THE ECONOMY OF

THE EU AND TURKEY

LECTURE-6:
EU MICRO POLICIES – CAP & TRADE
TODAY’S PLAN

• EU Micro Policies: CAP & Trade

– Readings:
• Baldwin & Wyplosz Ch 9*, 12*
• Neal, Ch 4
THE COMMON AGRICULTURAL POLICY
• Set of policies that aim at raising the farm incomes in the EU.
• As the highest proportion of the EU budget goes towards the CAP, it’s the most challenging
policy item in the EU.
• CAP was introduced first in 1962 to keep the prices high and stable. Back then, the share of
agriculture in GDP and employment was much higher (although with differences for different
countries), and European countries were the importers for the agricultural goods.
• Technology was also not advanced. Hence supporting farmers were very important.
• But the scene has changed now (high productivity – less farmers needed, EU is now a food
exporter, food demand dynamics).
• The new reforms – based on rural development, environmental standards and animal welfare
IMPORTANCE OF AGRICULTURE
1955 VS 2017


THE OLD SIMPLE LOGIC:
PRICE SUPPORTS
• The early CAP was based on providing farmers at least a minimum price for their output (price floor).
Grains, dairy products, beef, sugar etc. And most of these prices were between 50 to 100 per cent higher
than world prices (dairy and sugar even higher).
– Either impose an administrative price and punish people who attempt to undersell (ineffective – black markets,
corruption, hard to control too many buyers and sellers).
– Market based solution: Market intervention (promising to buy unlimited amounts of goods at the price floor – then
who would sell it for a lower price?)
• Basic price-floor diagram for a net importer – see figure 9.2
• CAP tariffs were called variable levies as they were adjusted daily with the world price.
• As a result of higher prices (than the world p): EU farmers produce more, consumers consume less, and a
tariff revenue accrues.
• From a consumer perspective, it’s a tax; and from a farmer perspective it’s a subsidy. Consumption
tax>subsidy=revenue (equals tariff). It’s actually the consumers paying for it – political aspects of the policy!
FARM SIZE AND
DISTRIBUTION OF BENEFITS
• The benefits are distributed unevenly. Some farms are large and very high-tech. labor-saving tech, pesticides,
fertilizers etc.
– Netherlands, Belgium, Luxembourg, Germany and France are the top 5 EU countries which have the highest shares
of big lands.
– Greece, Hungary, Lithuania, Bulgaria and Romania are the 5 EU countries which have the lowest shares of big lands.
• See fig 9.5 for the distribution of gains, big and small farms – small farm’s s curve is above the large farm’s s
curve reflecting the efficiency differences (marginal cost is higher at any level of output).
• Price floor helps producers in proportion to their production – big producers benefit more from the policy
(differences in producer surpluses).
• At the same time, the CAP is paid by consumers. And the food has heavier weight in poor families’ budgets.
From poor families to big farmers (politics!).
CHANGED CIRCUMSTANCES
• In the beginning:
– price floors provided higher and more stable prices (farmers were happy)
– The booming growth was industry-biased, hence raising the incomes of farmers created social
cohesion
– Food production rose and got stabilized (memories of shortages and hunger after wartime)
– The variable levies created revenue for the EU budget
– Even if the food prices were rising, the average income was rising much faster.
• BUT! The Green Revolution (tech improvements in agriculture, pesticides, fertilizers etc.)
– EU has turned into an exporter
– In normal case, high productivity, falling prices. But EU farm lobby was too strong!
– The supply problem – see figure 9.6
THE PROBLEMS AFTER
THE GREEN REVOLUTION
• The budget problem: EU had to buy all the food that the consumers didn’t want. After 65 the CAP’s cost and budget share
has increased exponentially.
• The disposable problem: mountains of wheat, beef, and butter. As the s curve continued to shift outwards, the excess food p
continued, so the stocks were increasing instead of decreasing the next term.
• Dumping to foreign markets etc wasn’t enough, also opposed by other food exporters (as dumping drove down the world
p). Particularly harmful to world’s poorest nations such as Mozambique (could have been a sugar exporter to Algeria and
Nigeria – but now it is the EU exports).
• Smugglers trying to sell their products within the EU.
• Farm income was still a problem – employment share was going down, the income of others were rising much faster.
Contrary to the size of the CAP budget, farmers were unhappy and leaving agricultural prod.
• Inequality across farm size grew more rapidly.
• Industrialization of farming had consequences on environment and animal welfare (more animals to graze, antibiotics, more
fertilizers and pesticides, harms on wildlife and diversity, problems with water quality due to nitrates and phosphates)
THE SIMPLE LOGIC OF THE NEW CAP
• The new CAP: support prices lowered to the world price level, farmers are compensated for the lower
prices with decoupled direct payments, a new linking of the payments to social concerns (environment,
rural development, animal welfare).
• See fig 9-10 for the price cuts & compensation
– Net gain: consumer surplus up, producer surplus down, elimination of negative tariffs – positive net effect of
price cuts.
• As the lobby was too strong, there was a political push for compensation for price cuts (p lowering to
world p). The compensation is called decoupled direct payments (that are not linked to the level of food
production). The net gain was still the same with the price-cut case. Only now the revenue is passed from
government to farmers.
• In the beginning this transfer was accepted but then was considered unjustified by the 2000s,
– Payments were made under names, and it became clear who were benefitting, for ex Queen of England, Nestle (30
million over 2 years).
– Payments were now going to CEEC – who never experienced the price cuts in the first place.
CAP REFORM
• Up to mid 1980s CAP costs were handled through increased contributions from member states
(not a big deal as it was only half a per cent of EU GDP).
• But the CAP was challenged specifically after Spain and Portugal’s memberships 1986 (their
climate was not proper for the agricultural goods that are the most supported such as beef, dairy
and sugar). Together with Ireland and Greece, these countries demanded that the budget would
be allocated more towards structural spending.
• Since the 1986, the CAP has been repeatedly reformed (from old logic to new logic). The CAP’s
share of the budget began to fall. The reforms were also the products of the push coming from
trade partners (during WTO talks and rounds etc.)
• Some direct payments are reduced and redirected towards Rural Development Fund.
• New propositions: payments more to the small and medium sized farms, with a cap. Some to
young farmers. Efforts to green the CAP (crop diversification, preservation, improving water
quality etc.).
TODAY’S CAP
• Two pillars: direct payments and the costs of remaining price supports & Rural Development.
Implementation is delegated to Member States’ Ministries of Agriculture (as they know better the local
conditions).
• Key goals for the first:
– better distribution (more equal) across countries and farmers within countries. Also to link payments to
environmental goals. But there is flexibility for member states about the criteria (to young farmers, to small
farmers etc.)
– Also closer attention to absentee land owners and golf are owners.
• Rural development: land management projects, climate change based expenditures. Six priorities of
multi-year programmes that are prepared by the member states: improving innovation and knowledge
transfer, boosting competitiveness, promoting food-chain integration, helping ecosystems, encouraging
lower carbon economy, poverty reduction.
• One major problem: still half of the CAP money ends up not in the hands of the farmers such as non-
farming landowners.
EU TRADE POLICY

• Eu is the biggest world trader – even without Britain. Not only there is great deal of trade
within the EU, but also the EU has trade agreements with non-members.
• Two thirds of EU exports are to other EU countries. With more than 90% of these exports are
among EU15 (excluding the latest 10 new members)
• There are also great deal of trade with EFTA (Switzerland, Norway, Iceland and Liechtenstein)
and Turkiye.
• Asia (EU M more than X) and the US (X more than M) are also significant trade partners.
• Yet trade partners and trade patterns vary for different EU countries depending on some factors
(geography, culture etc.).
• EU mostly X and M manufactured goods (almost 90% in X and 65% in M).
EU TRADE POLICY
• EU have different common external tariff for different goods. The average CET is about 5
percent (pretty low – WTO!).
• About half of M with zero tariffs. Why? There is no one in the EU competing in these sectors
such as certain petroleum products., no political pressure!
• The highest CET on average are on: dairy products (36), sugars and confectionery (21),
beverages and tobacco(19), animal products(16), fish and fish products(12) and clothing(12);
while the CET varies with specific products within these categories.
• The EU has the exclusive power to set trade policy with third nations. Individual member states
cannot legislate on trade matters.
EU TRADE POLICY
• In the beginning it was all about tariffs, but now it’s expanded specifically with Lisbon Treaty –
to include policies on trade in services, FDI’s, IPR’s (intellectual property rights).
• The European Commission takes the lead in trade policy. European Parliament and the Council
are co-legislators. The Commission is required to inform the Parliament about the ongoing
negotiations.
• Once the tariff is down, it can’t be put back up, but loopholes specifically for dumping. The EU
imposes tariffs or negotiate price undertakings with the exporter in some cases.
NEXT WEEK

• The Macroeconomics of the EU: Monetary Union

– Readings:
• Baldwin & Wyplosz Ch 13, 14