Common Agricultural Policy (CAP)
What is the Common Agricultural Policy (CAP)?
Although farmers in many European Union countries are efficient and produce high yields, land, input and fuel costs make them uncompetitive with farmers elsewhere. Without additional financial support, many farmers would be unable to sustain their businesses and the overall rural economy would suffer significantly.
As a result, the EU operates the Common Agricultural Policy, which supports farmers by providing a range of price guarantees, direct payments and other instruments, including quotas and tariffs on some imported produce. By setting this up on a pan-European basis, national governments can no longer provide separate direct support for their agricultural sectors, but instead administer funds distributed via the CAP.
A brief history
The CAP was one of the original pillars of the European Community, comprising France, Germany, Italy, Netherlands, Belgium and Luxembourg. The treaty of Rome set out its basic principle and objectives:
- To increase productivity, by promoting technical progress and ensuring the optimum use of the factors of production, in particular labour.
- To ensure a fair standard of living for the agricultural Community.
- To stabilise markets.
- To secure availability of supplies.
- To provide consumers with food at reasonable prices.
Those objectives were written in 1958 and have never been amended. The Lisbon Treaty who will amend existing European Union and European Community treaties does not revise the objectives.
An increasingly complex system of quotas and support prices was set up, with further crops included as the European Community expanded. This basic system led to the infamous "butter mountains" and "wine lakes" of the 1980s, with farmers being paid to produce goods for which there was no market and which were then bought up for intervention storage and later sale at (lower) global market prices.
Additional instruments such as quotas for milk and other produce were introduced to limit production. "Set aside" was another innovation, with farmers being paid to keep a certain percentage of their land out of production.
The CAP has always been the most expensive of the EC's (later EU's) policies, accounting for about half of total central funds for many years. With successive waves of enlargement, it has become a less dominant part of the overall budget and a decreasing proportion of GDP.
The CAP today
Despite a reduction in the percentage of the overall budget assigned to the CAP, it cost €49.8bn – 46.7% of the budget – in 2006. The plan is that total spending should peak in 2008/9 and then decline until 2013, when the next major revision is due. In addition to the direct cost, it is estimated that European consumers pay approximately €50bn more in higher food costs.
Although originally a system of direct production subsidies and export subsidies, the CAP has been transformed since the early 1990s into one where farmers are given direct payments not tied to production. This is known as "decoupling". Payments are also increasingly being linked to animal welfare and environmental targets. A key factor recently has been the major reform of the sugar regime, which cuts guaranteed prices and aims to reduce overall production significantly. Sugar beet in Europe cannot compete with sugar cane growers overseas without a large subsidy.
Who benefits?
France is – and always has been – the largest recipient of CAP funds (20% of the total in 2006), with Spain, Germany, Italy and the UK all also receiving significant amounts (two-thirds of the total between these five countries). Although getting smaller absolute amounts, Greece and Ireland receive the largest per capita payments.
Newer Member States get a less generous deal, initially 25% of the rate of the established countries. However, payments will converge by 2013, when countries such as Poland with important farming sectors will become major beneficiaries. As total spending will not rise, the net payments to the current major beneficiaries will decline to some extent.
Across the whole EU, it is the bigger farmers who are the greatest beneficiaries, with 20% of farmers estimated to receive 74% of funding.
The CAP and world trade
The European system of price support and import barriers has in the past distorted trade patterns, often to the disadvantage of developing countries. In particular, EU farmers have been heavily subsidised (until recently) to grow sugar beet, whereas free trade would dictate that sugar would be imported from countries which can grow it at lower cost.
Europe is not unique in subsidising farmers and distorting markets. The USA – a major exporter of agricultural produce – also subsidises the sector. One of the key objectives of the (now stalled) Doha round of WTO negotiations has been to reach a deal on reduction or elimination of agricultural subsidies in order to benefit developing world farmers.
The CAP from 2103
The successive elements of CAP reform in the last 20 years have significantly changed the Common Agriculture Policy into a relatively modern policy. Farmers have become much more market-oriented and the trade-distorting effects of the subsidies are relatively limited. But the steady annual decline of 3-5 percent in farm numbers has not changed. The priorities for the CAP and the driving forces for reform have evolved in recent years. With the WTO talks deadlocked, and the US and others facing more pressure over domestic support rules than the EU, the traditional pressures for change have eased and are unlikely to be relevant.
For the next reform, the post-2013 CAP, there is one main issue which has emerged and is likely to make the next reform as significant as the MacSharry and Fischler reforms. The issue is the budget and/or having a common policy for 27 EU member states. In the context of Europe’s economic crisis and a large share of EU spending directed towards the CAP, serious questions are being raised about the reasons for the current levels of spending, the efficiency and the extent to which it provides genuine EU added-value.
As European Commission President José Manuel Barroso prepares the debate for the next EU Financial Perspectives for 2014-2020, in a context where EU states will certainly not be willing to increase the overall size of the budget, it is clear that he would like to dedicate a much smaller share of the budget to the CAP, suggesting that EU funding for issues such as research and development provide better EU added-value.
With the Lisbon Treaty now in force, the decision-making process for big CAP decisions takes on a new process involving full co-decision (rather than mere consultation) with the European Parliament.
