EPIC Publishing Updates: The European Union Explained Chapter 11: the Common Agriculture Policy
Reasons for Organizing Agriculture
Prior to the signing of the Treaty of Rome in 1957, a number of EU-specific political conditions favoured the adoption of an agricultural policy. First, in the early 1950s some 25 percent of the total workforce of the original six member states was employed in agriculture. In Italy the figure was close to 40 percent, and in France 26 percent. Although in West Germany it was only around 20 percent, farmers represented a major constituency of the ruling Christian Democrats. An agricultural policy therefore had a much larger impact on the lives of Europeans than it has today. Second, except for Luxembourg, the original member states already had a system of farm-price support. Especially in France, West Germany, and Italy, most farmers were small holders and required subsidized prizes to maintain an acceptable level of income. But against the backdrop of the establishment of a European Single Market in 1957, a unified and streamlined agricultural market simply became a necessity. The third reason for adopting an agricultural policy was the insistence of the French government, which was prepared to help get the European project off the ground only if a strong and durable system of support for prices and farm incomes was developed. France regarded the CAP as a powerful counterweight to West Germany's perceived industrial dominance within the Community. If Germany, with its strong export-oriented manufacturing industry, was to benefit from the free movement of goods, the French farmers ought to benefit from a European agricultural policy.
Table 11.1. Objectives of the CAP
• To increase agricultural productivity• To ensure a fair standard of living for farmers • To stabilize markets• To assure food supplies• To provide consumers with food at reasonable prices
Source: Article 39, Treaty of Rome, 1957.
How does the CAP work?
As a system of indirect income support for farmers, the CAP functions by separating the European Union's internal market from the world market through three distinct measures:1. A unified market: the free movement of agricultural products across all borders within the EU2. Community preference: EU products are preferred over imports from non-EU countries3. Financial solidarity: the CAP is exclusively funded from the EU budget, and national governments are not allowed to subsidize farmers' income.
Even better for European agriculture, every product is guaranteed a price higher than the world-market price that is set annually by the Council of Agriculture Ministers through unanimous voting. The EU also buys any crop surpluses from European farmers, and it imposes a duty on non-EU producers to bring the prices of their products from the (lower) world-market level to the (higher) EU level. In return, EU producers receive an export subsidy that brings the cost of their products down from their (higher) EU standard to the (lower) world-market standard (see Table 11.2). This organizational structure requires the member states to set up agencies that pay farmers for their products, and also to buy food surpluses. Member states forward the amount of their CAP expenses every month to the Commission for reimbursement. The budget of the CAP is organised into two pillars. Pillar 1, also referred to as the European Agriculture Guarantee Fund (EAGF) is by far the larger of the two with around three quarters of allocated CAP money and offers direct payment to farmers, as well as export subsidies. Pillar 2, the European Agriculture Fund for Rural Development (EAFRD) targets specific measures, such as biodiversity, organic farming, or conservation.
Table 11.2. The Pricing System of the CAP
• Target price: guarantees EU farmers a minimum price for every product.• Intervention price: the price at which CAP agencies buy off surplus products (the same as the target price)• Entry price: the price that EU importers have to pay (higher than the target price)• Levy: the duty on EU imports, which raises them to the level of the target price • Refund: given to EU exporters in order to bridge the gap between high EU prices and lower world-market prices.
The Structural Shortcomings of the CAP System
Table 11.3. The Shortcomings of the CAP
• Overproduction• Storage• Big farms benefit more than small farms• Environmental damage• Trade protectionism• Disincentive for farmers from the developing world to become self-sustainable.
Attempts to Reform the CAP
Every reform idea used a combination of these solutions to different effect. As a first serious attempt, the European Community introduced the so-called Stabilizer Reform Package of 1988. Initial negotiations were complicated by two opposing fundamental conceptions on how agriculture should be managed. On one side, Britain and Denmark argued for budgetary adjustments, production ceilings, and a producer's tax to help defray the cost of storage and export subsidies. On the other side, Belgium, France, Germany, and the Mediterranean countries emphasized the socio-cultural necessity of supporting agriculture to maintain the livelihood of rural communities, and argued for continued price support at current levels, with producers suffering only marginal penalties for exceeding their production ceilings. A number of reforms were finally adopted in 1988 (see Table 11.5), but none addressed the basic flaws in the CAP. Germany funded a compromise by paying an extra 5 billion ECU to the EC budget over the next five years (ECU refers to the European Currency Unit, a basket of European currencies that was used as a means of settlement between European central banks). Production ceilings were set for all major crops, and price penalties were imposed on producers who exceeded the ceilings. Unfortunately, the ceilings were established at relatively high levels, and the fines were low. Member states were also asked to introduce a land set-aside program, as well as early retirement schemes. However, the major problems remained: developments on the world market still did not necessarily influence EC farmers' decisions; the reforms completely ignored the problem of overproductivity; the introduction of environmental standards was not achieved; and the income gap between the highly productive minority of large agricultural producers and the economically less efficient but socially important majority of small-business farmers continued to widen.
More radical steps were needed, and these came with the 1992 MacSharry Reform Package, named after the Irish Agricultural Commissioner Ray MacSharry. By the 1990s, with the proposal of a single currency and the development of the Single Market taking centre stage in European politics, the CAP, to some degree, had lost its meaning as one of the vital cornerstones of European integration. Market intervention as practiced in the CAP was an anachronism for a community that advocated the free movement of goods, services, capital, and labour. By the 1990s, moreover, the contribution of the agricultural sector to the GDP and to overall employment had dropped significantly since the 1950s.
Table 11.5. Key Attempts to Reform the CAP
• Stabilizer Reform Package (1988)• MacSharry Reform Package (1992)• Agenda 2000 (1997)• Fischler Reform (2003) • Cioloş Reform (2013)• CAP 2023 - 2027
MacSharry was appalled by the levels of overproduction still afflicting European agriculture. In 1992, the EU generated an excess of 20 million tonnes of cereal, 1 million tonnes of dairy produce and 750,000 tonnes of beef. He attempted to solve this problem by implementing a widespread reduction in prices. For example, the intervention price for cereals dropped by 29 percent, for beef by 15 percent, and for butter by 5 percent. Land set-aside programmes were also on the agenda with large-scale farmers being asked to reduce their arable land by 15 percent. MacSharry also established a programme that subsidized farmers for up to twenty years if they set aside land with the specific aim to protect the environment. The result was a massive increase in the cost of the CAP, a consequence of the land set-aside subsidies, but also of the increased direct payments which were now handed to all farmers to the tune of 207 ECU per hectare. MacSharry argued, however, that in the long run the reduced use of agricultural land would lead to significant savings. More important, the new CAP represented a major shift from a policy of non-transparent consumer subsidies (through higher prices in supermarkets) to one of transparent taxpayer subsidies (through direct payments to farmers). Thus, the CAP was now more open to regular public scrutiny and evaluation. MacSharry's reforms also enabled the EU to come to an agreement in the General Agreement on Tariffs and Trade (GATT) rounds. After an agricultural Cold War between the U.S. and the EU that stalled negotiations for seven years, the Uruguay Round finally came to an end in December 1993. The new GATT covered all farm products and further reduced the EU's subsidies to its farmers. Although the GATT certainly did not force the EU to open its agricultural markets to the world, and particularly to developing countries, it nonetheless represented a much-needed step in the right direction.
The reforms of the early 1990s, however, could not guarantee a stable CAP in the face of continued technical progress and rising productivity. EU members were well aware that drastic reforms were needed to avoid a further budget crisis and to maintain Europe's political legitimacy before increasingly dissatisfied taxpayers. More important, with the countries of Central and Eastern Europe applying for EU membership, a radical overhaul of the CAP seemed appropriate. The Commission argued that the entry of the candidate countries would at least double the agricultural land and the number of people working in agriculture and would also burden the CAP with an additional 15 billion Euros, an increase of 40 percent. Responding to this challenge, the Commission, in 1997, published its Agenda 2000, proposing reforms that continued down the path taken by MacSharry with higher standards for food safety and the environment, as well as a further reduction in prices, for instance for cereals (minus 20 percent) and beef (minus 30 percent). The Commission intended to establish a program that would create alternative sources of income for farmers, with the clear aim of reducing the number of CAP recipients. In any case, the Commission estimated that the total costs for the CAP would rise by 6 billion Euros per year. Not surprisingly, the Agenda 2000 was therefore hotly debated at the Berlin summit in March 1999. In a diplomatic tour de force, French President Jacques Chirac, who had always been responsive to his own domestic agricultural lobby, managed to convince the fourteen other heads of government that enlargement to Central and Eastern Europe remained a remote prospect and so immediate action was not required. Hence reform of the CAP was delayed until negotiations with the candidate countries had reached a more mature state; a decision many commentators judged to be short-sighted. Specifically a more widespread cut in prices hardly materialised. In the end, the member states could only agree on a milk price reduction of 15 percent (to become effective in 2005). Beef prices were reduced by 20 percent (instead of the proposed 30 percent), and the price of cereals was reduced by a mere 7.5 percent. As a minor concession, the new CAP included long overdue standards for food safety and the environment. The summit also agreed to increase direct aid payments, either per hectare or per head of cattle. This meant that at least the annual budget stayed at approximately the same level of 42.3 billion Euros. But the package also meant that further drastic reforms were needed to prepare the CAP for enlargement. The summit acknowledged this by asking the Commission to return with another proposal in 2002. Government leaders found it difficult to confront their agricultural constituencies with the bitter truth that they ought to get used to a future of reduced subsidies and lower guaranteed prices. In the end the Berlin summit reached a compromise that failed in its attempt to please taxpayers and finance ministers, on one side, and the powerful agricultural lobby, on the other.
A further point of controversy was the reform of the World Trade Organization (WTO). The Seattle meeting in 1999 dramatically displayed the ideological differences between countries concerning the global market. Many EU trading partners--particularly the U.S. and Australia--demanded the complete elimination of export subsidies. In return, the EU pointed to other, less transparent forms of subsidies such as tax breaks, which the U.S. delegation tried not to mention. The EU also wanted full recognition of the multifunctional role of agriculture, with such objectives as environmental preservation, landscape conservation, and food safety. In Seattle the Agriculture Commissioner Franz Fischler and the Trade Commissioner Pascal Lamy at least offered special trade concessions, such as tariff-free access for the least-developed states. Nonetheless, negotiations stalled at the follow-up meetings in Doha (2001) and in Cancun (2002). Fischler managed to reignite the debate in December 2002, with a detailed proposal for the next WTO round where the EU argued for a worldwide cut in trade-distorting subsidies by 55 percent and for lowering export refunds by an average of 45 percent complemented by a reduction of import tariffs by an average of 36 percent. The centrepiece of his plan was to allow goods from the poorest countries to enter the industrialized world duty-free. However, Fischler continued to insist on the socio-cultural and environmental objectives of the European agricultural model, arguing that measures supporting such standards ought to be exempt from the reduction commitments. He also took a parting shot at the United States by pointing out the need to address export credit systems and shipping food aid merely to dump surpluses in order to keep up prices. The proposal undoubtedly had some highly progressive elements, but the establishment of these unquestionably more favourable conditions for developing countries depended largely on the ability of First World competitors to settle their differences.
Regarding enlargement to the countries of Central and Eastern Europe, the Commission dutifully presented two key proposals on how to rejuvenate the CAP. In January 2002 DG Agriculture outlined its plans on how to integrate twelve new member states, which would increase the number of farmers in the EU by 70 percent (see Table 10.6). The key was the gradual introduction of direct payments, but, in reality, this meant that, in 2004, farmers in the accession countries would receive only 25 percent of the financial aid given to their counterparts in Western Europe, with the amount gradually rising to 100 percent by 2013. Fischler argued that a full introduction of EU payments would reduce the incentive for badly needed structural reforms in the farming sectors of Central and Eastern Europe. Clearly the EU did not want to create a dependency culture, but it had to face the criticism that it was trying to establish a two-tier system, with accession farmers treated as second-class citizens. In return, Fischler argued that the new EU farmers would benefit from increased rural development measures; 80 percent of which would be covered by the EU budget, including early retirement, afforestation, technical assistance, and environmental programmes. He also envisioned the retraining of farmers for other professions to be financed by the EU’s Cohesion Policy (see chapter 11). To further sweeten his reform, Fischler also offered the government of the accession countries the chance for national top-ups (a measure with existing EU members were not permitted to pursue) in order to match these countries’ agricultural spending levels prior to joining the EU.
To the Commission's delight, the European summit in Copenhagen in December 2002 fully accepted Fischler's ideas, which then became the legal basis for organizing agriculture in the post-accession era. The summit also determined the exact amount of money the new member states could expect, rising from 9.9 billion Euros in 2004 to 14.9 billion Euros in 2006. This meant that Poland - the largest of the accession countries - would secure a transfer of 1 billion Euros from the EU's Structural Funds. For all new entrants the financial package increased by 408 million Euros. In the end the costs related to enlargement rose to a total of around 37 billion Euros between 2004 and 2006. The existing member states therefore avoided an increase in their contributions to the EU budget, which to this day is just a fraction over one percent of their GNP. Instead, enlargement was financed from existing funds.
Fischler's intention to shake up the CAP did not stop with enlargement or the WTO. In July 2002 he proposed further radical steps for the internal reform of the CAP, with a plan that de-coupled subsidies from the amount that farmers produced. The Commission also proposed a new system, “cross-compliance," which set conditions for the granting of subsidies: farmers had to follow highly specific guidelines for upholding environmental, animal welfare, and hygienic standards, and for preserving the countryside. Hence Fischler's objective was to address, once and for all, the embarrassing anachronism of the traditional price support scheme that allowed 20 percent of EU farmers to receive 80 percent of CAP money. The member states approved the Commission's idea and this new regime was implemented by mid-2003, with a more detailed list of compliance factors agreed upon at the European Council meeting in June 2005. But farmers unions across Europe were highly critical of the cross-compliance system. Although most agreed that the old price support system was outdated and needed drastic reform, the new system, they felt, imposed a heavy bureaucratic burden with its numerous, detailed rules, for example, specifying the type of taps allowed for milk tanks, and that oil tanks had to be blue and diesel tanks green.
As the next step in the EU's long attempt to change its most costly budget item, the so-called revision clause called upon the Commission to outline reform ideas before the new financial perspective of 2014 - 2020 entered the negotiation phase. As such, the EU agriculture ministers, in 2008, agreed on a "health check" with the aim of simplifying the CAP in order to push further environmental and biodiversity standards while also allocating an additional 90 million Euros to farmers in Central and Eastern Europe. The health check abolished the requirements to set aside ten percent of arable land. Quantitative restrictions on milk production came to an end in 2015. Hence, with overproduction now less of an issue, farmers were again allowed to maximise their production potential. In addition, the amount spent on direct aid was reduced. Instead, all farmers who received more than 5,000 Euros in direct aid had their payments reduced by five percent, with the money being transferred to the Rural Development budget.
The Cioloş Reform (2013)
The main changes to the way agriculture was organised included a move towards a greener CAP, where farmers were asked to increase biodiversity by growing at least three crops (with the largest crop not allowed to exceed more than 70 per cent), whilst also being required to establish so called ‘environmental focus areas’ (EFA) with hedges, trees, or biotopes. These were complemented by rural development measures, such as financial support for organic farming. With regards to direct payments, each farmer now received at least sixty per cent of the national or regional average. Incentives for young farmers were also on the agenda. Only a third of EU farmers were over the age of forty, which prompted the EU to set aside a rather paltry 1,250 Euros per year for farmers in that age bracket. Not surprisingly, opinions on the reforms were divided. Some member states including Denmark and the UK had for years argued for more market liberalisation and less price interventions. Cioloş at least partially achieved this, since sugar quotas were abolished by 2017 and financial support for establishing new vineyards ceased to exist from 2016 onwards. On the other hand, the EU imposed standardised rules to foster biodiversity with the aim of establishing a more ecologically minded landscape. While this was laudable, it undoubtedly made the CAP even more bureaucratic. Moreover, environmentalists were furious with the EP given the broad range of exemptions to the flagship reform measure on a greener agriculture. As such, small farms with less than ten hectares (which accounted for thirty per cent of all EU farms) did not have to abide by the crop diversification rule. And farms with less than 15 hectares did not have to establish ecological focus areas at all. Of course, these exemptions greatly undermined a more widespread ecological impact. To sum up, the reform package addressed a number of severe shortcomings. The direct payment system now seemed fairer and important environmental rules were established. However, the fundamental nature of the CAP changed very little. It was still the biggest EU budget item with bureaucratic burdens surrounding farming not easing, and farmers still being shielded to some extent from market forces (see Table 11.7.). Hence, the 2013 reform did not result in a rethink on how farming could be best organised. Instead, it was a continuation of previous practises, which resulted in a tweaking, but not a reshaping of the CAP.
The CAP Reform 2023 - 2027
Apart from these ecological and environmental aspirations, the new CAP also mentioned more targeted support for smaller farms, which represented a continuation of the agenda of the Cioloş reforms. But the ten targets listed in Table 10.8. neatly summarise the invigorated aim for placing the environment at the centre of Europe’s agricultural system. Another ground-breaking element of the reform package were so-called national strategic plans, which enabled member states to finetune their respective agricultural agenda in line with national prerogatives, as long as those plans supported the ten targets. Hence, the Commission set out the general direction of European agriculture, with the specific approach on how to reach those targets identified by each member states. It put an end to the CAP’s previous one-size-fits-all approach.The whole reform package came in at 387 billion Euros for the 7-year budget cycle running from 2021-27, with 291.1 billion Euros earmarked for Pillar 1 (direct payments to farmers, and export subsidies) and 95.5 billion Euros reserved for Pillar 2 (rural development, environmental measures). This meant that for the first time, agriculture was no longer the biggest expenditure item; an accolade now held by the cohesion policy. While for the previous budget cycle of 2014 – 2020, the CAP swallowed up 37 per cent of EU finances, it was now just under 30 per cent. Some key measures included: • 40 percent of the CAP budget is climate relevant. • 3 per cent of each farm has to be dedicated to biodiversity. • 25 per cent of the CAP budget for direct payments is to be allocated to eco schemes.• 35% of rural development funds are designed to support climate initiatives, biodiversity, environment, and animal welfare. • National governments have to give at least 3 percent of direct payments to young farmers, and at least 10 percent of direct payments to small and medium sized farms.
The explicit focus on such grave concerns as biodiversity, climate change, and sustainability was undoubtedly laudable, and once more placed the European Union above many public entities when it comes to environmental protection. Yet, the fundamental ingredient of EU agriculture - public money being handed out per farmed acre - was still largely untouched. A taste of what might arise in future reform negotiations was presented by Germanys’ Agriculture Minister, Cem Őzdemir. The prominent member of the Green Party argued that public subsidies ought to be linked to services that benefit society as a whole, including climate, health, or any environmental measures. Őzdemir therefore referred to a logic that first appeared to some extent in the system of cross compliance (introduced by Franz Fischler in 2003), which saw a partial de-coupling of public subsidies from food production in preference over land management. This was also an approach picked up by Brexit Britain in its post-CAP reforms. But Germany’s idea were not embraced by everyone. Agriculture commissioner Janusz Wojciechowski instantly stated that ‘the CAP should be, first of all, a budget for farmers.’ Hence, the traditional cornerstone of EU agriculture might just remained unchanged: public financial support for food producing farmers.
Why Is the CAP So Difficult to Reform?
One fundamental question remains. Have the recent reform efforts been sufficient to make the CAP fit for the twenty-first century? Back in the 1950s, when the CAP was first conceived, member states were just emerging from a decade of food shortages as a result of World War II. But ensuring food supplies and increasing agricultural productivity among EU farms are much less pressing issues now as evidenced by the fact that the EU has gradually become the world's largest food importer. Hence, although the CAP 2023-2027 has strong environmental and economical undercurrents, the overall objectives of the CAP as outlined in the Treaty of Rome are outdated, and bizarrely so. The EU tried to adjust to new challenges and developments by establishing an increasingly complex agri-environmental agenda and by opening up to global food trade. On the other hand, despite cuts, the CAP still accounts for a significant chunk of the EU budget which continues to be an anachronism given the low GDP and employment shares of the sector. In some areas in north-western Europe, agriculture has virtually lost its economic relevance. Instead, in parts of Spain, France, and Italy, we have seen the emergence of life-style farmers who quit their stressful office jobs and retired to the countryside to look after the odd sheep or olive tree. But agriculture continues to be much more relevant for newer member states (such as Romania, Bulgaria, and Poland) and indeed for some of the candidate countries (Turkey and North Macedonia). Hence the CAP still has an important role to fulfil in the ambitious plan to reunite a once divided continent and to spread acceptable standards of living across the whole of Europe. Agriculture still matters, and as long as this is the case, calls for a re-nationalization of financial support and regulations seem premature. Above all, agriculture happens in rural and thus quite often in economically struggling areas. It therefore would make sense to view agricultural public policy from a spatial, and not a sectoral perspective. It is a geographical area that requires financial support. Granted, farmers ought to benefit from any such support mechanism, but so could other businesses, from manufacturing to services that are after all, located in an area that might struggle to compete within the EU’s Single Market. Hence, one might want to consider embedding the CAP as part of a wider cohesion strategy that also encompasses policies designed to improve rural development, infrastructure, transport, or education in a holistic, and not a policy-sectoral fashion.