Common policy, common budget? Péter Halmai Professor of Economics Szent Isván University Budapest, The future of the EU budget

CAP caught in cross-hairs? –After 2013 the situation of the CAP is open –facing the greatest challenge of CAP-history Widespread approaches –CAP represents the past, it makes EU- adjustment to challenges of the globalization difficult –Financing of the CAP doesn’t result in EU- wide value added –Present sources of the CAP enable changes in budget expenses (other financial goals)

CAP: moving target Changing priorities –Direct payments instead of market measures –Strengthening competitiveness –Agri-environment – cross compliance –Second pillar: integrated rural development –Health Check –Support is paid by taxpayers not by consumers

CAP expenditure and CAP reform path ,1 0,2 0,3 0,4 0,5 0,6 0,7 Export subsidiesMarket support Direct aidsDecoupled payments Rural development% of EU GDP billion € EU-12EU-15EU-25EU-27EU-10 % GDP

Criticism on the CAP Partial decoupling Direct payments are based on historical payments Capitalization of direct payments in land prices and land lease fees – distortion of input markets Restricted role of rural development Significant disparities have evolved making the new member states handicapped Conclusion: despite remarkable changes present system of the CAP is still not sustainable

Possible options Corrections Radical reform Re-nationalization Total liberalization

European Public Goods and the CAP European agricultural model, multifunctional agriculture –Joint output –Certain non-product outputs: externality, public goods (e.g. land management) –Purely on the basis of market mechanism an adequate production of these is not ensured –Stricter rules – agri-environment, animal health, food security – than that of competitors cause disadvantaged competition –It is difficult to determine the economic costs of rural externalities

To what extent community financing can be justified? Fiscal federalism theory – centralized financing (at EU level) is justified: significant, positive and negative cross- border externalities and spill-over effects Multifunctional agriculture European Public Goods The re-nationalization would jeopardize the functioning of internal market, economic-social cohesion

Vision: Common Agricultural and Rural Policy Change is needed: a radical deepening of CAP-reform Sustainability (economic, environmental, social) and a Common Agricultural and Rural Policy with environmental values and competitiveness in the focus should be emphasized

Conclusions The rural economy provides European public goods, too The reformed (new?) policy might promote more efficiently the production of European public goods Free lunch is not possible

Common policy, common budget? Budapest, The future of the EU budget

Certain public goods provided by agriculture Public goodsSpill-over effects Environment friendly agricultural production practices Protection of natural resources Stable ecosystem Biological diversity Protection of valuable natural areas Carbon sequestration Local, regional, European Regional, European Local, regional, European European Ethical agricultural productionFood safety Animal welfare Local, regional, European Socially sustainable agricultureBuffer function on the labour market Cultural diversity Local, regional, European Land managementStable ecosystem Biological diversity Carbon sequestration Regional, European Local, regional, European European Preventing deforestationForest biodiversity Stable ecosystem Wildlife Reduction of greenhouse gas Carbon sequestration Local, regional, European Regional, European Local, regional, European European Combating desertification and droughtCarbon sequestration Watershed protection Biodiversity conservation in drylands European Regional, European Local, regional, European, Sustainable mountain developmentStable ecosystem Hydrological stability Carbon sequestration Regional, European Local, regional, European European

Structural change in Common Agricultural and Rural Development Policy At present: Common Agricultural Policy Pillar 1: market policy VISION: Common Rural Policy (?) Pillar 1: Incentives for provision of rural public goods Direct payment Other internal market measures External market measures Pillar 1/A Flat-rate subsidies based on public goods Pillar 1/B Complementary subsidies on regional base (targeted support for the provision of public goods) SPS Coupled with production Intervention Support for private storage Promotional/ marketing support Support for structural change Withdrawal support Export refunds Promotional/ marketing support Pillar 2: Rural development Pillar 2: Strengthening the viability of rural economy and society Pillar 1 Competitiveness Pillar 2 Environment management Pillar 3 Diversification and improvement of life quality 2/A: Improvement of competitiveness of agriculture, forestry, aquaculture Structural adjustment Risk and crisis management 2/B: Economic/ Social Strengthening of rural communities