1. Common Agricultural Policy (CAP)  After a long time of food shortages suffered by Europe throughout WWII.  Established in 1957 with the Rome Treaty upon France’s insistence. (In 1962, The European Agricultural Guidance and Guarantee Fund was created as a basis for common policy. Since then, the Fund has been the biggest beneficiary of the EU budget.)  CAP includes a set of rules and mechanisms which regulates the production, trade and processing of agricultural products in the EU with attention focused on rural development.

2. Four Main Objectives of CAP  Secure food production for the population and ensure self-sufficiency in food products.  Increase agricultural productivity by promoting technological progress.  Ensure a fair standard of living for farmers. Fair and regular incomes to farmers- as independent as possible of uncontrollable factors such as climate, soil or disease and partly as a counteraction to the rapid depopulation of rural areas.  Stabilized and fair food prices for consumers. In addition, dependence on imports had to be reduced and farming had to be modernized. CAP provided several financial incentives to farmers to achieve these goals.

3. Workings of CAP I  It consisted measures such as Financial Incentives to farmers “A Price Support System” based on setting a target price for a commodity and imposing a levy on cheaper imports and intervening to buy produce at a predetermined level to maintain the stability of the internal market (Price floors-minimum farm prices- were set.)

4. Workings of CAP II  It was based on 6 main mechanisms. 1. Price Support: Guaranteed minimum prices set by agricultural ministers. 2. Import Taxes: Ensured external prices can not weaken internal EU prices due to cheap imports. 3. Intervention: Support by selling or storing surpluses. 4. Stock removal: Dispose of surpluses by other means e.g. Free Food Scheme. 5. Subsidized exports: “dumping” of surplus produce while destabilizing prices in third countries 6. Production Control: Quotas (e.g. Milk) and “ set aside” (refers to land).

5. Problems of CAP  The CAP system led to:  1. Overproduction of food supplies “mountains of butter and cheese and lakes of milk and wine” Chronic surpluses in agriculture.  2. Degradation of environment- associated with the intensification of agricultural production and the amplified use of chemicals and heavy machinery.  3. Inefficient production methods were effectively being subsidized, along with small scale farming.  4. Huge budgetary costs of this system for the financing EU members. By the 1980s, the EC piled up so many reserves that it had to pay exporters to destroy produce.

6. CAP under fire!  These problems put CAP under intense financial and political strain. Over 50% of EU budget was being allocated to CAP (but this has been decreasing over the recent years. In 2000, 40.9 billion Euros (50% of EU budget) on CAP.  These led to reforms of the 1990s-subtantially replaced “guaranteed prices” under the price support system with “direct compensation and payments” to farmers when and if prices fell.  Hence, CAP had to adapt in order to meet these challenges by adopting a new approach based on a combination of lowering institutional prices and making compensatory payments to farmers (Greater reliance on market in setting prices).  BUT its significance derives from the vast # of people affected by it and the extent of territory covered. Also it has symbolic significance given the extent of independence transferred from national to the European level.

7. “Pressures for Reform”  Budgetary Pressure: This led to the MacSharry reforms of 1992. Total tax transfer increased from 0.77% of the GDP of 9 members in 1980 to 1.03% of the GDP of the 12 members in 1989.  Consumer pressure: In 1986, the cost to consumers in terms of higher food costs was over twice the budgetary cost of supporting agriculture and was almost equal to the net benefits to producers: “A zero-sum game.”  External Pressure: The Uruguay Round of GATT tried to solve the problem of trade distortion associated with the CAP. USA also changed its policy stance and agreed that the agriculture becomes a centerpiece of the Round (1986-1992). Signing of Blair House Accord between the USA and EU and a Peace Clause: until 2003, the EU and the USA were prevented from taking unilateral trade action against each other’s farm policies.

8. MacSharry Reforms (1992)  These pressures led to the approval of MacSharry Reforms in 1992. (to be implemented during 1995-2000)  During this period, there would be a significant reduction in the existing border measures and reduce tariff levels by 36%, internal support measures by 20%, and reduce export subsidies by 36%.  Supply-Control Mechanisms: Producer co-responsibility meant cost of surplus disposal be shared by the producer. Marketing quotas to limit the production of dairy production esp. milk. Co-responsibility levies and budgetary stabilizers to control the output level and budgetary cost of the cereals regime (Penalties for excess production over a threshold level.) Introduction of land-set aside policy.

9. “Agenda 2000”: The Reform of CAP  New reforms presented by the Commission in 1992 have been implemented with the Agenda 2000.  Involved direct transfers rather than price support systems. Number of subsidized farmers were reduced. Farmers were asked to produce no more than what they can sell to prevent overproduction and cut the cost of CAP.  Also new reforms led European prices to parallel international prices.  Problems like “mad cow disease” dealt a heavy blow to meat exports. Brought the issue of safety to the foreground.

10. Challenges Ahead  Competition becomes worldwide in this area and EU faces competition from developing countries with very low production costs and from the US with subsidized products.  Entry into the EU: New entrants’ economies are largely based on agriculture, and small scale producers will have difficulty in sustaining competition from low cost producers. Agriculture accounts more than 20% of employment and around 10% of the GDP of these new entrants.  EU will have to expand its budget and its support through structural funds to these new regions.  Will CAP survive enlargement? Or Will a two-tier or a fragmented policy emerge?  According to some estimates, extending CAP to 4 more candidates would raise the CAP budgetary cost by 6.3 billion euros-one third of the current budget. Poland is keen on obtaining the full package as it would entail significant transfers to Polish agriculture. But existing members are reluctant to do so!  Need for a progressive phasing of these subsidies for CAP to survive the enlargement and the pressures from WTO.