With the foundation of the European Economic Community in 1957, which later became the European Union (EU), all member states agreed on an integration of their individual market in a common market which guarantees the free movement of goods, capital, services, and people. Right at the beginning of this process called European Integration, a common agricultural policy which supports, regu-lates and protects the European agricultural market was introduced.
The ancient reason for its establishment was the desolate food supply situation in Europe after the Second World War. As society and economy has been damaged by years of wars, the agriculture had been crippled and nearly all European states were dependant of food imports . In open competition, countrymen suffered huge changes in quantity and prices, which yield to an unsteady and under average in-come as well as an unsecure food supply for consumers . The agrarian market was supposed to failure without governmental intervention . In order to achieve a stable self-supply of affordable food and a better agricultural productivity , the European agriculture was taken out of the regulation system of a free market economy and the common agricultural policy (CAP) came into force 1962.
Table of Contents
1 Reasons for the common agricultural policy in the EU
2 Evolution of the European market intervention
2.1 Post-war-period till 1992 : price support, import levy and export subsidy
2.2 1992 till 2004: coupled direct payments and rural development
2.3 2004 till 2013: decoupled direct payments
2.4 The GAP after 2013
3 Conclusion
Research Objectives and Themes
This paper examines the development of market intervention instruments within the European Union's Common Agricultural Policy (CAP) and analyzes their specific impacts on agricultural supply, market stability, and the transition from price support systems to direct payment schemes.
- Historical evolution of the CAP from post-war food security needs to modern market-oriented policies.
- Economic analysis of price intervention mechanisms, including intervention pricing, import levies, and export subsidies.
- Evaluation of the structural shift from coupled to decoupled direct payments.
- Discussion of rural development initiatives and the integration of environmental and quality standards.
- Assessment of future reform options for the CAP beyond 2013.
Excerpt from the Book
2.1 Post-war-period till 1992: price support, import levy and export subsidy
In order to offer incentives for farmers to produce more, CAP provided subsidies and systems guaranteeing high prices for agrarian products after the Second World War. The primary instrument to stable the common agricultural market was the price support by intervention pricing.
Figure 2 (on page 3) illustrates the mechanism of intervention pricing. In a free market, the market equilibrium settles down at the price p* and quantity Q* (point A). Now, the annual agrarian price circle of the EU sets the intervention price pI of certain agricultural products above the market price p*, which leads to a floor at pI. As the quantity demanded at the higher price pI is less than the supply at pI, there is an excess in supply (distance between QDI and QSI). To avoid the market price to be driven down to p* due to the missing demand, national intervention agencies occur as an additional consumer and, supposed the excess reaches exactly specified quality standards, they are forced to buy out the excess at the price pI. This shifts the demand curve to the right to QD’ and market equilibrium at pI can be sustained.
This approach increases the producer surplus from the triangle COA to FOE. As the pI > p*, the consumer surplus decreased from the triangle BCA to BFD. Although the increase in producers exceeds the decrease in consumers surplus (additional triangle DAE), there is a death weight loss whose which height depends on how the intervention agencies use the excess bought. They could sell the excess on the world market for the lower world market price, store or destroy it. In case of destroying, costs of DQD IQS IE plus the cost for the destruction process occur and are opposite to no net gain. Then the DWL would be DQD IQS IEA (red and purple area).
Summary of Chapters
1 Reasons for the common agricultural policy in the EU: This chapter outlines the historical context of the CAP, focusing on the need for post-war food stability and the subsequent integration of the agricultural market.
2 Evolution of the European market intervention: This chapter provides a comprehensive analysis of the different stages of CAP intervention, tracking the shift from price support systems to direct payments.
2.1 Post-war-period till 1992 : price support, import levy and export subsidy: This section details the initial supply-side policies used to ensure food security and their economic implications on market equilibrium.
2.2 1992 till 2004: coupled direct payments and rural development: This section covers the MacSharry-Reform, the introduction of coupled payments to reduce overproduction, and the creation of the second pillar for rural development.
2.3 2004 till 2013: decoupled direct payments: This section discusses the transition to the Single Payment Scheme (SPS) and the decoupling of subsidies from specific production volumes.
2.4 The GAP after 2013: This section examines the potential future reform options for the CAP, weighing efficiency against political feasibility.
3 Conclusion: This chapter summarizes the persistent challenge of justifying high CAP expenditures relative to the agricultural sector's small contribution to the total EU GDP.
Keywords
Common Agricultural Policy, CAP, market intervention, intervention pricing, export subsidies, import levy, decoupled direct payments, Single Payment Scheme, rural development, food security, European integration, agrarian market, MacSharry-Reform, agricultural supply, agricultural subsidies.
Frequently Asked Questions
What is the primary focus of this paper?
The paper provides an economic analysis of the instruments used by the Common Agricultural Policy (CAP) to regulate the European agricultural market and their long-term impact on supply and market structures.
What are the central themes discussed in the work?
The central themes include the historical development of agricultural support, the mechanics of price intervention, the transition from production-linked subsidies to decoupled payments, and the ongoing debate regarding future CAP reforms.
What is the main objective of the research?
The objective is to evaluate how different intervention instruments have shaped the European agricultural sector and to understand the shift in policy goals from simple price support to broader economic and rural development objectives.
Which scientific methodology is applied?
The paper utilizes an analytical economic approach, employing supply and demand models (market equilibrium, producer/consumer surplus) to visualize and assess the impact of subsidies and intervention pricing.
What is covered in the main body of the paper?
The main body traces the evolution of the CAP through three distinct eras: the post-war price support period, the period of coupled payments and initial reforms starting in 1992, and the modern era of decoupled direct payments beginning in 2004.
Which keywords best characterize the study?
Key terms include Common Agricultural Policy, market intervention, intervention pricing, decoupled direct payments, and rural development.
What are "butter mountains" as mentioned in the text?
They represent the extreme overproduction result of historical intervention pricing, where the EU was forced to store vast quantities of surplus agricultural goods that were not consumed by the market.
What characterizes the "Single Payment Scheme" (SPS) introduced in 2003?
The SPS decoupled subsidies from specific production levels, allowing farmers to receive payments based on land eligibility rather than the volume of crops or animals produced, making the market more demand-driven.
Why are there "inner-European strains" regarding CAP payments?
Strains arise because the implementation and levels of income support vary between member states, leading to situations where some states benefit more from the central CAP budget than others.
- Quote paper
- Cornelia Andree (Author), 2012, Instruments of market intervention in the European agricultural market and their impacts on supply, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/210027
