EU agricultural policy: great potential for budget savings

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This guest post is written by Professor Ulrich Koester, Professor Emeritus of Agricultural Market Analysis and Policy at the University of Kiel. It originally appeared in German as an opinion piece in the periodical Wirtschaftsdienst 8/2011.

Discussions on the EU medium-term financial framework 2014-2020 are currently taking place in Brussels. Of particular significance are the expenditures for agricultural and fisheries policies. These policies account until now for €58 billion of expenditure or 47.4% of the EU budget. According to the draft proposal this share should reduce to 39% by 2010. It is rather shocking that, at a time when budget resources are scarce, and in light of the poor experiences to date with the current instruments and the results of numerous scientific and internal EU analyses, that it appears that the volume and structure of EU expenditure will not be greatly changed.

The largest share of EU expenditure goes on the first pillar of the Common Agricultural Policy. The item ‘direct payments to farmers’ corresponds in the 2010 budget year to €39.6 billion of expenditure. The overall budget cost is probably 10% higher, as the member states bear the administrative costs of disbursing these payments and, in some cases, add to these payments from national resources. The continuation of these payments only makes sense if they contribute to the fulfilment of agricultural or more general policy objectives of the EU.

Direct payments lack a rationale

It should be recalled that direct payments were first introduced in 1993 as compensation for possible income losses as a result of reductions in cereals and beef intervention prices, and later increased as further reductions in support prices were made.  However, it was the administrative support prices and not market prices which were reduced.  Market prices in every year fell by less than the reduction in intervention prices and, indeed, for some time have been considerably higher than in the years before 1993 when direct payments were introduced. The most recent OECD-FAO (2011) projections indicate that market prices at the end of the projection period 2011-2020 will be even higher than in the year 2011. Compensation to farmers for past decisions to lower support prices thus hardly seems justified.

The European Court of Auditors in a recent audit report established that direct payments do not contribute to the realisation of the majority of the declared goals of EU agricultural policy and that, in the few cases where they do make a positive contribution, their costs are unreasonably high. Direct payments result mainly in an increase in land rental prices and values. Biofuel subsidies of the German government have a similar negative impact as direct payments. The Scientific Council of the German Federal Ministry for Food, Agriculture and Consumer Protection as well as leading European agricultural economists have advocated renunciation of direct payments as well as biofuel subsidies for this reason.

In defence of direct payments it is claimed that they provide recognition to farmers for their contribution to sustaining the environment. But given that the current direct payments are largely determined by the supposed income losses resulting from price reductions, it is clear that at farm-level there is no equivalence between the level of payment sreceived and the environmental contribution that is made. Nor can the payments be justified by comparison with the additional requirements to comply with good agricultural and environmental practice (cross-compliance). The required expenditures to ensure cross-compliance differ strongly between farms and between regions and, in any case, are much lower than the size of the payments. The Court of Auditors pointed out in its Special Report that both the concept of cross-compliance and the application of the sanction system are quite inadequate.

Equalising direct payments across member states

If, despite these many criticisms, the system of direct payments is maintained, then any talk of levelling these across member states should be strongly opposed. Currently, there are significant differences in the level of payments per hectare between the individual Federal states in Germany and between the old (EU-15) and new (EU-12). The EU-12 are pushing hard for an adjustment. It is argued that this is justified on competitiveness grounds. However, this argument overlooks two things. First, the origin of the payments and their size in the EU-15 still reflects the earlier reduction in intervention prices for agricultural products. In the EU-12, however, following their accession they have experienced almost without exception politically-dictated price increases. Compensation in these circumstances is hardly justified. Second, it does not make economic sense to seek an adjustment in the distribution of payments for competitiveness reasons. Agriculture in the new Member States is competitive when new entrants to the sector can earn an equivalent income as in other sectors in those countries. No one suggests that, for competitiveness reasons, government officials in all EU countries should receive the same salaries. Why, then, should it be necessary to equalise the income to land?

Second Pillar expenditures

The second pillar of the Common Agricultural Policy is based on the European Agricultural Fund for Rural Development. The content of the more than 40 eligible measures demonstrates that the funds are mainly directed to promote the agricultural sector and frequently are in conflict with the principle of subsidiarity. Because agriculture, even in those countries such as Romania and Bulgaria which are the least developed Member States, cannot be the main driver of rural development, much of these funds in the second pillar are ineffective in promoting rural development and often spent inefficiently.

The Court of Auditors has repeatedly stressed the inefficiency of these measures and particularly the administrative difficulties associated with implementing the individual measures, for example, in the handling of agri-environment measures. It has even shown that there are measures whose effectiveness cannot be demonstrated and yet which are continued. Many of these measures are an open invitation to corruption, as detailed business information must be provided usually by the owner himself or herself and then checked by an inspector. It is no secret that, in some countries, the job of inspector is eagerly sought after! There is frequently no strong desire at the national level to check the legality of the measure, in part due to the system of co-financing. The level of co-financing from the EU can reach 85% for some measures in some countries and is at least 50%. Added to this, some Member States relieve the beneficiaries of any contribution at all in the case of certain measures.  Thus co-financing creates distorted incentives for efficiency calculations both among beneficiaries and countries. Further, the Commission is hardly in a position to check the costings for individual measures.

It is striking that, in the discussions on adapting the agricultural policy for the next period, hardly any attention is paid to expert analyses. Since no one is listening to expert advice, at least the costs of experts to provide this advice could be dispensed with. Agricultural politicians instead seem to be searching for new arguments to use to prevent a reduction in their budget. A new vocabulary, such as ‘greening’, must be invented in order to justify the continuation of inefficient measures. A more fundamental reform is required. This EU agricultural policy will further strengthen disenchantment in the EU.

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