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Fletcher School of Law and Diplomacy, Tufts University
The Economics of the European Union
Professor George Alogoskoufis
Lecture 5: The Common Agricultural Policy and its International Impact
George Alogoskoufis, The Economics of the European Union
The Common Agricultural Policy
❖ The Common Agricultural Policy (CAP) is the agricultural policy of the European Union.
❖ It implements a system of agricultural subsidies and other programmes.
❖ It was introduced in 1962 and has undergone several changes since then to reduce the cost (from 71% of the EU budget in 1984 to 39% in 2013) and to also consider rural development in its aims.
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George Alogoskoufis, The Economics of the European Union
Background to the Common Agricultural Policy
❖ The idea of a common agricultural policy was born in the late 1950s and early 1960s when the founding members of the EC had emerged from over a decade of severe food shortages during and after World War II.
❖ As part of building a common market, tariffs on agricultural products would have to be removed. However, the political clout of farmers and the desire to achieve self sufficiency in food production, led European governments to the Common Agricultural Policy (CAP).
❖ The Treaty of Rome defined the general objectives of the CAP. The principles of the CAP were set out at the Stresa Conference in July 1958. The creation of a common agricultural policy was proposed in 1960 by the European Commission, and the CAP mechanisms were adopted by the six founding Member States. In 1962, the CAP came into force.
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George Alogoskoufis, The Economics of the European Union
A Policy of High Prices, Tariffs and Export Subsidies
❖ The CAP started as an attempt to guarantee high prices, and therefore high income, for European farmers, in order to attain food security in Europe. Initially it was combined with tariffs offsetting the difference between international and European agricultural prices.
❖ From the 1970s, because of the “green” revolution and the large increase in the supply of agricultural products, Europe was transformed from a net importer to a net exporter of agricultural products at the CAP prices. Support prices were so high that they resulted in excess supply in Europe (“butter and grain mountains”, and “wine lakes”).
❖ Instead of reducing prices, which was politically difficult, the EEC used export subsidies to dispose of the excess supply
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George Alogoskoufis, The Economics of the European Union
An Economic Analysis of the Common Agricultural Policy of the 1960s
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George Alogoskoufis, The Economics of the European Union
The Shift in Agricultural Supply and the Creation of Agricultural Surpluses
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George Alogoskoufis, The Economics of the European Union
An Economic Analysis of the Common Agricultural Policy of the 1970s
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George Alogoskoufis, The Economics of the European Union
Net Economic Cost of the “old” CAP❖ The cost for European consumers was estimated in 2007 to exceed the
benefit to European farmers by about €20 billion (Boulanger P. and Jomini P. (2010), On the Benefits to the EU of Removing the Common Agricultural Policy, Sciences Politiques GEM Policy Brief, Paris.).
❖ The cost to European taxpayers was estimated at €55 billion in 2009 in the same study.
❖ Thus, the total net cost of the CAP was €70 billion, or about 0.56% of the EU’s GDP.
❖ In addition, there are costs for food exporting countries in the rest of the world, such as the USA, Australia, New Zealand, Argentina, and various emerging economies and developing economies.
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George Alogoskoufis, The Economics of the European Union
The Social Inequality of the Common Agricultural Policy
❖ Apart from its huge economic cost, the CAP was also characterized by social inequality.
❖ It benefited large low cost farmers much more than small farmers.
❖ In addition, it benefited large landowners (including Queen Elisabeth II and Prince Charles), agricultural input suppliers and agrochemical firms.
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George Alogoskoufis, The Economics of the European Union
Producer Surplus of “Small” and “Large” Farmers
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George Alogoskoufis, The Economics of the European Union
Reforms of the CAP❖ The CAP has been reformed since the 1990s to introduce income
support for farmers in exchange for a reduction of the high agricultural prices (McSharry reforms).
❖ This type of price-cut-and-compensate reform was carried further by the so-called Agenda 2000 reforms and the June 2003 reform. The reforms continued in 2005 and 2008.
❖ The reformed CAP is a long way from the original price support system. It is essentially an income support system with market determined prices.
❖ This has eliminated the impact on the rest of the world and the excess supply.
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George Alogoskoufis, The Economics of the European Union
The CAP of Today❖ Today the CAP is based on two pillars
❖ First, direct payments, which are not linked to the production of particular crops, but only on what a farm received under the “old” system, and the cost of remaining price supports.
❖ Second, “rural” development, such as quality incentives, improvement of standards, advice, the environment, quality of life of farmers and animal welfare.
❖ However, problems remain, especially the social inequality of the policy.
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George Alogoskoufis, The Economics of the European Union
The Evolution of the CAP: An Official Summary
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THE TREATY OF ROME CREATES THE EUROPEAN ECONOMIC COMMUNITY(a precursor of today’s EU), between six western European countries. CAP is foreseen as a common policy, with the objectives to provide affordable food for EU citizens and a fair standard of living for farmers.
THE COMMON AGRICULTURAL POLICY (CAP) IS BORN!The essence of the policy is good prices for farmers. With every passing year, farmers produce more food. The shops are full of food at affordable prices.The fi rst objective – food security – has been met.
THE CAP FALLS VICTIM TO ITS OWN SUCCESS. Farms are so productive that they are producing more food than is needed. The surpluses are stored and lead to ‘food mountains’. Several measures are introduced to bring production level closer to what the market needs.
THE CAP SHIFTS FROM MARKET SUPPORT TO PRODUCER SUPPORT.Price support is scaled down, and replaced with direct aid payments to farmers. They are encouraged to be more environmentally-friendly. The reform coincides with the 1992 Rio Earth Summit which launches the principle of sustainable development.
THE CAP FOCUSES MORE ON FOOD QUALITY.The policy introduces new measures to support farm investment, training, improved processing and marketing. Steps are taken to protect traditional and regional foods. The fi rst European legislation on organic farming is being implemented.
THE CAP CENTRES ON RURAL DEVELOPMENT.The CAP puts more focus on the economic, social and cultural development of rural Europe. At the same time, the reforms started in the 1990s are continued to make farmers more market-oriented.
THE CAP SHIFTS FROM PRODUCT SUPPORT TO PRODUCER SUPPORT. Farmers now receive an income support payment, on condition that they look after the farmland and fulfi l environmental, animal welfare and food safety standards.
THE CAP OPENS TO THE WORLD.The EU becomes the world’s largest importer from developing countries, importing more than the US, Japan, Australia and Canada combined. Under the ‘everything but arms’ regime the EU has given free market access to all least developed countries. No other developed country gives such openness, commitment, and real market access to developing country farmers.
THE EU FARMING POPULATION DOUBLES, FOLLOWING THE ENLARGEMENTwith 12 new countries. Eighteen years after the fall of the Berlin wall, the European Union numbers 27 member states and over 500 million citizens. EU's agricultural and rural landscape changes as well.
A NEW CAP REFORM SEEKS TO STRENGTHEN THE ECONOMIC AND ECOLOGICAL COMPETITIVENESS of the agricultural sector, promote innovation, combat climate change and support employment and growth in rural area.
