UNIT 1: STEPS ACCORDING TO THEORY OF ECONOMIC INTEGRATION

0º) STARTING POINT: PROTECTIONISM, NO INTEGRATION.

Most used trade barrier: TARIFF = tax on imports at the border, rises costs, border price different from domestic price.
EFFECTS in the short run: 1- Favours DOMESTIC PRODUCER (lobbies) 2- Hurts DOMESTIC CONSUMER (millions
a little, not organised) 3- Revenue for the GOVERNMENT (small) 4- Hurts foreign producer, decrease. It seems to work
IN THE SHORT RUN: domestic production increases to satisfy domestic demand, import substitution.
PROBLEMS IN THE LONG RUN: - ISOLATION from international markets (domestic protected, industries
non-competitive and inefficient, foreign retaliation in the competitive ones) and SMALL DOMESTIC MARKET. -
SCARCITY of products when imports cannot be substituted by domestic production ( raw materials, high-technology
machinery). NO GAINS FROM INTERNATIONAL SPECIALISATION. →INTEGRATE WITH NEIGHBOURS,
CREATE LARGER MARKET
1. FREE TRADE AGREEMENT
REMOVE TARIFFS AMONG MEMBERS (zero), Keep OWN TARIFFS AGAINST THIRD COUNTRIES (makes
agreement easier)
PROBLEM: RULES OF ORIGIN needed (for goods from third countries entering through the border with the lowest
tariff): - They still act as a barrier to trade, even among members of the FTA (stopped at the border) - Difficult to apply in
practice, because foreign goods can be slightly modified once inside the FTA. Define % of value needed to be considered
domestic (eg.70%) and enjoy zero tariff.
In the free trade agreement each country puts its own tariffs to the foreign goods, in a custom union they put the same

with the common tariff it changes to the 2. CUSTOM UNION. tariffs should be the same to every country outside the
borders of the union. They have to get along and make a common decision.
1958: the EU was formed as a custom union
REMOVE TARIFFS AMONG MEMBERS. Agree COMMON TARIFFS (common commercial policy) against third
countries: - No “Rules of Origin'' needed. - Difficult to agree to common tariffs. - How to distribute revenue from the
tariffs.1986: it was a custom union. Spain entered the EU.

3. SINGLE MARKET
Remove also NON-TARIFF BARRIERS to trade of GOODS: EXAMPLES: - Long queues at the borders. - Abuse of
TECHNICAL AND HEALTH STANDARDS and regulations. HARMONIZE. - Discrimination in public procurement. -
Discriminatory taxes AFTER crossing the border - Subsidies to national producers (STATE AID) → Ensuring undistorted
COMPETITION.Unrestricted trade in SERVICES
FREE MOVEMENT for goods, services, labour and capital.
mutual recognition of titles, physical and financial capital market. specific exam for law and medicine.

4. MONETARY UNION. EUROPEAN UNION IS (but it has some features of economic union)

To CONSOLIDATE THE SINGLE MARKET, avoiding the effects of variations in the exchange rates on
INTERNATIONAL COMPETITIVENESS and trade.
The exchange rate is the value of one country’s currency in relation to another . With different currencies, it is
IMPOSSIBLE TO STABILISE FOREVER the exchange rate, NEITHER UNDER A FLEXIBLE NOR A FIXED
REGIME. RADICAL SOLUTION = SHARE THE CURRENCY
Fixed exchange rate: it's an intervention in the currency, and sometimes it needs a devaluation for one of them in order to
get the other.
Common exchange rate policy: central bank, the only one capable of producing dollars. One currency in common, one
central bank in common, one monetary policy and an exchange rate policy. Some things are in national power

5. ECONOMIC UNION
Fiscal policy through taxes, public expenditure and debt.

Right now, we have Fiscal policy/budgetary policy, different national budget and fiscal policies (taxes and public
expenditure are decided by national governments)
Each national government decides its public expenditure: pensions, unemployment payments, education, health, payment
of interests on public debts
Countries spend more than they collect through taxes: public deficit. How? They ask for money from other countries, so
they create a new public debt. But the total debt is the sum of this year’s debt plus the previous years (deficit of this plus
debt of last’s)

Public debt greece= 180% of gdp. This huge public debt can create problems for the EU, as the common central bank was
spending a huge quantity of money to only help the Greek economy. Even if other countries are not okay with it, they
must help its debt crises so it does not become a banking crisis. The European central bank ECB must help them when
this happens, providing liquidity and printing more euros. But this generates inflation, as there is more money circulating.
So, national policies can interfere with common monetary policies.

If they didn't have that deficit because they didn't have that money to spend in public expenditure, issues such as
education, pensions and health would be injured.

6.POLITICAL UNION. United States. There are no more steps of integration

Share non-economic policies: justice, police, defence
The EU has only reached a corporation, it isn’t a political union.
The EU has some small features of Political Union: common foreign and security policy, attempted constitution (intento
de formar una constitucion) euro order: ask another country to send someone that is being searched by the law.
Ode to joy/himno de la algeria: himno de la EU. Map of 6 countries to understand the process of enlargement.

UNIT 2: HISTORY ACCORDING TO THEORY. THE EUROPEAN CASE.

First peaceful attempt at European unity, but not the only one.
Starting point: post- war period, after Second World War (1945), protectionism, destruction.
Customs Union 1958 treaty of rome: eu began as a customs union to ALL PRODUCTS (not only for coal and steel). 6
founder countries of the European Economic Community. Transitional period of 8 years to decrease the tariffs of the
products to the common tariff until 1968, when the whole transition was made and the common trade policy began.
They wanted more independence, that's why they jumped

Previous decisions that helped:

Marshall Plan, Benelux (customs unions) and ECSC (European Coal and Steel Community)

Even in the customs union the different currencies of the countries were already a problem. So in 1979 the European
monetary system was created. President of the European commission: the one in charge to make decisions and proposals.

1986: Spain, Portugal and Greece (1981) entered the customs union. In 1-1-1993 the Customs union changed into
a Single Market: single act. free movement for goods, services, transport, financial services, people, labour and capital.
It was a huge step, in the custom they were only dealing with tariffs. The monetary union (the euro) was created almost
immediately after this change.

Treaty on European Union (TEU) or Maastricht Treaty 1993: same currency, monetary policy, exchange rate and
central bank. The countries must pass an exam to enter the union, if they meet the maastricht/convergence criteria, they
can enter. The first one was completed in 1-1-1999 when the European Monetary Union is formed. It contains criteria
about low inflation 2%, low public deficits and debts, which must be below 3% of GDP

Public expenditure, taxes, deficit and public debt, budgets are a national spanish decision
The stability pack: public deficit should be smaller of the 3% of the GDP

Next generation programme: issue european common debt 750.000 million euros, how to spend that money in the future,
it is an extraordinary programme, repair the debt and get rid of it, just because of the pandemic. Economy recovers, digital
transition,
Even if in terms of production eu, ee.uu and china produce more or less the same, the gdp per capita in ee.uu and in eu is
much higher as in china there are near 1500 million people and in the eu there are near 500 million.

Out of the euro: denmark, sweden, poland, czech republic, hungary, croatia (2023), romania and bulgaria. Denmark put
the condition of joining whenever they want the euro if the EU wanted them to accept the other treaties. They are out of
the central bank as well.

UNIT 3. INSTITUTIONS OF THE EUROPEAN UNION

EUROPEAN COUNCIL: meetings of the EU’s top national leaders (Pedro Sanchez and the rest of presidents) + a
permanent President. They meet because they have a more general view of the problems, they are not specialised. They
provide strategic guidance and final compromises to solve disagreements. This institution was established in 2009 in the
treaty of lisbon. They have NO ROLE in law-making, they are informal meetings. To translate their decisions into law, it
is necessary to follow the legislative procedure: commission proposes, council of ministers and parliament approve. They
meet 4 times a year.

● Executive power: make proposals of legislation and changes: EUROPEAN COMMISSION.

3 implements, 2 approve, 1 proposes URSULA VON DER LEYEN PRESIDENT. Órgano ejecutivo de la UE.
guardian of the treaties (watches that the countries and companies that operate in their single market are
complying with and respecting them, fines if they don’t) and representative of the EU on the international stage
(in international treaties, cooperation for development, foring affairs/relaciones exteriores, international politics
and security). They have the right to initiate proposals,it is the driving force. When parliament and council say
yes, they IMPLEMENTE (execute) EU policies and decisions.

● Legislative power. It is shared by: COUNCIL OF THE EUROPEAN UNION AND PARLIAMENT. They have
to vote to decide, and both have to approve it. Cope decisions , decide together CHARLES MICHELL
PRESIDENT OF THE COUNCIL
○ COUNCIL OF THE EUROPEAN UNION/COUNCIL OF MINISTERS: shares legislative power with
the European Parliament. Approve the EU’s common budget jointly with Parliament. Formed by 1
minister from each country, it has different configurations. If they are deciding about agriculture, they
meet the ministers of agriculture, and the same with every area under discussion. The economic
configuration is the most important one, ECOFIN (economical financial affairs, 27 countries in the EU
meet) and EUROGROUP (when the 19 countries that are members of the euro € meet), and it meets the
ministers of economy. Each one represents their country and makes decisions according to their interests.
Every 6 months one country holds the presidency,for their ministers to meet, rotating alphabetically.
There is a different voting power, because as different as the commission, here they are representing their
country and each one has a different size and importance. In order to change the treaties, they need
unanimity. Decisions are made by QUALIFIED MAJORITY/ DOUBLE MAJORITY, when they vote
they need in favour a bit more than half of the countries (at least 55% of member states 15 countries or
more). And, the members/ministers voting in favour must represent 65% or ⅔ of the European population
or more (strong majority). 4 countries that equal 35% of the population can as well be considered as
enough in order to make a decision.
○ EUROPEAN PARLIAMENT: shares legislative power with the COUNCIL OF THE EUROPEAN
UNION. It approves European legislation, budget and exercises control. Members of parliament from the
27 countries. There are elections and it is directly elected every 5 years. The number of members per
nation varies with population. Most democratic institution of the EU. Its work is organised in
Parliamentary committees and plenary sessions. Decision making on the basis of a simple majority (half
plus one the votes). It is located in Strasbourg (France). 705 members.

● Judicial power: EUROPEAN COURT OF JUSTICE. Monitors.

27 commissioners, one from each EU member. JOSEP BORREL commissioner of SPAIN. Each national
government decides who is going to be representing the country in the commission. Ursual von der Leyen doesn´t
decide it, but she gives them the portfolios, and assigns the job for each one. She is chosen by the leaders of every
 European country. The commission can be rejected and changed by the whole group once voted, if they don’t
like it. 1 commissioner= 1 vote. Equally important. They don’t act as national representatives, but for general
wellness. Decisions are made through simple majority (14 votes), but they try to get general consensus.

UNIT 4: THE COMMON BUDGET. REVENUE

Legislative procedure:
Codecision. Same weight to Council and Parliament, both have to approve a measure (the Council using a qualified
majority and Parliament a simple majority).

Revenue: OWN RESOURCES that belong to the Union. “Traditional ones”. Tariffs ½, small part of VAT 3%, 1% natuna
income, 4 resources. PROPORTIONAL money given by the 27 members.
Countries have the legal obligation to transfer this money to the Union. These are the revenue from the
1. tariffs of the EU from the CET (common external tariff, since the beginning of the creation of the Eu when it was a
customs union in 1958) and
2. Agricultural tariffs (higher, variable…)
The revenue from these traditional resources was not enough, due to trade liberalisation and EU enlargements (every time
there is an enlargement , there is a new country which enters tariff free.
New resources were needed, the importance of the traditional one has fallen over time. Today around 15% of total
revenues.
3. Third resource. Part of Value added Tax Revenue from the member States.
Created as a closing resource. We want to spend more, but we can't spend more than our revenue, so in order to “ close”
that space between the revenue and the expenditure, to balance this quantity, they created this third resource. The VAT is a
national tax, but a small percentage of it goes to the European budget.
It was set at the level necessary to balance the budget, a 1% of the harmonised national VAT base, a measure or
consumption, to avoid differences in national tax rates.

Type of taxes:
Regressive: the more money you have, the smaller the percentage of tax that you pay on income.
Proportional: you pay according
Progresive: the more money you have, the bigger the percentage of tax you pay on income.
Revenue VAT= rate (21%) * Base (value of your consumption).
Problem: VAT taxes only consumption, so it is a regressive tax. Low incomes are taxed more strongly, due to lack of
savings.
Diminishing importance of this resource, since 1988 it isn’t the closing resource. 12% of total revenue in 2019.

4. Fourth resource(1988). Part of the national income of EU members (GNI).

New closing resource. Not regressive, but PROPORTIONAL, same percentage (0,65%) of any income.
Nowadays it is the most important resource, contributes around ¾ of total revenue (72% in 2019).
Common budget of the EU-27 is financed basically in a proportional way: each country contributes around 1% of its
national income GNI.

5. New resources of revenue in the future: green taxes (environmental).

- Non- recycled plastic: national contributions on the amount. Since 2021. The only one in operation so far, the
others are still being developed.
- Share 25% of the revenue from the European emissions trading system will go to the common budget.
- Carbon border adjustment mechanism: imports from third countries with no carbon pricing system buy
certificates when crossing the EU’s border and pay as if produced inside the EU. They want to sell their products,
so they have to pay for this certificate. Focused on some activities with high emissions.
- Digital tax: selling in the EU without physical presence and not paying almost any taxes. Pay tax of 3% of gross
revenues obtained in the EU, even if not established physically. They go to the common budget.

UNIT 5: THE COMMON BUDGET. EXPENDITURE

Expenditure: REGIONAL or COHESION POLICY 45%, CAP Common Agricultural Policy 40%. very focused. Some
members will receive what they’ve contributed from their income (1%) and more, but others receive less. It is not
proportional, it is REDISTRIBUTED.
AGRICULTURE 38.8% of annual budget 2019, despite small weight of agriculture in EU´s total GDP.
REGIONAL or COHESION POLICY 45.7% of annual budget 2019. SINCE 2009 COHESION EXPENDITURE
LARGER THAN CAP (for the first time).

Other expenditure: financial perspectives

-Global europe: third world development and humanitarian aid. Around 6%.
-Administration: pay employees that work for European institutions. Around 7%
-Security and citizenship: inmigration control border. Around 2%. In the hands of the member states, but they receive help
from the union.
Clarified by the New Economic Geography: -there are more agglomeration forces, supply-linked. Being together means:
specialised providers and infraestructures, technological innovation, specialised labour. This is the justification of regional
and cohesion policies.

● Historical development of EU spending area

○ In the past.
1. Expenditure started at a very low level. CAP didn’t exist, most money was spent in administration, for building
the new common institutions. Remained like this until the 1960s.
2. CAP spending 1965. In 1979 it almost dominated the budget.
3. Enlargements: new members more interested in regional policy. The European regional development fund ERDF
was founded in 1975 The new members were very interested in financing it, because it went only for them. Then
in 1993 the Cohesion fund was created to compensate possible losers for the single market. To poor countries, not
to poor regions.
These 2 and 3 represent 85%. In 2009 the regional received more than the CAP; it wasn’t that this received less, but that
the regional fund received more.

○ In the future:
1. New priorities: need for more expenditure in R+D, education and climate change.
2. Multiannual financial framework: finally main efforts devoted to fighting the COVID crisis and the new priorities
in spending not growing much in the ordinary common budget. In the common budget there are no new priorities,
but in the Next generationU NGEU (to fight the pandemic), a new project, which is outside the ordinary budget,
most of the money is going to be spend in these new priorities (technological advance, digital and green
transition). It is a momentary solution, but in the future when this programme ends, the common budget will
continue not to have these new priorities from the extraordinary programme.

UNIT 6: BUDGET. NATIONAL NET BALANCES

Net National Balances: which countries are net contributors, which one gets more than they put.
● Revenue and expenditure:
-Revenues are proportional, every member country contributes making a similar effort, small, around 1% of their national
income/GDP.
-Expenditures are a redistributive part of the budget, more focused in the relatively poor countries, where agriculture is
more important and most poor regions are located. They recover the money they’ve contributed and MORE. The other
countries are also receiving, but less than what they’ve contributed.

● Everyone contributes and receives. National balance = Expenditure-Revenue.

-Rich countries get back more than half the money they have contributed. The negative balance is not that much as many
politicians and journalists say.
-Poor countries receive a lot of money, but they also contribute their 1% to the common budget. The positive balance is
not that much at the end.
 ● In relative terms (as % of GDP) the main net contributor in absolute terms was Germany (13.000 million euros,
balance of -0,43%)
● In relative terms, “small poor” countries are the most favoured. Greece, Portugal, Spain and Ireland are the main
recipients, before Eastern enlargement. They receive more than what they contribute. After the Eastern
enlargement 2007-2012 countries like lithuania, estonia, latvia, hungary, poland entered this group.

REMEMBER: The financial transfers involved in the EU budget ARE ONLY A MINOR PART, although very VISIBLE,
of the consequences of EU MEMBERSHIP for a member country: Single Market and monetary integration (euro) are
much more important.

SPANISH NET BALANCE: positive BUT DECREASING. Before Eastern enlargement, top recipient (in millions, not as
% GDP).Almost disappearing (2.000 million euros per year).
Eastern enlargement (without increasing resources enough) = more countries and regions with a right to receive regional
and cohesion funds… And “STATISTICAL EFFECT”, new members reduce AVERAGE per capita income.

Annual budgetary procedure: in the conciliation committee they have to reach a compromise so that in the 2nd reading the
council and the parliament approve it.

Multiannual financial framework:

Financial perspective. 7 years, but then they have to decide in detail the annual budget, which has to respect the
framework. Approved unanimously by the European Council and by Parliament without amendments. Broad spending
guidelines (pautas)

(Common budget/ GDPEU27) * 100 = 1% of the European GDP. Must be balanced by law every year. G=T no deficit, no
debt because there is no need to finance any deficit, as you spend only your revenue. Common budget is small (1%).
National budgets are much larger.

UNIT 7: REGIONAL COHESION POLICY

Remember that fiscal policies are in national hands, each country decides his, not in common ones. Though with some
restrictions, due to the stability pact.

JUSTIFICATIONS:
A) EUROPE'S ECONOMIC GEOGRAPHY.
GOAL: reduce regional inequality, so that growth is spread all over the EU. Avoid that some regions left behind. But
ARE REGIONAL INEQUALITIES SIGNIFICANT IN EUROPE? YES.
Europe's economic geography is very centralised, economic activity highly concentrated.
Western Germany + Benelux + NorthEastern France + South-Eastern England + Northern Italy= 1/7 area, 1/3 population,
½ economic activity EU-28.
Europe´s economic “CORE”, centre. Concentration of economic activity drops as one moves away from the core, towards
the “PERIPHERY”
Not only dispersion ACROSS NATIONS; also WITHIN REGIONS of the same country. Egs.: - Spain: Madrid –
Extremadura. - Italy: Milan – Naples and Sicily. - UK: London – Northern Scotland
In EU, there has been CONVERGENCE (in per capita income) ACROSS NATIONS, narrower national differences. At
the same time, WIDER REGIONAL DIFFERENCES within nations, more concentration of economic activity in certain
areas. Therefore, REGIONAL APPROACH needed to design policies.
Less developed Member States grow faster = converge. Eastern enlargement increased national and regional inequalities

B) Theory: NEW ECONOMIC GEOGRAPHY.

TRADITIONAL theory of where firms prefer to locate: DISPERSION FORCES – SUPPLY LINKED (lower costs):
increase the attractiveness of less developed regions, if everything else was equal: - Lower wages - Lower price of land
(and office space, housing…)
AGGLOMERATION FORCES, DEMANDLINKED (access to a larger market, to customers): - Reduce transport costs -
Avoid barriers to access (eg. tariffs…)
According to the traditional theory, if transport costs are small and barriers to access disappear, both areas (poor and rich)
would tend to converge AUTOMATICALLY, just letting free markets work. EUROPEAN UNION makes tariff and
non-tariff barriers disappear. AFTER EACH ENLARGEMENT (Southern, Eastern), this idea: “new members have low
wages, firms will go there and leave old members...”. BUT not the whole truth: TERRITORIAL INEQUALITIES ARE
VERY PERSISTENT. Due to the existence of other AGGLOMERATION FORCES that traditional theory forgot.
THERE ARE MORE AGGLOMERATION FORCES, SUPPLY-LINKED: (at Detroit cars, at Hollywood films, at Silicon
Valley…). Been together means: - Specialized providers - Specialized infrastructures - Technological innovation -
Specialized labour.
Conclusions of traditional theory are reversed. When the EU makes barriers disappear, CONVERGENCE IS NOT
automatically guaranteed by free market forces; even DIVERGENCE is possible. PUBLIC POLICIES (like the regional
cohesion policy of the EU) are needed to promote convergence

Regional/Cohesion policy: 3 funds.

1. European Regional Development Fund (ERDF) around 55%. Largest fund, main tool. FEDER.
Established in 1975 after Uk’s entry as a large net contributor to the budget without large benefits from Common
Agricultural Policy. Wide scope (ambito), few limitations, can be used to finance any kind of project that
stimulates regional economic growth (transport, innovation, digital infraestructures..). Focused on relatively poor
regions.
Bulk (mayor parte de) of the money (around 80%) goes to CONVERGENCE REGIONS (regions whose
per-capita income <75% of the EU average).
2. European Social Fund (ESF) around 25% Fondo social europeo.
Money goes to needed areas. Enhancing access to employment, improving human capital. Focus mainly on
unemployed workers, so most of the money end ups in porter countries and regions.
3. Cohesion Fund (CF) around 20%:
smaller fund. Created in 1993, (when the single market was created) to help the then less prosperous countries in
case the single market increased divergence. It was a Spanish proposal. given to countries (not regions) with a per
capita income of < 90% of the european union average.
It can only be used in a limited way: to finance transeuropean transport infrastructure/network, and to finance
environmental proposals (energy efficiency, renewable energy…). 7 years period for the next fund.

Before the eastern enlargement, Spain was one of the countries that received most. 60% of the cohesion fund. Only
extremadura now remains as the Convergence region. The rest changed into TRANSITION REGIONS (with per capita
income between 75%-90% of EU average, Andalucia, Castilla-La Mancha…)

Implementation: amounts allocated to each region or country according to criteria:

Per-capita income, population, surface, transport infrastructure, quality and stock of infrastructure.
Principles of:
1. Subsidiarity: projects proposed and managed by regional or national authorities. Evaluation and control by the
Commission. They supervise that the money is being well spent, but they don’t control the money, the countries
decide where to spend it.. Some countries made a more efficient use than others.
2. Additionality: European funds must not replace public expenditure by the Member State, projects are co-financed.
Un po 75% if Convergence Regions 75% of the money comes from ERDF, 25% from national authorities.

New “rule of law conditionality”

-affects all funds received from MFF and the extraordinary program NGEU. Necessary for member countries to respect
rule of law to ensure correct use of resources from the EU. Funds can be withheld (retenidos, not give), if a country
doesn't comply with the european requests. If they continue, the UE can decide not to pay.
-tool to put pressure on countries added to the ordinary infringement procedures (Commission penalties, Court of Justice
of the EU)
Even more powerful: article 7 TEU. If there is a serious and persistent breach of the EU’s values, the voting rights of that
country in the Council can be suspended.
 UNIT 8: COMMON AGRICULTURAL POLICY CAP 1
A) RATIONALE BEHIND THE CAP:
Agriculture is a SECTOR with specific characteristics, that justify a special treatment:
1º. LENGTH OF PRODUCTION CYCLES, it takes time to recover initial costs (machinery, labour, seeds…) until
harvest.
2º. UNCERTAINTY: climate, pests.
3º. High STORAGE COSTS.
-non-economic factors:
1º. STRATEGIC REASONS: avoid foreign dependence in supply of food (if wars…).
2º. ECOLOGICAL REASONS: avoid rural exodus and desertification; farmers take care of the environment.
3º. POLITICAL REASONS: importance of the vote of those living in the countryside at elections
-objectives(Treaty of Rome)
MAIN OBJECTIVE (END): to ensure a “fair” (better) STANDARD OF LIVING for European farmers, increasing their
income.
MEANS, how: INITIALLY MARKET INTERVENTION), to guarantee high agricultural prices.

-3 principles:
1. Market unity: Each product, same treatment (independently of the EU country where produced). - Free movement
inside the EU
2. Financial solidarity: CAP financed in common, through the Common Budget of the EU.
3. Community preference to European production, protection (high tariffs) against cheap imports

Institutions:
EAGF (European Agricultural GUARANTEE FUND). Fund for payments to farmers. Resources come from the common
budget. Initially GUARANTEE OF MINIMUM PRICES, took most of CAP expenditure and a large part of the common
budget. EAFRD (European Agricultural FUND for Rural DEVELOPMENT). SMALLER Fund that finances (also with
resources from the common budget) rural development programmes: modernization, infrastructures, innovation,
professional education, diversification of activities (eg. rural tourism), revitalise rural areas… Not to individual farmers,
to rural areas

MARKETS INTERVENTION: INITIAL DESIGN when CAP began (to understand logic, problems and reforms)
Usually intervention to GUARANTEE MINIMUM PRICE.
MINIMUM GUARANTEED PRICE, INTERVENTION PRICE “P INTERVENCIÓN” (at which EAGF – FEOGA buys
any surplus to EU farmers). well above WORLD PRICE (“P INTERN”) of 30 and even above “Price of Autarky” (where
supply and demand are equal). This causes excess supply, surplus, that EAGF buys (at the intervention price of 65).
VERY COSTLY. Only possible to do this by using also high TARIFFS (“T”). Eg. Imports enter the EU market at World
Price 30 + Tariff 40 = 70. Too expensive now to compete with European products below the intervention price. VERY
PROTECTIONIST
THE MOST IMPORTANT CASE. Normally. P at the guaranteed, INTERVENTION P, at which EAGF buys any
SURPLUS (S – D = 200 –130 = 70 tons) Expenditure due to CAP: intervention P x Surplus = 65 x 70 = 4550 euros (grey
area). Plus storage costs (not represented). THE SURPLUS IS CAUSED BY THE HIGH INTERVENTION PRICE.
Sometimes the surplus is destroyed or used for humanitarian purposes. Or exported abroad at the international price to
recover part of the cost.

NON-INTERVENTION:HIGH COSTS OF PRODUCTION in EU (climate, small size of farms, wages..). Supply curve
“up”. If AUTARKY: domestic D = domestic S of EU, but high P. If FREE TRADE, small domestic production, large
IMPORTS at world P (P intern). Agricultural lobbies and value of votes = intervention.

Without CAP, European farmers would have to compete with international prices, and this would be perjudicial for them,
as these are cheaper.
Market intervention: minimum guaranteed price, intervention price (more than double compared to the international
price). Tariffs are higher than the intervention price, to make the foreign product more expensive.
PROBLEMS of this initial design: EUROPEAN FARMERS benefit, though MAINLY the LARGER ones, are more able
to increase production responding to higher prices (20% of farms got 80% of benefits). EUROPEAN CONSUMERS
among the losers, paying high Prices. BUDGET PROBLEM, CAP very expensive for the common budget. FOREIGN
FARMERS (USA and developing countries): cannot sell in EU, even if more competitive, due to high tariffs AND suffer
competition of European exports in their own markets. WTO Rounds (Uruguay, Doha): PRESSURE TO REFORM CAP!

UNIT 9: COMMON AGRICULTURAL POLICY CAP 2

New CAP:
1992 Macsharry Reform. 2 components:
-Guaranteedprices lowered (end of old system) and compensated farmers with a different kind of support, giving them
income directly, through transfers not linked to production (new logic, to avoid causing a surplus and using tariffs).

Compensate with new system: direct payments to farmers, decoupled from production (completely unrelated from
production, no incentives to increase production and create surplus), payment based on a farm’s Historical (past)
production, later towards payment per hectare, independently of how much or what they produced.

Compensate with new logic:

-Conditionality: to receive the full amount, need to respect environmental and animal welfare(not taken into practice)
-Modulation: to cap the maximum amount a farmer can get. Direct payments act like a subsidy to rural land ownership.
More goes to landowners (usually rich).

FUTURE OF THE CAP: Less international pressures for reform from USA or developing countries. BUT still high
COST for common BUDGET (now of direct payments). Agriculture is a small and traditional sector (around only 2% of
EU GDP and 4% of employment). Spend instead in R&D? New (relatively poor) members benefit more from Regional
Policies. CAP tendency is to lose relative weight in the common budget (though slowly).