The review published today is a more anodyne document, and it shies away from making specific recommendations on which expenditure areas might see their budgets cut. In this it closely resembles the leaked document on CAP reform put into the public domain earlier this month and which also summarises the conclusions of a public consultation. Indeed, the budget review document is even less prescriptive in that it does not even attempt to sketch out alternative models for the financial perspective period. The document makes the usual rhetorical references to the need for the budget to reflect EU priorities (particularly the 2020 strategy), to concentrate on areas where there is European value added, and to allocate resources on the basis of results. There then follows an extended review of EU expenditure areas presented in a totally neutral fashion. There is no attempt made to suggest that expenditure in an area should be increased or decreased relative to current spending, or relative to other budget items. The section devoted to agricultural spending was clearly written by DG AGRI, and is an exact précis of the leaked CAP reform document. The flavour of the document is summed up in the final paragraph of the agricultural section.

Reform of the CAP could therefore be pursued with different degrees of intensity. It could restrict itself to ironing out some current discrepancies, such as more equity in the distribution of direct payments between Member States and farmers. It could make major overhauls of the policy in order to ensure that it becomes more sustainable, and reshapes the balance between different policy objectives, farmers and Member States, in particular by introducing a more targeted approach to priorities. A more radical reform would go further, moving away from income support and most market measures, and giving priority to environmental and climate change objectives rather than the economic and social dimensions of the CAP.

Indeed, reform of the CAP could imply any of these things, but the budget review paper isn’t going to tell us which.

Newspaper comment has focused on the suggestion that the paper proposes to scrap the VAT-related contribution from Member States and to replace this with an EU VAT tax. Thus the BBC News website highlights “EU proposes new Europe-wide VAT”. This is sloppy journalism. In the section on own resources, the paper simply lists some of the well-known proposals for EU taxes which are not just revenue handed over by national governments, including an EU VAT but also taxes on the financial sector, auction revenue from carbon permits, air transport taxes and so on. These are introduced under the rubric that “The Commission considers that the following non-exclusive list of financing means could be possible candidates for own resources to gradually displace national contributions” and in conclusion the paper says “Each of these financing means has its particular characteristics and presents advantages and disadvantages. In the light of the comments received, the Commission will submit proposals as part of its overall proposals on the next Multiannual Financial Framework.” One might have expected that the public consultation was designed to elicit the comments, but the paper is totally neutral on the favoured option if any. However, the idea that the EU should rebuild its own direct sources of revenue is now back on the table.

The paper strongly disapproves of the stance of Member States in approaching the budget negotiations in the spirit of trying to maximise their net transfer from the EU budget. It is hostile to the idea of corrective mechanisms, in the belief that a more diversified expenditure structure will eliminate the need for such mechanisms. But this fails to recognise the political economy of these negotiations. It would be better to explicitly recognise that the pattern of transfers emerging from the budget negotiations is a legitimate source of concern, and to agree beforehand what that pattern would be. Member States could then negotiate on the substantive budget issues, knowing that whatever agreement was reached would not affect their bottom line.

Concrete commission proposals on the post-2013 multi-annual budget are expected to be published in July of next year, with unanimous member state approval and European parliamentary support needed before they can become law.

As part of the December 2005 heads of government agreement on the 2007-2013 financial perspective it was agreed that there would be a midterm ‘budget review’ in 2008-09 which would look at all areas of the EU budget. including the two hottest political potatoes – the large share of funds going to the CAP and the British budget rebate. The review began with a big public consultation led by the then Budget Commissioner Dalia Grybauskaite, who pulled no punches in describing the budget as largely out of tune with Europe’s current and future challenges. However, she left the Commission early to become President of Lithuania and with delays to the Lisbon Treaty ratification the review process slowed to a standstill.

The future of the budget hit the headlines late last year with the leaking of an early draft of the Commission’s communication on the future of the budget. This suggested share going to the CAP and Europe’s regional policy needed scaling back to free resources for innovation, energy security, climate change and jobs. The document, which is understood to have been drafted by Commission President Barroso’s close advisers, was immediately disowned by a handful of outgoing Commissioners who saw it as a threat to their own budget lines.

We now learn that the Commission’s revised communication will be published in the first week of October (expect leaks before that). Budget Commissioner Janusz Lewandowski is said to favour “evolution over revolution” and in an interview with the German newspaper Handelsblatt the Commissioner suggested a reduction in the CAP budget. This week his officials have suggested the CAP budget could decline to around 33 per cent of the total (down from the current 40 per cent). MEPs with close links to farming lobbies are already raising the alarm. Irish MEP Mairead McGuinness said

“The Budget Commissioner sees a future with less spent on agriculture and more on research and innovation. His words are part of a softening up process, preparing the ground for a lower agriculture budget”

Yet Lewandowski is clearly taking a more cautious approach than previous Commissions. A decade ago the Prodi Commission suggested the CAP budget be cut to 30 per cent of the total EU budget. Prodi was eventually outmaneuvered by his own Agriculture Commissioner Franz Fischler and the CAP budget has increased each year since then with the bulk of it being ring-fenced up to 2013 under the terms of a deal made by French and German heads of government back in 2002.

Meanwhile, current Commission President Barroso, in his first ‘State of the Union’ address, steered clear of saying anything concrete on the future of the CAP that might frighten the horses. He called for “an open debate without taboos”, argued that the EU budget should be directed “where it leverages growth & delivers on our European agenda” and said that farm policy should contribute towards achieving global food security and the sustainable management of natural resources and reversing biodiversity loss.

One issue that looms large over the CAP is the possible extension of national co-financing, which applies to every other part of the EU budget, to CAP farm subsidies. This would help countries that are net contributors to the budget and might free up resources within the EU budget for other areas. It’s a move that seems to have been accepted by influential parliamentarians like Paolo De Castro MEP, chairman of the Agriculture Committee and is thought to be favoured by the French government.

In a possible sign of things to come in relation to co-financing, the Czech Republic government has decided that it will no longer make voluntary nationally-financed contributions to top-up CAP direct payments to Czech farmers and landowners. These optional payments have been taken up by all of the new member states during a transition period in which the EU funded contribution covers only a share of the total payments that can be made. The amounts involved have been substantial. In 2010, for example, the Czech government had topped up EU farm subsidy payments by €271 million. In the same year Poland topped up its farm subsidy payments by €1.1 billion, Hungary by €529 million and Bulgaria by €267 million.

There can be no doubt that if the CAP sees more national co-responsibility the idea of farm subsidies as ‘free money from Brussels’ will fade. Co-financing will focus minds in national finance ministries on whether voters would scarce national public funds should be spent on farm subsidies while cuts are being made in other areas like health, education, defence and housing.

But as things stand, CAP subsidies are mostly free handouts to member states and their farming communities – they do not create commensurate value for European citizens. This applies in particular to the Single Farm Payment which farmers receive as long as they keep their land in ‘good agricultural and environmental condition’. These minimum conditions largely correspond to the legal baseline – that is, all farmers need to do is to respect the law.

Making those who pay for this waste aware of their unfavorable position actually serves European integration. The CAP absorbs more than 40% of the EU budget, depriving the EU of the renewed momentum it could gain if it became more relevant for attaining the priorities of the future. Citizens are ready to support an EU that creates real value added – by tackling climate change, promoting European infrastructure, or enhancing internal and external security. They are never going to endorse an EU that lavishes money on one politically powerful sector to the detriment of the entire economy.

The distributional issue behind CAP reform will become ever more critical over the next years. Public debts will continue to rise and painful spending cuts will make the population more sensitive to wasteful expenditures. Also, the strain on financial solidarity in the EU provoked by the debt/Euro crisis will spur interest in the transfer mechanisms hidden in the EU budget.

So who is cutting the best deal in the CAP? And who has pulled the short straw? A short paper of mine can be downloaded here. The paper focuses on member states’ receipts of direct income support under the first pillar, which total €42 billion. These are compared with member states’ contributions to financing the direct income support. The national contributions are comprised of the contributions based on value added taxes (VAT) and gross national income (GNI), corrected for the UK rebate and other exceptions.

The most important net contributor to direct income support in 2010 is Germany with €2.44 billion, followed by Italy with a negative net balance of €1.6 billion. Other important net contributors are the Netherlands, Belgium and the United Kingdom.

The biggest beneficiaries, each gaining more than €1 billion, are Greece, Poland and Spain, followed by France, Ireland and Hungary. All these countries defend a large CAP budget and a strong first pillar. Irrespective of their public justification, the money their farmers receive from other member states’ taxpayers certainly plays a role in their love for the old-style CAP.

The net balance for all major net payers will further deteriorate in the coming years. In 2013, Germany will make a net contribution of roughly €3 billion, followed by Italy with €1.9 billion, the Netherlands with €900 million and Belgium with €800 million. The strongest deteriorations in the net balance affect Germany, France, the United Kingdom, Italy and Belgium. France sees its net gains shrink from €868 million in 2010 to less than half in 2013.

Is it advisable for the EU-12 to push for a strong first pillar with much direct income support? Clearly, the EU-12 will be much better off by shifting the money from the CAP to the EU’s cohesion funds. EU-12 member states receive a share of every € spent that is three times higher for cohesion funds than for direct income support under the CAP. The ratio for Estonia is 5, for the Czech Republic, Latvia and Romania 4 or higher, and for Poland and Slowenia above 3.

You can download the entire paper here.

Any project in the business world worth EUR 55 thousand comes with a detailed cost estimate. A commercial project of EUR 55 million will be underpinned by a study examining and justifying all expenses. But EUR 55 billion of public money can apparently be claimed on the basis of a shared gut feeling that this is about right.

A study by two consultancies, ADAS and SAC, has gone through the hassle of spelling out the budgetary needs involved in meeting environmental and landscaping objectives in the UK. They derive the number of required units to be covered by agri-environmental schemes (e.g. hectares of grassland and woodland, or lengths of field margins and stone walls) from policy target indicators, and take into account overlaps where one area is subject to similar or incompatible agri-environmental schemes. The cost per agri-environmental scheme per unit is assumed to be somewhere close to the middle of current cost ranges.

The study finds that the total costs for the UK would amount to £2 billion. Costs per hectare run between £56 (Scotland) and £96 (England). The highest cost by far (£1 billion) is for biodiversity protection.

That is little. Member states will have to co-finance a share of the costs. Based on the estimates of this study and assuming a co-financing rate of 50%, EU payments of about EUR 50 per hectare would be sufficient in the UK. Some of the policy objectives (especially those related to landscaping, historic sites and public access to land) covered in the study arguably fall within national responsibilities, and others may be better achieved through regulation or taxes than through subsidies. Justifiable EU payments for land management may thus be even lower than estimated in the study.

But one may add some funds for training and advisory services on sustainable farming, and possibly be more ambitious on climate change. Nevertheless, the results of this study indicate a significant potential for EU-wide subsidy reductions, considering that the EU currently spends roughly EUR 300 per hectare on average (dividing EUR 55 billion by 173 million ha; however, some of the money is used for non-agricultural land or for programs unrelated to land use). What is needed is a serious, EU-wide estimate of the costs of different CAP policy options ahead of the negotiations for a new long-term budget.

You can read a summary of the report at European Voice, or download the report in full over at followthemoney.eu.

Farming should protect Europe’s environmental resources not use them up

In 2009, farm incomes fell across the whole of the EU, not least in France. Dairy farms have been hardest hit with average prices down twenty per cent. This is despite the EU spending 55 billion euro on the common agricultural policy, one of whose aims is to ensure farmers a fair standard of living.

Not long ago the lists of who gets what from farm subsidies were considered ‘state secrets’. No wonder. They reveal that far from supporting small family farms, as the public might suppose, the CAP is lining the pockets of Europe’s biggest landowners and agri-businesses. The data shows that across Europe, 85 per cent of aid goes to the top 17 per cent of recipients.

This is because under the twisted logic of the CAP, the biggest farms with the best land get the most public assistance. Besides helping the rich get richer and big farms to buy out their smaller neighbours, subsidies for land ownership and production rights creates a kind of closed shop. Young farmers must buy their way in and are saddled with heavy debts.

Modern agriculture has brought an abundance of food but it has come at a price that goes beyond the financial costs of the CAP. Over the past quarter century, 40 per cent Europe’s farmland birds have disappeared. Bee colonies, so necessary for pollination of arable crops, are experiencing sudden collapse. Rivers and seas are fouled with fertilizers, pesticides and animal effluent. Each year more ancient natural pasture is put to the plough and more wetlands are drained: once gone, forever lost. The CAP has done little to help. In France, for example, payments for farmland conservation amount to 380 million euro in 2008. They are dwarfed by old-style subsidies of 9.34 billion euro.

Things have improved a little in the past few years and Europe is no longer hurting farmers in developing countries by dumping big surpluses overseas. Farmers are mostly free to farm to market demand rather than to government diktat. Yet these reforms have been opposed at every turn by farm unions and the politicians and civil servants in ministries of agriculture, between whom there are often close ties.

And now, even this modest progress is at risk from a new wind of protectionism blowing across the continent. With a growing world population and a changing climate the question of how humanity will feed itself is back on the political agenda. And rightly so. During the winter of 2007/08, food prices leaped to record levels and the world’s poor faced hunger and even comparatively wealthy Europeans felt the pinch. The response in some quarters has been to adopt a siege mentality and aim for self-sufficiency in food. Why, it is argued, should we put ourselves at the mercy of global markets when there is more we can squeeze out of our own lands?

To base an entire agriculture policy on this logic would be a mistake. Seductive though it may be, the promise of European food self-sufficiency is an illusion as it would come through even greater dependency on on imports of natural gas from Russia for fertilizer and oil from the Middle East to run farm machinery.

Instead of a renewed push for unsustainable agricultural intensification, we should encourage more environmentally-friendly farming. Climate change will increase the risk of drought, flooding and poor harvests and the frightening reality is that any food shortages we may have experienced lately are nothing compared to what we might expect mid-century. We would be wise to safeguard the fertility of our own over-exploited soils, conserve our own precious water, protect the biodiversity we need for the pollination of fruits and vegetables and the ecological resources we will need in an uncertain future. In Europe there is little ‘spare land’ to cultivate and big increases in yields will be hard to find. Increasing global food production can best be achieved by helping farmers in poorer countries whose agricultural productivity lags far behind ours.

Following the election of a new European Parliament and the appointment of a new Commission, the EU will this year embark on a fundamental review of its agriculture policy, which still accounts for 40 per cent of the community’s entire budget. Aside from providing income support to a sector of society that is, more often than not, richer than the average citizen, taxpayers get little for our money. The future must be a common European policy to protect and preserve Europe’s lands, recognising the role played by sustainable farming.

It is certain that such a shift will be fought hard by those who have got used to receiving ‘money for nothing’ but at a time when government budgets are under such strain, we cannot go on like this. In 2009 we discovered where money goes and witnessed the sheer the waste and inequity of a system that in 2008 paid 1,583,120 euro to Prince Hans Adam II of Liechtenstein and 253,987 euro to Prince Albert of Monaco. This year we must start taking action to build a better policy.

Jack Thurston is co-founder of farmsubsidy.org, a network of journalists, researchers and activists pushing for greater transparency in the CAP.

It is also likely to put to the test the memorable dictum of former Commissioner Ralf Dahrendorf that

“[the CAP] is little more than an instrument for Ministers of Agriculture to get for their farmers in Brussels and in the name of Europe what they would not get at their national Cabinet tables.”

Not surprisingly, farm unions are running scared. Farmers Guardian reports that NFU head of economics and international affairs Tom Hind said the suggestion the CAP should be partially co-financed ‘fills us with dread’. “We are absolutely clear on the need to defend the common policy,” he said. Mairead McGuinness MEP, a leading member of the Agriculture Committee, has spoken out against the prospect of co-financing of the CAP, fearing the consequence for farm subsidies if they must compete with national spending on schools and hospitals.

Germany, a massive net contributor to the EU budget, has always been a supporter of co-financing. France, until recently, the biggest net beneficiary, has always opposed the idea. The French position has changed of late, following the realisation that the enlargement of the EU means that France is becoming a steadily bigger net contributor to the EU budget and at some point fairly soon will pay more for the CAP than it gets out of it. The UK has traditionally opposed co-financing on the grounds that it doesn’t actually reduce spending on farm subsidies but simply changes the responsibility for financing them, and with the UK rebate still in place, the UK is exempted from being a significant net contributor to the EU budget. With the UK rebate slimming down each year and unlikely to survive the next big budget negotiation, the UK may consider co-financing to be a more attractive second-best option should overall cuts to the CAP budget be impossible to achieve.

The countries that oppose co-financing are those that benefit from the largest net budgetary flows from the CAP: Ireland, Greece, Spain, Poland, Portugal and Romania. France and Germany, together with other powerful net contributor countries like the Italy, Netherlands, Denmark, Sweden and Austria should comprise a strong coalition in favour of co-financing. The UK’s support, or at least acquiesence, could be a critical deciding factor.

With the Commission and a large number of powerful member states now favouring co-financing of the CAP, it seems to me very likely that it will be an important part of the Euro-fudge cooked up to preserve the CAP after 2013 but still allow the EU to expand its budget in other policy areas. Exact mechanisms and rates for co-financing and the crucial question of how much of co-financing will be compulsory and how much will be voluntary top-ups at the member state level remain to be negotiated. With most other areas of the EU budget already subject to national co-financing (including the rural development ‘pillar’ of the CAP) the privileged position of the CAP is unlikely to last beyond 2013.

The paper says that it is too early to see what the future reform of the CAP will look like, but argues that it should be driven by two objectives. ‘Firstly, it should resolutely pursue the modernisation of the CAP, concentrating spending where it most adds value. Second, it must stimulate a further significant reduction in the overall share of the EU budget devoted to agriculture, freeing up spending for new priorities.’

The paper argues that direct aids should be reduced and linked more strongly to the delivery of public goods. A Pillar 3 should be established dealing purely with climate change.

The full communication is expect to be published in November.

This does not mean that nothing happed in 2009. One of the most important CAP issues was certainly the enhanced transparency of subsidy recipients. This brought the CAP into the headlines and created plenty of bad press for export subsidies and the Single Farm Payment. However, the outrage did not translate into a search for alternative policies. Another issue that drew attention to the CAP was the situation on the milk market and the protests by milk farmers. To some extent, complaints by development NGOs and trading partners about the resumption of dairy subsidies also got into the media. From one point of view, all this has been god news for CAP reform, simply because almost anything that attracts attention is favorable for reform. Those who defend the status quo are aware of and ready to fight for their interests, much more than the majority of citizens that pay, in one way or another, the price for a wasteful CAP.

On the other hand, the developments may have lowered expectations for the CAP post-2013. That is, actually removing milk quotas (as decided in the Health Check), re-directing money from large to small farms (as attempted in the Health Check), and phasing out export subsidies (as announced in the Doha Round) could become benchmarks for success rather than self-evident minimum requirements of reform. Besides, the political pressure exercised by milk farmers may have discouraged politicians from advocating far-reaching CAP reform.

There were also some larger conferences in Brussels and the member states; inter-ministerial multi-stakeholder processes have begun to define national visions and positions; and cross-cutting reform coalitions are emerging. But I believe that the major significance of 2009 lies not in the debates we had this year but in the legacy of this year’s events for 2010 and beyond.

First, public debts have risen tremendously in most member states as governments saved failing businesses and stimulated the economy. These debt levels are incompatible with the Stability and Growth Pact, and they are unsustainable in the face of an aging population. Under these circumstances, it will become increasingly clear that the EU budget will not grow after 2013, so competition for funding will intensify. There is also a possible threat of cuts to the EU budget that may convince pro-Europeans to invest their political capital into more effective, and thus more legitimate and defensible EU spending. The stress on public finances will also make itself felt more indirectly. As governments will be forced to increase taxes and to curb spending on sensitive items, such as social security and health care, the political climate will be most hostile to wasteful subsidies. It will be awkward for governments to reduce unemployment benefits at home but to continue to lavish public money on landowners in the EU.

Second, I expect the climate debate to become more relevant for agriculture after a climate deal has hopefully been reached. At the moment, the debate focuses on the objectives that should be set (depending on the climate models) and the political feasibility of a deal (depending on the US, China, India …). Once we have an agreement with clear targets in our hands, the question will be: how can the EU live up to its commitments? And then we start thinking about the fact that agriculture is responsible for about 10% of EU greenhouse emissions; that this share is likely to increase as cars become more energy efficient, while ruminant digestion is hard to improve; and that the CAP does next to nothing to make agriculture more climate-friendly.

Third, the ratification of the Lisbon Treaty will give the European Parliament co-decision power in agriculture. In the past, the EP could give its opinion on the CAP but its consent was not needed to enact CAP legislation. Therefore, the Committee on Agriculture and Rural Development was unimportant and primarily attracted MEPs who were close to farm interests. In the future, other MEPs – notably members of the committees on the budget, the environment, development, and industry, research and energy – can be expected to push for CAP reform. More generally, the EP as a whole will have an interest to ensure that its new powers in agriculture are exercised responsibly and are not subjected to narrow national interests or dictated by farm lobbies.

Fourth, elections have been held in October 2009 in Germany, which is not only the biggest member state but also a swing state when it comes to CAP reform. In the Health Check negotiations, Germany strongly defended conservative positions, shielding milk farmers and blocking progressive modulation. This is everything but a natural position dictated by national interests. After all, Germany is the major net contributor to the EU budget, it is strongly dependent on a liberal world trading system that is constantly undermined by agricultural protectionism, and the deep-rooted ideals of a social market economy run counter to the current CAP. Now, the elections have replaced the uninspiring coalition between conservatives and social democrats with a clear conservative-liberal majority. This outcome is a mandate for bold reform. Angela Merkel had already propagated profound changes in the 2005 campaign. Prodded by her liberal coalition partners, she may finally fulfill the promises which got her the job. It is also noteworthy that the CSU, the independent Bavarian branch of the conservatives that traditionally caters to farm interests, has scored its worst outcome in its history. This weakens their ability to stymie CAP reform.

So in 2009 the long-term CAP debate was less forceful than I would have hoped, but this year’s developments bode well for 2010.

How do you interpret, from a CAP perspective, the year that has lapsed since the big budget conference, and its implications for CAP reform?

Responses to the consultation on the future of the EU budget are overwhelmingly critical of the CAP, as was the Budget Commissioner Dalia Grybauskaite, before she stepped down from the Commission having been elected President of Lithuania.

Despite the chorus of disapproval, I have very serious doubts about the capacity of the CAP to refom itself from within. As well as being overseen by a DG that jeaously guards its prestige within the Commission (and its budget) the policy is ultimately decided by national Agriculture Ministers. And as former Commissioner Ralf Dahrendorf put it some twenty years ago,

“… [the CAP] is little more than an instrument for Ministers of Agriculture to get for their farmers in Brussels and in the name of Europe what they would not get at their national Cabinet tables.”

So why would any farms minister seek to reduce the flow of ‘free money’ from Brussels for his or her most important client group? For the rare farms minister who is interested in more than simply how much EU money he or she can bring home, former Portuguese farms minister and former MEP Arlindo Cunha puts his finger on the most important reason barrier to reform from within,

“the decision-making system of the CAP will never allow for such a thing as a radical reform because of the redistributive effects which it implies.”

Former French farms minister Jean Glavany, who was burned by his own attempts to reorient the CAP in the late 1990s in France, put it another way:

“The CAP is a heavy cruise ship that can’t make a U-turn like an inflatable dinghy… all it takes is for one country to oppose it, for the rules not to change.”

These are the reasons that I now think that the quickest route to a more rational and less expensive farms policy will come from greater national financial responsibility for its financing. I made the case in an article in last week’s Daily Telegraph. You can read it here.

Co-financing is the first step on the road to a reorgansation of European farm policy along the lines that I have set out and it’s interesting to see that this is being talked about more and more in Brussels, not to mention certain national capitals. The fact that Mrs Fischer Boel should feel the need to mount a defence against the idea of greater subsidiarity and national responsibility shows the direction in which the debate on the CAP his headed.