Common Agricultural Policy
(CAP)
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After a long time of food shortages suffered by Europe
throughout WWII.
Established in 1957 with the Rome Treaty upon France’s
insistence. (In 1962, The European Agricultural Guidance and
Guarantee Fund was created as a basis for common policy. Since
then, the Fund has been the biggest beneficiary of the EU
budget.)
CAP includes a set of rules and mechanisms which regulates the
production, trade and processing of agricultural products in the
EU with attention focused on rural development.
Four Main Objectives of CAP
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Secure food production for the population and ensure
self-sufficiency in food products.
Increase
agricultural
productivity
by
promoting
technological progress.
Ensure a fair standard of living for farmers. Fair and
regular incomes to farmers- as independent as possible
of uncontrollable factors such as climate, soil or disease
and partly as a counteraction to the rapid depopulation
of rural areas.
Stabilized and fair food prices for consumers.
In addition, dependence on imports had to be reduced
and farming had to be modernized. CAP provided several
financial incentives to farmers to achieve these goals.
Workings of CAP I
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It consisted measures such as
Financial Incentives to farmers
“A Price Support System” based on
setting a target price for a commodity
and imposing a levy on cheaper imports
and intervening to buy produce at a
predetermined level to maintain the
stability of the internal market (Price
floors-minimum farm prices- were set.)
Workings of CAP II
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It was based on 6 main mechanisms.
Price Support: Guaranteed minimum prices set by
agricultural ministers.
Import Taxes: Ensured external prices can not weaken
internal EU prices due to cheap imports.
Intervention: Support by selling or storing surpluses.
Stock removal: Dispose of surpluses by other means e.g.
Free Food Scheme.
Subsidized exports: “dumping” of surplus produce while
destabilizing prices in third countries
Production Control: Quotas (e.g. Milk) and “ set aside”
(refers to land).
Problems of CAP
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The CAP system led to:
1. Overproduction of food supplies “mountains of butter
and cheese and lakes of milk and wine” Chronic surpluses
in agriculture.
2. Degradation of environment- associated with the
intensification of agricultural production and the
amplified use of chemicals and heavy machinery.
3. Inefficient production methods were effectively being
subsidized, along with small scale farming.
4. Huge budgetary costs of this system for the
financing EU members.
By the 1980s, the EC piled up so many reserves that it had
to pay exporters to destroy produce.
CAP under fire!
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These problems put CAP under intense financial and political
strain. Over 50% of EU budget was being allocated to CAP
(but this has been decreasing over the recent years. In 2000,
40.9 billion Euros (50% of EU budget) on CAP.
These led to reforms of the 1990s-subtantially replaced
“guaranteed prices” under the price support system with
“direct compensation and payments” to farmers when and if
prices fell.
Hence, CAP had to adapt in order to meet these challenges by
adopting a new approach based on a combination of lowering
institutional prices and making compensatory payments to
farmers (Greater reliance on market in setting prices).
BUT its significance derives from the vast # of people
affected by it and the extent of territory covered. Also it
has symbolic significance given the extent of independence
transferred from national to the European level.
“Pressures for Reform”
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Budgetary Pressure: This led to the MacSharry reforms
of 1992. Total tax transfer increased from 0.77% of
the GDP of 9 members in 1980 to 1.03% of the GDP of
the 12 members in 1989.
Consumer pressure: In 1986, the cost to consumers in
terms of higher food costs was over twice the budgetary
cost of supporting agriculture and was almost equal to
the net benefits to producers: “A zero-sum game.”
External Pressure: The Uruguay Round of GATT tried to
solve the problem of trade distortion associated with the
CAP. USA also changed its policy stance and agreed that
the agriculture becomes a centerpiece of the Round
(1986-1992). Signing of Blair House Accord between the
USA and EU and a Peace Clause: until 2003, the EU and
the USA were prevented from taking unilateral trade
action against each other’s farm policies.
MacSharry Reforms (1992)
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These pressures led to the approval of MacSharry
Reforms in 1992. (to be implemented during 1995-2000)
During this period, there would be a significant reduction
in the existing border measures and reduce tariff levels
by 36%, internal support measures by 20%, and reduce
export subsidies by 36%.
Supply-Control Mechanisms: Producer co-responsibility
meant cost of surplus disposal be shared by the
producer. Marketing quotas to limit the production of
dairy production esp. milk. Co-responsibility levies and
budgetary stabilizers to control the output level and
budgetary cost of the cereals regime (Penalties for
excess production over a threshold level.) Introduction
of land-set aside policy.
“Agenda 2000”: The Reform of
CAP
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New reforms presented by the Commission in
1992 have been implemented with the Agenda
2000.
Involved direct transfers rather than price
support systems. Number of subsidized
farmers were reduced. Farmers were asked to
produce no more than what they can sell to
prevent overproduction and cut the cost of
CAP.
Also new reforms led European prices to
parallel international prices.
Problems like “mad cow disease” dealt a heavy
blow to meat exports. Brought the issue of
safety to the foreground.
Challenges Ahead
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Competition becomes worldwide in this area and EU faces competition
from developing countries with very low production costs and from the
US with subsidized products.
Entry into the EU: New entrants’ economies are largely based on
agriculture, and small scale producers will have difficulty in sustaining
competition from low cost producers. Agriculture accounts more than
20% of employment and around 10% of the GDP of these new
entrants.
EU will have to expand its budget and its support through structural
funds to these new regions.
Will CAP survive enlargement? Or Will a two-tier or a fragmented
policy emerge?
According to some estimates, extending CAP to 4 more candidates
would raise the CAP budgetary cost by 6.3 billion euros-one third of
the current budget. Poland is keen on obtaining the full package as it
would entail significant transfers to Polish agriculture. But existing
members are reluctant to do so!
Need for a progressive phasing of these subsidies for CAP to survive
the enlargement and the pressures from WTO.