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.