Common Agricultural Policy

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COMMON AGRICULTURAL POLICY.

The Treaty of Rome (1957), the founding document of the European Economic Community (EEC), committed its signatories to establishing a Common Agricultural Policy (CAP) and set out a list of contradictory objectives for that policy. The motivations for this policy were politically strong. In 1959 agricultural workers formed 24 percent of the employed labor force in France, a similar proportion in the German Federal Republic, and 33 percent in Italy. Their electoral judgments counted, particularly in Germany and Italy, where they were closely tied to the Christian Democratic political parties. And agricultural exports were an import contribution to Dutch and Italian trade. Even so, the idea of enforcing a common trading and pricing policy on so great a number of small-scale farmers would probably not have become so important were it not that in every member state of the Community agriculture had already been receiving a wide range of state subsidies—for output, for new investment, for veterinary services, for fuel, for exports—as well as being favored by the tax system. During the throes of the Great Depression there had been little support for the idea of a free domestic market in agricultural products; in the food shortages of the aftermath of World War II, there was even less. Sales were regulated in some member-states of the EEC, notably Germany and the Netherlands, by producers' associations such as the Deutscher Bauernverband, or, in the Netherlands, the Stichting voor de Landbouw. Everywhere in the EEC, ministries of agriculture functioned rather like national agricultural corporations managing the sector with state largesse.

One notable aspect of the CAP, however, was that although the common market of the EEC was shaped with the intention of sweeping away barriers to trade within the Community, the effect of the CAP was to increase the extent of regulation and controls on traded agricultural produce within the market and to sustain high levels of protection on the same products against nonmember states. Since the CAP came into effect the standard of living of those still employed in the sector has greatly improved, fulfilling one of the CAP's intentions. For most of the agricultural produce that can be produced in Europe's climate, the EC/EU is more or less self-sufficient.

Financial support for agriculture has dominated the Community's budget. Expenditure on agriculture and fisheries amounted to 80.6 percent of the 1973 general budget. Agreement on budgetary reform in 1988 led to a steady decline in this share. In 1999 it was only 45.5 percent. There are, however, other items in the budget that provide some measure of support for agriculture. Until 1970 the budgetary contributions of the member-states were related through a system of "keys" to their Gross Domestic Output. Persistent demands by France that the Community be financed through its own resources (ressources propres) led to a fundamental change in 1970. The customs dues raised by the Common External Tariff were allocated to these "own resources." Levies on agricultural produce crossing internal frontiers, their purpose being to standardize prices within the Community, were also allocated to the Community's own budget. One percent of the Value Added Tax (VAT) collected in all the member-states was allocated in the same direction. Lastly, direct financial contributions from the member-states had to be made to bring the Community's own resources up to a maximum of 1.27 percent of the Community's GNP in 1999. That last step carried with it, of course, the implication that the European Community had some attributes of a nation.

DEVELOPMENT

In many parts of the Community, agriculture is a small-scale activity. The number of separate enterprises under supranational management through common community rules made the task of managing almost impossible. One result was that the CAP took up such a large share of the funding that other policies were underfunded. Furthermore, national contributions to the common budget dominated political arguments between the member states, and often within them. One result of the CAP has been to preserve small farms throughout a half century of change in the organization of European industry and services—change that has been driven by trade liberalization and increasingly open markets. It would be difficult to argue that in the early stages of the EEC this was not politically and socially a wise choice. As subsidized enterprises tend to do, however, the system has partially outlived its usefulness.

The European Agricultural Guidance and Guarantee Fund (usually referred to by its French acronym FEOGA), although in 2006 only a minor cog in the subsidization machinery, was the major distributor of subsidies until the 1990s. Its expenditures supported farmers' incomes by subsidizing the prices of more than two-thirds of the EC's agricultural products through guaranteed prices and sales. This involved purchasing and storing produce that could not otherwise attract the fixed price and frequently selling it later to Eastern European countries or providing it as food aid to the third world. Some products continue to be directly subsidized, and many products remain protected by import regulations. Final EC prices are fixed annually by the national ministers of agriculture acting as an EC committee. Since ministries of agriculture have acted in all countries as supporters of farmers' pressure groups, the prices have been high. Excess production has been one result.

Like developed non–European Union (EU) countries that export agricultural produce, the European Union subsidizes agricultural exports. This practice has led to high-level trade disputes with the United States, Australia, and Argentina. It has led also to clamorous protest from those who believe exports from the poorest third-world countries should be encouraged by subsidies rather than made more difficult by subsidies to producers from rich European and American states. In 2006 export subsidies constitute a much smaller share in the CAP's subsidy expenditure than at any time in the CAP's history.

CHANGE

Community subsidies for exports take the form of "restitutions," which are, in plainer English, refunds allowing exporters to close the gap between Community prices and the price at which they will have to sell in the unsubsidized world. In 1986 such restitutions absorbed about 40 percent of the FEOGA guarantee fund. In 2005 they amounted to less than 20 percent of the same fund and are due for further reduction. Protest over the extent and size of agricultural subsidies has been increasing within the European Union since 1984, when the first serious attempts were made to hold agricultural expenditure to a lower rate of increase than that of the union's overall budget. Efforts to reduce EU food surpluses have been slow and controversial because the financial consequences do not fall equally on the member states. In the 1990s some countries, particularly the United Kingdom, used EU subsidies to stop production on less fertile land. Restrictions on domestic milk production have been in operation since 1986. Similar procedures have been cautiously adopted for cereal farming, a sector which for the first twenty years of the CAP was notorious for its large share of export subsidies, which it obtained because of the influence of large-scale grain farmers in national farmer's organizations in France and the United Kingdom. Further financial restrictions came in 1988, when the rate of growth of annual agricultural expenditure was fixed at no more than three-quarters of the growth of total EC expenditure.

In the 1990 world trade talks, usually known as the Uruguay Round, the United States led a challenge to the European Union, calling for a 75 percent cut to its agricultural subsidies. The talks collapsed over this issue. The European Union's response fell far short of the United States' demand. It was not clear that the United States' own extensive agricultural subsidies were as low as the level it demanded from the European Union.

It is difficult to predict the extent to which the 1990s policy changes within the CAP will survive in the greatly enlarged European Union of the twenty-first century. Attempts to freeze farm spending between 2000 and 2006 were rejected by Germany, although the level of spending was increased only slightly and part of the increase was to help the new member states to adapt to the new, and for them unexpected, harsher regime. They had been expecting to benefit from the extensive and proliferating programs of agricultural subsidy. The special program of subsidization, the Special Assistance Programme for Agricultural and Rural Development (SAPARD), that they were offered, was directed toward increasing investment in farming methods, marketing techniques, conservation, village preservation, rural heritage projects, and other matters that seem of more immediate concern to farmers in western Europe. (The list does not include many of the easier pickings that had earlier been provided for western European farmers.)

The CAP should be understood as a lingering consequence of the Great Depression of the 1930s, which cemented agricultural protection firmly into place and stimulated increases in food output across Europe as a way of reducing imports. The complex interplay between national government policies and farmers' own bureaucracies has only since 1990 slowly adapted to fit the agricultural sector into a less regulated trade regime. The European Union's reactions have not been slower than those in other parts of the world, especially when the political complexity of its constitutional arrangements are taken into account. Indeed, it may well be that the most potent force for change has not been international pressure but internal dissent among the early EU members, where agricultural labor is now only a very small part of the total labor force and has far less political leverage with national governments.

The CAP's contribution to the construction of the European Community also has to be recognized. It presided over an unprecedented movement of labor out of the agricultural labor force and into other branches of the labor force. Between 1951 and 1959, at least 350,000 agricultural workers per year left the land and were absorbed into other jobs. Such a large change would not have been possible without a rapid growth in manufacturing. One consequence was a sharp improvement in labor productivity in the agricultural sector. The determination of governments in the 1930s to keep people on the land was swept away. In the more backward sectors of the European Union, labor productivity in agriculture improved the most spectacularly. In the German Federal Republic, it improved by 5.5 percent annually between 1949 and 1959, in France by 4.9 percent, and in Italy by 4.7 percent. United Nations estimates suggest that the improvement of total productivity in Europe was greatest in the northwest, where labor markets were tightest. In that region, about two-thirds of the investment in agriculture went to labor-saving machinery. The CAP made changes in total productivity throughout the German economy relatively easy, resolving one of the worst problems of the 1930s and in doing so making domestic politics far more peaceful. The same can be said about its political impact in France and Italy.