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Darling’s daring bid for reform

The UK Chancellor of the Exchequer (aka Finance Minister) Alistair Darling wrote earlier this week to all his counterparts on the Economic and Financial Affairs Council (ECOFIN) ahead of today’s meeting, setting out the case for a radical reform of the EU’s agriculture and trade policies. Specifically, he calls for the abolition of direct aids (some €34 billion a year) and the abolition of EU tariffs on agricultural imports. He also signals the growing concern in the UK about the EU’s headlong rush into food-for-fuel policies that are widely seen as contributing to the rapidly rising costs of food in Europe and elsewhere.

Here is the text of the letter in full:

13 May 2008

Dear Dr Bajuk,

Rising global food and energy prices are increasing inflationary pressures across the world economy, hitting poorest households the hardest and threatening to reverse the progress we have made over the past few years in reducing poverty. The increases in agricultural prices seen over the past two years have been substantial, with wheat prices for example rising by around 150 per cent, and food price inflation in the EU27 has accelerated over the past year, to stand at over 7 per cent in March.

The EU has a clear responsibility to play a full role in the international community’s collective efforts to address the consequences of spiralling food prices by tackling the causes, but it also has responsibility to its own citizens to ensure that its own policies do not unnecessarily inflate the cost of food within the EU. It is therefore unacceptable, that at a time of significant food price inflation, the EU continues to apply very high import tariffs to many agricultural commodities. The Commission should give urgent consideration to extending the suspension of import tariffs on grains and to reducing or suspending the import tariffs that apply to other agricultural commodities.

Against a backdrop of climate change, population growth, higher energy prices and increased global demand for meat, EU and global food security in future will be critically dependent on ensuring efficient international markets for agricultural products and pursuing liberal trade policies. To this end, and consistent with the Lisbon Agenda, I believe that under the discussions at the June ECOFIN on food prices and our preparation of the June European Council, ECOFIN ministers should seek to agree an agenda for tackling the problem of rising food prices focussed on the following core elements.

First, we need an ambitious international trade deal concluded as soon as possible. Barriers and distortions in the global food market increase volatility and stifle the incentives to increase supply to match demand. Second, we need a fundamental reform of Europe’s agricultural sector. Specifically this should include:

* phasing out of all elements of the CAP that are designed to keep EU agricultural prices above world market levels (such measures cost EU consumers EUR43 billion in 2006);

* an end to direct payments to EU farmers (which cost EU taxpayers EUR34 billion – 32 per cent of the whole EU budget – in 2006);

* improving the efficiency of EU markets for agricultural land, labour and capital;

* raising farmer knowledge of the benefits of market mechanisms for risk management, such as agricultural futures and options, and ensuring a more liquid market for these is free to develop and covers more commodities; and

* encouraging an appropriate level of agricultural research and development at EU and national level.

Third, we need a renewed focus on ensuring the single market delivers the best outcomes for the European citizen. I welcome the Commission’s decision that one of the first “market monitors” under single market review proposals agreed at the Spring Council in March will examine the retail sector and propose that this study should cover groceries and make recommendations on what more could be done to tackle rising food prices.

Fourth, we need a close examination of the direct and indirect effects of EU biofuels policy, including a full assessment of its effect on food prices, now and in future. This is the objective of a review led by Ed Gallagher in the UK who will produce his interim finding at the end of this month. In line with the conditions agreed at the Spring 2007 Council, the implications of these effects should be factored into the current negotiations on the Fuel Quality Directive and Renewable Energy Directive.

I look forward to the opportunity to discuss these issues on 14 May.

I am copying this letter to ECOFIN colleagues and Commissioners Almunia, Mandelson, Michel, Grybauskaite and Fischer Boel.

With French Agriculture Minister Michel Barnier making all the running in the Agriculture Council with a firm defense of direct payments to farmers and a renewal of EU ‘community preference’, Darling’s letter indicates that the British strategy for achieving CAP reform is to work through ECOFIN. The UK government must have realised that the CAP Health Check is not going to offer any prospects for significant progress towards it’s bold long term objectives for the CAP, and is pinning its hopes on the Budget Review, in which the Agriculture Council is more likely to be eclipsed.

However, if past experience of the politics of EU financing is anything to go by, the UK will be roundly outmaneuvered by the French and the Germans with the Irish, Poles, Greeks and Spanish playing a supporting role. In my view the UK needs to think a little more about what a reform alliance across the EU might look like, and work towards a policy agenda that offers something for everyone, not just the traditional ‘gang of three’ (UK, Denmark and Sweden). The alternative is to sound like a lone voice in the wilderness, reminiscent of the worst days of John Major’s government. There is also a tactical error in setting objectives that are so out of line with the political centre of gravity in Europe. It means that whenever the EU is debating a smaller point about the CAP, for instance, during the health check, any UK contribution to the debate is dismissed casually by the Commission and member states with the line, ‘Well you British, you want to scrap the CAP, so why should we be listening to anything you have to say.’

Rather than becoming the poster child for an unattainable vision of market liberal purity, the UK should be taking the opportunity of the EU Budget Review to advance a positive vision for the EU beyond 2013, a vision that is crafted to appeal to a winning coalition of other member states. Not a shopping list but an intellectually consistent expression of of the principles around which the EU budget – and EU revenue – should be organised. Such a vision would inevitably lead to a much smaller role for the CAP and would make the UK’s budget rebate unnecessary. This is the deal that the UK has been working towards for several years now.

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7 Replies to “Darling’s daring bid for reform”

  1. Jack, Chancellor Darling’s letter is a very interesting one . Much in the letter makes sense but it is not always consistent. He makes his pitch for support from his fellow Ministers on the basis that the EU must “play a full role in the international community’s collective efforts to address the consequences of spiraling food prices by tackling the causes” by which he is clearly referring to the food riots in developing countries and the dire warnings of the World Bank that rising food prices threaten to roll back the gains made in reducing poverty in the past decade.

    But his prescription, that the EU and other developed countries should suspend import tariffs on grains, would simply make matters worse.

    Suspending EU import tariffs on grains at this point would simply make cheaper grain available to the EU pig and poultry industries (by far the biggest consumers of grain in the EU), thus allowing EU consumers to munch their way through more chicken McNuggets and pork vindaloos at the expense of even higher world grain prices for the poor of this world who really do depend on direct grain consumption for their energy needs.

    By far the highest levels of protection to any grain are the import tariffs maintained by Japan and South Korea to protect their rice farmers. Suppose Japan and South Korea followed Chancellor Darling’s advice in the morning and eliminated these tariffs to reduce rice price inflation for their well off consumers? This would send the current record-high world rice price even further into the stratosphere, bringing about those very food riots he wants to avoid.

    I don’t wish to support Michel Barnier’s position that current high world prices mean that EU’s food protectionism should be strengthened. This would be, for EU taxpayers and consumers, a hugely inefficient and expensive way of trying to bring food prices down for developing country consumers. But sometimes faith in free markets can become ideological and blind people to the real consequences of policy actions.

    In truth, world trade rules should be designed with the long-term predictability of the trading system in mind, not misused as an instrument for short-term world price stabilisation (or destabilisation). Lowering EU import tariffs on grain at this point in time would have exactly the same effect on world market prices as the export bans of grain and rice exporting countries which Mr Darling undoubtedly deplores.

  2. Very good point, Alan.

    I suspect Darling has more of an eye on high prices within the EU than food riots in developing countries. Labour took a drubbing at the local elections on 1 May and when the Ministers came out over the next few days the script seemed to be “voters are feeling the pinch due to the credit crunch and high fuel and food prices”.

    Earlier today the Governor of the Bank of England gave his darkest warning yet about the UK economy, in particular rising inflation, again due to fuel and commodity price rises.

  3. Excellent that you’ve been able to reproduce the letter.

    Trouble is that I don’t think that Darling really has the skills, approach and knowledge to really make headway on any EU issues. In all his ministerial roles he has had a poor attendance record at Councils, he does not have the charm to manage to build good relationships in the EU context.

    Furthermore the Treasury is always too arrogant in its EU policy – it’s a hangover from the days of Gordon Brown when the Treasury and its officials always assumed they were the only ministry anywhere that knew how to organise economic policy.

    So while Darling’s words might – in themselves – be OK, I fear that he’s not going to make much progress.

  4. I agree that Darling’s position is not particularly good for UK’s self interest in the HC. Barnier (a much smarter tactician than his predecessor, and in addition someone who knows well the way the EU works) seems to be trying to do exactly the opposite: end the French extremist position that has consistently disqualified this country in the CAP debate for the last few years and gather a coalition. With the help of the food crisis, it might work. Anyway, he is playing much more smoothly than the usual French “guerre des tranchées”.

    However, thinking that the Brits will be, or have been “outmaneuvered by the French” sounds a bit like British paranoia from this side of the channel (where we believe that we have consistenly been outmanoeuvred since Churchill, if not since Azincourt, 1415). More seriously, I doubt that Darling’s position is as medieval as Jack and Jon Worth suggest. The genius of the UK policy has been to manage to link intimately the debate on the rebates and the one on the CAP. The way I see it is that Darling knows that there is simply nothing to hope from the HC, that will be a minor reform. So, he is just looking beyond and positionning the UK for the big one: the discussion of all the EU financing, including rebates and structural funds. In that case it does make sense to start from a super extreme position. There is no risk of disqualifying yourself in a debate where you hold the wild card of the British rebate.

    I know, the grass is greener, we always think that your politicians are smarter than ours. But let us admit it, for the last 10 years it has been true. JCB

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