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ELO Brussels Conference

6th & 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

 Thiswas 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 2000
the 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.