Reform of the Common Agricultural Policy: a Lib Dem success story

A fortnight ago I was in Strasbourg where I was lucky enough to speak to two Liberal Democrat MEPs from farming backgrounds about their work to reform the EU’s Common Agricultural Policy (CAP).

Phil Bennion, Liberal Democrat MEP for the West Midlands, explained to me how the CAP, which has two pillars of funds, works.

“Pillar one is common to every country in the European Union, pillar two is devolved and co-funded by member states. In the UK we spend 80% of our pillar two money on environmental schemes, while other countries spend theirs on things like cooperative marketing, cooperative storage schemes and training. Pillar one is the only part of the policy that is totally common.”

Phil’s interest in reform of the CAP “goes back to the mid-1980s when we were still in an era of price support, and we were using price support as a means of supporting farmers.” And, as he explained, “the consequences of that, were that, having paid £100 a tonne to the farmer for intervention to grow the wheat, what the EU was doing then was selling it at £30 a tonne – mainly to north Africa – which didn’t seem to me to be a sensible policy.”

“It seemed to me that we didn’t have an agricultural policy – we had a policy of disposing of large tonnages of grain to poor countries at very low prices.” And so the effect, Phil explained, of the CAP of the 80s was to undercut poor farmers in developing countries.

After seeing these and other “perverse incentives” in the CAP, Phil came up with a series of ideas to deliver a different form of agricultural support. He came up with the key idea that support should be delivered along area lines and with other payments for farmers providing specific ‘public goods’ – such as improved biodiversity, for example.

George Lyon, Liberal Democrat MEP for Scotland, wrote the European Parliament’s first report on reform of the CAP. George told me his main themes were “the need to incentivise and drive a new agricultural production system that was much more nutrient efficient, energy efficient and carbon efficient – and much more sustainable.”

And Phil and George have had remarkable success in their efforts to reform the CAP – helped by the liberal block being the swing vote in the European Parliament.

George Lyon says “Back in the 80s and 90s the system was to support the end price and that made the cost of food to consumers higher, but it also resulted in huge butter mountains and food mountains and wine lakes and all the rest of it. That system has been dismantled since the 90s and the last reform liberalised the agricultural markets across Europe quite substantially. The CAP of the past is long gone, and dead and buried thank god.”

“The drive has been to a much more market focused policy, one where the public purse rewards for the delivery of public goods and that’s the direction we want to keep pushing in.”

The common perception of CAP is of a monolithic waste of money, paying money to do nothing. But Phil says this is completely inaccurate. “We’ve got rid of set-aside, we’ve got rid of the food mountains.”

“The idea that the CAP is this monster out of control is a thing of the past. In the 80s CAP took up 85% of the total EU budget. It will be down to under 40% this year and, under the commissioner’s plans, it’s expected to fall to somewhere around 35%.”

Given that reform of the CAP is something Liberal Democrats have pushed long and hard for, I put it to George Lyon that the CAP might be called a Lib Dem success story. “Yes” he says. “Liberals have pushed hard to reform the CAP and that has been one of the success stories.”

* George Potter is a councillor in Guildford

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22 Comments

  • Alex Sabine 1st May '12 - 2:26pm

    I agree with Sean and Mike that it is abolition, rather than reform, of the CAP which is required. Piecemeal reforms over many years have reduced some of its most pernicious effects but there is still a long way to go and the timeframe is unacceptably glacial.

    CAP remains a protectionist racket which feathers the nests of wealthy European farmers, sheltering them from competition from farmers in poorer nations while raising world food prices and impoverishing millions of people.

    Moreover, its continued existence acts as a barrier to progress in WTO negotiations and prevents the wider liberalisation of world trade that is urgently required to ensure that globalisation works in the interests of developing countries.

    George writes: “George Lyon told me, quite accurately, that there’s no point in scrapping subsidies in the EU unless you scrap them everywhere else in the world.”

    Here we have the classic cry of protectionists through the ages when they have run out of other justifications. The same argument is used about removing tariffs, export subsidies and other non-tariff barriers to trade. It misses the key point that, even within countries that practise it, protectionism privileges a minority (producers of protected goods) while harming the majority (consumers and taxpayers).

    Protectionism is bad for rich and poor countries alike; indeed, the fact that average tariff levels are higher in poor countries than in rich ones is one key reason why they remain poor.

    Granted, it is more politically difficult to face down the vested interests of EU farmers if there is no movement from other parts of the world. (The logic of course works the other way too.) But from the point of view of the welfare of consumers and taxpayers worldwide there is every “point” in doing so. Indeed, a truly enlightened country or trading bloc would do so unlilaterally rather than hiding behind the excuse that others are just as bad.

    As the economist Joan Robinson famously observed, just because your trading partner throw rocks into his harbour, that is no reason to throw rocks into your own.

  • The UK’s accession to the common market in 1973 was largely predicated on the issue of food security and tariff free access to European markets. There has not, however, been a sound economic argument for continuing with the CAP for mamy years now.

    Agrucultural subsidies are an intensely political artefact, inextricably linked with powerful agricultutal lobbies. Perhaps, even mose so in Japan and the United States than in Europe.

    As Sean Rickard notes above, the impact on agrucultural land prices is pernicious – erecting a barrier to entry to smaller farmers.

    This is a relic of Europe’s post-war settlement that had had it’s day. The time has come to cut the umbilical cord and free the agricultural sector to unsubsidised open competition.

  • Alex Sabine 1st May '12 - 3:57pm

    To be fair, there are some welcome moves afoot in the latest reforms, such as ending the hugely damaging sugar production quotas, which greatly disadvantage farmers in poor countries and channel large amounts of public money to European agri-business. But many harmful practices remain, and the overall edifice is intact.

    As I understand them, the EU’s current plans for CAP envisage a continuation of the two-pillar system, in which pillar one (production subsidies to farmers and price support) accounts for the vast majority of the budget and pillar two (rural development spending) a much lower proportion. Pillar one spending alone totals more than any other item in the EU budget.

    The UK and Nordic countries have argued for a significant cut in overall spending on CAP with support focused more through pillar two, but France in particular is determined to keep high spending on pillar one.

    The latest proposals actually blur the distinction between the two pillars, since it seems that pillar one funds can be used towards objectives currently addressed by rural development funds (eg payments for the provision of ‘public goods’). This in turn will make it harder to reduce pillar one funds, which may well be the intention.

    As Phil Bennion says, pillar two is “devolved and co-funded by member states”. But to secure funding under pillar two member states are required to produce a Rural Development Plan which has to be approved by the Commission.

    I see no reason why this should be decided at EU level at all. If national governments want to fund rural development schemes they should be free to do so in their own particular ways, but there is no genuine cross-border issue here that justifies funding being allocated to the EU and then channelled back to member states.

  • Alex Sabine 2nd May '12 - 2:36am

    @ George

    First of all, I don’t believe that either domestic or EU policy can be justified on the basis that it helps particular interest groups which are portrayed as worthy – and that includes farmers, who are nothing if not effective lobbyists. (As it happens much of my family has a farming background, so I certainly have no axe to grind against farmers – but they are not uniquely deserving of taxpayer support and anti-consumer market intervention.)

    “…If you’re advocating that we replace the central EU scheme with various national ones…”

    Personally I’m not advocating that we “replace the central EU scheme with various national ones”; I’m arguing that we should phase out agricultural subsidies altogether.

    That said, I would note in passing that many British farmers, especially small hill farmers, fared better under the post-war system of deficiency payments and that (at least until the 1960s when import controls were introduced) that system had fewer economically damaging features than the CAP of the 1970s and 1980s. CAP favoured, and was designed to favour,

    “…then what you’re basically saying is that you want to end the single market in agriculture. Wanting to do so as part of ending the single market altogether is a perfectly reasonable position, albeit one I would disagree with. But if you want to keep the single market then what you’re asking for is a single market in every area except agriculture. Which is simply ludicrous.”

    I find this logic bizarre. The single market is (supposed to be) about lifting barriers to the free flow of goods, services, capital and people throughout the EU. To ensure fair ands undistorted competition in this single market there are general rules restricting the use of state aid that apply to most industry sectors.

    These rules do not apply to farming (or fisheries). Key legal instruments of EU competition policy are not applicable in the agricultural sector, which enjoys a raft of exemptions. Subsidies that are deemed to be compatible with CAP are specifically exempt from the general state-aid rules. (And of course EU agricultural policy itself erects tariff and non-tariff barriers against the rest of the world.)

    So while there is a single market in agriculture, it is not subject to the normal single market rules, because agriculture is deemed a special case. Instead there is a sector-specific policy, which reflects the origins of the EU in terms of sectoral integration and the bargains that were struck between the two main founding countries (France and Germany) as well as concern about post-war food shortages. As Joe says, it is “a relic of Europe’s post-war settlement that has had its day”.

    I’m not saying I want to end the single market in agriculture; I’m saying I want to dismantle CAP and end the special treatment of agriculture so that it is brought within the ambit of the general single market rules that apply to most other economic activities.

    It might be that some of the pillar two functions of CAP (supporting land stewardship, conservation etc) would be compatible with the state aid rules, and if so member states should decide for themselves whether they want to pursue these without money having to be channelled through the EU and then recycled.

    My main point in this regard was that CAP is now defended on the basis that it is supporting rural diversification, conservation and so on, and yet this rationale is weak because there are few genuine cross-border issues at stake. Along with its other failings, it therefore breaches the principle of subsidiarity, which holds that decisions should be taken at the most local level possible.

    As Nick Clegg pointed out in a chapter on EU reform in the Orange Book back in 2004, much the same argument applies to the way EU structural funds to depressed regions are dispensed. Clegg argued that it made no sense for countries that are net contributors to the EU budget to receive recycled structural funds.

    As part of an argument for a rebalancing of “lopsided” EU competences, Clegg wrote: “Regional funds are still being channelled to all member states, even those such as Britain, France and Germany, who are the main contributors in the first place… Logically, those governments should take full responsibility for the channelling of funds to their own deprived regions, rather than depend upon the recycling of funds via the EU.”

    He also correctly noted: “It disrupts the key relationship between voters and those elected to public office if domestic issues with no obvious EU dimension are arbitrarily shuffled off to Brussels for resolution.”

  • Alex Sabine 2nd May '12 - 4:07am

    @ George

    “For the record, George Lyon and Phil Bennion are both economic liberals and both have made a major effort in liberalising the CAP. I’d particularly recommend reading the policy papers on the CAP they’ve written before you accuse them of resorting to the “last cry of protectionists”.

    I’m certainly not accusing them of being protectionists; I agree they (and ALDE more generally) have been ‘on the side of the angels’ when it comes to at least reforming the CAP in the right direction.

    But the specific argument you cited – that there is no point in scrapping subsidies in the EU unless they are scrapped everywhere else in the world – is an argument perennially invoked by those favouring the retention of protectionist measures, notably the French and Americans with regard to agriculture.

    As I said, it makes the elementary error of assuming that protectionist measures benefit countries that deploy them while harming their trading partners. In reality they are self-defeating and harmful to the countries deploying them.

    Following the Bush administration’s introduction of steel tariffs in 2002, the cost to American steel users in higher prices and lost jobs dwarfed the benefits to American steel firms. Likewise, the fact that average tariff levels are much higher in developing countries than developed countries hurts them much more than us.

    The idea that trade liberalisation can only be beneficial if pursued multilaterally and with all countries in lock-step seems to be based on the mercantilist fallacy that exports are the point of trade.

    This gets it the wrong way round: exports are the stuff we send off to Johnny Foreigner so that we get what we actually want, that he does better and cheaper than we can make ourselves. Imports are the purpose of trade, not exports, a corollary of Adam Smith’s argument that the purpose of all production is consumption.

    But while unilateral trade liberalisation is desirable in principle and would bring overall benefits to the country doing it, I accept that the influence of powerful producer lobby groups in all countries means that the multilateral route – with the inevitable horsetrading – is probably the only practical way of advancing the cause of free trade worldwide. It is in this context that rich-country protectionism is a major political obstacle to developing countries realising their potential.

  • George,

    We should applaud the efforts of George Lyon and Phil Bennion for their work and effort in liberalising the CAP and in reducing the CAP’s share of the EU budget to below 40%.

    However, even with the proposed reforms to the CAP there is still a long way to go to address the key remaining issues:

    – The CAP encourages European agri-businesses to export huge quantities of food worldwide that poor farmers cannot compete with on price and is seen as part of an unfair trade system rigged in favour of the richer countries.

    – Europe is spending far too much on the CAP – when agriculture generates just 1.6% of EU GDP and employs only 5% of EU citizens.

    – With European economic growth in the doldrums, and fierce competition from emerging giants like China and India, the EU needs to pay less for farming and invest more in scientific research and technology.

    – Spending less on subsidies and more on agricultural research can help with improving crop varieties and livestock, which could benefit developing countries.

    – Agricultural land prices are artificially inflated by subsidy payments making it difficult for the next generation of younger farmers to acquire and develop holdings.

    Much of the work undertaken by the European Agriculture Council under the auspices of the CAP can be more effectively managed by national and regional agricultural co-operatives.

    Unilateral targetted tariffs to protect against foreign state-subsidised dumping of particular commodities may be warranted in exceptional limited circumstances, but not as a perpetual instrument (such as the tariffs leading to the ‘Banana Wars’)to permenantly modify world food prices in the EU.

  • Alex Sabine 3rd May '12 - 4:45am

    George: As I said, I acknowledge that in practice trade liberalisation has tended to happen through multilateralist horse-trading via GATT and later the WTO rather than nations pursuing their enlightened self-interest by simply removing the rocks from their own harbours. The important thing is that it happens, and as fast as possible.

    As a counterweight to my own (perhaps rather dogmatic) views on free trade, I offer this defence of pragmatism by the highly intelligent former Labour Trade Secretary Edmund Dell, writing in 1986 ‘Of Free Trade and Reciprocity’:

    “Reciprocity re-emerges whenever real business is to be transacted in trade negotiations. While the disciples of Adam Smith have claimed intellectual and moral victory over the errors of mercantilism, the real power has remained in the hands of practical men who play the mercantilist game of reciprocity.

    “Reciprocity, as an idea, has a great attraction for government ministers. They feel it necessary to make verbal obeisances to the spirit of economic liberalism. Reciprocity appears to reconcile this political necessity with the even higher priority of being able to defend what they have done as a good deal.

    “The possibility should not be ignored, however, that… it is the free traders who are making unreasonable demands on national sovereignty. Ministers should free their consciences of guilt and stand forth bravely for the mercantilism that they all in fact practise. They should end the hypocrisy by which they compel mercantilist pragmatism to doff its cap to liberal dogmatism and go on to claim, as an excuse for their actions, the compulsion of political necessity.”

    I don’t agree with Dell on this matter, but as usual he puts his finger on what actually goes on, and why. I would prefer ministers to end their hypocrisy by challenging the “political necessity” of mercantilism; but ultimately I can live with the results so long as the trade barriers actually come down.

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