The context of the CAP development

1) The context of the CAP development

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Even before the then European Community (EC) came into existence in 1958, agriculture was a sensitive issue for most European governments. Near-famine conditions in much of post-war Europe made food security a national priority. The centrality of peasant proprietorship in European political culture, the romantic lure of the land, and the emergence of a highly influential farmers’ lobby gave agriculture added political salience. A decline in the relative economic weight of the primary sector and a corresponding drop in farmers’ incomes raised the political stakes. Not surprisingly, by the mid-1950’s agriculture had become a heavily protected and subsidised sector. These traditional government interventionist measures, widely used to protect agricultural price levels and buttress farmers’ earnings, were powers which governments were loath to give up, but in an environment of general support for market integration as a whole in the EC.

Agricultural interests were successful in imposing CAP as part of the Treaty of Rome in 1957 and in sustaining it as the major common EEC, European Community (EC) and now EU policy, for over three decades. The CAP was a major part of the Franco-German ‘initial compromise’ (Ahrens, 1986). This allowed the EEC to be founded on the basis that German industry was to benefit from access to French and other EC markets, while French agriculture was to benefit from being a supplier of food to Germany. Some governments, such as the German and Dutch would have been happy to exclude agriculture entirely from the new EC, continuing instead to subsidise their agricultural sector at a national level. The French government, by contrast, wanted to include agriculture in the EC in order to shift the cost of subsidising its large and unproductive agricultural sector from the national to the European level. As France made this a condition of accepting a common market in manufacturing goods, France’s partners had little choice but to commit themselves in the Treaty of Rome to establishing an EC-level agricultural policy.

2) The Principal Features of the CAP

There was no disagreement among the member states on the general objectives of the policy (Article 33, formerly Article 39, TEC) to:

* Increase agricultural productivity

* Ensure a fair standard of living for farmers

* Stabilise agricultural markets

* Guarantee regular supplies of food

* Ensure reasonable prices for consumers

Member states agreed to replace the various ‘national organisations’ of agriculture with one ‘common organisation’ that would have at its disposal such measures as “regulation of prices…and common machinery for stabilising imports or exports” (Article 34, formerly Article 40). The treaty charges member states with establishing the new European agricultural regime by developing a Common Agricultural Policy before the end of the transition to the customs union and charged the Commission with taking the first step by convening a conference of member states “with a view to making a comparison of their agricultural policies, in particular by producing a statement of their resources and needs” (Article 37, formerly Article 43). This process began in July 1958 when Sicco Mansholt, vice president of the Commission with the responsibility for agriculture, convened the obligatory conference of the Commission, governments and farmers’ representatives in Stresa, Italy, to devise the following guiding principles of the Common Agricultural Policy:

* A Single Market: Agricultural produce should be able to move freely throughout the EC.

* Community Preference: Priority should be given to EC produce over that of other countries.

* Financial Solidarity: The cost of the policy should be borne by the EC rather than by individual member states.

Although officially unstated, another principle subsequently emerged: Farmers should receive an income “equivalent” to that received by other sectors of society.1 Following the Stressa conference, the Commission formulated proposals to replace individual member states’ systems of customs duties, import quotas and minimum prices with a harmonised community-wide market, free intra-community trade in agricultural products, and a common protection vis-�-vis third countries. By 1970, as part of a wide ranging budgetary agreement, the member states finally switched to a community funding of the CAP, in which the basic elements were:

* Target price: The EC-wide guaranteed minimum price for a particular agricultural commodity or product.

* Intervention price: The price at which specially designated intervention agencies in member states buy surplus produce in unlimited quantities (guaranteed withdrawal form the market)

* Entry price: The minimum price at which produce may be imported into the EU.

* Levy: A duty imposed on agricultural imports to raise their prices to the level of entry prices (Levies are part of the EU’s own ‘resources’)

* Refund: A rebate paid to the EU exporters to bridge the gap between lower world prices and higher EU prices.

3.0 The CAP Reforms from the Mansholt Plan to Agenda 2000

The CAP’s market regulating mechanisms-target prices, intervention, levies, and export subsidies-ensured that the CAP soon met most of its objectives: Agricultural productivity increased greatly, farmers enjoyed a fair standard of living (although some benefited more than others due to the CAP’s largesse), agricultural markets were stabilised, and food security was assured. However, consumers were clearly losing out as high prices in shops and supermarkets reflected high target prices for farm produce and high levies on imported foodstuffs. Although the CAP could therefore be judged a success on the basis of its stated objectives, the policy’s market-regulating mechanisms caused serious economic, environmental, and political problems:

* Guaranteed prices bore no relation to demand and encouraged massive overproduction.

* Surplus produce had to be stored in ‘intervention’ in warehouses throughout the EC at considerable cost to taxpayers (these were the infamous butter mountains, wine lakes, etc.)

* Big farmers (farmers with large farms) produced more and thereby earned more money, whereas small farmers, who needed most assistance, earned less.

* In order to increase output from their already overworked fields, farmers used excessive amounts of herbicides, pesticides and artificial fertilisers, thus accentuating the EC’s acute environmental problems.

* The maintenance of quotas levies and tariffs in agricultural trade angered exporters to the EC and contrasted unfavourably with the EC’s efforts to promote global market liberalisation in other sectors.

* Export price supports distorted world prices and undercut non-EC exporters, leading to trade disputes.

4.0 The CAP Reforms from the Mansholt Plan to Agenda 2000

4.1 All of these problems became apparent early on in the CAP’s existence and by the end of the 1960’s Sicco Mansholt, father of the CAP, tried to rectify some of the CAP’s most obvious excesses in the so-called Mansholt Plan, which was the first, ill-fated effort to reform the CAP2. With hindsight, the 1960s were a good time for the CAP when most of the market organisations were completed, had there not been the Mansholt Plan. In its Memorandum on the Reform of Agriculture in the European Economic Community of December 1968, the Commission sought to deal with two major problems which had arisen: emerging surpluses and the decline of income growth in agriculture compared as compared with the rest of the economy. The Memorandum talked about an explosive situation. It feared that the surpluses would undermine support for agriculture in society and that the growing disparity between farm and non-farm income will erode the contribution of agriculture to social stability. Unfortunately, the Memorandum with its proposals for reduction of arable areas and cowherds triggered the explosion: a very hostile reaction by the farming community.

4.2 Obscene levels of overproduction in the late 1970’s triggered a renewed discussion of CAP reform. In 1979 the Council introduced a modest change in the system of price guarantees and imposed a ‘corresponsibility’ levy on dairy farmers to help meet the cost of intervention storage and subsidised sales of surplus produce. However, when the coresponsibility levy failed to curb excess output, the Commission proposed a production quota, and after an intensive series of negotiations at the highest level, the EC agreed in March 1984 on a quota system for milk production. However, Goodman (1996) argues that this was an inadequate response to the problem of overproduction, and did little to reduce spending on the CAP (by 1984 the CAP accounted for over 70 percent of EC expenditure).

4.3 With the possibility of bankruptcy, impending Mediterranean enlargement, and Margaret Thatcher’s insistence on budgetary reform, there was intensified pressure for radical action, Indeed, as part of the budgetary package agreed to at the June 1984 Fontainbleau summit, the heads of state and government agreed to curtail the growth of CAP expenditure.3 At the same time, however, they agreed to increase the EC’s own resources, thereby eliminating the most compelling reason for far-reaching CAP reform: the threat of running out of money.

4.4 In 1987 and 1988 the question of CAP reform was once again at the top of the EC agenda due to budgetary pressure. As part of the Delors I budgetary package, introduced in 1987 in the wake of the Single European Act, the Commission proposed a mix of measures to prevent overproduction, limit expenditure, diversify support for farmers and promote rural development.4 From the point of view of agriculture, the Delors I package was an agreement to control spending within a strict budgetary discipline, whereby agricultural guidelines of the European Agricultural Guidance and Guarantee Fund (EAGGF) would not be increased beyond 74 percent of the rate of increase in the EC’s GNP as of 1988. However, the 1988 package proved only moderately successful and pressure for effective reform continued to build not only because of the CAP’s exorbitant cost but also because of two new developments:

1) The CAP encouraged unfavourable international comment on the recently launched single market program as it raised fears abroad about the emergence of a ‘Fortress Europe’. If the protectionist and trade-distorting CAP was an example of a common policy in action, the single market would hardly help the rest of the world. Thus, the EC made vigorous efforts to combat the pessimistic prognoses about the single market’s external impact intensified internal pressure for CAP reform.

2) Poor progress in the September 1986 Uruguay Round negotiations on the General Agreement on Tariffs and Trade (GATT), due largely to disagreements over agricultural export subsidies, heightened international pressure on the EC to reform CAP. The EC came under intense pressure from the USA and the Cairns Group to curtail subsidies for agricultural production and exports, whilst Third World countries insisted on progress on agricultural trade and liberalisation in return for concessions in other sectors.

4.4 Following the Uruguay Round, the EC eventually tabled an offer to reduce farm subsidies by 30 percent over ten years from 1986 [much less than the EC’s trading partners calls for a cut of 90 percent in export subsidies and 75 percent in other farm support over ten years from 1991/92. Moreover, the EC insisted that any agreement to reduce farm subsidies and other supports would have to permit “rebalancing” -that is, allowing the EC partially to offset cuts in some areas with increases in others, provided the overall trend in support was downwards. Following the EC’s refusal to make a more substantial offer on agriculture, a compromise proposal was made by the secretary-general of the GATT in late 1991, but this rejected by the EC because it ‘called into question the very principles of the community’s agricultural policy,’5. Mounting pressure from international trading partners to cut agricultural price supports provided a powerful impetus to undertake serious CAP reform both to save the Uruguay Round and to rein in a system plagued by overproduction and spiralling costs.

4.5 It was within this context that the Commission reopened the reform debate in February 1991 with its “Reflection Paper on the Development and Future of the CAP.”6 The paper offered the usual mix of corrective mechanisms, but also saw the Commission recommending [for the first time] a proposal to break the automatic link between price support and volume of food production. To balance the deepest price cuts ever contemplated by the Community, the Commission proposed full compensation for small farmers and scaled compensation for big farmers, subject to big farmers’ removal of large tracts of land from production (set-asides).

Agricultural Commissioner Ray MacSharry was the architect and prime political mover of the plan, and he was appalled at the extent of inefficiency which the CAP was subject to. MacSharry knew that although the most effective method of CAP reform would have been to replace the system of guaranteed payments with a fair program off income support for farmers, the visible cost of such a program was politically unacceptable. Accordingly, although the MacSharry Plan included some direct income support, it did not propose to abolish guarantee prices. The NFU uniformly opposed the MacSharry Plan and claimed that it would bankrupt small farmers and unfairly penalise big, efficient producers. Furthermore, the British government agreed with the NFU and complained to the Commission that the plan discriminated against large producers.

A solution to the oppositions was reached on May 21st 1992 with a revised plan. Although the plan contained smaller cuts than the original MacSharry proposals, the price reductions approved by the Council were nonetheless substantial and included a 29 percent drop in cereals prices over four years. More important, the package began the process of shifting the basis of agricultural assistance from price supports to direct income supplements (in this case paid to big farmers in return for land set-asides of 15 percent). However, the generous compensation package agreed by the Agriculture Council made the reformed CAP more expensive than before, but by cutting guaranteed prices and taking land out of production, the reform helped reduce the EU’s ruinous agricultural surpluses. At the same time, most farmers did not experience the drops in their income predicted by the NFU; on the contrary, farm incomes across the board rose steadily in the following years.

5.0 Agenda 2000: A Shift in the Regional Impact of CAP?

5.1 The recent changes occuring in the policies of the CAP are of great importance to the members of the NFU. This section examines the recent reforms to the CAP and investigates the impact that Agenda 2000 will have on British farming during the forthcoming stages of Eastern Enlargement, and how the CAP support curently available to British farmers may be on the verge of dramatic changes as the enlargment process takes hold and challenges the CAP in a manner it has never experienced throughout its history. Whereas previous EU enlargement has necessiated readjustments of the CAP regime, for the first time in the EU’s history the prospect of enlargement has prompted proposals for major CAP reform.

That is because, in agriculture, as in other areas, Central and Eastern European enlargement is qualitatively different from previous enlargements. Specifically, whereas only 5.3 percent of the EU’s workforce is engaged in agriculture, over 22 percent of the workforce in the applicant states is so engaged. The accession of all ten Central and Eastern European applicant states would result in a doubling of EU agricultural land. Moreover, agricultural prices in Central and Esatern Europe are much lower than in Western Europe. Thus extending the CAP to the new member states in Central and Esatern Europe necessitates either a big increase in its budget – a political impossibilty – or major cuts in price supports for exisiting member states, including the farmers of the UK.

5.2 The impetus of enlargement and, to a lesser extent, of upcoming WTO negotiations and of growing environmental and consumer concerns underlay the following proposals for CAP reform in Agenda 2000, the Commission’s strategy for “strengthening and widening the Union in the early years of the 21st century,” released in July 1997:7

* Improve the EU’s global competitiveness through lower prices.

* Guarantee the saftey and quality of food to consumers.

* Ensure stable incomes and a fair standard of living for the agricultural community.

* Make agricultural production methods environmentally friendly and respectful of animal welfare.

* Integrate environmental goals into the CAP’s intruments.

* Seek and create alternative income and employment opportunities for farmers and their families.

In essence, Agenda 2000 proposed that the EU continue the MacSharry reforms by shifting agricultural subsidies from price supports to direct payments.

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