What we want to learn about this topic
European agriculture is very diverse, stretching from the artic regions in northern Scandinavia to the Mediterranean olive groves in Southern Europe. To describe these differences, it is useful to be able to compare agricultural structures across countries along a number of different dimensions, e.g.:
These differences help to understand some of the lines of division which emerge in the Council
of Agricultural Ministers.
Fennell 1997 (Ch. 3, 'The changing shape of the agricultural
sector'), EU Commission (Annex Chapter A 'EC agriculture past and present') and the Keane and Lucey chapter ('The
CAP and the farmer') in the Ritson and Harvey book contain discussions
on structural change in EU agriculture. The raw statistical data is contained in the annual Commission
reports. Grant 1997, (Ch. 2, pp. 32-62)
also makes comparisons between member based on the centrality of agriculture and first stage food processing in
each member state's economy. Ockenden and Franklin 1995 (Ch.
2 pp. 27-35) contains brief pen pictures of the agricultural policy positions of the main EU member states.
The European Commission has published a statistical report entitled 'EU
Agriculture Entering the 21st Century' containing a variety of useful charts showing the evolution of the EU
agricultural economy over the past decade.
You should be familiar with the distribution of powers between the EU institutions. Traditionally, this could be summarised as: the Commission proposes, the Council disposes, Parliament advises, and the Court rules. However, under the Maastricht and Amsterdam Treaties, the Parliament has been given greater powers of co-decision. However, in the case of agriculture, the Council must consult with the Parliament but can proceed without its consent. The only agricultural area where the Parliament has significant power concerns impacts on public health, where the Treaty of Amsterdam gave the Parliament co-decision power.
The role of member states and lobby groups is formalised through management and advisory committees respectively ('comitology')..
The annual price review was the centrepiece of agricultural policy-making in the past. It is now greatly diminished
in importance, mainly because price decisions are taken in the context of medium-term plans such as the MacSharry
reform or Agenda 2000, and also because the Commission's powers to manage markets have been increased under the Financial
Perspective arrangements and the need to comply with WTO rules.
Background readings include Swinbank, A. 'The CAP decision-making process', in Ritson
and Harvey; Tracy (Ch. 7 'Policy-Making')
and Grant 1997 (Ch. 6 'Decision-making and the CAP', pp. 147-182).
Article 33 (ex 39) set out objectives for a common agricultural policy but left open the means to
achieve these objectives. The EEC (at the time) was not starting with a clean slate in designing a common policy
- all of the original members already had protectionist agricultural policies in place, and it was a question of
integrating these policies into a common policy.
The key decisions on the market mechanisms which would be used were taken in January 1962, although common prices
were not achieved until 1968. These common prices were not a simple average of existing national price levels,
but under German influence tended to the higher end of the existing range.
Three key principles were established early on:
Two broad policy instruments were established: price and markets policy, designed to influence and support farm prices and incomes, and funded by the Guarantee Section of FEOGA, the Agricultural Guarantee and Guidance Fund; and socio-structural policy, designed to encourage the modernisation of farming, funded by the Guidance Section of FEOGA. Although it was initially foreseen that expenditure on the latter instrument would amount to around one-third of the total CAP budget, it rarely exceeded 5% of CAP expenditure until very recently.
These mechanisms have evolved over time with particularly significant changes occuring in
the 1990s as a result of the MacSharry reform, the WTO Agriculture Agreement and the Agenda 2000 reform. To see the significance
of these changes, it is important to understand the mechanisms used in the original regimes (commodity market organisations, or CMOs). Cereals is usually
taken as the prototypical regime but each commodity regime has its own characteristics.
Note the use of three support pillars: import levies, intervention buying and export subsidies. Additional support
can be provided through consumer subsidies, aids to private storage, withdrawals, deficiency payments. Additional comments might
include
Useful reading includes Tracy 1996 Chap 2 'Common market organisations' and Grant 1997 Ch. 5 'Butter mountains, wine lakes and beef wars: the commodity regimes'. The DG AGRI website has a series of useful Fact Sheets on individual commodity regimes following the Agenda 2000 agreement in its publications section. In its agricultural markets markets section you will find links to the basic legislation governing the operation of the common market organisations, plus the annual volume of market outlook projections for individual commodities up to 2009. This is a huge website, so use the Index feature (to the right under the masthead) to find your way around and to search for information on specific topics.
Agriculture has traditionally been the largest single expenditure item in the EU budget, accounting for up to 70% of expenditure in the 1980s and still amounting to about 45% of the total in 2005. Traditionally, the Council of Agricultural Ministers established support prices and the cost of maintaining these support prices was then picked up by the budget in an open-ended way. An important change was introduced in 1988 at the same time as the new financial perspective mechanism for EU budgets. This saw the introduction of the agricultural guideline which placed a maximum rate of increase on EU agricultural spending. For the first time, Agriculture Ministers had to operate within a fixed budget. This budget constraint was tightened in the Agenda 2000 agreement which specified that EU agricultural spending should not increase on average in real terms over the 2000-2006 period. The conclusions to the Berlin European Council meeting at which Agenda 2000 was agreed specified that total expenditure, excluding rural development and veterinary measures, in the 2000-2006 period would not overshoot an average annual expenditure of 40.5 billion euros. In addition, it invited the Commission to submit a report in 2002 to the Council on the development of agricultural expenditure accompanied, if necessary, by appropriate proposals.
The cost of the CAP, including the distribution of gainers and losers among Member States, is discussed in Lecture 16.
The so-called 'green money' system since the introduction of the euro is now largely of
historic significance, but an understanding of the reasons for the system is useful in gaining an appreciation
of how the CAP has operated over time.
CAP support prices are fixed in euros (previously ecus), and require conversion rates to translate these into national
currencies for countries which have not yet adopted the euro. These conversion rates are referred to as green rates. Unlike market exchange rates, these were administrative
rates which were altered (or not) by government decision.
Normally, payments in national currency would have decreased in a country whose currency had depreciated, and increased in a country whose currency had depreciated.
Problems arose when member states resorted to green exchange rates different to market exchange rates, to either
pursue price stability (in the case of the UK with a depreciating currency in the 1980s) or to protect farm incomes (as in Germany, with an appreciating currency in the 1980s), thus giving rise to different prices across member states when measured at
market exchange rates.
These differences were compensated for by border taxes and subsidies (monetary compensatory amounts, or MCAs). Farmers in countries with revalued
currencies were protected by taxes on imports and subsidies on exports (so-called positive MCAs), and vice versa
for countries with devalued currencies (negative MCAs). In the absence of these border taxes and subsidies, there
would be an incentive for traders to sell their produce in countries which had revalued currencies without revaluing
their green rates (because the trader would get the same nominal price in the revaluing country's currency, and
this would be worth a lot more in his own national currency). There was a gentleman's agreement that positive MCAs
would be removed only if this could be done without reducing nominal farm prices in domestic currency in countries
with an appreciating currency (for example, by revaluing the green rate at the same time as a price review increase
in the nominal ECU value of support).
With the de facto ending of ecu price increases in the early 1980s, the introduction of the 'switchover system' in 1984 at German insistence to prevent a cut in nominal support prices meant a hidden upward push to support prices
in that decade (by an extra 21% by 1992).
Although the MCA systrem was introduced to prevent trade distortions, in practice it created additional distortions
due to its limited coverage across products, inadequate compensation and the possibilities of fraud.
The introduction of the single market on 1 Jan 1993 required a thorough reform of the MCA system as it was no longer
possible to administer border taxes and subsidies on intra-EU trade. MCAs and the switchover system were abolished,
but a 'floating franchise' system to protect strong currency countries was introduced.
With the introduction of the euro on 1 Jan 1999, agricultural support prices are no longer influenced by currency
fluctuations for euro members, but the agri-monetary system continues to apply to EU countries outside the euro
zone. Farmers in a country whose currency has experienced a significant appreciation may be granted financial compensation partly funded by the EU.
See Ritson, C. and Swinbank, A. 'Europe's green money', Ch. 6 in Ritson and Harvey for a useful review of the agri-monetary system to the end of 1995.
CAP background and evolution
Bureau, J. C. and Matthews, A., 2005. EU Agricultural Policy: What Developing Countries Need to Know, IIIS Discussion Paper No. 91, Trinity College Dublin.
Ackrill,
R., 2000, The Common Agricultural Policy. Sheffield, Sheffield University
Press.
Budget pressures on the CAP
House of Lords, 2005. The Future Financing of the Common Agricultural Policy, 2nd report Session 2005-06, European Union Committe, London, The Stationery Office.
The Provisional Agreement on the Financial Perspective 2007-2013 reached by the European Council in December 2005 gives the figures expected to be available for agricultural spending over this period. The Financial Perspective has still (Feb 2006) to be agreed with the European Parliament through an Inter-Institutional Agreement.
Supplementary references
Shucksmith, M., Thomson, K. and Roberts, D., 2005 (eds). CAP and the REgions: The Territorial Impact of the Common Agricultural Policy, CABI Publishing
(focuses mainly on the distributional impacts of the CAP over the regions, but has some background information on development of the CAP)
Wolf, J., 2002. The Future of European Agriculture, London, Centre for European Reform (on counter reserve)
(short, non-technical up-to-date survey of key trends, including a chapter
on the 2002 Mid-Term Review)
Ritson, C. and Harvey, D.(eds), 1997, The Common Agricultural Policy, 2nd edition, Wallingford, CAB International
(a selection of essays on different aspects of the CAP by agricultural economists - more analytical
in style that the other references on this page).
Tracy, M., 1997, Agricultural Policy in the European Union and other Market Economies,
2nd edition, Brussels, Agricultural Policy Studies. (there are both 1996 and 1997 editions; the 1996 edition is at 338.1094 +N61)
(concise and up to date review of current issues in the CAP)
Fennell, R., 1997, The Common Agricultural Policy: continuity and change, Oxford,
Oxford University Press.
(an excellent account of the CAP written from a policy-maker's perspective, with equal balance
given to price and structural policy, though at 434 pp in length students should dip into rather than try to read
it from cover from cover. However, it will repay the time.)
Ingersent, K. and Rayner, A., 1999. Agricultural Policy in Western
Europe and the United States, Cheltenham, Edward Elgar. ARTS 338.1094 N9.
Statistical sources
European Commission, Agriculture in the European Union: Statistical and Economic Information, 2005.
European Commission DG AGRI, 2002,
European Agriculture Entering
the 21st Century, Brussels.
(statistical report with lots of colourful graphics outlining the evolution of the EU agricultural
economy over the past decade).
European Commission DG AGRI, 2005, Prospects
for Agricultural Markets in the European Union 2005-2012,
(this regular report from DGAGRI provides forecasts of market trends for the main CAP commodities
and sets the context for the discussion of needed policy reforms in the future).
Short monographs useful as general background
Grant, W., 1997, The Common Agricultural Policy, London, Macmillan
(a readable, descriptive account of the development of the CAP by a political scientist. Useful
as general background).
Ockenden, J. and Franklin, M., 1995, European Agriculture: Making the CAP Fit the Future,
London, Chatham House Papers of the Royal Institute of International Affairs, Pinter Publishers.
(Franklin is a former Permanent Secretary at the UK Ministry of Agriculture, Fisheries and Food
as well as a former Deputy Director-General in DGVI in Brussels. This short book is three good central chapters
on the pressures for reform from the environment and technology, the GATT and eastern European enlargement).
Gardner, Brian, 1996, European Agriculture: Policies, Production and Trade, London, Routledge.
(Brian Gardner is an agricultural consultant closely associated with Agra Europe in Brussels.
A highly critical but readable account of the changes being forced on agricultural policy in Europe by environmental
legislation, biotechnology and political change).
Australian Bureau of Agricultural and Resource Economics (ABARE), 2000. US and EU Agricultural Support: Who does it benefit?, ABARE Current Issues 2000, 2, October 2000. 5pp. General accounts of CAP evolution (a little dated now)
Tracy, M., 1997, Agricultural Policy in the European Union, Brussels, APS Agricultural Policy Studies, Chap. 1.
(a concise summary of the evolution of the CAP)
Fearne, A., 'The history and development of the CAP, 1945-1990', in Ritson, C. and Harvey, D.(eds), 1997, The Common Agricultural Policy, 2nd edition, Wallingford, CAB International
(a chronological review paying attention to the agricultural implications of both the first and second EU enlargements).
Hubbard, L. and Ritson, C. 'Reform of the CAP: From Mansholt to MacSharry', Ch. 3 in Ritson, C. and Harvey, D.(eds), 1997, The Common Agricultural Policy, 2nd edition, Wallingford, CAB International
(a more analytical and reflective chapter on the reasons why the pressure for reform have been driven by budgetary factors rather than by the rational critique put forward by economists)
Fennell, R., 1997, The Common Agricultural Policy: continuity and change, Oxford, Oxford University Press,
(Ch. 1, 2 and 6 provide an account of the evolution of the CAP).
Grant, W., 1997, The Common Agricultural Policy, London, Macmillan, Ch. 3, pp. 63-82
(shorter, more condensed survey of developments than the Fearne chapter)
Commission, 1994, 'EC Agricultural Policy for the 21st Century', Chap. 3 'The evolution of the CAP', European Economy No. 4, pp. 11-26. See also Chapter A in the Annex 'EC agriculture past and present' for a rather longer review.
Web resources
The Commission's DG AGRI site is the starting point for information on EU agricultural policy. The site's home page does not give access to all of the different resources on the site. For this purpose, click on the Index link in the upper right hand corner of the home page.