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A new direction for the European Union?

Britain and EU migrants

Reform of the Common Agricultural Policy

Introduction

An earlier SEE paper “The Future of the EU Budget – the Agriculture Dimension”, Sept., 2010 gave the background to the latest moves to reform the Common Agricultural Policy (CAP).  This paper sets out the latest proposals from the European Commission and considers how the debate may develop.  From the description which follows it will be apparent that, while the Commission has put forward a raft of proposals to change all the detailed parts of the CAP, it is not proposing a radical change in either the nature or the cost of the CAP.  What is envisaged is essentially a progressive adaptation of the CAP following the direction which it has taken since the early 1970s, as a result of reforms which have met some of the UK’s criticisms and those of overseas food producers.

The CAP towards 2020

In October, 2011, the Commission issued its detailed proposals for reforming the CAP as from 2013[i].  The proposals, which run to some 400 pages of legal text, are the culmination of a consultation process began during the early part 2010 and which included a major Commission report entitled: The CAP towards 2020: meeting the food, natural resources and territorial challenges of the future[ii].  The consultations enabled the Commission to conclude that “the overwhelming majority of views expressed concurred that the future CAP should remain a strong common policy structured around its two pillars” (Pillar I covering what is left of the traditional market intervention measures and the system of direct payments to farmers, and accounting for some 75% of the total CAP spend; and Pillar II which supports rural development and is co-financed between the EU budget and the Member States).  On that basis, the Commission saw the CAP of the future responding to three challenges: food security given the prospect of growing world food needs and problematic supply responses; producing public goods, notably in response to climate change, natural disasters and the maintenance of an environmentally friendly landscape; and thirdly, as a driver of the rural economy, especially in the newer Member States.

Commission Proposals

What is proposed is not a radical change in the CAP but basically a continuation of changes that have been made progressively over the last 20 years.  Crucially, this has involved a move away from public support of market prices (with intervention in the market by agencies at EU expense) towards more free market prices (with a safety net) and direct aid to farmers not tied to their current farming practices.

The latest proposals make a number of significant changes in the way the direct payments are calculated.  Most importantly, they propose switching the basis of calculation from a historic, and now increasingly distant, level of farm production to simply the size of the farm in hectares.  Secondly, payments will now be limited to those still actively engaged in farming.  Thirdly, direct payments going to the newer Member States currently, under their terms of accession, at reduced levels will be progressively brought into line the rest of the EU.  Fourthly, it is proposed to make the payment to larger farms digressive with a cap of 300,000 euros.  In thus favouring smaller farms, the Commission could be said to address a concern expressed by the OECD[iii].   A recent report points out that the EU’s direct payments do not target any specific income objective and thus lead to ‘inefficiencies as a significant share of support leaks to unintended beneficiaries i.e farmers who do not have low incomes’.  Although the level of capping proposed (less than 0.5% of total direct payments) is modest, it will reduce receipts in Member States like the UK with relatively larger farms (an average of 54 hectares in the UK compared, for example, with 6 in Poland), while at the same time spreading the amount of direct payments to each region and Member State more evenly.  

To qualify for direct payment farmers will still have to satisfy certain environmental criteria (‘cross compliance’) but, on top of that, 30% of the total budget for direct payments will in future be allocated to fund additional ‘greening’ payments to farmers who will have to maintain permanent pasture, cultivate at least three different crops and, more controversially, have to ‘set aside’ at least 7% of their farmland for specific ecological purposes like planting trees or hedges or leaving land fallow.  The 30% allocation is compulsory – as is a scheme to help small farmers with a simplified lump-sum payment -   but, in addition, Member States can use up to 5% of their direct payments budget for special payments to augment incomes where farmers face difficult conditions; and up to a further 2% to encourage younger farmers. 

The current system of market support is to be largely retained with only minor adjustments.  Two sectors will however experience big changes.  The Commission does not propose to renew the quota systems for milk or sugar when they are due to expire, respectively at the end of 2013 and in September 2015.  Both these sectors have been tightly regulated for many years and freeing up the market (under international pressure in the case of sugar quotas) will lead to big adjustments in favour of more efficient producers.  In the belief that agriculture will be subject to greater market instability in the future, the Commission proposes adding two new market intervention measures: an emergency reserve to react to crisis situations and an extension of the scope of the European Globalisation Adjustment Fund.

For Pillar II, the Commission propose greater co-ordination with other related EU policies and a number of new schemes:

1.      to help to establish producer organisations and other means to strengthen the role of farming in the food chain

2.      to help young farmers

3.      to encourage eco-systems and for more efficient ways to combat climate change

4.      to stimulate economic activity in rural areas

5.      to allow Member States to give extra support to areas with natural handicaps.

Finally, the Commission proposes doubling the budget (currently some 700 million euros) for agricultural research and innovation.

The CAP and the EU Budget

The debate about the future of the CAP is running in parallel with negotiations about the size and scope of the EU budget as a whole.  The finances of the EU are governed by overall limits set for several years at a time (the co-called Multi-Annual Framework).  The Commission has already initiated discussion on the framework for 2014-2020, proposing a total budget rising over the period by 4.8% in cash terms (and close to a freeze in real terms)[iv].  Within the total, proposed expenditure on the CAP would rise slightly from around 60 billion euros in 2013 to around 63 billion by 2020 and falling only very slightly as a share of the total.  Pillar I would absorb about three-quarters of the total, as at present.

Net contributing countries are calling for the total budget to be frozen or even reduced, while the UK would also like to see the proportion of the budget going to agriculture reduced.  However, it is worth bearing in mind that one reason why the CAP budget has remained high is that it has had to finance the switch from market support to direct payments to farmers.  This switch –  a highly desirable trend of CAP reform - has inevitably meant that more of the cost is borne by the EU taxpayer, with the economic benefit going to the EU consumer.

Some have argued in favour of reducing the EU budget by increasing ‘co-financing’, either by switch funds from Pillar I to Pillar II or in some other way, but this approach is favoured neither by the Commission nor by most Member States including France and Germany.  The proposals do nevertheless provide for some flexibility between the two Pillars: a Member State can transfer up to 10% of its direct payments budget into Pillar II; and conversely (for some countries) up to 5% from Pillar II to Pillar I.

The Debate

The Commission’s proposals will be discussed in the coming months in the Council of Ministers and its subsidiary bodies, and in the European Parliament.  The Parliament, with enhanced powers, will have a considerable influence on the final outcome.  In the past, when the Parliament’s role was essentially consultative, it has often been favourable to agricultural expenditure, heavily influenced by the strong farming lobby both within and outside the Parliament.  But under the Lisbon Treaty, the Parliament now shares decision-making powers with the Council over CAP as with other forms of expenditure.  This may eventually cause others in the Parliament to support other policies at the expense of the CAP.  So far, however, this does not appear to be happening.  Reacting to the earlier Commission paper, the Parliament called for “a strong and sustainable CAP with a budget commensurate with the ambitious objectives to be pursued”, i.e., “maintained at least at the same level as 2013”.  Key MEPs have complained that the package contains “too much bureaucracy, less money and not enough justice”[v].  Complaints that the new proposals are too complex are widespread and, although the Commission claim to have made some measures simpler, experience suggests that there is no escape from detailed controls and checks.

Environmental groups predictably welcome the ‘greening’ of direct payments but argue that the proposals do not go far enough.  However, the proposal to allow 7% of land to be set aside comes in for much criticism at a time when food and energy is becoming scarce.  The EU farming organisations take this view and consider that overall the proposals do not do enough to improve the profitability and productivity of EU agriculture.

As to the Member States, the UK is in the lead among those Member States who want to see more radical changes and lower CAP expenditure.  This view is not shared by France and Germany, who have been working together on CAP reform and most Member States are likely to rally around the Commission’s general approach.  Predictably, the newer Member States, who until now have had only restricted access to the direct farm payments and where farming still plays a big role in the economy, are most enthusiastic supporters of the CAP and especially of the proposals which would bring the level of their direct payments gradually into line with those of the older Member States.

Decisions on the CAP are unlikely before a decision on the EU budget framework for 2013-2020 and this is not expected before the second half of 2012.  Moreover, given the widely differing views among the Member States and the complexities of the issues involved, the agricultural debate is likely to be long running.  The aim is to have the debate concluded during 2013 in time for the new regulations to take effect from 1 January, 2014, but even this extended timetable may prove to be optimistic.

Conclusion

The forthcoming debate is likely to result in changes and improvements to the CAP. But given the position taken up by the Commission, and the polarisation of views between the reforming and the defending Member States, it seems unlikely that the broad structure of the CAP and its cost, will be much changed.  Nor will it do much to improve access to the European market, notably for agricultural producers in developing countries.  Direct farm payments will be updated and rebalanced to the benefit of the newer Member States.  Skewing the payments to favour smaller farms will not suit the UK but will be hard to resist.

While critics of the CAP, led by the UK, can  argue that higher world prices provide the opportunity to scale down if not eliminate the level of direct farm subsidies, defenders of the policy, who are in the majority in the Council, consider that the prospect of world food shortages justifies the continuation of substantial support to EU farmers.  The subsidies they enjoy are thus likely to remain high, albeit not greatly different from those enjoyed by their American counterparts, and CAP expenditure will continue to absorb a large share of the EU Budget.  Nevertheless, following the reform packages of the last decades, the CAP has steadily become less interventionist, more market-orientated and less trade distorting.  Any eventual conclusion to the Doha round of WTO negotiations will consolidate and possibly enhance these improvements.

December 2011

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[i] COM(2011)625-631

[ii] COM(2010)672 Final

[iii] “Evaluation of Agricultural  Policy Reforms in the European Union”, published by the OECD, October 2011. 

[iv] COM(2011)500

[v] Luis Capoulas Santos, who will lead for the Parliament in the CAP negotiations.

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