The CAP: Looking Back, Looking Ahead

European IntegrationVol. 31, No. 3, 271–289, May 2009

ISSN 0703–6337 Print/ISSN 1477–2280 Online/09/030271-19 © 2009 Taylor & FrancisDOI: 10.1080/07036330902782113

ARTICLE

The CAP: Looking Back, Looking Ahead

ALISON BURRELL

Agricultural Economic and Rural Policy Group, Wageningen University, Wageningen, The Netherlands

Taylor and FrancisGEUI_A_378381.sgm10.1080/07036330902782113Journal of European Integration0703-6337 (print)/1477-2280 (online)Original Article2009Taylor & Francis313000000May [email protected]

ABSTRACT This paper offers a brief overview of the Common Agricultural Policy(CAP) from its origins until the present day in order to identify the factors that havebeen shaping its evolution. It then attempts to evaluate how persistent these trends willbe in the future, whether new policy imperatives are gaining relevance in CAP reformand what they imply for the CAP over the coming years. Budget crises, internationaltrade pressures and enlargement have driven the CAP reforms of the last fifteen years.In the future, change will be driven by the need to maintain the economic rationality andpolitical acceptability of agricultural policy in an enlarged European Union of twenty-seven heterogeneous member states. Further decentralization of decision making andfinancing can be expected.

KEY WORDS: European agricultural policy, direct payment, second pillar, modulation, subsidiarity, re-nationalization

Introduction

Critics of the Common Agricultural Policy (CAP) of the European Union(EU) like to depict it as a highly protectionist set of measures, resistant tochange and unresponsive to outside pressures. In fact, for some years theCAP has been evolving along a relatively consistent reform trajectory, evenif this has sometimes been masked by short-term fluctuations caused by thevagaries of EU decision making and exogenous developments. In fact, someof these shocks may have accelerated the underlying policy reform processand determined the particular parameters of the reform path chosen.

Correspondence Address: Alison Burrell, Agricultural Economic and Rural Policy Group,Wageningen University, Hollandseweg 1, 6706KN Wageningen, The Netherlands. E-mail: [email protected]

272 Alison Burrell

This paper begins with a brief overview of the CAP from its origins untilthe present day in order to identify the factors that have been driving andshaping its evolution. It then attempts to evaluate how persistent thesetrends will be in the future, whether new policy imperatives are gaining rele-vance in CAP reform and what they imply for the CAP over the comingyears.

The First Forty Years of the CAP

The mechanisms of the CAP were put in place over the eleven-year periodfollowing the Treaty of Rome in 1957. High internal farm prices, strongmarket intervention and border protection were its essential characteristicsfrom the start. Most commodity regimes were based on variable importlevies and variable export subsidies as the main instruments of border protec-tion, while target prices and internal intervention purchasing provided afloor for domestic prices. The Community budget directly financed allexpenditures on agricultural support.

For the first twenty-five years, the CAP’s commodity support regimesremained largely unchanged. Decisions on farm prices were taken annuallyin a context detached from outside pressures or constraints. There wereno binding limits on agricultural policy expenditure for much of the period,and the policy regimes operated largely in isolation from macroeconomicand world market trends. Annual CAP expenditures were usually a compro-mise to accommodate the domestic political objectives and strategic interestsof the member countries. The result was continuing high prices and escalat-ing expenditure as member states negotiated to increase benefits for theirdomestic farmers.

Pressure for change came from various fronts. First, the integration goalsand projects (including the single market, monetary union, energy policy,regional policy) of the Delors Commissions (1985–1994) ended agriculture’sstatus as the only sector subject to comprehensive Community-level policiesand the main recipient of the Community budget. Secondly, rising produc-tion levels strained CAP commodity regimes and the Community budget.Thirdly, Community enlargement significantly diluted the relative homoge-neity of farm conditions and sectoral preferences of the original six membersand fragmented member state support for the CAP’s regime structure. Thethree northern European countries that joined the original six members inthe early 1970s had a stronger free-trade orientation, while the three newMediterranean country members during the 1980s had technologically andstructurally weak agricultural sectors whose commodities were subject to‘light’ price support regimes. Fourthly, the CAP came under attack fromtrading partners within the Uruguay Round multilateral trade negotiations(launched in 1986) for its prohibitive tariffs and its persistent dumping ofsubsidized surplus products on world markets. Fifthly, changing societalperceptions of the CAP challenged the status quo. The media consistentlyhighlighted the large food surpluses in intervention storage, and their waste-ful disposal drew heavy public criticism. There was also criticism of the

The CAP: Looking Back, Looking Ahead 273

inequitable distribution of CAP support across individual farmers and of theenvironmental damage from intensive farming systems stimulated by highoutput prices.

The MacSharry reform of 1992 substantially reduced support prices forcereals and beef. These cuts were partly ‘compensated’ by direct producerpayments,1 fixed per hectare of current planted area or per head of livestock,but with the total number of hectares and animals eligible for paymentssubject to regional ceilings. The ‘blue box’ category of domestic support inthe 1994 Uruguay Round Agreement on Agriculture (URAA), which isexempt from any reduction commitment, was created to accommodate thesepayments. For the rest of the 1990s, the ceilings on subsidized exports in theURAA were the most binding constraint for the EU and helped to keepfurther reform of the commodity regimes on the policy agenda.

The MacSharry reform also included agri-environmental and afforestationmeasures and an early retirement scheme that were to be co-financed by theCommunity and member states. They effectively laid the foundation stonefor the ‘second pillar’ of rural development policy in the CAP (CEC 1998a,3) alongside the ‘first pillar’ of CAP market management and income supportmeasures. The Single European Act of 1987 and successive treaties in the1990s strengthened the Community’s commitment to environmental protec-tion and led to efforts to integrate environmental protection into agriculturalpolicies. With respect to rural development, the Cork Declaration (1996)emphasized the need for a stronger commitment to rural development policy,characterized as ‘multidisciplinary in concept, multi-sectoral in application,with a clear territorial dimension’, ‘encompassing economic diversification— including small and medium scale industries and rural services — themanagement of natural resources, the enhancement of environmentalfunctions, and the promotion of culture, tourism and recreation’ (Point 2).Although the declaration was not endorsed by the Council of Ministersor taken up at subsequent summits, it signalled the need to stimulate ruraleconomies well beyond the boundaries of agriculture and strongly influencedthinking on subsequent CAP evolution.

Pressures for reform mounted during the 1990s. Food safety and qualityand animal welfare appeared as issues on the agricultural policy agenda and,by the end of the decade, were included as aims of the CAP. The fall of theBerlin Wall in 1989, and member states’ commitment to enlarge the Unionto include the ten ex-Soviet bloc countries, created a stimulus for a more radi-cal reform of the CAP than had hitherto been achieved. The Agenda 2000reform of 1999 was intended to prepare the Community’s policy settings andbudget for the coming enlargement. With the CAP still claiming about 45 percent of EU spending, further price cuts, accompanied by direct payments aspartial compensation, were agreed for cereals and beef. Although these cutssoon proved inadequate, Agenda 2000 contained several elements relevant tofuture CAP developments. First, the second pillar — rural development — ofthe CAP was significantly strengthened and consolidated. The accompanyingmeasures from the MacSharry reform, along with structural and on-farmprocessing aids, were brought together with new horizontal measures

274 Alison Burrell

targeting certain activities well beyond the farm sector (Article 33 measures)to form a single rural development regulation (Regulation 1257/1999). Notonly did this regulation visibly diversify the scope of the CAP, but it alsoestablished within the CAP a ‘set of alternative management principles,including those of decentralisation, partnership, multi-annual programmingand co-financing’ (Lowe, Buller, and Ward 2002, 4).

Secondly, Agenda 2000 introduced voluntary modulation, wherebymember states could opt to switch up to 20 per cent of CAP direct incomepayments under pillar one into co-financed second pillar funding. Voluntarymodulation offered individual countries the possibility of increasing thefunds at their disposal for rural development measures, but in a way that wasneutral for the EU budget. Very few countries, however, chose this option,and France abandoned modulation after only three years.

During the negotiations leading to the 2004 enlargement, there was muchdiscussion over whether new entrant countries (whose farm prices would riseafter accession) would be eligible for direct payments. The case for withhold-ing these payments from new members (the Commission’s initial preference)was based on the lack of historic justification in terms of compensation forprice cuts, the strain these payments would impose on the EU budget, theadministrative burden they would place on over-stretched bureaucracies incountries with many small farmers, and the fear that large cash injectionsinto agriculture in countries with a large share of the workforce still engagedin the sector would undermine restructuring efforts. The case for extendingdirect payments to new member countries was based on arguments againstcreating a two-tier CAP, and avoiding a precedent of new members not beingcompelled (or allowed) to accept the entire acquis communautaire uponentry. Political considerations won the day and, in 2002, it was decided thatthe ten candidate countries scheduled to enter in May 2004 would eventuallyreceive the same direct payments as EU-15 countries, but phased in over anumber of years after accession.

The Fischler reform of 2003 made deeper and, in some respects, path-breaking changes in the CAP. Within the new Single Payment System (SPS),existing, commodity-specific direct payments were combined into a SingleFarm Payment (SFP), defined in terms of a payment per hectare of eligibleland (Regulation 1782/2003). The scope of the payment would be extendedby a similar conversion of dairy support into a per hectare payment, startingin 2005.2 The ten new member states would adopt a simplified version ofthe scheme, with individual entitlements not based on previous productionlevels, and to be phased in, starting at 25 per cent of the EU-15 rate in 2004.In a significant departure from the previous CAP direct payment scheme, theSFP was decoupled from production of specific commodities3 and, indeed,from the requirement to produce at all. Entitlements to receive the SFPdepend on the average direct payments claimed on hectares and animalsover the reference period 2000–2002. Member states could then choose howto distribute such payment entitlements over eligible farmers: either follow-ing individual farmers’ own past payment allocations, or aggregated andthen averaged at a flat rate over all eligible hectares in a region with the


option of different rates for crops and grassland. Some countries opted for aregionalized scheme, thereby achieving a more equitable distribution of thesupport.

Cross-compliance was attached to the direct payment. Farmers mustcomply with nineteen ‘statutory management requirements’ (SMRs)4 (five ofwhich involve environmental protection), keep farmland in good agriculturaland environmental condition (GAEC)5 and maintain permanent pasture.

The Fischler reform also introduced compulsory modulation starting at3 per cent in 2005 and rising to 5 per cent in 2007. Up to 20 per cent of theresources mobilized by compulsory modulation in a member state can beredistributed via a central fund to other countries in the Union. In addition,countries may withdraw up to 10 per cent of payments for particular sectorsinto a so-called ‘national envelope’, which can be used to promote specifictypes of farming with benefits for the environment or for improving thequality and marketing of agricultural products. The Fischler package hasbeen called ‘à la carte reform’ because of its many options, and the devolu-tion of detailed implementation choices and rules to national administrations(Swinbank and Daugbjerg 2006, 55). Member states have taken advantageof its flexibility.

The reforms of the last fifteen years have resulted in a CAP whose scope,modalities and impacts are very different from those of its original incarna-tion. EU agricultural policy making can no longer be described as an inward-looking process seeking a compromise among different national interests. Asregards the traditional ‘business’ of the CAP (market management andincome support), the EU’s WTO commitments are a major determinant ofwhat is possible internally. WTO rules also condition the choice of instru-ments for pursuing the more recently adopted second pillar objectives.

The main beneficiaries of the trend away from market price support arethe consumer and the food industry. EU products are more competitive onworld markets. In theory, the combination of lower domestic prices, due tointernal reforms, and the conversion of non-tariff barriers to tariffs,mandated by the URAA, has improved orientation to world markets,although tariff barriers still remain high enough in many cases to supportdomestic prices well above world market levels and to provide the samedegree of insulation as the earlier variable import levies. By breaking the linkwith current commodity production, the SFP frees producers to respond tocurrent internal market conditions, albeit at prices that are distorted aboveworld market levels. Nonetheless, the SFP is still tied to land and, hence, candistort decisions about who owns land and whether it stays in agriculture.The link with land has two further implications: it remains possible to attachterritorially relevant cross-compliance conditions to the payment, andsupport remains capitalized into land values.

Will Past Drivers of Reform Continue?

This section examines whether the main factors driving the evolution of theCAP over the last fifteen years — summarized in Figure 1 — are likely to

276 Alison Burrell

continue in the future, and how they might alter the future shape of theCAP.Figure 1. Main factors driving the evolution of the CAP over the last fifteen yearsThe shift to direct payments enables support to be more targeted (to partic-ular groups of farmers or policy objectives) through the use of detailed rulesregarding eligibility and/or the imposition of conditionality on farmers. Thispossibility fits well with broadening the objectives of the CAP to embrace theenvironment and sustainability, rural development, food quality and safety,and animal welfare. Pillar 2 of the CAP has been gradually strengthened inorder to promote these new objectives, although its budget allocation is stilldwarfed by that of the first pillar.

As shown in Figure 1, the main changes — extension of objectives, rein-strumentation within Pillar 1 and the creation of Pillar 2 — have beendriven by multiple factors. Whether the timing of consecutive CAP reformswas triggered more by budget crises, international pressures of trade nego-tiations and agreements, or enlargements is the subject of continuing

BUDGET PRESSURES

NEW OBJECTIVES FOR THE CAP

CREATION AND EXPANSION OF PILLAR 2

RENATIONALISATIONÖ

OF DECISION MAKING?

OF FINANCING?

ENLARGEMENT

INCREASINGTERRITORIAL DIVERSITY

SOCIETAL CONCERNSSTAKEHOLDER MOBILISATION

EVOLVING CONTEXT ANDDRIVING FORCES

PRINCIPLE OF SUBSIDIARITY

INTERNATIONAL PRESSURESAND AGREEMENTS

PILLAR 1

REINSTRUMENTATION FROM MARKET PRICE SUPPORT TO DIRECT INCOME SUPPORT

ENVIRONMENTAL TARGETING

MAIN CONSEQUENCESFOR THE CAP

Figure 1. Main factors driving the evolution of the CAP over the last fifteen years


debate (see, for example, Swinbank and Daugbjerg 2006). The evidencesuggests that all three have played an important role, their relative impor-tance depending on the reform in question. Pressure to restart UruguayRound trade negotiations undoubtedly stimulated the 1992 reform andshaped its content. At other times, budget crises have been major reformtriggers. At first sight, the shift from market price support (paid by theconsumer) towards direct budget payments for farmers, launched with theMacSharry reform and deepened by subsequent reforms, appears to workagainst lowering budget expenditure. However, the extra budget cost ofdirect payments is mitigated in that the associated price cuts, by reducingboth production volumes and the price gap, help to lower the costs ofmanaging and disposing of surplus output. Direct payments also allowbetter control of annual budget expenditure. The Agenda 2000 andFischler reforms were intended to anticipate budget pressures expectedwith the 2004 enlargement, and to reduce exposure to pressure from tradepartners.

Although these three drivers of budgetary constraints, international pres-sures and enlargement remain part of the context in which the CAP operates,they are unlikely to influence significantly either the timing or the content offuture reforms. Instead, the next stage of CAP reform will be driven byendogenous pressures arising from the need to decentralize control of thedetailed design and operation of CAP policies to the twenty-seven highlydiverse member states. Rebalancing decision making power between Unionand member state levels, and the extent to which alternative funding sourcesoutside the EU budget can be mobilized for agricultural policy, will be thedecisive factors determining the CAP’s future evolution.

Any negotiated agreement under a relaunched WTO Doha DevelopmentRound (DDR) is unlikely to require significant reinstrumentation of theCAP. The tariff reductions likely to be agreed will not trigger a change oflong-term direction for the CAP, but may accelerate the further disman-tling of market price support. The Commission has expressed confidencethat the CAP is on trend to absorb the elimination of export subsidies,already agreed for 2013 by negotiating countries as part of a final Dohaagreement, should one materialize. On the other hand, if the DDR failsand there is no agreement to extend the Peace Clause, the EU might finditself facing a WTO dispute settlement challenge on export subsidies orother forms of agricultural support, allowed in the Agreement on Agricul-ture but falling outside GATT rules. The impact of a WTO dispute rulingwould probably be the same as the concessions the EU has offered withinthe DDR negotiations.

The EU’s strong position on environmental issues in the WTO arena haslost visibility in recent years. At the end of the 1990s, concerns about theimplications for sustainable farming and the countryside if a new tradeagreement compelled a drastic reduction in farm income support crystal-lized around the concept of agriculture’s ‘multifunctionality’. It was fearedthat certain public goods produced by European farming, such as preserva-tion of the rural landscape and provision of natural habitats for wild

278 Alison Burrell

species, would come under threat (Potter and Burney 2002). A significantdecline in farm incomes could force rapid structural change, a switch tomore profit-orientated, less environmentally respectful farming systems, andthe possible withdrawal of agriculture altogether from marginal areas thatderive their character from the farmed landscape and the presence of farm-ing families. The idea, strongly supported by the European Commission,was that these non-commodity outputs of farming are part of Europe’scultural heritage and valued by European citizens. In its initial negotiatingproposal (WTO 2000), the EU cited protection of the multifunctional roleof agriculture as its pre-eminent non-trade concern. Since then, ‘multifunc-tionality’ has disappeared from the vocabulary used in EU communicationsto the WTO, and the EU has expressed confidence in being able to safe-guard the ‘European model of farming’ by trade-neutral measures.However, other non-trade concerns concerning production standards (inparticular, the EU’s high animal welfare standards), which would put EUproducers at a disadvantage on unprotected markets, remain.

An important aim for the EU in the DDR has been to extend the protectionafforded to agricultural and food geographical indications (GIs) to matchwhat is already available for wines and spirits under Article 23 of the agree-ment on Trade-Related Aspects of Intellectual Property (TRIPS) agreement.The current TRIPS safeguard prevents use of geographical names (such asParma ham or Champagne) when they mislead the public concerning thegeographical origin of the good (Article 22). Article 23 goes much further,however, stipulating that GI owners must be able to defend their propertyright under local laws ‘even where there is no unfair competition and wherethe true origin of the good is indicated or the geographical indication isaccompanied by expressions such as “kind”, “type”, “style”, “imitation” orthe like’. In fact, GI owners still encounter difficulties in obtaining even thedegree of protection already specified by TRIPS Article 22 (O’Connor andCompany 2007).

In 2005, 639 agricultural and food GIs were registered in the EU (CEC2006a). They represent only a very small share of EU production, albeit alarger share of EU exports. However, the (former) EU Trade Commissionerstressed on many occasions that progress on GI extension is a pre-conditionfor the EU signing a final Doha agreement. Opponents of the EU on this issuecontend that third-party use of geographical indications does not restrictmarket access for the ‘genuine’ EU product on export markets, and that thecost to their food industry and consumers if these names can no longer beused would be disproportionate (Vincent 2007).

The issues surrounding multifunctionality, environmental impacts oftrade, animal welfare and GIs are all indicators of the growing frictionbetween trade liberalization, on the one hand, and national standards andnon-trade concerns, on the other. They are likely to be at the forefront offuture multilateral trade negotiations. Since EU agricultural policy has takena clear turning in the direction of sustainable farming and food quality, theEU is expected to play a leading role in this future WTO confrontation ratherthan dilute its policy aims under these headings.


Budget crises are unlikely to be a relevant factor in the timing of reform inthe coming years but budget limits will be important. Under the newfinancial framework for 2007–2013, CAP spending is effectively frozen until2013 (Official Journal 2006). The total amount available for both pillars ofthe CAP is fixed to decline between 2007 and 2013 by about 7.5 per cent.The share earmarked for first pillar expenditure will remain steady at about79 per cent. Moreover, the framework stipulates that the allocated budget,agreed in 2004 prices, will be adjusted upwards annually by a fixed 2 percent to allow for inflation. Hence, if the average rate of inflation exceeds thisamount, the real reduction in agricultural spending from the EU budget willexceed 7.5 per cent over the next seven years. Although this financial disci-pline is likely to prevent unforeseen short-run crises, the straightjacket itimposes on EU spending suggests that agricultural policy makers will facesome difficult choices.

Regarding future enlargements, Croatia, Turkey and the former YugoslavRepublic of Macedonia are currently official candidates for EU membership.Although all three countries are much poorer than the EU-25 average,Croatia and Macedonia are small, with just 4.4 and two million inhabitants,respectively (Eurostat); their entry is without implications for the CAP. Bycontrast, Turkey’s population is nearly seventy-two million and rapidlygrowing, its total agricultural area is over forty million hectares and about30 per cent of its work force is still engaged in agriculture. Some sectors(such as fruit and nuts) are competitive on world markets, but Turkey’sgrain, red meat and dairy sectors are very uncompetitive, in great need oftechnical modernization and restructuring, and lacking full market integra-tion. If Turkey entered the EU in 2015 without further CAP reform, therewould be little impact on EU agricultural markets, but the cost of the CAPwould increase by about €5.2 billion (Burrell and Oskam 2005). As the earli-est realistic entry date for Turkey is well beyond the present EU financialframework, enlargement will not be an important driver of foreseeable CAPdevelopments.

Evolution of the Two Pillars and Further Decentralization of the CAP

The second pillar of the CAP is now firmly established, with its own aims andorientation, more decentralized management procedures and joint EU–member state funding. Its incentive-orientated philosophy of governmentintervention to increase agriculture’s provision of public goods is moreacceptable to EU citizens than the blanket production subsidies and decou-pled income transfers of the first pillar. Pillar 2 delegates to national govern-ments decisions on the detailed rules for implementation, including someaspects of policy design. The legislation setting out the Pillar 2 framework forthe period 2007–2013 (Official Journal 2005) identifies three targets:competitiveness through restructuring, environment and countryside, qualityof life in rural areas and diversification of economic activity. In addition,LEADER initiatives (bottom-up, cooperative and networking approachesrelating to rural development) will also be funded. Member states can choose

280 Alison Burrell

among various measures under these headings, and develop programmesadapted to local conditions as long as minimum funding shares for eachobjective are respected.

There appears to be a strong commitment among policy makers to ‘grow’the second pillar. Thus, the decline in central budget funding for the CAP for2007–2013 is seen as unfortunate, given the inadequacy of second pillarresources to date, the demand for the scope of rural development initiativesto be widened so as to include a broader set of objectives, and the fact thatthere seem to be enough viable projects (Shucksmith, Thomson, and Roberts2005). At the same time, expansion of Pillar 2 presents new and difficultchallenges. In reviewing the 2000–2006 period, Dwyer et al. (2006) highlightthat national administrations have tended to favour programmes based onhistorical precedents rather than on actual conditions and needs, and failedto exploit the new opportunities creatively, in part because of the stricturesof the legislative framework. Lack of matched funding from national budgets(required by co-financing) may inhibit some countries, especially newmembers, from taking full advantage of the opportunities.

Resources allocated to the first pillar within the declining total budgetallocation for the CAP for 2007–2013 remain about four times greaterthan those of the second pillar. In future years one can expect competitionbetween the two pillars for budget resources and it will focus on the extentto which modulation is increased and the way in which that is done. Atthe same time, competition between the various objectives of the CAP islikely to occur within the first pillar. Already with the Fischler reform, someattributes of second pillar measures (such as environmental targeting viacross-compliance, and devolution of implementation details to nationalgovernments) were incorporated into the design of the first pillar SPS.

The current Commissioner for Agriculture has stated that, after 2013,the CAP ‘will still have a “first pillar” of some kind, but we will need tothink carefully about the exact form of that pillar. We will also need astrong second pillar — rural development policy — to continue to supportcompetitiveness, care for the environment, economic diversification and ahigh quality of life in our rural areas’ (Fischer Boel 29 June 2007). TheCommission’s vision of the future Pillar 1, as expressed in its recent ‘HealthCheck’ proposals (CEC 2008a, 2008b) is for a simpler and more flexiblestructure (implying, inter alia, reduction in the types of direct paymententitlement, the possibility to sell these entitlements without land, removal ofset-aside obligation, fewer options for partial decoupling, and gradual relax-ation of milk quota limits). A reduction in the size of Pillar 1 support is alsoimplied, since it is proposed to increase the rate of compulsory modulationfrom 2 per cent to 8 per cent (phased in over four years). The proposed real-location of funds from Pillar 1 to Pillar 2 support will redistribute paymentsaway from larger farms at a progressive rate towards those that are moreable or disposed to respond to rural development measures.

Despite the stipulation in the Health Check proposals that the new fundsobtained from increased modulation be used to address four specific ‘newchallenges’ (namely climate change, renewable energies, water management


and biodiversity), the specific policy design and decision making regardingthese measures will be at the discretion of each member state. Hence, theoverall result will be an increase in the share of CAP funding that is targetedand managed in the member states themselves.

EU enlargement to twenty-seven countries has greatly increased the heter-ogeneity of agro-climatic conditions, infrastructural endowment, environ-mental and rural development challenges, institutional settings and nationalpreferences. Member states do have strong differences in their preferences fordifferent types of rural development programmes (Dax 2005; Dwyer et al.2007). In such a context, when preferences vary between jurisdictions,decentralized decision making brings welfare gains by matching policiesmore closely to preferences (Oates 1972). In addition, given the wide varietyof local conditions, the flexible, project-orientated, devolved approach of thesecond pillar is a more cost-efficient way of securing targeted public goodsand addressing rural development needs, which are essentially territoriallyspecific.

National preferences regarding the desirability of transferring income tofarmers under the first pillar and the optimal distribution of these transfersover farmers are also quite different among member states. So is the extentof income disparities within agriculture, and between agriculture and othersectors. Preferences about the degree of centralization that is desirable in theUnion also diverge. EU-level decision making for agriculture is stronglypreferred in Belgium, Germany, Spain and the Netherlands, whereas decen-tralization of agricultural policy is most strongly preferred in Finland,Sweden, Austria and the UK (Ahrens, Meurers, and Renner 2006, 14).

The treaty-enshrined principle of subsidiarity implies that policy makingshould be undertaken at member state level except where policies haveeconomies of scale, the very nature of the policy requires centralization, orthe policy objectives and impacts are transboundary in nature (Rabinowicz,Thomson, and Nalin 2001). Applying the principle to the Health Checkproposal for extra modulation earmarked for particular purposes, it mayseem that potential economies of scale and coordination in the areas of miti-gating climate change and promoting renewable energy (two of the areastargeted by the increased modulation funding) make them inappropriate fordecentralized decision making. However, the Health Check proposal (seeCEC 2008a, Annex 2) envisages measures targeting on-farm responses.Arguably, optimal design of such measures needs to take into account localfarming conditions and incentives.

Alesina, Angeloni, and Schuknecht (2001), considering the optimal trade-off between the benefits of centralization as union size increases and the costsof harmonizing policies due to growing preference heterogeneity, perceivethe economies of scale in EU agricultural policy to be low. They concludethat, with over 40 per cent of current EU legislation and nearly half theEU budget relating to agriculture, the EU is over-expanded in this area. Atthe same time, decentralized decision making may suffer from lack of policymaking expertise at the lower level (Rabinowicz, Thomson, and Nalin2001), or may be vulnerable to capture by local interests or less accountable

282 Alison Burrell

if national governments do not act in the public interest (Begg 2006;Ederveen, Gelauff, and Pelkmans 2006). A counterbalancing factor is thatnational governments in EU member states are at least subject to periodicelectoral scrutiny.

Table 1 compares the distribution of decision making competence betweenthe EU and member states for the SFP and the second pillar. It shows that theareas of difference concern the choice of objectives, specific targets (cross-compliance) and programmes (rural development). A further importantdifference is that eligibility conditions for the SFP are defined by the EU,whereas those for rural development projects are objective- and project-dependent. Assuming diverse national preferences for distributional aspectsof CAP support, devolution of these decisions to the national level wouldundoubtedly increase the policy effectiveness of payment allocations. Marketprice support and management policies were necessarily administered atUnion level in order to capture scale economies. The historic origin of theSingle Farm Payment as compensation for cuts in administered market pricesexplains why the income-redistributive aspects of this measure were alsodecided at Union level in the past. However, the rationale for keeping thedecision making competence for the income redistributive function of apurely decoupled payment at the centre in the future is unclear (CEC 1998b;Rabinowicz, Thomson, and Nalin 2001).

A comparison of the British and French use of second pillar funds obtainedthrough their voluntary modulation schemes in the early 2000s (Lowe, Buller,and Ward 2002) emphasizes how devolution to national level or below offerscountries flexibility to pursue national or local priorities concerning both firstand second pillar objectives. The French rural development programme ismanaged from the centre, whereas the British programme favours regionaldevolution of decision making and control to involve local stakeholders. Asfor the extra modulated funds, the UK used them to support countrysidemanagement, whereas France has prioritized farm structural policy via landmanagement agreements. Because these funds were obtained via modulationfrom the first pillar, each country could and did follow national preferencesin distributing the burden of modulation on farm incomes (Lowe, Buller, andWard 2002; Agra CEAS 2003).

Table 1. Competence for the Single Farm Payment and rural development policy

Definition of objectives

Choice of objectives

Specific targets/Measures

Details of implementation

Payment rates, ceilings

SFP with cross-compliance

EU EU EU (except GAEC: MS)

MS (for cross-compliance measures)

EU

Rural development

EU MS (via national strategy plans)

MS (from a list available measures)a

MS EU

EU, MS: Union-level, member state-level decision making.aNational rural development plans are approved in Brussels.


Two alternative future directions suggest themselves for the directpayment component of the first pillar. One is to phase out the SPS (the result-ing, much-reduced first pillar would address only market stabilization issues)and thereby increase the amount available for more targeted programmes inline with national priorities (Buckwell 1997). The second is to devolve moreof the decision making power for the SPS to national governmentswho would distribute the payments so as to achieve a greater social dividendin terms of both income distribution and public good provision objectives.An option that minimizes adjustment problems of the first alternative,namely replacing the payment entitlement linked to land by a saleable bondpaying a declining rate of interest over a fixed number of years, has beenunder discussion among academics (Daugbjerg and Swinbank 2004) andpolicy analysts for many years but is not supported by the Commission(Fischer Boel February 2007). The second option has received less discussionso far.

Inevitably, given the strict and declining limit on funding from the EUbudget, the issue of devolving more of the CAP funding burden to thenational level arises. Although it is often assumed that decentralization ofdecision making and funding must go together, there is no necessary linkbetween them. Having said this, common sense and much evidence suggeststhat the quality of governance and preference matching is likely to beenhanced under the ‘principle of fiscal equivalence’ whereby benefitsprovided at one tier of government are financed by that tier (Olson 1969).

Second pillar measures have always been co-financed. There are, however,other ways of tapping into national budgets to help fund the CAP. Table 2describes three shared-funding possibilities for which precedents exist withinthe EU in other policy areas. The three possibilities for rebalancing thefinance available for the two pillars and extending the total amount availablefor agriculture suggest themselves. First, as already discussed, compulsorymodulation at higher rates shifts budget resources out of the first pillar intothe second pillar, where it would attract an additional member state contri-bution via co-financing. Secondly, the rate of the member states’ co-financingcontribution for the second pillar can be raised. Thirdly, some form of sharedfunding (compulsory or top-up) could be adopted for the first pillar as wellas the second, allowing a transfer of funds to the second pillar but withoutreducing direct producer payments to the extent that would otherwisebe needed.6 The third option is less consistent with the principle of fiscalequivalence, less equitable and less cost-efficient in terms of achieving other

Table 2. Alternative shared-funding arrangements

EU contribution MS contribution

Co-financing Conditional on MS share being paid

Discretionary, fixed proportion

Compulsory shared financing Certain Mandatory, fixed proportionTop-up financing Certain Discretionary, with ceiling

284 Alison Burrell

policy targets besides income support. All three options are neutral as regardsEU budget expenditure on agriculture, but would increase the total amountof spending going to agriculture under EU policies by involving a greaterdirect financial contribution from member states.

The ‘renationalisation of the CAP’ by returning the responsibility for agri-cultural policy to national governments has been discussed and promotedover the last twenty years (Rabinowicz, Thomson, and Nalin 2001). Justwhat re-nationalization implies by way of devolved responsibilities is amatter of debate. For Kjeldahl and Tracy (1994, 1), ‘renationalisationimplies a shift of competence back from EU institutions to national ones —in terms of decision-making, of financing or of implementation, or of allthese aspects’. More recently, the Sapir Report (2003, 164) by an expertgroup with a remit from the Commission to review the whole range of EUeconomic policies and devise a strategy for faster EU growth, argued for‘decentralising to Member States the distributive function of the CommonAgricultural Policy, as is already the case for all other individual distributivepolicies’. It concluded that ‘meeting the growth agenda implies, if the overallsize of the budget remains the same, a sharp reduction in EU agriculturalexpenditure’ (Sapir Report 2003, 166). The Report recommends the re-nationalization of CAP funding so that the EU budget can focus on policiesthat coordinate the efforts of member states and that have a large growthmultiplier.

As mentioned above, a significant degree of decision making responsibilitywithin the CAP has already moved back to national governments withoutprotest. It is specifically the financial aspect of CAP re-nationalization thathas met with the fiercest opposition from some member states. This resis-tance is to be expected where common-pool budgeting creates winners andlosers on the grand scale of the CAP. An argument often advanced in favourof maintaining centralized funding is that it prevents individual memberstates from engaging in unfair competition and maintains a level playing fieldin EU agricultural markets. Under a re-nationalized CAP, were some memberstates to support their farmers more than others, this would confer on thema competitive advantage. A separate concern is that returning responsibilityfor public good provision (such as environmental protection) to nationalgovernments could trigger a race to the bottom in order to keep domesticproducers’ costs down.

However, the old model — centralized redistributive CAP transfers — hasnever been competition-neutral or equitable, whether between countries,commodities or individual farmers. Moreover, with full decoupling ofdirect payments, differential levels of income transfer can hardly act as aproduction subsidy to particular commodities. Adopting compulsory sharedfunding, rather than co-financing, would ensure that national agriculturalsectors receive comparable overall support from their governments. Alterna-tively, top-up financing would guarantee at least a basic level of support toagriculture in all member countries. In any case, it would be crucial to set upstrict protocols for re-nationalized payments at the Union level to preventdistortions of the single market, and to have in place appropriate statutory


minimum standards in order to guard against a competitive lowering of envi-ronmental and other public good standards. Commission guidelines on stateaids to agriculture (CEC 2006b) already specify detailed and comprehensiveconstraints that policies financed at national level must respect in order topreserve consistency with the CAP and the principles of the single market,and these may well prove adequate in this broader context. Even after acomplete re-nationalization of CAP decision making and funding, marketregulation, monitoring of state aids and making sure that internal policiesmeet international commitments would remain EU-level activities.

Begg (2006) points out that EU structural and cohesion policies aimdeliberately to promote faster growth in economically backward regions andboost their competitive advantage and, hence, are not intended to be compe-tition-neutral. If direct payments to farmers were distributed according tosimilar social, equity-inspired criteria as the structural funds, concerns aboutunfair competition might dissipate. At the regional level, Dax (2005) reportsthat market price support per hectare is positively correlated with per capitaGDP and negatively with the unemployment rate, but somewhat surprisinglythat the opposite is true for Pillar 1 direct payments per hectare. As for Pillar2 support per hectare during the first rural development planning period(2000–2006), it either exhibits the same correlations with regional economicindicators as market price support, or is distributed independently of them,depending on the database used. At the level of individual farms, however,Pillar 1 support is strongly correlated with farm size, whereas farms receivingthe most Pillar 2 support are in the smallest size categories.

There is no precedent for even partial EU withdrawal from a major policyarea, such as farm income support. New member states and those who arenet beneficiaries of the CAP would strongly resist such a move. If it occurs,it will be the result of a comprehensive top-level review and realignment ofall EU-level activities rather than a unilateral decision by EU agricultureministers. Such a review does not appear to be imminent. However, thedebate over returning agricultural policy in all its aspects back to the memberstates will gain momentum in the coming years. If negotiations with Turkeygather speed in the next few years, there will be closer examination of at leastpartial CAP re-nationalization in order to mitigate the budget impact ofTurkish entry. Nonetheless, re-nationalization (which is likely to mean aweakening of operational and financial control from the centre) presupposesadequate national administrative capacity and experience of working withinthe EU framework according to EU performance criteria. This considerationreduces its attractiveness as a response to enlargement pressures.

Conclusions

This paper has sketched the evolution of the CAP over the forty years of itsexistence. For its first twenty-five years, the CAP remained largely as set upby its founders, with the sole aim of managing agricultural markets andsupporting farmers’ incomes. Fifteen years of successive reforms havereduced the excesses of the earlier period and widened agricultural policy

286 Alison Burrell

objectives in response to societal demands. A significant share of marketprice support has been replaced by direct payments, which are now largelydecoupled. Alongside market management and income support measures, agroup of incentive-based measures has developed for which much of thedecision making and policy details, as well as a share of the funding, havepassed back to member states. The CAP now formally consists of these twopillars.

The CAP has become less distorting with respect to production decisionsand internal markets, even while significant distortions remain: betweensectors due to differential rates of border support, and with respect to worldmarket prices generally. Changes have been environmentally benign, first,because the decoupling of first pillar support from production favours lessintensive production methods and cross-compliance has given more muscleto environmental directives and, secondly, because agri-environmentalmeasures under the second pillar have provided positive incentives forenvironmental enhancement.

Continuation of the trend away from blanket income support towardsmeasures targeting public good provision and rural development could beimpeded by dwindling budget resources. Although the impetus to continueshifting resources from the first to the second pillar is strong, it may soonmeet resistance from some member states. It is, therefore, likely that ways ofincreasing resources for second pillar measures, by tapping into nationalbudgets, will be actively sought. Indeed, interest is growing to re-examine theoption of returning most agricultural policy, including both decision makingand funding, to national governments. The reinstrumentation of the CAPthat has taken place over the last fifteen years has made such a change morefeasible than ever before, and there are strong demands to use the EU budgetfor initiatives that promote and coordinate growth in the Union as a whole,rather than for income transfers to an economic sector with poor growthpotential.

If member states do not want to assume responsibility for funding firstpillar direct payments to their own farmers, another option with consider-able support is to phase them out. Reasons for not doing so include the pres-ence of small marginal farms in a number of member states, and the negativeimpact of the structural change and/or land abandonment that would followif these farms were forced out of the sector. These arguments are increasinglyunconvincing. First, even with decoupled transfers, the amount received byan individual farm depends on the number of entitlements it owns, which inturn depends strongly on farm size. Consequently, the payment received bya small farm from the first pillar is small. Moreover, marginal farms in lessfavoured areas that are able to benefit from agri-environmental and ruraldevelopment schemes are increasingly better catered for under the secondpillar. Secondly, EU-15 farmers are rapidly ageing; the 2000 census showedover half of them to be over fifty years of age. Older farmers tend to be onsmaller farms, and the majority are without successors. Therefore, in theyears ahead, structural change on a significant scale will occur in any casedue to the gradual disappearance of these farmers and, with them, their


farms as independent holdings.7 At the same time, the expansion of theremaining farms, by permitting the use of more modern farming techniques,will add more urgency to environmental issues, such as preservation oflandscape features and maintenance of biodiversity on agricultural land.Unless new regulatory instruments are adopted, there will be a need for moreincentive-based agri-environmental measures and, hence, for an increase inthe second pillar.

We expect the CAP to continue evolving along its present path, towardstronger market orientation, with greater focus on public good provision andmore devolution of decision making to member states. In addition, condi-tions seem favourable for the launching of a new trend towards greaterequity in the allocation of farm income support. CAP developments willcontinue to be marked by intense political bargaining between memberstates, which in the new political arena of twenty-seven member states islikely to be much less predictable in the short-run. Increasing participation inthe policy process from non-agricultural interest groups highlights the heter-ogeneity of the relevant stakeholders, and widens the margin of uncertaintyaround future predictions.

Acknowledgement

The very helpful comments and suggestions of three referees are greatlyappreciated. Any remaining errors are those of the author.

Notes1. Oilseeds and protein crops were also brought into the area payment system.2. Similar conversion of price support into a direct payment incorporated into the SFP was implemented

for cotton, hops, tobacco and olive oil in 2004, for sugar in 2005 and wine in 2007.3. Countries were allowed to retain partial decoupling for specific commodities at given rates and

subject to national ceilings. In fact, about 90 per cent of direct payments made are on a fully decou-pled basis (Grethe 2006).

4. These SMRs are detailed in EU directives, many of which have been part of EU legislation for someyears.

5. The issues targeted and the criteria to be applied are set out in Annex IV of Regulation 1728/2003.It has been left to member states to prioritize the choice of issues and to draw up detailed rules, takinginto account ‘the specific characteristics of the areas concerned, including soil and climatic condition,existing farming systems, land use, crop rotation, farming practices, and farm structures’ (Article 5).

6. In the negotiations over the Agenda 2000 reform in early 1999, Germany (in the Presidency)favoured introducing co-financing for direct payments. The German proposal was dropped onlydays before the final decision, largely at the insistence of France. This option has no support fromthe current Commission.

7. This argument applies principally to the countries of EU-15. Starting with the accession of Greece in1981, with each enlargement the EU has imported a new (even if temporary) ‘small farm problem’.It will take another generation before newer member states reach this point.

ReferencesAgra CEAS. 2003. Economic evaluation of Agenda 2000. Report for Defra by Agra CEAS Consulting

and Imperial College, University of London, http://statistics.defra.gov.uk/esg/evaluation/agenda2000/wholerep.pdf.

288 Alison Burrell

Ahrens, J., M. Meurers, and C. Renner. 2006. Beyond the big-bang enlargement of the EU: preferencesand the need for flexibility. Paper presented at the Conference ‘Subsidiarity and economic reform’organized by the European Commission, 8–9 November, Brussels.

Alesina, A., I. Angeloni, and L. Schuknecht. 2001. What does the European Union do? WP 8647, NBERWorking Paper Series.

Begg, I. 2006. Subsidiarity in regional policy. Paper presented at the Conference ‘Subsidiarity andeconomic reform’ organized by the European Commission, 8–9 November, Brussels, http://www.eu-newgov.org/database/DOCS/P19aD13_regional_subsidiarity_begg.pdf.

Buckwell, A.E. 1997. Towards a common agricultural and rural policy for Europe (CARPE). Report ofan Expert Group for the Directorate General for Agriculture, European Commission, http://ec.europa.eu/agriculture/publi/buck_en/cover.htm.

Burrell, A., and A. Oskam. 2005. Turkey in the European Union: implications for agriculture, food andstructural policy. Wallingford: CABI.

CEC (Commission of the European Communities). 1998a. Agenda 2000: commission proposals,Brussels, COM(98)158 Final.

CEC (Commission of the European Communities). 1998b. Financing the European Union. Report onthe Operation of the Own Resources System.

CEC (Commission of the European Communities). 2006a. Agriculture in the European Union: statisticaland economic information 2005, Table 4.24.9.1.

CEC (Commission of the European Communities). 2006b. Community guidelines for state aid in theagriculture and forestry sector 2007 to 2013. 2006/C 319/01.

CEC (Commission of the European Communities). 2008a. Proposal for a Council regulation amendingregulation (EC) No 1698/2005 on support for rural development by the EAFRD. COM(2008)306Final, 142–161.

CEC (Commission of the European Communities). 2008b. Commission staff working document accom-panying health check proposals. SEC(2008)1886.

Cork Declaration. 1996. A living countryside. Statement issued by the European Conference on RuralDevelopment, 7–9 November, Cork, http://ec.europa.eu/agriculture/rur/cork_en.htm.

Daugbjerg, C., and A. Swinbank. 2004. The CAP and EU enlargement: prospects for an alter-native strategy to avoid lock-in of CAP support. Journal of Common Market Studies 42:99–119.

Dax, T. 2005. The on-going CAP reform — incentive for shift towards rural development activities?Paper presented at the XIth EAAE Congress, 23–27 August, Copenhagen.

Dwyer, J., N. Ward, P. Lowe, and D. Baldock. 2007. European rural development under the commonagricultural policy’s ‘second pillar’: institutional conservatism and innovation. Regional Studies 41:873–87.

Ederveen, S., G. Gelauff, and J. Pelkmans. 2006. Assessing subsidiarity. Report 133, Netherlands Bureaufor Economic Policy Analysis.

Fischer Boel, M. (Commissioner). 2007. Speech at conference ‘Mind the CAP’, 1 February 2007, atWageningen University, http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/07/59&format=HTML&aged=0&language=EN&guiLanguage=en.

Fischer Boel, M. (Commissioner). 2007. Address to the Parliamentary Agriculture Committee inNicosia, Cyprus, 29 June 2007, http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/07/455&format=HTML&aged=1& language=EN&guiLanguage=en.

Grethe, H. 2006. Environmental and agricultural policy: what roles for the EU and the member states?Paper presented at the Conference ‘Subsidiarity and economic reform’ organized by the EuropeanCommission, 8–9 November, Brussels.

Kjeldahl, R., and M. Tracy, eds. 1994. Renationalisation of the common agricultural policy?.Copenhagen: Institute of Agricultural Economics.

Lowe, P., H. Buller, and N. Ward. 2002. Setting the next agenda? British and French approaches to thesecond pillar of the common agricultural policy. Journal of Rural Studies 18: 1–17.

Oates, W. 1972. Fiscal federalism. New York: Harcourt Brace and Jovanovich.O’Connor and Company. 2007. Geographical indications and TRIPs: 10 years later … A roadmap for

EU GI holders to get protection in other WTO members. Report for the European Commission,http://trade.ec.europa.eu/doclib/docs/2007/june/tradoc_135088.pdf.


Official Journal of the European Union. 2005. Council Regulation (EC) No 1698/2005 of 20 September2005 on support for rural development by the European agricultural fund for rural development(EAFRD). Official Journal of the European Union L 227/1-40.

Official Journal of the European Union. 2006. Interinstitutional agreement between the EuropeanParliament, the Council and the Commission on budgetary discipline and sound financial manage-ment. Official Journal of the European Union C 139/1.

Olson, M. 1969. The principle of ‘fiscal equivalence’: the division of responsibilities among differentlevels of government. American Economic Review 59: 479–87.

Potter, C., and J. Burney. 2002. Agricultural multifunctionality in the WTO — legitimate non-tradeconcern or disguised protection?. Journal of Rural Studies 18: 35–47.

Rabinowicz, E., K.J. Thomson, and E. Nalin. 2001. Subsidiarity, the CAP and EU enlargement. Report2001–2003, Swedish Institute for Food and Agricultural Economics.

Sapir Report. 2003. An agenda for a growing Europe: making the EU economic system deliver. Reportof a study group (Chairman André Sapir) for the President of the European Commission.

Shucksmith, M., K. Thomson, and D. Roberts, eds. 2005. The CAP and the regions. The territorialimpact of the common agricultural policy. Wallingford: CAB.

Swinbank, A., and C. Daugbjerg. 2006. The 2003 CAP reform: accommodating WTO pressures.Comparative European Politics 4: 47–64.

Vincent, M. 2007. Extending protection at the WTO to products other than wines and spirits: who willbenefit?. Estey Centre Journal of International Law and Trade Policy 8: 58–69.

WTO. 2000. EC comprehensive negotiating proposal. 14 December, G/AG/NG/W/90, Geneva.

Documents

The CAP: Looking Back, Looking Ahead