The EU is stumbling through the most disastrous crisis in its history. The only way out of the disarray, if the Eurozone survives it at all, is rigid fiscal discipline everywhere in the EU, and structural adjustments that improve the competitiveness of Europe’s economy (De Grauwe 2011).
Here is an idea. The EU is discussing a reform of the Common Agricultural Policy – CAP to almost everyone – as part of the new five-year budget plan that will be in effect from 2014. This is an opportunity for letting the CAP make a contribution to fiscal discipline.
The commission’s proposals fall short
As it happens, the calendar of policy planning in the EU has required the commission to present its legislative proposals for the CAP in the 2014–20 period, published on 12 October, just at a time when the Eurozone crisis is accelerating dramatically (see here).
This is not the commission’s fault. Nor can we expect the commission to have only macroeconomic concerns in mind when planning the EU’s agricultural policies for a period when (hopefully!) the worst of the current economic troubles may be behind us.
But we might expect to find at least some significant element of response to the overall economic and financial troubles in the package of proposals, not least because it would generally be sensible for agricultural policies, anywhere in the world, to be parsimonious by using public money in the most effective way and to strengthen the competitiveness of the farming industry so as to make it increasingly independent of government support. But, alas, that orientation is not at all transpiring from the commission’s proposals.
The same old budget shifted to new receipts
Rather than a determined effort to save big chunks of expenditure on the CAP, the overriding aim that appears to govern the proposals is to reshuffle money between different groups of farmers and policy instruments, in the hope of making the continuation of a fundamentally unchanged policy more acceptable among taxpayers and the general public.
The original idea was to keep CAP expenditure at most constant in nominal terms after 2013, and even that could not really have been considered a major saving. However, the commission’s budget proposals of June 2011 foresee some increase of agricultural expenditure in nominal terms (from €412 billion in the 2007–13 period to €423 billion in 2014–20) even under the CAP’s traditional budget heading.
In addition, through an exercise in creative accounting, there would be extra expenditure on agricultural policies of €17 billion in 2014–20, raising the total to €440 billion in nominal terms.1 In constant prices, this amounts to a reduction of no more than 7% – not really a breathtaking saving in times when public expenditure overall has to be fundamentally revised in order to correct huge fiscal imbalances in the EU’s member states.
As disappointing as the lack of response to the EU’s fundamental crisis is the absence of determination to continue with CAP reform, along the lines of the reforms initiated and implemented since 1992 by the three preceding commissioners for Agriculture, MacSharry, Fischler, and Fischer Boel.
In a nutshell, these reforms were aimed at improving the performance of the CAP by making the policy more effective through reducing economic waste and environmental damage. The OECD has recently assessed and commended these CAP reforms, and highlighted the economic and environmental benefits they have achieved (OECD 2011).
The backbone of the reforms since 1992 has been the move from price support to direct payments, and the decoupling of these payments from farm production. It required political courage and wit to push these reforms through the EU’s institutions and lobbies, but three successive commissioners managed to get them accepted, and left the CAP with a much-improved design, opening new avenues towards a more effective policy, less economic damage, greater respect for natural resources, and improved relations with the EU’s trading partners.
The big challenge: The future of direct payments
The challenge now facing the current commission is what to do with the decoupled direct payments in the future.
- The payments have successfully served the purpose of compensating farmers for sudden cuts in support prices, an essential ingredient of such fundamental policy reform.
- But 10 to 20 years down the road, and with much higher farm product prices in today’s world, the compensation argument no longer carries weight.
- The next logical step is a gradual reduction of the direct payments – shifting some of the savings to more targeted and differentiated policies (eg those found in the rural development section of the CAP).
- The rest of the savings could then help to contribute to the much-needed new discipline in public budgets.
Instead, the commission has chosen to propose the continuation of cross-the-board payments per hectare to all farmers in the EU, rather than the gradual conversion into payments per unit of public good provided.
Green paint for old-fashioned CAP compensations
It proposes to paint 30% of the per-hectare payments as green by making them conditional on compulsory agricultural practices assumed to be beneficial for the environment. This is a perfect example of the lack of efficiency and effectiveness of a cross-the-board policy as compared to targeted measures. The ‘greening’ element of the proposal mainly serves the purpose of providing a pretext for continuing to make per-hectare payments.
The proposal to redistribute payments from countries with larger payments per hectare to those with lower payments, and to introduce degressivity and capping of payments for larger farms, is advertised as aiming to improve equity. However, as long as no relationship is established between the actual income of the recipient and the amount of payment, there is no way that better equity can be effectively achieved. If I receive the same payment as my neighbour, there is no equity at all if my income is much higher than his. Again, this element of the package comes across as an attempt at suggesting features of the per-hectare payment regime that make it more acceptable in the eyes of a wider public, and at stabilising the regime by removing criticism from the side of the countries currently receiving low per-hectare payments.
Turning back the clock on past reforms
It is hard to regard these proposed changes in the system of direct payments as a policy reform in the sense of a significant break with the past. There are other elements that would actually turn back the clock on past reforms. This is particularly true of the proposal to allow member states to expand the scope of payments coupled to production.
To be fair, the package proposed by the commission also contains positive elements. Some of the changes foreseen in Pillar 2 make good sense. To place more emphasis on innovation is an excellent idea (even though the expenditure proposed for this purpose would still be only marginal relative to the overall CAP budget). Elimination of sugar quotas would constitute another welcome step in the direction of more market orientation. Allowing small farmers to take their payments up to the year 2020 with them if they leave agriculture and transfer their holding to another farmer is an innovative element with the potential to support structural adjustment.
But then there are also other new elements of a rather problematic nature. One of them is a proposed income stabilisation tool under Pillar 2. The nature of volatility in agriculture is such that hefty upward price spikes are much more pronounced than the subsequent price troughs. It is not clear why farmers should need protection against that type of volatility. Moreover, the mechanics of the stabilisation tool proposed are such that the probability of a right to payments is higher the larger the occasional price hikes turn out to be. What is more, farmers are not expected to pay money back when their incomes are particularly high – they only receive, but never contribute. This is not stabilisation, but pure old-fashioned farm support.
In presenting his proposals, EU farm commissioner Dacian Ciolos claimed that they constituted a “deep and ambitious reform that is politically viable.” But in reality the package is not geared to reform, and even less to a deep and ambitious one. It is primarily focused on a perpetuation of cross-the-board per-hectare payments rather than opening the door towards a more targeted and better performing CAP. It does, therefore, little to reduce the burden farm policy places on today’s cash-strapped public budgets. While the EU is suffering its most severe political, financial, and economic crisis, agricultural policymakers make desperate efforts to maintain an outdated and inefficient system of financial benefits for farmers. Have they lost touch with reality?
Editor’s Note: This article is a shortened version of a commentary that appeared in Agra Europe No. 2487, 1 November 2011.
De Grauwe, Paul (2011), “European summits in ivory towers”, VoxEU.org, 26 October.
Adinolfi, F, J Little, and A Massot (2011), “The CAP in the Multiannual Financial Framework 2014/2020”, European Parliament, Directorate-General for Internal Policies, Document IP/B/AGRI/NT/2011_12, Brussels: European Parliament.
OECD (2011), “Evaluation of Agricultural Policy Reforms in the European Union”, OECD.
These budget figures are from Adinolfi et al (