The common agricultural policy of the European Union


Term Paper, 2019
16 Pages, Grade: 1,3

Excerpt

Table of contents

Table of contents

List of figures

List of tables

1 Abstract

2 Introduction

3 Development of CAP

4 Changes and problems
4.1 Green revolution
4.2 The supply problem
4.3 Farm Income problem

5 The new CAP Reforms
5.1 Price cuts and decoupled direct payments
5.2 Environmental direct payments

6 Today’s CAP
6.1 Employment structure in agriculture
6.2 Impact of eastward enlargement on the CAP

7 Conclusion

8 References

List of figures

Figure 1: Total expenditure of the European Union

Figure 2: Price floor

Figure 3: Green Revoltuion in the EU

Figure 4: Distribution of CAP budget

Figure 5: Employment in agriculture in the EU

Figure 6: Agriculture, forestry, and fishing, value added of the new Member States of eastern enlargement

List of tables

Table 1: Extremly uneven distribution of CAP payments, EU27, 2011

1 Abstract

Accession to the European Union brings many advantages to a nation, in particular the free movement of goods, persons, services, capital and payments. But the domestic agricultural sector also benefits from EU membership in the form of subsidies. This paper aims to examine through which measures and reformers the common argiculture policy (CAP) attempts to promote the agriculture of its member states. It also discusses the impact of CAP measures on the world market. The development of the agricultural sector in the new accession countries after the eastward enlargement will be examined in more detail. Which countries have seized the opportunity of EU accession and fully exploited their potential? Or are there also countries which have not been able to make any progress in agriculture despite high EU subsidies?

2 Introduction

The cornerstone of the common European agricultural policy falls at the birth of the European Union. In 1957, the six founding States joined forces by signing the Treaties of Rome. The main objective of this communitarisation was the joint promotion of European agriculture. Over the years, more and more countries joined the Union. Today, the European Union comprises 28 member states. The Common European Agriculture Policy (CAP) is one of the oldest policy areas of the EU and plays an important role in the EU budget. The functioning of the CAP is very complex and is regularly changed by new reforms. Although agriculture is only a small part of the economy today, it is still important to promote this sector. The CAP's main objectives are to increase productivity, secure supply and stabilise markets. (Eurostat und Europäische Kommission, 2019)

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Total expenditure of the European Union

Soucre: (Eurostat und Europäische Kommission, 2019)

Figure 1 shows EU expenditure in 2017. Agricultural policy plays an important financial role in the EU. At 44%, support for agriculture in the Member States accounts for a very large share of the EU budget. In 2017 more than 56 billion euros were invested by the CAP in the agricultural sector. Are these high expenditures also justified or how are they to be paid? These questions will be explored in the following work.

3 Development of CAP

CAP was founded in 1960 with the intention of promoting domestic agriculture through high and stable prices and strengthening it in relation to the world market. Baldwin explains that CAP initially pursued the goal of price support. All farmers in the European Union received a safe and stable price for their goods. This price was very high and was 50 - 100% more than the world price at that time. This system was called 'market intervention'. CAP assured the farmer an unlimited purchase of the goods at this price. For the farmers, this system meant a high level of security, as the market price could never fall below the CAP price limit. The aim of this CAP policy was that importers would never push European Union prices below the price limit. (Baldwin & Wyplosz, 2015, S. 219 f.)

The fact that the purchase price of CAP is significantly higher than the current world market price has some impact on the farmers' situation. Due to the higher price, farmers produce more agricultural products than they would sell on the world market without subsidies. However, the higher price also leads to a reduction in consumption in the European Union. As a result of the increased production, the sum of EU imports decreases.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Price floor

For producers and farmers in the EU, the selling price of their goods is made up of the current world market price and CAP subsidies. Consumers have to pay the same price for the purchase. However, this includes the sum of the world market price and taxation (Pw+T). At this price the entire production is sold on the domestic market (Zf). Since the time when both sides have the identical price, the production and the consumption are at the same level. As a result, imports remain identical. A major problem in this area is the considerable differences in farm size and labour efficiency in the EU. The definition of a farm is very diverse in the various member states. Especially the factors size, productivity and effectiveness show extreme differences. The agricultural sector has a large majority of supposedly small farms (less than 5 hectares). The problem is that these farms are increasingly inefficient. Controversially, only 3% of all EU27 farms are classified as large farms (more than 100 hectares). However, this small component accounts for more than half of the total land used. Another indicator underlines the strong inequalities in the distribution of farms. For example, 69% of all farms in the European Union have less than 5 hectares of land. On the basis of these facts it becomes clear that the effects of the lower price limit also have different effects on farms. As small farms have higher marginal costs, they show lower efficiency in their production. As a result, they also have a lower supply compared to large farms. This also explains why the supply curve of small farms is below that of large farms. Now one can look more closely at the effects of the price limit depending on the size of the farm. Baldwin explains that without the implementation of the price limit, the large farms would produce, but the small farms would stop producing because the market price does not cover their own marginal costs and production is not economic. With the implementation of the price limit, both small and large farms can produce. Both farm sizes benefit from the structural change. However, the level of the economic advantage varies greatly, as the large farms benefit much more than the small ones. As a consequence, the large farms are growing more and more strongly and can further increase their efficiency and production through advances in research and technologies. The producer surplus on this price floor is unevenly distributed and the gap between large and small farms is getting worse rather than better. In summary, two significant effects resulting from the introduction of the lower price limit can be noted. On the one hand, the advantages of implement this price policy are strongly distorted in the sense of large companies. Furthermore, the lower price limits are paid by a regressive consumption tax, since the lower price limit is paid by the consumers and food plays an important role in the budget of poor families. (Baldwin & Wyplosz, 2015, S. 222 ff.)

4 Changes and problems

The implementation of the new reform in 1962 brought many benefits. The Tarrifs generated revenue for the European Union. The majority of farmers were happy with the change, as they experienced an economic upswing due to high and above all stable prices. The improved income promoted social cohesion and increased or stabilised food production.

4.1 Green revolution

A true revolution in the agricultural sector resulted in the so-called 'Green Revolution'. Within a short time, the production and efficiency of the sector increased rapidly. This is due to numerous new, more efficient farming methods. Pest control through pesticides, chemical herbicides, efficiency-enhancing fertilisation methods or giant harvesting machines are just a few of the groundbreaking advances for European agriculture brought about by the Green Revolution. This development can be seen in Figure 3.

Abbildung in dieser Leseprobe nicht enthalten

Figure 3: Green Revoltuion in the EU

Soucre: Worldbank

The benefits of automation in the agricultural sector were far-reaching. The increase in the efficiency of farms brought with it a strong increase in production volumes. The EU no longer had to buy large quantities of agricultural products from countries, but was now producing more than its own needs required. As a result, the EU quickly went from being an agricultural importer to an exporter. In many economic sectors such a development has numerous negative effects. Prices often fall rapidly. But the EU farm lobby has been strong enough to protect and fight against this danger. Prices for agricultural products in the EU did not fall and remained consistently above world market levels. (Baldwin & Wyplosz, 2015, S. 224 f.)

4.2 The supply problem

Rapid progress in agricultural productivity led to production in the EU going beyond self-sufficiency and leading to strong overproduction as a consequence. European consumption was well below production volumes. Baldwin speaks of real wheat and butter mountains or milk lakes, which emerged in Europe around 1980. These surpluses were sold on the world market at subsidised prices, bought up by the EU with heavy losses or stored. These dumping sales angered the major food exporters of the world. Measures on EU markets lowered world prices and reduced the volume of exports from non-EU countries. (Baldwin & Wyplosz, 2015, S. 225 f.)

[...]

Excerpt out of 16 pages

Details

Title
The common agricultural policy of the European Union
College
University of Applied Sciences Constanze
Grade
1,3
Author
Year
2019
Pages
16
Catalog Number
V502606
ISBN (eBook)
9783346051851
Language
English
Tags
EU, CAP, Europäische Union, Agrarpolitik, GAP
Quote paper
Maximilian Gander (Author), 2019, The common agricultural policy of the European Union, Munich, GRIN Verlag, https://www.grin.com/document/502606

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