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Free market think tank weighs in on CAP reform

The European Centre for International Political Economy (ECIPE) is a rare creature among Brussels think tanks: first, it advances a strong free trade agenda and second, it does not rely on EU institutions for its funding (its website says that its ‘base funding’ comes from the Free Enterprise Foundation in Sweden). Earlier in the summer EPICE published a briefing paper about the CAP written by Valentin Zahrnt. There’s not a whole lot new in the paper and there is a lot in common with a policy brief I wrote for the Centre for European Reform back in December 2005. The author comes down firmly on the non-trade-distorting, public money for public goods agenda advanced most strongly by Sweden, Denmark and the UK (and more moderately by the Netherlands).

Zahrnt wrote an op-ed piece in yesterday’s Wall Street Journal Europe which summarises the position:

“Limiting the CAP to those targeted instruments that efficiently promote societal objectives would allow the EU to give back certain competencies to the member states. If subsidies are paid only for such services as preserving open spaces, enhancing scenic variety and promoting animal welfare, they will only minimally distort trade. In this case, the threat of trade distortions in the EU’s internal market cannot serve as a justification for having a common agricultural policy. Agricultural subsidies could be largely left to national authorities that are in a better position to pursue local preferences, with locally responsive policies that are financially more responsible.”

The last sentence is perhaps Zahrnt’s principal original contribution to the debate, but it is an important one. Fiscal decentralisation of the CAP is an idea that even France – for so long the defender of the status quo but due to become a net-contributor to the EU budget sometime after 2012 – may one day come round to. Zahrnt’s other interesting idea – related to the first – is the notion of linking co-financing rates to the amount of ‘European value added’ that a policy instrument exhibits. He writes:

“The EU co-financing rates should be adapted to the cross-border effects of each measure so as to reflect the European interest. Preventing pollution that spills across boundaries, such as nitrate in rivers, may justify financial contributions from the EU budget: as polluting member states do not face the full environmental costs, they will not invest sufficiently into clean farming practices on their own. The same applies to protecting species that are scarce or endangered from an EU wide perspective. Predominantly national or local objectives, such as enhancing scenic landscape values or offering early-retirement schemes for farmers, should not be financed through the EU.”

A spotlight on European value added is an idea that has been advocated by Jorge Nuñez Ferrer a research fellow at CEPS, who has probably written more widely on the EU budget reform debate than anyone else. But I’ve never seen it spelled out with such a clear link to co-financing. Definitely an idea worth further elaboration.

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One Reply to “Free market think tank weighs in on CAP reform”

  1. The issue of re-nationalization of the CAP is likely to be a major one when we start talking serious business (I mean, not the Heath Check, but the post 2013 financial perspectives). Zahrnt’s position is close to the Dutch government one (and to the one of some of my coauthors from SOW Amsterdam whom I often disagree with in spite of signing common papers). This position has strong economic foundations, and Alberto Alesina among others has written some clever stuff along these lines. The attitude of the French government (most of its position regarding the CAP can be explained by a trivial calculus on the rate of return of its contribution to the EU budget, a typical “restaurant game”/prisoner’s dilemma case) does not help the cause of “financial solidarity”.

    However, Zahnrt’s position is ridiculously narrow regarding environmental goods. Many of these goods (landscape for example) have an existence value that affect the utility of citizens who do not even live nearby. Even if you are skeptical about virtual existence values, Europe is now so integrated that tourists from all over the Union flock to the areas where extensive farming contributes to open spaces, landscape value and biodiversity. As a European I feel concerned about both the Irish Burren and the Crete landscapes. My area (Sologne, a hunting area in Center France) gets absolutely filled with British and Dutch tourists from May to september, and every single guesthouse, lodge and camping place is filled with non nationals (actually, the Dutch have a terrible reputation of bringing their own food and being careful of not spending anything locally… bringing Dutch food when you go to France is a sign of serious problem with your utility function if you ask me, and people with weird cheese tastes make untrustworthy fiscal decentralizators).

    I am not saying that pillar 2 measures should not be reformed. I am not sure that many of them actually provide some public goods). But when they do, the public good is truly European. In such cases, there is still a strong case for pillar 2 measures to be largely funded by the EU budget (much more than pillar 1 measures).

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