a principled debate without any priors. Furthermore, the leeway granted underthe discretionary pillar to temporarily continue established, ineective policies would acilitatea rigorous selection o policies that qualiy or the public goods pillar.

4.3 SFP ToP-UPS

Governments would be ree to top up the SFP beyond what their discretionary envelopes canpay or. This is already permitted or the new member states that receive relatively ew decoupleddirect aids (under the Single Area Payment Scheme). In the uture, all member states would havethis right, albeit within limits that decrease over time.

A rst advantage would be to ease pressure on the EU budget by allowing member states to assistarmers. The discretionary pillar could be scaled back more quickly i additional national moneycan compensate armers. Furthermore, such a move would shit political pressure rom the Eu-ropean to the national level. The SFP lobby will direct part o its resources at their government

to secure additional transition payments instead o throwing their entire weight into blockingEU-level reorm. And nally, such a solution would unmask the hypocrisy o those governmentsthat argue or the vital unctions o the SFP as long as it is paid or by Brussels but reuse to shitparts o the expenses to their national budgets.

4.4 SIngLE mARkET

There is no reason to ear additional distortions to the single market, neither rom the introduc-tion o the discretionary pillar nor rom the possibility to top up the SFP. Compared to the cur-rent situation, the absolute dierences in payment levels o possibly distorting policies would bealling as payment levels decrease over time: i armers in comparable situations get€20,000 and

€10,000 respectively today, this is more worrisome than the gap between €5,000 and€2,500in the uture. What is more, the EU-unded base SFP is likely to be distributed more equally thanthe current SFP.31 Finally, current distortions would be scaled back by cutting arm modernizationpayments (indirectly, by placing them in the discretionary envelope) that are employed highlyunevenly across the member states. In sum, the proposed structure would level an already skewedplaying eld.

5. criteriA for the AllocAtion of cAP PAyments

So far, it has been argued that undamental change in the CAP instruments is necessary – includ-ing a phase-out o the SFP – and that this could best be achieved by also modiying the structure



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o the CAP. I change in instruments and possibly also structure materializes, this will increasethe chances that the distribution o CAP unds across countries will also be adapted. This sectionlooks at how national envelopes have been allocated in the past, and it discusses criteria that couldreasonably shape allocation o uture CAP payments.

The assumption that uture distribution, compared to past practice, will be guided more by ra-tional criteria and less by historic subsidy receipts is plausible. Any change on the scale to be ex-pected is hard to imagine without a principled approach. Also, the structural unds – comparableto the CAP in size and nature – are assigned according to a distribution key determined by policyobjectives. The arbitrary allocation o CAP payments relying on increasingly outdated reerenceperiods is thus an anomaly likely to be corrected.

5.1 FIRST PILLAR/dISCRETIonARy EnvELoPES

Past allocation

When the SFP was introduced in 2003, the money that was reed up by removing subsidies thathad hitherto been coupled to production was transerred to national SFP envelopes in accord-ance with member states’ previous receipts o coupled subsidies.32 Member states enjoyed somelatitude in how they distributed the SFP to armers. They could choose between three models:the historic model, where payments correspond to the level o subsidies each armer had receivedduring the 2000-2002 reerence period; the regional model, where governments dene one orseveral regions within their borders and pay a regionally xed rate per hectare that has been eligi-

ble or subsidies during the 2000-2002 reerence period; and a hybrid model that combines thesetwo approaches. Payments were to be reduced by 3% in 2005, 4% in 2006, and 5% in every yearthereater. The money generated through such modulation was to be transerred to the second pil-lar o the CAP. The way the money was to be allocated to countries was supposed to take account

o agricultural area, agricultural employment, and GDP per capita in purchasing power. However,at least 80% o the money should remain in the country where it has been generated.

The 2008 Health Check maintained this approach although there were complaints about unjustand outdated national envelopes, notably rom Eastern Europe. The additional money reed upthrough reinorced modulation (gradually rising to 10% in 2012 or payments above EUR 5,000,plus an extra 4% or amounts exceeding EUR 300,000) was again shited to rural development.

Table 5 shows the disparity o the national rst pillar envelopes. At the top comes Greece withan astonishing€544 per hectare; at the bottom is Latvia with a meager €83. The 2013 guresrefect the rst year when the new member states receive their ull envelopes – until then, theyare getting even less as their payments are progressively phased in.33The data sources or this and

all the ollowing tables can be ound in the annex.



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tAble 5: 2013 AllocAtion of first PillAr enveloPes

mEmBER STATES €mILLIon % ShARE PER hA

Austria 752 1.65 236

Beliu 615 1.35 447

dear 1,049 2.30 394Fila 571 1.25 249

Frace 8,521 18.70 310

gera 5,853 12.84 346

greece 2,217 4.86 544

Irela 1,341 2.94 324

Ital 4,370 9.59 343

Luebur 37 0.08 283

neterlas 898 1.97 469

Prtual 606 1.33 174

Spai 5,139 11.28 206

Swee 771 1.69 247

Uite ki 3,988 8.75 247

eu-15 36,727 80.58 295

Bularia 742 1.63 243

Cprus 53 0.12 366

Czec Republic 909 1.99 258

Estia 101 0.22 112

huar 1,319 2.89 312

Latia 146 0.32 83

Lituaia 380 0.83 143malta 5 0.01 494

Pla 3,045 6.68 197

Raia 1,620 3.55 118

Slaia 388 0.85 200

Sleia 144 0.32 295

eu-12 8,853 19.42 185

Bularia a Raia: 2015 etitleets

Future allocation

The same factors can be expected to determine distribution independently o whether memberstates hold on to the current two-pillar structure or move to the proposed new structure. Neitherthe rst nor the discretionary pillar is targeted at public goods; their distribution will be shaped

by the staying power o old entitlements, concerns over distortions in the common market, andairness considerations.

Three criteria, in particular, look likely to infuence uture allocation o the rst pillar/discretion-ary envelopes: The greater the 2013 rst pillar envelope, the greater the agricultural area, andthe higher the GDP per capita, the greater the uture envelope. Even i member states will notormally ollow an allocation ormula, one can expect results to refect these criteria.



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2013 frst pillar envelope: The ocial argument will go that a country with a large rst pil-lar envelope in 2013 will have to pay a relatively substantial amount o income-supporting andproductivity-increasing subsidies ater 2013 in order to avoid hardship and appease arm protests.This issue could in principle be addressed when reorming EU budget nancing by (temporarily)lowering contributions o those countries whose rst pillar envelopes are sharply reduced. But

since governments nd it dicult to shit money within their budget, some responsiveness to pastpayment levels can be expected. The real importance o 2013 rst pillar envelopes will be basedon bargaining power: the old distribution will serve as starting point or negotiations, and thosewho avor change will be the demandeurs.

Agricultural area: One justication or this criterion is that dierences in support levels perhectare across armers threaten to distort competition. Even i distortions are considered to besmall, the argument that agricultural area should be rewarded similarly across Europe appeals to

basic ideas o equality and the spirit o European integration. In addition, CAP beneciaries areclaiming that even the rst/discretionary pillar promotes public goods. To the extent that this as-sertion wields infuence, agricultural area commands supplementary legitimacy as an allocation

criterion since the creation o public goods is roughly proportional to agricultural area.34

GDP per capita: In richer member states, wages in non-agricultural jobs that are comparable toagricultural employment are higher. So a higher level o income support is needed to ascertain aair standard o living or armers and prevent land abandonment. Furthermore, fattening incomesupport across Europe without taking account o dierences in GDP per capita would lead toexcessively high support in poor member states and thus increase distortions in the economy. Theinclusion o GDP per capita may be resented or contradicting the principle o European solidar-ity. But agricultural policies should not become a tool or accelerating economic convergence inEurope. Structural policies are more eective to this end.35

Agricultural employment appears not to be a suitable candidate or guiding uture subsidy al-

location. The main ormal reason against it is that armers’ entitlements to the SFP are based onland independently o the workorce they employ. Maintaining coherence between domestic andEuropean distributional criteria is appealing. Furthermore, Romania and Poland each hold closeto twenty percent o the EU’s total o ‘agricultural work units’. They would thus seize signicantshares o CAP unds rom other member states. Since these two countries do not wield sucient

bargaining power in the EU to push through such a result (especially as they are strong net ben-eciaries o the CAP and the EU budget in any case), inclusion o agricultural employment as adeterminant o subsidy allocation is unlikely. A nal obstacle arises over measurement issues.

Agricultural output is even less appropriate as an allocation criterion. In principled terms, thiswould run aoul o the very idea o the Single Farm Payment: decoupling rom production. And

rom a pragmatic point o view, such a criterion would avor more productive member stateswhose armers tend to have less diculty in surviving without income support. It would also becounterproductive because it would entice governments to stimulate production (by maintain-ing a maximum o coupled payments or investing in arm modernization) rather than promoteless intensive, environmentally riendly arming. So there are convincing arguments against theinclusion o an output criterion – and little speaking in avor it. In particular, ood security cannotserve as a justication. First, the instruments o the rst/discretionary pillar are not geared toenhance ood security; the SFP as its main component is explicitly decoupled rom production.Second, ood security is not at risk in the EU.36



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5.2 SECond PILLAR/PUBLIC goodS EnvELoPES

Past allocation

The guidelines for the distribution o rural development payments under the second pillarare vague, pointing to regional convergence objectives, historic levels o rural development pay-

ments, and undened particular situations and needs as determinants.37 The actual distributiono rural development payments or 2007-2013 largely refects member states’ 2000-2006 pay-ments. In the EU-15, these payments were made under the European Agricultural Guidance andGuarantee Fund. Their level is itsel based on rural development payments and commitments inthe 1994-99 period (under various schemes, e.g. the EU’s regional policy objective 5b). The newmember states received separate payments until 2006 under the Special Accession Programmeor Agriculture and Rural Development (Sapard). These were calculated according to armingpopulation, agricultural area, gross domestic product (GDP) per capita in purchasing power, andthe specic territorial situation.38 But the 2007-2013 distribution has also been driven by thepolitical dynamics o the December 2005 European Council (rather than by criteria related to theobjectives o the second pillar). The resulting distribution can be seen in table 6.39

tAble 6: 2013 AllocAtion of second PillAr enveloPes

mEmBER STATES €mILLIon % ShARE PER hA

Austria 511 4.00 160

Beliu 54 0.43 40

dear 62 0.48 23

Fila 272 2.13 118

Frace 906 7.10 33

gera 1,131 8.86 67

greece 619 4.85 152

Irela 307 2.41 74

Ital 1,258 9.86 99

Luebur 12 0.09 90

neterlas 67 0.52 35

Prtual 564 4.42 162

Spai 1,041 8.16 42

Swee 239 1.87 77

Uite ki 267 2.09 17

eu-15 7,310 57.27 59

Bularia 396 3.10 130

Cprus 21 0.16 144

Czec Republic 418 3.27 119

Estia 113 0.89 125

huar 579 4.53 137

Latia 151 1.18 85

Lituaia 254 1.99 96

malta 11 0.08 1,032

Pla 1,850 14.49 120

Raia 1,233 9.66 90

Slaia 317 2.49 164

Sleia 112 0.88 229

eu-12 5,454 42.73 114



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Future allocation

Which criteria could determine the distribution o the second pillar/public goods envelopesin the uture? This depends partly on whether the old or a new structure will prevail (see below).It also depends on which public goods will be promoted.40There are our prominent categorieso public goods argued to be dependent on agriculture: rural development, ood security, the

environment, and ood saety and animal welare.

Regarding rural development, it is questionable whether governments should infuence wherepeople work and live. But even i one believes that it is a worthy objective to conserve existingsettlement structures against the changing preerences o the population, one should not resortprimarily to agricultural policies. Ecient approaches to promoting rural development would benon-discriminatory across sectors. This is the case with investment into inrastructure and educa-tion. Alternatively, they would be targeted at the particular potential o each region, depending onits location, natural and cultural richness, entrepreneurial spirit, or existing industrial and servicestructure. Finally and decisively, rural development is not a European public good. I countrieswish to subsidize a more decentralized settlement structure, this is a national choice that will not

signicantly aect European welare.Food security is not threatened in the EU. The EU has the purchasing power to source suppliesrom the world market. In the case o persistent and severe production shortalls within the EUcombined with a blockade o ood imports, countries could easily expand cultivated areas, usemore intensive arming methods and shit production patterns to increase yields. In particular,curbing the production o meat, milk, and biouels could ree up capacity or growing basic grains.51 million hectares were used as pastures and permanent meadows in 2005, compared to 100million hectares o arable land; in addition, much arable land serves eed stu production.

Whereas rural development and ood security do not qualiy or EU intervention, several Euro-pean public goods can be identied in the environmental eld.

The ght against climate change is a joint European challenge that goes beyond allocat-•

ing national emission ceilings to the member states. Since monitoring the implementa-tion o emission trading in agriculture is dicult, payments may be needed to inclinearmers to go beyond legal minimum requirements.

The protection o biodiversity is an EU task. Animals cross borders, and so does bi-•

odiversity-threatening pollution. Besides, preserving biodiversity in Europe can bethought o as a European responsibility on the global stage.

One can argue that the EU shares an interest in the amenity value o its landscapes.•

Most benets o a diverse, traditional, well-kept landscape will be reaped within the

country – by direct enjoyment, as an advantage to attract qualied human resources,or through tourism. Still, travelers may not pay or all the pleasure they take in thelandscapes o other member states.

The risk o foods is infuenced by agriculture. What armers grow and where, how they•

manage their soils, how they handle water courses, such issues are crucial or food con-trol. And since rivers cross borders, the case or a European dimension can be made.

Another argument or payments is that they can help armers to implement EU legislation onood saety and animal welare. There might exist a common EU interest in such assistance inorder to enable more demanding legislation – without driving agricultural production to oreignlow-standard suppliers – and to enhance compliance. Consumers who almost inevitably eat ood



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rom dierent areas o the common market, and animal rights promoters whose eelings do notstop at borders, stand to benet.

It is questionable whether this justication is valid or whether armers should incur the ull costso compliance with EU legislation (according to the polluter pays principle). Several considera-

tions speak against leakage o production to oreign countries with less demanding environmentalstandards. First, imported ood must in any case meet many o the EU’s standards, notably thoseon human, animal, and plant health. Second, the additional costs o complying with environmen-tal standards in agriculture appear generally moderate. Even with regard to animal welare, wherecompliance costs are particularly high and cannot largely be recuperated through price premia,pressures to relocate production are mostly minor.41 Third, land is a key actor o productionspecic to agriculture – and one that cannot be moved abroad. This limits the extent to whichdomestic production will be replaced by oreign production.

I some agricultural production is transerred in response to high EU standards, this is not inevi-tably undesirable. Most environmental problems caused by agriculture are local (or instance,ground water pollution or soil erosion). It is thereore ecient that every country decides on the

environmental standards that best conorm to its level o development and other characteristics,such as population density and non-agricultural sources o environmental pollution. Even wherea global public good is concerned, such as biodiversity or the climate, it is not clear whether acountry with higher standards has indeed a better environmental perormance. A country withrelatively high environmental standards may at the same time employ relatively polluting pro-duction techniques – or instance because land is scarcer while agro-chemicals and machines arecheaper than in other countries, or because its cold climate requires using energy to keep animalsin stables while animals can graze reely in other countries throughout the year. A transer o pro-duction to countries with lower standards is not necessarily harmul to the global environmentalcommons.

It is thereore unlikely that ood saety and animal welare will be a dominant actor in the distribution o uture CAP payments. It may, however, come into play as a supporting argument orcertain allocation criteria.

In order to derive the optimal allocation o EU public goods unds or environmental – andpossibly ood saety and animal welare – objectives, one has to determine or each country 1)to what extent these goods would be undersupplied without EU unding, 2) how valuable theirsupply is or the EU, and 3) how eective EU payments are in promoting their supply. Since EUdecision-makers will never ascertain these actors, the distribution o EU public goods unds can

be assumed to ollow some simple criteria.42

Such criteria will have to rest on an unambiguous justication. This makes it improbable that

member states will agree on a GDP-based criterion. The ambivalence in this regard is that, onthe one hand, one can make a case in avor o investing a relatively large amount o EU resourcesin poor countries where the production o public goods is relatively cheap (turning Bulgaria andRomania into biodiversity havens and carbon sinks). On the other hand, relatively high levels o EU payments are needed to encourage armers in rich member states to produce a minimumsupply o public goods. Due to this ambivalence, dierences in GDP will preerably be accountedor through dierentiated co-nancing rates.

Furthermore, allocation criteria will have to be easily applicable and resistant to abusive claims.Highly targeted allocation to the member states that have the greatest need or that are undertak-ing the greatest eort to advance European public goods is thus not workable. For instance, one



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might believe that high nature value areas deserve additional EU unding. The problem with sucha criterion is that it would be poorly dened and open to abuse, leading to inextricable disputesduring reorm negotiations and resulting in a distorted allocation.43The past experience o an EUaverage o 57% o agricultural area declared as Less Favored Area should serve as a warning.

Finally, such criteria must not be responsive to the severity o the environmental challenges in thedierent member states in a way that would reward poor stewardship o environmental goods. Inthe best case, successul environmental protection is recompensed.

Based on these considerations – unambiguous justication, clear-cut application, and adequateincentive eects – our criteria appear to have the best chances o driving the allocation o thepublic goods envelopes.44The greater member states’ agricultural, orest, Natura 2000, and or-ganic arming areas, the greater their uture envelopes.

Agricultural area: Agricultural area is loosely related to the need or unds to promote all theEuropean public goods. This relationship is most straightorward when it comes to enhancing theamenity value o landscapes but also reasonably close or climate protection, biodiversity preser-

vation, and water management measures. Agricultural area can similarly serve as a proxy or theunds needed to ensure ood saety and animal welare.

Forest area: Forest land is eligible or second pillar support and would remain so under a publicgoods envelope. The importance o responsible orest stewardship is increasingly being recog-nized. Member states with signicant orest areas can make a strong case or obtaining paymentsto enhance the environmental value o their orests. Furthermore, excessively penalizing orestarea compared to agricultural area, given the contribution o orests to ghting climate change,should be avoided.

Natura 2000 area: The size o Natura 2000 areas is a suitable criterion or our reasons. First,it is clearly designated and registered.45 Second, member states that designate Natura 2000 areas

pay a price as they have to ulll strict EU requirements that limit land use. It is thus air to rewardsuch eorts. Third, the compliance costs make it unlikely that member states grant Natura 2000status at an excessive scale to bias CAP allocations in their avor. Fourth, i the impact o Natura2000 areas on CAP allocation nevertheless disposes member states to extend their Natura 2000areas, this would be a desirable development.

Organic arming area: Organic arming is preerable with regard to all environmental publicgoods listed above (climate, biodiversity, amenity value, food control). It also ensures higheranimal welare than traditional arming and possibly produces healthier ood. Importantly, theEU-level denition o minimum requirements or organic arming, together with a sophisticatedcertication and monitoring system, avoids abusive declarations.46

Anticipating uture subsidy allocation is more dicult i the second pillar is upheld. The problemis that the second pillar has no clear and coherent set o objectives but mixes more or less hiddenincome support, arm productivity improvements, public goods payments, and rural develop-ment programs unrelated to agriculture. It seems reasonable to assume that member states willpaper over this incongruity and pretend that the second pillar is about (European) public goods.Distribution would thus be roughly similar but not identical to the public goods envelopes. Itcan be assumed that orest, Natura 2000, and organic arming areas will receive less weight thanunder a public goods envelope. Furthermore, one can expect uture second pillar envelopes to beresponsive to 2013 levels i the old structure is upheld. Continuity in the structure will strengthenthe position o those who insist on continuity in the payments.



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6. scenArios for the AllocAtion of cAP PAyments

What distribution of CAP payments would result i the criteria proposed above were to be ap-plied? This section answers this question or several scenarios, looking at rst pillar/discretionaryenvelopes, second pillar/public goods envelopes, and the total CAP budget.

6.1 FIRST PILLAR/dISCRETIonARy EnvELoPES

Table 7 shows the characteristics o the EU member states according to the criteria or the dis-tribution o the rst pillar/discretionary envelopes identied above. This enables us to appreciatehow countries will be aected by giving greater or lower weight to a specic criterion. The tableis also helpul in interpreting the scenario results. Due to the many scenarios and member states,not every single estimate can be discussed in the paper. By reerring back to this data and the al-location ormulae, readers can explain individual estimates.

tAble 7: member stAtes’ chArActeristics relevAnt for future AllocAtion of first PillAr/discretionAry enveloPes

mEmBER STATES 2013 FIRST PILLAR AgRICULTURAL AREA gdP/CAPITA

€ illi % sare illi a % sare EU=100

Austria 752 1.65 3.19 1.85 124.7

Beliu 615 1.35 1.37 0.80 118.4

dear 1,049 2.30 2.66 1.54 117.1

Fila 571 1.25 2.29 1.33 115.5

Frace 8,521 18.70 27.48 15.93 108.1

gera 5,853 12.84 16.93 9.82 115.6

greece 2,217 4.86 4.08 2.36 96.5

Irela 1,341 2.94 4.14 2.40 143.1

Ital 4,370 9.59 12.74 7.39 99.3

Luebur 37 0.08 0.13 0.08 258.4

neterlas 898 1.97 1.91 1.11 132.2

Prtual 606 1.33 3.47 2.01 75.5

Spai 5,139 11.28 24.89 14.43 104.2

Swee 771 1.69 3.12 1.81 120.2

Uite ki 3,988 8.75 16.13 9.35 118.4

eu-15 36,727 80.58 124.55 72.21 110.3

Bularia 742 1.63 3.05 1.77 39.2

Cprus 53 0.12 0.15 0.08 92.5

Czec Republic 909 1.99 3.52 2.04 81.3

Estia 101 0.22 0.91 0.53 65.0

huar 1,319 2.89 4.23 2.45 62.6

Latia 146 0.32 1.77 1.03 55.1

Lituaia 380 0.83 2.65 1.54 60.6

malta 5 0.01 0.01 0.01 78.9

Pla 3,045 6.68 15.48 8.97 56.1

Raia 1,620 3.55 13.75 7.97 44.9

Slaia 388 0.85 1.94 1.12 70.7

Sleia 144 0.32 0.49 0.28 90.8

eu-12 8,853 19.42 47.94 27.79 --



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The next step is to combine the criteria into a ormula and apply the ormula to the data. Whereasthe selection o criteria can be analytically explained, the ormulae and resulting scenarios areinherently more arbitrary. Justication will be given or their key characteristics but many details

– notably the values given to the parameters – are chosen to produce distinct results rather than being based on predictions o likelihood.

It appears reasonable to assume that the GDP per capita will enter the allocation ormula as a cor-rection to the agricultural area:47 the higher the GDP per capita, the more payments are necessaryto keep agricultural area under utilization, to ensure a air standard o living to armers, and toappease protesting armers and land owners. Furthermore, it can be expected that the eect o GDP per capita on subsidy allocation is not linear. Very rich member states will receive less andvery poor member states more than what a linear consideration o GDP per capita would suggest.The allocation ormula is thus constructed in the ollowing way:

Future envelope = a*2013 rst pillar envelope + (1-a)*agricultural area*(GDP per capita)b + x

The multiplayer a determines to what extent uture envelopes are dependent on 2013 rst pillar

entitlements. The exponent b assigns a weight to GDP per capita that has the desirable non-linearproperties or values smaller than 1. The variable x ensures that the shares o all member states inthe uture rst/discretionary pillar add up to 100%.48

By varying the values o a and b, our scenarios are set up (see table 8). The conservative and theprogressive scenarios assign high (2/3) or low (1/3) values to the multiplier a. Consequently,2013 rst pillar entitlements weigh heavily in the conservative scenario, while agricultural area(together with GDP per capita) are more infuential in the progressive scenario. In both cases,the exponent b takes on a medium value (0.5). The other two scenarios dier in the value givento the exponent b, while a is held constant at a medium value (1/2). In the GDP-low scenario,b is at 0.3, so that GDP plays a minor role, whereas b is at 0.8 in the GDP-high scenario.

tAble 8: scenArios for future AllocAtion of first PillAr /discretionAry enveloPes

SCEnARIoS a 1-a b

2013 rst pillarAricultural area a

gdP/capitagdP/capita

Cseratie 2/3 1/3 0.5

Prressie 1/3 2/3 0.5

gdP-lw 1/2 1/2 0.3

gdP-i 1/2 1/2 0.8

The results o this calculation can be ound in table 9. It rst presents the percentage share o each member state in the 2013 rst pillar. Then, two columns show or each scenario the memberstates’ share o the uture rst pillar/discretionary envelopes together with the changes comparedto the 2013 levels. For instance, Belgium will receive 1.35% o all rst pillar entitlements in 2013which would be reduced to 1.2% under the conservative allocation ormula. This would shrinkits envelope by 11%. The scenario in which a country does best is marked in bold (the same will

be done in other tables reporting estimates).



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tAble 9: estimAtes for future AllocAtion of first PillAr/discretionAry enveloPes

mEmBERSTATES

2013 FIRSTPILLAR

ConSERvATIvE PRogRESSIvE gdP-LoW gdP-hIgh

% sare % sare cae % sare cae % sare cae % sare cae

Austria 1.65 1.81 10% 1.97 20% 1.84 11% 1.97 20%

Beliu 1.35 1.20 -11% 1.05 -22% 1.11 -18% 1.16 -14%

dear 2.30 2.12 -8% 1.93 -16% 1.98 -14% 2.07 -10%

Fila 1.25 1.33 6% 1.40 12% 1.34 7% 1.40 12%

Frace 18.70 18.20 -3% 17.70 -5% 17.72 -5% 18.25 -2%

gera 12.84 12.23 -5% 11.60 -10% 11.69 -9% 12.21 -5%

greece 4.86 4.06 -16% 3.25 -33% 3.65 -25% 3.66 -25%

Irela 2.94 2.95 0% 2.97 1% 2.84 -3% 3.14 7%

Ital 9.59 8.95 -7% 8.31 -13% 8.59 -10% 8.67 -10%

Luebur 0.08 0.10 18% 0.11 37% 0.09 13% 0.12 53%

neterlas 1.97 1.76 -11% 1.54 -22% 1.61 -18% 1.72 -13%

Prtual 1.33 1.49 12% 1.65 24% 1.61 21% 1.50 13%Spai 11.28 12.58 12% 13.92 23% 13.11 16% 13.40 19%

Swee 1.69 1.81 7% 1.93 14% 1.82 8% 1.94 15%

Uite ki 8.75 9.34 7% 9.94 14% 9.41 8% 9.96 14%

eu-15 80.58 79.93 -1% 79.27 -2% 78.41 -3% 81.18 1%

Bularia 1.63 1.47 -10% 1.31 -19% 1.50 -8% 1.26 -23%

Cprus 0.12 0.11 -9% 0.10 -18% 0.10 -14% 0.10 -14%

Czec Republic 1.99 1.97 -1% 1.94 -3% 1.98 -1% 1.91 -4%

Estia 0.22 0.29 32% 0.37 65% 0.35 56% 0.30 37%

huar 2.89 2.61 -10% 2.31 -20% 2.54 -12% 2.34 -19%

Latia 0.32 0.47 48% 0.63 96% 0.60 86% 0.49 53%

Lituaia 0.83 0.97 16% 1.10 32% 1.09 31% 0.95 14%

malta 0.01 0.01 -16% 0.01 -33% 0.01 -24% 0.01 -26%

Pla 6.68 6.78 1% 6.87 3% 7.20 8% 6.31 -6%

Raia 3.55 4.20 18% 4.86 37% 4.97 40% 3.97 12%

Slaia 0.85 0.89 5% 0.94 10% 0.94 11% 0.87 2%

Sleia 0.32 0.30 -4% 0.29 -8% 0.30 -5% 0.30 -6%

eu-12 19.42 20.07 3% 20.73 7% 21.59 11% 18.82 -3%

Table 10 presents the same inormation in a dierent way. Member states are ranked by the per-

centage changes they experience in their rst pillar/discretionary envelopes. Three groups aredistinguished: the winners who increase their share by at least 10%, the losers whose shares all

by 10% or more, and a moderately aected group in-between. The Czech Republic is abbreviatedas CZ, Luxembourg as LU, the Netherlands as NL, and the United Kingdom as UK.



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tAble 10: Winners And losers (by relAtive chAnges in first PillAr/discretionAryenveloPes)

ConSERvATIvE PRogRESSIvE gdP-LoW gdP-hIgh

Winners Winners Winners Winners

Latia 48% Latia 96% Latia 87% LU 53%

Estia 32% Estia 65% Estia 57% Latia 53%

Raia 18% Raia 37% Raia 40% Estia 37%

LU 18% LU 37% Lituaia 31% Austria 20%

Lituaia 16% Lituaia 32% Prtual 21% Spai 19%

Prtual 12% Prtual 24% Spai 17% Swee 15%

Spai 12% Spai 23% LU 14% Lituaia 14%

Austria 10% Austria 20% Austria 12% Uk 14%

Swee 14% Slaia 11% Prtual 13%

ma Uk 14% Fila 12%

Swee 7% Fila 12% ma Raia 12%

Uk 7% Slaia 10% Pla 8%Fila 6% Swee 8% ma

Slaia 5% ma Uk 8% Irela 7%

Pla 1% Pla 3% Fila 7% Slaia 2%

Irela 0% Irela 1% CZ 0% Frace -2%

CZ -1% CZ -3% Irela -3% CZ -4%

Frace -3% Frace -5% Frace -5% gera -5%

Sleia -4% Sleia -8% Sleia -5% Pla -6%

gera -5% Bularia -8% Sleia -6%

Ital -7% l gera -9%

dear -8% gera -10% l

Cprus -9% Ital -13% l Ital -10%

dear -16% Ital -10% dear -10%

l Cprus -18% huar -12% neterlas -13%

Bularia -10% Bularia -19% Cprus -13% Cprus -14%

huar -10% huar -20% dear -13% Beliu -14%

neterlas -11% neterlas -22% Beliu -18% huar -19%

Beliu -11% Beliu -22% neterlas -18% Bularia -23%

greece -16% greece -33% malta -24% greece -25%

malta -16% malta -33% greece -25% malta -26%

Several observations can be made. The main losers are countries whose highly competitive agri-culture or specialization in strongly subsidized products has led to disproportionately high 2013envelopes. This concerns Greece, Malta, Cyprus, the Netherlands, Belgium, and Denmark. Greeksuers the greatest absolute losses, and together with Malta also the greatest relative losses, as its2003 share greatly exceeds its share in agricultural area, while its GDP ranks slightly below EUaverage. Germany and France lose a little, while Irish receipts remain about unchanged (thanksto a high GDP per capita). The main winners among the EU-12 are the high-income countriesLuxembourg, Austria, Finland, Sweden, and the UK. Spain and Portugal also improve their posi-tion as they have low per hectare payments under the 2013 allocation.

Some Eastern European member states lose because o their low GDP-per-capita levels. This isthe case or Bulgaria and Hungary. In the case o other Eastern European member states, this e-



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ect is dominated by the gains rom moving rom the disadvantageous 2013 distribution towardsa scheme that pays or agricultural area more equally (Estonia, Latvia, Lithuania, Romania, andSlovakia). Not much changes or the Czech Republic, Poland, and Slovenia.

Few transers occur between the EU-15 and the EU-12. The redistribution within each group

is much more signicant and approximately neutral in the balance. Even under the GDP-lowscenario which avors new member states most, they increase their receipts only by 11%. In aGDP-high scenario, new member states lose slightly.

6.2 SECond PILLAR/PUBLIC goodS EnvELoPES

Table 11 displays member states’ characteristics according to the criteria suggested or distribu-tion o the second pillar/public goods envelopes.

tAble 11: member stAtes’ chArActeristics relevAnt for future AllocAtion of secondPillAr/Public goods enveloPes

mEmBERSTATES 2013 SECondPILLAR AgRICULTURALAREA FoREST AREA nATURA 2000 oRgAnICFARmIng

€ illi % sare illi a % sare illi a % sare 1000 ² % sare 1000 a % sare

Austria 511 4.0 3.2 1.8 4.0 2.3 18.6 1.8 372 5.2

Beliu 54 0.4 1.4 0.8 0.7 0.4 6.0 0.6 32 0.4

dear 62 0.5 2.7 1.5 0.6 0.3 5.7 0.6 145 2.0

Fila 272 2.1 2.3 1.3 23.3 13.2 68.4 6.7 148 2.1

Frace 906 7.1 27.5 15.9 17.3 9.8 89.4 8.8 557 7.8

gera 1,131 8.9 16.9 9.8 11.1 6.3 67.1 6.6 865 12.1

greece 619 4.9 4.1 2.4 6.5 3.7 37.8 3.7 278 3.9

Irela 307 2.4 4.1 2.4 0.7 0.4 9.5 0.9 41 0.6

Ital 1,258 9.9 12.7 7.4 11.0 6.2 84.1 8.2 1150 16.1Luebur 12 0.1 0.1 0.1 0.1 0.1 0.5 0.1 3 0.0

neterlas 67 0.5 1.9 1.1 0.4 0.2 8.7 0.9 47 0.7

Prtual 564 4.4 3.5 2.0 3.9 2.2 25.3 2.5 233 3.3

Spai 1,041 8.2 24.9 14.4 28.2 15.9 214.8 21.1 988 13.9

Swee 239 1.9 3.1 1.8 30.9 17.5 82.8 8.1 248 3.5

Uite ki 267 2.1 16.1 9.4 2.9 1.6 31.7 3.1 660 9.3

eu-15 7,310 57 124.5 72 141.6 80 750.6 74 5,767 81

Bularia 396 3.1 3.1 1.8 3.7 2.1 55.5 5.4 13 0.2

Cprus 21 0.2 0.1 0.1 0.4 0.2 1.4 0.1 2 0.0

Czec Republic 418 3.3 3.5 2.0 2.6 1.5 16.9 1.7 312 4.4

Estia 113 0.9 0.9 0.5 2.4 1.4 13.5 1.3 79 1.1

huar 579 4.5 4.2 2.5 1.9 1.1 27.4 2.7 122 1.7

Latia 151 1.2 1.8 1.0 3.1 1.8 13.3 1.3 150 2.1

Lituaia 254 2.0 2.6 1.5 2.2 1.2 11.8 1.2 120 1.7

malta 11 0.1 0.0 0.0 0.0 0.0 0.1 0.0 0 0.0

Pla 1,850 14.5 15.5 9.0 9.2 5.2 69.3 6.8 285 4.0

Raia 1,233 9.7 13.8 8.0 6.6 3.7 31.5 3.1 131 1.8

Slaia 317 2.5 1.9 1.1 1.9 1.1 18.0 1.8 117 1.6

Sleia 112 0.9 0.5 0.3 1.3 0.7 11.0 1.1 29 0.4

eu-12 5,454 43 47.9 28 35.3 20 269.7 26 1,360 19



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In order to create scenarios, one needs to distinguish between a situation where the second pillarstructure survives and a situation where a new public goods pillar is established. Table 13 showstwo scenarios or the second pillar. In the conservative case, 50% o the uture envelope is deter-mined by 2013 envelopes, 20% by agricultural area, and 10% each by orest, Natura 2000, andorganic arming areas. In the progressive case, 2013 envelopes account or only 20% o uture

envelopes, while agricultural area determines 50%. The weights o orest, Natura 2000, andorganic arming areas remain unchanged at 10%.

The table also presents our scenarios or the public goods case in which 2013 envelopes are ir-relevant. One emphasizes agricultural area, two assign particular weight to Natura 2000/organicarming besides agricultural area, and the last assumes that agricultural area, Natura 2000, andorganic arming receive equal weights.

The weight or orest areas is held constant at 10% in all scenarios. Giving greater importance toorest areas is not considered as an option because this would transer even more money to themain winners rom reorm;49 it would thus be politically unacceptable.

tAble 12: scenArios for future AllocAtion of second PillAr/Public goods enveloPes

SCEnARIoS2013 SECondPILLAR

AgRICULTURALAREA

FoREST AREA nATURA 2000oRgAnICFARmIng

Sec pillarcseratie

0.5 0.2 0.1 0.1 0.1

Sec pillarprressie

0.2 0.5 0.1 0.1 0.1

Public sarea-cuse

0 0.7 0.1 0.1 0.1

Public snatura-cuse

0 0.4 0.1 0.4 0.1

Public s

raic-cuse 0 0.4 0.1 0.1 0.4

Public sultiuctial

0 0.3 0.1 0.3 0.3

In all scenarios, the allocation ormula is simply the sum, or all criteria, o member states’ sharein the criterion (see table 11) and the corresponding weight or the criterion (see table 12). 50 Table 13 presents member states’ shares o the second pillar allocation or 2013 together with theconservative and progressive second pillar scenarios.



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tAble 13: estimAtes for future AllocAtion of second PillAr enveloPes

mEmBERSTATES

2013 SECondPILLAR

ConSERvATIvE PRogRESSIvE

% sare sare cae sare cae

Austria 4.00 3.30 -18% 2.66 -34%

Beliu 0.43 0.52 21% 0.63 47%

dear 0.48 0.84 75% 1.16 141%

Fila 2.13 3.52 66% 3.28 54%

Frace 7.10 9.37 32% 12.02 69%

gera 8.86 8.89 0% 9.18 4%

greece 4.85 4.03 -17% 3.28 -32%

Irela 2.41 1.87 -22% 1.87 -22%

Ital 9.86 9.47 -4% 8.73 -11%

Luebur 0.09 0.08 -17% 0.07 -23%

neterlas 0.52 0.66 26% 0.83 60%

Prtual 4.42 3.41 -23% 2.69 -39%

Spai 8.16 12.05 48% 13.93 71%

Swee 1.87 4.20 124% 4.18 123%

Uite ki 2.09 4.32 106% 6.50 210%

eu-15 57.27 66.53 16% 71.01 24%

Bularia 3.10 2.68 -14% 2.28 -27%

Cprus 0.16 0.14 -16% 0.11 -30%

Czec Republic 3.27 2.80 -15% 2.43 -26%

Estia 0.89 0.93 5% 0.82 -8%

huar 4.53 3.30 -27% 2.68 -41%Latia 1.18 1.31 11% 1.27 7%

Lituaia 1.99 1.71 -14% 1.57 -21%

malta 0.08 0.04 -48% 0.02 -76%

Pla 14.49 10.64 -27% 8.98 -38%

Raia 9.66 7.29 -25% 6.78 -30%

Slaia 2.49 1.92 -23% 1.51 -39%

Sleia 0.88 0.72 -18% 0.54 -39%

eu-12 42.73 33.47 -22% 28.99 -32%



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Table 14 provides the results or the remaining public-goods-pillar scenarios.

tAble 14: estimAtes for future AllocAtion of Public goods enveloPes

mEmBERSTATES

AREA-FoCUSEd nATURA-FoCUSEd oRgAnIC-FoCUSEd mULTIFUnCTIonAL

% sare cae % sare cae % sare cae % sare cae

Austria 2.22 -44% 2.22 -45% 3.24 -19% 2.89 -28%

Beliu 0.70 64% 0.64 50% 0.60 40% 0.59 38%

dear 1.37 185% 1.08 124% 1.52 215% 1.28 164%

Fila 3.13 47% 4.74 123% 3.35 57% 4.35 104%

Frace 13.79 94% 11.64 64% 11.35 60% 10.73 51%

gera 9.37 6% 8.40 -5% 10.07 14% 9.19 4%

greece 2.78 -43% 3.19 -34% 3.24 -33% 3.36 -31%

Irela 1.87 -22% 1.43 -41% 1.32 -45% 1.21 -50%

Ital 8.23 -16% 8.49 -14% 10.86 10% 10.15 3%

Luebur 0.07 -26% 0.06 -34% 0.06 -37% 0.06 -39%

neterlas 0.95 82% 0.87 68% 0.82 56% 0.81 55%

Prtual 2.21 -50% 2.35 -47% 2.58 -42% 2.55 -42%

Spai 15.19 86% 17.17 111% 15.02 84% 16.40 101%

Swee 4.17 123% 6.06 224% 4.67 149% 5.77 208%

Uiteki

7.95 279% 6.07 190% 7.92 278% 6.68 219%

EU-15 74.00 29% 74.41 30% 76.61 34% 76.01 33%

Bularia 2.01 -35% 3.11 0% 1.53 -51% 2.43 -22%

Cprus 0.10 -40% 0.12 -30% 0.08 -50% 0.10 -40%

CzecRepublic

2.18 -33% 2.06 -37% 2.88 -12% 2.57 -22%

Estia 0.75 -16% 0.99 11% 0.92 4% 1.02 15%

huar 2.26 -50% 2.34 -48% 2.04 -55% 2.16 -52%

Latia 1.24 4% 1.32 11% 1.56 32% 1.51 27%

Lituaia 1.48 -25% 1.37 -31% 1.53 -23% 1.44 -28%

malta 0.00 -94% 0.00 -95% 0.00 -96% 0.00 -96%

Pla 7.88 -46% 7.22 -50% 6.39 -56% 6.45 -56%

Raia 6.45 -33% 4.98 -48% 4.61 -52% 4.24 -56%

Slaia 1.23 -50% 1.43 -43% 1.39 -44% 1.47 -41%

Sleia 0.42 -52% 0.66 -25% 0.46 -48% 0.60 -31%

EU-12 26.00 -39% 25.59 -40% 23.39 -45% 23.99 -44%



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Table 15 ranks the winners (whose shares in payments increase by at least 10%), the losers (whoseshares all by at least 10%), and the moderately aected group in-between.

tAble 15: Winners And losers (by relAtive chAnges in second PillAr/Public goods enve-loPes)

conservAtive ProgressiveAreA-focused

nAturA-focused

orgAnic-focused

multi-functionAl

Winners Winners Winners Winners Winners Winners

Swee 124% Uk 210% Uk 279% Swee 224% Uk 278% Uk 219%

Uk 106% dear 141% dear 185% Uk 190% dear 215% Swee 208%

dear 75% Swee 123% Swee 123% dear 124% Swee 149% dear 164%

Fila 66% Spai 71% Frace 94% Fila 123% Spai 84% Fila 104%

Spai 48% Frace 69% Spai 86% Spai 111% Frace 60% Spai 101%

Frace 32% nL 60% nL 82% nL 68% Fila 57% nL 55%

nL 26% Fila 54% Beliu 64% Frace 64% nL 56% Frace 51%

Beliu 21% Beliu 47% Fila 47% Beliu 50% Beliu 40% Beliu 38%Latia 11% Latia 11% Latia 32% Latia 27%

ma ma Estia 11% gera 14% Estia 15%

ma Latia 7% gera 6% Ital 10%

Estia 5% gera 4% Latia 4% ma ma

gera 0% Estia -8% Bularia 0% ma gera 4%

Ital -4% l gera -5% Estia 4% Ital 3%

l Estia -16%

l Ital -11% Ital -16% l l l

Bularia -14% Lituaia -21% Irela -22% Ital -14% CZ -12% CZ -22%

Lituaia -14% Irela -22% Lituaia -25% Sleia -25% Austria -19% Bularia -22%

CZ -15% LU -23% LU -26% Cprus -30% Lituaia -23% Austria -28%

Cprus -16% CZ -26% Raia -33% Lituaia -31% greece -33% Lituaia -28%

greece -17% Bularia -27% CZ -33% LU -34% LU -37% greece -31%

LU -17% Raia -30% Bularia -35% greece -34% Prtual -42% Sleia -31%

Austria -18% Cprus -30% Cprus -40% CZ -37% Slaia -44% LU -39%

Sleia -18% greece -32% greece -43% Irela -41% Irela -45% Cprus -40%

Irela -22% Austria -34% Austria -44% Slaia -43% Sleia -48% Slaia -41%

Prtual -23% Pla -38% Pla -46% Austria -45% Cprus -50% Prtual -42%

Slaia -23% Sleia -39% huar -50% Prtual -47% Bularia -51% Irela -50%

Raia -25% Prtual -39% Prtual -50% Raia -48% Raia -52% huar -52%

Pla -27% Slaia -39% Slaia -50% huar -48% huar -55% Pla -56%huar -27% huar -41% Sleia -52% Pla -50% Pla -56% Raia -56%

malta -48% malta -76% malta -94% malta -95% malta -96% malta -96%

Some EU 15 member states see their envelopes sharply reduced. This applies to Greece, Ire-land, Luxembourg, Austria, and Portugal. But most experience even stronger increases, namelyBelgium, Denmark, Spain, France, the Netherlands, Finland, Sweden, and the UK. Germanyand Italy gain moderately under an organic-ocused scenario but may lose somewhat in otherscenarios.

Almost all new member states lose in all second pillar and public goods scenarios. The only excep-



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tion is Latvia and Estonia. Latvia is the only consistent winner, especially in the organic-ocusedor multiunctional cases. Estonia also benets, except under the progressive second pillar and thearea-ocused public goods scenarios.

Transers rom the new to the old member states are remarkable. The old member states increase

their share by 16% (24%) in the conservative (progressive) scenario and by up to 34% in theorganic-ocused public goods scenario.

It is important to note that this distribution will change as new member states with relativelysmall Natura 2000 and organic arming areas catch up. However, they will never increase theseareas to such an extent that they will obtain the 43% o any uture second/public goods pillar thatthey are currently being granted under the second pillar.

6.3 ToTAL CAP EnvELoPES

The implications for the uture allocation o total national CAP envelopes can be seen by com-

bining the (sub-)scenarios or the rst/discretionary and the second/public goods pillars. Threescenarios or the uture CAP budget allocation are dened in table 16. In the rst case, the oldstructure is maintained and both the rst and the second pillar are distributed according to therespective conservative scenarios (see Sections 6.1 and 6.2). Accordingly, this CAP scenario islabeled conservative.

The other two cases envision more ambitious reorm. It is assumed that the structure is reormed,so that the second pillar is replaced by a public goods pillar. These CAP scenarios are dubbedarea-ocused and multiunctional, respectively, because the public goods pillar is distributed onceaccording to the area-ocused and once according to the multiunctional scenario. The discretion-ary pillar is assumed to be distributed progressively, giving greater weight to agricultural area andGDP per capita and less to 2013 entitlements.

Creating scenarios or total CAP envelopes requires determining which share o the CAP budgetwill be spent on which pillar. It is assumed that two thirds o the CAP remains in the rst pillarin the conservative CAP scenario, that is, i the structure is not reormed and payments or bothpillars are distributed conservatively. I reorm turns out to be more dynamic, leading to a newstructure with a progressively distributed discretionary pillar, it is assumed that two thirds o theCAP budgets are spent on the public goods pillar.51

tAble 16: scenArios for future AllocAtion of the cAP budget

scenArios sub-scenArio choice sub-scenArio Weights

First/iscretia

pillar

Sec/public

s pillar

First/iscretia

pillar

Sec/public

s pillar

Cseratie cseratie cseratie 2/3 1/3

Area-cuse prressie area-cuse 1/3 2/3

multiuctial prressie ultiuctial 1/3 2/3

Taking the estimates rom tables 9, 13, and 14 and combining them with the weights rom table16 leads to the estimates in table 17.



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tAble 17: estimAtes for future AllocAtion of the cAP budget

mEmBERSTATES

2013 CAPShARE

ConSERvATIvE AREA-FoCUSEd mULTIFUnCTIonAL

% sare cae % sare cae % sare cae

Austria 2.16 2.31 7% 2.14 -1% 2.59 20%

Beliu 1.15 0.97 -15% 0.82 -29% 0.74 -35%

dear 1.90 1.69 -11% 1.56 -18% 1.49 -22%

Fila 1.44 2.06 43% 2.55 77% 3.37 133%

Frace 16.16 15.26 -6% 15.09 -7% 13.05 -19%

gera 11.97 11.12 -7% 10.11 -16% 9.99 -17%

greece 4.86 4.05 -17% 2.94 -40% 3.32 -32%

Irela 2.82 2.59 -8% 2.24 -21% 1.80 -36%

Ital 9.65 9.12 -5% 8.26 -14% 9.54 -1%

Luebur 0.08 0.09 7% 0.08 -2% 0.07 -11%

neterlas 1.65 1.39 -16% 1.15 -30% 1.05 -36%

Prtual 2.01 2.13 6% 2.02 1% 2.25 12%

Spai 10.59 12.40 17% 14.76 39% 15.57 47%

Swee 1.73 2.61 51% 3.42 98% 4.49 159%

Uite ki 7.29 7.66 5% 8.61 18% 7.77 6%

eu-15 75.48 75.46 0% 75.75 0% 77.10 2%

Bularia 1.95 1.87 -4% 1.78 -9% 2.06 5%

Cprus 0.13 0.12 -8% 0.10 -24% 0.10 -24%

Czec Republic 2.27 2.24 -1% 2.10 -8% 2.36 4%

Estia 0.37 0.50 37% 0.62 69% 0.80 119%

huar 3.25 2.84 -13% 2.28 -30% 2.21 -32%Latia 0.51 0.75 48% 1.03 103% 1.22 138%

Lituaia 1.09 1.21 12% 1.36 25% 1.32 22%

malta 0.03 0.02 -23% 0.01 -79% 0.00 -82%

Pla 8.39 8.06 -4% 7.54 -10% 6.59 -21%

Raia 4.89 5.23 7% 5.92 21% 4.45 -9%

Slaia 1.21 1.23 2% 1.13 -6% 1.29 7%

Sleia 0.44 0.44 1% 0.38 -14% 0.50 14%

eu-12 24.52 24.54 0% 24.25 -1% 22.90 -7%

Table 18 ranks the member states by the changes in their total CAP receipts and sorts them intogroups o winners, losers, and moderately aected countries.



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tAble 18: Winners And losers (by relAtive chAnges in totAl cAP PAyments)

conservAtive AreA-focused multifunctionAl

W W W

Swee 51% Latia 103% Swee 159%

Latia 48% Swee 98% Latia 138%Fila 43% Fila 77% Fila 133%

Estia 37% Estia 69% Estia 119%

Spai 17% Spai 39% Spai 47%

Lituaia 12% Lituaia 25% Lituaia 22%

Raia 21% Austria 20%

ma Uk 18% Sleia 14%

Raia 7% Prtual 12%

Luebur 7% ma

Austria 7% Prtual 1% ma

Prtual 6% Austria -1% Slaia 7%

Uk 5% Luebur -2% Uk 6%

Slaia 2% Slaia -6% Bularia 5%

Sleia 1% Frace -7% CZ 4%

CZ -1% CZ -8% Ital -1%

Pla -4% Bularia -9% Raia -9%

Bularia -4%

Ital -5% l l

Frace -6% Pla -10% Luebur -11%

gera -7% Sleia -14% gera -17%

Cprus -8% Ital -14% Frace -19%

Irela -8% gera -16% Pla -21%

dear -18% dear -22%

l Irela -21% Cprus -24%

dear -11% Cprus -24% greece -32%

huar -13% Beliu -29% huar -32%

Beliu -15% huar -30% Beliu -35%

neterlas -16% neterlas -30% neterlas -36%

greece -17% greece -40% Irela -36%

malta -23% malta -79% malta -82%



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Table 19 presents the gains or losses in € million that will result or each member state becauseo the changes in the distribution key. It is assumed that the post-2013 CAP budget that will bedistributed to national envelopes amounts to € 55 billion (roughly the current size o the CAP).

tAble 19: cAP scenArios Absolute gAins

conservAtive AreA-focused multifunctionAl

W W W

Spai 996 Spai 2294 Spai 2738

Swee 482 Swee 931 Swee 1516

Fila 339 Uite ki 725 Fila 1058

Uite ki 204 Fila 609 Latia 388

Raia 187 Raia 566 Uite ki 261

Latia 134 Latia 288 Estia 240

Austria 79 Lituaia 148 Austria 233

Estia 75 Estia 139 Prtual 135

Lituaia 70 Prtual 8 Lituaia 131Prtual 67 Bularia 58

Slaia 14 l Czec Republic 46

Luebur 3 Luebur -1 Slaia 44

Sleia 2 malta -12 Sleia 34

Austria -13

l Cprus -17 l

malta -3 Sleia -34 Luebur -5

Cprus -6 Slaia -41 malta -12

Czec Republic -18 Bularia -95 Cprus -17

Bularia -42 Czec Republic -97 Ital -61

Beliu -95 Beliu -181 Beliu -222

dear -116 dear -190 dear -226

Irela -127 neterlas -277 Raia -242

neterlas -143 Irela -324 neterlas -329

Pla -179 Pla -465 Irela -565

huar -227 huar -535 huar -571

Ital -287 Frace -586 greece -846

greece -445 Ital -765 Pla -990

gera -470 gera -1022 gera -1089

Frace -494 greece -1058 Frace -1707

The biggest percentage gains go to Finland and Sweden as well as to the Baltic republics. Spainobtains by ar the greatest absolute gains. Other countries that stand to gain (though not alwaysunder all scenarios) are Austria, Portugal, the UK, and Romania.

Luxembourg, Bulgaria, and the Czech Republic are aected only by minor changes (oten withchanging signs in dierent scenarios). Slovenia and Slovakia win in the multiunctional but losein the area-ocused scenario.

Clear losers are Belgium, Denmark, Germany, Greece, France, Ireland, Italy, the Netherlands,Cyprus, Hungary, Malta, and Poland. Especially large changes occur under the multiunctional



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scenario: Belgium, Greece, Ireland, the Netherlands, Hungary, and Malta would lose more than30% o their CAP receipts.

There are only very moderate transers between the EU-15 and the EU-12 countries. The expla-nation or this is that the shit rom the rst/discretionary to the second/public goods pillar im-

proves the position o EU-12 countries, while the changes o the distribution key or the second/public goods pillar reduces their share.

7. conclusions

The CAP needs undamental reorm indeed. The traditional core o the rst pillar, market inter-vention and coupled subsidies, have long been discredited. But shiting money to the SFP is notthe solution – instead, the SFP should itsel be phased out. In addition, the various instrumentsconfated in the second pillar need to be reassessed. Only some o them are in principle appropri-ate to promote (European) public goods, and even ewer are actually implemented to ecientlyattain this end.

The necessary overhaul could best be realized by discarding the old two-pillar structure andreplacing it with a discretionary and a public goods pillar. The basic idea o this structure is thatcountries should enjoy fexibility in how they phase out inecient policies, while the EU reormdebate should not be clogged with the contentious details o phase-out strategies. For instance,progressive modulation, co-nancing o the SFP, and reorm o the Less Favored Area schemeare all improvements compared to the status quo but should not be attempted in the post-2013reorms. Instead o amending or scaling back inecient policies one by one, they should all begrouped in one envelope that is subject to continuous reductions.

A third topic o the reorm, besides instruments and structure, is the distribution o the CAP budget into national envelopes. Many member states, especially but not only rom the EU-12,

urge or the redistribution o national envelopes under the post-2013 CAP. This distributionalquestion is linked to the other two reorm topics. I ar-reaching changes o the instrumentsand the structure o the CAP are undertaken, this will make a more thorough re-distributiono CAP payments across member states more likely. By the same token, distributional quarrels

between governments and populist appeals to national interests are among the chie obstacles toany eciency-enhancing reorm. It is thereore critical to understand the distributional eectso reorm and to come to grips with the uture CAP allocation.

This requires identiying criteria that can inorm the uture distribution o CAP payments. Thepaper suggests several such criteria whose case can convincingly be made. In the case o the rst/discretionary pillar, these are 2013 rst pillar envelopes, agricultural area, and GDP per capita.

The distribution o uture public goods envelopes would probably be determined by agriculturalarea, orest area, Natura 2000 area, and organic arming area. I the second pillar is upheld, itsenvelopes can be expected to be also shaped by 2013 second pillar entitlements.

By combining these criteria into allocation ormulae, member states’ uture envelopes can beestimated. Some results rom the many scenarios considered in this paper shall be highlighted. Itcan be seen that several traditional deenders o the CAP are indeed likely to lose rom reorm.This concerns Belgium, France, Greece, Ireland, and Italy. However, Italy may approximatelypreserve its share under the multiunctional scenario that strongly rewards Natura 2000 areas andorganic arming. I reorm is unavoidable, the Italian motto should be: the more, the better. Bycontrast, the multiunctional scenario is especially undesirable or Belgium, France, and Ireland(compared to their results under other scenarios).



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Other countries that deend the status quo would – surprisingly – win rom reorm. This is espe-cially striking in the case o Spain that would see both its envelopes increased under any reormscenario and that would reap the greatest absolute gains o all member states. Finland would getthe third highest increase under all scenarios just ater Sweden and Latvia. For both countries, the

benets would be greater, the bolder the reorm. To a lesser extent, this also applies to reorm-

averse Portugal and Austria.

The opposite case exists as well. Denmark and the Netherlands, who avor CAP reorm (albeitless strongly than the UK and Sweden), are likely to be aced with a decreasing share in CAP pay-ments. The same is true or Germany which may turn into a CAP reorm promoter in the run-upto 2013 (due to its interest in limiting wasteul expenditures being the main net contributor to theEU budget, its rather liberal convictions in economic policy, and its commitment to environmen-tal protection). Such countries need to engage in a broad-scale debate early on, so that as manyactors as possible understand what is at stake, and commit to reorm in the name o the larger

benets to European integration, beore the street protests and behind-the-door deals come todominate the nal stages o negotiations.

A special though similar case is the UK. This country will likely increase its share in CAP payments but may nevertheless indirectly lose rom CAP reorm. The hidden drawback is that the UK may be orced to sacrice its budget rebate. In the budget review consultations, most stakeholdersexpressed a preerence or the removal o all ad hoc/historical corrections and many would liketo avoid the introduction o a generalized correction mechanism in their place. Such a change will

become harder to resist i the CAP becomes more ecient and is being distributed according torational criteria.

Sweden endorses CAP reorm in line with its liberal economic approach and pro-environmentalstance. It appears not to be aware o a more material incentive: it could be the greatest relativewinner when it comes to national CAP envelopes.

The Eastern European member states are very heterogeneously concerned. The Baltic Republicsstand to gain substantially rom CAP reorm, most so under the ambitious multiunctional CAPscenario. All other Eastern European member states can expect to gain only moderately (exceptor Romania in a scenario that heavily compensates agricultural area) – or they even risk to lose.During the next nancial ramework, most Eastern European member states would probably beserved best by advocating undamental CAP reorm while minimizing CAP expenditures.

The logic behind such a move is that this would boost their receipts rom European structuralunds. The contributions to the Budget Review consultation have made it clear that many stake-holders want to abolish EU payments to poor regions in not-so-poor member states, keeping onlyan inter-state transer mechanism to the benet o the poorest member states. And even among

those who wish to maintain the possibility to tap structural unds or all regions, most agree thatthese unds should be concentrated more strongly on less-developed member states and regions.Eastern European member states thereore have a material interest to back radical and principledCAP reorm in the spirit o the Budget Review. Ambitious changes in the notoriously rigid CAP,driven by the leitmoti o promoting European public goods, would strengthen the case or o-cusing European solidarity transers on poor (Eastern European) member states and ending theinecient web o cross-subsidies characteristic o current structural and cohesion policies.

The more Eastern European member states expand their share in the structural unds, the moreattractive it becomes to reduce the CAP budget in order to ree up money or structural unds.Even i Eastern European member states are surprisingly successul in moving towards a fat rate



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approach, they will be much better o by shiting the money to the structural unds instead. Aurther advantageous side eect would arise i CAP reorm acilitates the move towards an ex-clusively GNI-based EU budget (as Eastern European member states apparently have no interestin the exceptions or certain net contributors).

The hope is that better targeting o EU subsidies at European public goods and sound co-nancingwill reduce the importance o national envelopes in the uture. The nal winner would be the EU.

I you wish to be inormed o uture ECIPE studies and the events on agriculture, please send ane-mail to [email protected] asking that your name be put on the agriculture list.

Annex

The data or the tables has been taken rom the ollowing sources:

2013 rst pillar envelopes: Council Regulation (EC) 73/2009.

2013 second pillar envelopes: Commission Decision 2007/383/EC.

GDP per capita: Eurostat, 2008 orecast (EU27=100) in Purchasing Power Standards.

Agricultural area: Eurostat, agrarea (arable land, permanent grassland, permanent crops, andkitchen gardens), 2007.

Forest: UNECE, orest & other wooded land, 2005.

Natura 2000: DG Environment, Natura 2000 Barometer, Terrestrial Special Protection Areas andTerrestrial Sites o Community Importance, June 2008.

Organic arming: www.organic-europe.net, 2007.

literAture

BirdLie International. 2009. Could Do Better: How Is EU Rural Development Policy Deliveringor Biodiversity?

Brady, Mark, Konrad Kellermann, Christoph Sahrbacher, Ladislav Jelinek, and Antonello Lobi-anco. 2007. Environmental Impacts o Decoupled Agricultural Support: A Regional Assessment:Swedish Institute or Food and Agricultural Economics Working Paper 2007:1.

Brunner, Ariel, and Harry Huyton. 2008. The Environmental Impact o European Union Agri-cultural Subsidies in the World Trade Organization Green Box: Mimeo.

Chau, Nancy H., and Harry De Gorter. 2005. Disentangling the Consequences o Direct Pay-ment Schemes in Agriculture on Fixed Costs, Exit Decisions, and Output. American Journal of

Agricultural Economics 87 (5):1174-1181.

Commission Regulation. 2004. Commission Regulation No 796/2004 laying down detailed rulesor the implementation o cross-compliance, modulation and the integrated administration andcontrol system provided or in o Council Regulation (EC) No 1782/2003 establishing commonrules or direct support schemes under the common agricultural policy and establishing certain

support schemes or armers.



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Council o the European Union. 2005. Council Regulation (EC) No 1698/2005 o 20 September2005 on Support or Rural Development by the European Agricultural Fund or Rural Develop-ment (EAFRD).

European Commission. 2009a. Prospects or Agricultural Markets and Income in the European

Union 2008-2015: Directorate-General or Agriculture and Rural Development. ———. 2009b. Statement o Estimates o the European Commission or the FinancialYear 2010:Financial Programming 2010-2013.

European Council. 1999. Council Regulation (EC) No 1268/1999 on Community support orpre-accession measures or agriculture and rural development in the applicant countries o cen-tral and eastern Europe in the pre-accession period.

———. 2003. Council Regulation (EC) No 1782/2003 o 29 September 2003 establishingcommon rules or direct support schemes under the common agricultural policy and establishingcertain support schemes or armers and amending Regulations (EEC) No 2019/93, (EC) No

1452/2001, (EC) No 1453/2001, (EC) No 1454/2001, (EC) 1868/94, (EC) No 1251/1999,(EC) No 1254/1999, (EC) No 1673/2000, (EEC) No 2358/71 and (EC) No 2529/2001.

European Court o Auditors. 2008. Is Cross Compliance an Eective Policy?: Special Report No.8/2008.

Grethe, Harald. 2007. High Animal Welare Standards in the EU and International Trade - Howto Prevent Potential ‘Low Animal Welare Havens’? Food Policy 32:315-333.

Institute or European Environmental Policy. 2007. Final Report or the Study on HNV Indica-tors or Evaluation.

Kaditi, Eleni, and Johan F. M. Swinnen, eds. 2006. Trade Agreements, Multifunctionality and EU Ag-

riculture. Brussels: Centre or European Policy Studies.

Mantino, Francesco. 2003. The Second Pillar: Allocation o Resources, Programming and Man-agement o Rural Development Policy: Conerence Paper Prepared or the Land Use PolicyGroup Conerence on ‘Future Policies or Rural Europe - 2006 and beyond’, Brussels, March2003.

Nunez-Ferrer, Jorge. 2008. Can Reorming Own Resources Foster Policy Quality?: SIEPS Report2008/3.

OECD. 2008. Environmental Performance of Agriculture in OECD Countries. Paris: OECD.

Ramboll Management. 2007. Study to Assess the Administrative Burden on Farms Arising romthe CAP.

Velazquez, Beatriz. 2008. The Single Payment Scheme in the Impact Assessment o the CAP‘Health Check’: Paper prepared or the 109th EAAE Seminar ‘The CAP ater the Fischler Re-orm’, Vicerbo, Nov. 20-21, 2008.

Vercammen, James. 2007. Farm Bankruptcy Risk as a Link between Direct Payments and Agri-cultural Investment. European Review of Agricultural Economics 34 (4):479-500.

Witzke, Harald von, and Steen Noleppa. 2007. Agricultural and Trade Policy Reorm and In-equality: The Distributive Eects o Direct Payments to German Farmers under the EU’s NewCommon Agricultural Policy: Humboldt-Universität Working Paper No. 79/2007.



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Witzke, Harald von, Steen Noleppa, and Gerald Schwarz. 2008. Global Agricultural MarketTrends and Their Impacts on European Union Agriculture: Humboldt Universität Working PaperNo. 84/2008.

footnotes

I a rateul t Ariel Bruer, Freri Eri, kale hart, Bettia Rul a Jac Turst r elpul1.

cets earlier rats. I a als iebte t eber state a Eurpea Cissi cials w

sare teir tuts wit e. Special tas t Frééric Pert r uble-ceci all ata a

calculatis, as well as t Elizabet haes r ecellet prreai. Te prject as bee supprte b

te gera marsall Fu te Uite States.

See te rul 300 staeler ctributis te csultatis cucte b te directrate-geeral2.

Buet i 2008 as well as te cissie scietic stuies at ttp://ec.eurpa.eu/buet/rer/

ie_e.t.

Far iisters passe a ir rer, ubbe ‘healt Cec’, i 2008, wse ajr eect is t issipate3.

serius rer abitis arisi r witi Eurpe r te urati te curret acial raewr.Als, te Wrl Trae oraizati (WTo) will t elier te eteral stiulus tat as bee ifuetial

i te past laar rers 1992 a 2003: te prspects r cclui te da Ru are

ucertai – a te rat areeet te etiati table alls srt requiri uaetal CAP

aaptatis i it were t be passe. Te ai cae wul be te eetual real eprt subsiies.

Alrea i 2008, te Eurpea Cissi as ste a cerece t preset te results te ciil4.

sciet ialue a scietic reprts cucte as a iitial step te Buet Reiew. Tis prcess is

prepari te ‘real’ buet etiatis b ssteaticall ealuati bt EU spei a aci. B

te e 2009, te Cissi ites t reeal te receatis it as erie s ar, llwe

b a cuicati CAP rer i suer 2010.

See te speec b maria Fiscer Bel, te Cissier r Ariculture a Rural deelpet, at5.

ttp://eurpa.eu/rapi/pressReleasesActi.?reerece=SPEECh/09/279&rat=hTmL&ae=0&l

auae=En&uiLauae=e.

new eber states tus receie a uc larer sare i te s-calle sec ta i rst pillar6.

paets. See Secti 5.

Fr istace, a eeralize crrecti ecais cul be itruce it te gnI-base buet7.

ctributis, a subsequetl be pase ut i step wit reuctis wasteul CAP subsiies. See

als nuez-Ferrer (2008) r a prpsal a EU aci scee tat is respsie t te allcati

irect paets uer te CAP.

See Eurpea Cissi (2009b).8.

See Secti 5.2, wic als arues tat rural eelpet is t a reasable bjectie r te CAP.9.

Se te icrease aricultural pructi wile ters ecrease it. It is icult t quati tese10.

eects a estiate et caes i pructi ue t te SFP. But ee i teir et eect is zer, te

still lwer ecic eciec.

See vercae (2007).11.

See Cau a de grter (2005). Witze a nleppa (2007) sw tat st icrprate ars i12.

gera wul perate at a lss witut te SFP.

Te Britis departet r Eiret, Fari a Rural Aairs (dera) estiates te aerae cst 13.

prcessi a iiiual SFP clai i 2007-08 at £742. See ttp://www.parliaet.te-statier-ce.

c/pa/c200809/casr/c090126/tet/90126w0009.t.

See Rabll maaeet (2007).14.

See oECd (2008).15.

Bra et al. (2007) tat ecuple paets t lea t csistetl better eiretal16.

utces ta te cuple paets tat ae l bee criticize r teir eatie eiretal



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eects. kaiti a Swie (2006) equall reiall ieret a ie eiretal eects

utarete plicies.

See Eurpea Curt Auitrs (2008). See als Bruer a hut (2008) a www.ccat.wur.l.17.

Te sae ca be sai tse eleets crss cpliace tat ai t esure saet a aial18.

welare.

See Eurpea Cissi (2009a) a Witze, nleppa, a Scwarz (2008).19.

See velazquez (2008).20.

See velazquez (2008). See als te list ures ar-subsi-illiaires at www.arsubsi.r.21.

Te healt Cec rer as etee te rae istruets eliible r rst pillar ui (tru22.

Art. 68 Cucil Reulati (EC) n 73/2009), urter blurri te isticti betwee te tw pillars.

S ar, te pssibilit ‘lutar ulati’ is titl restraie.23.

oe suc saeuar sul be tat cuple paets ust at least t ecee te 2013 leel. Far24.

erizati subsiies tat t ecietl sere a public a are tus t illeible uer te

public s eelpe sul reai belw a tresl tat preets siicat icreases cpare

t 2013 leels (at least i tse cutries tat spe strl tis ite i 2013). A all ar

erizati prras sul ae t cpl wit stricter citis tat preet eiretal ar.

Itruci c-aci r te SFP – albeit a ipreet i itsel – appears t esirable because25.

it wul cplicate etiatis. hweer, te pssibilit t tp up te SFP, as iscusse belw, wul

als sare te acial bure betwee te EU a te eber states.

Re-starti te ebate abut a b scee is t aisable r siilar reass. SFP etitleets ca26.

alrea be sl, a te sul receie a e ate tru te et rer. Te SFP ces s clse t

a b tat te iscussi abut a ew b istruet wul uecessaril cplicate atters.

Tis is t t isiss te er aluable wr eaci trasparec abut paets cucte i27.

te rst place b www.arsubsi.r. debui te t tat te SFP is eee t elp sall arers

sul t priaril lea t clais r ieret repartiti but r te abliti te SFP.

oe suc r -SFP ice supprt tat eber states cul epl t ste te trasiti28.

a appease prtest is te Less Fare Area scee. Tis scee as justicati uer a public

s eelpe: re tarete prras tat presere eiretall riel ari i areas werela abaet wul be eclicall uesirable are preerable. I tis sese, te l-stai

iscussi rer te Less Fare Area paets pits it te wr irecti, bt b

leitiizi a istruet tat sul be ree a b restraii eber states t epl it r

plitical es t acilitate erall CAP rer.

See BirLie Iteratial (2009).29.

Fr istace, ari-eiretal paets ca be cuple t practices i te pructi a30.

specic crp. Tis will istrt pructi i te paets are i a cpliace ceap.

See Sectis 3.3 a 5.1 te curret ibalaces. Future leeli will result r equalizi per31.

ectare paets acrss eber states a a arers witi te sae eber state (as te

istric SFP el recees).

See Eurpea Cucil (2003).32.

Fr Bularia a Raia, were te SFP will be ull pase i l i 2016, ata as bee tae r te33.

ear 2015 as a appriati teir ‘tie-iscute’ etitleets/baraii pwer i 2013.

Te aruet tat aricultural area is a useul pr r te elier public s is ae i te et34.

secti.

Ater 2013, structural us will prbabl bece ee re beecial t Easter Eurpea cutries35.

wit lw gdP per capita, cpesati te r lesser CAP receipts. See Secti 7.

See te et secti.36.

See Cucil te Eurpea Ui (2005).37.

See Cissi Reulati (2004) a Eurpea Cucil (1999).38.



ECIPE WORKING PAPER

Te healt Cec rer as aecte tis istributi l slitl.39.

Te ter ‘public s’ is use bral. Aricultural researc a eelpet are t etie ere.40.

I researc is ace tru te CAP, it sul t be part te atial eelpes but be allcate

accri t scietic ecellece.

See grete (2007).41.

mre e-raie criteria wul be cceiable i EU plicies prescribe r wic bjecties te e42.sul be use. Fr istace, a cutr cul receie etra us eicate t f aaeet i its

f aaeet erts siicatl aect ter eber states. or it cul et specic ui r

prtecti iratr birs.

See Istitute r Eurpea Eiretal Plic (2007) te callees ieret i iicatrs r i43.

ature alue arla.

See als mati (2003). he csiers natura 2000 a raic ari but t aricultural area as44.

criteria lie t eiretal public s. A iprtat ierece is tat e accuts r aricultural

eplet, eplet/ueplet rates, a gdP per capita i rer t resp t ecic/

scial ees. Sice te preset paper assues tat eiretal serices will be te e bjectie

te uture sec/public s pillar, suc actrs pla rle.

See ttp://ec.eurpa.eu/eiret/ature/atura2000/ie_e.t.45.

See Cucil Reulati (EC) n 834/2007.46.

‘gdP per capita’ is uerst as eiati r EU aerae (EU=100) as sw i table 7. Te Sapar47.

prra r te ew eber states as als use gdP eiatis as a crrecti actr t aricultural

area (a aricultural eplet). See Article 78 Cissi Reulati (2004).

Te sare subsiies tat is t allcate b te rst tw cpets te rula is istribute48.

acrss eber states accri t teir sare base te rst tw cpets. Te prble -

allcate sares arises because gdP per capita is t epresse as a percetae sare (lie 2013 rst

pillar etitleets a aricultural area) a because it is bei epetiate.

Spai, Swee, Fila, Estia, a Latia – see Secti 6.3.49.

Fr istace, te Austria sare i te cseratie sceari ca be calculate i te llwi wa:50.

4.0*0.5+1.8*0.2+2.3*0.1+1.8*0.1+5.2*0.1.

Tis ierece i te allcati us t te tw pillars a appear ecessie. Ater all, te public51.

s pillar will be arrwer i scpe ta te sec pillar; it wul tus receie less e i ui

per istruet reais ucae. Te uerli assupti is tat us will be raicall re-allcate

acrss istruets uer te area-cuse a ultiuctial CAP scearis. oe als as t tae it

accut tat tese alues are aeraes er te et acial peri. A aerae 1/3 r iscretiar

pillar paets ca be attaie ee i iitial paets are ier prie tat te all belw 1/3 at te

e te et acial peri (presuabl 2020).

winners and losers from cap reform

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