Europe is beset. Banks are sinking, governments are falling and people are taking to the streets in anger as high unemployment, stagnant growth and ballooning deficits make for a gloomy start to 2012. The region needs cash and is devising ever more desperate schemes to get some, from lending to the International Monetary Fund to borrow it back, to extending its begging bowl to forex-rich Beijing.
Austerity is extracting a pound of flesh from teachers to bus drivers, but the one constituency that remains politically off-limits is the continent’s powerful farmers. Although agriculture contributes only 1.8 per cent of the European Union’s (EU’s) GDP, Brussels is currently firming up plans to continue to spend hundreds of billions of euros on trade-distorting farm subsidies called the Common Agricultural Policy (CAP).
The current CAP regime will end in 2013 and “reforms” of the system are, thus, being worked out for the 2014-2020 period. According to the European Commission’s draft proposals, the CAP budget for the seven-year period would be some 400 billion euro (an amount enough to make the region’s bank recapitalisation needs disappear), accounting for 36 per cent of total EU spending.
This is considered a reform because if approved, these figures would represent a drop in the total percentage of the EU budget swallowed up by CAP. In 2010, 45 per cent of the budget went to farmers (down from 70 per cent in 1985). Moreover, it’s also proposed to make 30 per cent of the direct payments contingent on farmers meeting environmental criteria such as crop rotation and leaving a certain percentage of farm land fallow. Payments will also be capped at 300,000 euro with progressive levies being charged on subsidies over 150,000 euro.
Among the largest recipients of CAP funding currently are Her Majesty, the Queen of England and the Duke of Windsor. In 2010, the largest payments of all were made to a state-owned bank in Romania and a state-owned water company in Portugal. The proposed reforms might help rid the system of such embarrassments. But given that only a very small percentage of the 10 million farmers benefited by CAP receive over 300,000 million euro in handouts, the move is more cosmetic than substantial.
CAP originated as a means to avoid food shortages in Europe following World War II. By the 1990s, payments were linked to production leading to massive stockpiles of rotting agricultural produce; the infamous “mountains of bread” and “lakes of butter”. Subsequent reforms decoupled subsidies from production and linked them instead to land ownership.
Under the current system, farmers are paid, in the main, according to each hectare of land they own. But this leads to the ironic situation in which the largest farmer-holders (like the Queen) get the most subsidies, while poorer, more marginal farmers get the least. There are, moreover, several instances of “farmers” getting paid for doing nothing since they don’t actually grow anything but simply own land.
“Throughout CAP’s many reforms and the latest proposals are no exception, the structure of the regime might have changed but the allocations remain the same,” says Jack Thurston, an agricultural policy analyst and co-founder of the website Farmsubsidy.
Some of the most egregious instances of trade distortions caused by CAP have been eased over the years with the majority of export subsidies phased out. But a recent report by the University of Laussane points out that a dismantling of the many remaining CAP instruments, in particular its various import duties would increase world GDP by nearly 33 billion euro.
And now the Organisation for Economic Co-operation and Development (OECD) has added its voice to the chorus of CAP, publishing a report that urges policy-makers to take advantage of the high prices currently being fetched by agricultural commodities to wean European farmers off subsidies and instead invest money in “innovation”.
But when it comes to farmers, it’s a “heads you lose, tails I win” situation, according to Thurston. “In Europe if agriculture is doing well as a sector then it’s argued that it needs support all the more to ensure its continued success. And of course if it’s not doing well, then it needs state support to help it do better,” he says.
European governments may be more cash-strapped than ever before, but taking money away from farmers to give it to banks will be politically unpalatable, says Thurston, even if it makes economic sense. “Farmers on the rampage make bad TV,” he concludes and Europe’s leaders can’t afford angry farmers in addition to their already hefty list of woes.
Indeed, cross farmers have a history of wreaking havoc. In 2009, attempts by EU to abolish milk quotas led to frenzied dairy producers terrorising Brussels (EU’s headquarters) by driving menacing tractors onto streets and blocking traffic in addition to dousing hapless EU officials with buckets of milk as they exited their offices. The cracked windows of some EU office buildings still await repair from the time when angry fishermen, upset at the rising fuel prices, hurled their catch at them. Small wonder that EU’s leaders appear to find it less daunting to ask China for money than irate European farmers.