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| | What Agricultural Policy for Europe |
The health check of the Common Agricultural Policy (CAP) proposed by Mariann Fischer Boel, European Commissioner for Agriculture and Rural Development, is coming at a period marked by concerns about food security. However, and as we already emphasized in March1, none of the measures advanced by the European Commission integrates this now imperative objective.
With this in mind, we are republishing the full piece by the Academy of Agriculture entitled “Quelle politique agricole pour l’Europe ?” ( What Agricultural Policy for Europe ?),2 which contributes to enriching the debate on the direction to be taken with the health check and the future CAP reform.
It is no longer disputed today that the Common Agricultural Policy, which has in fact been modified recently, is no longer adapted to society’s new requirements and the new economic and social world order. In September 2007, speaking in Rennes, the French president himself started this extensive debate and the Commission followed up several weeks later with the publication of the “Health Check” requested by the Council in 2003.
Under these circumstances, members of the Academy of Agriculture of France, whose names are footnoted in this article, deemed it necessary to contribute to this vast project of reforming the CAP.
Does Europe still need a common agricultural policy?
What we call an “agricultural policy” today is much more than a policy to support agricultural production. It is in fact an agricultural, food, environmental and land policy that seeks to continuously ensure the quantity and quality of the food supply for consumers at stable and reasonable prices, while protecting the future. Consequently, it must be part of a comprehensive vision, focused on consumers’ demands and citizens’ expectations, while taking into account the interests of farmers and the distinctive characteristics of agriculture. There are nearly 500 million consumers in the European Union today, making it the largest solvent market in the world. It is completely unrealistic to believe that the world market could continuously meet the needs of European consumers in terms of quantity, quality and security. The American soy embargo in 1973 and the current supply shortages in some markets demonstrate how important it is for Europe to ensure its independence and food security for the products it is able to produce.
Although the prevailing conditions after World War II may have justified Europe's implementation of a voluntary food security policy in the 1960s, it is clear that the end of the Cold War did not reduce the high level of instability that characterizes the world in which we live. This justifies, today as in the past, the need for Europe to safeguard its food sovereignty. The fundamental objectives set for agriculture in the Treaty of Rome therefore remain entirely applicable today. However, given developments in production methods and changes in the expectations of consumers and citizens, these objectives are today complemented with new requirements in terms of product quality, environmental protection and the development of rural areas — requirements that must be integrated into any Common Agricultural Policy.
Finally, the growing political and societal demands for transparency and the evaluation of government actions require, in agriculture as elsewhere, a justification of subsidy measures and the validity of their allocation among the different categories of beneficiaries.
Only an ambitious and consistent Common Agricultural Policy can make it possible to obtain this set of objectives.
Learning from the facts
The experience of agricultural policies carried out in the past two decades shows that the direction Europe has taken since 2003, -- and even since 1992 -- leads to an impasse. Indeed, the entire reasoning behind the reforms undertaken or proposed is built on one premise, developed by the OECD and taken up by the WTO at the Uruguay Round — that of the virtue of a world market and the liberalization of international trade would supposedly increase its effectiveness. The observation of the effects of the WTO’s 1994 Agriculture Agreement, and the first phase of reforms of agricultural policies that accompanied it, shows that none of the objectives sought was attained, either in terms of reducing agricultural subsidies, stabilizing international prices or furthering economic development in the Least Developed Countries. The impossibility of concluding the Doha Round, in which negotiations reproduced and worsened those of the Uruguay Round, confirms the impasse to which the current guiding principles of agricultural policies favored by the WTO lead. Aside from a few major exporting countries that receive specific geographic and structural allowances for certain products, most WTO members do not benefit from the current proposals. The extension of the Round can therefore be explained in terms of primarily political reasons — no stakeholder wants to appear responsible for the failure of the negotiations.
Today, the work of economists from diverse backgrounds comes together to show that no significant improvement in collective well-being can result from liberalizing agricultural trade. In fact, left alone, the agricultural markets are unstable, chaotic and encourage speculative behavior or an aversion to risk, which undermine investment and improvements in productivity3 and hurt consumers. This body of work also shows that the WTO’s classification for subsidies is in no way relevant — the so-called decoupled subsidies impact the markets as much as other subsidies. Consequently, the complete or even partial decoupling of subsidies that the Community chose in 2003 and the Commission now suggests strengthening in its “Health Check” appears to negate the founding principles of agricultural policies, namely the need to control productivity and price fluctuations in order to guarantee the durability of production capacities and supply at a reasonable and stable price for consumers. Furthermore, it will be increasingly difficult, in the eyes of European citizens, to justify granting subsidies to certain categories of farmers without any production requirements.
Food demand is generally inelastic, so much so that slight changes in volume cause significant price variations. That is why it is better to intervene beforehand, controlling quantity, than to wait and correct the harmful effects of erratic price fluctuations. That means, in other words, that a system of revenue insurance established to compensate for price fluctuations after the fact could be infinitely more costly and less effective than a proactive system of regulating production volumes.
For “joint productions”,4 which is the case primarily of environmental goods and services tied to agriculture, it is not possible to consider the production of different goods in an isolated matter on independent markets. The organizational complexity of agricultural production systems and their close mutual interdependence means that the production of tradable goods and non-tradable “amenities” must be simultaneously considered within a consistent, comprehensive agricultural policy. This makes it impossible to isolate the different facets of agricultural policy into separate issues of management and financing, which could double costs for taxpayers and consumers. That would be the case, for example, of a first pillar of the policy (the EAGF) that would support merging farms, reducing the workforce, specializing agricultural systems and concentrating products into certain geographic areas, and a second pillar (the EAFRD) that would finance, conversely, efforts to diversify production and establish and create jobs as well as maintain activity in problem areas.
Finally, economists believe that there is no decisive economy of scale in agriculture. Consequently, an agricultural sector made up of a significant number of farms large enough to sustain a family is just as effective, on the macro-economic level, as a sector composed of a small number of large employee-based operations. Given that maintaining a sufficient number of agricultural assets is necessary to ensure sufficient employment opportunities for society, the irrational merging of farms no longer necessarily appears to be a measure of effectiveness or competitiveness in the sector. From a sustainable development perspective, such as the one drawn up by the European Union at the Göteborg Summit, the competitiveness of agriculture must indeed be measured comprehensively by examining the three aspects of economic, environmental and social performance.
Major directions proposed
With the above observations, a few basic principles can be established around which to define the future Common agricultural Policy after 2013.
Long-term objective: international agreements on market regulation
While it is less costly to control volumes than compensate for falling prices, it is clear that since 1980 the international community has lessoned its efforts to bring the instability of world prices under control. The solutions that have been gradually implemented under the influence of international organizations seek to dismantle physical intervention measures (inventory and land set-aside policies in particular) in favor of financial instruments (loan rates, deficiency payments, direct decoupled subsidies, revenue insurance, etc.). They contribute, on the contrary, to maintaining the volatility of world prices or even exacerbating it by transferring the imbalance on the domestic market to the world market.
Europe must affirm its willingness to restart the process of international cooperation for a concerted regulation of markets. This position will certainly be well received in many countries, in particular developing countries, which are the biggest losers in the liberalization process. Asserting the principle of food sovereignty must allow the Least Developed Countries to freely protect their markets in order to develop their production capacities, as the United States does for that matter. But Europe must make it as clear as possible that this is not a matter of proposing international agreements based on products, like those put forward in the 1970s (some of which still exist, even though only partially), but rather giving priority to WTO-type multilateral agreements that involve all the signatory members of the organization — and not just a few exporters and importers — making it possible to control the behavior of “free riders.” 5
However, promoting international agreements only makes sense as long as it is tied to coherent national or regional (CAP-style) policies.
Within the EU, a coherent package of intervention instruments
Due to the interdependence of markets and production and given the extreme diversity of the economic, environmental and social conditions in each country and region, it is unrealistic to envisage the creation of agricultural policies under a single mold like the OECD and WTO try to do. It is also unrealistic to imagine that there is a miracle market tool (decoupling for example) likely to provide a solution for all of the problems that must be resolved. An effective agricultural policy is intrinsically complex. Its effectiveness is the result first of the coherence and complementary nature of the tools implemented, which are necessarily diverse in nature. From this point of view, all the calls for “simplifying” the agricultural policy have, in Europe, lead to the implementation of systems that are just as complicated as the previous measures they were meant to simplify (for example, the implementation of SPEs in France) and in any case more burdensome in terms of bureaucracy.
Inventories and controlling movement: tools that remain indispensable
First, the typical intervention measures based on increasing and decreasing inventories remain very useful, as long as prior intervention remains less expensive than correcting price or revenue fluctuations after the fact. But these measures are limited by the accumulation of stocks. They must then be complemented with mechanisms that limit their use (in terms of time and quantity), or even, if need be, measures for controlling production that can be adjustable according to the level of stocks. (These national and regional inventory and control measures could be the subject of an international meeting, for example, within the context of the multilateral agreements mentioned above, in efforts to achieve a better regulation of prices and world stocks.)
The necessary regulation of borders
As a result of the previous proposals, the protection of borders constitutes an essential tool for any food and agricultural policy. Protection must, in any case, remain unrestricted for importing developing countries. The inability to invoke Article XXVIII of the GATT is indeed unfortunate. This article is still in force and allows for a renegotiation of tariff concessions, the granting of which was justified in the past but could lead to harmful imbalances if the initial circumstances change. The proposals made within the context of the Doha Round carry major disruptive factors for markets, in particular for European markets. There is therefore no reason for Europe alone to bear alone the negative consequences of liberalizing only agricultural trade (which, we have seen, results in a zero-sum game) and it should not feel obligated to agree to new concessions in order to conclude the Doha Round. In as much as only a minority of emerging exporting countries seem to be benefiting from the current proposals, the absence of an agreement can in no way be considered a political failure, but rather a simple return to economic realities.
Indispensable compensatory aid
Given the social, quality, and environmental requirements that will have to be implemented in the years to come for European agricultural production, European production costs will most often stay higher than world prices. The current rise in certain prices in no way implies that all the problems have been solved. For Europe, nothing would be more irresponsible than to orient its medium- or long-term policy based on a short-term economic environment that is favorable but absolutely unstable. The debate remains mostly open regarding the medium- and long-term prospects for change in world prices. Aside from a few favorable economic periods, in the current state of customs tariffs and given the gap between European production costs and international supply costs, granting direct compensatory aid will most often remain necessary in Europe.
In order to meet the objectives for market regulation, without wasting public monies, this aid must once again become countercyclical, in other words, it must be adjustable based on price fluctuations. It shall under no terms be separated from the type of production. A revision of the WTO's Agricultural Agreement is therefore necessary on this issue. Such a revision will be that much easier to obtain since the US, which initiated the separation, quickly gave up on this idea.
To reconcile the objectives of market regulation, social equity and rural development, direct aid should be capped according to production volume (or indirectly by limiting the number of hectares or heads of cattle) and according to a maximum value amount per asset. That amount must be able to be adjusted based on the market situation. The difficulty in enumerating the agricultural assets within Europe (a definition that varies greatly from one country to another) suggests that establishing a ceiling or scaling back aid and redistributing it among the different categories of producers should be done in a national or regional context, according to EU regulations. The need for a balanced distribution of agricultural activity throughout the territories also implies the possibility of regional adjustments for this aid (which is in line with the current principle of deficiency payments for natural handicaps and thereby reveals the limits of the current distinction between the first and second pillars of the CAP).
Strengthened measures to protecting the environment and agricultural jobs
The environmental and social objectives of the agricultural policy require enforcement of current regulations and, at the same time, the establishment of stringent conditions for the allocation of all types of direct public aid. These mandatory conditions must be complemented with contractual incentives that encourage practices whose social and environmental benefits surpass the requirements, for example in protecting biodiversity and natural areas. Establishment subsidies must be strengthened, adjusted and formalized under contract according to the economic situation and assets of future farmers. Bringing together all public subsidies, in the framework of a comprehensive single farm contract with just one source of financing and one monitoring system, could make it possible to create consistency among the different activities on each farm as well as an overall vision of the different subsidies received, thereby responding to a political requirement for transparency.
Food aid to the most disadvantaged
These essential points do not cover all of the aspects the agricultural and food policy that Europe needs. Unlike the food stamps program in the United States, Europe has never really implemented a policy of systematic food aid targeting certain specific categories (struggling segments of the population, school meals) or certain highly nutritional products (fruits, vegetables, organic products, etc.). Yet this type of aid, while it attempts to satisfy specific needs and expand consumption to poorer segments of society, also represents a tool for regulating markets that could be a very useful addition to the set of tools previously analyzed.
Reforming budgetary instruments
Some more technical adjustments, which we will not go into here, also prove to be necessary to implement the principles and modes of action mentioned above. Therefore, the yearly budgeting of the CAP must be called into question. One of the key objectives of this policy is to overcome market imperfections — because markets are structurally unstable and can quickly turn around from one year to the next — but it is also becoming clear that the financial means of intervention must be able to be adjusted with time. Mechanisms for long-term adjustments over the course of several years and transferring savings and expenses as well as mechanisms for adjusting the participation of States Members in financing the CAP based on the economic situation, or specific refinancing with the European Central Bank, must thus be considered, in such a way so as to be able to adjust the resources to the needs for financing over time.
Furthermore, breaking down the agricultural policy into several pillars under different funds (EAGF, EAFRD, Regional Fund, Social Fund, Cohesion Fund) constitutes a budgetary device that maintains the confusion between the different policies.
The agricultural policy is not meant to be a substitute for the policy of territorial cohesion or the Union’s energy policy. Financing for rural development must therefore come explicitly from socio-structural funds and the energy policy must be self-financed.6 The need to coordinate these different policies under concerted European, national or regional programs in no way implies budgetary confusion regarding their financing. |
In a period in which the future of the CAP is being debated (2008 Health Check, financial prospects for the comprehensive European budget and preparation for the 2013 expiration date), the current euphoria in some agricultural markets is confusing, as demonstrated by the Commission’s current deregulation options.
Contrary to what the Commission’s plans or many political speeches allude to, no serious economic analysis allows us to believe that the markets, left alone, can sustainably ensure, without major problems, the food security and food safety of 450 million Europeans in keeping with strict social and environmental standards. Nothing would be more irresponsible than to think that Europe no longer needs an agricultural policy, and that, in the absence of any regulatory intervention by public authorities, prices will be able to adjust sustainably to European production costs. Lastly, precisely because of its power, Europe cannot sidestep its responsibilities toward developing countries. To exercise its food sovereignty based on sustainable agriculture, Europe needs a strong voluntary agricultural policy. To construct this policy, it is necessary to free itself from the intellectual trends of the moment and glean lessons from a food history full of unpredictable turnarounds. In the first phases of its construction, Europe established an effective agricultural policy to meet its needs at the time. Today, those needs have changed significantly and the European Union has become the leading economic power in the world. This is by no means a question of longing for the past and advocating for a return to the original agricultural policy that was designed in another context with appropriate means. However, nothing would be more absurd than ignoring the lessons while designing the agricultural policy of the future that Europe needs.
French Academy of Agriculture
| 1 “Momagri’s Strategic Proposals for the Goepel Report on the CAP ‘Health Check,’” Jacques Carles, Executive Vice President of momagri, 03/17/2009.
2 Signed by Gilles Bazin, Michel Jacquot, Lucien Bourgeois, Jean-Christophe Kroll, Jean-Marc Boussard, André Neveu, Jean-Claude Clavel, François Papy, Hélène Delorme, Claude Servolin and Denis Hairy.
3 Increase in productivity must be understood here in the broadest sense — its economic but also environmental and social dimensions. Producing the same thing under improved environmental conditions is a gain in productivity, as is producing the same thing while distributing more profits.
4 The expression “joint production” refers to a situation in which one production technique makes it possible to obtain two distinct products. This presents many problems to the economic theory of production. If, in addition, one or more of these products is “non-tradable” products, the problem becomes even more complicated.
5 The “free rider” concept refers to a situation in which a country that is not part of the measure, and is not contributing to it financially, uses the regulations implemented by other countries to its own benefit.
6 Europe does not currently have an energy policy. This is decidedly a mistake. But it would be an even more serious mistake to believe that the agricultural policy, through the costly denaturation of food resources into biofuel, can take the place of a common energy policy.
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