Problems arising from the Common Agricultural Policy

Table of Contents

List of abbreviations

1. Introduction

2. Problems of the CAP
2.1. Financial and disposal problems
2.2. Unequal distribution of benefits
2.3. Environmental damages

3. Reforms

4. Evaluation of today’s CAP

References

List of Abbreviations

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1. Introduction

Launched in 1962, the Common Agricultural Policy (CAP) was intended as a common policy in order to strengthen common links in other policy areas. According to Article 33 (former Article 39) of the Rome Treaty^[1] the primary objectives of CAP are to:

a) increase agricultural productivity
b) ensure a fair standard of living for farmers
c) stabilize markets
d) guarantee food supplies
e) ensure reasonable prices for consumers.

Unfortunately these objectives are mutually contradictory and create serious problems. Analyzing the major impacts of the CAP, this paper is organized as follows:

In chapter 2 the main problems caused by the CAP are explained. Here, emphasis is put on financial and disposal troubles, on the inequity of the CAP support and on environmental issues. In chapter 3 the reforms are presented in brief. Chapter 4 concludes with an evaluation of today’s CAP and hints to future challenges.

2. Problems of the CAP

2.1. Financial and disposal problems

Initially, the EU was a net importer of most food. So it could support prices via import tariffs. But due to technical progress and the fact that the CAP rewarded output, farmers extended production. Usually this implies falling prices, but as the EU wanted to protect its farmers, food prices were set above the world price. Facing an excess supply of food, the EU had consequently to act as a “buyer of last resort” and changed from an importer to an exporter between the 1960s and the 1990s (Baldwin/Wyplosz 2004, pp. 220). Nevertheless, the EU remains the world's largest agricultural importer (ERS 1999, p. 5). The intervention causes immediate financial and disposal problems.

Instead of earning import levy revenues, the EU has to spend large sums to buy the excess supply and to subsidize export. In 2005 the EU is expected to spend 46% respectively 49 billion euros of its budget (106.3 billion euros) on aid to agriculture (European Commission 2005). Considering that in 2002 the agricultural sector provided only 4% of jobs (or about 6.7 millions) in the EU15 and about 2% of European output, the high share becomes more striking. In contrast, in CAP’s origin, about 20% (or about 15 millions) of Europeans worked in the agricultural sector and produced about 10% of the EU6 GDP (Jovanovic 2005, p. 209; Zobbe 2001, p. 3). Hence, the high costs are a constant source of friction between supporters and critics of the CAP (particularly between France and the UK).

Secondly, a disposal problem arises. Initially, the EU intended to store the food and sell it later. But instead, the supply curve continued to shift up and the EU became the owner of “food mountains”. As a result, there was a serious amount of spoilage. To put it in other words, consumers have to pay high prices for food that is allowed to rot.

The alternative is to export. But this induces several implications: Although its prices are above world prices, the EU is able to export food because “restitution” or “export refunds” equal to the difference between EU and world prices are paid to traders. This practice of exporting goods at prices below their costs is also known as “dumping” and is generally prohibited by WTO rules. But until the Uruguay Round Agreement in 1994 few restrictions were placed on the dumping of agricultural products (Baldwin/Wyplosz 2004, p. 222).

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^[1] http://europa.eu.int/eur-lex/lex/en/treaties/dat/12002E/htm/C_2002325EN.003301.html