Food Policy, Vol. 22, No. 4, pp.

329-343, 1997
Pergamon © 1997 Elsevier Science Ltd. All rights reserved
Printed in Great Britain
0306-9192/97 $17.00 + 0.00
PII: S0306-9192(97)00018-3

The restructured CAP and the periphery

of the EU 1

N i c h o l a s C. Baltas
Department of Economics, Athens University of Economics and Business, Athens, Greece

Agriculture is a vital element not only of the rural economy but also of the wider
national economy for the peripheral countries of the European Union (EU), namely
Greece, Ireland, Portugal and Spain. It accounts for a significant part of their econom-
ies with the highest share in national income and employment among the member
states of the EU. The purpose of this paper is to evaluate and examine in a broad sense
the consequences of Common Agricultural Policy (CAP) reform for the peripheral
countries of the Union. The major conclusion is that the redistributive effects of the
reform for cereals, though in favour of the Mediterannean states, are minor. In the
milk and beef sectors, given that market prices (until the BSE scare) did not fall in
line with institutional prices in conjuction with the compensation payments, the reform
had a beneficiary impact on Irish livestock producers in the early years. For the south-
ern European countries, post-reform changes are limited, although a positive effect is
observed on milk output and farmers' income in Greece and Spain. Moreover,
although there is no significant change in the sheelv-goat sector, there is a net loss for
tobacco producers. Finally, the most positive aspect of the reform for these countries
appears to be the early retirement scheme for older farmers. © 1997 Elsevier Science
Ltd
Keywords: restructured CAP, peripheral-countries, EU

Introduction
The European Union's (EU) Common Agricultural Policy (CAP), which has been characterized
as the "cornerstone" of the whole EU, has been the focus of controversy and attempted reform
for a long time. In practice, however, the pressure for reform from within the EU over the
past 15 years has arisen mostly because of budgetary concerns, while the pressure from other
affected countries, mainly the US, Canada, Australia and other exporters of temperate agricul-
tural products, have not resulted in much change. The recent GATT agreement over agricultural
trade liberalization, however, has prompted a renewed attempt at CAP reform, reflected in
Commissioner Ray MacSharry's proposals (Commission of the European Communities,
1991a, b).
The principal aim of the "MacSharry Plan" was to shift CAP support from a regime based
on the support of commodity prices, in which producer benefits are largely proportional to the

~An earlier version of this paper was presented at the 4th Biennial International Conference organized by the European
Community Studies Association, Charleston, SC, USA, 11-14 May 1995.

329
330 The restructured CAP: N. C. Baltas

volume of output, towards a system of compensatory payments to farmers. This was intended
in part as a means to redistribute policy benefits in favour of smaller producers, a shift that
would also result in a redistribution of support among member states given the variation in
farm size structures across the Union.
The purpose of this paper is to evaluate and examine in a broad sense the consequences of
the latest CAP reform for the peripheral countries of the Union. While there is no unique
definition of the regions constituting the peripheral countries of the Union, in terms of agricul-
tural structure there are major differences between the peripheral, mostly Mediterranean, areas
of the Union and the rest. For instance, in Greece, Ireland, Portugal and Spain agriculture's
shares in their national income and total employment respectively are significantly higher than
in the other EU countries. Furthermore, farms in Spain, Greece and Portugal, are on average
smaller and have lower labour productivity and higher shares of Mediterranean products, com-
pared to farms in the north. For the purposes of this paper, and in order to facilitate the
statistical work, the peripheral regions of the EU will be identified with the four countries
mentioned above.
The paper consists of five sections. The following section reviews agriculture in the periph-
eral countries. The reform of the CAP is described in Section Three. In Section Four the effects
of CAP reform on the agricultural sectors of the peripheral countries are discussed. Finally,
in Section Five, some conclusions are drawn and some policy implications are identified.

Analysis of the current position of agriculture in the peripheral countries

For the southern European countries and Ireland, agriculture is a vital element not only in the
rural economy but also of the wider national economy. It accounts for a significant part of
their economies, contributing the highest share of national income and employment among the
member states of the EU, in which the average level is 3% and 6% respectively. Greece's
agriculture occupies the first place in terms of its share in GDP and total employment followed
by Ireland, Portugal and Spain (Table 1). These figures, coupled with persistent structural
problems, such as an ageing population, a substantial number of farmers with persistently low
incomes, etc., explain the relatively protectionist attitude of these countries which translates
into concessions demanded in terms of both price policy and structural aid.
Greece's agricultural gross value added per hectare is double that of the other three countries
(Table 2). However, in terms of agricultural gross value added per person employed, it holds
the third place with an average labour productivity that represents 55% of the EU average.
This can be attributed to the large number of people employed in Greek agriculture coupled
with the small and fragmented lots. This, in combination with the relatively dry climatic con-

Table 1 Agriculture in the economy and in employment

Country Share of agriculture in GDI~ (%) Share of agriculture in total

employmentb (%)

Greece 16.1 21.4

Ireland 8.1 13.8
Portugal 4.7 11.6
Spain 4.1 10.1

a1991 data; b1992 data.

Source: European Commission (1993).
The restructured CAP: N. C. Baltas 331
Table 2 Area, production and employmenP

Country Utilized Final GVA b (million GVA (per ha Employment GVA per
agricultural production of ECU) ECU) in agriculture person
area (000 ha) agriculture (000) employed
(million ECU) (ECU)
(1) (2) (3) (4) (5) (6)

Greece 5741 8616 6301 1098 793 7946

Ireland A.4 A.A. 4420 2611 588 154 16,955
Portugal 4532 3577 1713 378 522 3282
Spain 26,389 23,840 12,090 458 1253 9649
Total of EC-15 139,864 210,890 116,432 832 8155 14,277

"Data for the four countries refer to the year 1992, for the total of EC-15 mostly to 1992 and for the 3 new member
states to 1991
bGVA = Gross value added of agriculture.
Sources: (1) European Commission (1993); (2) Eurostat (1993); (3) OECD (1978-91).

ditions and the mountainous nature of the land, leads to low efficiency and high production
cost for most of the agricultural products. Agricultural labour productivity in Ireland, Spain
and Portugal is double, one and a half times and half as much as that of Greece, respectively.
In any case, the southern countries of the EU are characterized by large, labour-intensive
agricultural sectors and low labour productivity resulting in low farm incomes. A consequence
of this are the marked disparities in farm incomes between the EU member states. Thus, the
richest average farmer (Belgium) has an income approximately twice as high as the Community
average and is more than eight times better off than the poorest average farmer (Portugal).
Average farm sizes in the southern countries are small. In Greece and Portugal they are
well below the EU average while Spain's are close to it. On the other hand, Ireland is well
above the EU average (Table 3). Average sizes, however, are misleading due to big regional
variations. Moreover, averages may be pulled down by the existence of numerous small-hold-
ings which are farmed on a part-time basis. A better indicator is provided by the "European
Size Units" (ESU). Using this definition, the southern European countries' average is about 5
ESU while Ireland's is more than double that.
Agri-food products account for a relatively high share of total Irish exports, with grass-

Table 3 Farm sizes"

Country Average size (ha) Average size (ESU)

(1) (2)

Greece 4.0 4.2

Ireland 26.0 11.6
Portugal 6.7 3.9
Spain 15.4 5.6
EC-12 14.0 11.2
EC-15 14.2 --

aData for EC-12 refer to the year 1989/90 and for the 3 new member states to the year 1988.
Sources: (1) Eurostat (1994); (2) Eurostat (1988).
Note: ESU" European Size Units refer to the total "standardized gross margin" of the holdings in question. The
"standardized gross margin" is the difference between the standardized monetary value of gross production and the
standardized monetary value of specific cost items (mainly purchased inputs). In the 1989/90 survey 1 ESU was equal
to ECU 1200.
332 The restructured CAP: N. C. Baltas

Table 4 Share of agri.food products a in total trade (1992)

Country Share of agri-food products:

In total imports (%) In total exports (%)

Greece 11. I 31.8

Ireland 8.9 21.0
Portugal 24.3 11.9
Spain 18.7 15.6

ai.e. SITC 0 + 1 (included agricultural raw materials, processed foodstuffs, etc.).

Source: European Commission (1993).

based products--meat, livestock, dairy products--playing a major role. In terms of imports,

agri-food is relatively unimportant. It is estimated that approximately 40% of Ireland's net
foreign exchange earnings come from this sector. The southern European countries present
a mixed picture. Greece, Spain and Portugal (especially the first two) are big exporters of
"Mediterranean" produce z (Table 4). But these countries also have substantial agricultural
imports, particularly feed grain and livestock products. Portugal is even more dependent on
such imports.
Regarding the contributions to and receipts from the EU budget, all four countries are net
receivers. Ireland, a country with a large agricultural sector and high agri-food exports, is a
big beneficiary of the budget (Table 5). Spain and Greece do quite well out of both the FEOGA
"Guarantee" and the structural funds. Portugal is a net beneficiary only thanks to the structural
aid it receives. If the net receipts are expressed in terms of utilized area and employment in
agriculture (as reported in Table 2), the hierarchy of beneficiaries is somewhat different. Ireland
takes first place, followed by Greece, Portugal and Spain. All four countries get quite a lot
from the "Cohesion Fund" which was set up to facilitate the convergence of their economies

Table 5 EU budget, 1993 (million ECU)

Country Contributions Receipts (payments) Net receipts

Total FEOGA guarantee

Amount % Amount % Amount %

Greece 1011 1.58 5148 8.02 2719 7.90 4137

Ireland 567 0.89 2939 4.58 1606 4.67 2372
Portugal 910 1.42 3418 5.32 479 1.39 2508
Spain 5173 8.09 8263 12.87 4188 12.17 3090
EC-12 63,973 100.00 64,208 100.00 34,423 100.00 235

Source: Court of Auditors (1993, pp. 15 and 37).

2FEOGA expenditure was traditionally dominated by the support provided to the northern member countries. "Too
much" was produced of "northern commodities" which received "above-average protection". The "southern commodi-
ties" (i.e. fruit, vegetables, olive oil, cotton, wine, sheep and goat meat and tobacco) have traditionally played a minor
role in the history, and certainly in the cost, of the CAP. Conversely, CAP expenditure has traditionally been greatest
for the northern commodities (i.e. milk, sugar, beef and veal). After Spain's and Portugal's accession, Mediterranean
commodities (in particular, olive oil, peaches, wine, cotton, tobacco, etc.) have become more noticeable in terms of
CAP expenditure.
The restructured CAP: N. C. Baltas 333

with those of the other EU member states. The objective of social and economic cohesion
became the subject of a special protocol as well as o f specific provisions in the Maastricht
Treaty (Articles 130 (a-e)). The Cohesion Fund provides financial contribution to projects in
the fields of the environment and transport infrastructure. Finally, a Community Support Frame-
work II (CSF II) was established in 1993 that will lead to further financial transfers to the
poorer regions of the Community. Within this context, the farm sectors o f the peripheral coun-
tries are expected to benefit both from a very high proportion of Community co-financing
(around 85-95%) and from the more selective and differentiated way of structural aid pro-
vision.

Reform of the CAP

On 21 May 1992, the Council of Ministers reached political agreement on far-reaching changes
to the CAP. Although the reform makes fairly wide-ranging changes to the rules in force
hitherto, it does not invalidate the objectives as laid down in Article 39 of the EEC Treaty
and the three principles on which the C A P was founded, namely a common market for agricul-
tural products; Community preference providing protection against world market fluctuations;
and financial solidarity through the common financing of the policy.
The retention of these principles has meant that the basic policy instruments, i.e. intervention
buying-in to support market prices and variable levies and export refunds to close the gap
between Community and world market prices, have been kept in place, albeit at much lower
levels. In addition, they have been supplemented by new instruments, namely:

• a substantial reduction in the prices of agricultural products to make them more competitive
both within the Community and on world markets; 3
• compensation for the price cuts in the form of hectare or headage payments based on historic
data and thus not directly linked to the quantities produced;
• implementation of measures to limit the use of the factors of production (set-aside of arable
land and stocking rate criteria) alongside the retention of earlier supply management meas-
ures such as the milk production quotas;
• introduction o f accompanying measures such as promotion of environmentally friendly farm-
ing, afforestation and early retirement.

The reform implies a major shift in emphasis from price support to forms of farm support

3Before the CAP reform, world market prices for most agricultural products were well below those of the EU. Hence,
the consumer on the one hand gained from price stability and availability of plentiful supplies, but on the other hand
lost from having to pay very high prices. Moreover, as the poor in the population spend a relative high proportion
of their disposable income on food and the CAP's price support mechanism keeps food prices high, poorer people
and the poorer member states ended up by paying a large share of the burden of the CAP. For example, the proportion
of income going to the consumption of food in Greece, Ireland and Portugal is twice the EU average. Therefore, the
CAP caused rmms/ve transfers of income from consumers to producers of food within countries and, through trade,
between EU countries. Moreover, since the CAP failed to concentrate on poor farmers, the problem here was not
only that the poor people of Europe were paying for the cost of the CAP disproportionately, but also that those who
benefited most from the policy were the richer farmers of the Community.
334 The restructured CAP: N. C. Balms

not directly linked to p r o d u c t i o n . 4 It covers 75% of agricultural production falling under com-
mon market organizations (i.e., cereals, oilseeds, protein crops, tobacco, milk, beef and sheep-
meat) and is being phased in over the three marketing years 1993/94 through 1995/96.

C o n s e q u e n c e s of the C A P reform for the peripheral countries of the E U

Literature related to the effects of CAP reform on the agriculture of the peripheral countries
is rather limited. There are some working documents but these are not widely available. The
existing studies examine some aspects of the effects which CAP reform is likely to have on
the agricultural sectors of the EU countries and the implications for relations with countries
outside the Community (e.g. Josling, 1994; Swinbank, 1993). Since a detailed quantification
of the impact of CAP reform on the peripheral countries of the EU is not always feasible since
there is no analytical data available (published) for the three years of CAP reform for all the
peripheral countries, a mainly qualitative approach is attempted here. More specifically, the
impact of CAP reform on the related products are analyzed for the peripheral countries of
the EU.
Although it is early to fully evaluate the impact of the CAP reform on cereals, given the
lack of relevant hard data, some tentative conclusions can nevertheless be drawn. Total cereal
production had dropped by about 3.5% in the three successive years following the reform.
One of the major contributory causes of this cut-back in production was, undoubtedly, the
success of the set-aside programme, introduced as an integral part of the whole reform process.
The area devoted to cereals has been reduced more or less by the acreage predicted by Allanson
(1993) S (Table 6 Table 7). It had stood at around 36 million ha following the decision taken
by the Council of Ministers to reduce set-aside by 3 percentage points in the 1995/96 marketing
year. Equally significant was the fact that the first two years have not seen the increase in
yields which would offset any reduction in the area under cereals. In this context, it is not

4Before the reform of the CAP the price support policy provided a strong incentive to the big farmers, who took
advantage of the guaranteed high prices and the opportunity to make a profit by investing in agriculture to produce
as much as possible irrespective of market demand. A consequence of the price support policy was that the largest
and the most intensive farms absorbed the greater part of the FEOGA expenditure although their owners were certainly
not those most in need of better living standards. So, 80% of the support provided by FEOGA was devoted to the
20% of farms which accounted for the greater part of agricultural land. Obviously, the system did not take adequate
account of the income situation of the vast majority of small and medium size family farms in the peripheral countries
of the EU.
5Allanson analyses the distributional implications of commodity-based support programmes by means of an empirical
analysis of the MacSharry proposals for the modulation of support in the cereals sector. The results of the study reveal
that in the EU-12 the estimates indicate that more than 90% of holdings, accounting for 40% of the total cereals area,
would be exempt from set-aside (Table 6). However, due to the relatively low reference yields in the "Mediterranean"
states, the holdings and the area under cereals that would be exempt from set-aside are significantly lower for these
countries. Table 7 presents estimates of the proportion of the total cereals area that is expected to be set aside. Overall,
it is predicted that 8.9% of the EU-12 cereals area would be set aside and that this would lead to a 9.4% fall in
output, calculated on the basis of yields given in Table 6. These cutbacks would be distributed across the Community's
peripheral countries as follows: Portugal (1.3%), Greece (1.4%), Spain and Ireland (9.4%). Under the MacSharry Plan,
modulation would induce some very limited redistribution of support in favour of member states with low yields and
poor farm size structures in which virtually almost all producers are exempt from set-aside. Thus, the shares of output
and producers' returns would rise in Portugal from 0.94 to 1.03% and from 0.94 to 1.01% respectively, in Greece from
2.74 to 2.99% and 2.74 to 2.93%, while in Ireland and Spain they would remain practically unchanged. Karantininis et
al. (1994), investigating the efficiency of compensatory payments which are induced under CAP reform on Greek
cereals, also finds that the new regime is a "second best" policy which improves the total welfare of both producers
and consumers. Chetoui (1996) finds that cereal price reductions due to the CAP reform would lead to a 12% increase
in the use of Greek cereals and a 13% decrease in their grain substitutes consumption, if other feed prices were to
remain unchanged.
The restructured CAP: N. C. Baltas 335

Table 6 Area equivalent limits and the distribution of holding with cereals by member state of the periphery

Country Reference 1992 tonne Proportion of holdin~ with Proportion of cereals area on
yield" (t/ha) limits (area cereals and subject to: holdings subject to:
equivalent)
(ha)

No set-aside Set-aside (%) No set-aside Set-aside (%)

(%) (%)

Greece 3.40 27.06 99.33 0.67 90.61 9.39

Ireland 5.46 16.85 88.91 11.09 37.16 62.84
Portugal 1.66 55.42 99.87 0.13 91.54 8.46
Spain 2.50 36.80 93.30 6.70 37.12 62.88
EC- 12 4.60 20.00 90.52 9.48 40.56 59.44
weighted mean

aReference yields were calculated over the period 1986-90 from data on total cereal yields reported in Cereal Statistics
(Home Grown Cereals Authority, various years).
Source: Allanson (1993, Table 2).

Table 7 Estimated set-aside obligations and the distribution of cereal output and producer returns by member
state of the periphery

Country Proportion of Proportion of EC-12 cereals output Proportion of EC-12 producer

cereals area to under: return under:
be set aside(%)

Old regime(%) New regime(%) Old regime(%) New regime(%)

Greece 1.41 2.74 2.99 2.74 2.93

Ireland 9.43 1.01 1.01 1.01 1.01
Portugal 1.27 0.94 1.03 0.94 1.01
Spain 9.43 13.38 13.40 13.38 13.38
EC-12 weighted 8.92 (100) (100) (100) (100)
mean

Note: Cereal output shares are calculated from the structural data in Table 1 (Allanson, 1993) using the reference
given in Table 2. Producer returns are calculated under the old regime as the product of output and the old buying-
in price of 155 ECU/t, and under the new regime as the product of output and the final target price of 100 ECU/t,
plus all compensation payments.
Source: Allanson (1993, Table 3).

without interest to note that the agro-chemical industry reports reduced purchases of fertilisers
and pesticides by farmers (European Commission, 1995, p. 8). However, in the third year, the
fall in yields in Spain6 and Portugal, due to bad weather conditions, was partially compensated
for by a rise in yields in other member states, particularly in Northern Europe. Under the

6The compensatory payments policy led to an improvement in the Spanish cereals sector (Astorquiza et al., 1996).
Farm economic results were better in the specialized cereals farms than in those with diversified crops, due to the
farmer's dependence on the compensatory payments. In the specialized cereals farms, compensatory payments exceed
50% of gross margins and apparently the farm size does not affect this aspect. Besides the economic results, the
surveys carried out also detected the following qualitative effects:
• The increase in liquidity caused by the new policy has increased availability of credits for farmers.
• There is great uncertainty about the maintenance of the compensatory payments in the future.
• There is no belief that the new policy is bringing about deprofessionalization of farming, although it is thought
that it is opening up possibilities for emerging non-professional farmers.
• There is a certain feeling of precariousness and dependence on the administration.
336 The restructured CAP: N. C Balms

reformed CAP, the intervention price for all cereals was reduced, reaching 119.19 ECU per
tonne in the final year of the reform. These reductions were not fully offset by compensatory
payments, which reached 54.34 ECU per tonne per ha, estimated on the basis of each country's
historical cereal yield. The drop in production resulted in a balanced internal cereals market
in which the prices that prevailed were higher than the intervention prices and thus farmers
from all countries benefited in the early years of reform, especially as the peripheral countries
were also able to take advantage of devaluing currencies to raise nominal support prices during
this period.
The reform concerning milk does not change fundamentally the old system. Although it
tightens somewhat the overall quota, it exempts Greece and Spain, which originally received
a quota increase of 100,000 and 500,000 tonnes respectively. This will have a positive effect
on their milk production, taking also into consideration the reduction in feeding costs due to
cuts in the price of cereals. Moreover, the 5% reduction of the butter intervention price spread
over a two-year period does not influence at all the southern countries to which, being highly
deficitary, the intervention mechanism is not applied. In any case, milk production in the
southern countries accounts for less than 10% of total EC cow's milk production. On the
contrary, in Ireland, agriculture depends heavily on dairy products. However, it should be
pointed out that under the 1992 reform headage payments are paid to producers, the majority
of whom are small and medium size operators. Moreover, livestock producers are eligible for
headage payments made for their dairy cows under the less favoured areas Directive.
The current EU situation in the market for milk and dairy products seems fairly balanced
after CAP reform. It should, however, be underlined that market stability is still fragile and
cloaks a structural surplus which consistently requires large-scale intervention in the form of
subsidized end-uses. Milk and dairy product quotas remained unchanged, except for those
applying to Greece and Spain which were increased in order to take into account the serious
milk deficits of these two countries, to reach the level of 630,000 and 5,567,000 tonnes respect-
ively. The intervention price for butter was further reduced by 3% as from July 1994 in order
to improve its competitiveness following earlier price cuts in 1993. As a result, the target price
for milk fell by 1.5%. These moves have been accompanied by a drop in butter production
and a sharp fall in the intervention stocks of butter and skimmed-milk powder which now
stand at historically low levels. These developments have not had any significant effect on the
southern EU countries' dairy products. In Ireland, the compensation payments did not fully
offset the reductions in institutional prices. However, because market prices did not fall in line
with institutional prices--partly due to the continuing rise in cheese production as a result of
increasing consumer demand--farmers did benefit in the early years of the reform.
The effects of the reform on the beef sector are similar to those on the milk sector. Inter-
vention prices for beef and veal were reduced by 6.2% at the beginning of July 1993 and by
a further 5.3% at the beginning of July 1994. Two further reductions by 5% each have also
taken place since then, as provided for in the 1992 reform. These institutional price reductions
were passed on to the market prices, which were around 80% of the prevailing intervention
prices. However, the reduction in the beef intervention price was outweighted by the reduction
in feeding cost and the premia on bovine animals. Again, this reform left almost all farmers
in the south unaffected. On the other hand, in Ireland, because market prices did not fall in
line with institutional prices in conjunction with compensation payments, the reform had a
beneficiary impact on livestock producers in the early years.
In the sheep-goat sector, the Union is only 82% self-sufficient. About 43% of production
is located in the southern countries of the EU and 5% in Ireland. The basic mechanism of
The restructured CAP: N. C. Balms 337

support involves a sheep-goat premium. The reform proposals limit the number of ewes eli-
gible for this premium to 1000 head per producer in the less favoured areas and to 500 else-
where. In any case, flock size cannot exceed the producer's reference flock (i.e., the average
for 1989, 1990 or 1991). With this reform, the Union tries to stabilize the existing level of
production in the sheep-goat sector which has in fact registered successive drops of - 3.1%
in 1992 and 1993 and - 1.4% in 1994 and remained stable in 1995. In any case, no significant
changes have taken place in the peripheral countries, either in the level of output or farm
incomes following CAP reform.
In the case of tobacco, where more than 90% of EU production is located in the four
Mediterranean countries (including Italy), a quota system was introduced for the first time,
reducing the global maximum quantity from 370,000 tonnes in 1993 to 350,000 tonnes in the
1994-97 period. This reform established a quota scheme by member state and group of tobacco
varieties (there are now 8 groups of varieties instead of the 34 groups recognized under the
old system), and puts an end to intervention and export refunds. The 17% drop in the EU's
production of raw tobacco in relation to 1992 is the direct result of the first-time application
of the reform adopted in mid-1992. Obviously, this measure negatively affected farm incomes.
Greek farmers especially had significant losses because of the country's relatively large tobacco
production (a little less than half of the total EU output). This reduction is significant for
certain varieties such as flue-cured tobacco produced in Greece, which fell from 71,526 tonnes
in 1992 to 37,921 tonnes in 1993 (i.e., a reduction of 47%). Moreover, since tobacco production
is localized and is one of the most labour intensive agricultural products, this implies that net
per farm losses in some regions were much larger than average.
The last part of CAP reform concerns structural adaptation and agri-environmental action.
Regarding the environmental part, the measures 7 introduced are mainly applicable to farmers
who use intensive cultivation methods, which is generally not the case for the southern farmers.
In Ireland, considerable progress has been achieved in the area of farm pollution control in
the period between 1989 and 1993 and environmentally friendly farming has been encouraged
under a national pilot scheme which has operated on a limited basis since 1992. Two important
measures will form part of this strategy, namely the continuation of the Operational Programme
for the Control of Farmyard Pollution supported by the Structural Funds and the Agri-Environ-
ment Scheme to be introduced under the CAP reform agreement, co-financed by the Guarantee
Section of the FEOGA. In addition to encouraging farmers to follow a specific code of good
environmental practice, this scheme will also address requirements in relation to overgrazing
problems, danger to Natural Heritage Areas (formerly known as Areas of Scientific Interest)
and water quality sensitive areas. All on-farm investment schemes must conform to strict
planning/environmental standards and grant aid is only payable when the national and EU
authorities are satisfied that the necessary requirements have been met.
Most of the 158 programmes submitted by the member states under Regulation (EEC) No.
2078/92 have been approved by the Commission (European Commission, 1995, p. 109). This
Regulation continues and extends the measures provided for in Article 19 of Regulation (EEC)
No. 2328/91, which came into force before the reform of the CAP. The programmes submitted
by the member states set out a variety of approaches to solving environment problems in
agriculture. In accordance with the principle of subsidiarity, the programmes are approved by

7The agri-environmental measures will be directed at promoting environmentally friendly production measures for
which farmers would receive extra aids in recognition of their role in the protection of the rural environment and
management of the landscape.
338 The restructured CAP: N. C. Baltus

the Commission on condition that the principal objectives laid down in Regulation (EEC) No.
2078/92 are observed. In addition, the budgetary allocation for Regulation (EEC) No. 2078/92
was substantially increased.
The plans on afforestation 8 influence mostly the northern farmers, as farm sizes in the south
are typically too small to be suitable for afforestation. 9 Conversely, the early retirement
scheme ~° instituted by Regulation (EEC) No. 2079/92 will be particularly beneficial in the
periphery of the EU, since in the South nearly three-fifths of the farmers are over the age of
55 while in Ireland less than half are above that age. The resulting restructuring of farm
holdings will create the necessary conditions for maintaining the maximum number of viable
farm households in the wider rural economy. Moreover, this scheme, which is co-financed by
the EU, is characterized by higher levels of aid and greater flexibility in comparison to previous
schemes. Although it is not compulsory, it could potentially prove very important from the
social equity and macroeconomic perspectives, given the inadequate pension systems of these
countries and their mounting social security and pension budgetary expenditure.
By 1995, nine member states (with the exception of the United Kingdom, The Netherlands
and Luxemburg) have presented draft schemes for early retirement from farming. Taken
together, the programmes' objective is the retirement of 184,200 farmers and 7500 farm work-
ers over the next six years (European Commission (1995, p. l l0). The area released should
amount to almost 3 million ha. It is estimated that around 5% of this land will be used for non-
agricultural purposes, such as forestry and the creation of ecological reserves. The remainder of
the area released will be taken over by other farmers, who will use it either to extend their
holdings or set up as full-time farmers.
Undoubtedly, there is a new thrust to the MacSharry reform. The reductions in price support,
mainly in the cereals sector, are coupled with direct compensatory payments. Hence, the idea
is that the burden of CAP support should shift from the consumer to the general tax-payer.
The increased CAP budget ~t comes basically from the compensatory payments to cereal, milk
and beef producers, where the overall cost will increase. The overall budgetary cost in the
tobacco, wine, olive oil and sheep-meat sectors will decline (Table 8 Table 9). Looking at
these two tables we can notice some minor differences between estimated and actual figures.
The benefits to consumers resulting from the reformed CAP are rather small but have marked
distributional implications which are reported in Table 10. Thanks to lower overall price levels,
the total envisioned reduction in consumer expenditure in the EC-12 is about 6.3 billion ECU
or about 0.18% of their total final consumption expenditure. It is clear that in the two poorest

~Against the background of the Community's deficit in wood and wood products and the importance of forestry for
land use and the environment,the afforestation programme will considerablyincrease the financialmeans available
for the afforestation of agricultural land which is no longer needed for productive purposes.
9Pursuant to Regulation(EEC) No. 2080/92 institutinga Communityaid scheme for forestry measures in agriculture,
17 programmes (11 national and 6 regional) and 19 sub-programmes(for Italy) were approved by the Commission
in 1994. Still under examinationare 5 regional programmes (for Germany,Italy and France).
~°The early retirementscheme increases the aids availableto older farmers wishing to step out on conditionthat the
land released is used to improve the production structure and economic viabilityof agriculturalholdings (increase in
size, especially in regions where holdings are fragmented), or is used for non-agriculturalpurposes if restructuring is
not possible.
t~The 1994 financialyear is the first in which the main budgetary effects of the reform of the CAP were felt. The
guidelinefor 1994 was set at ECU 36,465 millionagainst36,657 in 1993, which bringsthe share of FEOGAGuarantee
Section down to 49.7% of the total against 54.4% in 1993. The Commissionestablished that the fair compensation
offered to producers to offset the lower prices would initially entail higher budget expenditure,which is warranted if
the situation of the CAP can be improved. In 1997 when the new provisions will be fully operational, FEOGA
Guarantee Section expenditurefor that year will be much less than would have been the case if the system applying
prior to the reform of the CAP had been maintained.
The restructured CAP: N. C. Baltas 339

Table 8 Budgetary benefits and costs from CAP reform (in million ECU)

Product Net financial cost of CAP reform proposals

1993 1994 1995 1996 1997 Total 1993-97

Cereals - 688 - 668 702 743 201 290

Milk 240 894 1400 1480 1367 5381
Beef-meat 53 81 180 365 365 1044
Sheep-meat - 119 - 168 - 210 - 216 - 220 - 933
Tobacco - 86 - 236 - 326 - 404 - 404 - 456
Net FEOGA - 550 - 47 1746 1968 1309 4426
Costa

alncludes some other minor items.

Source: Net benefit data in individual sectors and years are from EC Commission working documents.

Table 9 Budget appropriations for 1994 and 1996

Sector 1994 1996

Arable crops 13,425 17,185

Sugar 2099 1942
Olive oil 1999 1781
Fruit and vegetables 1722 1729
Wine 1567 1113
Tobacco 1235 1106
Milk and milk products 4244 4214
Beef and veal 4786 5458
Sheep- and goat-meat 1587 1353

Source: FEOGA, Eurostat and DG VI.

Table 10 Estimated consumer benefits from the proposed CAP reforms

Country Products (million ECU) Per capita Per capita benefit

benefit as percentage
(million of consumption
ECU) expenditure (%)

Cereals Milk Cheese Beef Total

Greece 59.0 7.3 110.1 43.6 220.1 21.9 0.571

Ireland 19.7 8.8 17.0 15.3 60.7 17.3 0.279
Portugal 48.8 11.9 27.2 30.7 118.6 11.5 0.394
Spain 158.3 57.3 68.3 106.8 390.7 10.0 0.162
EC-12 1492.6 433.1 2674.3 1712.6 6312.7 19.4 0.178

Note: Computed from data in EC Commission (various years) and the hypotheses of the MacSharry proposals. The
per capita concumption of various commodities in the EC member states is based on 1989 data.
Source: Sarris (1992, Table 8).

countries of the EC, Greece and Portugal, benefits to the consumers a m o u n t to m u c h l a r g e r

shares of the average consumer basket compared to t h e o t h e r c o u n t r i e s . B u t e v e n w i t h i n e a c h
E C c o u n t r y , t h e b e n e f i t is h i g h l y s k e w e d in f a v o u r o f t h e p o o r e r h o u s e h o l d s . F o r i n s t a n c e , i n
Greece Sands (1992), using the results of the 1987/88 household budget survey, found that
340 The restructured CAP: N. C. Baltas

the shares of bread and cereal products and of beef and dairy products in the food and total
expenditures of the poorest households are 39.1 and 19.0% respectively, while for the wealth-
iest households they are 27.8 and 5.7% respectively. Clearly, the benefits in terms of price
reductions for consumer goods will comprise a much larger portion of the budget of the poorer
households, compared to that of the richer ones. Table 10 shows that the average consumer
benefit on a per capita basis is highest for Greece (21.9 ECU/capita) followed by Ireland
(17.3 ECU/capita), Portugal (11.5 ECU/capita) and Spain (10 ECU/capita). Most of the savings
will occur in the beef and dairy products, mainly as a result of cereal price reductions.
When the total consumer benefits of Table 10 are added to the net budgetary benefits of
Table 8 we obtain the net benefits of the CAP reform proposals, which will amount in 1997
(the year of presumed steady state) to a total net gain of 7.62 billion ECU per annum.
Zanias and Maraveyias (1996) provide some quantitative results j2 on the cohesion impact
of the CAP among the different member states. Three cohesion member states, Greece, Ireland
and Spain increased slightly their overall benefits from the operation of the CAP in 1 9 9 4 -
essentially the first post-reform year-----compared to the previous five years, whereas the fourth
member state, Portugal, slightly reduces its losses (Table 11). The benefits for Greece arise
from the direct budgetary payments to producers and its low contribution to the budget. Other-
wise, Greece's losses from intra-EU trade nearly breaks even from extra-EU trade. The losses
from trade are associated with the lower protection rate for its exports (mainly fruit and

Table 11 Benefits/losses on the cohesion impact of the CAP, 1994 (million ECU)

Country Net trade transfer Contributions Direct Total Total benefit/losses

to FEOGA payments benefit/losses(l)
from + (2) + (3) + (4):
FEOGA
Guarantee

Intra EU Extra EU As Per annual

trade trade percentage work unit
of GVA"
(%)
(1) (2) (3) (4) (5) (6) (7)

Greece - 271.0 11.5 516.6 2,145.2 1,369.1 23 2,013.7

Ireland 451.0 199.4 289.9 471.4 831.9 33 3,615.4
Portugal - 213.5 - 28.2 464.7 305.9 - 400.6 - 29 - 548.0
Spain 451.4 137.6 2,642.6 3243.3 1,189.8 11 1,465.2

a1993 gross value added was used for 1994.

Source: Zanias and Maraveyias (1996, Tables 1-3).

~2Tbe total benefits/losses have been calculated as follows:

Member State Benefit = Ei{( XI~- II~)*[NPR~/(1 + NPRI)} + (XT~ - ITi)*[NPRJ(I + NPRI)] + DPI} - BC,
where:
Xli = intra-EU exports of commodity i;
II~ = intra-EU imports of commodity i;
NPRi = nominal protection rate of commodity i;
XTi = extra-EU exports of commodity i;
IT~ = extra-EU imports of commodity i;
DPi = direct payments related to commodity i;
BC = budgetary contribution (attributed to FEOGA Guarantee Section) of the member state.
The restructured CAP: N. C. Baltas 341

vegetables) and the higher ones for its agricultural imports (mainly livestock products). Ireland
gains because of positive trade transfers (it exports highly protected agricultural products) but
also from its relatively low contribution to the agricultural budget (low income country). Spain
benefits from direct payments as well as from positive trade transfers. It should be noted that
Spain joined the group of "gainers" in 1993 and more than tripled its benefits in 1994. Portugal
loses out, despite its low budgetary contribution, due to low direct payments and because it
exports lower-protection agricultural products. Thus, although the CAP reform has slightly
reduced the loss, it has failed to turn the second poorest country in the EU (Portugal) into a
gainer. In terms of benefit/loss per annual work unit, it is the Irish farmers who benefit most
followed by the Greeks and the Spaniards.

Concluding remarks
From the foregoing analysis we have seen some distributional effects on the peripheral coun-
tries of the EU due to reform of the CAP. The first major conclusion is that the redistributive
effects of the modulation proposal for cereals incorporated in the MacSharry Plan are minor.
This limited redistribution of support operates to the advantage of the Mediterannean states
where low yields and poor farms size structures are the norm, because the set-aside scheme
does not apply and price reduction is compensated by hectare payments.
In the milk sector, the increase of quotas for Greece and Spain had a positive effect on milk
production and farmers' incomes, while for Portugal the situation has remained the same. On
the other hand, the reform had an overall small positive impact on the Irish milk and dairy
sectors. The effects of the reform in the beef sector are similar to those in the milk sector. In
the sheep-goat sector no significant change occured in the level of output and farm income.
However, there is a net loss for producers of tobacco, a typical southern product. The change
in the tobacco regime resulted in income reductions of the southern EU countries. However,
the reform entails substantial consumer gains which are proportionally higher in the south,
particularly to the poorer households.
The impact of the reformed CAP on the total benefits/losses is rather mixed, because the
three member states Greece, Ireland and Spain are net beneficiaries, whereas Portugal continues
to be a looser. Therefore, although the philosophy of the reformed CAP favours a more cohes-
ive impact, this does not seem to be, at least strongly, supported by quantitative evidence.
Maybe, the very mild improvement on cohesion that the reform had in 1994 becomes greater
when the results for 1995 and 1996 will be available. Thus, a complete picture of the reform
on cohesion can be obtained when data from the full implementation will be disposable.
Moreover, one need not forget that, in the reform, by giving a greater play to the market
forces will lead to a more competitive structure in the agricultural sectors of certain peripheral
countries (most notably Greece and Portugal), this is going to have a positive affect on cohesion
in the longer term. Such a prospect has definitely to be assisted by appropriate structural
measures which eliminate the factors that have operated as obstacles in this process in the
past. However, some direct payments under the reformed CAP are tied to factors of production
(i.e. the compensatory amounts which are linked to historical area and yield). In such cases,
negative results for competitiveness may arise as inefficient, in some cases, structures may be
preserved. Switching into more flexible forms of direct payments will avoid such an impact
(Zanias and Maraveyias, 1996).
Through the reform, direct payments became essential to numerous farms, including the
most successful ones. Yet, the degree of production efficiency and the weight of the financial
342 The restructured CAP: N. C. Baltas

charges remained a major determinant of financial results and of the farms' ability to adapt
to this new situation. The maintenance of the various compensatory payments beyond the
transitory period initially envisaged by the reform, is indispensable in order to guarantee the
survival of most farms in the peripheral countries of the Union.
Otherwise, some of the more prosperous EU countries are likely to continue to press for
the "renationalization" of the CAP in order to avoid further reductions in farmers' incomes
due to the decreasing protection that the reformed CAP will provide. Given agriculture's rela-
tively big size in the peripheral countries (particularly the southern ones) and the inability of
their national governments to provide the necessary subsidies, this prospect will be detrimental
to the interests of these countries. To counter this, the necessary measures will have to be
taken for the sector's structural and institutional modernization. This will allow the production
of cheaper, better quality agricultural products, thus improving the international competi-
tiveness of their farming sectors (Baltas, 1996).
The most positive aspect of the MacSharry reform for the peripheral countries appears to
be the one concerning the early retirement scheme for older farmers. This is not only because
the potential financial transfers to the south are large but also because this structural measure,
in combination with a restrictive price policy, might mean lower land values which facilitate
land acquisition and lead to greater farm size. In fact, the sector's structural adjustment should
create the necessary conditions for maintaining the maximum number of viable farm house-
holds in the wider rural economy. However, it should be pointed out that about half of the
southern farmers are over 55 years and nearly half of these have no successors.
However, the weak state of the economies of the peripheral countries and the gloomy pros-
pects for job opportunities outside agriculture, coupled with the large proportion of "less-
favoured" regions in their farming sectors, form a serious obstacle to such an adjustment. In
this respect, the increased support for less-favoured regions and the structural measures aimed
at the creation of alternative sources of income for people that abandon farming or for part-
time farmers assume tremendous importance (Caraveli, 1993).

Acknowledgements
I am indebted to A. Mathews, F. B. Soares and G. Zanias for their comments.

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