CAP 2020: Is Europe losing touch with reality?
Prof. Stefan Tangerman - Agra Europe, 01.10.2010 (AE2487)


"The European Union is stumbling through the most disastrous crisis in its history with the unbearable debt burden of Greece driving economic and financial policy makers into ever deeper despair.

Desperate attempts are being made to fight fire with fire, by throwing the money of the somewhat less indebted Member States at the problem, potentially threatening the financial stability of even those countries that have so far still been considered reasonably safe havens by investors. But there is not the slightest doubt, not even in the minds of the political fire-fighters, that the only way out of the current deep disarray, if the Eurozone survives it at all, is rigid fiscal discipline everywhere in the EU, as well as structural adjustments that improve the competitiveness of Europe’s economy. How are those responsible for the future of the CAP responding to this chaos? Which contributions of agriculture and agricultural policy are they proposing to overcome the deep economic troubles in which the EU is nearly drowning? You would have thought that two overriding general goals would now govern all plans for the future of the CAP, in addition to any more specific aims in the agricultural and food sector. Firstly by saving public expenditure to help re-balance government budgets; and secondly by improving the competitiveness of Europe’s agriculture and food economy so as to help re-ignite economic growth.


Commission’s proposals fall short
As it happens, the calendar of policy planning in the EU has required the Commission to table its legislative proposals for the CAP in the 2014-2020 period, published on 12 October, just at a time when the Eurozone’s crisis is accelerating dramatically. This is not the Commission’s fault. Nor can one expect the Commission to have only macro-economic concerns in mind when planning the EU’s agricultural policies for a period when (hopefully!) the worst of the current economic troubles may be behind us. But one would expect to find at least some significant element of response to the overall economic and financial troubles in the package of proposals, not the least because it would generally be sensible for agricultural policies, anywhere in the world, to be parsimonious by using public money in the most effective way and to strengthen competitiveness of the farming industry so as to make it increasingly independent of government support. Alas, that orientation is not at all transpiring from the Commission’s proposals.

The calendar of policy planning in the EU has required the Commission to table its legislative proposals for the CAP just at a time when the Eurozone crisis is accelerating dramatically.
Rather than a determined effort to save big chunks of expenditure on the CAP, the overriding aim that appears to govern the proposals is to reshuffle money between different groups of farmers and policy instruments, in the hope to render the continuation of a fundamentally unchanged policy more acceptable among taxpayers and the general public.

The original idea was to keep CAP expenditure at most constant in nominal terms after 2013, and even that could not really have been considered to be a major saving. However, the Commission’s budget proposals of June 2011 foresees some increase of agricultural expenditure in nominal terms (from €412 billion in the 2007-13 period to €423bn in 2014-2020) even under the CAP’s traditional budget heading. In addition, through an exercise in creative accounting, there would be extra expenditure on agricultural policies of €17bn in 2014-2020, raising the total to €440bn in nominal terms.1 In constant prices, this amounts to a reduction of no more than 7% – not really a breathtaking saving in times when public expenditure overall has to be fundamentally revised in order to correct huge fiscal imbalances in the EU’s Member States.

As disappointing as the lack of response to the EU’s fundamental crisis is the absence of determination to continue with CAP reform, along the lines of the reforms initiated and implemented since 1992 by the three preceding Commissioners for Agriculture, MacSharry, Fischler and Fischer Boel. In a nutshell, these reforms were aimed at improving the performance of the CAP by making the policy more effective through reducing economic waste and environmental damage. The OECD has recently assessed and commended these CAP reforms, and highlighted the economic and environmental benefits they have achieved.2 The backbone of the reforms since 1992 was the move from price support to direct payments, and their decoupling from farm production. It required political courage and wit to push these reforms through the EU’s institutions and lobbies, but three successive Commissioners managed to get them accepted, and left the CAP in a much improved design, opening new avenues towards a more effective policy, less economic damage, better respect for natural resources and improved relations with the EU’s trading partners.

The future of direct payments
The challenge facing the current Commission is what to do with the decoupled direct payments in the future. The payments had successfully served the purpose of compensating farmers for sudden cuts in support prices, an essential ingredient of such fundamental policy reform. But 10-20 years down the road, and with much higher farm product prices in today’s world, the compensation argument no longer carries weight. The next logical step in the longer-term process of reforming the CAP would now have been to embark on a process of gradual reduction of the direct payments, and shifting some of the savings to more targeted and differentiated policies such as some of those found under Pillar 2. In a nutshell, these reforms were aimed at improving the performance of the CAP by making the policy more effective through reducing economic waste and environmental damage. The rest of the savings could then have helped to contribute to the much needed new discipline in public budgets. This policy orientation could have made a major push towards improved competitiveness of the EU’s farming industry, weaning Europe’s farmers gradually from continuous public income support. It could also have established clear contractual relationships between agriculture and society whereby the public purse would have paid farmers for providing well defined public goods needed in their specific local environment.

Instead, the Commission has chosen to propose the continuation of across-the-board payments per hectare to all farmers in the EU, rather than the gradual conversion into payments per unit of public good provided. It proposes to paint 30% of the per hectare payments as ‘green’ by making them conditional on three compulsory agricultural practices assumed to be beneficial for climate and environment (crop rotation, maintenance of permanent grassland, and devotion of 7% of the farm’s arable area to ecological focus).  This is a perfect example of the lack of efficiency and effectiveness of an across-the-board policy as compared to targeted measures. Crop rotation may on some farms be much more sensible if achieved sequentially rather than in the same year; maintaining permanent grassland may not be the most effective way a given farm can contribute to fighting climate change; and 7% ecological focus area is most certainly too little in some regions and too much in others. Moreover, many farms will already fulfil these conditions anyhow, and then it is not clear why the ‘green’ payment should be made, nor what it achieves. This suggests that the ‘greening’ element of the proposal mainly serves the purpose of providing a pretext for continuing to make per hectare payments.

The proposal to redistribute payments from countries with larger payments per hectare to those with lower payments, and to introduce degressivity and capping of payments for larger farms, is advertised as aiming to improve equity. However, as long as no relationship is established between the actual income of the recipient and the amount of payment, there is no way that better equity can be effectively achieved. If I receive the same payment as my neighbour, there is no equity at all as my income is much higher than his. Again, this element of the package comes across as an attempt at suggesting features of the per hectare payment regime that make it more acceptable in the eyes of a wider public, and at stabilising the regime by removing criticism from the side of the countries currently receiving low per hectare payments.

Turning back the clock
It is hard to regard these proposed changes in the system of direct payments as a policy reform in the sense of a significant break with the past. There are other elements that would actually turn back the clock of past reforms. This is particularly true of the proposal to allow Member States to expand the scope of coupled payments. Not only would this do away with beneficial policy changes achieved in the past. It is also not in the interest of farmers to have strings attached to payments they receive.

To be fair, the package proposed by the Commission also contains positive elements. Some of the changes foreseen in Pillar 2 make good sense. To place more emphasis on innovation is an excellent idea (even though the expenditure devoted to this aim would still be only marginal relative to the overall CAP budget). Elimination of sugar quotas would constitute another welcome step in the direction of more market orientation. Allowing small farmers to take their payments up to the year 2020 with them if they leave agriculture and transfer their holding to another farmer is an innovative element with the potential to support structural adjustment.

But then there are also other new elements of a rather problematic nature. One of them is the proposed income stabilisation tool under Pillar 2. It may seem that the large volatility experienced on agricultural markets in recent years is a good reason to help farmers achieve income stability. However, the nature of that volatility was such that hefty upward price spikes were much more pronounced than the subsequent price troughs. It is not clear why farmers, or enterprises in any sector of the economy, should need protection against volatility in the form of occasionally high producer prices. Moreover, the mechanics of the stabilisation tool proposed, whereby payments would cut in whenever farm income drops by more than 30% below its three-year average, are such that with occasionally rather high prices the probability of a right to payments is the higher the larger the intermittent price hikes turn out to be. In other words, the better market conditions are once in a while, the more likely it is that farmers can receive stabilisation payments. What is more, farmers are not expected to pay money back when their incomes are particularly high – they only receive, but never contribute. This is not proper stabilisation, but pure old-fashioned farm support. In 2008, in the context of the CAP Health Check, the Commission had already taken a look at precisely this stabilisation tool, and dismissed it. At the time the Commission argued that “a great weakness with introducing an EU-wide scheme for providing basic coverage against income crises would be the high budgetary variation and uncertainty, which is difficult to conciliate with a policy of budget stabilisation and the likely need of some tool to limit the expenditure” 1.

Why budget stability and limitation of expenditure should now be less important, in times of a serious crisis of public budgets, remains a mystery. In presenting his proposals, EU farm Commissioner Dacian Ciolos claimed that they constituted a “deep and ambitious reform that is politically viable.” But in reality the package it not geared to reform, and even less to a deep and ambitious one.
It is primarily focused on a perpetuation of across-the-board per hectare payments rather than opening the door towards a more targeted and better performing CAP. It does, therefore, little to reduce the burden farm policy places on today’s cash-strapped public budgets. While Europe is suffering through its most severe political, financial and economic crisis, agricultural policy makers make desperate efforts to maintain an outdated and inefficient system of financial benefits for farmers. Have they lost touch with reality?


1 These budget figures are from Adinolfi, F., J. Little and A. Massot (2011), The CAP in the Multiannual Financial Framework 2014/2020. European Parliament, Directorate-General for Internal Policies, Document IP/B/AGRI/NT/2011_12. Brussels: European Parliament.
2 OECD (2011), Evaluation of Agricultural Policy Reforms in the European Union. Paris: OECD.
3 Directorate General for Agriculture and Rural Development (2008), CAP Health Check – Impact Assessment Note no. 8, Subject: Risk and Crisis management. Document D(2008) NG-CF/15335, Brussels 20 May 2008, p. 17-18.