ELO Brussels Conference6th & 7th November 2003

CAP reform: Entrepreneurial Opportunities

in the Enlarged EU

Forty years of the CAP

Michel Ebner MEP

Forty years of the CAP

The post-war productionist policy for agriculture The booming years of the 1970s and 1980s Environmental and International backlash Mac Sharry reforms, direct payments Fischler Reform 1: Agenda 2000 Fischler Reform 2: Decoupling ‘03 Where next?

The post-war productionist policy for agriculture: objectives

Article 39 of the Treaty of Rome for the EEC 6:

– Focus was recovery of production post-war,

– based on improving productivity, thereby living standards of farmers,

– plus stability and security of supplies,

– and fair prices to consumers.

A policy for agriculture could reasonably be thought of as a rural development policy too.

The CAP of Rome and Stresa: instruments

Based on the Franco - German deal with the core features of high internal common prices, defended by:

– domestic market intervention,

– variable import levies,

– variable export subsidies.

Supported within a common external tariff, under financial solidarity – the farm budget, FEOGA.

This was a very Northern European Agricultural Policy

This was the essence of the policy for Cereals, oilseeds, proteins, sugar, wine, beef, and dairy.

These commodity regimes were only completed in the late 1960s.

Successive enlargements required a broadening of scope of the policy; – UK and Ireland – the sheep regime– Greek and Iberia - the southern products: olive oil,

tobacco, cotton.

The booming years of the 1970s and 1980s

High prices and stable prices encouraged massive technical and structural change.

This was a golden age of agricultural science. It was bound to lead to tears – predicted by Mansholt. Mansholt’s structural policy was always the poor cousin. The macroeconomic economic instability of the 1970s

provided a big challenge. Single internal market survived 1970s currency volatility, by

virtue of the Agri-Monetary System

The policy contained the seeds of its own destruction

The open-ended price support system encouraged growth in EU production ahead of consumption.

EU moved from net importer to net exporter of major supported commodities

By the 1980s the structural surpluses were very visible: cereal, butter and beef mountains, wine lake, olive oil slick.

The budgetary cost of domestic intervention plus subsidising exports grew exponentially

Environmental & International backlash

The Green movement increasingly came alive in the 1970s and 1980s: ‘Silent Spring’, et seq.

The perception was that an over-stimulated agriculture was environmentally damaging

This was re-inforced by the perceived damaging international effects of protectionist EU (and US and Japanese) policies on agricultural exporters

Punta del Este declaration at the start of the Uruguay Round signalled the end of agriculture’s exemption from GATT trading rules.

Reform efforts in the 1980s

Was aimed at symptoms, not causes, eg– Aids to consumption: school milk, pensioner butter…– Co-responsibility levies– Maximum guaranteed quantities– Supply controls, especially in 1984,– Milk quotas

Refusal to recognise the ineffectiveness of these measures whilst prices remained artificially high & stable.

Mac Sharry reforms: direct payments and accompanying measures

Final recognition that price supports had to be cut: implemented for COPs and beef (mid 1990s)

Price cuts were compensated by direct payments, conditional on hectares planted or heads of beef held – this is the first stage of decoupling.

Price supports and supply controls maintained for dairy, sugar and other products.

New supply controls for arable crops: set-aside Accompanying measures: agri-environment; afforestation; less

favoured areas; new entrants,

Fischler Reform 1: Agenda 2000the 2 Pillar architecture

Pillar 1 – agricultural production support– Direct payments, COPS, beef, sheep, olive oil – Supply controls especially milk and sugar– Continuing intervention, but at lower prices– Pillar 1 measures are EU wide; based on obligatory

expenditure, annual payments; and 100% FEOGA guaranteed,.

Pillar 2 – Rural Development Regulation– Agri-environment schemes– Rural development measures– Pillar 2 measures are: regionalised, programming based,

multi-annual, menu driven, & co-financed.

The two Pillar CAP, continued

But the pillars are imbalanced

Bulk of the funds are in Pillar 1 (86%)

Mechanisms for fund switching from Pillar 1 to 2– Cross compliance on all direct payments, ‘fines’ accrue to Pillar

2; compulsory but conditions low.

– ‘modulation’ ie cut direct payments, switch funds to Pillar 2; Member State match funding; voluntary for the Member State.

Co-financing requirement kills the desire to switch to Pillar 2

Beneficiaries of Rural Development are farmers

Fischler Reform 2: Mid Term Review July ‘02

After only 2.5/7 years of Agenda 2000, the 2002 Mid Term Review signalled further big change.

Driven by :– Domestic unhappiness with the CAP

Seen as a policy for quantity not quality Still seen as environmentally damaging Accused of absorbing to much of EU budget

– Eastern Enlargement – WTO Doha Development Round

MTR signalled decoupled payments and more funds to be switched to Pillar 2.

Fischler Reform 2: Decoupling ‘03

Package agreed June 2003

Creates a decoupled Single Farm Payment SFP for COPs, beef, sheep, dairy (and sugar, olive oil, tobacco & cotton). Big simplification.

The SFP conditional on respecting EU directives (18) and ‘good agricultural and environmental’ conditions, advisory system available to help.

5% compulsory fund switching – modulation

Financial discipline to keep CAP within the Brussels guidelines for Pillar 1 for enlarged EU.

Rural Development Regulation extended to stimulate quality and meeting standards, for environment and animal welfare.

Where next?

The reforms since Mac Sharry have been necessary for internal,EU-15 and enlargement, and external, WTO, reasons.

However they do not define a sustainable policy for sustainable rural economies. Why not?

– More reforms of production regimes required – sugar, dairy, olive oil, cotton, tobacco,

– EU still dependent on some export subsidisation and high border tariffs

– The justification for the Single Farm Payment is muddled between: compensation; income support; maintaining farming; paying for environment.

– The balance of budget expenditure remains too heavily skewed to Pillar 1

– The Rural Development measures are still too narrowly focused on farmers

Concluding remarks

The CAP has proved to be a complex but adaptive set of arrangements for EU agriculture.

The drivers for change have been internal political, economic, technological, and environmental forces.

With enlargement, and the changes in information technology, biotechnology, changing consumer and citizens demand for food and the countryside,

there is every reason to expect that the policy will have to continue to be as dynamic in the future.