Understanding the EU Common Agricultural Policy

10 MINS READApr 18, 2014 | 09:47 GMT
Europe's Controversial Farming Policy
French farmers from the Farmers Confederation union demonstrate with a flock of sheep outside the Louvre on March 28 ahead of debates on the Common Agricultural Policy.

The European Union's Common Agricultural Policy essentially consists of a combination of subsidies to agricultural producers, supported by import barriers for agricultural products and incentives for exports. It accounts for roughly 40 percent of EU budget expenditures. It is a source of contention among EU member states; some want greater subsidies and others want the policy reformed or annulled altogether.

In the long run, the Common Agricultural Policy is likely to make up a smaller percentage of the bloc's budget than it does now. However, food security, specifically domestic production, will continue to concern European leaders, and agricultural producers will remain politically significant in most EU countries. Reform of the policy in the coming years will focus on modernization and simplification, but complete abolishment of the Common Agricultural Policy is unlikely.

The Common Agricultural Policy is a crucial yet controversial EU policy. It generates fierce fights among governments, it affects millions of Europeans, from dairy producers in Poland to grocery stores in Spain, and it costs each EU citizen around 30 euro cents ($0.41) a day in taxes. And yet, the Common Agricultural Policy is one of the most complex and least understood policies of the European Union.

To understand the policy, we need to go back to the 1940s and early 1950s. The severe food shortages that many Europeans experienced during and after World War II left a deep emotional impact on the continent. When France, Western Germany, Italy, Belgium, the Netherlands and Luxembourg created the European Economic Community in 1957, peace in Europe was a key goal but so was food security. Most of these countries were already protective of their agricultural sectors, so if Europe was to achieve a truly common market with no barriers for trade, it needed to harmonize agricultural subsidies. 

Like most of the decisions regarding European integration, the Common Agricultural Policy was ultimately a compromise between France and Germany. German industries would be allowed to access the French market, and in exchange German taxpayers would contribute to subsidies for French farmers.

In its early form, the policy basically meant that the European Community would buy farm output when the market price fell below an agreed target level. Brussels also raised tariffs for imports of agricultural products and, over time, started to subsidize agricultural exports. This quickly led to overproduction and the creation of "mountains" and "lakes" of surplus food. Many government officials and experts expressed concern about the program's shortcomings in the early 1960s, but reform proved extremely difficult.

Since the early 1990s, reform in the Common Agricultural Policy sought to shift from market intervention to more direct support for producers. The goal was to give farmers more freedom to produce what the market and consumers wanted, allowing them to explore new niches. However, the EU Commission still intervenes in some commodities such as wheat, butter and powdered milk.

EU members have fully delegated the subsidization of agriculture to Brussels. Money for the Common Agricultural Policy comes from the European Union's general budget, within the ceilings established by the bloc's six-year financial framework. In its current form, the policy is based on two pillars. The Single Payment Scheme, which accounts for roughly 75 percent of total Common Agricultural Policy spending, mostly consists of direct payments to farmers and landowners. The second pillar, known as Rural Development, aims to promote economic, environmental and social development (something similar to the bloc's structural funds but specifically focused on rural areas). Complementing these subsidies are external tariffs and quotas for agricultural imports from outside the European Union. These measures are not exactly part of the Common Agricultural Policy, but they are meant to help European farmers.

Share of Agriculture in Europe's GDP

Winners, Losers and Those In Between

Agriculture is a relatively small sector of the EU economy, accounting for less than 2 percent of the bloc's gross domestic product and roughly 5 percent of employment. However, the European Union is the second-largest agricultural exporter in the world (slightly behind the United States) and the world's largest importer of agricultural goods. Agriculture is more important to the economies in Eastern and Southern Europe than to those in Central and Northern Europe. For instance, in Romania, agriculture represents more than 5 percent of gross domestic product and almost 30 percent of employment, and in Greece agriculture represents around 2.5 percent of the gross domestic product and 13 percent of employment. France is the European Union's largest agricultural producer, but the sector is not as important in terms of gross domestic product and employment. Naturally, countries that depend more on agriculture defend the Common Agricultural Policy, and those where agriculture is less relevant criticize it.

Farming Jobs in Europe

According to a March Eurobarometer poll, most Europeans consider it important to provide financial assistance to rural areas. More than 75 percent of respondents believe the Common Agricultural Policy benefits all EU citizens, although only a minority know about it in detail. However, the policy also has received strong criticism, including accusations of ineffectiveness and misspending, allegations that it creates artificially high food prices and reports that it hurts smaller farms and even damages the environment. The most relevant of these critiques, and the one that will shape the Common Agricultural Policy in the future, is the accusation that it disproportionately benefits some member states and harms others.

In absolute terms, France benefits the most from the Common Agricultural Policy, receiving about 17 percent of the policy's allocations, followed by Germany, Spain, Italy and the United Kingdom. However, because of the size of their economies, Germany, Italy, the Netherlands and the United Kingdom are net contributors to the Common Agricultural Policy (France recently became a marginal net contributor as well). The main net recipients of Common Agricultural Policy benefits are Poland, Greece, Romania, Hungary and Ireland. Most countries in Nordic and Baltic Europe have a balanced position between their contributions and their allocations.

The distribution of payments between countries is a zero-sum game in which someone's gain is someone else's loss.

Not surprisingly, the United Kingdom is one of the most vehement enemies of the Common Agricultural Policy. London is not the main net loser in the policy (Berlin is), but the program has become one of the many arguments for the United Kingdom's criticism of the European Union. For some British officials, the policy represents everything wrong about Europe: inefficiency, money squandering and corruption. The United Kingdom secured a significant victory in late 2013, when the members of the European Union agreed to apply marginal reductions in Common Agricultural Policy spending for the 2014-2020 period. This happened in the context of broader discussions about the EU budget in which London received support from Berlin and other Northern European governments to freeze spending at the EU level.

The Politics of the Agricultural Policy

The management and reform of the Common Agricultural Policy is slow and complex. Reforms are generally proposed by the European Commission, the EU's main executive arm, but then are discussed and negotiated among the Commission, the European Parliament and the European Council (which represents the member states). The European Union's enlargement to the east further complicated decision-making, as it increased the number of countries involved, and some of the newer members have large agricultural sectors. As with most significant reforms of EU policy, decision-makers are under permanent pressure from lobbies and influence groups at the national and supranational level.

During the negotiations, the distribution of Common Agricultural Policy payments among member states is of crucial importance. The distribution of payments between countries is a zero-sum game in which someone's gain is someone else's loss. There is no specific formula to allocate payments, as distributions are negotiated by the member states in the context of agreeing to the overall ceilings for the EU budget. This makes the whole process completely political, and several attempts to reach a more structured way of distributing payments have been blocked by the nations that are interested in preserving the status quo.

But even when countries manage to get a satisfactory share of funds, actual absorption (the extent to which countries are capable of effectively spending the funds) remains difficult for several EU members. This is particularly true for countries in Central and Eastern Europe whose insufficient administrative capacity often limits their ability to absorb agricultural and cohesion funds. The Common Agricultural Policy is sometimes subject to fraud, ranging from the misuse of funds to the presentation of documents leading to wrongful payment of funds from the European Union. Since the management of Common Agricultural Policy funds is the responsibility of EU countries, most of the time fraud investigations are in the hands of national governments. This naturally makes the process, once more, subject to political manipulations.

There is also a difference between Eastern and Western Europe in terms of labor productivity in the agricultural sector. Several regions in France, the Netherlands and the United Kingdom are considerably more productive than some regions in Poland, Romania and Bulgaria. To a certain extent this is influenced by farm structures, since in many Eastern and Southern European countries' farms tend to be smaller, with lower levels of mechanization and with significant parts of their production destined for on-farm consumption.

For some British officials, the policy represents everything wrong about Europe: inefficiency, money squandering and corruption.

There is one final aspect of the politics behind the Common Agricultural Policy: EU authorities using it as leverage. In recent years, Brussels has pushed for a tighter connection between agricultural subsidies and economic reforms in the receiving countries. In February, the European Council decided that if a member state fails to act in response to an economic recommendation from the commission, part or all of its structural fund payments could be suspended. While this tool has yet to be tested (and technically should only apply to reforms in the agricultural sector), it will probably become a way for Brussels to put pressure on member states at a time when the European Union's credibility as an enforcer of European fiscal targets is under question.

The Future of the Common Agricultural Policy

The Common Agricultural Policy's share in the EU budget has decreased significantly over time, from around 70 percent in the 1960s to roughly 40 percent in the 2010s, and will probably keep decreasing in the future. The progressive transition to service economies, in which agriculture is not as important, partially explains this factor. For example, the share of agriculture in France's gross value added fell from 5.7 percent to 1.8 percent between 1975 and 2013. The process is similar in the east: in Romania, it fell from 19.1 percent to 6.4 percent between 1995 and 2013. Urbanization is another significant factor. According to Eurostat, only a fifth of the population of the European Union lives in purely rural areas (in 1950, roughly half of the population of Western Europe and two-thirds of the population of Eastern Europe was living in rural areas). Over the past two decades, the share of agriculture in total employment fell by half in countries such as France, Spain and Italy.

As the economic role of agriculture decreases, so will the political weight of the sector and the government's interest in protecting it. However, this process will probably be extremely slow. Agriculture will affect EU policies for the foreseeable future, particularly when it comes to negotiating trade agreements with other countries or trade blocs. Protectionism will probably keep shaping Europe's negotiations with countries like the United States and trade blocs like Mercosur, as both want easier access to the European market for their agricultural products. Recent protests by agricultural producers in France and Italy are reminders that they are still very relevant domestic political actors in many countries.

Even if Europe's population reaches its peak by the late 2030s and then begins declining, as forecast, and technological innovation improves agricultural productivity, the issue will remain an important part of Europe's approach to food security. As a result, the European Union is likely to focus its future efforts in making the Common Agricultural Policy more efficient and simple, but a substantial reform — or abolition — seems extremely unlikely.

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