1. THE COMMON AGRICULTURAL POLICY (CAP)

2. The significance of the CAP 20 years ago, The Economist Magazine (29 Sept 1990) said: “The Common Agricultural Policy is the single most idiotic system of economic mismanagement that the rich western countries ever devised.” Still second-most expensive EU policy (although much less than it used to be as % of EU budget) Central to acquiscommunitaire Political implications Budgetary bargaining (recall: ‘net contributor’ debate) Enlargement (2004 but also previous espec 1980s) World Trade Policy

3. How is the money spent?

4. Origin of the CAP Community’s founding bargain Agriculture then core ‘industry’ in Europe (next slide) Objectives of the CAP (Art. 33 TEC) 1. Raise agricultural productivity 2. Ensure fair standard of living for farmers 3. Stabilize markets 4. Secure independence of food supplies 5. Ensure reasonable prices for consumers Theory: allocation of resources; Redistribution through public intervention (welfare state policy). Fusion of production and income related goals. But nowadays more reliance on regulatory approach.

5. The proportion of the work force employed in agriculture and the agricultural sector’s share of GDP in individual European countries have greatly decreased since the creation of the European Community and in comparison with the US (bottom row).

6. Why is agriculture different?{i.e. why public intervention?} Continuous demand food availability indispensable on a daily basis total food demand is income and price inelastic Discontinuous supply land and farm labour are fixed in time & space weather-induced major uncertainties biological cycles in production (e.g., beef, olive oil) unexpected shocks (diseases, natural disasters etc) Result: volatility of prices (and consequently of farmers’ income)

8. Production quotas (e.g. sugar)

9. Subsidies for storage

10. Tariffs and export subsidies Consequences: Artificial pricing system rewards high production Farmers become ‘rent seekers’ (seek ‘rent’ instead of profit)

12. Recall: Community Expenditure 1960-2000 NB: decreasing share of agricultural spending as % of total expenditures.

13. What the Commission proposed (for the entire 2007-13 perspective - not annualised!)

14. What the Council agreed In Dec 2005 under UK rotating presidency

15. Source: Susan Senior Nello (2009) The European Union: Economics, Politics, and History 2nded Ch.12

16. Source: Susan Senior Nello (2009) The European Union: Economics, Politics, and History 2nded Ch.12

17. Source: Susan Senior Nello (2009) The European Union: Economics, Politics, and History 2nded Ch.12

19. CAP spending per capita,1998 Source: The Economist, February 3, 2001, p. 51

21. EU and US direct payments

23. General critique of the CAP Costly in terms of EU budget Discrimination against more efficient producers on the world market (US, developing world) Over-production: butter mountains, wine lakes... Big, northern European farmers have benefited disproportionately Expensive for consumers Expensive for taxpayers Detrimental for the environment Distortions of EU budgetary contributions

24. Reform Attempts (1) Mansholt Plan, 1968 (‘Agriculture 1980’) Controversial and radical review to restructure sector and resolve problems of farm surpluses and inadequate incomes. How? By restructuring the ‘guidance’ part of European Agricultural and Guidance and Guarantee Fund (EAGGF) But structural reform rejected by Council due to national politics, economic considerations & international economic developments. 1980s: Internal pressure due to inability to control CAP budget Hence, limit production volume (eg. milk quotas) instead of reforming price policy. But legal limit put on agricultural price support in 1988 (‘capping’) ; introduction of ‘set-aside’ scheme MacSharry 1991-92 (EU Agriculture Commissioner) New urgency of GATT: avoid collapse of Uruguay Round (CAP is market distorting) Compensation by direct aid payments to farmers Big farms required to reduce production areas 1999 Berlin Agreement on Agenda 2000 ‘multifunctionality’

25. Attempt to replace structural measures by ‘sustainable’ rural development policies (‘pillarisation’) but failure of Cork Declaration in 1995 to meaningfully redirect financing towards Pillar 2

26. Reform Attempts (2) Agenda 2000 and Mid-term Review 2003 (also called the Fischler Reform) Internal pressures: enlargement, WTO negotiations Increased direct compensation, ‘set-asides’ Sustainability and multi-functionality Limited price reductions: inter-state bargain (Shroeder-Chirac)

27. Reform Attempts (3) On-going reforms More de-coupling of subsidies and production to force farmers to respond to market forces. How? Capping: ‘Single Farm Payment’: to reduce inequity (subsidies for biggest farmers: receiving more than €100,000 annually) and WTO litigation (Doha) Total farming budget capped at €40bn until 2013 (EU-27) and direct aids phased in for new entrants Aid to farmers becomes conditional: multifunctionality and cross-compliance ↑ min. size of smallholding to eliminate ‘hobby’ farmers End state buying of all cereals except wheat for bread to eliminate food mountain Abolish requirement to leave 10% of land uncultivated For 2008/9 health check of the CAP see summary in lecture handout (ch 12 Susan Senior Nello)

28. Source: Susan Senior Nello (2009) The European Union: Economics, Politics, and History 2nded Ch.12

30. Financial Times 21 Nov 2007

32. Enlargement Challenge New MS (2004) possessed twice as much arable land and 50% more farmland per inhabitant than EU-15 Giving farmers in new MS full direct payments immediately meant disincentive to modernization. Commission decided on gradual introduction of direct payments by 2013 (10 years transition period) Increasing resistance in Germany and other net payers to pick up the CAP bill (‘net contributor’ debate) EU budget increase estimate: €8-11bn (20% of CAP budget) but EU GDP predicted to grow by much less than 5% ! Politics of bargaining especially France -Germany

33. Source: Susan Senior Nello (2009) The European Union: Economics, Politics, and History 2nded Ch.12

34. Why so difficult to reform? Part of European welfare policy Electoral politics: strength of concentrated agricultural interests, powerful farm lobbies Fusion of production & income related goals National protectionism throughout Europe Commission’s influence constrained by institutional design: management committees made up of civil servants from MS implementation rests with MS who manage ‘national envelopes’ according to own criteria & requirements Institutional insulation of CAP within Council Subsidiarity principle difficult to apply to a common policy totally funded by the EU

35. Evaluation and outlook Developments that influence the pace and shape of CAP reform (Senior Nello, 2009: 306-7) => Partial re-nationalization of agriculture?

36. Conclusion Despite major reforms (de-coupling; sustainable development) the CAP remains the 2nd largest (albeit decreasing) item of EU expenditures and it is still a source of political disputes (and grand bargains). Shape of CAP reforms influenced by weight of agricultural spending in the Community budget; GATT/WTO commitments, and public concern for safer food and more environmentally friendly agriculture ‘Health check’ of EU farm policy favours more targeted pay-outs & suggests changes to take a/c of new priorities. But will these new priorities (due to public support) mean less spending? Solution: partial re-nationalization of the CAP?

37. GMOs In Feb 2006 the WTO ruled in a long-standing trade complaint brought against the EU by the US, Canada and Argentina that the EU had applied a ‘de facto’ moratorium on approval of GM foods and crops btw June 1999 and Aug 2003 contradicting the Brussels’ claim that no such moratorium existed which effectively constitutes an unfair trade barrier.

39. Farmland in International Comparison Source: European Commission, The Agricultural Situation in the European Union, 1998 Report, p. T/24.

40. Number of farms Source: European Commission, The Agricultural Situation in the European Union, 1998 Report, p. T/24.

41. Average farm size Source: European Commission, The Agricultural Situation in the European Union, 1998 Report, p. T/24.

42. Average farm size in EU 15 Source: European Commission, The Agricultural Situation in the European Union, 1998 Report, p. T/24.