Global Policy Forum

Is the Common Agricultural Policy Sustainable?

The EU’s Common Agricultural Policy (CAP) that subsidizes European farmers is notable because of the harm it causes to producers in the developing world.  Now, Eastern European farmers, who do not receive high subsidies as their Western European counterparts, are lobbying for reform to make arrangements “more equitable”. This article highlights the many failings of the CAP, and advocates for changing the system. However, this seems improbable at the present.

By Dalibor Rohac

March 21, 2011

For Europeans and outside observers alike, the Common Agriculture Policy (CAP) is perhaps the single most dumbfounding institution on Europe’s policy landscape. While only five percent of Europeans work in agriculture, around half of the European Union’s budget is spent on subsidizing farmers, resulting in a massive waste of resources, high food prices, and an adverse impact on agricultural producers in developing countries.

Every year, around €42 billion is given in free handouts to farmers in Europe. Furthermore, European institutions step in at regular intervals to purchase agricultural commodities in order to keep their prices up. In recent decades, the stories – sometimes exaggerated, sometimes accurate – about excess supplies of milk and other agricultural produce dumped into the ocean, or destroyed in other ways, have become almost legendary.

Besides European consumers, who pay inflated prices for their food, the CAP harms agricultural producers in developing countries who, in a liberalised environment, might be able to export their produce into Europe.

And, from a longer term perspective, it is not clear that the European farming industry is benefitting from this policy either. Clearly, some producers would disappear if it weren’t for the money flowing in from the EU. However, others would prosper – especially in those countries in Europe who might have a competitive advantage in agriculture. After all, agriculture in New Zealand has been thriving since its full liberalization in the 1980s.

The problem is that those who benefit the most from the CAP are not those who would be likely to succeed in open competition on free market with agricultural produce. To a large extent, European agriculture can best be understood as a case of a small, tightly-knit interest group receiving very concentrated benefits, while the costs of the policy are dispersed among Europe’s population. That is the most important factor why getting rid of the CAP has appeared difficult.

On a meeting on Thursday, 17 March, the EU’s agriculture ministers discussed the options of either reforming or scrapping the CAP. However, it was naive to expect a genuine change from that gathering.

Official Commission materials prepared for the meeting outlined three options for a reform: keeping the status quo, making the scheme more generous to farmers in Eastern Europe, and phasing direct payments out and hence scrapping the CAP in its present form. The document states that “the overwhelming majority of views concurred that the future CAP should remain a strong common policy,” in order to foster food security and to provide “European citizens with quality, value and diversity of food produced sustainably.”

Therefore, it does not come as a surprise that no massive overhaul of the scheme was agreed upon Thursday. The conclusions of the Council meeting have essentially reiterated the need to keep the CAP in its present form and expressed a vague commitment towards making the distribution of subsidies between Western and Eastern Europe “more equitable.” The Council is also, somewhat curiously, opposed to capping direct payments to large individual farms.

It is easy to see that the CAP would not be financially sustainable if it were extended fully to the new member states of the EU. Unfortunately, the sense of unfairness perceived by the rising interest group of Eastern European farmers seems to be one of the key factors leading European politicians to rethink the future of the CAP.

At the same time, certain countries have been net contributors to the system, without getting much of it for themselves. So the EU is stuck between pressure to make a larger portion of the CAP benefits available to farmers in the East, and a rising discontent among those who end up paying the bill. Traditionally, Denmark, United Kingdom, and the Netherlands have been among the voices advocating a reduction in the CAP budget.

However, the future of the CAP is going to be decided by the big countries, most importantly by France – a traditional supporter of generous agricultural handouts – and Germany. Germany, of course, is among the net payers – for every euro contributed to the system, German farmers receive only 70 cents in direct payments. It is therefore quite paradoxical that German policymakers, however, do not yet stand clearly on the side of those who would want to see the CAP significantly reduced.

But that arrangement is not stable. Just as it is not reasonable to expect German taxpayers to pay the bill for governments on the Eurozone’s periphery, it is no more reasonable to believe that the Germans will subsidise the continent’s agribusiness indefinitely. And although a true reform of the CAP is unlikely to emerge anytime soon, one has to wonder how much longer European policymakers will be able to kick the can forward.


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