DirectorNicolae Idu

Editor-in-ChiefOana Mocanu

Associate EditorsIrina RâmniceanuGilda Truicã

Editorial Board

Farhad Analoui - Professor in International Development and Human Resource Management, the Center for International Development, University of Bradford, UK

Daniel Dãianu - Professor, Academy of Economic Studies, Bucharest, former Minister of Finance

Eugen Dijmãrescu - Vice Governor of the National Bank of Romania

Nicolae Idu - Director General of the European Institute of Romania

Andras Inotai - Professor, Director of the Institute for World Economics, Budapest

Mugur Isãrescu - Governor of the National Bank of Romania

Alan Mayhew - Jean Monnet Professor, Sussex European Institute

Costea Munteanu - Professor, Academy of Economic Studies, Bucharest

Jacques Pelkmans - Jan Tinbergen Chair, Director of the Department of European Economic Studies, College of Europe - Bruges

Andrei Plesu - Rector of New Europe College, Bucharest, former Minister of Foreign Affairs, former Minister of Culture

Cristian Popa - Vice Governor of the National Bank of Romania

Tudorel Postolache - Member of the Romanian Academy, Ambassador of Romania to the Grand Duchy of Luxembourg

Helen Wallace - Professor, Director of the Robert Schuman Centre for Advanced Studies, European University Institute, Florence

CONTENTS

ROMANIA'S EU ACCESSION NEGOTIATIONS: THE SIGNIFICANCE OF THE EU BUDGET 5 Robert Ackrill

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER 23Valentin Cojanu

A POWER ASYMMETRY GOODNESS OF FIT ANALYSIS OF THE AGRICULTURAL OUTCOME OF ROMANIA'S ACCESSION NEGOTIATIONS TO THE EUROPEAN UNION 49Irina Râmniceanu

THE ADOPTION OF THE COMMON AGRICULTURAL POLICY: ELEMENTS OF PRE AND POST ACCESSION IMPACT 65Daniela Giurcã

RURAL DEVELOPMENT AND AGRICULTURAL POLICY IN THE CONTEXT OF NEGOTIATING THE EUROPEAN UNION ACQUIS 93Marius Spiridon

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5

ROMANIA'S EU ACCESSION NEGOTIATIONS: THE SIGNIFICANCE OF 1

THE EU BUDGET

*Robert Ackrill

Abstract: Romania completed its negotiations for accession to the European Union, as scheduled, by the end of 2004. The experience of the negotiations over the 2004 enlargement confirmed that the EU budget is an absolutely key issue in such talks. The purpose of this paper is to consider the context of Romania's negotiations over the EU Budget. First, we look at the relationship the EU15 member states have with the EU budget. We show how rules governing the operation of the EU Budget have affected budgetary flows to the EU15 and highlight the stability over time of the shares of total budget flows to and from each member state. Second, we look at the experience of the new Member States in their accession negotiations and review the outcomes. This will allow us to see how the political economy of the EU Budget affected the talks and the deal the new member states were able to secure. We then apply the lessons learned to the case of Romania. Our analysis reveals inflexibilities in the negotiations that left Romania more or less facing a 'take-it-or-leave-it' offer.

1. INTRODUCTION

2004 was a momentous year for the European Union. Ten countries from central, eastern and southern Europe joined on 1 May and, on schedule, Romania and Bulgaria completed their negotiations for accession in 2007, albeit with certain conditions still to be met for 2007 entry. In this paper we focus on the one area of discussion that, despite not being the subject of any of the 31 negotiating chapters, was absolutely crucial to the successful conclusion of the talks the magnitude (and, by implication, the distribution) of the financial flows between the EU Budget and the member states. The EU budget has, for many years, had a political significance far in excess of its modest economic size. It was therefore not surprising that the talks over

* Robert Ackrill, PhD, is Senior Lecturer in Economics at Nottingham Trent University, UK. He has published widely in the areas of the EU Budget, the CAP and EU enlargement.1 An earlier version of this paper was presented in May 2004 to “Symposium 37” at the University of the West, Timisoara and to the

thEuropean Institute of Romania, Bucuresti. It also draws on related work presented to “Constructing World Orders”, SGIR 5 Pan-European Conference, The Hague, in September 2004. The author thanks participants for helpful comments. Whilst the title of this paper looks remarkably similar to Mayhew 2003b, published in this Journal, this paper has been designed, as far as possible, to present ideas complementary to Mayhew's, focusing on EU budgetary processes.

money should prove acrimonious.This paper has two goals. First, we

analyse the relationship between the EU15 and the EU Budget, along with the experience in the accession negotiations of the New Member States (NMS), to provide context to Romania's financial agreement. Second, we place this discussion within the context of the politics and rules under which the EU Budget operates. These serve to emphasise the constraints, economic and political, within which all applicant states have had to negotiate their future budgetary relations with the EU15.

The paper is divided as follows. Section 2 sets out the key features of the EU Budget . Sect ion 3 considers the consequences of the EU Budget process for the distribution of transfers amongst the EU15 member states. Section 4 uses this as

Vol.5, No.1, 2005ROMANIAN JOURNAL OF EUROPEAN AFFAIRS

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6

ROBERT ACKRILL

the basis for explaining the shape of the budgetary agreement for the 2004 enlargement. In Section 5 we draw this together to offer an insight into the budget agreement for Romania. Section 6 concludes.

2. THE EU BUDGET FEATURES AND PROCESSES

The EU Budget is the means by which 2the EU funds most of its activities . We begin

by noting some of its main features (see, inter alia, Ackrill, 2000; Laffan, 2000 for more details). First, it is extremely small. Annual spending is limited to about 1% of

3EU Gross National Income (GNI) , whereas EU member states' national budgets currently range from about 35% of GDP to about 60% (Romania sits at the lower end of this range). Second, the EU Budget is subject to an annual balanced budget rule. The EU sets a limit on revenues, then agrees spending each year to respect this limit.

Revenue (or 'Own Resources') for the EU Budget comes from four principal sources. 'Traditional' own resources are made up of the import tariffs associated with the Common Agricultural Policy and the Common Commercial Policy. These represent about 12% of total revenues (2002 figures). Most money is raised through revenues related to VAT (29% of the total in 2002) and GNI (59%). Thus a member state's total contributions to the EU Budget are broadly in proportion to the relative size of its economy. There is, however, a limit on the VAT contribution to ensure poor countries, with a higher share of Consumption in National Income, do not pay excessive sums under this own resource.

On the expenditure side there are many policies that attract EU spending, but the largest two by far, taking over 80% of total spending each year, are the Common A g r i c u l t u r a l P o l i c y ( C A P ) a n d Structural/Regional Policies. Thus, in terms of each country's net contribution to/from the EU Budget, broadly speaking 'size matters' for payments to the EU Budget, whereas economic structure (the size of the agricultural sector and level of economic development) are dominant in determining a member state's receipts from the Budget.

Before we look at the EU's budgetary processes, we need to explain one more feature of the EU Budget, the d i s t i nc t ion be tween Compu l so ry Expenditures (CE) and Non-Compulsory Expenditures (NCE). CE are those expenditures for which an explicit commitment is made in the Treaty of Rome. CE is dominated by CAP income-support ('Guarantee') spending. The largest component of NCE is Regional Policy spending. A key feature of CE is that once the expenditure-generating policies are in place, the EU is committed to fulfilling all resulting claims on the budget. NCE, however, is more or less the exact reverse: total spending is agreed, then funds are allocated between competing claims. Thus total NCE is fixed in advance whilst the burden of CE is potentially open-ended.

The CE/NCE dis t inc t ion i s particularly important for the relative powers of the European institutions. The European Parliament has steadily gained more control over the execution of the EU Budget and it has the greater say over NCE but the Treaty of Rome has limited the annual growth rate of NCE. With CE and

2 The EU is involved in other financial activities, for example borrowing through the European Investment Bank, but these lie outside the framework of the EU Budget and so are not considered here.3 It is common to refer to a figure of 1.24% of GNI (previously 1.27% of GNP). This is misleading, as it includes sums intended for spending in future years on multi-annual projects.

CAP spending in particular their powers are much less. The only way to influence CAP spending is to change the expenditure-inducing legislation (that is, to reform the CAP). Co-decision has not been extended to CAP market support policies and so the balance of power over the CAP and its spending remains firmly with the member states through the Council of Ministers. That said, the 1992 reform of the CAP had a profound impact on the evolution of CAP spending. To see why, consider the principal forms of CAP support and expenditure before and after the 1992 reform.

Before 1992, the main expenditures were associated with price support, the policy of maintaining prices for farm products within the EU at levels higher than elsewhere in the world. These high prices encouraged farmers to produce greater quantities until, for many products, the EU was producing more than it consumed. This drove up two types of spending. Because of the price gap, the EU had to pay exporters a subsidy to enable them to sell EU products on the world market. Second, because not all surplus production could be exported at once, much of it was initially put into store ('intervention'). Intervention is key to the evolution of budget spending on the CAP, because it guaranteed farmers a buyer for their produce, even if they could not sell it on the open market so farmers kept on producing more. The nature of CE meant the EU had to meet all resulting costs they could not stop buying into intervention just because costs rose. CAP support therefore drove up production, which increased surpluses and pushed up CAP spending.

The 1992 reform reduced support prices significantly, replacing them with direct payments. These payments have a fixed unit value but, crucially, they also have

7

ROMANIA'S EU ACCESSION NEGOTIATIONS: THE SIGNIFICANCE OF THE EU BUDGET

eligibility limits built into the legislation. For example, payments to livestock producers include a limit on the number of animals each farmer can claim for. For arable farmers, the per-hectare payment is derived from a f ixed yield f igure based, unchangingly, on yields during 1986-1990 (1995-1999 for the NMS). There is also a limit on the total area that payments can be claimed for. As a result, the total cost of direct payments is limited. Such CAP support is still 'Compulsory', but by building spending constraints into the legislation, significant future growth is likely only when new member states join the EU and become eligible for support.

3. BUDGET OUTCOMES FOR THE EU15: AN ANALYSIS OF KEY FEATURES

In this section we consider briefly the evolution of the EU Budget as a whole. We then analyse member states' shares of total budgetary flows in which we observe remarkable stability, especially on the revenue side, but even in terms of expenditures. Institutional constraints and decision-making rules have contributed to this. As the EU Budget has grown and more policies given support, it is worth reiterating what has happened to spending on traditional policies like the CAP. Although recent reforms have changed the nature of support, the amount spent on the CAP has fallen only as a percentage of total EU spending, not in absolute terms.

Table 1 summarises, for selected years, aggregate EU budgetary transfers. Note that not all money passes through the member states. On the revenue side, money unspent one year can be carried over to the

4next . This amount was unusually large in 2001, resulting in the smaller percentage of total revenue in 2002 collected from the

4 Which is then no longer designated as having come from a particular member state.

member states. On the expenditure side a number of payments, notably assistance to third countries, are made directly to these

Table 1: The EU Budget A Summary (selected years), € million*

1 2 3 4 5 6 7

Own Resources Expenditures

Year from member states total 2%3 to member states total 5%6

1976 7710 7993 96 6579 7288 90

1980 15428 16066 96 14592 16289 90

1985 26081 28085 93 24664 28099 88

1990 41413 46469 89 36886 43325 85

1995 67828 75077 90 58248 66901 87

2002 77968 95434 81 72734 85145 81

Sources: EU Court of Auditors Annual Reports and European Commission Budgets Directorate General Annual Reports on Allocated Expenditure, Various Years.Note: *Common unit of account, this being the € from 1999.

countries rather than through individual member states.

Because our analysis focuses on member states' shares of EU budget transfers, we are most concerned with transfers to/from individual member states. We show these in Table 2. The net transfer is shown as a negative for net contributors to the EU budget and a positive for net recipients. Whilst some countries have long been net contributors, changes on both sides of the budget have led to the situation where, of the EU15, only the four Cohesion Countries (Greece, Ireland, Portugal and Spain) remain as net beneficiaries.

In Tables 3 and 4 we present some simple statistics indicating the stability of EU budgetary transfers, using the means and coefficients of variation (CoV standard deviation as a percentage of the mean) for member states' percentage shares of EU Budget transfers. As a simple measure of stability, we consider whether an individual sub-period mean spending share lies outside

the full-period mean plus or minus one full-period standard deviation. In Table 3 we consider EU Budget revenues, where we

5 Similar analyses for own resource contributions by type, in aggregate and disaggregated by source country (not reproduced here),

confirm the picture of stability of member states' shares. There are, however, slightly more individual outliers, suggesting some smoothing across own resources.

8

ROBERT ACKRILL

disaggregate the full period first by EU enlargements (in 1981, 1986 and 1995) and second around 1988, when the EU agreed significant reforms to the budget process.

The general picture is one of stability of own resource shares, despite changes in the structure of own resources over time. Using our simple stability measure, there are nine outliers, although three observations are for the initial, transitional, period of new member states' membership, whilst the two for Luxembourg may simply be a small-number problem with the statistics. A comparison of the CoV data before and after the 1988 reform shows that for almost all countries the CoV fell. This is expected, a priori, because revenues from import tariffs fell (these varying with, inter alia, exchange rates and agricultural production), replaced with revenue from VAT and, increasingly, GNP, revenue sources that evolve much more slowly over

5time .

9

ROMANIA'S EU ACCESSION NEGOTIATIONS: THE SIGNIFICANCE OF THE EU BUDGET

Tab

le 2

EU

Budge

tary

Tra

nsf

ers

by

Mem

ber

Sta

te,

sele

cted

yea

rs,

Ä m

illi

on

Sourc

es:

See

Tab

le 1

Note

s: O

R –

ow

n r

esourc

es;

exp

– e

xp

en

dit

ure

s; n

et –

exp

end

itu

res-o

wn

res

ourc

es.

O

R

exp

n

et

OR

ex

p

net

O

R

exp

n

et

OR

ex

p

net

O

R

exp

B

el

Dk

D

El

E

19

76

49

8 3

86

-11

2 1

59

39

7 2

38

21

08

10

88

-10

20

19

80

95

1 6

77

-273

3

46

68

0 3

34

46

10

29

40

-16

70

19

85

12

93

10

70

-22

3 6

20

91

3 2

92

75

04

41

85

-33

19

38

8 1

70

3 1

31

5

19

90

17

64

99

0 -7

74

77

5 1

19

8 4

23

10

35

7 4

80

7 -5

55

0 5

64

30

34

24

70

36

71

53

83

19

95

26

80

23

69

-31

1 1

29

5 1

60

1 3

06

21

32

4 7

89

3 -1

34

31

98

5 4

47

4 3

48

9 3

64

5 1

08

63

20

02

30

18

19

92

-10

26

16

88

14

27

-26

1 1

75

82

11

53

2 -6

05

0 1

33

8 4

67

3 3

33

5 6

55

1 1

51

75

F

Ir

e

It

Lux

N

L

19

76

16

52

15

48

-10

4 3

9 2

28

18

9 1

31

7 1

14

7 -1

70

12

9 -3

6

75

19

80

29

92

33

72

38

0 1

39

82

7 6

87

19

29

26

11

68

1 2

0 1

5 -5

1

27

3 1

66

7

19

85

53

19

54

16

97

29

6 1

54

9 1

25

2 3

63

0 4

48

0 8

51

51

9 -4

2 1

88

9 2

23

2

19

90

80

89

62

85

-18

05

36

8 2

26

1 1

89

2 6

09

8 5

68

1 -4

17

75

15

-60

26

15

29

84

19

95

11

87

7 1

01

50

-17

27

66

5 2

55

2 1

88

7 6

41

4 5

80

0 -6

14

16

8 1

23

-45

43

50

23

45

20

02

1415

2 11

771

-2

381

1

01

9 2

56

3 1

54

4 1

12

79

81

13

-31

66

184

13

5

-49

44

68

15

39

Pt

UK

A

ut

Fin

Sw

e

19

76

1

25

0 9

94

-25

6

19

80

3

16

8 1

80

3 -1

36

5

19

85

5

09

0 3

10

7 -1

98

3

19

90

50

3 1

10

3 6

01

65

34

31

48

-33

87

19

95

86

5 3

24

6 2

38

1 9

25

2 4

53

1 -4

72

0 1

76

3 8

58

-90

5 8

88

72

3 -1

65

16

58

20

02

11

87

38

57

26

69

10

15

3 6

02

1 -4

13

2 1

80

9 1

53

7 -2

72

11

85

11

78

-7

20

86

12

22

net

1

71

1

7

21

8

8

62

4

78

1 1

06

3

95

3

43

3

68

-2

00

5

-2

92

9

72

1 -9

37

-8

64

10

ROBERT ACKRILL

6 See Ackrill (forthcoming, 2005) for a full discussion of these and related results. We do not repeat this analysis for Regional Policy

spending because of difficulties involved in creating a consistent data series, given the evolution of the policy and consequent changes in data provision and presentation.

Table 3 Percentage Shares of Total Own Resources by Member State (means and coefficients of variation)

19731980 6.6* 1.9 28.4 21.2 0.6* 15.8 0.1* 9.0* 16.2 19811985 5.2 2.1 28.1 1.5 19.7 1.1 13.3 0.2 7.0 21.8* 1986-1994 4.3 2.1 28.2 1.4 7.5 19.9 0.9 14.8 0.2 6.5 1.2 13.0 19952002 3.9 2.0 26.4 1.6 7.2 17.3* 1.2 12.6 0.2* 6.3 1.4 13.0 2.5 1.4 2.8 19731988 5.8 2.1 28.1 1.4 6.1* 20.8 0.8 14.7 0.2 7.9 0.9* 17.7 19892002 4.0 2.0 27.4 1.5 7.6 18.1 1.0 13.7 0.2 6.3 1.4 12.7 2.5 1.4 2.8 19732002 5.0 2.0 27.8 1.5 7.4 19.5 0.9 14.3 0.2 7.2 1.3 15.3 2.5 1.4 2.8

CoV 19731980 6.6 24.3 4.7 11.5 38.0 17.3 16.2 5.8 28.6 19811985 4.8 8.8 2.5 13.7 2.3 11.9 7.1 16.1 2.9 7.6

-

-

-

-

-

-

-

-

Means Bel Dk D El E F Ire It Lux NL Pt UK Aut Fin Swe

Table 4 repeats the analysis for expenditures, except that the second disaggregation of data (in addition to the one by EU enlargement) splits the data in 1993, from which date the 1992 CAP reform was implemented. The results indicate some variability in the early years, but much greater stability subsequently even with successive enlargements. Again, this is expected a priori. First, NCE has risen as a share of total EU spending. Second, the CAP (the largest spending policy), saw much price support spending replaced with (the more stable) direct payments after 1992. Table 5, focusing exclusively on CAP spending, confirms this.

Note that of eleven outliers, three each occur for Italy and the Netherlands, both of whom see spending shares decline subs tant ia l ly over t ime. A more disaggregated analysis of CAP spending, not presented here, indicates that Italy experiences a general decline in CAP

receipts, but with no obvious cause. With the Netherlands, however, the fall in total CAP receipts arises principally from the 1984 reform of the dairy sector. As a result, their receipts by the late 1990s were about €1.5 billion per year lower than a decade earlier from this sector alone.

Of particular interest are the figures for France and Ireland. Not only do these countries gain considerably from the CAP (France in total terms, Ireland in per capita terms) but Table 5 indicates they have managed to achieve a greater stability of spending shares over time. Indeed, they are the only countries for which the CoV declines in each sub-period prior to the

61992 CAP reform . Table 5 shows that even if we halve the width of the band by which we define outliers, still neither country has a single outlier. This stability of shares of CAP spending, it should be reiterated, has been achieved even as the EU has expanded.

Table 4 Percentage Shares of Total Spending by Member State (means and coefficients of variation)

Sources: Court of Auditors Annual Reports and Annual Reports on Allocated Operating Expenditure; own calculations.Note: * - outlier, as defined in the text. The outliers are determined by reference to the exact values of the numbers. In rounding to one decimal place some outliers may not, in this table, appear so to be.

11

ROMANIA'S EU ACCESSION NEGOTIATIONS: THE SIGNIFICANCE OF THE EU BUDGET

Means Bel Dk D El E F Ire It Lux NL Pt UK Aut Fin Swe1976-1980 5.8* 5.6* 20.2* 20.5 4.8 17.2 0.1 11.4* 14.4

1981-1985 3.7 3.7 16.3 5.4* 20.2 5.1 18.7* 0.0 8.7 18.1* 1986-1994 3.7 3.2 14.1 7.5 12.0 18.6 5.0 15.1 0.3 7.6 3.8 9.2 1995-2002 2.8 2.2 14.4 7.6 17.7 17.1 4.1 12.0* 0.2 2.9* 5.2 9.0 1.9 1.5 1.6 1976-1992 4.2 4.1 16.6 6.3 11.3 19.7 5.0 17.1 0.1 9.4 3.2 13.4 1993-2002 3.2 2.3 14.2 7.9 17.0 17.3 4.2 12.1* 0.3 3.3* 5.3 8.9 1.9 1.5 1.6 1976-2002 3.8 3.4 15.7 7.0 14.7 18.8 4.7 15.2 0.2 7.1 4.4 11.7 1.9 1.5 1.6

CoV 1976-1980 12.1 10.1 16.8 15.4 23.2 7.4 37.2 5.2 19.8 1981-1985 10.1 8.3 8.5 31.1 9.4 13.1 6.7 29.3 3.3 19.7 1986-1994 31.9 16.0 8.4 17.6 26.3 10.6 12.0 15.1 108.1 34.5 43.8 11.9 1995-2002 18.7 12.0 5.0 8.1 11.9 4.2 12.7 11.7 18.5 21.4 10.2 11.1 14.2 14.0 11.5 1976-1992 32.0 27.0 19.2 24.7 28.8 12.5 15.5 10.0 130.7 21.2 43.2 33.8 1993-2002 26.7 14.7 6.2 10.4 13.4 5.0 13.5 14.6 87.5 27.6 10.2 11.3 14.2 14.0 11.5 1976-2002 33.3 36.4 17.9 20.9 26.8 12.3 17.0 19.6 112.5 48.3 31.9 35.9 14.2 14.0 11.5

Bands

± one s.d.

upper 5.1 4.7 18.6 8.5 18.6 21.1 5.5 18.2 0.4 10.6 5.9 16.0 2.2 1.7 1.8

lower 2.5 2.2 12.9 5.6 10.7 16.5 3.9 12.2 0.0 3.7 3.0 7.5 1.6 1.3 1.4

Sources and Note: See Table 3.

19861994 7.3 11.1 9.7 20.6 17.2 6.2 9.0 10.7 15.3 4.0 26.7 19.4 1995-2002 4.6 5.7 11.1 5.4 13.6 3.6 16.9 12.8 13.3 4.8 7.8 15.4 5.9 5.5 7.1 19731988 16.1 18.1 4.2 23.3 18.1 8.9 36.5 15.6 18.5 14.5 8.4 25.3 19892002 5.3 5.4 11.5 8.9 12.7 6.4 20.4 15.3 16.3 4.2 14.1 17.7 5.9 5.5 7.1 1973

-

-

-

-2002 22.8 13.9 8.3 15.1 15.4 10.4 31.2 15.6 23.9 16.4 19.8 28.4 5.9 5.5 7.1

Bands

± one s.d.

upper 6.1 2.3 30.1 1.7 8.5 21.6 1.2 16.5 0.2 8.4 1.6 19.7 2.7 1.5 3.0

lower 3.8 1.7 25.4 1.3 6.2 17.5 0.6 12.0 0.2 6.0 1.1 11.0 2.4 1.3 2.6

Cov Bel Dk D El E F Ire It Lux NL Pt UK Aut Fin Swe

Table 3 (continued).

12

ROBERT ACKRILL

Table 5: Percentage Shares of CAP Guarantee Spending by Member State (means and coefficients of variation)

Mean Bel Dk D El E F Ire It Lux NL Pt UK Aut Fin Swe 1976-1980 6.1* 6.3* 20.6* 21.8 4.6 16.0 0.2* 12.7* 11.7+ 1981-1985 4.2 4.5 18.2 4.9* 23.3 4.5 19.2* 0.0+ 10.8+ 10.4 1986-1994 3.6 4.2 16.2 6.9 8.2+ 22.3 4.7 15.4 0.0+ 9.8 1.0+ 7.7+ 1995-2002 2.7+ 3.2* 14.8+ 6.6 13.0+ 23.2 4.2 11.8* 0.1 3.7* 1.8+ 9.8 2.2 1.5 1.7 1976-1992 4.5 4.9+ 18.2 5.9 6.9+ 22.3 4.7 17.1+ 0.1 11.4+ 0.8* 9.6 1993-2002 2.9+ 3.3+ 14.8+ 6.9 12.9+ 23.3 4.3 11.8* 0.1 4.2* 1.8+ 9.5 2.2 1.5 1.7 1976-2002 3.9 4.3 16.9 6.3 10.4 22.7 4.5 15.1 0.1 8.7 1.3 9.6 2.2 1.5 1.7 CoV 1976-1980 12.7 9.1 17.6 18.2 26.4 14.1 39.1 7.3 29.8 1981-1985 9.2 5.3 6.2 41.7 12.1 18.9 8.7 27.3 3.8 7.4 1986-1994 22.1 9.3 10.7 14.9 50.9 9.7 15.7 15.6 76.6 32.7 59.1 9.6 1995-2002 31.3 13.7 4.8 5.6 11.1 4.1 8.4 10.0 26.2 25.9 11.4 9.2 38.7 38.4 35.7 1976-1992 28.6 19.9 15.3 28.1 54.9 13.0 19.7 12.7 126.4 17.8 49.9 27.2 1993-2002 29.3 14.4 4.9 9.9 10.1 3.8 8.1 11.3 36.1 32.7 14.0 10.8 38.7 38.4 35.7 1976-2002 35.5 26.3 16.5 21.7 38.0 10.5 16.9 21.0 103.9 45.3 43.7 22.4 38.7 38.4 35.7 Bands +/- one s.d. upper 5.3 5.5 19.7 7.7 14.4 25.0 5.3 18.3 0.1 12.7 1.9 11.7 3.0 2.0 2.2 lower 2.5 3.2 14.1 5.0 6.5 20.3 3.8 11.9 0.0 4.8 0.8 7.4 1.3 0.9 1.1 +/- 0.5 s.d. upper 4.6 4.9 18.3 7.0 12.4 23.8 4.9 16.7 0.1 10.7 1.6 10.6 2.6 1.8 1.9 lower 3.2 3.8 15.5 5.6 8.5 21.5 4.1 13.5 0.0 6.8 1.1 8.5 1.7 1.2 1.4

Sources and Note: See Table 3 and Ackrill (2005, forthcoming). Also, *=outliers greater than the full-period mean +/- one full period standard deviation, +=outliers greater than +/- one-half of the full period standard deviation.

7 Recently through the European Council as well.

In conclusion, the analysis in this section has demonstrated that member states' shares of transfers to and from the EU Budget have been stable over time, for some countries even as the EU has enlarged. The EU's decision-making processes, the nature of Non-Compulsory Expenditures and recent CAP reforms have all played a role in this. Crucially, for the EU Budget generally and the CAP in particular, the greatest

budgetary power has remained with the member states, through the Council of

7Ministers . Given collective decision-making in a zero-sum budget game, countries cannot all achieve maximum returns from the EU budget. For a given distribution of budget spending ab initio, however, they are able to take decisions that preserve spending shares. What, though, does all this imply for the NMS and

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ROMANIA'S EU ACCESSION NEGOTIATIONS: THE SIGNIFICANCE OF THE EU BUDGET

8 The EU tends to use the terms 'Payment Appropriations' and 'Appropriations for Payment' interchangeably.

Table 6: Selected Elements of the Financial Perspective, 2000-2006, €mn, 1999 prices (commitment appropriations unless otherwise stated)

Part A: EU15 (Berlin Summit Agreement, March 1999) Item 2000 2001 2002 2003 2004 2005 2006

Agriculture 40920 42800 43900 43770 42760 41930 41660 - CAP guarantees 36620 38480 39570 39430 38410 37570 37290 - rural development, other measures 4300 4320 4330 4340 4350 4360 4370 Structural Operations 32045 31455 30865 30285 29595 29595 29170 Pre-Accession Aid 3120 3120 3120 3120 3120 3120 3120 - Agriculture 520 520 520 520 520 520 520 - pre-accession structural instruments 1040 1040 1040 1040 1040 1040 1040 - PHARE (applicant countries) 1560 1560 1560 1560 1560 1560 1560 Total Commitment Appropriations 92025 93475 93955 93215 91735 91125 90660 Total Payment Appropriations 89600 91110 94220 94880 91910 90160 89620 Available for Accession (Payment Appropriations) 4140 6710 8890 11440 14220 - Agriculture 1600 2030 2450 2930 3400 - Other Expenditure 2540 4680 6440 8510 10820 Ceiling on Payment Appropriations 89600 91110 98360 101590 100800 101600 103840 - as %GNP 1.13 1.12 1.18 1.19 1.15 1.13 1.13

Romania? These questions are dealt with in the next two sections.

4. THE BUDGET OUTCOME FOR THE NEW MEMBER STATES

We begin this section by looking at the amounts laid down for spending in the NMS. These were first set out in the Financial Perspective agreed in 1999. The presentation of the tables by the EU is compl ica ted by mix ing payment appropriations (sums available for spending in any particular year) with commitment appropriations (sums available for spending in the current year plus agreed future spending on multi-annual projects). Table 6 shows elements of the Financial Perspective. Parts A and B present spending in the EU15 and EU21 as agreed in 1999 (when only six new member states were expected to join and in 2002). Part C shows the revised Budget from May 2003, for an EU25 with enlargement in 2004. From Table 6, some interesting points emerge:

Pre-Accession Aid

The sums assigned for assistance prior to joining the EU remain unchanged between the 1999 agreement (Parts A/B) and the 2003 revision (Part C) €3.12 billion each year. Since the 1999 figures assumed an accession of six countries, this implies more money is now available for Romania, given that as of May 2003 the list of post-2004 applicants was three (Romania, Bulgaria and Turkey), not seven.

Total Spending From 2004 in an Enlarged EU

Even though the 2004 enlargement brought in four more countries than was planned for in the 1999 Financial Perspective, total EU spending from 2004, as set out in the revised 2003 Financial

8perspective, remained unaltered . This is a key point that we shall return to later.

ROBERT ACKRILL

Part B: EU21, 2002 Accession (Berlin Summit Agreement, March 1999)

Item 2000 2001 2002 2003 2004 2005 2006 Agriculture 40920 42800 43900 43770 42760 41930 41660 - CAP guarantees 36620 38480 39570 39430 38410 37570 37290 - rural development, other measures 4300 4320 4330 4340 4350 4360 4370 Structural Operations 32045 31455 30865 30285 29595 29595 29170 Pre-Accession Aid 3120 3120 3120 3120 3120 3120 3120 - Agriculture 520 520 520 520 520 520 520 - pre-accession structural instruments 1040 1040 1040 1040 1040 1040 1040 - PHARE (applicant countries) 1560 1560 1560 1560 1560 1560 1560 Enlargement 6450 9030 11610 14200 16780 - Agriculture 1600 2030 2450 2930 3400 - Structural Operations 3750 5830 7920 10000 12080 - Internal Policies 730 760 790 820 850 - Administration 370 410 450 450 450 Total Commitment Appropriations 92025 93475 100405 102245 103345 105325 107440 Total Payment Appropriations 89600 91110 98360 101590 100800 101600 103840 - of which, enlargement 4140 6710 8890 11440 14220

Part C: EU25, 2004 Accession (Agreed May 2003) Item 2000 2001 2002 2003 2004 2005 2006

Agriculture 40920 42800 43900 43770 44657 45677 45807 - CAP guarantees 36620 38480 39570 39430 38737 39602 39612 - rural development, other measures 4300 4320 4330 4340 5920 6075 6195 Structural Operations 32045 31455 30865 30285 35665 36502 37940 Pre-Accession Aid 3120 3120 3120 3120 3120 3120 3120 - Agriculture 520 520 520 520 - pre-accession structural instruments 1040 1040 1040 1040 - PHARE (applicant countries) 1560 1560 1560 1560 Compensation 1273 1173 940 Total Appropriations for Commitments 92025 93475 93955 93215 102985 105128 106741 Total Appropriations for Payment 89600 91110 94220 94880 100800 101600 103840 Ceiling, Appropriations for Payment, %GNI 1.07 1.08 1.11 1.1 1.08 1.06 1.06

14

Sources: Parts A and B “European Parliament, Council, Commission. Interinstitutional Agreement on Budgetary Discipline and Improvement of the Budgetary Procedure”. Official Journal of the European Communities C172, 18.6.1999, pp. 1-22. Part C “Decision of the European Parliament and of the Council of 19 May 2003 on the adjustment of the Financial Perspective for Enlargement.” Official Journal of the European Communities L147, 14.6.2003, pp. 25-30.

The Allocation of Spending, by Policy, in the New Member States

Given the refusal of the EU15 to raise to ta l spending fo r an expanded enlargement, we look now to see if any change was agreed to the distribution of planned spending by policy area.

At the 1999 Berlin Summit, as well as agreeing the Financial Perspective summarised in Parts A and B of Table 6, a reform of the CAP was agreed, notionally to prepare it for enlargement within the spending limits. A major issue of contention emerged early on would the EU extend to the NMS all instruments of CAP support, in particular direct payments? EU public

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ROMANIA'S EU ACCESSION NEGOTIATIONS: THE SIGNIFICANCE OF THE EU BUDGET

9 The meaning of '25%' and '100%' needs clarifying. Actual payment levels vary between countries because of

different historical yields. '25%' does not refer to one-quarter of the value of the 'EU15' payment, because each country's payment is different, but to one-quarter of the full (100%) value of each country's payment, calculated using the EUwide methodology.

statements showed indecision on this. Two of the most common arguments against extending direct payments were that such levels of transfer would inhibit farm re-structuring and that since these farmers did not face the original price cuts (accession would see many prices rise) there could be no logic in giving them compensation payments.

Paradoxically this second argument was undermined by the 1999 CAP reform. The 1999 reform continued the 1992 process of reducing price support levels and raising direct payment levels, but in 1999 the rise in direct payments only covered half the price cut. Further, all support instruments other than direct income support were grouped into a new Rural Development policy (or Pillar II of the CAP). Countries could then re-cycle some Guarantee (Pillar I) money into Pillar II policies. These changes weakened the direct link between price cuts and direct payments, the latter no longer being specific compensation for specific price cuts.

Thus, after the 1999 reform, it was agreed that direct payments would be granted to farmers in the NMS. Indeed, negotiating accession on any other basis would have been impossible. The situation would have arisen that the CAP would be granting substantial aid to farmers in richer countries but not to farmers in poorer countries, whilst the latter would still be subject to many constraints under the CAP, notably production quotas and set aside.

Crucial issues still had to be discussed, however, most notably how the payments would be made to the NMS but the Financial Perspective still respected. The eventual solution was to phase-in the direct payments over ten years. Starting at 25%,

they would be gradually increased until, in 2013, they would be made at 100% “of the levels then applicable” a wording that leaves open the possibility of further reform

9between now and then . Some countries, notably Poland, had demanded an initial payment level of 40% and a shorter transition period, but ultimately the EU15 position prevailed.

The impact of this on projected CAP spending in the NMS is summarised in Table 7. Note that the revised 2003 Financial Perspective (as summarised in Part C of Table 6) does not break down Pillar II spending between Commitment and Payment Appropriations. Note also that the 1999 Financial Perspective shows the same sums projected for CAP (Pillar II) spending under both CA and PA. These data reveal some interesting developments. First, the phasing-in of direct payments has resulted in a re-scheduling of spending. The bottom line even suggests that Pillar II spending will be phased-in. Recall also that with accession occurring only on 1 May 2004, the 2004 totals only cover eight months-worth of spending. In addition, compared with the 1999 Financial Perspective, the 2003 agreement raised the sums to be spent on the C A P o v e r 2 0 0 4 - 2 0 0 6 . P a y m e n t Appropriations are increased by €526 million, with Commitment Appropriations raised by about €1 billion (within the unchanged overall limit for total PA).

The decision to phase in CAP direct payments also requires us to comment upon the spending element 'Compensation' (near the bottom of Table 6). This decision created the unfortunate situation that some of the NMS will initially be net contributors to the EU Budget, given that they must make revenue contributions in full ab initio. As a

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Table 7 The Evolution of Planned CAP Spending in the New Member States, €mn, 1999 prices

Item CA/PA/NDA 1999/2003 2004 2005 2006 Total Total Agriculture CA & PA 1999 2450 2930 3400 8780 Total Agriculture CA 2003 1897 3747 4147 9791 Total Agriculture PA 2003 911 3248 4095 8254 CAP Guarantees NDA 2003 327 2032 2322 4681 Rural Development CA 2003 1570 1715 1825 5110 Rural Development PA 2003 584 1216 1773 3573

Sources: Table 6; Disaggregated data for 'CAP Guarantees' and 'Rural Development PA', from the EU Budget Website:http://europa.eu.int/comm/budget/pdf/financialfrwk/copenhagen_package/webtablesEN.pdfNotes: CA Commitment Appropriations; PA Payment Appropriations; NDA Non-Differentiated Appropriations.

result, the EU will pay compensation during the first three years of membership. Moreover, the figures finally agreed in May 2003 were €100 million higher than those originally approved at the Copenhagen Summit in December 2002, when the accession negotiations were concluded.

What is interesting is that despite the modest sum involved, the money has been taken from planned structural spending in the NMS, an area of particular need in these rather poorer countries.

The foregoing discussion allows us to draw a number of conclusions that both illuminate the way in which the politics and processes of the EU Budget impacted on the accession negotiations and also help us understand the situation faced by Romania. The first point to note is that, as intended in 1988, the member states have shown a strong commitment to the spending limits set out in successive Financial Perspectives. The 2004 enlargement showed that total spending as laid down in the 1999 Perspective was inviolable, even with a larger than planned accession.

This increasingly effective budget discipline is widely seen as a positive development in the management of EU

finances (see, inter alia, Ackrill 2000). The discussion in this paper, however, suggests problems as well. The EU15 have defended their spending shares, through the interaction of member states via policy reform negotiations. For non-compulsory expenditures the main element, Regional

Policy, had seen spending rise significantly since 1988, in relative and absolute terms. This ended in 1999, with a limit on transfers to any member state set at 4% of its GDP. For the first time, EU regional policy had to adapt to spending limits, rather than enjoying ever-higher spending, agreed in pursuit of wider EU policy goals. The negotiations for the 2004 enlargement have advanced still further the financial constraints faced by structural spending.

In order to grant support to the NMS and keep total spending within overall limits, structural spending in the EU15 has come under threat. Spain in particular has vehemently opposed any reduction in its considerable financial advantage currently about one third of EU structural spending and one-fifth of total EU spending. At least principles such as the 4% rule are common to all member states. The same cannot be said for the most expensive policy of all, the

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ROMANIA'S EU ACCESSION NEGOTIATIONS: THE SIGNIFICANCE OF THE EU BUDGET

CAP. This policy has undergone huge change in the last decade, with the basis of support changed and Rural Development policies introduced, yet spending on the policy has fallen only as a percentage of total EU spending, not in absolute terms. Indeed, national co-financing of Pillar II measures mean the total cost of CAP policies has risen, albeit with the burden now shared between the EU and national budgets.

For some countries, there was a wider agenda lying behind the wish to grant lower direct payments to the NMS. The UK and Sweden, for example, wanted to give the NMS less, not for discriminatory reasons but because they believed (mistakenly), that in order to maintain a Common Agricultural Policy, and ensure the EU25 spending limit was respected, a reform would have to be agreed that saw lower payments to the EU15 also. The final agreement ultimately showed how far some countries were prepared to go to defend their spending shares even willing to sacrifice commonality of support under the CAP, this supposed 'cornerstone' of European integration, to achieve this. Put cynically, the goals for fiscal discipline set by the EU15 in the 1999 Financial Perspective then had to be met by the NMS.

A further feature of the final accession agreement was a deal whereby, for the first three years of membership, the NMS could use some of their Pillar II money to top-up direct income payments. The amount is, however, limited to 20% of Pillar II funds and must be co-funded by the member state. From 2007, all top-up money must come from national sources. This raises questions about the ability of the NMS to fund this, although see Hallet (2004) for a positive assessment of this particular issue.

Given the political sensitivity of EU spending across the member states it came as no surprise when, in proposing further

reforms for the CAP (agreed in 2003), Commissioner Fischler made specific reference to the impact of the reforms on the budget. Even though this reform was seen by many as the most radical ever (by aiming to break more fully than in 1992 the link between support received by farmers and current production levels), the proposals were drawn up merely “with a view to achieving the objective of stabilising agricultural expenditure in real terms” (European Commission, 2002: 29 emphasis added). Furthermore, although funds can be re-cycled from Pillar I to Pillar II across the CAP as a whole, a minimum of 80% of re-cycled money must remain in the 'home' country, minimising the redistribution of CAP funds between countries. It appears that, in order to stand a chance of getting agreement on CAP reform, the member states must first receive a guarantee that their budgetary gains from the policy will not be eroded by the reform.

5. ROMANIA AND THE EU BUDGET: PROCESS AND OUTCOME

The foregoing discussion raises a series of issues that can inform a considered assessment of Romania's experiences with the EU Budget process. One point that can be made, given the foregoing discussion, is that whatever is agreed, Romania will find it extremely difficult subsequently to negotiate a higher budget share. Below, we estimate likely parameters within which a budget deal for Romania could lie, given the agreement reached with the three biggest NMS the Czech Republic, Hungary and Poland.

The approach taken in this analysis is very simple and mechanistic. We justify this by arguing that a key consequence of the foregoing analysis is that the allocation of

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budget shares to NMS and even to the EU15 is based not so much on policy need as on securing a share of limited funds. This allocation is determined with reference to policy-related variables (rather than specific policy instruments), within tight process-driven restraints, especially the primacy of overall spending limits, expressed through the Financial Perspective. Moreover, we note not only the direct control exerted over Non-Compulsory Expenditures, but recent CAP reforms that have imposed comparable constraints on this largest Compulsory Expenditure as well. Thus we consider spending in the Czech Republic, Hungary and Poland by reference to the relative values of various economic indicators. From this, we derive 'high' and 'low' estimates of possible budget transfers to Romania. All estimates refer to Payment Appropriations:

CAP

We estimate a single figure, making no distinction between income support and Rural Development expenditures. We find that, in the NMS8, there is a very close correlation with the variable 'utilised agricultural area' (UAA) except for Slovenia, for which special arrangements were agreed. This correlation is reasonable, a priori, on two grounds. First, the largest single element of income support is direct payments, in particular the area-based support for the arable sector. Second, given the low level of economic development and the need for support across the whole rural economy, total agricultural area would be a reasonable proxy for a country's need for Rural Development assistance. We use 2001 data for UAA published by the European Commission and base our estimate of spending in Romania on projected CAP transfers and UAA data in the Czech Republic, Hungary and Poland

(NMS3) for 2004-2006. We express UAA in Romania as a ratio relative to UAA in these three countries, then apply that ratio to planned CAP spending in the NMS3. This produces a series of estimates for CAP spending in Romania for 2007-2009, across which the range from highest to lowest is no more than about 10%, with a gap of 6% in 2009.

Regional Policy (RP)

Population shares prove to have a very close correlation with projected regional policy support spending in the NMS8, with the exception of the Czech Republic. Note that throughout the NMS, only the Prague region in the Czech Republic and Bratislava region in Slovakia are not classified as Objective 1. Overall, for most countries, total population is thus a reasonable proxy for RP spending eligibility (within which, Objective 1 spending is the largest single element). Given the Czech Republic is something of an outlier in this regard, we use the same approach as for CAP spending, but just consider data for Hungary and Poland for 2004-2006. Our higher and lower estimates are again spread by no more than about 10%, falling in 2009 to 8.5%.

Other Spending

We estimate the balance on total spending as total Payment Appropriations minus CAP spending minus regional policy spending, excluding the temporary compensation payments. We estimate 'other spending' as a residual rather than by direct calculation because of the presence of tight budgetary constraints and an inflexible negotiation process. This means, for example, an increase in CAP spending will see 'other' spending fall in order to respect any explicit or notional spending limit. We

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ROMANIA'S EU ACCESSION NEGOTIATIONS: THE SIGNIFICANCE OF THE EU BUDGET

Item Range 2007 2008 2009 2007 (12

mth)

CAP high 348 1385 1680 522

low 317 1234 1579 476

RP high 491 1014 1203 736

low 449 941 1125 674

Other high 184 288 375 277

low 146 239 324 218

Total high 1023 2686 3257 1535

low 912 2415 3029 1368

Table 8 Estimates of EU Spending in Romania, €million, Payment Appropriations

Sources: European Commission website (see Table 7); agricultural area data from European Commission; population data from Eurostat; own calculations.

then produce a matrix of estimates for possible spending in Romania, based on our earlier 'high' and 'low' estimates of CAP and RP spending. The results of this simple exercise are summarised in Table 8.

These results are only indicative estimates, underpinned by a series of important assumptions. First and foremost, we have assumed the general basis upon which spending in the NMS8 has been determined will apply equally to Romania. For regional policy, our estimates are considerably below the 4% threshold for GDP (calculated using Eurostat GDP estimates for 2004 and 2005 and assuming the growth rate between these two years is sustained into the future). Regional policy spending may therefore be raised above the levels shown here. Our approach assumes the direct payments under the CAP are phased in according to the same schedule as in the new member states, thus the pattern for Romania in the period 2007 to 2009 mirrors that in the NMS from 2004 to 2006. The estimate of spending in 2007 is based on an eight-month figure for 2004 spending in the NMS: the last column of Table 8 adjusts this figure for a full twelve months. Finally, the bottom line (literally) of Table 8

shows that annual gross transfers are going to be quite significant, possibly rising as high as 4-5% of GDP, although the net transfer after own resource contributions will be about one percentage point lower.

6. CONCLUSIONS

Membership of the European Union will bring much to Romania, both political and economic, hopefully mainly positive. In this paper we have looked at just one element possible gains for Romania from the EU budget, but we have considered this from a particular point of view. We have argued that EU budgetary processes and constraints are such that member states' shares of EU Budget transfers tend to be very stable. Recent accession negotiations, especially over the CAP, have shown the lengths the EU15 will go to, to defend their budget shares. For a new member state, this is important because it suggests not only that there is very little flexibility in the pre-accession budget negotiations, it also implies that once a member, a country will find it extremely difficult to negotiate higher transfers. Put crudely, what you get on entry is what you are then stuck with.

One of the main conclusions from the

ROBERT ACKRILL

20

earlier sections of the paper, that justified our fairly simple approach to estimating possible budget transfers to Romania, was an increasingly mechanistic approach to the EU Budget and national budget shares. The evidence shows that the EU15 countries have successfully created and defended a certain pattern of budgetary transfers that enlargement, even one on the scale of 2004, will not be allowed to disrupt. Even the Common Agricultural Policy, described as a 'cornerstone' of European integration, is being implemented differentially in the EU15 and the NMS in order to ensure existing gains to the EU15 are retained within the strict spending limit laid they down in the 1999 Financial Perspective.

The transfers likely to be made available to Romania will be substantial. That said, given the extraordinary political sensitivity surrounding the EU budget and its distribution across the EU member states, each applicant has more or less been presented with a take-it-or-leave-it offer on budget transfers. Ever-diminishing flexibility in budgetary processes mean little scope for applicants to raise by any significant amount the sums on offer; nor is there much likelihood of countries raising their shares in future Financial Perspectives. Nominal amounts may go up, but whatever share of EU spending Romania gets from 2007, that more or less is that.

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REFERENCES

Ackrill, R.W. (2000). The European Union Budget, the Balanced Budget Rule and the Development of Common European Policies. Journal of Public Policy, 20(1) 1-19

Ackrill, R.W. (forthcoming, 2005). Common Agricultural Policy. In P. van der Hoek (ed.) Handbook of Public Administration and Policy in the European Union. New York: CRC Press.

Ackrill, R.W. and Kay, A. (2005). Historical institutionalist perspectives on the development of the EU budget system. Unpublished mimeo, Department of Accounting, Finance and Economics, Nottingham Trent University.

European Commission (2002). Mid-Term Review of the Common Agricultural Policy. Communication from the Commission to the Council and the European Parliament. COM(2002)394 final, Brussels, 10.7.2002.

Hallet, M. (2004) Fiscal Effects of Accession in the New Member States. European Economy Economic Papers No 203. European Commission Directorate General for Economics and Financial Affairs. Available at:

http://europa.eu.int/comm/economy_finance/publications/economic_papers/economicpapers203_en.htm

Laffan, B. (2000). The Big Budgetary Bargains: from Negotiation to Authority. Journal of European Public Policy, 7(5), 725-743

Mayhew, A. (2003a). The Financial and Budgetary Impact of Enlargement and Accession. SEI Working Paper No. 65, Sussex European Institute, University of Sussex.

Mayhew, A. (2003b) The Financial Settlement in the Enlargement of the European Union: Lessons for Romania? Romanian Journal of European Affairs, 3(1), 5-34.

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

*Valentin Cojanu

Abstract: This material attempts to predict the results of negotiations in the process of the EU enlargement. The analysis is to shed light on the underlying determinants of possible outcomes and to suggest with anticipation improved ways of conduct. The interaction between nation-states is modeled in classes of games or strategic structures of interaction on the basis that the incentives of each party are revealed by their behavioral stance. The findings present a detailed analysis of bargaining power and offer predicted solutions to negotiations for the cases of the two candidate countries Poland and Romania considered in the application. The model's predictions closely follow the results of negotiations in every significant detail.

1. Introduction

The scope of negotiations on the accession of the Central and Eastern European Countries (CEECS) into the European Union (EU) mostly embedded in the 31 chapters of acquis extends beyond the political decision of enlargement. Evidence of official statements and present records of results show that the main concern of both sides actually resides in the terms upon which negotiations are concluded.

The topic of beneficial enlargement of an integration structure is theoretically exposed to a large variety of arguments. The conventional analysis represented by the theory of economic integration helps in explaining the rationale underlying negotiations set in such a context, but leaves aside the strategic considerations inherently associated with that process. As the way negotiations are structured and the inherent conflicting nature of dossiers like "agriculture" eloquently shows the analysis of the process of strategic interaction proves

essential in understanding the economic terms on which the integration negotiations proceed and conclude. One of the objectives of this study is thus to define and justify these variables as determinants of negotiations in the accession process.

The agricultural dossier of the EU enlargement suits particularly well in this picture because of the diversified nature of its conflicting topics. A first hint is inferred from various nuances of views regarding its importance: the negotiations over agriculture has been described as a "political landmine", implying "large conflicts of interest" (Gacs and Wyzan) , but nevertheless a "win-win project", that, if successful, will leave "no losers by the wayside" (Fischler).

The latter consideration, which aptly belongs to a former EU Commissioner for agriculture, encapsulates the rationale for an analysis of the strategic aspects of negotiations: each party aspires to a winning position in rather improbable terms of what success may be taken for. Because the interplay of interests is precisely based on

* The author holds a senior lectureship on International Trade & Competition with the Academy of Economic Studies in Bucharest ( ). www.competition.ase.ro

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ROMANIAN JOURNAL OF EUROPEAN AFFAIRS Vol.5, No.1, 2005

these different representations of the terms in which negotiations are to be concluded, the analysis proposed by this study is to shed light on the underlying determinants of possible outcomes and to suggest with anticipation improved ways of conduct.

The interaction between nation-states is modeled in classes of games or strategic structures of interaction on the basis that the incentives of each party are revealed by their behavioral stance, while their negotiating agenda is either explicitly or implicitly formulated in official documents, historical contexts or publicly voiced statements. It is this attempt, which makes the game-theoretical construct necessary because both behavior and negotiations are predominantly based in the integration process on the interplay of expectations. Indeed, a foray into the government's behavior given the challenges of integrating countries with very different economic potential will try to highlight possible strategic policy interrogations.

As the CEECS negotiated separately their accession, a choice had to be made as to the most appropriate case(s) to consider. The option was to include an application of the model on Poland and Romania, the largest agricultural countries in CEECS according to data on agricultural land and the contribution of agriculture to GDP. The initial presumption that the cases of both Poland and Romania would provide adequate inputs for the analysis proved right. The model's predictions closely follow the results of negotiations in every significant detail. Moreover, the overview tableau of possible solutions helps assess better the gains and losses from negotiations given the interplay of interests and so makes the methodological contrast with conventional approaches to integration more visible.

The subject of strategic negotiations, along with a presentation of methodology is introduced in Section 2. Despite the major achievements in the economic research, the theme proposed here still finds at the junction of conventional with innovative approaches to the study of economic interaction when several countries integrate. The strategic analysis of negotiations addresses first the theoretical framework in which to build a model of bilateral negotiations; then, the model is used to test and predict the possible outcomes of negotiation on specific issues in general, and specifically for the purpose of this study in relation to negotiations on agriculture. Resemblance with other classes of interactions, e.g. debt rescheduling, enforcement of international agreements, and security aspects, indicates the option of considering 2x2 games in an empirical context. Section 3 presents this study's findings in two parts: the former analyzes bargaining power and the latter presents the solutions to negotiations. The arguments are elaborated against the background of the interaction pattern of the EU enlargement process and the issue of agricultural negotiations, whose conclusion became effective also for the last two candidate countries Bulgaria and Romania in June 2004. Section 4 on conclusions ends this study and suggests implications for further application of games of strategy in negotiations.

2. Overview of literature and research methodology

The economic factor is by no means a predominant explanation of integration, although one should consider it more realistically diffused into a multiple-level interaction among negotiating countries. A

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comprehensive literature surveyed by Reza suggests that the states' behavior is determined by a three-layered system of basic constraints embodying elements of i ndependence , dependence , and interdependence (44), which eventually shed light on the available and desirable courses of actions.

Conventionally, the formation of policy preferences has been explained in terms of domestic the "independence" level or international the "dependence" level constraints or both. The work of several authors (e.g., Schelling; Mo; Putnam; Helpman) models bargaining as domestic and international games that are played simultaneously, and shows that the bargaining outcome is resilient on the effective way a decision is reached in the first place.

According to several studies (e.g., Patterson; Pahre and Papayoanou) this approach is inconclusive. What they suggest is that negotiations rather encompass simultaneous effects on state behavior of a third level of interactive decisions as well. As proposed by Lehman, to make this conjecture explicit amounts to value the relative power of negotiating partners. The concept is suggestive of the supplementary constraints impeding choice selection, beyond the commonly descr ibed dichotomy of international and national levels of analysis.

This search for robust results induced a good strand of applied research (e.g., Aggarwal and Allan; Lenway and Murtha; Patterson L.A.; McDonald) to develop the two-level framework into variants of three- and four-level games with the intent to refine the strategic analysis. What eventually emerges from these last studies consists of varied solutions to define constraints, which poses "a task of e l imina t ion , which can only be

accomplished by an examination of the cases" (Conybeare 53). A precise interpretation is thus subsequently sought for at three presumed constraining levels of analysis. The debate reveals the problem of representation of constraints at each level.

2.1 The international level of economic dependence

The concept of power conveys the message on the constrained resources a nation has in the conventional sense that more power means better chances to arrive at the preferred outcome. Serdar emphasizes two main approaches to power: power by which states pursue and control others' behavior, and capacity stemming from their capabilities (2). The distinction is suggestive for the analytical procedures to measure power: the hegemonic context depicted by the former case is revealed by various indicators of power asymmetry, while the latter indicates a more laborious process to influence decisions in international relations.

In general, approaches to asymmetry give a country's size a subjective predictive value depending on the particular interaction. The underlying rationale offered by Lindert assumes that a country is "small" if it is likely to be more dependent on a particular trade relationship with its partner country, viz. it trades exports and imports with low price elasticity of demand (191). Conybeare exemplifies this kind of economic warfare in his model of trade war. His presumption correspondingly asserts that "as the disparity in size increases, the ability of the large country to extract gains from the small or hurt it with retaliation increases; the ability of the smaller country to gain from a tariff or hurt the large country by retaliation diminishes" (26); the conflict engenders a mutual loss if both countries are either large or small (27-28).

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STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

The accession process makes the enlargement negotiations a particular game of interaction in which the degree of dependence rests on the power deduced from the functioning of the future decision-making mechanism. In this sense, a member state's or candidate country's power is defined as its capacity to influence the outcome of the decision-making process within the enlarged EU.

Several studies (e.g. Bobay 14; Laruelle and Widgren 3; Baldwin 78) support the opinion that the number of votes a country has does not measure alone its power. Estimates of integrating countries' decisional capacity are usually argued to depend on the probability of coalition formation (Algaba et al. 15; Laruelle and Widgren 3). This literature proposes two standard assumptions on a country's capacity to exercise its power. Under the first assumption, all coalitions have an equal

probability of formation. Under the second assumption all the coalitions of a given size have the same probability of forming. The first assumption leads to the non-normalized Banzhaf index, while the second one leads to the Shapley-Shubik index.

Table 1. Estimations of relative decisional power within the enlarged EU-27 Council

Type of decisional power

Countries (Voting rights)

Range of Banzhaf indices

Range of Shapley-Shubik indices

Strong Germany (29), France (29), United Kingdom (29), Italy (29)

I: 0.0778 II: 0.0665

I: 0.0871-0.0870 II: 0.0837-0.0836

Moderately strong

Spain (27), Poland (27) I: 0.0742 II: 0.0631

I: 0.0799 II: 0.0767

Moderately weak

Romania (14), Netherlands (13), Greece (12), Czech R. (12), Belgium (12), Hungary (12), Portugal (12), Sweden (10), Bulgaria (10), Austria (10), Slovakia (7), Denmark (7), Finland (7), Ireland (7), Lithuania (7)

I: 0.0426-0.0218 II: 0.0407-0.0263

I: 0.0399-0.0196 II: 0.0394-0.0208

Weak Latvia (4), Slovenia (4), Estonia (4), Cyprus (4), Luxembourg (4), Malta (3)

I: 0.0125-0.0094 II: 0.0198-0.0177

I: 0.0110-0.0082 II:0.0131-0.0106

Source: Algaba et al. for indices; Treaty of Nice for allocation of voting rights in the Council.

In spi te o f thei r d i f ferent mathematical constructs, both indices evaluate a country's vote as pivotal when the addition of its vote to a particular coalition switches that coalition from losing to winning (Algaba et al. 3; Baldwin 76). A winning coalition is defined as that which can make a decision without the vote of the remaining players (Laruelle and Widgrén 2). They prove useful in the sense that they measure power as the relative number of times a country is 'pivotal', i.e. changes a losing coalition into a winning coalition. An index of 0.020, for instance, would indicate that the probability of influencing the result of voting is 2 per cent.

The two alternative approaches are likely to give a first assessment of the impact of the EU enlargement on power. Table 1 below summarizes the findings from literature and discriminates among several types of decisional power.

Table 1 presents two estimates for indices: 'I' stands for the first decision rule the weighted triple majority corresponding to votes (QMT), countries (SMT), and population; 'II' stands for the second decision rule - the rule I except for a

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qualified majority of 2/3 of the countries. The computations show a remarkably similarity between the two indices, but sufficiently discriminate among groups of countries as to their relative power.

The analysis however has not the accuracy to indicate that a 'moderate' position could be meaningfully considered apart from the larger group, which it belongs to, either 'strong' or 'weak'. Nevertheless, the results confirm the dichotomy between 'large' and 'small' Member States widely accepted in the literature on voting power indices as suggested by Plechanovova, which without exceptions parallel those countries in the table with 'strong' and 'moderately strong' power, and 'moderately weak' and 'weak' power, respectively.

At the same time, as the EU acts as a bloc and demonstrates the capacity to structure the negotiations, it normally plays 'strong'. The indices are instead particularly indicative of each candidate countries' influence. Given the current weighted voting system, Poland is the only country of the CEECS group which can play 'strong' at the international level, while other countries, some more economically advanced than others, are only able to play 'weak'.

The analytical value of this concept of power should be precisely understood to the extent this measure of power tells, "how powerful a country is likely to be on a randomly chosen issue" (Baldwin 78; italics added). Possible coalitions are likely to form on specific negotiating issues and national preferences could thus reveal a mixture of interests in various instances. The other two levels of analysis are thus required to overcome this kind of limit the indices display.

2.2 The na t iona l l eve l o f economic independence

There is commonly acknowledged

that nation-states embody country-specific governance capabilities (Lenway and Murtha 513), which bear on the strategic interaction a highly influential mixture of domestic politics. The attempt to reveal the mechanism in greater detail nonetheless remains subject to analytical approaches with varying degree of explanatory power. Schelling's and Putnam's works advance the conjecture that, given sufficiently great domestic constraints, a country can have a bargaining advantage in international negotiations. Mo attempts to model that predicted behavior and his results show that the precise outcome depends on the institutional setting whereby domestic political power is distributed "in the medium range". However elusive this result may sound, it nonetheless underscores that a negotiating country has to make in fact more concessions under greater domestic constraints.

Miller strengthens the case of failure to avoid international conflict due to domestic problems when he finds that democratic and autocratic states indeed behave differently: the latter appear more prone to escalate the conflict (399). His response, as well as the Conybeare's lay emphasis on political vulnerabilities of leaders, such as economic recessions, levels of domestic, cyclical decline of specific industries, which discount the benefits of future cooperation, and hence allow for protectionism.

Recent research in institutional economics is an appropriate field, which economists turn to in order to comprehend this diversity of factors. In a comprehensive study, Easterly and Levine make a strong

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STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

case for institutions, understood in the form of diverse instances like political stability, property rights, legal systems, patterns of land tenure and so on. Their findings explain cross-country differences in GDP per capita once one controls for institutions. In their words, "institutional quality seems to be a sufficient statistic for accounting for economic development" (33). As easily can be inferred from these descriptions, the institutional context is eventually made recourse to in order to gather convergent, even if disparate, explanations for domestic policy influences.

The widely acceptance of the quality of institutional change for positive economic outcomes has been lately reflected in the proliferation of cross-country indices measuring various aspects of governance. Studies like those of Kushnirski, Easterly and Levine, Weder make a positive correlation between credible and stable institutions, on the one hand, and high levels of governance or institutional indicators, on the other hand.

Kaufmann et al. construct probably the most laborious index of governance broadly defined as "the traditions and institutions by which authority in a country is exercised" (Governance matters). Specifically, the methodology aggregates estimates of three aspects of governance: the process by which those in authority are selected and replaced; the capacity of the state to implement sound policies; and the respect of citizens and the state for the rules which govern their interactions.The authors' research draws on 17 separate sources of subjective data on perceptions regarding the quality of governance in different countries, which include international organizations, political and business risk rating agencies, think tanks, and non-governmental organizations

(Governance matters II). Six aggregate governance indicators - "Voice and Accountability", "Political Stability", "Government Effectiveness", "Regulatory Quality", "Rule of Law", and "Control of Corruption" are then computed within a range from 2.5 to 2.5, such that higher values correspond to more credible and more stable institutions.

As the individual countries' indicators are methodologically transferable in aggregate ones, an aggregate index for the EU is computed as a weighted average of Member States' institutional indicators. For the present purpose, the national indicators are given weights corresponding to each member state's representation in the European Parliament. The choice is suppor ted f i r s t ly by the fa i th fu l representation of this elective body of the national electorates. Due to the Parliament's ascending role over Commission, its composition is thought to reflect more appropriately the influence of the domestic politics of the Member States. Secondly, the discussions engendered by the enlargement as to the new composition of the Members o f E u r o p e a n P a r l i a m e n t ( M E P S ) convincingly show the growing importance of Parliament in the EU decision-making process. Yataganas considers the case indicative of a still persistent interference of national policies in European integration, which proliferates to the composition of the Commission as well (42, 24).

The aggregate indicator for the EU is computed as a weighted average of individual indicators, where the weighs correspond to the share of each Member State in the EP. During enlargement negot ia t ions (2001) , Par l iament ' s composition was as follows: Germany 99 (15.8%), UK, France and Italy 87 (13.9%), Spain 64 (10.2%), Netherlands 31 (5.0%),

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Greece, Portugal and Belgium 25 (4%), Sweden 22 (3.5%), Austria 21 (3.4%), Denmark and Finland 16 (2.6%), Ireland 15 (2.4%), and Luxembourg 6 (1%) out of a total 626 MEPS (Yataganas 18). A synthetic table is presented below.

Table 2 Estimates of indices of institutional stability

Source: Country estimates are calculated as simple average of the six aggregate governance indicators from Kaufmann, Kraay, and Zoido, Governance matters II, 2002.

A cautious note is required in interpreting data in Table 2 as well. First, the indicators are suggestive when applied to individual cases rather than comparing different national estimates. For example, a decrease of the EU indicator from 1.22 to 1.12 in the period under consideration indicates a loss in institutional stability, but the values are not statistically significant in contrast with other close estimates. Second, discrimination between broad categories does make a difference as regards the influence of domestic politics. According to Kaufmann et al., an acceptable classification would consist of top, middle and bottom terciles as measured against the -2.5 / +2.5 interval. That means that the parties considered by this study could be assigned the following institutional 'labels': 'stable'/'credible' for the EU and

'moderately stable/credible' for both Poland and Romania because of their closer distance to the first tercile.

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2.3 The issue-area level of economic interdependence

Aggarwal and Allen suggest that it is reasonably to think of cases where overall power "may not always be fungible across issue-areas" (12). By consequence, the most preferred outcomes a large country would normally envisage might be seriously distorted by an apparently weak specific bargaining position. Trade negotiations, and particularly integration arrangements, have become increasingly multilateral. Large-numbers trade games increase the complexity of interaction and admittedly change the expectations about countries' behavior (Alesina and Spolaore 23; Conybeare 55).

Diverse explanations were proposed to understand power in interdependence. A

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

consistent approach to the topic offers the Leap and Grigsby's model, which distinguishes between power that is available (potential power) and power that parties actually use (enacted power) (205). It provides so an explanation for the process by which power is accumulated or, alternatively, dissipated. In their view, transformational factors account for the degree of the unused power and may take the form of: a particular party's strength of commitment to a bargaining relationship; the alternatives available to a party; and information available that has an impact on the bargaining relationship (205).

The general concept of the sources of potential power is constructed on the degree of control a negotiator organization or people may exert on the various elements of the negotiating environment. The extent these resources are exploited hinges on the

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transformational factors a negotiator faces in the specific context. The innovation the model of Leap and Grigsby suggests is that disparate such factors proposed by the literature are thought to produce simultaneous effects on potential power and thus to provide a more accurate evaluation of the strength or weakness of bargaining power. An analytical depiction of the process appears in Figure 1 below.

A dynamic perspective is introduced when considering short run and long run adjustments of potential power. Bargaining provides a continuous opportunity for the players to learn about each other and to react in a way to strengthen their own positions. It is thus evolving an ongoing examination of the determinants of power, more realistically perceived than in ex post investigations.

2.4 Method design

A strategic interaction modeled as a game consists of: relevant players; strategies; outcomes; and preferences for payoffs associated with each outcome. The players are the negotiating parties, i.e. the EU and each CEEC for the present purpose. The strategies represent the possible courses of actions, provided that the behavioral options perceived by the players may be plausibly reduced to cooperation ('C') or non-cooperation ('~C') on a given issue.

A process of exposing the basic situations of interaction has been developed in the works of Aggarwal and Allen (AA), Conybeare (C), and Brams and Kilgour (BK). This study uses an adapted game model of strategic interaction for integration negotiations. A generic two-person, symmetric normal form game of strategic interaction is presented in Figure 2 below.

Figure 2. A generic game of strategic interaction

Based on and adapted from Aggarwal and Allan 11; Brams and Kilgour 7.

Player B

Cooperate(C) Not cooperate (~C)

Cooperate (C)

Player A

Mutual consensus (MC) in issue area

B prevails (BP) in issue area

Not cooperate (~C)

A prevails (AP) in issue area

No consensus (NC) in issue area

Four possible outcomes are depicted in the figure above. From the point of view of actor row they are: CC (mutual consensus); ~C~C (no consensus); C~C (other's player winning); and ~CC (winning). The preference set specifies how good or bad each outcome is for each player. The way preferences are deduced is fundamental for finding the predicted conclusion of the negotiations in the form of one the four possible outcomes. General

rules are hard to find, as they usually are acknowledged by some authors, but discarded by others. For example, cardinal scales of measurements are found more informative (Bacharach 21), but at the same time largely irrelevant for game theory applied to international relations (Snidal 46). A typically minimal level that could warrant a valid definition of the game structure is provided by ordinal measures of preferences. Utility scales illustrate a preference order for each player, in which the four possible outcomes are simply ranked from best (4) to worst (1).

The following assumptions are made about the relationships among each player's preference order for payoffs under the three situational variables exposed earlier. Arguments from the literature review shortly explain the choice and the approach, which is similarly suggested by the adopted models is indicated next. The corresponding

31

structures of strategic interaction with ordinal measures of pay-offs are indicated further in Figure 3.

a. Institutional stabilitya1: each player prefers mutual

consensus to no consensus when institutionally stable (CC > ~C~C) AA

a2: each player prefers no consensus to mutual consensus when institutionally unstable (~C~C > CC) AA

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

b. Overall powerb1: each player prefers no consensus to

the other player's winning when power strong (~C~C > C~C) AA

b2: each players prefers the other player's winning to no consensus when power weak (C~C > ~C~C) AA

c. Issue-area bargaining powerc1: each player always prefers winning

when issue-strong (~CC is best) AA+BKc2: each player prefers winning to no

consensus or the other's playing winning when issue-weak (~CC > ~C~C or C~C) AA

d. Interactive effect of overall power and issue-area bargaining power

d1: each player prefers winning to mutual consensus when power strong and issue-strong (~CC > CC) BK+C

d2: each player prefers the other player's winning to mutual consensus when power weak and issue-weak (C~C > CC) C

3. Negotiations on the agriculture dossier: bargaining power, representations and solutions of the games

The proposed model of strategic interaction applies to the issues specific of enlargement negotiations on agriculture. The EU and each of the CEEC exchange concessions and settle on various matters like production quotas, level of subsidies, and rural developmental funds. Data are gathered to illustrate one of the two facets of the bargaining position given certain levels of overall power, as well as of quality of the domestic politics environment: a partner may play 'strong' or 'weak' on a specific issue when it is institutionally either stable or unstable and when it enjoys 'strong' or 'weak' capabilities to influence overall decisions. The country's assessment of overall power and institutional stability follows the mentioned findings in the literature.

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Figure 3. Deduced constrained preference order from Row's Perspective (for column, ~CC is replaced by C~C and conversely)

Institutional stability Stable Unstable Issue resources and overall power

Issue strong Power weak

Chicken 3,3 2,4 4,2 1,1

Leader 2,2 3,4 4,3 1,1

Hero 1,1 3,4 4,3 2,2

Issue weak Power strong

Prisoner's Dilemma 3,3 1,4 4,1 2,2 Stag Hunt 4,4 1,3 3,1 2,2

Deadlock 2,2 1,4 4,1 3,3

Deadlock analogue 1,1 2,4 4,2 3,3

Issue strong & power strong

Prisoner's Dilemma 3,3 1,4 4,1 2,2

Deadlock 2,2 1,4 4,1 3,3

Deadlock analogue 1,1 2,4 4,2 3,3

Issue weak & power weak

Leader 2,2 3,4 4,3 1,1

Hero 1,1 3,4 4,3 2,2

annual EC's Regular Reports on each candidate country's progress towards accession.

The negotiations on the Common Agricultural Policy (CAP) mechanism however make the agriculture dossier highly controversial. The negotiable aspects construct a classical bargaining game built on exchanges of concessions, divergent arguments and situations of conflict. The reason is that CAP involves policy measures with important budgetary impact for both partners alike: for the EU, this financial envelope covers about half of the total budget; for the CEECS, it represents approx. 70% of the total value of their agricultural output.

3.1 Bargaining positions of negotiating parties

The baseline negotiating position for the EU included the following main elements:

• Direct payments: Direct income subsidies for farmers in candidate countries should be phased in over a 10-year period, starting at 25% of those paid in the existing Union in the first year of accession. In order to facilitate the appropriate adoption of the CAP mechanism, the CEECS were presented the option to choose between the standard direct payments system and a simplified approach for a limited period in the form of a decoupled area payment applied to the whole agricultural area.

• Production quotas and other supply management instruments: It has been stated that the quantitative reference levels should be determined on the basis of past performance, i.e. to reflect actual production in a recent year, 1995-1999. The Commission provided detailed proposals on production in all the sectors with a market organization, relevant for the candidate countries.

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The research design requires original data on each partner's capacity to play 'strong', when it favorably appropriates against its own value systems the conclusion of negotiations, or to play 'weak', when the enacted power makes the more preferred behavior difficult to carry out. The terms of reference for data collection are provided by the Leap and Grigsby's construct of bargaining power. Analysis aims at predicting the possible strategic options of the partners when the integration agreement frames the general objectives, but the negotiations on specific issues have not a predetermined settlement.

Two eastern countries experiences are observed in the application, in both cases the agriculture topic being of sensitive importance to the negotiators. The first case is that of Poland, one of the countries, which completed the negotiations in December 2003 and became a Member of the EU on

stMay 1 , 2004. The second case is that of Romania.

A substantial part of the object of accession negotiations was initially presented in the 1995 White Paper (Preparation of the Accession Countries), a Commission document containing all-inclusive references to the legislation relevant to the internal market. The applicants were indicated here the regulations concerning the veterinary, plant health and animal nutrition fields and agricultural commodities subject to specific marketing standards. Another non-negotiable component of the acquis consists of institutional requirements referring to the establishment and functioning of the Common Market Organizations (CMOS), which are essential to the proper operation of the agricultural markets. Detailed legislative and institutional presentations are subjects of subsequent accession documentation such as Agenda 2000 and

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

sources in the agricultural sector.• Temporary authorizations for

establishments processing and placing on the domestic market raw milk and milk based products, as well as meat and meat products for which production has not been fully compliant with all EU veterinary requirements.

• Establishment of a new common market organization in table potatoes and for expansion of the list of agricultural products covered by the EU financial support, such as herbs.

• Temporary financial support (3 years from the date of accession) for expenses borne in connection with the establishment of the Integrated Administration and Control System (IACS) up to 50% of the total cost of the System.Romania put forward the following baseline negotiating position (Romania's Position):

• Transitional periods of 5 years from the date of accession to adopt safeguard measures for the import of agricultural products from one or more Member States.

• Transitional periods for complying with various Community regulations regarding veterinary and phytosanitary issues in the production for wine, pig, meat processing, and milk.

• Direct payments: the adoption of the period 1985/9 1990/1 to determine the base area, and the reference period 1990 - 1994 for rice

. 3.2 Assessment of bargaining power

The EU plays strong on issue bargaining power. The Commission proposals make clear that the candidate countries will be treated unequally for at least a decade after membership. It will continue to support the rural habitat, but is not willing to cause imbalances in candidate countries by huge payments. It emphasizes

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• Rural development: The candidate countries have been already presented the opportunity to gain experience in the design and implementation of a co-financed policy through the pre-accession instrument SAPARD. Supplementary accompanying measures will be implemented upon accession.

• Risk of deflection of trade: At the request of Poland, the Czech Republic and Slovakia for introduction of an import safeguard clause, the EU favored transitional measures to be decided before accession under the appropriate procedure.

• A scheme of flat-rate payments: A group of self-subsistence farms should be assisted over a definite period.The Commission's negotiating position is presented in Appendix, Tables A1 and A2.

The Poland's baseline negotiating position consisted in (Government):

• Introduction of necessary protective measures during the first few years of the membership, if trade between Poland and one or several EU Member States leads to a justified threat of serious disturbances in the Polish agricultural market.

• Direct payments: In its reaction to the EU proposal of January 2002, Poland exposed a more relaxed position and accepted a gradual introduction of the financial support over an only three-year transitional period (2004 2006). The initial installment of 25% of the EU level was considered "decisively too low" (Gwozdz 38).

• Production quotas: The most important negotiation problems were referred to the production of milk, white sugar and isoglucose, potato starch, dried fodder and raw tobacco. Poland expected a flexible approach as regards the reference crop on justification pertaining to the potentially superior land productivity, as well as maintaining of jobs and income

• Topping-up of direct payments.Or extracted no result from negotiation on important initial demands:

• Application of safeguard measures.• More favorable yield estimates.

3.3 Assessment of general power and institutional stability

This study adopts the Nice Treaty results on decisional power within the Council alongside corresponding game-theoretical assessments as an adequate guide to general power. Thus, strong general power is the attribute of the EU and Poland, while a weak position describes Romania. This study accepts the results of specific research on institutional capacity in order to hypothesize on the stability of the partners' domestic coalitions. The convergence of results admits stable regimes for the parties concerned, i.e. EU, Poland, and Romania.

3.4 Representations and solutions of the games

The objective of the strategic analysis of negotiations is to predict the expected outcome in the generic form of "cooperative" and "non-cooperative" strategies; the practical meaning refers to "high/low concessions" when describing the strategies' payoffs. A cooperative approach to negotiations implies "high concessions" while a non-cooperative approach yields "low concessions". The discussion centers on the final terms agreed to by the negotiators. These terms are summarized under the main headings in Appendix, Tables A1 and A2.

The constraints, which modeled Poland's behavior during negotiation, determine two possible situations for this candidate as depicted in Figure 4 below. As the EU always plays a PD game, the

35

the functions of agriculture in addition to food production such as preserving the cultural landscape and contributing to the economic and social viability of rural areas. It has succeeded in maintaining the principal objectives of negotiations:

• Progressive introduction of payments to farmers.

• Reference quota levels specific to the most recent period.

Poland is determined to defend the interests of its agriculture but nevertheless is eager to find appropriate solutions within the general context of enlargement negotiations. Poland plays weak on issue bargaining power although provided enough time constraints for the EU it could have adopted a strong position. It was quick to compromise on some issues (e.g. the transitory period for IACS or the sale of agricultural land plots), and it has not succeeded in persuading its partner on some issues deemed essential by Polish negotiators:

• Equal competitive conditions.• More favorable recent yield

estimates.• Potato market organization.

Romania played the negotiating game until June 2004 when the Chapter 7 was provisionally closed, half a year earlier than available estimates indicated. There are arguments that a weak issue bargaining power accommodates at best its position: a f r ag i l e po l i t i ca l suppor t , spa r se informational context, heavy reliance on food consumption, and mostly a poorly d e v e l o p e d s t a t e o f a g r i c u l t u r e , economically and institutionally, all converged to this conclusion. Romania either did not formulate demands, which were finally claimed as "successes" of negotiations such as

• I n c r e a s e d f u n d s f o r r u r a l development.

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

'~C~C' because Poland would predictably also choose not to cooperate.

The interesting feature of this strategic interaction is the prediction of the same equilibrium and the possibility to reach a better outcome for each partner in both situations if they cooperate. There is a mutual benefit the negotiating partners extract if they agree on high concessions on their agenda.

Figure 4. The EU-Poland strategic game: Representation

Issue resources and overall power

Institutional stability

(Player) Stable Issue weak Power strong (Poland)

Stag Hunt 4,4 1,3 3,1 2,2

Prisoner's Dilemma

3,3 1,4 4,1

2,2

Issue strong & power strong (European Union)

Prisoner's Dilemma 3,3 1,4 4,1 2,2

Figure 5. The EU-Poland strategic game: Solutions

European Union

C ~C

C

Poland

3,3 1,4

~C 4,1 2,2

European Union

C ~C

C

Poland

4,3 1,4

~C 3,1 2,2

(1) (2)

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solutions of negotiations are represented in two strategic structures, (1) and (2) in Figure 5.

A Polish interpretation of the results of negotiations was that "Poland did not succeed in reaching its negotiation target" (Costs and Benefits 109). The Appendix nevertheless shows a mixed picture of concessions and in some instances, e.g. diary production and potato starch, there are significant differences in favor of Poland. The solutions presented above suggest that the two partners initially found no consensus in issue area only to progressively reach for mutual agreement.

In situation (1), which is a symmetric PD game, both countries have the dominant strategy of choosing a non-cooperative approach ('~C'). The partners arrive here at no consensus '~C~C' - in negotiations. In situation (2), it is only the EU which has a dominant strategy playing '~C' and the game reaches the same equilibrium

As for Romania, the negotiations proceeded at normal pace and finished sooner than expected in June 2004. The EU does not change its behavior during negotiations and again plays a PD game. Romania is constrained to a Leader game. The possible outcomes are proposed according to the Figures 6 and 7 below.

The EU alone follows a dominant strategy, which expectedly is not to cooperate. Romania would find in a cooperative approach the best outcome given the circumstances. As a result, the

Figure 6. The EU-Romania strategic game: Representation

Issue resources and overall power

Institutional stability

(Player) Stable Issue strong & power strong (European Union)

Prisoner's Dilemma 3,3 1,4 4,1 2,2

Issue weak & power weak (Romania)

Leader

2,2 3,4 4,3 1,1

Figure 7. The EU-Romania strategic game: Solution

European Union

C ~C

C

Romania

2,3 3,4

~C 4,1 1,2

of negotiations clearly indicate a maximum degree of lenience on behalf of this candidate. Only for crops and beef, the results do not depart much from the request; for sugar, tobacco, milk, and sheep meat the negotiated quota are about half the original demand, whereas several other areas (e.g. rice, potato starch, fruit and vegetables, fibers, and honey) received no mentions. This latter treatment is also specific for some related issues, either financial (e.g. inclusion of the Romanian varieties of flax and hemp for fibre and registration of national tobacco varieties in view of being included in the scheme of production premiums granted to producers) or non-financial (e.g. a transition period of 3 years in order to implement at national level the policy of non-vaccination against classic swine fever).

The image is completed with the observation that in other several areas for which agreements were eventually agreed e.g. seeds, hops, nuts, and partially for milk and beef - Romania stated that it would specify later the statistics required to

37

analysis leads to an equilibrium in which Romania 'cooperates' and agrees on high concessions, while the EU 'stands firm' and maintains low concessions.

The strategic situation does not invite the parties to find ways to improve their gains: for Romania, it would be hardly imaginable to attempt to arrive at '~CC', its next better payoff, because the EU would have only to reach its worst outcome; for the EU, the equilibrium rewards the best payoff of the game.

3.5 Discussion

The analysis reveals several pertinent questions to elaborate on. A first set refers to the accuracy of results: Do the analytical representations of real situations reflect what in fact happened during negotiations? How

did Poland and EU find ways to cooperate?In the case of Romania, things appear

most simply to explain. Comparison between the initial demands and the results

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

consider the appropriate market support and was thus not even in position to make a proposal. That attitude is explained by the fact that at the time the Position Paper had been submitted, the first General Agricultural Census after 1948 was carrying out and no reliable data were by consequence available for the purpose of negotiations.

The EU-Romania game however raises the intriguingly possible occurrence of the event 'CC', because one may ask why could Romania value it less preferably than 'C~C'? One has to recall here the argument that a double weakened position (overall and issue area power) engenders the lowest level of compromise, which is well manifest in the final results of negotiations. The economic meaning of this behavior is thus understood best in terms of constrained limited ability to ask for and expect concessions from the negotiating partner.

As for the EU-Poland game, both parties began negotiations on severely intractable positions which are suggestive for the initial '~C~C' equilibrium. Some basic principles of negotiations were considered 'leave it or take it' issues. Poland stated for example that "the obligations [in respect of direct payments] might be effective only if the supportive measures for agriculture - identical to those enjoyed by farmers in the EU Member States - are ensured" (Poland's Reply 6, 30). In its turn, the EU stressed that no provision should be made for safeguard measures against imports from EU Member States and decided "to address the risk of deflection of trade due to Poland's accession, where necessary, through transitional measures … before accession under the appropriate procedure" (Accession Negotiations Jan. 86). In fact, both parties eventually indulged in the other's arguments and thus found a consensual approach.

The way to a cooperative outcome has been paved with significant concessions on behalf of both parties. Poland had to leave aside demands, which were initially put forth authoritatively. One important example refers to the establishment of a Common Market Organization for potatoes (Poland's Reply 52). The Polish team emphasized that the issue of establishing the CMO of Cotton Market was justified in the past by the enormous economic importance of this crop for Greek agricultural producers. They continued the argument and stressed that the market of edible potato similarly is a considerable market for Polish agriculture and Poland is one of the greatest potato producers in the world.

Other examples of Polish demands which did not meet the EU approval include: financial assistance from the EU to part-fund the employment and training of the additional personnel needed to implement and manage the EAGGF Guarantee payment system; inclusion of the varieties for fiber crops artemida, alba and wiko in the list of EC flax varieties; grant of export refunds in relation to the cereals used for production of Polish vodka exported to third countries.

As for the EU, it had to confront one major Polish request that the minimum requirements for the recognition of producer organizations should be a minimum number of 5 members and a minimum value of marketable production provided by the members of €100,000. The EU's first reaction was that "the application of such low thresholds in a large area as the whole territory of Poland would not be justified" (Accession Negotiations Jan. 94). The final agreement (Appendix, Table A1) observes the Polish position.

In another instance, the EU again proved conciliatory against a Polish innovatory proposal to complement direct

38

VALENTIN COJANU

aid paid to farmers up to the total level of direct support he would have been entitled to receive in Poland prior to accession under a like national scheme. The EU conceded that Poland should be given that possibility on the ground that it had applied national direct payments to farmers before accession (Accession Negotiations Apr. 89). That case set a pattern and was followed during negotiations with Romania as well.

4. Conclusions

The conventional way of thinking abou t i n t eg r a t i on ha s p roduced undoubtedly remarkable results, if only one has to bring into discussion the topic of increased efficiency in a larger economic space. Even if several contrasting empirical findings were to be left aside, there is however the amounting evidence about non-traditional gains from integration which would make the topic increasingly complex to be satisfactorily treated with the usual analytical tools. Here is where the game-theoretical perspective could offer convincing insights on the way countries look for and are capable to get the most advantageous outcomes from integration negotiations.

The application to the agricultural dossier of the last EU enlargement seems particularly suited both to reveal the effectiveness of game theory to deal with problems of strategic interactions and to provide reliable predictions as regards the negotiation solutions. The results prove satisfactorily consistent with the conduct and results of the negotiations.

It is beyond doubt than any advantage this model exhibits is to be strengthened or weakened by further research. The work here shows that its application is more appropriately suited to cases of multiple-negotiable issues and largely interactive contexts involving 2

partners, which may or may not lead coalitions.

There are several promising venues to provide more insightful results in analyzing strategic negotiations. Some stem from the inherently limited scope of this study. That is the case, for example, with the institutional indices which this research makes reference to. It is evident that any coalition of in ternat ional par tners cannot be appropriately described that way. Besides, there is also the problem of providing a coherent aggregate explanation for coalition behavior. Perhaps, the economic analysis has yet to make recourse to more intakes from the original research in cooperative games and transpose them in meaningful descriptions.

A second example of investigation, which would naturally continue this study, refers to the issue of multiple strategies. There are reasons to think that the actual pursue of negotiations involve more than two strategic options. An argument at hand is that a 'middle' approach to concluding a deal is presumably not so rare an occurrence. Finding the right path to formalize the order of preference in these 2x3 games is seemingly another provoking research objective.

Finally, the issue of multiple levels of interactions enlarges further the research agenda. Although it seems convincing enough to limit the analysis to the three levels of dependence, independence, and interdependence it may also seems inciting to consider supplementary sources. For example, the independence level could be separated in domestic and international institutional contexts; or, more readily, the domestic area conceivably comprises areas of interact ion at individual (e.g. personalities), group (e.g. social classes), and institutional level (e.g. governmental and non-governmental organizations).

39

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

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.

42

VALENTIN COJANU

Ap

pen

dix

Tab

le A

1.

Neg

oti

atin

g ag

end

a o

f th

e EU

-Pola

nd

gam

e

(1)

Fin

anci

al i

ssu

es

Co

mm

on

Mar

ket

Org

aniz

atio

ns

Nego

tiat

ing

issu

es

EU

req

uest

P

ola

nd

req

uest

Resu

lts

of

nego

tiat

ion

s

Cro

ps,

oil

seed

s, p

rote

in c

rop

s (i

)est

abli

shm

en

t o

f b

ase

area

(ii)

est

abli

shm

en

t o

f re

fere

nce

yie

ld

(iii

) est

abli

shm

en

t o

f eli

gib

ilit

y o

f la

nd

fo

r d

irect

pay

men

ts

(iv)

est

abli

shm

en

t o

f d

uru

m w

heat

are

a

9,2

07

,66

7 h

a (9

,21

7,6

67

ha)

2

.96

t/h

a D

ecem

ber

31

20

00

Fix

ed

max

imu

m a

reas

9,2

48

,00

0 h

a (9

,26

3,0

00

ha)

3

.61

t/h

a N

o r

equ

est

9,2

91

,37

7 h

a 3

.00

t/h

a

Po

tato

Sta

rch

Est

abli

shm

en

t o

f p

rod

uct

ion

qu

ota

9

0,5

46

to

2

60

,00

0 t

o

1

44

,98

5 t

o

Dri

ed

fo

dd

er

Est

abli

shm

en

t o

f N

atio

nal

Gu

aran

teed

Qu

anti

ties

0 t

o (

deh

yd

rate

d +

su

nd

ried

) 1

60

,00

0 t

o

13

,53

8 t

o

Suga

r (i

) fi

xin

g o

f su

gar

pro

du

ctio

n q

uo

tas

A +

B

(ii)

fix

ing

of

iso

glu

cose

qu

ota

s A

+ B

1,6

65

,01

7 =

1,5

90

,53

3

+ 7

4,4

84

to

2,4

93

=

2,4

93

+ 0

.0 t

o

1,8

66

,00

0 =

1,6

50

,00

0

+ 2

16

,00

0 t

o

20

,00

0 =

1

5,0

00

+ 5

,00

0

to (

42

,00

0 =

40

,00

0 +

2

,20

0)

1,6

74

,49

5 =

1,5

90

,53

3

+ 8

3,9

61

to

6,2

32

=

6,2

32

+ 0

to

Tobac

co

Est

abli

shm

en

t o

f p

rod

uct

ion

qu

ota

3

7,9

33

=

Flu

e cu

red

22

,00

0

Lig

ht

air

cure

d 1

2,6

33

D

ark

air

cure

d 1

,86

7

Fir

e cu

red

1,2

33

70

,00

0 (

55

,00

0)

37

,93

3

Mil

k

Mil

k q

uo

ta s

chem

e T

= D

+ S

ales

8.8

75

.00

0 =

6.9

56

.33

3

+ 1

.91

8.6

67

to

11

.21

7.0

00

t

(11

,84

5,0

00

) in

2

00

3 u

p t

o

13

.74

0.0

00

t i

n

20

08

=

10

.50

6.0

00

t

8,9

64

,00

0 i

n

20

03

up

to

9,3

80

,00

0

in

20

08

=

8,5

00

,00

0 i

n

20

03

up

to

8,9

16

,00

0

43

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

45

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

Co

mm

on

Mar

ket

Org

aniz

atio

ns

Nego

tiat

ing

issu

es

EU

req

uest

P

ola

nd

req

uest

Resu

lts

of

nego

tiat

ion

s

(11

,18

3,0

00

) in

2

00

3 u

p t

o

13

.17

6.0

00

t i

n

20

08

+

71

1.0

00

t (

66

2,0

00

) in

2

00

3 d

ow

n t

o

56

4.0

00

t i

n

20

08

in

20

08

+ 4

64

,00

0 i

n

20

03

do

wn

to

46

4,0

00

in

2

00

8

Bee

f (i

) A

ddit

iona

l pa

ymen

ts

(ii)

Sla

ug

hte

r p

rem

ium

(i

ii)

Sp

ecia

l b

eef

pre

miu

m

(iv)

Suc

kler

cow

pre

miu

m

27

,39

3,2

75

Ä

adu

lt:

2,0

34

,30

9

calv

es:1

,200

,625

8

57

,70

0

50

3,6

82

– 1

0%

= 4

53

,31

4

(32

5.5

81

)

Not

qua

ntif

ied

2

,02

1,0

00

1

,01

7,0

00

2

,20

0,0

00

1

,50

0,0

00

1,8

15

,43

0

83

9,5

18

92

6.00

0 y

oung

bul

ls

32

5,5

81

Sh

eep

mea

t

(i

) E

we

pre

miu

m

(ii)

Add

itio

nal

paym

ents

, gl

obal

am

ount

s

36

4,0

00

(33

5,8

80

) 3

31

.00

0 Ä

72

0,0

00

33

5,8

80

(2)

Non-f

inan

cial

iss

ues

Pola

nd

po

siti

on

Nego

tiat

ion

resu

lt

Rec

ogn

itio

n o

f pro

duce

r org

aniz

atio

ns

sho

uld

be

a m

inim

um

nu

mb

er o

f 5

m

emb

ers

and

a m

inim

um

val

ue

of

mar

keta

ble

pro

du

ctio

n p

rovi

ded

by

the

mem

ber

s o

f Ä

100,0

00.

A 3

yea

r tr

ansi

tio

nal

arr

ange

men

t to

set

cri

teri

a fo

r th

e p

reli

min

ary

reco

gnit

ion

of

pro

du

cer

org

aniz

atio

ns

in t

he

fru

it a

nd

veg

etab

les

sect

or

at 5

pro

duce

rs a

nd

a

min

imu

m v

alu

e o

f m

arke

tab

le p

rod

uct

ion

of

Ä100,0

00

Solu

tio

n w

hic

h w

ou

ld e

nab

le t

he

pre

sen

t st

ruct

ure

in

res

pec

t o

f th

e ra

w

mat

eria

ls f

or

hig

h w

ines

pro

du

ctio

n t

o b

e m

ain

tain

ed i

n P

ola

nd

aft

er a

cces

sio

n.

Dec

isio

n t

o c

lass

ify

Po

lan

d i

nto

a w

ine

gro

win

g zo

ne

and

ob

liga

tio

n t

o r

egis

ter

and

cla

ssif

y th

e vi

ne

vari

etie

s w

as p

ost

po

ned

un

til

acce

ssio

n.

Po

ssib

ilit

y o

f p

laci

ng

the

insc

rip

tio

n "

Po

lish

win

e/"P

ols

kie

win

o o

wo

cow

e" o

n

the

fru

it w

ine

lab

els

to P

oli

sh w

ine

pro

du

cers

, as

wel

l as

fo

r ex

ten

din

g th

e li

st o

f sp

irit

dri

nks

su

bje

ct t

o t

he

pro

tect

ion

in

res

pec

t o

f th

eir

geo

grap

hic

al o

rigi

n a

nd

fo

r p

rote

ctin

g th

e tr

adem

ark

nam

es o

f se

lect

ed s

pir

it d

rin

ks.

Des

ign

atio

ns

for

alco

ho

lic

dri

nks

(e.

g. g

eogr

aph

ic, tr

adit

ion

al) h

ave

bee

n a

gree

d

for

the

req

ues

ted

var

ieti

es (

Po

lish

vo

dka

, P

oli

sh C

her

ry,

Her

bal

Vo

dka

, P

oli

sh

fru

it w

ine,

and

Po

lish

win

e).

Det

erm

inat

ion

of

the

min

imu

m r

aw t

ob

acco

pro

du

ctio

n v

olu

me

nec

essa

ry t

o

A 5

yea

r tr

ansi

tio

nal

arr

ange

men

t to

set

th

e th

resh

old

fo

r th

e re

cogn

itio

n o

f a

44

VALENTIN COJANU

reco

gniz

e th

e p

rod

uce

rs'

gro

up

at

a su

itab

ly l

ow

lev

el w

hic

h w

ou

ld f

acil

itat

e gr

ou

p e

stab

lish

men

t.

pro

duce

r gr

oup

in

the

tobac

co s

ecto

r at

1%

of

the

guar

ante

e th

resh

old

fo

r al

l pro

duct

ion

reg

ions

in P

ola

nd.

Intr

od

uct

ion

of

a m

od

ifie

d s

yste

m o

f m

ilk

pro

du

ctio

n q

uo

ta a

dm

inis

trat

ion

ove

r a

per

iod

of

a fe

w y

ears

aft

er a

cces

sio

n.

Dis

trib

uti

on

of

qu

ota

bet

wee

n d

eliv

erie

s an

d d

irec

t sa

les

wil

l b

e re

vie

wed

on

th

e b

asis

of

actu

al 2

00

3 f

igu

res.

Po

ssib

ilit

y o

f in

itia

tin

g ta

lks

on

th

e in

tro

du

ctio

n o

f a

mo

dif

ied

syst

em

of

mil

k p

rod

uct

ion

qu

ota

ad

min

istr

atio

n o

ver

a p

erio

d o

f a

few

yea

rs a

fter

acc

essi

on

. A

tra

nsi

tio

nal

arr

ange

men

t o

f o

ne

year

fo

r th

e al

loca

tio

n o

f m

ilk

qu

ota

to

in

div

idu

al p

rod

uce

rs a

nd

co

nse

qu

entl

y b

e ex

emp

ted

fro

m t

he

pay

men

t o

f ad

dit

ion

al l

evie

s in

th

e fi

rst

qu

ota

yea

r.

Ad

op

tio

n o

f su

ckle

r co

w p

rem

ium

sys

tem

as

it o

ccu

rred

in

cas

e o

f th

e la

st E

U

en

larg

em

en

t. T

he

mu

lti-

pu

rpo

se b

reed

of

cow

s to

be

reco

gnis

ed a

s su

ckle

r co

w

pro

vid

ed t

hat

th

ey w

ere

serv

ed b

y a

bee

f b

reed

bu

ll.

A 3

yea

r tr

ansi

tio

nal

arr

ange

men

t re

lati

ng

to w

hic

h a

dd

itio

nal

bre

eds

are

enti

tled

to

rece

ive

the

suck

le c

ow

pre

miu

m.

Sourc

e: D

ata

coll

ecte

d f

rom

Co

sts

and

Ben

efit

s, T

able

1,

109;

and

Euro

pea

n C

om

mis

sion, En

larg

emen

t an

d A

gric

ult

ure

.

Tab

le A

2.

Neg

oti

atin

g ag

end

a o

f th

e EU

-Rom

ania

gam

e

(1)

Fin

anci

al i

ssu

es

Co

mm

on

Mar

ket O

rgan

izat

ion

s N

ego

tiat

ing

issu

es

EU

req

uest

R

om

ania

req

uest

R

esu

lts

of

nego

tiat

ion

s C

rop

s, o

ilse

ed

s, p

rote

in c

rop

s (i

)est

abli

shm

en

t o

f b

ase

area

(ii)

est

abli

shm

en

t o

f re

fere

nce

yie

ld

(iii

) est

abli

shm

en

t o

f eli

gib

ilit

y o

f la

nd

fo

r d

irect

pay

men

ts

(iv)

est

abli

shm

en

t o

f d

uru

m w

heat

are

a

7,0

13

,00

0 h

a 2

.65

0 t

o/h

a 6

,89

1,1

00

ha

3.0

87

to

/ha.

7

.01

2.6

66

ha

2.6

50

to

/ha

Ric

e (i

) est

abli

shm

en

t o

f b

ase

area

(ii)

are

a p

aym

en

t b

ased

on

nat

ion

al a

vera

ge

yie

ld

1

7,0

00

ha

Po

tato

Sta

rch

Est

abli

shm

en

t o

f p

rod

uct

ion

qu

ota

4,0

00

to

D

ried

fo

dd

er

Est

abli

shm

en

t o

f N

atio

nal

Gu

aran

teed

Qu

anti

ties

50

0,0

00

to

+ 2

50

,00

0 t

o

oth

erw

ise

dri

ed

an

d

gro

un

ded

(lu

cern

e an

d

clo

ver)

Suga

r (i

) fi

xin

g o

f su

gar

pro

du

ctio

n q

uo

tas

(ii)

fix

ing

of

iso

glu

cose

qu

ota

s 1

09

,16

4 t

o

50

0,0

00

to

0.0

to

10

9.1

64

t

32

9.6

36

t

9.9

81

t

Fib

ers

Aid

fo

r p

roce

ssin

g o

f st

raw

an

d h

em

p g

row

n f

or

fib

er

8

,87

6 t

o:

75

0 t

o l

on

g fl

ax f

ibre

s +

45

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

Co

mm

on

Mar

ket O

rgan

izat

ion

s N

ego

tiat

ing

issu

es

EU

req

uest

R

om

ania

req

uest

R

esu

lts

of

nego

tiat

ion

s

8,1

26

to

sh

ort

fla

x an

d h

em

p f

ibre

s P

roce

ssed

Fru

it a

nd

V

egeta

ble

s

Nat

ion

al a

nd

/or

Co

mm

un

ity

thre

sho

lds/

gu

aran

teed

C

om

mu

nit

y ar

ea

for

pro

cess

ing

aid

4

00

,00

0 t

o f

resh

to

mat

oes

ou

t of

wh

ich

5

0,0

00

to

of

tom

ato

p

roce

ssed

pro

du

cts

5

,00

0 to

net w

eig

ht fo

r p

eac

hes

in s

yru

p

and

/or

nat

ura

l ju

ice

1,0

00

to

net w

eig

ht fo

r W

illi

ams

and

Ro

cha

pear

s in

syru

p a

nd

/or

nat

ura

l ju

ice

Tobac

co

Est

abli

shm

en

t o

f p

rod

uct

ion

qu

ota

21

,30

0 t

o

1

2,3

12

t

Mil

k

Mil

k q

uo

ta s

chem

e T

= D

+ S

ales

7

,50

0,0

00

to

fo

r 2

00

7.

3,0

57

,00

0 t

o =

1

.09

3.0

00

t p

en

tru

li

vra

re l

a fa

bri

ci,

rest

ul

1.9

64

.00

0 p

t.

Van

zar

i d

irect

e

+ 1

88

.40

0 t

rezerv

a re

stru

ctu

rare

B

eef

(i)A

dd

itio

nal

pay

men

ts

(ii)

Sla

ugh

ter

pre

miu

m

(iii

) Sp

eci

al b

eef

pre

miu

m

(iv)

Su

ckle

r co

w p

rem

ium

1

,58

3,0

00

(ad

ult

s:

1,4

98

,00

0 c

alves:

8

5,0

00

) 7

25

,00

0 (

1,5

50

,00

0

for

20

07

) 1

50

,00

0 h

ead

s fo

r 2007.

85

8.2

60

Ä

1,2

33

,00

0

(ad

ult

s:

1,1

48

,00

00

ca

lves

: 8

5.0

00

) 4

52

.00

0

15

0.0

00

hea

ds

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eep

meat

(i)

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e p

rem

ium

(i

i) A

dd

itio

nal

pay

men

ts,

glo

bal

am

ou

nts

8,9

00

,00

0

5,8

80

,62

0 h

ead

s 6

.21

6.7

82

Ä

Honey

1

,44

9,0

00

beeh

ives

H

op

s Su

pp

ort

sch

em

e fo

r h

op

s p

rod

uct

ion

No

po

siti

on

198

ha

Seed

s Fin

anci

al a

id t

o s

eed

pro

du

cers

R

ice:

10

0 t

o

Oth

ers

: 2

,29

4 t

o

45

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

46

VALENTIN COJANU

Co

mm

on

Mar

ket O

rgan

izat

ion

s N

ego

tiat

ing

issu

es

EU

req

uest

R

om

ania

req

uest

R

esu

lts

of

nego

tiat

ion

s

Nu

ts

1

,64

5 h

a

(2)

Non-f

inan

cial

iss

ues

Ro

man

ia p

osi

tio

n

Nego

tiat

ion

resu

lt

A tra

nsi

tio

n p

eri

od

of 3

year

s fo

r m

od

ern

izin

g an

d r

e-v

amp

ing

the

slau

gh

teri

ng

and

meat

p

roce

ssin

g u

nit

s, m

ilk

pro

cess

ing

un

its,

as

well

as

for

the

org

aniz

ing

the

mil

k co

llect

ing

and

sta

nd

ard

izat

ion

cen

ters

in

co

mp

lian

ce w

ith

th

e C

om

mu

nit

y re

qu

irem

en

ts a

n d

for

com

ply

ing

wit

h t

he

Co

mm

un

ity

req

uir

em

en

ts r

egar

din

g co

w m

ilk

farm

s an

d q

ual

ity

of

raw

mil

k o

bta

ined

.

Tra

nsi

tio

nal

peri

od

s o

f 3

year

s fo

r m

od

ern

izin

g an

d u

pgra

din

g 2

6 s

lau

gh

teri

ng

and

meat

p

roce

ssin

g u

nit

s, tw

o p

ou

ltry

meat

pro

cess

ing

un

its,

an

d 2

8 m

ilk-p

roce

ssin

g units

to m

eet

EU

req

uir

em

en

ts,

as w

ell

as

for

the

org

aniz

ing

the

mil

k co

llect

ing

and

sta

nd

ard

izat

ion

ce

nte

rs a

nd

fo

r co

mp

lyin

g w

ith

EU

ru

les

on

dai

ry f

arm

s an

d t

he

qu

alit

y o

f ra

w m

ilk

ob

tain

ed.

A t

ran

siti

on

peri

od

of

4 y

ear

s fo

r o

rgan

isin

g th

e vin

eyar

ds

inven

tory

an

d r

egis

ter.

A

tra

nsi

tio

n p

eri

od

of

8 y

ear

s fo

r th

e re

mo

val

of

hyb

rid

vin

eyar

ds

(Regu

lati

on

14

93

/99

) C

lass

ific

atio

n o

f R

om

ania

n w

ine

areas

in

lin

e w

ith

Ro

man

ia's

pro

po

sals

.

An

eig

ht-

year

tra

nsi

tio

nal

peri

od

fo

r re

mo

vin

g p

roh

ibit

ed

hyb

rid

var

ieti

es

of

vin

e.

Su

pp

lem

en

tary

rig

hts

fo

r p

lan

tin

g vin

e var

ieti

es

for

qu

alit

y w

ines

pro

du

ced

in

sp

eci

fied

re

gio

ns,

co

rresp

on

din

g to

1.5

% o

f th

e to

tal

vin

eyar

d c

ult

ivat

ed

are

a.

Rig

ht

to a

dd

su

cro

se t

o e

nri

ch g

rap

e m

ust

so

as

to i

ncr

eas

e th

e al

coh

oli

c st

ren

gth

of

win

es.

Reco

gn

itio

n a

nd

pro

tect

ion

of

desi

gn

ati

on

of

ori

gin

an

d g

eo

gra

ph

ical

desi

gn

ati

on

fo

r a

nu

mb

er

of sp

irit

dri

nks

mad

e o

f p

lum

s an

d o

f w

ine

dis

till

ate, ty

pes

of m

ilk, yo

gu

rt, b

utt

er

mil

k,

cheese

, sa

lam

i, s

ausa

ges,

bre

ad,

pre

tzels

, p

ie,

and

pro

cess

ed

fru

its.

A

pp

lian

ce o

f th

e p

rovis

ion

s re

lati

ng

to t

he

con

dit

ion

s fo

r th

e p

rod

uct

ion

, p

rod

uct

s ch

arac

teri

stic

s an

d p

laci

ng

on

th

e m

arket

of

the

trad

itio

nal

ch

eese

bra

nd

s N

asal

, B

rad

et,

H

om

oro

d,

(sm

oked

ch

eese

, etc

).

Dero

gat

ion

fro

m v

ete

rin

ary

no

rms

for

pro

du

cin

g b

y tr

ad

itio

nal te

ch

no

logie

s 5

8 typ

es

of

chee

se a

nd

co

w,

sheep

an

d b

uff

alo

dai

ry p

rod

uct

s.

A

tra

nsi

tio

nal

peri

od

of

thre

e year

s fo

r th

e u

se o

f ce

rtai

n p

lan

t p

rote

ctio

n p

rod

uct

s co

nta

inin

g ac

tive

ingre

die

nts

no

lo

nger

use

d i

n t

he

EU

.

Reco

gn

itio

n a

nd

pro

tect

ion

of

the

gen

eri

c d

esi

gn

ati

on

of

a sp

irit

dri

nk.

Sou

rce:

Dat

a co

llec

ted

fro

m E

uro

pea

n C

om

mis

sion, En

larg

emen

t an

d A

gric

ult

ure

; R

om

an

ia D

eta

ils

Its

Acc

essi

on T

erm

s; a

nd R

oman

ia's

Pos

itio

n P

aper

.

47

STRATEGIC NEGOTIATIONS IN THE PROCESS OF THE EU ENLARGEMENT: A GAME-THEORETICAL APPLICATION TO THE AGRICULTURAL DOSSIER

49

A POWER ASYMMETRY - GOODNESS OF FIT ANALYSIS OF THE AGRICULTURAL OUTCOME OF ROMANIA'S ACCESSION NEGOTIATIONS TO THE EUROPEAN UNION

*Irina Râmniceanu

Abstract: Starting from the power asymmetry concept, this paper aims to qualitatively assess the goodness of fit of the final agricultural package to the Romanian objective needs and possibilities. The power asymmetry will be linked to the common agricultural setup that the EU designed for all the newcomers, Romania included, but also to the differences between Romania's initial position paper and the final outcome of the negotiations. The goodness of fit judgment implies reference to Romania's output and structure as well as to its experience with Community compatible measures and institutional systems.For this purpose, the paper will focus (1) on some quantitative aspects of the negotiations (levels of single area payments and of reference areas or quantities) as well as (2) on the challenging aspects deriving from the adoption of particular parts of the relevant acquis communautaire (rural development regulations and cross-compliance).

1. Conceptual framework and objectives

The conclusion of the accession negotiations with Romania and Bulgaria in December 2004 marked the end to the foreseeable timetable for the further enlargement of the European Union (EU). The Community doors are still open for more countries to come but the terms of accession and the deadlines are yet undecided.

Although lagging three (possibly four) years behind the 10 countries that joined the EU in May 2004, Romania and Bulgaria are still part of the same enlargement process that distinguishes itself from any other such previous undertaking. The Eastern enlargement is unprecedented in many respects: the number of countries joining the EU, the development gap

between the newcomers and the old member states, the systemic changes that the Central and Eastern European countries had to undertake to mention only some of them. The particular economic conditions of the candidate countries lead to a relatively high asymmetric interdependence with the EU. Although Eastern enlargement brings mutual benefits to both parties, “the opportunity cost of non-accession is disproportionately greater for any single candidate country than for the EU as a whole” (Sissenich, 2004).

Re la t i ve ly h igh asymmet r i c interdependence resulted in fairly high power asymmetry all along the accession negotiations. Of course, the power gap between the existing and the aspiring members was larger than in the case of any previous EU enlargement, since it lead to

* Irina Râmniceanu is a researcher at the European Institute of Romania as well as a Teaching Assistant at the Academy of Economic

Studies, Faculty of International Business and Economics, where she gives seminars on International Trade and Trade Policies. She is also a PhD Candidate in International Economics preparing a thesis that aims to analyse the implications that the Common Agricultural Policy reform produces in the New Member States and Romania. The research activity that she carries out within these two organisations is focused both on the agricultural and rural dimension of the European integration process and on International Trade and Competitiveness issues.

ROMANIAN JOURNAL OF EUROPEAN AFFAIRS Vol.5, No.1, 2005

50

IRINA RÂMNICEANU

much more stringent accession terms. As never before, condi t ional i ty and consequently close monitoring of the candidates became part of the accession process. Thus, given the power asymmetry, the EU was able to set the accession rules almost unilaterally … but “all exclusive clubs set their membership rules unilaterally and have the prerogative of screening would-be members” (Sissenich, 2004). The candidate countries were not able to use the number argument in order to strengthen their position in the accession negotiations and the accession judgment was basically made on a case-by-case basis.

During the negotiations with the candidate countries, the EU was in the position to use a “carrot and stick” approach. Full membership became the reward all candidates strived for, while the non-observance of conditionality could have been sanctioned with delays in achieving it.

The strength of the EU position was also reflected in its ability of starting to transfer its policies to the candidate countries even before the moment of formal accession. (Pre-accession) Europeanisation in its top-down understanding (see Wishlade et al, 2003) became a logical consequence of power asymmetry and a complement to conditionality.

Given this picture, a key question arises: what kind of effects does the existing power asymmetry produce on the candidate countries?

According to Hughes et al (2003), “studies of EU conditionality have attributed it with success in steering systemic change in the CEECs”. Yet, these studies tend to focus “on the broad impact of the Copenhagen criteria on democratisation and marketisation, rather than trace specific policy impacts and changes during the negotiations for membership” (Grabbe, 2001 and Smith, 1998 cited in Hughes et al, 2003). Indeed, the effects of the

conditionality and Europeanisation should also be judged from the perspective of policy goodness of fit that is by taking into consideration the differences between EU and national policy goals and measures. Thus a conflict might arise between the advantage of triggering and/or speeding up a necessary reform process and inadequate policy fit.

During the accession negotiations, agriculture proved to be one the most sensitive sectoral policies to address, mostly because its relatively high share in the domestic economies of the candidate countries and its major structural problems. Romania is no exception to the rule. On the contrary, in its case the problems are even more severe. The EU had the difficult task of providing a common framework to fit fairly var ious and sometimes diverging agricultural problems in both old and new members.

Starting from the power asymmetry concept, this paper aims to qualitatively assess the goodness of fit of the final agricultural package to the Romanian objective needs and possibilities. The power asymmetry will be linked to the common agricultural setup that the EU designed for all the newcomers, Romania included, but also to the differences between Romania's initial position paper and the final outcome of the negotiations. The goodness of fit judgment implies reference to Romania's output and structure as well as to its experience with Community compatible measures and institutional systems.

For this purpose, the paper will focus (1) on some quantitative aspects of the negotiations (levels of single area payments and of reference areas or quantities) as well as (2) on the challenging aspects deriving from the adoption of particular parts of the relevant acquis communautaire (rural development regulations and cross-compliance).

2. The agricultural setup for the New Member States

As mentioned above, the Common Agricultural Policy (CAP) had to be adapted to accommodate the needs of an enlarged EU. The solution was comprised in the 2003 CAP reform package to which particular tailor-made arrangements from the Accession Treaty are added.

The 2003 CAP reform can be read in two different ways: as a domestic clean-up of a less than perfect policy but also as a means of sheltering the insiders from the pressure of the outsiders. The unilateral character in deciding the appearance of the new CAP is obvious: the newcomers had to accept a policy that was designed before they joined the Union. Compared to the previous “versions” of the CAP, the 2003 policy can be characterised as more demanding (as mandatory cross-compliance was introduced) but less rewarding (as financial discipline and decoupling practically put an end to open-ended

spending). Of all the features of the new CAP, the financial discipline doubled by the way in which the money available for enlargement was decided reveals in the most explicit manner the power asymmetry favouring the EU15. As shown in Ackrill(2005), the old members of the EU prove a particular determination and ability in defending their agricultural spending shares to the detriment of the new entrants.

Of course, this can be justified by the need to protect the interests of the old

members by limiting the financial strains deriving from accepting poor new members with large and less developed agricultural sectors. Also, the European Commission opposes to large inflows of money into newcomers' agricultural sectors for fear that it hinders the necessary restructuring process.

In any case, whether sufficient or not in terms of meeting objective sectoral needs, the money made available to the new members might not be fully valued due to specific absorption capacity problems. While deciding the money available and the rules for spending it mirrors the power of the old members, the (in)capacity of spending it emphasizes the weakness of the new ones and even defends to a certain extent the attitude of the former. The problems in utilizing the pre-accession financial instruments are a good indication for the risk associated to post-accession fund use. In this respect, Romania's ability of spending SAPARD money for instance is particularly illustrative (see Table 1).

According to the Romanian SAPARD Agency cited by Radu (2005), out of the money that should by spent by the end of 2005, only 37% has actually been used so far. The explanations for the low absorption rates may rely both on the “supply” and on the “demand” for funds. Thus, on one hand the institutions of the domestic public administration are new and/or lack experience while on the other hand the potent ia l fund benef ic iar ies lack information and the means for matching-up public funds.

2000 2001 2002-2006 Appropriation for commitment (million euros) 204.23 208.39 1052.37 Absorption rate (%) 100% 53% -

Table 1: The SAPARD public funds allocation and the corresponding spending in Romania

Source: Radu (2005)

51

A POWER ASYMMETRY - GOODNESS OF FIT ANALYSIS OF THE AGRICULTURAL OUTCOME OF ROMANIA'S ACCESSION NEGOTIATIONS TO THE EUROPEAN UNION

52

IRINA RÂMNICEANU

In any case, the actual use of the EU money in agriculture might re-shape the results of any budgetary cost-benefit analysis. Nevertheless, the introduction of the Community support also bears a non-financial dimension, which should also be considered in terms of both positive and negative effects. For instance, relying again on the pre-accession experience, the S A P A R D s u p p o r t w a s g e n e r a l l y characterised as a drop in the ocean. Yet, the question is: was it the money important in triggering transformation or rather the pressure to spend it?

The 2003 CAP reform package provides a new common framework for agriculture in an enlarged EU but it does not address the specific problems that are shared by the vast majority of the new entrants while having no correspondence in the old members. The large number of agricultural holdings producing mainly for self-consumption is one such example. These issues were specifically part of the accession negotiations and were included in the Accession Treaty. The basic EU approach was to offer the same remedy for all acceding countries treated as a single unit. The fact that in broad lines the outcome of the agricultural negotiations follows the same pattern reflects once more the asymmetrical power of the EU as compared to the candidates.

For instance, all newcomers are subject to phasing-in of direct payments while benefiting from simplified schemes of implementation and from specific rural development measures to be used solely during a transition period (e.g. support for semi-subsistence farms or for producer organisations and reverse modulation). Although some of the candidate countries strongly opposed at certain points to some issues in the Community offer and even took

1a radical stance , their influence on the EU position was marginal. As an exception, one remarkable outcome deriving from the strong demand of the candidate countries was the inclusion of the EU compensatory payments in the direct support granted to the newcomers.

Although quite inflexible with regard to the basic architecture of the intervention in the candidates' agricultural sectors, the EU opted for built-in elements of flexibility to which individual derogations and transitional periods resulting from accession negotiations can be added. The CAP becomes thus less “common” and more “à la carte”. Undoubtedly, this approach is the logical compromise between the desire of maintaining a (still!) common policy and the pressure of applying it to an increasingly diverse EU. Nevertheless, flexibility means choices and choices mean responsibility. Given the institutional weaknesses in the New Member States, such an approach might lead to particular challenges: will they be able to make the right options and thus fully benefit from the advantages that the CAP in its current shape might offer them?

Although it missed the first wave of Eastern enlargement and qualifies only for late accession (in 2007 presumably), Romania shares the broad lines of the applicable agricultural policy and the burden of making the best possible choices. Its dilemmas and the general framework into which they fit are the subject of the next chapter.

1 Poland, for instance.

53

3. Particularities of the agricultural outcome for Romania and the goodness of fit

Power asymmetry in Romania's accession negotiations to the EU

Romania makes no exception from the above general considerations with regard to power asymmetry during the accession negotiations process. The basic philosophy of applying the CAP after accession is the same as in the first-wave countries. Of course, the transitional periods (e.g. phasing-in of direct payments) take into account the delay in Romania's joining the EU. More information on the power gap between Romania and the EU can be

derived from a comparative picture joining up Romania's initial demands and the final results with regard to particular aspects of the agricultural negotiations (see Table 2).

The figures in the table above speak for themselves with regard to the power asymmetry in Romania's agricultural negotiations to the EU. Better results than expected were obtained just in very few cases (such as the reference area for arable crops or hybrid vines), while for the vast majority of matters negotiated the final outcome meant less than the initial demand. For the subjects analysed, the “rates of success” vary from about 6% to 85%. In addition to the general factors that may

Subject Initial position Final

outcome

Share of the final outcome

in the initial position

Reference area for arable crops 6,891,100 ha 7,012,666 ha 101.76% Reference output for arable crops 3.09 to/ha 2.65 to/ha 85.76% Reference quantity for milk (deliveries and direct sales)

7,500,000 to 3,057,000 to 40.76%

Basic quantity for the production of sugar 500,000 to 109,164 to 21.83% Basic quantity for the production of isoglucose

no request 9,981 to n.a.

Processing threshold for tomatoes 50,000 to 50,390 to 100.10% Processing threshold for peaches 5,000 to 523 to 10.46% Maximum guaranteed quantity for long flax fibre

750 to 42 to 5.6%

Maximum guaranteed quantity for short flax fibre and hemp fibre

8126 to 921 to 11.33%

Total area covered with direct producing hybrid vines (to be grubbed up)

70,000 ha (mandatory)

52,000 ha (optional

replacement)

30,000 ha* n.a.

Table 2: Romania's initial position and the final outcome of the agricultural negotiations (for selected subjects)

A POWER ASYMMETRY - GOODNESS OF FIT ANALYSIS OF THE AGRICULTURAL OUTCOME OF ROMANIA'S ACCESSION NEGOTIATIONS TO THE EUROPEAN UNION

Source: Ministry of Agriculture, Forestry and Rural Development of the Republic of Romania (2002) and Tratatul de aderare: negocierile pentru aderarea României si Bulgariei la Uniunea Europeanã proiect (2005)Note: * - as a derogation from the Council Regulation no 1493/1999, Romania was granted planting rights for replacing the 30,000 ha of hybrid vines with Vinis vitifera. It was also allowed to provide national support for restructuring and conversion of up to 75% of the replanting costs.

,

54

IRINA RÂMNICEANU

explain Romania's weak position in the agricultural negotiations, some studies (Cojanu, 2004) point out some specific disadvantages such as the lack of statistics on which to build a solid request for the post-accession agricultural sector.

In any case, Romania was rather unlikely to have been able to significantly improve its negotiation position. If the outcome of the negotiations is now a given, the crucial questions become: (1) how does it fit into the domestic needs? and (2) what can Romania do in order to maximise its positive effects?

These issues are going to be addressed further following only two lines of analysis, as mentioned above: (1) some quantitative aspects of the negotiations (levels of single area payments and of reference areas or quantities) and (2) the challenging aspects deriving from the adoption of particular parts of the relevant acquis communautaire (rural development regulations and cross-compliance).

Some quantitative features of the agricultural outcome for Romania and their goodness of fit

The paper will focus only on two major quantitative implications of Romania's agricultural negotiations: the amount of direct payments as well as the maximum guaranteed areas and quantities.

With respect to the implementation of the direct payments, Romania's list of results and options is no different from any other candidate countries. Thus, according to the Community offer, Romania may choose to use the simplified Single Area Payment Scheme (SAPS) during the first three years of accession. It thus stays in line with all the new entrants except for Slovenia and Malta who have already implemented IACS-compatible systems in the pre-accession period. Also, Romania may opt for making complementary national direct payments, and will benefit from optional

2cross-compliance (except for the Good agricultural and environmental practices GAEP which are mandatory), and from the possibility of using reverse modulation. This list of options leaves to the national authorities the burden of establishing the level of direct payments that would best fit into the Romanian structure of the agricultural sector.

W h i l e t h e i m p l e m e n t a t i o n mechanism is rather similar in all New Member States with the exception of Slovenia and Malta, there are significant differences among them with regard to the level of single area payments (see Table 3). Under these circumstances it proves challenging to attempt an estimation of its amount in Romania and its potential effects on farm restructuring.

2 Only for the first three years of accession, during the application of SAPS.

55

Tab

le 3

: Si

ngl

e ar

ea p

aym

ent

leve

ls i

n 8

New

Mem

ber

Sta

tes

and

est

imat

es f

or

Ro

man

ia f

or

the

firs

t ye

ar o

f ac

cess

ion

Cyprus

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Poland

Slovakia

NSM 7 average

(no Cyprus)

Romania AVG

Romania MIN

Romania MAX

Min

imum

elig

ible

hold

ing

size

(ha)

0.3

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

Uti

lize

d A

gric

ult

ura

l A

rea

*

(th

ou

san

d h

a)

13

4

43

00

1

00

0

58

00

2

50

0

35

00

1

82

00

2

44

0

53

91

1

48

00

1

48

00

1

48

00

To

tal

elig

ible

are

a fo

r SA

PS

(th

ou

san

d h

a)

12

0

34

69

8

00

4

35

5

14

75

2

28

8

14

84

3

19

55

4

16

9

11

39

6

12

13

6

87

32

Shar

e o

f el

igib

le a

rea

for

SAP

S in

th

e U

AA

9

0%

8

1%

8

0%

7

5%

5

9%

6

5%

8

2%

8

0%

7

7%

7

7%

8

2%

5

9%

Dir

ect

pay

men

ts f

or

20

04

**

- E

U

con

trib

uti

on

(m

illi

on

eu

ros)

9.3

0

168.9

017.3

0264.9

025.1

068.2

0

557.1

0

73.0

0

167.7

9

405.0

405.0

4

05

.0

Tota

l (poss

ible

) dir

ect p

aym

ents

for 2004

-

EU c

on

trib

uti

on

an

d m

axim

um

nat

ion

al t

op

pin

g u

p (

mil

lio

n e

uro

s)

20

.46

37

1.5

83

8.0

65

82

.78

55

.22

15

0.0

4

12

25

.62

16

0.6

03

69

.13

891.0

0891.0

0891.0

0

To

tal

aid

fo

r SA

PS

(mil

lio

n e

uro

s)

9.69

19

8.94

21.4

030

5.81

30.4

882

.07

65

9.86

85

.72

19

7.75

48

1.14

481.

144

81

.14

Shar

e o

f th

e to

tal

aid

fo

r SA

PS

in

tota

l (p

oss

ible

) dir

ect p

aym

ents

for

20

04

47%

54%

56%

52%

55%

55%

54%

53%

54%

5

4%

5

4%

5

4%

Per

hec

tare

pay

men

t -

SAP

S (e

uro

s/h

a)

80.8

57.3

26.8

70.2

20.7

35.9

44.5

43.8

47.4

42.2

39.6

5

5.1

So

urc

es:

Euro

pea

n C

om

mis

sio

n s

tati

stic

s (2

00

2),

Stro

ssm

an (

20

04

), N

atio

nal

In

stit

ute

of

Stat

isti

cs (

20

04

) an

d D

um

itru

(2

00

5)

No

tes:

* -

Th

e U

AA

val

ues

dat

e b

ack

to 2

00

2 a

s n

o u

p-t

o-d

ate

valu

es w

ere

avai

lab

le;

**

- T

aken

fro

m t

he

20

05

bu

dge

t.

A POWER ASYMMETRY - GOODNESS OF FIT ANALYSIS OF THE AGRICULTURAL OUTCOME OF ROMANIA'S ACCESSION NEGOTIATIONS TO THE EUROPEAN UNION

56

IRINA RÂMNICEANU

Although absolute values of single payments vary greatly (e.g. from 20.7 euros/ha to 80.8 euros/ha), a closer look at the figures reveals interesting similarities. The share of the total aid dedicated for SAPS in the total (possible) direct payment for

32004 is very much the same in all the new members except for Cyprus. In any case, Cyprus can be left out of this judgment for at least two reasons: its size makes it a particular case in the new entrants group and the size of the eligibility threshold for a holding is 0.3 ha rather than 1 ha, as in all the other countries analysed and as it will very likely be in Romania as well. As it can be seen from the figures in Table 3, all the seven New Member States taken into account did not fully use their direct payments funds for SAP, meaning that they made very similar choices with respect to the share of complementary national direct payments. Another similarity that is noticeable in the figures above relates to the share of the total area eligible for SAPS in the national utilised agricultural area (UAA). It can be seen that the latter shares vary more than those corresponding to payments, but this might also be explained in part by a methodological weakness. While the values for total eligible areas for SAPS date back to 2004, the UAA figures are those for 2002, as no more up-to-date values could be found.

In any case, given the remarkable similarities in terms of proportionality identified above, it is quite reasonable to make estimates for Romania assuming that it will follow the same pattern. To be more precise, that means that Romania is presumed to maximally top-up its direct payments and to use complementary national direct payments (as a share in total direct payments) in a similar way with the bulk of the first-wave entrants. Thus, the SAP

share for Romania will be assumed to be 54% (which is the average for the new members in Table 3 except Cyprus), whereas for the land share three scenarios are considered: (1) minimum share of eligible area (as in Latvia), (2) average share of eligible area (the average is calculated for the seven countries taken into account), (3) maximum share of eligible area (as in Poland). Following these hypotheses, it can be derived that the level of SAP in Romania is likely to range between 39.6 euros/ha and 55.1 euros/ha, with an average around 42.2 euros/ha. Of course, any deviation from the initial assumptions will adjust the figures accordingly.

However, some challenging issues arise (apart from administrative matters): (1) up to what level is Romania willing and able to top-up direct payments? (2) to what product groups will Romania direct its complementary national payments? and (3) what are the likely economic and social effects associated to a change in the method and level of intervention?

Although a more thorough and detailed analysis is required to answer all the questions above, some consequences may be envisaged nevertheless. The change in the intervention system might produce dramatic effects in a highly polarised agricultural sector. Thus approximately half of the Romanian agricultural holdings (2,221,508 farms according to the National Institute of Statistics, 2004) that have less than 1 hectare will not be eligible for Community support. They will also lose the

4national per hectare aid for small farms . Moreover farms ranging between 1 and 5 ha and representing approximately 43% of all agricultural holdings in Romania will find their 70 euros/ha support replaced with a lesser support at least in the first years

3 The figure includes both the Community support and maximum possible national top-up (of up to 55% of the EU level).4 Currently this annual aid rises to 2,500,000 lei/ha (that is approximately 70 euros/ha) and it is granted for farms smaller than 5 ha.

57

following accession. Nevertheless, in order to have a complete image on the effects on this change a fair comparison is required. That means that full support should be taken into account both before and after accession (for instance benefiting from a semi-subsistence aid of approximately 1200

5euros/year completely changes the perspective). However, very large farms will benefit from unprecedented support (if decoupling is considered), while new members are exempted from modulation in their first years of accession.

Apart from the worrying effects, some positive developments might also be envisaged: setting higher size-eligibility criteria is likely to foster land concentration while also the change in intervention will put an end to “begging for votes” support.

Table 4: Romania's average output or cultivated area (1997-2002) and the final outcome of the agricultural negotiations (for selected products)

Source: National Institute of Statistics (2003) Tratatul de aderare: negocierile pentru aderarea României ºi Bulgariei la Uniunea Europeanã proiect (2005)Note: * - The quantities produced were converted from hectoliters to tonnes using a conversion rate of 1liter = 1 kilogramme; ** - The average comprises the entire production of tomatoes and not only that intended for processing.

With regard to maximum guaranteed quantities or areas, Romania has obtained mixed results following the accession negotiations. By dividing the reference areas or quantities to actual levels of production, the conclusions differ from one common market organization to another. Before a more detailed analysis, it is worth

5 The amount of money comprise both the level of Community support and the national contribution, according to the rules of funding rural development measures.

mentioning that Romania, like the other candidate countries, requested that the pre-1990 period be considered as a reference for calculating the post-accession maximum guaranteed quantities or areas (for instance that is the case for arable crops and for processed fruit and vegetables). But as in the case of the other candidate countries, the EU did not validate such a request. A comparative approach bringing together some aspects of the quantitative outcome of the agricultural negotiations as well as the average level of production between 1997 and 2002 might cast some light over the sectoral impacts of Romania's accession to the EU.

As it can be seen from the table above, Romania has practically negotiated a very good deal for its arable crops, obtaining

an eligible area that covers the surface that is actually cultivated with the relevant products. In the tomato case for instance, although the data available made it impossible to calculate the average of tomatoes intended for processing (out of the total tomato output), the reference in Romania's position paper provides an

A POWER ASYMMETRY - GOODNESS OF FIT ANALYSIS OF THE AGRICULTURAL OUTCOME OF ROMANIA'S ACCESSION NEGOTIATIONS TO THE EUROPEAN UNION

Product Average (1997-2002) Final outcome Share of the

final outcome in the average (1997-2002)

Arable crops 7,034,883 ha 7,012,666 ha 100% Cow milk* 5,061,000 to 3,057,000 to 60% Sugar 382,167 to 109,164 to 28% Tomatoes** 627,380 to 50,390 to n.a. Flax fibre and hemp fibre 12% 8000 to 963 to

58

IRINA RÂMNICEANU

indication that the threshold negotiated is very close to the quantity that is actually processed (that is 50,000 tonnes for 1999). Yet, for some other products the outcome is less encouraging. Milk production is going to be one of the sectors most likely to be affected by Romania's accession to the EU. Only 60% of the current production will be entitled for Community support and the analysis does not go into the details regarding the quality requirements that the milk collectors and processors have to meet and the consequent restructuring in the associated industry. Also the production of flax and hemp will undergo negative effects as a result of the application of the CAP, as only about 12% of the current output may benefit from aid while also these products are not covered by single payment schemes.

Some qualitative features of the agricultural outcome for Romania and their goodness of fit

This part of the paper only aims to deal with the implications of Romania's adopting the common rural development policy as well as with the specific set of requirements comprised in the cross-compliance package. The analysis will leave aside all other qualitative issues related to the standards and other requirements that the agricultural products must meet in order to benefit from support and / or be marketed all over EU.

Rural development policy will prove to be of particular importance to Romania after it joins the EU. On one hand, rural development may act as a necessary safety net for an agricultural sector most likely subject to major restructuring, while on the other the financial package for Romania (2007-2009) reveals that more than half of the total CAP money was directed towards

6Pillar II . Even more than in the case of Pillar

6 Yet, up to 20% of it can be redirected towards Pillar I in the form of reverse modulation.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Czech Republic Slovenia Slovakia Hungary Latvia Estonia Poland Lithuania

Graph: NRDP funds break-down into 3 categories of rural development measures

Environment-oriented measures Competitiveness-oriented measures Transfer to Pillar I

59

I, rural development planning reveals the “à la carte” facet of the CAP. The differences in the choices of the New Member States support this perspective (see graph).

Romania will be the main responsible for directing support towards the measures that best fit its needs. Yet, as shown in Râmniceanu (2004), not all the rural development measures are equally accessible nor are they equally fit to Romania's needs. If accessibility is also

7linked to fund absorption and it finds itself at odds with the necessity of implementing a measure, then domestic authorities are supposed to solve a delicate dilemma: will they favour a measure that is easy to get or one that is good to fit?

In terms of accessibility, besides the general eligibility criteria and co-financing requirements that differentiate the measures comprised in the rural development menu, there are some objective specifics that provide particular links to Romanian realities. One example relates to the implementation of the early-retirement scheme. One of the eligibility criteria for a farmer to benefit from support is that (s)he participated to a social security scheme. In Romania, out of the total approximately 300,000 persons falling within the age limits, less and less people are able to pay the social security contribution (Dumitru et al, 2004). Also, another example relates to environment-oriented measures included in the Community menu (that is measures covered by Priority axis 2). The necessity for supporting such measures is expressed by Ministerul Integrãrii Europene (2004), according to which the agri-environmental problems in Romania are widespread. In spite of that, authorities showed little interest and gained very little experience in putting in place specific schemes. For instance, one of the few initiatives that might be perceived

as a close-up to Community-compatible support is the adoption in 2004 of the Mountain Law, that provides for granting natural handicap payments to farmers in the mountain areas. Yet, no such payments has been made so far, as the legal provisions have not become operational up to present. Out of the environment-oriented measures, Romania is relatively more advanced in promoting organic farming, although it lags behind New Member States even in an area that was perceived as benefiting from competitive advantage. Moreover, although Romania went for an ambitious SAPARD programming that directed 12% of the money available towards agri-environment and forestry, it has not used these funds, as the relevant measures are not accredited yet. In addition to these, many of the Priority axis 2 measures are subject to cross-compliance, which makes them even more difficult to access.

Although according to the 2003 reform cross-compliance covers now both pillars of the CAP, for the newcomers that opt for the SAPS the application of this principle with regard to direct payments is optional, with the notable exception of GAEP that remains obligatory. Therefore, for the first three years of accession cross-compliance will be relevant for Romania mostly for the accession of some of the Pillar II money. In terms of the observance of the regulat ions comprising the cross-compliance package, Romania was not particularly successful in obtaining transition periods or derogations as a result of the accession negotiations nor in capitalising its pre-accession period for gaining experience. For instance, Romania is mostly sensitive in complying with the requirements of the Nitrates Directive. Although it asked for a transitional period, it was not granted that possibility. As the

7 As shown above for the SAPARD programme, the spending of money made available may indeed prove problematic.

A POWER ASYMMETRY - GOODNESS OF FIT ANALYSIS OF THE AGRICULTURAL OUTCOME OF ROMANIA'S ACCESSION NEGOTIATIONS TO THE EUROPEAN UNION

60

IRINA RÂMNICEANU

matter of fact, the only regulations for which it asked and was granted transition periods concern the placing of plant protection products on the market as well as food safety. With regard to its implementation experience, Romania still faces some difficulties in putting into place some Community mandatory requirements (e.g. registration of animals).

Given these, it might be expected that Romania will follow the example of Poland and Lithuania and will opt for a rather balanced approach with respect to rural development programming. That means that it is likely to devote relatively less money to the more demanding measures (environment-oriented) and prefer those that are easier to get. Nevertheless, such an approach does not necessarily mean that the measures favoured cannot be good to fit. For instance, Romania may support the diversification of the activities in the rural area (out of the Priority axis 3) or investment in farm modernisation and infrastructure (out of the Priority axis 1), measures for which there is both objective need and a certain experience gained via SAPARD.

Maybe even more than in the case of direct payments, the positive effect of the adoption of the CAP can be foreseen for rural development, as the domestic policy gap will be filled in with Community measures whose implementation requires strategic thinking, identification of the needs and stricter financial discipline.

4. Conclusions

The power asymmetry in the accession negotiations may be considered a given both for Romania and for the other Central and Eastern European countries that have already joined the EU. It is a natural result of the asymmetric interdependence established between the Community and each of the aspiring states. For the latter, the

opportunity cost of non-accession is judged far more important than that for the EU.

Therefore the EU was able to impose its accession terms almost unilaterally, ra is ing thus quest ions about the compatibility of its offer and the particular and diverse needs of the entrants. Nevertheless, the new CAP involves a compromise between the interests of the old members and those of the new ones, although the former seem to prevail. Thus, on one hand it turns more demanding and less rewarding to the disadvantage of the less experienced and less developed newcomers. On the other hand, it contains built-in elements of flexibility as well as special t ransi t ional or derogative a r r angement s tha t a re a imed a t accommodating the various needs of the New Member States. Nevertheless, the consequence of that is the increased responsibility for the most adequate choices pressuring on the new entrants.

In Romania's case, the power asymmetry in the accession negotiations is obvious, particularly from following a comparative perspective between the initial demands and the final outcome. Anyhow there are some sectors where, from a purely quantitative perspective, better than expected results were obtained (for instance arable crops and vineyards).

Considering that the negotiations are concluded, the power asymmetry can no longer be a key issue if a pragmatic approach is favoured. The emphasis falls now on the goodness of fit of the accession terms bearing in mind that Romania is expected to take its share of the responsibility for the right choices.

A non-exhaustive analysis shows that:

- the introduction of the SAPS is likely produce dramatic effects on a highly polarised agricultural sector;

61

Thus, a SAP of about 42.2 euros/ha is reasonable to expect, for the first year of accesion if full topping-up is presumed. Also, complementary national direct payments will add in accordance to decisions to be taken. As a consequence of the change in t h e i n t e r v e n t i o n s y s t e m approximately half of the total Romanian holdings having less than 1 ha will no longer be eligible for support, while large farms may get unprecedented aid. In any case, it is expected that a further stimulus for farm consolidation is thus activated and that the electoral support is terminated.

- the negotiated maximum guaranteed areas and quantities will lead to mixed effects over the various common market organisations;

Some sectors such as milk as well as flax and hemp are going to be confronted with shortages in post-accession aid, while others such as arable crops are likely to be able to fully benefit from the Community support.

- the success of the implementation of the European rural development policy depends to a great extent on the choices of the national authorities

who may be confronted with a conflict between measures that are easy to get and measures that are good to fit;

Some of the rural development measures (e.g. early retirement and agri-environment), although fit to Romanian needs may be difficult to implement either due to unfit eligibility criteria or to lack of experience on the Romanian side. Considering these, Romania is expected to opt for a rather balanced approach with respect to rural development programming, thus devoting relatively less money to the m o r e d e m a n d i n g m e a s u r e s (environment-oriented) and prefer those that are easier to get. Nevertheless, such an approach does not necessarily mean that the measures favoured cannot be good to fit.

- the demanding cross-compliance package for which few exceptions we re ga ined f o l l ow ing t he n e g o t i a t i o n s c a n b e f a i r l y circumvented during the first three years of accession if less money is directed towards Priority axis 2 measures.

A POWER ASYMMETRY - GOODNESS OF FIT ANALYSIS OF THE AGRICULTURAL OUTCOME OF ROMANIA'S ACCESSION NEGOTIATIONS TO THE EUROPEAN UNION

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IRINA RÂMNICEANU

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16. Sissenich, B. (2004) - European Union Policies towards Accession Countries, Paper prepared for the conference “Public Opinion about the EU in Post-Communist Eastern Europe” at Indiana University, Bloomington

17. Strossman, C. (2004) - EU-25 Agricultural Situation, Enlargement of the Common Agricultural Policy, GAIN Report Number E34004, USDA Foreign Agricultural Service, Brussels

18. Tratatul de aderare: negocierile pentru aderarea României si Bulgariei la Uniunea Europeanã proiect (2005), Bruxelles, AA 1/2/05 REV 2

19. Treaty of Accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia to the European Union (2003) signed in Athens on 16 April 2003

20. Wishlade, F., Yuill, D., Mendez, C. (2003) - Regional Policy in the EU: A Passing Phase of Europeanisation or a Complex Case of Policy Transfer?, Regional and Industrial Policy Research Paper Number 50, published by European Policies Research Centre, University of Strathclyde

A POWER ASYMMETRY - GOODNESS OF FIT ANALYSIS OF THE AGRICULTURAL OUTCOME OF ROMANIA'S ACCESSION NEGOTIATIONS TO THE EUROPEAN UNION

,,

,

,

65

THE ADOPTION OF THE COMMON AGRICULTURAL POLICY ELEMENTS OF PRE AND POST ACCESSION IMPACT

*Daniela Giurcã

Abstract. The short time left until the EU accession date has become a strong pressure factor for the speeding up of the necessary restructuring processes of the agrifood sector and rural areas. This is a challenge without precedent for the decision makers in the following period in order to prepare the sector from both institutional and legislative point of views to implement the Common Agricultural Policy and for the management of the funds related to it. In the same time the sector also has to be to be “morally” prepared for the requirements and potential shocks due to the lack of competitiveness after entering the Single Market and this activity has to be also a priority.

The absorption of community funds proposed for Romania in 2004, will depend especially of the wish for restructuring and "the abilities" of the decision makers in chasing the right pattern of agricultural policy for the next period, and after accession. The cost/benefits estimations in this document are based on a very simplistic approach. The scenario proposed starts from the optimistic hypothesis that, until 2007 Romania will be fully prepared from institutional point of view, as well as from point of view of the requirements regarding food security, animal welfare, the environment's state etc., and it will be able to produce at the level established by negotiations, fulfilling 100% the eligibility conditions, and Romania will enter on the Single Market with the negotiated elements (quotas, basic areas, reference productions, etc.).The assessment methodology is based on the application of CAP legislation in force for each product and the estimation of direct payments and funds allocated for market measures following the rigors imposed to Romania for the gradual allocation of direct payments.

* Daniela Giurcã was 14 years researcher and 4 years scientific secretary at the Institute of Agricultural Economics-INCE at the Romanian Academy. She was involved in different projects related to European integration. Since 2005 she is policy specialist in the “Romanian Agribusiness Development Project” a program of the United StatesAgency for International Development. E-mail contact: dgiurca@yahoo.co.uk.

The short time left until the EU accession date, has become a strong pressure factor for the speeding up of the necessary restructuring processes of the agrifood sector and rural areas. This is a challenge without precedent for the decision makers in the following period. The agrifood sector needs to be prepared from the institutional point of view for the imp lemen ta t ion o f the Common Agricultural Policy and for the management of the funds related to it and also to be morally prepared for the requirements and

potential shocks due to the lack of competitiveness after entering the Single Market.

The absorption of community funds proposed for Romania in 2004, will depend especially of the wish for restructuring and "the abilities" of the decision makers in chasing the right pattern of agricultural policy for the next period, and after accession.

The cost/benefit assessments of the 1 2EU accession and of CAP adoption ,

following different methodologies have

1 Idu N.coord. (2001) "Costs and benefits of the EU accession for all candidate countries from Central and East Europe, the European Institute from Romania, Bucharest; Ciupagea C. coord., Marinas L., Turlea G., Unguru M., Gheorghiu R., Jula D. (2004) "The assessment of costs and benefits of Romania's accession to EU", the European Institute, Romania Impact Studies PAIS II.

ROMANIAN JOURNAL OF EUROPEAN AFFAIRS Vol.5, No.1, 2005

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DANIELA GIURCA

constituted a challenging and controversial research subject, offering a quantified orientative framework, with different degrees of accuracy on the possible effects of the acquis communautaire's adoption.

The recent change of CAP and the new orientation of the community support for agriculture and rural development, as well as its dynamics (the proposals of the Commission for the rural development policy change starting with 2007), make the measuring of CAP adoption impact more and more difficult, the quantifications being only estimative and based on a series of hypotheses, being practically impossible to apply and use the previous methodologies. Though, such assessments are necessary and even if they are based on a series of presumptions, they can provide the decision makers with a basis for choosing the right type of agricultural policy in the pre and post accession period, within the limits of flexibility offered by the community's acquis, but can also offer milestones for producers and consumers.

The main processes, generating costs and benefits of the agrifood and rural sectors' integration into the EU, are due especially to the "short term" pressures, made by the need of rapid changes towards an agricultural pattern, "obligatory", totally different from the present one. The quantification of these obligatory processes impact is extremely difficult and from many points of view (presented in Table 1), can be made only on subjective assessments.

The main "costs", mainly in the pre-accession period, are due to the exigencies of legislative, institutional nature, as well as to the differences between the national agricultural policy and CAP - on one hand and the Romanian and EU agricultural and rural level of development on the other hand. The financial allocations, necessary for the adjustments are significant and represent important costs for the national budget, because they are addressed to some priorities "imposed" by the future status that of EU member. Also this category can comprise the budgetary efforts for co financing the projects which are developing through the pre-accession financial instruments.

The costs paid by consumers will be probably the most considerable and difficult enough to be assessed. They will be due generally to the increase of agrifood products' prices and will be felt mainly after accession. The "benefits" category is even harder to be quantified, because a series of elements are subjective and maybe idealistic, if they are regarded from the perspective of the Romanian realities

In this category there are enlisted: the change of the producers and consumers' mentality, the formation of another type of farmer, of another type of inhabitant in the rural area. The benefits due to CAP adoption, through the mechanisms, which ensure the preservation in good conditions of the environment, of the food security, of animal welfare, are and will remain on the future, extremely difficult to assess.

2 Leonte, J.; Firici, C; Burtea, V.; Balanica, S.; Preda, M. (1998) "Economic welfare (costs and benefits of Romanian accession to EU", Phare Project RO 9505-04-01, Rusali, M.; Giurca, D. (2000) "Costs and benefits of EU accession for Romanian agrofood sectors", Phare Project RO 9804-03-02, Rusali, M.; Giurca, D.; (2001) "The impact of CAP adoption on the market of main Romanian agrifood products", BOOKS, ESEN-2 an opened project "Problems of Romania's integration into EU, Requirements and Assessments", the Section for Economic, Juridical and Sociological Sciences of the Romanian Academy, the Reflection Group "The Assessment of the National Economy State. NIER-CIDE, A Pouliquen (2001) "Competitiveness and agricultural incomes in the agrifood sectors in the CEE'countries, European Commission, the General Directorate for Agriculture (2002)" "The Analysis of the EU expansion towards the CEE countries", Dumitru, M.; Diminescu, D.; Lazea, V. (2004) "Rural Development and the reform of Romanian agriculture" CEROPE, assessments and studies made by specialists within the MAFRD and the assessment at the basis of elaboration of the position Documents of Romania and which served to the negotiations' ending-up (working documents unpublished).

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THE ADOPTION OF THE COMMON AGRICULTURAL POLICY ELEMENTS OF PRE AND POST ACCESSION IMPACT

The category of "known facts", necessary for such assessments, includes:

- the Budgetary engagements of EU meant for Romania in the period 2007-2009 for agriculture and rural development (the proposal from April, 2004);

- the results of the negotiations - the CAP legislation into force and the

proposals for the reform of the rural development policies

- the orientative farm structure and of uti l ised agricultural area ( in conformity with the results of the general agricultural census).The category of "unknown" facts is

more complex and needs a series of estimations referring to:

- the value of budgetary engagements of Romania, starting with the year 2007;

- the level of areas, livestock number, of productions and consumptions at the level of the year 2007 and in the following years.

- the number and structure of farms, eligible for direct payments and market measures.

1. The financial efforts (national and community) in the pre-accession period destined for the agricultural sector and rural development

Some preliminary estimations of 3MAFRD , referring to the financial effort

meant for the institutional building, necessary for the implementation and functioning of the acquis communautaire in the agrifood sector amount to approximately 800 million Euros (from budgetary sources

and preaccession instruments). For the period 2004-2007 expenses are estimated at

4around 530 million Euros for the development of the institutional framework, necessary until accession date (of which, over 80% represents the financial effort meant for the sanitary-veterinary sector).

5The value of investments for the European integration in the period 2001-2003 amounted to 68 million Euros (of which, 19.5 through PHARE Programs, around 30 from budgetary sources, 9 from own sou rce s and o the r 9 f rom extrabudgetary sources).

In conformity with the data 6presented by the MAFRD in May 2004, the

EU support meant for the preparation of the sector for accession through PHARE Program, was significant. Thus, in the period 2001-2003 the value of PHARE Projects destined to legislative harmonization, institutional construction and technical assistance, went up to 36.4 million euros, of which, 37% for the sanitary-veterinary sector, 35% for the fito-sanitary sector, 11% for the policy of agriculture and rural development at national and regional level 7% for the control of agrifood products' quality and the rest of sums for the fishery and wine sectors.

For the period 2004-2006, there are foreseen projects in value of 75 million euros of which 45% destined to investments, 31% to inst i tut ional construction, and 25% for legislative harmonization) following four priorities: economic analyses and sectoral policies, management of FEOGA funds, rural development, food security and the sanitary veterinary and fitosanitary sectors.

3 20034 Ciupagea C., coord., Marinas L., Turlea G., Unguru M., Gheorghiu G., Jula D., (2004) "Costs and Benefits assessment for Romania's EU accession", the European Institute, Romania Study of impact PAIS II.5 MAFRD (2004) "The Strategy for sustainable Agricultural and Food Development in Romania".6 MAFRD (2004) "The Strategy for sustainable Agricultural and Food Development in Romania".

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DANIELA GIURCA

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69

7Through SAPARD program , the EU allocates to Romania 150 million euros annually in the period 2000-2006 for rural development. Although, the sums are significant (1050 million euros), it is possible that these could not be absorbed totally within this period.

One of the main causes is due to the limited budgetary resources, which do not permit the projects' cofinancing (the budgetary contribution for the whole period should be of over 280 million Euros) and to lack of capital for the private cofinancing, estimated to approximately 370 million euros. To all this, there are added also the European rigours connected with eligibility and the procedures, hard enough to validate the projects

7 Special Pre-Accession Programme for Agriculture and Rural Development.8 Which was referred to a Union of 27 members.

2. The post-accession financial implications

2.1. Assessments at national level

In February 2004 the European Parliament was presented the budget

8proposal for the period 2007-2013 , including also "the financial package" allocated to Romania and Bulgaria for the period 2007-2009, following that for the period 2010-2013, to both countries should be allocated sums in conformity with the regulated financial provisions. The financial engagements of the EU for Romania and Bulgaria are presented in Figure 1. The funds for agriculture and rural development represent the must significant part, 35% of total of the sum, to which is added an

Figure 1 The structure of the financial package (EU budget) for Romania and Bulgaria in the period 2007-2009

Source: on basis of proposals made by the European Commission in "A financial package for the accession negotiations with Bulgaria and Romania, Communication from the Commission, Brussels, 19.2.2004 and the proposals from April 2004. Separation for the Chapters: "Administration" and "Internal policies" is estimated.

THE ADOPTION OF THE COMMON AGRICULTURAL POLICY ELEMENTS OF PRE AND POST ACCESSION IMPACT

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DANIELA GIURCA

important part of the structural funds.The total value of sums proposed to

Romania from the EU budget allocated for agriculture, rural development and

9structural funds is of 9.894 billion euros . If the separation of the other two Chapter "internal policies" and "administration" (which in the financial package are presented as sums for both countries Bulgaria and Romania) were made following the same share, then, Romania could benefit more, with 1.1 billion euros, such as the total sum could reach 10.9 billion euros, in the period 2007-2009 (the sums and their structure by chapters are presented in Figure 2).

9 Proposal April 2004, Bulgaria has the sum of 3.852 billion Euros allocated.10 Ciupagea C., coord., Marinas L., Turlea G., Unguru M., Gheorghiu G., Jula D., (2004) "The assessments of costs and benefits for Romania's EU accession", the European Institute, Romania Impact Studies PAIS II.

Figure 2 Proposal for a financial package for Romania (April 2004)

Source: on basis of proposals made by European Commission in "A financial package for the accession negotiations with Bulgaria and Romania, Communication from the Commission, Brussels, 19.2.2004 and proposals from April 2004. The separation for the chapters "Administration" and "Internal policies" is estimated.

In conformity with some recent 10estimations , the budgetary effort of

Romania for the period 2007-2009 (evaluated following the principles of cofinancing of structural funds and the obligatory Romania's contribution to the EU

budget 1,14% of the GDP prognosis of the respective period) amounts to 7.4 billion euros.

In conformity with the EU, Romania will be allocated, in 2009 funds in value of 7% of that year's GDP, in comparison with 1% of the GDP, national contribution.

In the optimistic scenario, in which Romania will be completely prepared for the accession in 2007 the net balance of financial transfers between Romania and EU, could be a positive one, the net flows of funds being estimated at over 6 billion euros. These gains could decrease substantially if Romania is not sufficiently prepared to "absorb" the allocated funds.

2.2. Assessments for the agricultural sector and rural area

Taking into account the level of agriculture's development and of the rural area in Romania, the EU proposed to the

(

71

Government a redistribution of funds presented in the financial package at the Chapter of rural development (20% of the sum, initially foreseen) towards the chapter of direct payments and a sum of 800 million euros from the structural funds destined to the rural development. In conformity with these assessments, the total sum of the community funds destined to agriculture and rural development, possible to be granted in the period 2007-2009 amounts to 4.7 billion euros. Figure 3 exhibits the structure and value of the financial allocations from the EU budget, possible to be granted to Romania in the period 2007-2009

Another negotiated facility for the period 2007-2009 refers to the possibility of completing the sums allocated to direct payments from the community budget, with a value equal to 30% from the sums allocated through the community budget (trough “top-up” mechanism). The value of the budgetary effort destined to completion

Figure 3 The possible repartition of the community budget for agriculture and rural development in the period 2007-2009

Source: estimations on basis of financial package presented to the EU (the key of repartition by years 25%, 35%, 40% from the total amount for Romania).

of direct payments is amounted to 403 million euros in the period 2007-2009.

Significant amounts are also necessary for the co-financing the programs for rural development. For the period 2007-

112009 the value of this cofinancing is amounted to 870 million euros. In total, the value of the national budgetary effort necessary for agriculture and rural development, in the period 2007-2009 can be of 1.2 billion euros, sum, which could be by 0.1 billion euros more than the budget followed by the MAFRD in the period 2001-2003. One could therefore reach the conclusion that there should be no problems from this point of view.

In the optimistic scenario, where Romania will have until 2007 an agricultural and rural sector 100% prepared for the absorption of the available community funds, the net benefit of the sector in the period 2007-2009 could be of 3.4 billion euros.

11 33% of the sums allocated for rural development

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DANIELA GIURCA

2.3. EU accession's implications upon agricultural producers

The assessment of the accession's impact at the level of agricultural producers and agri-processors has become more difficult together with the CAP change.

With all this, a simplistic approach based on hypotheses (in case of "unknown") and data known (the results obtained by closing the common position document and t h e r e g u l a t i o n s o f t h e a c q u i s communautaire and the methodology of application for Romania) could offer an orientative framework on the impact of the community acquis' adoption at the producers' level.

The estimation is based on a very simplistic approach. The scenario proposed starts from the optimistic hypothesis that, until 2007 Romania will be fully prepared from institutional point of view, as well as from point of view of the requirements regarding food security, animal welfare, the environment's state etc., and it will be able to produce at the level established by negotiations, fulfilling 100% the eligibility conditions, and Romania will enter on the Single Market with the negotiated elements (quotas, basic areas, reference productions, etc.).

2.3.1. Assessment of direct payments

The assessment methodology for direct payments is based on the application of CAP legislation in force for each product and the estimation of direct payments and funds allocated for market measures (there, were it was possible) following the rigors imposed to Romania for the gradual allocation of direct payments (in 2007-25% of the value of payments granted in EU, in

2008-30%, in 2009-35%, in 2010-40% and then, an annual increase of 10%, until reaching the value of 100% of the EU support, possible to be granted (horizon 2016 see table 2).

Each product was addressed separately, according to available statistical data, to the negotiated elements and by applying all the community legal provisions. The assessment consisted in an estimation of direct payments value and of the support for the Common Market Organisation for the main products.

Having in view the very long term (10 years since the accession), these values are only orientative. It is possible, until then, to witness favourable changes regarding Romania, especially concerning the reference productivity for arable crops and possibly, other changes in granting direct payments.

The milestones of this assessment refer to the period between 2007-2009, for which, the total value of direct payment is already established by the European Commission. (see figure 3)

For the arable crops used in the assessment of direct payments, attention was granted to negotiation results (see table 2 ) a c t u a l l y r e f l e c t i n g t h e E U recommendations expressed in the answer given to Romania after the presentation of the position paper, referring to the way of setting reference areas and productivities or based on recent statistical data (the average between 2000 2002) for the crops included in the category of arable crops.

Thus the total reference area eligible for direct payments will be 7 012 666 in 2007 (75%of the total arable land in Romania) and the reference yield needed for the assessment of direct payments will be 2.65to/ha.

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73

Products Negociation results Regulation Calculation basis

Estimated value of direct payments –horizon 2016 (equal to the EU 25 )

million euro Arable crops (EC) No 1258/1999

(EC) No 1782/2003 1171

- Base area - Reference yield

7012666 ha 2,65 to/ha

(EC) No 1251/1999 (EC) No 1782/2003

Rice (EC) No 1782/2003. 0,063 - Base area - Reference yield

500 ha 1,681 to/ha

Milk and milk products (EEC)No 3950/92, (EC) No 1788/2003 (EC) No 1255/1999 (EC) No 1782/2003

135

Specific reference quantity (quota) out of which: - delivered milk - direct sales - special restructuring

reserve quota ( in 2009)

- 3,057,000 to with 35.93 g/kg fat content

- 1,093,000 to - 1,964,000 to - 188,400 to

Beef and veal (ceilings) (EC) No 1254/1999 (EEC) No 1208/81 (EC) No 1760/2000 (EC) No 1825/2000

222

- Special beef premium 452000 heads (EC) No 1254/1999 - Suckler cow premium 150000 heads (EC) No 1254/1999 - Slaughter premium 1233000 heads out of

which: 1148000 adults and 85000 calves

(EC) No 1254/1999

The global amounts for additional payments

858260 euro (EC) No 1254/1999

Sheep and goats (EC) No 2529/2001 93,5 The ceiling for the ewe premium out of which:

5880620 heads

- in the mountain area 1764000 heads - in the plain area 4116000 heads Goats 400000 heads The global amount for additional payments

6,216,782 euro

Pastures 654898 ha (EC) No 1255/1999 229

Table 2 Calculations hypotheses for the evaluation of direct payments for Romania

Source : own estimations based on negotiation results and EU legislation

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DANIELA GIURCA

Table 3 Reference areas and productivities for the assessment of direct payments for arable crops in Romania horizon 2007

Source: based on negociation results

Arable crops eligible for direct

payments

Base area ha

Reference yield to/ha

Reference production to

Wheat and rye 2272809 2,65 6022944 Barley 569531 3,10 1765545 Maize 2848145 3,5 9968508 Sorghum 2755 1,5 4133 Sunflower seeds 891687 1,3 1159194 Soyabean 70650 2,0 141300 Other crops 355211 Rice 500 1,681 840 Total arable crops 7012666 2,65

According to these milestones, mentioned in the final negotiation documents and in conformity with CAP legislation in force for Romania, starting 2007 (see table 2) a simple assessment can be done (version 1) for the value of direct payments that can be granted in 1016 (equal to the EU-25), as follows:

from which:PDa = the value of direct payments

for arable crops (equal as in UE-25)Sr = the value of base area

negotiated for Romania

( ) PiUEprSrPDa **=

Table 4 Estimation of direct payments horizon 2016- second version

* the national guaranted quantity for long fibre is 42 to and for short fibres is 921 to, and the support in this case is differentiated 200 Euro/t for long fibres and 90Euro/t for short fibres Source:own estimations based on negotiations results

Culturi arabile Sr ha

Pr to/ha

PiUE euro/to

PDa euro

Weat and rye 2272809 2.65 63 379,445,463

Barley 569531 3.1 63 111,229,404

Maize 2848145 3.5 63 628,015,973

Sorghum 2755 1.5 63 260,348

Sunflower seeds 891687 1.3 63 73,029,165

Soyabean 70650 2 63 8,901,900

Rice 500 1,681 126,75 106,533

Other 355211 2.65 63 59,302,476

Fibre crops* 1378 91,290

Total direct payments for arable crops 1,260,382,552

pr = the reference yield PiUE = the intervention price in EU -

63Euro/t (according to EC1258/1999 and EC1782/2003)

PDa = (7012666*2 ,63 )*63 =1,170,764,589 euro

According to this simple assessment, direct payments related to arable crops that can be granted to Romania in 2016 would stand at 167 euro/hectare.

The results of a more precise assessment (version 2) based on reference areas and productivities for all arable crops (presented in table 4), according to the same

(

methodology are presented in table 4. According to this version, in 2016, direct payments related to arable crops would amount to 180 euro/ha.

According to EU regulations for the implementation of CAP in the new member states, more precisely, (in 2007 the community budget should share 25% of the value of EU granted payments, in 2008 30%, in 2009 - 35% and in 2010 40%, which will subsequently increase by 10% annually until the final value of 100% of EU support is reached) we assessed the value of direct payments/ha to be granted from the community budget between 2007 2016 (table 5).

75

Table 5. Direct payments per hectare pertaining to arable crops that can be granted to Romanian producers between 2007 2016 (euro/ha).

Source: own estimation based on negotiations results

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Version 1 42 50 58 67 83 100 117 134 150 167 Version 2 45 54 63 72 90 108 126 144 162 180

These values can undergo positive changes (especially on the long term) as the reference yields are expected to be reached and they can increase in the following years, implicitly increasing the value of direct payments. Before accession or immediately after it is also possible, to see reference productivities set for more recent periods taking 2004 in consideration would bring an increase in the reference productivity.

The assessment of direct payments pertaining to the animal breeding sector is based on the same simple methodology: applying community regulations for each product (milk, beef, sheep and goat meat) and the results of negotiations (see table 2). .

The milk quota allocated to Romania is 3,057,000 tons annually (quality requirements involving 35.93 g fat/kg) of which 1,093,000 tons for processing and 1,964,000 tons for direct sales. Due to the

specificity of this currently disorganised market, Romania also obtained a reserve (restructuring) quota of 188,000 tons of milk/year starting 2009 and an amendment referring to the direct sales quotas and industry delivery quotas that will have to be revised and possibly, reassessed (including a reassessment of the fat content required) based on more recent reference periods such as 2004 2006, when sector statistics are expected to be more precise. In order to meet the negotiated milk quotas 826216 heads are needed, with a yield of 3700 t/cow/year. According to EU regulations, 413108 ha of pastures (maximum 2UVM/ha) are needed for this number of

cattle. For milk, direct payments are

assessed according to CE regulation no. 1255/1999 amended by CE 1782/2003, as follows:

- the premium granted for the quantity within the quota, starting 2006 2007 shall be 24,94 euro/to.

- The supplementary premium /payment for the permanent pasture surface

Total direct payments per ton of eligible milk (quota), i.e. the premium plus the supplementary premium/ payment per pasture surface can not exceed 41.7 euro/to in EU 25 in 2007 and the payment granted for permanent pasture can not exceed 350 euro/ha.

According to these hypotheses we assessed direct payments pertaining to dairy products sector as follows:

THE ADOPTION OF THE COMMON AGRICULTURAL POLICY ELEMENTS OF PRE AND POST ACCESSION IMPACT

76

DANIELA GIURCA

where:- PDl =the value of direct payments

for milk (Euro)- Ql = Quota (t) in 2016 ( negotiated

quota + quantity for reserve)- pl = premium for quota (euro/t)- ps = supplement for quota

- possible to be granted for the entire quota- (16,76 euro/t) or which can be combined with a direct payment of de 350 euro/ha on the permanent pasture eligible for the quota ( established for each producer)

PDl = (3,245,400*24.94)+(16.6*3,245,400)= 135,333,180 Euro

According to these assessments, in 2016 direct payments/milk within the quota will be 41.7 euro/t and if considered that in view of meeting the quota 877,135 milk cows are needed (with a yield of 3.7t/head), one can say that the support for one eligible cow will be 155 euro/head. The total amount of direct payments in 2016 is 135 million euro of which 81 million for premium/milk quota and 54 million euro can be granted as supplementary premium or as direct payment per eligible hectare of permanent pasture, according to the national agricultural policy). Direct payments pertaining to the milk quota for Romania between 2007 2016 are presented in table 6.

The assessment of direct payments for beef, sheep and goat meat was made according to the methodology previously used, according to the hypotheses presented in Table 2.

The direct payments for beef and veal was made as following:

in which:- PDv = direct payments for beef

and veal

psplQlPDl += )*(

∑ += PavPvPDv

- Pv = premia specific for the sector - Pav =additional payments for beef

and veal meat

Table 7 presents the value of direct payments that can be granted for beef and veal in 2016.

Assessment of direct payments for mutton and goat meat was based on the same methodology using the results of negotiations and the community regulations in force: (EC) No 2529/2001.

Direct payments for mutton and goat meat were calculated as follows:

in which:- PDo = direct payments for sheep

and goats meat- Po = premia specific for the sector - Pao = Global amount for

additional payment for sheep and goat meat

Table 8 presents the value of direct payments that can be granted for mutton and goat meat in 2016.

Starting from these assessments we calculated the amounts of direct payments for beef and veal and mutton and goat meat, likely to be granted to Romanian producers between 2007 2016 (table 9) according to negotiations. More precisely, in 2007 the community budget should allocate 25% of the value of payments granted in EU, in 2008 30%, in 2009 35%, in 2010 40% followed by an annual increase of 10% until reaching 100% of EU support.

Table 10 and figure 4 present the value of direct payments likely to be granted to Romanian producers from the community budget. The payments are estimated according to working hypotheses for 2007-2016. Figures are orientative and together with the presented structure they serve only for the assessment of total amounts due to Romania.

∑ += PaoPoPDo

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77

Tab

le 7

Ass

essm

ent o

f dir

ect p

aym

ents

for

bee

f an

d v

eal t

hat

can

be

gran

ted

in 2

01

6.

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rce:

ow

n e

stim

atio

n b

ased

on

neg

oti

atio

ns

resu

lts

Neg

oti

ated

cei

lin

gs

Hea

ds

(1

)

Euro

/Hea

d

EC 1

25

4/1

99

9 (2

)

Pri

me

- Eu

ro

Pv

(1

*2

)

Addit

ional

pay

men

ts

Euro

Pav

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ecia

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52

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10

94

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0,0

00

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ckle

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ium

1

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0,0

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wh

ich

:

1,2

33

,00

0

- Fo

r ad

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14

80

00

80

91

,84

0,0

00

-

For

calv

es

85

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0,0

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60

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tal

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pay

men

ts f

or

bee

f an

d v

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in 2

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6 =

22

1,8

68

,26

0 e

uro

s

Tab

le 6

Dir

ect

pay

men

ts p

erta

inin

g to

the

milk

quota

that

can

be

gran

ted

to

Rom

ania

n p

roduce

rs f

rom

the

com

munit

y budge

t b

etw

een

20

07

– 2

01

6

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Budge

t fo

r d

irect

pay

men

t fo

r m

ilk

quota

– Eu

ro

out

of

whic

h:

31

,86

9,2

25

38

,24

3,0

70

47

,36

6,6

13

54

,13

3,2

72

67

,66

6,5

90

81

,19

9,90

8 9

4,7

33

,22

6

10

8,2

66

,54

4 1

21

,79

9,8

62

135,3

33,1

80

for

pre

miu

n

19

,06

0,3

95

22

,87

2,4

74

28

,32

9,0

97

32

,37

6,1

10

40

,47

0,1

38

48

,56

4,1

66

56

,65

8,1

93

64

,75

2,2

21

72

,84

6,2

48

80

,94

0,2

76

Fo

r ad

dit

ion

al

pre

mia

1

2,8

08

,83

0 1

5,3

70

,59

6 1

9,0

37

,51

6 2

1,7

57

,16

2

27

,19

6,4

52

32,6

35

,74

2 3

8,0

75

,03

3 4

3,5

14

,32

3 4

8,9

53

,61

4 5

4,3

92

,90

4 Eu

ro/

elig

ible

hea

d

(3,7

t

mil

k/y

ear)

3

9 4

6 5

4 6

2 7

7 9

3 1

08

12

3 1

39

15

4

Sou

rce:

ow

n e

stim

atio

n b

ased

on

neg

oti

atio

ns

resu

lts

THE ADOPTION OF THE COMMON AGRICULTURAL POLICY ELEMENTS OF PRE AND POST ACCESSION IMPACT

78

DANIELA GIURCA

Table 8 Assessment of direct payments for mutton and goat meat, likely to be granted in 2016.

Source: own estimation based on negotiations results

Negotiated ceillings

Heads

(1)

Euro/cap EC 1254/1999

(2)

Prime - Euro Po

(1*2)

The global amount for additional payments

Euro Pao

Sheep –overall ceiling for Out of which :

5,880,620

- In the mountain area about 30% 1644186.0 28 46,037,208 - In the palin area about 70% 3836434.0 21 80,565,114 - Goats 400,000 16,8 6,720,000 Additional payments 6,216,782 Total direct payments for sheep and goats meat in 2016 - 139,539,104 euros

Direct payments (both those in the vegetal and those in the animal sector) will be allocated regardless of the level of production, and they can be granted according to political decisions, both in a simplified payment form or as a single farm payment (likely to be granted according to results of negotiations between all owners of holdings that exceed 0.3 ha)

An increase of direct payments was obtained for 2007 - 2009 through reallocation of funds from the financial

Figure 4 The assessment of direct payments in conformity with the budget legislation of EU

Source: own estimation based on negotiations results

0

200

400

600

800

1000

1200

1400

1600

1800

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Mil

lio

nE

uro

Arable crops Milk and dairy products Beef and veal Sheep and goats

package (20% of the amounts designed for rural development). The European Union a l s o g r a n t e d t h e p o s s i b i l i t y o f supplementing direct payments resulted from negotiations by 30% (using the “top-up” mechanism). The complementary amounts will be granted from the national budget, Table 11 presents the assessment of direct payments following the above-mentioned adjustments for the period 2007-2009

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79

Tab

le 9

Dir

ect

pay

men

ts f

or

neg

oti

ated

mea

t ce

ilin

gs t

hat

can

be

gran

ted

to

Rom

ania

n p

roduce

rs f

rom

the

com

munit

y budge

t b

etw

een

20

07

an

d 2

01

6 (

euro

s)

Tab

le 1

0

Ass

essm

ent

of

tota

l dir

ect

pay

men

ts p

erta

inin

g to

neg

oti

atio

ns

and

CA

P t

hat

can

be

gran

ted

bet

wee

n 2

00

7 a

nd-

2016

for

the

Rom

ania

n a

grif

ood

sec

tor

(euro

s)

So

urc

e: o

wn

esti

ma

tio

n b

ase

d o

n n

ego

tia

tio

ns

resu

lts

Dir

ect

pay

men

ts

20

07

2

00

8

20

09

2

01

0

20

11

2

01

2 2

01

3

20

14

20

15

20

16

F

or

bee

f an

d

veal

5

5,4

67

,06

5

66

,56

0,4

78

7

7,6

53

,89

1

88

,74

7,3

04

1

10

,93

4,1

30

1

33

,12

0,9

56

15

5,3

07

,78

2

17

7,4

94

,60

8

19

9,6

81

,43

4

22

1,8

68

,26

0

For

shee

p a

nd

go

al m

eat

3

4,8

84

,77

6

41

,86

1,7

31

4

8,8

38

,68

6

5

5,8

15

,64

2

6

9,7

69

,55

2

8

3,7

23

,46

2

9

7,6

77

,37

3

1

11

,63

1,2

83

1

25

,58

5,1

94

1

39

,53

9,1

04

Dir

ect

pay

men

ts

20

07

2

00

8

20

09

2

01

0

20

11

20

12

2

01

3

20

14

2

01

5

20

16

A

rabl

e cr

ops

(op

tio

n 1

) 2

92

,69

1,1

47

3

51

,22

9,3

77

4

09

,76

7,6

06

4

68

,305

,83

5

58

5,3

82

,29

4 7

02

,45

8,7

53

8

19

,53

5,2

12

9

36

,61

1,6

71

1

,05

3,6

88

,13

0

1,1

70

,76

4,5

89

M

ilk

31

,86

9,2

25

3

8,2

43

,07

0

47

,36

6,6

13

5

4,1

33

,27

2

67

,66

6,5

90

81

,19

9,9

08

9

4,7

33

,22

6

1

08

,26

6,5

44

1

21

,79

9,8

62

1

35

,33

3,1

80

B

eef

and

vea

l m

eat

55

,46

7,0

65

6

6,5

60

,47

8

77

,65

3,8

91

8

8,7

47

,30

4

11

0,9

34

,13

0 1

33

,12

0,9

56

1

55

,30

7,7

82

1

77

,49

4,6

08

1

99

,68

1,4

34

2

21

,86

8,2

60

Sh

eep

an

d

goat

s m

eat

3

4,8

84

,77

6

4

1,8

61

,73

1

4

8,8

38

,68

6

5

5,8

15

,64

2

6

9,7

69

,55

2

83

,72

3,4

62

97

,67

7,3

73

11

1,6

31

,28

3

1

25

,58

5,1

94

13

9,5

39

,10

4

To

tal

dir

ect

pay

men

ts

41

4,9

12

,21

3

49

7,8

94

,65

6

58

3,6

26

,79

6

66

7,0

02

,05

3

83

3,7

52

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6 1

,00

0,5

03

,08

0

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,25

3,5

93

1

,33

4,0

04

,10

6

1,5

00

,75

4,6

19

1

,66

7,5

05

,13

3

THE ADOPTION OF THE COMMON AGRICULTURAL POLICY ELEMENTS OF PRE AND POST ACCESSION IMPACT

80

DANIELA GIURCA

Figure 5 presents the maximum value of direct payments (assessed for the arable crops) likely to be granted (from the EU budget and from the national budget) for the negotiated reference surface of 7012666 ha.

According to these assessments the amounts that can be granted per eligible surface would amount to 76 Euro/ha in 2007 (of which, 58 Euro from the community budget and 18 Euro from the national budget) in 2008 / 95 Euro, in 2009 / 110 Euro/ha.

Table 11. Direct payments likely to be granted to Romanian producers between 2007-2009 (euros)

Source: own estimation based on negotiations results

Direct payments (arable crops)

2007 2008 2009 Total

Estimation based on negotiat ion results 292,691,147 351,229,377 409,767,606

1,053,688,130 Transfers from rural development budget

115,400,000 161,560,000 184,640,000

461,600,000 Direct payments from the national budgetl (“top-up” mechanism) 122,427,344 153,836,813 178,322,282

Total direct payments 530,518,491 666,626,190 772,729,888

Figura 5 The value of direct payments possible to be granted for the basic area

Source own evaluation

76

95

110

74 86

101

117

134

150

167

0

200

400

600

800

1000

1200

1400

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Billio

neu

ro

0

20

40

60

80

100

120

140

160

180

Eu

ro/h

a

Direct payments from EU budget Direct payments from national budget Euro/ha

Macroeconomic assessments show that Romania will be a net beneficiary of community funds in the category of direct payments. At the macroeconomic level, the impact can be less encouraging for eligible producers.

In 2004 the envisaged budgetary support per hectare amounts to about 60 euros per hectare (2.5 million lei/ha). Theoretically one can assert that the positive impact at the level of eligible producers would be of only 16 euros after accession if

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81

Romania has the financial possibility to co-finance these payments. If this is not possible, then the community support will have a minor negative impact on producers (as they might actually lose 2 euro/ha) or even no negative impact at all if this loss were compensated by national budgetary allocations.

For mixed farms or for farms specialised on animal breeding the amounts might increase because direct payments assessed based on data negotiated in the animal sector will also be granted as payment per land surface according to the number of eligible animals in the exploitation/farm. (for example: for every eligible milk cow, considering that all the milk is designed for the quota (3.7 to/year and there is no domestic consumption and no milk is used as food for animals) in 2007 37 euro/head might be paid, increasing in 2009 to 54 euro/head). The maximum total estimated for these direct payments between 2007-2009 amounts to 117 million euros for milk, 199 million euros for beef and 125 million for mutton (table 12).

If we take into account the value of direct payments established through the

Table 12. The value of direct payments estimated and proposed in the financial package for 2007-2009 (million Euro)

Source own estimations

Direct payments from EU budget Estimations

Direct payments (amount established

by Financial package)

Diferences +/ -

Arable crops 1,053 Milk 117 Beef and veal meat 199 Sheep and goats meat

125

Total direct payments

1496 881 - 615

Transfers from rural development

461 461

Total 1958 1342 - 615

financial package for Romania we can assert that there are major differences of over 615 million euros less than the assessments presented in the proposed scenario (see table 12)

Having in view this significant difference between the amounts proposed and subsequently adjusted through the financial package and those estimated in the proposed scenario, based on regulations and negotiations one can appreciate that the European Union already expressed concerns referring to Romania's capacity of being fully ready for accession (the reserve amounting to 30%). If we take into account the transition periods (periods of grace granted to Romanian producers during which they are supposed to reach European standards) to be accepted subsequent to 3 years of negotiations (until 31.12.2009) for the modernisation and updating of milk processing units (28 units), as well as for the establishment of collection centres and of milk standardising centres; of 3 years (until 31.12.2009) for meeting the community requirements pertaining to milk cow farms and to the quality of raw milk obtained; 3 years (unt i l 31.12.2009) for the

THE ADOPTION OF THE COMMON AGRICULTURAL POLICY ELEMENTS OF PRE AND POST ACCESSION IMPACT

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DANIELA GIURCA

modernisation of slaughterhouses and for bringing meat processing units to European standards (26 units for red meat and 2 units for chicken) one can say that not all producers can meet the eligibility conditions starting 2007.

2.3.2.Options for direct payment allocation

Until the date of Romania's accession to European Union (2005 and 2006) the allocation of direct payments will change significantly, thus all direct payments will be integrated into a single form of payment, granted per farm (the single payment scheme). The amount pertaining to this scheme will be divided in entitlements in order to facilitate their transfer among producers. Entitlements can be transferred with or without the corresponding land, among farmers in the same member state. An EU member state can define the regions within which the transfer of entitlements can be done and can adjust the entitlements to the level of the regional average.

Any entitlement that has not been used for 5 years, except the cases of force majeure or other exceptional situations, is to be allocated to the national reserve. Within the same scheme farmers are to receive set aside entitlements calculated according to the reference periods (2000-2002), and according to the number of eligible hectares (the farm land needs to cover at least 0.1 ha, with a width of at least 10 metres. Smaller widths can be accepted 5 metres- in special cases justified by specific environmental conditions). These can be placed under rotation or can be used for the cultivation of energetic crops. Organic crop producers will be exempt from the set aside rule.

Payments will be made according to: the preservation of environment, the health of plants and animals and the degree to which the animal welfare and food security

norms have been met, and so on (the Cross compliance principle). The direct payment beneficiaries will have to preserve the entire surface in good agricultural conditions.

This obligation is valid at the level of the entire farm, and sanctions are applied for any case of non-compliance. This will be applied for all the sectors, both for used and for unused agricultural lands. Farmers who receive their single agricultural payment or other direct payments based on the CAP but do not comply with the standards imposed by legislation will be sanctioned by a partial or total reduction of the payment, according to the gravity of the case. Thus:

- Fines will be applied in case of non-compliance with the 18 priority European standards (good agricultural practices)

- The control will be carried out through the Integrated Administration and Control System (IACS)

The member state can retain 25% of the amounts that have not been granted by a breach of standards, the amounts thus saved being available for the member state, thus the member state being able to use them in a different way.

Direct payment granting through the system of single agricultural payments simplify the main component of the current Administration and Control System within EU and for Romania, which is still far in the implementation of IACS, the new configuration comes to the support of this process. IACS will also make the cross control between entitlements and the lands needed for their activation. Therefore, the identification of agricultural lands and of animals remains fundamental for the new administration and control system.

In view of ensuring a certain type of audit to farms receiving CAP support an “agricultural advisory system” will be established which will be compulsory, as part of the cross requirement. In a first stage

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83

this system shall be limited to producers that receive direct payments of 15 000 euros per year or those with a registered turnover of 100,000 euros per year. The other farmers will be able to join the system on voluntary basis. Through feedback the advisory system will offer advice for farmers with regard to the standards and good practices that apply in the production process. Farm audit will imply the structuring and regularisation of stocks, as well as the measuring of materials and processes used at the level of the farm, defined as relevant for environmental protection, food safety and animal welfare.

According to negotiations, Romania can decide whether to apply the single payment scheme or the surface payment scheme for three years after accession.

If the single payment scheme is applied the regional implementation scheme should be applied in the same way as the other countries that have accessed EU, which means that uniform “entitlements” can be granted per hectare for any region. Regional ceilings should be calculated based on the parameters used for the calculation of direct payments (the core land surface, the reference productivities and the ceilings) and production quotas. In the case of Romania these amounts need to be adjusted by the gradual percentage of introducing the direct payments. National ceilings for arable corps, beef and mutton can cover by this single payment (if Romania decides in favour of this).

Romania can also opt for the single area payment ( hectare) for three years after accession (period in which it can improve the IACS in order to be able to administer the single farm payment scheme). At the end of this period the European Commission will assess the status of implementation and will decide if this form of payment will continue or if the single farm payment scheme should

be adopted. The single area payment needs to be limited to a determined annual financial package as follows: the sum of available funds for Romania for direct payments (in compliance with the single payment scheme) plus the other direct payment schemes in compliance with those mentioned in Annex VI and I of EC 1782/2003, calculated according to European regulations and adjusted by the gradual percentage negotiated for the period 2007-2016.

Within this scheme, the value of payment per hectare is calculated by dividing the national direct payments ceiling to the agricultural land area. The agricultural land area is the area defined by

12EUROSTAT (regardless if it is cultivated or not at that time) from the year preceding the accession, adjusted according to the criteria approved by the Commission.

If Romania adopts this scheme, according to negotiations payments can be granted per eligible areas starting with 0.3 ha. According to the specific objectives of the national agricultural policy, after the approval of the European Commission, the single area payment ceiling can be established at 1 hectare, provided that the cropland is maintained in good conditions (according to EU regulations)

If the single area payments exceed the national package granted to Romania adjustments must be done.

As a result of negotiations an increase of payments from the national budget was obtained as follows: Romania can grant complementary direct payments (within the single payment scheme) of up to 55% of the value of direct payments at the EU level in 2007, 60% in 2008 and 65% in 2009 and starting with 2010 maximum 30% over the level of payments in the respective year . The European Union grants an “exception to

12 the total area of arable land, permanent pastures and familly gardens

THE ADOPTION OF THE COMMON AGRICULTURAL POLICY ELEMENTS OF PRE AND POST ACCESSION IMPACT

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DANIELA GIURCA

the rule”. More precisely, between 2007- 2009, direct payments (complementary payments that can be granted from the national budget) can be partially financed from the rural development funds, the financial package for 2007- 2009. This contribution must not exceed 20% of the respective year's allocation but Romania can decide to replace the annual rate of 20% by the following rates: 25% in 2007, 20% in 2008 and 15% in 2009.

If Romania decides to apply the single area payment, it must have the capacity to finance eligible direct payments (according to Annex I of EC 1782/2003).

The value of these payments shall be established by mutual agreement with the European Commission according to the specific objectives of the agricultural policy in Romania. The support for 2007-2009 must not exceed the difference between the level of direct payments applicable for Romania according to art 143a of (EC) No 1782/2003 and 40% of the direct payments applicable at the level of EU in 2004.

Direct payments granted to Romanian producers (from the community

and national budget) must not exceed the level of the support granted to EU producers (in 2004).

In the next 2 years, Romania should decide how to allocate direct payments according to the national policy objectives, the margin being limited by the EU regulations and the results of negotiations. Because the integrated administration and control system (IACS), which is essential for the implementation of the single payment scheme will still not be fully functional in 2007 it is possible for Romania to opt for the application of area payments. Also taking into account the fact that for areas larger than 0.3 ha payments might prove to be rather like social aid than a real support for producers (according to the general agricultural census there are over 1 million croplands with an area of 0.3 hectares, which corresponds to an area of over 670 thousand hectares, therefore it is possible for the minimum area to be established at 1 hectare. Figure 6 presents the options for granting direct payments per area.

According to present assessments, one can assert that the introduction of the

Figure 6 Options for granting single area payments

Source: own evaluation

120

10896

8472

60485547

38

4556

65 5670

8498

113

127141

0

20

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Eu

ro/h

a

SAU over 0.3 ha SAU over 1 ha SAU over 2 ha

UAA UAAUAA

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85

single farm payment option will be more advantageous for Romanian producers if Romania manages to meet the institutional requirements for the implementation of CAP immediately after 2007, and especially, the IACS.

2.3.3. Assessment of the support granted through Common Market Organisations

Due to the lack of statistical data necessary for a realistic assessment, the support granted for the common market organisations was estimated only for products such as: sugar, tobacco, rice and fibre plants.

2.3.3.1 Estimation of community support for sugar

The Common Market Organisation for sugar is regulated by CR No 1260/2001 through which EU supports beetroot producers by a complex price support system and quota limitation system. Each year a target price is established for white sugar. For the price to be maintained around the value of the target price, intervention agencies can buy (in extreme cases) white or raw sugar (offered for intervention) at the intervention price, according to a standard quality.

The quantity of sugar that can be sold on the EU domestic market, or which is eligible for export restitution is limited by quotas. There are two types of quotas: quota “A” and quota “B”. Each member state is allocated an “A” quota and a “B” quota. What do the “A” quota and “B” quota consist of?

In the case of sugar, in order to compensate the intervention and export restitution budgetary costs processors are required to pay a contribution of up to 2% of

the intervention price for “A” and “B” sugar that is processed. If in one year this contribution is insufficient for covering the budgetary costs for sugar price support, an additional tax of up to 30% of the intervention price can be imposed for the “B” sugar quota. However, in exceptional circumstances, the contribution can increase to up to 37.5%.

In order to support beetroot producers, processors are required to pay a minimum price for beetroot. The minimum prices consist in a base price for beetroot, which is established every year for the beetroot with a sugar content of minimum 16%.

Because the contributions paid by processors cover almost entirely the EU budgetary costs, it is often said that the sugar industry is “self- financed”. One should mention however that in EU too, sugar is an expensive product because consumers pay a higher price compared to other agrifood products.

The year 2005 will bring important changes in the sugar policy, which will probably continue over the following 4 years. It is also possible for the policy in this sector to be revised in 2008. The policy reforming proposal in this sector concerns, among others:

- A substantial reduction of experts by diminishing subsidies granted for exports

- Cancellation of market interventions and decreasing the domestic sugar price and offering different payments to sugar producers.

The European Commission appreciates that the reform of the sector will keep sugar production within competitive parameters. The main loss will be registered by producers who, through the direct payments granted will benefit from a partial compensation for their loss of income. The main gain will be for consumers because it

THE ADOPTION OF THE COMMON AGRICULTURAL POLICY ELEMENTS OF PRE AND POST ACCESSION IMPACT

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DANIELA GIURCA

is appreciated that the price of sugar will decrease significantly following the policy changes. The tendency of job shrinking in this sector (a generalised tendency not only

13at the level of the EU but also in countries that became members in 2004 and in countries waiting for the second wave) will probably be preserved. This is why a retraining scheme was suggested for factories that will no longer be competitive. The main reform measures suggested are:

- to reduce the intervention price from 632 euro/to to 421 euro/to, gradually, over a period of three years

- to reduce the minimum beetroot price from 43.6 euro/to to 27.4 euro/to gradual on a three year period;

- to cancel public intervention and to introduce a private storing system;

- to reduce community production quotas by 2.8 million tons (from 17.4 million tons to 14 million tons) gradually, over a period of three years;

- to reduce export subsidies by 2 million tons (from 2.4 million tons to 0.4 million tons)

- to introduce separate support for beetroot producers (which will be able to cover 60% of the income losses)

- transferable quotas among member states operators;

- a retraining scheme of 250 euro/to designed for uncompetitive factories which will be eliminated from the market.

In these conditions it is possible for a series of conditions gained following the concluded negotiations on this chapter to be modified at the moment of accession. Also, meeting the set quotas can become an important objective as, if these quotas are not met, they can be lost or transferred to other member states.

;

The estimation of community support for this sector after 2007 is based on the hypothesis that until 2007 Romania will produce sugar at the level of the negotiated quotas and the Common Market Organisation in this sector will remain unchanged (CR No 1260/2001). Extraction yield will be 10.69 t beetroot/1ton of sugar (72 % compared to the EU average). No assessments of the budget needed for meeting the isoglucose quota were made.

According to assumptions presented in Table 13, we assessed the total budget designed for the production of the beetroot sugar quota both for producers and for processors (by applying correction coefficients according to the yield in Romania) as well as the needed budget for raw sugar quota. For the accuracy of assessments, attention was also given to the circuit of taxes within the self-financing scheme specific to this sector.

According to estimates, the total budget designed for the negotiated sugar quota is 68.93 million euros of which: 63.5 million for meeting the beetroot sugar quota, of which:

• 33.9 million for beetroot producers• 29.6 million for processors• the value of taxes included in the

self financing scheme is 7.3 million euros

For 2007-2009 the budget designed for this sector will amount to 206.7 million, which represents over 28% of the budget designed for market measures within the financial package for Romania.

If the strategy for the rehabilitation of this sector and for an efficient functioning of the integrated circuit reaches its objective, Romania will meet the negotiated sugar quota even starting 2007, and if the Common Market Organisation in this sector

13 in the last de decade (1990-2001) the number of sugar factories in EU decreased from 240 to 135 and wok places diminshed with 17000

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Table13 Working assumptions

Estimated productions in 2007 Tonns CR No 1260/2001 The total sugar quotz from sugarbeet out of which:

109164 Intervntion price for sugar beat producers euro/to sugar beet

47.67

- Quota A 99240 Sugar beet for quota A euro/to sugarbeet

46.72

- Quota B 9924 Sfecla pentru cota B euro/t sugarbeet

32.42

The quota for refined raw sugar 329636 Intervention price for sugar A 2003-2004 (yield 7.7 t sugar beat for 1 t sugar) euro/to sugar

631.9

The isoglucose quota 9981 Intervention price for sugar B euro/to sugar

392

Quota A 9790 euro/to sugar 12.76

Quota B 191 Levy for self financing scheme quota B) euro/to sugar

224.21

Additional levy for quota A euro/t sugar

13.0

Additional evy for quota B euro/to sugar

246.0

Support for processing raw sugar euro/to sugar

29.2

remains unchanged one can appreciate that this sector could be a beneficiary of integration, the amounts likely to be allocated being significant, as compared to the current situation.

If the sector policy changes (according to principles presented above) the sector budget will decrease significantly. If we operate only two possible changes in the above assessment, i.e. intervention price cut from 632 euro/to to 421 euro/to and beetroot minimum price cut from 43.6 E/ton to 27.4 euro/to and we consider that for Romania the negotiated quotas will decrease according to the general tendency forecast for EU (by 20% as compared to the current levels) the total budget for beetroot sugar quota might be 33 million euros, that is, 48% lower than the amounts previously assessed in the assumption that this sector policy remains unchanged. Beetroot producers budget would be 14 million euros, 65% lower than the first version and for processors, the budget might be 18.8

million euros, therefore, 36.5% lower than the first version. The budget designed for raw sugar processing will also decrease by probably 20% , by which this quota will also decrease.

If the sector policy changes according to the presented principles until 2007 then new negotiations might be started, which could decrease the already negotiated quotas by a maximum 20% and perhaps part of the compensations offered to EU producers and processors for diminishing the effects of the policy change can be obtained. The maximum value of these compensations that might be applied in the case of Romania could be:

- 2.2 million euros designed to nonperforming sugar factories for retraining

- 11.9 million euros in direct payments to beetroot producers

If the same principles used in the case of the other direct payments are applied (25% of the value of those granted in EU in 2007, 30% in 2008 and 35% in 2009) then

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the value of this separate support might amount to 10.6 million euros between 2007 - 2009.

It is possible however, for the processing negotiations not to result in these compensations if production does not increase between 2006- 2007 to the level of the negotiated quotas. The increase of sugar production and the sector rehabilitation by that date becomes imperative also in view of offering new grounds for negotiations at the moment of accession and ensuring a quantum of compensations similar to those to be granted in EU for the retraining and redeployment of non performing processing units.

2.3.3.2. Estimation of community support for tobacco, rice and fibre plants

To estimate the support granted through the Common Market Organisation for these products the assumption used was that these sectors would be prepared to produce the negotiated quotas within the community quality requirements starting 2007.

Table 14 presents the milestones for the assessment of community support for these products. According to assessments

Table 14 Working assumptions

Products Negotiated results Regulation Value of support million euros

Rice (EC) No 1782/2003. 0,063

Base area 500 ha 126.75 euro/ha Reference yield 1,681 t/ha Flax and hemp (EEC)No1164/89 (EC) No

2316/1999. 0,091

- National quaranted quantity

(EC) No 1673/2000

- Long fibre 42 tons 200 euro/to - Short fibre 921 tons 90 euro/to Tobwacco National guaranted quantity out of whici:

12312 tons (EEC) No 2075/92, 32,126

- Virginia 4647 tons 2980.62 euro/to - Burley 2370 tons 2384.23 euro/to - Oriental si semi-oriental 5295 tons 2384.23 euro/to

one can say that through the common market organisation for tobacco, this sector might receive a support amounting to over 32 million euros and for fibre plants the community support would be 91 thousand euros and for rice, 63 thousand euros.

The estimates for the value of the support needed by Romania for market measures for all analysed products exceeds 100 million euros annually (of which, 69 million for sugar, 32 million for tobacco and 0.15 for fibre plants and rice) in case the negotiated quotas are met.

For 2007-2009 the support needed for these products would amount to 300 million euros. As the financial package proposed for Romania includes a financial market support of 732 million euros, while 432 million euros will remain for the support of the other products (milk, fresh fruit and vegetables, wine, pork, beef, chicken, eggs, hops, walnuts, etc)

The possible structure and the value of these allocations for 2007 - 2009 is presented in figure 6.

If all producers and processors are eligible and if they meet the food safety, sanitary veterinary and fito-sanitary community standards, probably Romania will be in this case as well, a beneficiary of

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Figure 6 Structure and value of funds, necessary to support markets for the period 2007-2009

community funds.T h e M A P D R ( M i n i s t r y o f

A g r i c u l t u r e , F o r e s t s a n d R u r a l Development) budget for 2004 includes funds for market support (according to other principles than those stipulated in the Common Market Organisation) of about 32% of the total volume (about 300 million euros). If EU budget allocations. amount to 183 million euros in 2007 (25% of the allocated financial package) then the impact on producers and processors will be a negative one (about 120 million euros) if we compare the situation with 2004. If the amounts proposed within the financial market support package are equal for the three years then the negative impact will decrease.3. Some conclusions

Fiber plants, 0.274

Rice, 0.190 Sugar, 206.791

Tobacco, 96.378 Other products,

428.367

Even if macroeconomic assessments of financial implications of Romania's accession to EU are theoretically significantly positive, judging however at the microeconomic level, one might say that these “gains” especially immediately after the accession might be in fact losses or their

Source : own evaluation based on negotiations results

impact might be almost null or insignificant.These estimates assessed according

to the assumption that Romania is fully ready to access EU can be negatively affected to a significant extent if the real situation shows that quotas can not be met (and sensitive sectors such as sugar and milk are in this situation), quality standards can not be met (processing units and slaughterhouses). One should mention however, that transition periods negotiated for both products and referring to the quality standards might buffer possible post-accession shocks. Agrifood products will be designed only for the domestic market.

Hungary's few months experience as a member state comes to support this statement.

The impact not at all negligible of

prince increases on consumers will certainly be significant especially given that the sector will not accelerate the rhythm of reforms for improving competitiveness.

.CAP implementation on the current structure of the agrifood and rural sector might transform Romanian producers and processors from potential beneficiaries of

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PAC adoption into possible losers.A major problem is the choice of the

appropriate type of agricultural policy for the following years. The alternatives for the allocation of the limited budgetary resources are very restricted.

- according to the current model, mainly focused on stimulating production in a not yet functional and non-transparent market, where the risk of this stimulus being perceived in a wrong way and failing to attain its goal in two years when the rules change or

- towards programmes targeting the stimulation of competition and aiming to prepare producers regarding the Common Market requirements in the short lapse of time until accession

- towards the adoption of the same Common Agricultural Policy before accession

Arguments for and against can be identified in the case of any alternative presented.

Efficient use of agricultural budget resources by their reorientation towards programs stimulating the efficiency and less or not at all towards the support of prices or export subsidies would be essential.

The adoption of agricultural policy measures according to the CAP current model is not opportune in the current structure. Producers need to be better familiarised with the Common Market Organisa t ion and wi th the rura l development policy measures and especially with the requirements on the new standards referring to food quality and safety, to animal welfare and to the “code of good agricultural practices”. Also, the presentation of post-accession opportunities and risks are elements that should be promoted more in the media.

In this sense the support through agricultural counselling focussed on the

“ABC” of the new Common Agricultural Policy in the next three years and on the implications of its implementation would have a beneficial effect on gaining awareness on the need to change mentalities and might stimulate positive reactions for the increase of sector competitiveness.

Direct payments in the current support structure (2.5 million lei/ha, for small farms of up to 5 hectares, which will be offered to 4.4 million agricultural producers) need to adapt to the new revised CAP coordinates. Eligibility criteria for direct payments were let to the discretion of political decision makers, the minimum threshold being established by EU at 0.3 hectares. In this sense prospective assessments and simulations of direct payment allocations in different versions might offer an orientative framework to decision makers to avoid these payments turning into social support.

The assessment of the number and typology of semi-subsistence farms is extremely important because an important number might migrate to the category or commercial farms and substantial support can be granted fro the rural development budget.

Support for irrigation, seeds and use of higher quality genetic material and the agricultural credit for production is not compatible with the new CAP and the continuation of this type of support needs to be carried out with precaution in the following years.

Due to the fact that from 2007 on, CAP will guide itself according to different principles, that is, the preservation of environment such programs should gradually be introduced. The generalised scheme for the introduction of the single area payment conditioned by the e x p l o i t a t i o n o f c r o p l a n d s i n

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environmentally friendly conditions should also be promoted at the level of the agricultural producers.

Facilitating the creation of a competit ive sector by st imulating entrepreneurship in the rural regions might lead to a “natural selection” among the semi-subsistence farms having the potential of developing into commercial farms and towards opportunities of non-agricultural activities, especially for subsistence and semi-subsistence exploitations that have

slim changes of becoming commercial farms.

According to a study drafted by the World Bank experts in cooperation with Romanian experts (Romanian Food and Agriculture in a European Perspective, October 2003), the clear separation of rural and social measures from the agricultural policy instruments might create an appropriate framework for the stimulation of efficiency and competitiveness in the agrifood sector

Bibliography

1. A Pouliquen (2001) “Competitivitatea şi veniturile agricole în sectoarele agroalimentare din ţările central şi est europene,

2. ALEXANDRI, C., RUSU, M., SERBANESCU, C. (2003): „Studiu privind mãsurile posibile pentru consolidarea fermelor în contextul aderãrii la Uniunea Europeanã: cazul României”. Studiu elaborat în cadrul proiectului FAO TCP/ROM/0167

3. Ciupagea C coord, Marinas L, Turlea G, Unguru M, Gheorghiu R, Jula D (2004) „ Evaluarea costurilor şi beneficiilor aderării Romăniei la UE”, Institutul European din România - Studii de impact PAIS II

4. Comisia Europeană “A financial package for the accession negotiations with Bulgaria and Romania, Communication from the Commission, Brussels, 19.2.2004

5. Comisia Europeană, Directoratul General pentru Agricultură (2002)“Analiza Impactului asupra Pieţelor Agricole şi a Veniturilor a extinderii UE către ţările central şi est europene ”

6. D Giurca, C. Şerbănescu (2002) „Produsele agroalimentare româneşti în schimburile internaţionale- o analiză a competitivităţii în cadrul CEFTA” în volumul Economia creşterii agroalimentare I Davidovici, D Gavrilescu (coord), Editura Expert,

7. D. Giurca (2002) „Impactul extinderii UE asupra unor produse agroalimentare româneşti sensibile: sumarul analizei cost-beneficiu şi principalele probleme ale negocierii”, poster prezentat la al X-lea Congres al Economiştilor Agrarieni, , Zaragosa, Spania

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8. D.Giurca, M.Rusali (1998) “WTO Commitments of Romania: Problems upon EU Accession” Proiect Phare RO 9505-04-01.

9. Davidova, S., Giurca, D., Rusali, M., Hubbard, L. (1999): WTO Commitments and CAP adoption in CEECs: The case of Romania. MOCT-MOST 9, 2000 Kluwer Academic Publisher. Printed in Netherlands.

10. Dumitru M, Diminescu D. Lazea V (2004) “Dezvoltarea rurală şi reforma agriculturii româneşti”-CEROPE

11. Giurca D., Rusali M, (2003) “WTO Commitments and CAP Adoption in Romania: Model Results” în volumul “Romanian Agriculture and Transition Toward the EU” S.Davidova şi K.Thomson (coord), Lexington Books, 2003

12. Idu N. coord. (2001), “Costuri si beneficii ale aderarii la Uniunea Europeana pentru tarile candidate din Europa Centrala si de Est” , Institutul European din România Bucuresti,,

13. Leonte J(coord) Giurca D, Campeanu V (2003) 'Politica Agricolă Comună-consecinţe asupra României” Institutul European din România - Studii de impact PAIS I

14. Leonte, J.; Firici, C.; Burtea, V.; Balanica, S.; Preda, M. (1998) ”Bunăstarea economică (costuri şi beneficii) ale aderării României la UE”Proiect Phare RO 9505-04-01.

15. Manoleli D (coord), Giurca D, Chivu L, Câmpeanu C (2004) “Ierarhizarea priorităţilor de dezvoltare agricolă şi rurală în România. Influenţele noii reforme a Politicii Agricole Comune” Institutul European din România - Studii de impact PAIS II

16. MAPDR (2004) “Strategia de dezvoltare durabilă a agriculturii şi alimentaţiei din România”

17. Rusali, M., Giurca, D. (2001): Constraints and Perspectives of the Romania's Accession to the EU, within WTO Commitments on Agriculture.” The 77-th EAAE Seminar “International agricultural trade: old and new challenges.” Helsinki (Finland), August 17-18, 2001

18. Rusali, M.; Giurca, D. (2000) “Costs and benefits of EU accession for Romanian agro-food sectors”, PHARE Project RO 9804-03-01,

19. Rusali, M.; Giurca, D. (2001) “Impactul adoptării PAC asupra pieţii principalelor produse agroalimentare româneşti” Caietul 5. ESEN 2 un proiect deschis “Probleme ale integrării României în UE. Cerinţe şi evaluări”. Secţia de Ştiinţe Economice, Juridice şi Sociologice a Academiei Române, Grupul de reflecţie Evaluarea Stării Economiei Naţionale. INCE CIDE

20. Serbanescu Camelia (coord.), Alexandri Cecilia, Davidovici I., Gavrilescu D., Luca L., 2003- Macro-economic framework for the agricultural policy working paper for „Strategy for Agriculture and Rural Development in Romania” FAO şi MAPDR, Bucureşti

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RURAL DEVELOPMENT AND AGRICULTURAL POLICY IN THE CONTEXT OF NEGOTIATING THE EUROPEAN UNION ACQUIS

*Marius Spiridon

Abstract: Elaborated during the first half of 2004 as an UNDP-financed project and never published in a complete form before, this study documents the failures of prolonged and significant state interference in the agricultural sector in Romania, focusing on the post-communist period. Given the unavoidable facts that in the absence of private property it is impossible to have either a rational allocation of resources and the right incentives, we reach the conclusion that the failures of the Romanian agriculture were not at all accidental, but inherent in its statist design. An assessment of the European Common Agricultural Policy and its potential impact on our agricultural sector is provided in the last part of the study.

1. Introductory remarks: why adopt the acquis?

Romania is currently engaged in the effort of concluding the accession negotiations with the European Union.

thAgricultural issues, dealt with in the 7 negotiation chapter (“Agriculture”), represent one of the toughest challenges for our endeavour, taking into account at least these factors:

- the European negotiators face a relatively big country (as Romania likes to call herself, “the smallest among the big countries”), with a large agricultural sector and a large part of the population employed in agriculture, and relatively poor. Given the nature of the European Common

1Agricultural Policy (CAP) , based on significant transfers and tight regulations, and the working of the Union's budget, from which 80% goes to agriculture and regional development (45% and 35%, respectively), it becomes obvious that:

a) Romania's accession would imply huge transfers of European funds to the agricultural sector (therefore a burden for European taxpayer, a “financial challenge”);

b) Romania should adopt and strictly enforce European agricultural regulations, otherwise the whole intricate fabric of the CAP will be disrupted (a “regulatory

2challenge”) .The first part of the challenge is

already solved: the financial package offered by the EU is “generous”, so Romanian authorities called it.

- as far as the Romanian side is concerned, “the regulatory challenge”, the task of harmonising domestic legislation with the European acquis, is in itself, by its sheer size, a “mammoth task”. But to have an idea of what is in stock for the authorities, we may add that harmonisation is just one part of the process, the others being the implementation part, to be successfully fulfilled only if Romania solves its “administrative capacity” shortcomings, and

* Marius Spiridon is a researcher and project coordinator at the European Institute of Romania as well as a lecturer at the Academy of Economic Studies in Bucharest, where he teaches subjects related to Comparative Economic Systems, International Trade, and European Integration. 1 Which will be briefly explained later on in this study.2 It seems that Turkey's unsuccessful efforts to become a member could be accounted for by the EU budgetary dynamics: Turkey is “too big and too poor”, a too heavy burden for Europe. The geographical considerations, although not entirely insignificant, are perhaps mere byplay in the whole picture

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the absorption capacity (the ability to effectively use the funds allocated, which very often implies complementing the European money with national money) playing a part at least as important as the harmonisation. By its efforts to harmonise legislation and reform the administration, Romania should persuade the Europeans that she is able and deserves to become a member of the EU, representing an “asset”, not a “liability”. There are no other means to do it.

Now, is there any argument, any benefit for Romania deriving from adopting the acquis?

Several answers come to mind while seriously considering the above-mentioned problem: ! The first comes by looking at the

general picture of the economy in Romania and in the EU. It is clear that the economic system in the EU generally is relatively much freer than what we have in Romania, therefore more business-friendly and conducive to production and prosperity. This fact is empirically illustrated by the Index of Economic Freedom in the World, which ranked Romania (in 2001) 116 among 124 nations (getting a 4.7 mark, out of 10). To be sure, Romania has made some progress since, but the fact remains that almost all that progress was achieved as a result of accession negotiations and not much has yet been done to catch up with the

3EU countries . Accession, if understood as a

systemic transformation, and not only as foreign aid, will certainly move the Romanian economy toward a more business-friendly economic environment,

this being generally the sine-qua-non ingredient of economic development. From this vantage point, even if agriculture were not a strong point of the European system, the agricultural acquis would not be too heavy a price to be paid for achieving a critical mass of reforms;! Nevertheless, Romanian agriculture

has been so heavily regulated and subsidised that it is out of question to believe that even the CAP could make matters worse;! On the contrary, compared to our

national agricultural regime, the CAP is just a m a r k e t - b a s e d , i n t e r v e n t i o n i s t arrangement. Its main aim is to manipulate the market in order to achieve certain results deemed good at the European level. But the basic structure of production in the EU is represented by privately owned farms and enterprises, on which it is super-imposed an entire web of regulations and subsidies. This aspect explains the Union's insistence on privatisation, land market, and rural development in Romania. ! The twin challenge of WTO

Romania– Some general data (1999) Too big and too poor?

Population: 22.5 mill. Area: 238 391 km2 Rural area: 212.7 thousand km2 (89% of country’s area) Total agricultural area: 14.8 mil. ha. Arable land: 9.3 mill. ha. (63% of the agricultural area) Rural population: 10.14 mill. (45,1%) Population employed in agriculture: 37.5% Rural population employed in agriculture:70% Agricultural income in total rural income: 65% GDP/capita: 3.964 $ Agriculture’s share in GDP: 11,4% (2000)

3 th th Great Britain is the freest economy in the EU (occupying the 4 place in the world with a mark of 8.2), followed by Ireland (7 th th thplace, 8.0) and the Netherlands (10 place, 7.8). France and Greece are the laggards (place 44 in the world, 14th and 15 in the EU

with the same mark, 6.7). th thThe freest economies among transition countries are Estonia (16 , 7.5, an impressive performance), Hungary (35 , 7.0), and the

thCzech Republic (39 , 6.9).

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negotiations and enlargement could lead to a more rational approach toward agriculture in Europe. Romania can only benefit from such a move.

2. Romanian agr icul ture in transition: what went wrong?

2.1 The socialist heritage: Why socialist agriculture was inefficient?

Before 1989, Romania was one of the most autarkic and statist economies in the region. Agriculture was no exception. In 1989, the structure of land ownership was as follows:

- state sector: 30%;- “collective” sector (production

cooperatives): 55%;4- private sector: 15% .

Three main points (concerning results, private property, and socialist inefficiency) deserve to be briefly highlighted at this stage.

a. Results

As the state was the overwhelming actor in the sector (85% of ownership concentrated in state's hands), it is obvious that it had a major incentive to make the results appear better than they really were. Socialist “achievements” had to be seen by everybody, inside and outside the country. This is a compelling reason not to make extensive use of the fake statistics of the period and to refrain from pronouncements such as “production has decreased in Romania after 1989” or “the standard of living is now much lower than before the Revolution.”

The socialist policy destroyed the villages, created powerful interest groups,

and encouraged gifted young people to leave the rural area, leaving behind an aged and ageing population. Production was a complete mess, the structure of production being distorted by irresponsible decisions aimed at almost complete autarky. (see also point 3)

b. “Private property”

Particular attention should be paid to the last information concerning land ownership: 15 % private property.

The image induced by this percentage, that of the existence of a private sector or field in agriculture is a misunderstanding. The truth is different: the whole organisational structure of Romanian agriculture was socialist through and through, with small plots of land around private homes in the countryside and larger ones in the mountain regions left in private administration. Perhaps this move prolonged the life of the regime, because those small plots effectively provided food for rural families and prevented hunger, very often being the case when these private plots supplied the rural and urban population with various products on the black market.

In a word, there was no private market, no private environment. As the data tell us, 85% of the land was in the hands of the state; there existed no land market whatsoever, the downstream and upstream of agricultural production were also monopolized by the state. No small, successful private entrepreneur could have ever expanded his business in such an environment. And that was precisely the point: not to expand, but to survive. The centrally planned, big state agriculture was the one that mattered.

4 See Irina Râmniceanu, Probleme structurale ale agriculturii românesti în perspectiva aderãrii la Uniunea Europeanã, Institutul European din România, Working Paper Series, no. 6, Bucharest, 2004, p. 13.

,

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c. Inefficiency

A crucial aspect is related to the inefficiency of the socialist agricultural system. Two explanations are provided:

i) The received, “mainstream” explanation connects agricultural failure in socialist countries with the “too large size” of state farms. Large farms have a series of disadvantages:

a) the policy of lifetime employment for workers makes them immune to firing, the ultimate resort for enforcing effort;

b) the large size of the labour force and fields make monitoring work behaviour extremely difficult;

c) the policy of equal remuneration breaks the link between effort and reward,

5heavily penalizing work .If we add the pervert incentives

governing managers' and planners' behaviour, the picture is complete.

ii) Even if correct, the above explanation overlooks a fundamental problem of collective ownership: the possibility to make rational economic decisions in a socialist ownership regime.

It is of course true that socialism faces a grave incentive problem. But that is not all. Is it not possible, by changing people's mentality, to overcome that problem and make socialism effective? Moreover, is it not possible, by downsizing the state farms, to gain in efficiency? The answer to both these questions is an emphatic “No”.

Almost all factors of production have alternative uses, i.e., could be involved in various production ventures and could bring various consumers' goods in existence. As the factors of production are scarce (we live in a world of scarcity, where the sphere of ends/needs is much larger than the sphere of means/resources), only some consumer

goods can be produced. It is obvious that, if waste is to be prevented, only the most important of the final goods should claim the factors of production available. In this world, we have only one possibility to figure out what those most important goods are: by comparing the expected proceeds to be obtained by their sale to consumers or other entrepreneurs with the prices to be paid for the inputs necessary for their production. In this profit-oriented economy, only the most profitable activities will be undertaken, those resulting in generating the most important goods in the eyes of the future consumers. The over-optimists will suffer losses, the penalty for not forecasting co r rec t l y consumer s ' needs and squandering scarce resources. The successful entrepreneurs will make profits and they could expand their activities. Only successful forecasting, over and over again, would maintain and expand one's share in production and ownership.

No in-kind calculation is possible. Only a world with private entrepreneurs, projecting their plans in the material world (factors of production) by means of private, voluntary exchanges, mediated by money, would do the job. Socialism destroys the possibility to meaningfully answer the question: “where to invest my resources?” by abo l i sh ing p r i v a t e p rope r t y ; interventionism destroys it by abolishing (for enterprises in its sphere of action) the profit criterion.

The final answer is that by abolishing private property and profits, neither downsizing, nor a change in mentality, would help to extricate socialism from chaos. No planner and no manager would ever know if he has made a good or bad investment decision. He has no clue whatsoever whether to expand, decrease, or

5 See Zvi Lerman, Csaba Csaki, Gershon Feder, Land Policies and Evolving Farm Structures in Transition Countries, World Bank, 2002.

97

to liquidate an undertaking. It is only logical that planners and managers together would do what they can rationally do: engage in lobbying, political manoeuvring, and

6bettering one's lot generally .

2.2 First stage of transition: 1990-92

The failure of socialist management could have been cured only by creating a truly private economic environment, based on private ownership of land, transferable (exchangeable) titles to land (what is called “the land market”), full privatisation of upstream and downstream activities, removal of price-support schemes and subsidies, and a free trade and exchange-rate policy. Nothing of the sort was even attempted. The main events in the beginning of our transition were:

1. the dismantling of production cooperatives. It is worth pointing out and symptomatic for Romanian transition that this change was brought about single-handedly by the former owners and/or their heirs (dispossessed during the 1948-1962 period), and not by any ideological commitment to reform on the part of the political class.

2. the political class recognized the new reality by adopting in 1991 a land law.

The outcome can be seen in table no. 2.

6 See Ludwig von Mises, Human Action, Ludwig von Mises Institute, Auburn, 1999.

Looked at from a quantitative point of view, the process was impressive: the former production cooperatives (around 5 000) were replaced by 4 million persons, the new owners of a sizable area of 8 million ha. The other resources of the cooperatives have been either sold or given back to the owners (animals), or transferred to agricultural associations (premises, machinery) or simply demolished, destroyed, or stolen.

M a n y e x p e r t s d e e m t h e restitution/privatisation process outlined above as the root cause for land fragmentation and, as a consequence, for low productivity and inefficiency in agriculture.

The untold part of the story of this “original sin” is illuminating and significant. It can be summarized by saying that all that impressive privatisation process was nothing more than extending the 15% of the land held in nominal “private property” before 1989 to 4 million nominal “owners” of 8 million ha. of land. That was all that happened, almost all the other features of the former system being replicated in another form. The former socialist state collapsed, but the statist mentality survived and condemned agriculture for one more decade to stagnation and poverty. A drought and bad results in 1992 were enough to

Table no. 1: Land fragmentation in Romania 1948/1998 (%)

Exploitation 1948 1998

< 1 ha. 36 % 45 %

1-2 ha. 27 % 24 %

> 2 ha 37 % 31 %

Grand total 100 % 100 %

Source: Emil Tesliuc, Romanian Agriculture: Achievements and challenges, Tranzitia economicã în România: trecut, prezent si viitor, Editura Economicã, Bucuresti, 2000.

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make the statist agriculture lobby to call for renewed action on the part of “the heavy

7hand of the state” starting in 1992.What justifies an economist to say

that no real privatisation was undertaken but a mere extension of the old “15%” regime is the lack of a private environment in agriculture. The features of the “new” statist environment were:

1. delaying the distribution of legal titles to land (see tables 2&3);

2. no possibility to exchange land on the free market (no “land market” in existence). This aberration continued until 1998;

3. practically all inputs, i.e. the “upstream sector” (mechanisation services, fertilisers, pesticides, certified seeds, irrigation (what was left) remained state monopoly;

4. all distribution channels and the “downstream sector” generally (storage, processing etc.) were also left in the hands of the state;

5. a not insignificant part of the land remained state-owned;

6. the inefficient public court system was slow at enforcing (if it had what to enforce at all) legal titles.

Table no. 2: Titles to land to be issued and effectively issued (2003)

Type of land No. of applications No. of titles issued

Agricultural land 4,223,067 3,897,176

Forest land 540,660 438,803

Table no. 3: Total land area requested and covered by titles (2003

Source: Ministry of Agriculture

Source: Ministry of Agriculture

Type of land Requested area (ha.) Area covered by titles (ha.)

Agricultural land 10,113,704 8,784,414

Forest land 1,755,765 1,256,782

Table no. 4: Evolution of the number of land titles issued (%)

Source: Dragos Negrescu: “Un deceniu de privatizare in Romania”, 2000

1993 1994 1995 1996 1998 1999 2002 2003

17.3 37.1 56.8 67 74.9 85 91 92.6

7 See Emil Tesliuc, “Romanian Agriculture: “Achievements and Challenges”, in Tranzitia economicã în România: trecut, prezent si viitor, Editura Economicã, Bucuresti, 2000.

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With small plots of land, few legal titles, no possibility to buy and sell land, with the state in control of both ends of the production process (means of production and marketing infrastructure) and of 40% of agricultural land, no access to credit, with a severe drought and no time to adjust, the agricultural sector did what it could: the production dropped in 1992 and the state stepped in. We forgot to mention that, given the general economic policy stance, the industrial sector production dropped too, another blow for the agricultural production on the demand side. But strangely- no one called for eliminating the state as manager of the Romanian industry and for its privatisation.

2.3 Second stage: 1992-97

The main developments of this period are the following:

a) the “15%” policy of maintaining isolation and fragmentation of nominally

private land in a statist environment continued;

b) the poor results of delaying reform in the other sectors of the economy (first and foremost in industry) had repercussions on agriculture: first, it initiated a migration from urban to rural areas (see table no. 7); second,

8 Many of these associations reflected the better access to mechanisation devices of the old “elite”.

Table no. 5: Fiscal and quasi-fiscal support (%)

Source: Tesliuc, op. cit.

1991 1992 1993 1994 1995 1996 1997 1998

Budgetary Support for Agriculture

8.9 23.9 11.6 13.8 13.2 15.1 11.0 10.3

Quasi-Fiscal Support for Agriculture

0.0 0.0 2.6 3.7 6.3 6.0 0.5 0.5

Budgetary and Quasi-Fiscal Support

8.9 23.9 14.1 17.5 19.5 21.0 11.5 10.8

it kept depressed the independent, non-governmental demand for agricultural products; and third, as the share of food expenditure in the budget of a Romanian was significant, the state tried not to lose control of agricultural supply and prices as a means of staving off social unrest in the country, especially in urban areas;

c) to implement the strategy, the Ministry of agriculture effectively became “the ministry of big state farms”: fixed prices were imposed for meat, milk and wheat; a system of state holdings (“integrators”) was created and huge fiscal and quasi-fiscal transfers were put in place (see table no. 2). The big state farms benefited from this arrangement, together with a part of

8agricultural associations , small private owners being left out. In this way, big state farms became the main supplier of agricultural products to urban markets.

d) this policy of favours granted to big state farms and agriculture found no place for a rural development policy.

e) the problem of land fragmentation was tackled through the attempt to create a Land Agency (never set-up in fact), to buy the small plots of land and to resell them later in larger units.

The whole experiment ended in bankruptcy. The big state farms, devoid of

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any possibility to allocate resources rationally and without any incentives to manage resources carefully (see point 2.1) proved able to waste everything: credit lines from the National Bank of Romania; direct financing from State Ownership Fund; and benefit (in vain) from debt cancellation. Agriculture financing became a threat for the banking system, for the government budget, a major source of inflation, and a liability (state farms went so heavily in debt that they were not any more “assets” to be sold but

9debts, liabilities) . In the 2002 National Plan for

Agriculture and Rural Development, an official document, the general agricultural policy is said to have been so designed as

“to come out to a shortage of foodstuffs in order to show that the private ownership is not compatible in Romania. It seems that this was also true when the Land law was applied without the insurance of mechanical means for carrying out the farming activity. On those occasions, it was nurtured the belief that the private sector

9 The example of Banca Agricola is a classic.10 See the National Plan for Agriculture and Rural Development over the 2000-2006 period under the EU Special Accession Program for Agriculture and Rural Development (SAPARD), revised version, July 11, 2002, p. 33.

would not be able to ensure the food supply for the food security of the population and that the old structures would be restored

10again.”

2.4 Stage 3: 1997 - 2000

The financial difficulties wrought by previous agricultural policies were enough to persuade the new administration that something had to be done, no matter the ideological commitment (or lack of commitment) to reform and private property.

1) the policy of lavish, hidden subsidies for the big state farms has been discontinued.

2) agricultural prices have been freed (the first important step in the right direction) and a new, more “neutral”, subsidy policy has been elaborated (by means of vouchers, which were not so discriminatory against the small landowners as the old methods). The ministry of agriculture ceased to be “the ministry of big state farms”.

Table 6: Privatisation of Agricultural and Food Industry

Source: SOF Press Release, July 1999 (P=privatised, L= liquidated)

Type Of Enterprise

Total Dec - 97 Dec-98

Jul -99

Number P L P L P L

State Farms (Former IAS)

517 0 0 0 0 14 17

Poultry And Pig Farms

114 21 42 37 57 43 65

Storage Companies

71 0 0 19 0 52 5

Service Providers

1758 1033 na 1430 43 1628 50

Food Industry

428 na na 216 na 266 25

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3) the most important action was the consecration in 1998, almost 9 years after the Revolution, of the freedom to exchange land.

Perhaps those in power at that time had high expectations concerning the results of those measures. What happened illustrated the truth highlighted earlier in this study, that only private property has means and the incentives to undertake a radical transformation of the economy in general and the agricultural sector in particular.

What the governants did was to change the structure of incentives, which was good, but not enough. Freedom to buy and sell land and price liberalization are important steps in the right direction. But here is how the general picture looked like and why the reform failed:

a) first, we need to look at the migratory flows between urban and rural areas (see table no. 7)

The key to understand the failure of

Table no. 7: Migratory flows between urban (U) and rural (R) (with residence change)

Source: National Plan for Agriculture and Rural Development

Direction 1991 1992 1993 1994 1995 1996 1997

R→U 10.7 9.4 6.9 6.6 5.9 5.9 5.6

U→R 2.5 3.8 3.4 4.7 5.8 6.7 7.9

R balance -8.2 -5.6 -3.5 -1.9 -0.1 +0.8 +2.3

the policy mix chosen after 1997 is to put agriculture back into context. The inflationary, populist, expansionist, ultimately unsustainable economic policies conducted at the beginning of the '90s attracted population from the rural area. By the middle of the decade, the effects of this populist program were visible: the lack of

real reform hit back and firing and poverty followed in its wake for the urban masses. For many, transplanted or not from the communist villages, the only way out was to go back in the countryside, where they could rely on subsistence farming, and where thei r t iny “unemployment compensation” would have been more valuable. The trend continued after 1997, as reforms were still missing from the general

11landscape .

b) for these people and for the peasants already there, the small plots of land represented a valuable asset, one affording them to live. Free prices for their meager agricultural surplus were nothing new (they sold their products at free market prices even before, because they did not benefit from subsidies). Only freedom to buy land really benefited them. But even this freedom was just a potential advantage, given the fact that almost everybody was in

the same, subsistence situation, with no alternative but to live from the proceeds, a definitely not feasible move.

c) the necessary and sufficient steps for agricultural reform would have been:

1. substantial systemic change (privatisation) in the rest of the economy. This is the only solution for providing real

11 Again, the dynamics is correctly described in the National Plan for Agriculture and Rural Development: “generally, it is about a return of initially migrated population, a return which is not due to the increase of rural quality life, but is the consequence of the difficulties encountered by the unemployed persons in the urban areas as a result of the restructuring of the economy”. In fact, it was the lack of “restructuring” that had to be blamed.

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alternatives of gainful employment for “peasants” and real, non-politic demand for agricultural products, supplying the successful agricultural entrepreneurs with the means to expand their businesses (now finally possible by the establishment of a land market).

2. privatisation of the big state farms and marketing channels. As one can see in table no. 6, privatisation of big farms was left to other, more willing people to do it. For cereals, production and storage remained in the hands of the state.

The state farm segment continued to produce with the help of high-interest loans from the banks (and subsidies), and to sell to the urban buyers, accumulating high debts and bankrupting the creditors. No natural relation private suppliers-urban buyers could develop due to these circumstances, and the private segment remained in isolation. The handful of vouchers was to no avail.

d) the legal system had its share in delaying the transformation. Besides the land titles, so slow to come, transactions in land were made more difficult by the high notary and other taxes and by the expensive access to arbitration and enforcement services.

e) Moreover, the irresponsible borrowing policy of state farms, well connected to the banking and state elites, backed by explicit or implicit state guarantees, left little credit for the small landowners, who were also crippled by the lack of property titles.

3. The European Challenge

We pause here with the independent accounting of agricultural evolution in Romania because, toward the end of the

decade, a powerful factor appeared in the picture, a factor of change: European integration.

Romania submitted its application for membership to the EU in 1995. In 1999 Romania was given the status of a candidate country and began accession negotiations in 2000.

Romania is now, in 2004, knocking at EU's doors. Perhaps agriculture is one of the main puzzles to be solved before celebrating accession. The agricultural dossier is arguably the most difficult among the eight left.

With all the intricate details of the Common Agricultural Policy, we should not lose sight of the fundamental issues in Romanian agriculture: fostering market relations in the rural area and, paradoxically, as we have argued before, reforming the rest of the economy (above all the industrial sector) as a necessary condition for agricultural reform. After all, our concern here is agriculture and rural development in Romania, the European requirements being a “context”.

Before reviewing our efforts to negotiate and implement the CAP, assessing the impact of the European agricultural policy on our rural life and concluding, a short description of the working of the CAP would be useful.

3.1 The CAP in brief: what is it about?

This is not a standard, book approach, but an attempt to look to European agriculture from the point of view of its capacity to move things forward, in the right direction in Romania.

Here are some general data about European agriculture:

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A fundamental insight into the nature of CAP is provided by the above box: EU is 1) a rich entity; 2) with a small population employed in agriculture; and 3) an agricultural sector insignificant as a relative contribution to the overall wealth. All these features are dissimilar compared to Romanian realities.

And indeed, European countries did not refrain from supporting agriculture. The essence of the CAP consists in huge transfers from the relatively free, private, efficient sector of the economy to the tiny agricultural sector. The concrete form of support varied over time and the CAP is in a process of transformation even now.

Leaving aside irrelevant details, the scheme comprises, in a nutshell, the following elements:

- a min imum pr ice , ca l led intervention price, set yearly by the Council of Agricultural Ministers for all the main foods. All the problems faced by the CAP flow from this political decision: the prices set were too high (often a third higher than international prices). As the EU authorities committed themselves to buy up any produce offered by food traders and processors, it is obvious that this

European Union (EU -15) – General data (1999) Population: 374.6 mill. Area: 3.191.000 km2

Rural population: 17.5% Population employed in agriculture : 5% GDP/capita: 18.075 $ Utilized agricultural area (Arable land): 40.6% Agriculture’s share in GDP: 2% (2000)

intervention price became the market price. The arrangement was not sustainable without o series of expensive accompanying measures:

- intervention stores, where the “surplus” bought flowed (processed foodstuffs, not raw commodities). Intervention prices being too high, production skyrocketed and the stocks grew larger and larger, with storage costs also

12higher and higher .

12 In 1986, only for butter, buying up and storage of surplus cost the Union taxpayer more than 2 billion dollars. The Council of Ministers spent an additional 4.5 bln $ to dump 1.3 million tonnes of butter on the international market. A tenth of the stockpile so badly deteriorated that it was inedible even by animals. The high cost of these price-setting-and-support policies explains why un-developed countries did not adopt such unnatural schemes and why such proposals advanced at the international level by the latter group of countries went unheeded. One CAP was enough.

1972 1986

3.5 22.4

1978

17

1994

45

Table no. 8: The bill for market intervention operations (billion $)

Source: Brian Gardner, European Agriculture, p. 66

Agricultural expenditure regularly consumed two-thirds of the EU budget and stabilised lately at about half the budget; in nominal terms the increases were significant (see the above table), but other budget items grew rapidly, especial ly regional development funds.

- export subsidies. Pretty modest at the beginning, the export subsidies grew over time (see the footnote for an illustration on butter), in the desire to hide the effects of intervention, captured by such expressions as “mount butter” and “lake wine”. In 1990, the Community spent 19.6 billion for export subsidies.

- a highly protectionist trade policy. Free trade in agricultural products would have allowed European consumers to buy from outside producers, making unbearable the cost of the CAP. To avoid that, a minimum import tariff was imposed, a

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threshold price, higher than the EU internal 13market price. A variable levy , equal to the

difference between the threshold and the world price, effectively isolated the European market from the rest of the world.

This agricultural regime of subsidies enta i led of course a number of consequences:

a) huge costs for the taxpayers and consumers;

b) degradation of the environment, the outcome of intensive agriculture, and products with a high concentration of chemical elements (due to the heavy use of pesticides, fertilisers etc.);

c) conflicts within the EU. After long and hot debates, Great Britain obtained a rebate, due to its disproportionate contribution to the EU budget.

d) conflicts outside the EU. European subsidies really destabilised world markets, becoming a source of intense conflict with the USA and other exporting countries (the Cairns Group).

e) the export subsidy policy developed into a foreign aid doctrine, a powerful force in creating dependence in the developing world and preventing the reconstruction of a viable agricultural sector there by means of free or low cost European products.

f) extensive fraud and corruption.g) the CAP benefited large farmers

rather than small landowners. 80% of EU support goes to the largest 20% of the farms.

The CAP is usually presented in a principles-and-objectives framework. It is easy to recast our presentation in such a form. The principles of the CAP are: 1) a free internal agricultural market; 2) community preference; and 3) financial solidarity. The second is but an expression of the highly protectionist policy, while the third catches

the common financing of agricultural expenses (EAGGF)).

The objectives feature such goals as: 1) to increase agricultural productivity; 2) to ensure a fair standard of living for the agricultural community; 3) to stabilise markets; 4) to assure availability of supply; and 5) to ensure reasonable prices to consumers. The high intervention prices provided tremendous financial incentives for farmers to increase productivity. They succeeded in this task (it was a private sector), by investing resources in research & development, making heavy use of fertilisers and pesticides, increasing the number of tractors (and mechanisation services generally), using hybrid seeds and advanced methods of disease control and, nowadays, taking recourse to the

14revolutionary methods of biotechnology .But the CAP did not succeed in

achieving the other goals, especially the foremost goal of raising farmers' incomes (at one time it was mentioned the achievement of a “parity of income with the other sectors”). The 80-20% is revealing in this respect. A signal failure was registered also

thregarding the 5 objective.Given this context, a series of reforms

has been undertaken during the '80s but especially during the '90s. The 80s added production quotas (too large to be effective), while the '90s tried more but achieved little:

- the MacSharry reform (1992) operated a small reduction in support prices, promptly compensated by new direct payments linked to historic yields (coupled with production). Nothing changed, except the fact that farmers now had to apply for a part of their revenue to the government, a step many farmers considered humiliating;

- Agenda 2000 (agreed in 1999) continued the MacSharry approach of price

13 The variable levies were removed us a result of tariffication.14 See Brian Gardner, European Agriculture, Cambridge University Press, 1999, for a description of these productivity-enhancing

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cuts compensated by direct payments. The pressure put on the CAP by the

environmental and consumer protection groups and the need to reform in the expectation of another WTO negotiation round resulted in a series of transformations meant to dress CAP in new clothes:

• environmental standards have been added;

• a new, “second pillar” (Rural Development), expanded the traditional, “subsidies for production approach”, designed to recognise the environmental, social, and cultural aspects of farming. Pillar II support is decoupled from production, b e i n g m o r e i n l i n e w i t h W T O requirements.10-15% of total agricultural support falls into this category.

• the agricultural budget ceased to be open-ended (ex-ante ceilings were added).

Because of i t s product ivi ty-enhancing potential, genetically modified organisms and biotechnology have received a rather unpleasant treatment in Europe until now. The latest evolutions tend to show a more tolerant EU in this area.

- the reforms agreed in June 2003 in view of enlargement.

Direct payments will start at 25% of the present level (EU-15) in 2004, and will reach 30% in 2005 and 35% in 2006. Starting in 2007, the percentage increase will be 10% per year, the parity with the support for the EU farmers being achieved in 2013.

The new member states have the possibility to top-up EU direct payments with national subsidies, but within strictly defined limits (first option: 55% of EU level in 2004, 60% in 2005, 65% in 2006 and no more than 30% of the phasing-in level in the relevant year after 2006; second option: the old national support increased by 10%). The payments should not be higher than 100% of EU-15 level of direct payments.

As for rural development schemes, special additional financial aid will be granted and some exceptional measures created (a higher proportion of EU co-financing, support for semi-subsistence farms etc.).

All these (quotas, set-aside measures, budget ce i l ings , an imal wel fa re , e n v i r o n m e n t a l s t a n d a r d s , r u r a l development, decoupling, direct payments, export subsidies etc.) made the CAP perhaps the most incomprehensible among all EU policies. And the most difficult among all accession negotiations dossiers.

3.2 Negotiations

The level of support for European farmers did not diminish with the adoption of reforms; it even slightly increased in real terms. But, to maintain that level, the EU had to engage in an “exercise in survival”, meant to transform agricultural policy so as to satisfy the demands of environmental, social, consumer protection and other powerful lobbies. Bureaucracy expanded as well as the complexity of regulation. Many of these regulations, extremely costly and intricate, benefit the large farms, but, at the same time, they are instrumental in production control. Complying with these sanitary, veterinary, animal welfare, phytosanitary, quality, environmental etc. standards, in both harmonisation and implementation aspects, is not an easy task.

The standards just mentioned are going to be essential for Romania's capacity not only to conclude negotiations in this field (and for all chapters), but also for our ability to absorb European funds and to export on the European market. A non-compliance in this field would leave Romanian farms in isolation.

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The abi l i ty to absorb rural development funds depends mainly on two elements: the availability of domestic (public or private) funds and the capacity to elaborate complex projects, in line with the European requirements in this area. These bureaucratic conditions will not be within our reach without major changes in Romanian agriculture and economy.

The agricultural chapter deals in a systematic way with the European acquis in the field. We will sketch the main points, highlighting the European Commission's opinion on the progress Romania made in adopting and implementing the acquis, opinion expressed in its last (2003) Regular Report:

1. Horizontal issues:a) implementation of institutional

and legislative requirements regarding the EAGGF;

b) statistical issues: Romania launched preparations to establish the Integrated Administration and Control System (IACS), to set up a Land Parcel Identification System (LPIS) and to develop the Farm Accountancy Data Network;

c) organic farming: establishing certification and inspection services in this area continued;

d) quality policy. The list of protected geographical indications has been adopted.

e) trade mechanisms. 2. Common market organisations. 13 products have been designated as

of “national importance” for the 2003-6 period. Some progress has been made, but more has to be done in such areas as setting up inter-professional organisations, regular market and price monitoring, implementing regulations regarding quality criteria, developing administrative structures for the management o f common marke t organisations.

3. Rural development and forestryNo significant progress has been

reported in agri-environmental measures. The accreditation of the SAPARD

agency in 2002 will improve funding for rural development measures, the priorities being processing and marketing of agricultural products, development and improvement of rural infrastructure and technical assistance. The financing amounts to 350 million euro for 2000 and 2001. SAPARD is a useful national experience in managing funding within a EU framework of rules.

Rural development includes such measures as:

• improvement of processing and marketing for agricultural products;

• improving the structures for quality, veterinary and plant-health control, and consumer protection;

• development and improvement of rural infrastructure;

• management of water resources for agriculture;

• investment in agricultural holdings;• support for environmentally-friendly

methods• development and diversification of

economic activities and developing 15alternative sources of income .

4. Veterinary and phytosanitary measures. Romania's efforts to harmonise legislation with the provisions of the acquis is appreciated, but “enforcement is hampered by very limited management and administrative capacity. […] Romania should focus further efforts on reinforcing the administrative capacity to implement the acquis, in particular in the veterinary and phytosanitary fields.”. Perhaps this fact explains the declaration of a Romanian official that “in the sanitary-veterinary fields, EU has a “zero toleration policy”.

15 See the National Agriculture and Rural Development Plan 2000-2006.

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The Commission also noted that state support for agriculture was in need of reform, much more consideration was to be given to rural development and that privatisation should be continued. The adoption of the Agriculture and Rural Development Strategy for accession was commended, as was the progress in land restitution.

The authorities hope to conclude the 16chapter by June this year .

3.3 The financial package for agriculture granted to Romania

The financial assistance granted to Romanian agriculture was “generous”, as Enlargement Commissioner, Guenther Verheugen, said. It went even beyond the Ministry's expectations.

The principles agreed in negotiating accession for the 2004-wave countries will also apply for Romania.

For the first pillar, the aid is distributed as follows:

- Romania will receive in direct payments an amount of 881 million euro (over three years: 2007-2009);

- for market measures, the assistance will reach 732 million euro (for the same period).

As regards the second pillar, rural development, the financial envelope is estimated at 2.42 billion euros.

Conclusions and recommendations

It is time now to summarize and to conclude the long journey undertaken by the Romanian agriculture.

The impossibility to sustain an extensive division of labour in the industrial sector by socialist or highly interventionist

16 Successfully concluded in June, as promised.

policies transformed agriculture into a buffer zone, an area of survival for the peasants and for the industrial workers laid off in the urban area.

A public policy designed to benefit the large, state-owned, big farms, cut the natural link (never in existence even before) between the urban population and the private agricultural sector. The state-owned farms maintained their status as main suppliers for urban markets, displacing the small landowners in this capacity, with the generous support of the state. Serious macroeconomic consequences followed (threat of banking bankruptcies, budgetary problems, inflation).

The private entrepreneurs were further hampered by the impossibility to engage in land transactions to expand their operations (until 1998) and their leasing contracts were not protected by the legal system.

Romania struggles even now with the heritage of these unfortunate policies: a fragmented, subsistence, backward agriculture, unable to meet the challenges of EU integration.

Recommendations:

1. engage in serious reforms in the rest of the economy.

It sounds paradoxical to recommend reform in the rest of the economy as the main policy solution for agriculture. It is nonetheless our conviction that only by freeing the rest of the economy will the necessary conditions for agricultural reform be created.

In the first half of the 1990s, populist, unsustainable policies resulted in a migratory flow from rural to urban. This is a warning not to repeat those inflationist-interventionist policies. After 1994, the

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bankruptcy of those policies became obvious and the rural area absorbed the poor, unsuccessful people left in their wake. This “survival surplus” could be absorbed back into towns by well-designed reforms.

The good results for agriculture of the freeing of the rest of the economy could be observed everywhere, but we believe that the EU is the prime example. So free was the rest of the economy in the Western countries that even a heavily interventionist policy in agriculture did not prevent the shrinking of the agricultural sector and agricultural employment in the economy. In France, a model CAP country, the farm population fell by 59% between 1960 and 1990, from 3.43 million to 1.39 people. In the EU-6 countries, the farm population fell by 54% (from 10.4 million to 4.8 million).

This is not an abnormal approach. After all, reform measures, like the economy, form a whole, they are inter-linked. And we must not forget that agriculture is chapter no. 7, one among 30 negotiation chapters. Thirty inter-dependent negotiation chapters. Perhaps EU is also instrumental in bringing about general reform in Romania.

b) at any rate, Romania should pay particular attention to its economic structure and avoid at any cost the pumping of excessive resources in agriculture. As one expert warned, carelessly applying the CAP in Romania would result in “a distortion in resource a l loca t ion o f p lane ta ry

17proportions” . Because of the low level of incomes in the rest of the economy, instead of reforming agriculture, “simple pumping” would provide financial incentives capable to further distort our economic system by attracting masses of people to agriculture and creating an unnatural dependence of large categories in Romania on the European

taxpayer.This danger is recognised by EU

negotiators: „granting Romania and Bulgaria the full scope of direct payments will not give the right incentives to restructure their agriculture.”

c) the privatisation process should be completed in agriculture. The process is already in delay, the last deadline being 2002. The Agriculture Ministry seems determined to find a solution to this problem, 110 big farms being even now in state hands. We have argued in the text for the benefits entailed by this measure. We need to add here that an important source of corruption and rent seeking would be removed from the system.

Privatisation of marketing and input services is also instrumental in linking the owners to the market.

d) clarifying the problem of land titles and land privatisation will speed up privatisation in the other sectors of the economy as well.

e) in order to reconnect agriculture to the credit system, it is first necessary to distribute all legal titles to land and solve the other problems related to ownership-recognition. Having legal titles (to land, to the crops (warehouse receipts etc.)) means having the capacity to offer guarantees, a very important condition for obtaining loans. Removing the big state farms by privatisation is also essential to free substantial amounts of credit.

f) remove the remaining transaction barriers from the land market. Buying and selling land is made more difficult by notary

18fees, land registration costs, stamps etc.g) the simultaneous application of

these measures has the potential of radically changing Romanian agriculture. They imply only legislative effort and not taxes or other

17 Dragos Negrescu, “Integrarea in piata unica”, intervention published in Exigente europene si realitati romanesti, European Institute of Romania, 2001,

p. 24.18 See Irina Ramniceanu, op.cit., p. 2

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financial expenditures. But changing the law is extremely difficult due to the powerful interests opposing such legislation. It is in this field that political skill is needed.

h) interventionist solutions proposed for reducing land fragmentation are illusory. The long-debated measure of taxing the owners who do not cultivate their land is an error. We have already explained how land fragmentation has been created and maintained during transition. Taxing for not cultivating the land is also bad because: a) it is an invasion of property rights, betraying a paternalistic attitude (perhaps it should be supplemented by such measures as imposing fines on the owners of several homes for not inhabiting them, or, better, not allowing the ownership of several homes!); b) any owner choosing not to cultivate his land has limited resources, which he decides to allocate to other, more important alternatives; it is wealth destroying, not a wealth enhancing measure.

i) launching a decentralization p r o c e s s w o u l d h e l p s y s t e m i c transformation. Leaving more resources at

the local level, plus as significant as possible a degree of fiscal independence, promotes many important and positive changes: 1) more resources will be managed at the local level, where local needs are better known; 2) fiscal competition will put pressure on the most interventionist municipalities and regions; 3) the political process of redistribution, top-down, centrally-run, will be eliminated or reduced in scope.

j) The heavily subsidised European agricultural sector could become a danger for agricultural reform in Romania. A revival of agriculture could be exploded, as in other third world countries, by cheap imports from the EU. Of course, we do not advocate tariffs to avoid that outcome. General economic reform, already recommended, is a better alternative. With general reform, the outcome of the distorting CAP would be to make Romania more industrial than normal and the EU more agricultural than normal. The socialist-industrialist camp should be pleased. The best solution would be, of course, reducing/eliminating the support supplied by the CAP.

Appendix: New Zealand: a model

New Zealand provides a powerful i llustration of the capacity of freedom to

transform an economy and to succeed in agriculture without government interference.

Of a size similar to Romania, New Zealand has been a relatively free and

prosperous country. Its problems began in the early 1970s, when the former liberal stance has been abandoned in the vain hope of countering two major external shocks: Britain’sentry into the European Community (1973) and the first oil crisis (1974). The UnitedKingdom represented the most important trading partner of New Zealand, taking 40% of its exports in late ‘60s and supplying 33% of the imports.

The interventionist reaction (it is a feeling of déja vu for Romania) featured measures such as:

� Increasing production grants for industry;

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19 The case is similar in the EU; that's the reason why such measures as “incentives for young people to establish in the rural area” are now part of the “rural development” package.

All these actions did nothing but provide a confirmation of the fact that economic science has nothing to learn from industrial and agricultural interventionism, but people must first suffer and then learn.

The effects of these self-styled “big policies” were big indeed:

� New Zealand exports lost their competitiveness in international markets. Unemployment, debt, inflation, and budget deficits increased. Cumulative intervention resulted in a wage and price freeze in 1982;

� Subsidies encouraged over-production in agriculture and burdened taxpayers and consumers;

� Land prices were driven high, preventing the young people to get into farming;19

� Water and land quality declined, due to the intensive exploitation of unsuitable land, an outcome of the high subsidies;

� The international community contemplated retaliatory actions against wildly protectionist New Zealand.

This whole mess was put to rest in 1984. An economic program similar to that outline above, in our “recommendations”, was adopted:

� General economic reform: the abolition of foreign exchange controls, deregulation of financial markets, privatisation, removal of subsidies, trade liberalisation, tax reform, deregulation of the labour market, sound monetary policies. Those measures made New Zealand a “top ten” country in the Index of Economic Freedom.

� Agricultural reform: removal of agricultural subsidies (see table no. 9, removal of price controls and external tariffs.

This “general” approach had another important feature: it was not undermined by government programs intended to “ease” the transformation (practically making impossible any change by removing the financial incentives for factor owners to change the allocation of resources). Only some one-off “exit grants” and temporary entitlements to extremely low income farmers were provided. Moreover, this general approach was universal, rapid, and simultaneous, including the whole economy, a significant factor of consent building.

prices, government product payments, fertiliser subsidies, incentives for landProviding significant assistance to agricultural producers (minimum

�

Isolating the internal market by high tariff walls;

�

development schemes, loans at below market interest rates, high tariffs and restrictive licensing). In 1984, 40% of New Zealand farmers’ gross income came from thegovernment.

� “think big” policies, intended to diminish the dependence on energyimports.

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The results were spectacular:

� We will mention first the environmentally friendly consequences, given the modern obsession with the environment. “Profit management” proved to be more conducive to “green” practices: water quality improved, while the land was more rationally used (submarginal land, unable to sustain agricultural activities has been left to other, non-agricultural activities). The use of fertilisers decreased as subsidies were removed. Subsidy-driven land management problems ended.

�

Production, productivity, and international competitiveness increased

significantly, despite the competition of heavily subsidised countries.

In 1999, 80% of New Zealand’s total farming outputs was exported; agricultural

exports accounted for more than 50% of the country’s total merchandise exports.20

Agriculture’s contribution to GDP and employment is rather “large”: 16 % of GDP andone in eight jobs. Again, this illustrates that freely chosen economic structures are best, not governmentally sponsored “knowledge-based” or “industrial” economies.

The dependence on Great Britain ended: its share is now a mere 6% in exports

and 5% in imports.

Producer subsidy equivalents per country (2000)

Source: Tom Lambie, Farming in a Competitive Food Chain, Institute of Economic Affairs, London, 2003, p. 2.

Producer Subsidy Equivalents (PSEs) per country

PSE support per acre

Country % Country US$

New Zealand 2 New Zealand 3

Autralia 6 Australia 1

Canada 20 Japan 4772

EU 49 Korea 3903

Japan 65 EU 336

United States 24 US 52

OECD Average 40 Canada 21

20 Exporting agricultural products could be profitable for a country if it is based on comparative advantage. Too often the old and bad policy prescription of “industrialisation” is taken for granted.

RURAL DEVELOPMENT AND AGRICULTURAL POLICY IN THE CONTEXT OF NEGOTIATING THE EUROPEAN UNION ACQUIS

Guidelines for Authors

ROMANIAN JOURNAL OF EUROPEAN AFFAIRS is the

first Romanian publication to focus exclusively on the European

integration debate and on Romania's role in an enlarged European

Union.

The publishers warmly welcome submissions of papers.

The RJEA comprises mainly articles. We also intend to develop a

section of book reviews. The Romanian Journal of European Affairs

may include articles that go beyond the scope of European

integration topics, but are, nevertheless, intrinsically connected to

them.

The ideal length of an article (written in English or French) is

from 4 000 to 8 000 words, including a 200-word abstract in English

or French and a very brief autobiographical note. Book reviews will

be no longer than 2 000 words.

RJEA is published on a quarterly basis, therefore

contributors should consider notifying us of their intention to submit

articles as soon as possible (specifying title of the article, name of the

author, abstract and a brief autobiographical note). Please send your

st st starticles or book reviews before February 1 , May 1 , August 1 and

stNovember 1 respectively, so that your contribution may be

considered for publication in the upcoming issue.

Authors should send notifications, as well as the final and

revised version of their articles or reviews in electronic form to

ier@ier.ro.