In the next few years there is to be a radical reform of the EU’s much-debated Common Agricultural Policy. Alan Osborn takes an in-depth look at the reform proposals and those affected by the future changes.

The French and the Germans may not like it, but there is going to be radical reform of the European Union’s Common Agricultural Policy in the next few years. This is the surprising but considered view of farming experts in the European Commission, who have been pushing unwilling EU Member States towards reform in recent months; the view is supported by the Organisation for Economic Cooperation and Development (OECD) and a number of the EU member governments who spoke to just-food.com. 

“CAP rewards inefficiency, creates food surpluses, offends developing countries and imposes enormous strains on the budget”

It is true that France and Germany recently struck a deal to ring-fence CAP spending until 2006 and France, at any rate, might not agree that big changes are inevitable. But the view increasingly taking hold in European and other countries is that outside pressures will soon force the EU into a choice that it has never fully faced before: reform its agricultural policies or be braced for potentially damaging consequences in trade and political cohesion.
 
For decades the great unanswered question about the EU has been why it continues to allow the existence of a farming policy that rewards inefficiency, creates food surpluses, offends developing countries and imposes enormous strains on the budget. About half of all EU spending – close to €78bn (US$80.1m) annually – goes on farmers who on average get about 40% of their income in the form of subsidies from Brussels. Attempts to reform the system are made every few years or so; and end up changing relatively little. Even the much-vaunted Agenda 2000 reforms left intact the flawed system at the heart of the CAP, say critics.
 
A limited role for the Commission

A study by the Swedish Institute for Food and Agricultural Economics has come to the not terribly surprising conclusion that where the CAP is concerned, reform negotiations are intergovernmental in nature, the Commission’s role is limited and national interests prevail over the EU’s common good. Put more bluntly, reform has been constantly blocked by the French government, which in turn is beholden to a noisy and effective farm lobby, though cultural influences are also important.

So, why should things be different now? Three factors are relevant say Commission analysts: the coming enlargement of the EU which will bring in farm-dependent countries in eastern and central Europe, the central role taken by agriculture at the ongoing World Trade Organisation Doha development round negotiations and a growing realisation that protectionism and subsidy may simply be untenable in a world where the food trade is becoming increasingly globalised.

A question of ethics

“Failure to cut EU farm subsidies will deepen poverty in developing countries by wrecking world trade talks”

There is also a political factor. By featherbedding its relatively few farmers, the EU may be sowing the seeds of further misery in poorer countries. Clare Short, the British international development secretary, says that failure to cut EU farm subsidies “will deepen poverty in developing countries by wrecking world trade talks.”

Perhaps even more importantly, the EU’s policies were described as “hypocritical” by the World Bank’s chief economist Nicholas Stern in November. He said World Bank research showed that rich countries spent about US$300bn a year on agricultural subsidies and full elimination of them would increase global agricultural trade by 17%. While America was also at fault, “European subsidies and barriers are, in general, much higher than those in the US”, Stern said. The charity Oxfam has called on developing countries to reject new agricultural agreements unless their vital development needs are adequately addressed.

Cutting the link between production and direct payments

Against this background the European Commission has acted, and many think it has done so boldly. The mid-term review of the CAP published by Brussels this summer says frankly that public spending on farmers “must be better justified” and that besides supporting farming incomes, “it must yield more in return regarding food quality, the preservation of the environment and animal welfare, landscapes, cultural heritage, or enhancing social balance and equity.”
 
Specifically the Commission proposes to cut the link between production and direct payments, to make payments conditional on environmental, food safety, animal welfare and occupational safety standards, and to increase substantially support for rural development via a modulation of direct payments, with the exemption of small farmers.
 
This is the most radical recommendation yet tabled by the Commission to end the extravagant system under which farmers are paid virtually unlimited sums related to how much they produce.  By “de-coupling” payments from output, support will be shifted from product to producer and, according to farm commissioner Franz Fischler, “farmers will no longer have to produce just for subsidies, or indeed at a loss.”

“European subsidies and barriers are, in general, much higher than those in the US “

Such an approach has the added merit of compatibility with WTO targets. The WTO Director-General Supachai Panitchpakdi said last month that one “salient” method of easing world poverty “would be the elimination of the link between a farmer’s actual product output and the direct subsidies he receives.” Such de-coupling “would remove the trade-distorting direct aids and would eventually encourage production,” he said. Agreeing, Dr Fischler says that “our proposals for de-coupling could be crucial in getting the best deal for the European model of agriculture.”
 
The view from EU member states

To many EU countries this will seem a long over-due move. Britain has campaigned for many years for farmers to be paid direct income supports instead of production subsidies and the British government has confirmed that “the proposals are broadly in line with UK thinking on the CAP, although they do not go far enough in some areas.”

Britain’s National Farmers Union says it supports “in principle” the de-coupling proposal but adds there are “inevitable practical problems that must be acknowledged, addressed, and resolved before such an approach could be implemented.” The European Parliament also supports the principle but wants the link between production and payments to be broken “partially” rather than totally.

France, of course, takes a fundamentally different view. It is the largest beneficiary of the CAP, claiming nearly a quarter of all farm handouts. France has said it will not discuss de-coupling, or indeed any CAP reform, before the new financial framework for 2007-2013 is considered. It has enlisted Germany as an ally but this may not last long according to some EU officials. While Germany’s farmers do well out of the present system, its exporters may not think this worth hanging on to if the price is that the EU has to give up potential trade gains outside agriculture in the Doha negotiations.