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Outlook on the common agricultural policy of the European Union

Masterarbeit 2003 97 Seiten


Table of Contents

Tables & Graphs


1. Introduction

2. Legal Background
2.1. Institutions of the EC
2.1.1. Commission
2.1.2. The Council of the European Union
2.2. General Principles of law
2.2.1. Equality
2.2.2. Subsidiarity

3. The Common Agricultural Policy
3.1. Reasons for development
3.2. History of the CAP
3.3. Functioning
3.3.1. Common market organisations
3.3.2. Direct Payments
3.3.3. Support for Rural Development
3.4. EAGGF
3.5. Facts in Figures

4. Eastern enlargement of the EU

5. Evaluation of the CAP

6. US System

7. Analysis of the Direct Payment policy
7.1. Decoupling of Direct Payments
7.2. Modulation
7.2. Bond scheme

8. Conclusion

References IV

Appendix A XII

Appendix B XVII

Tables & Graphs

Table 3.1. EAGGF Guarantee Section Spending

Table 3.2. Income structure of the common budget

Table 3.3. The main items of EU common budget expenditure

Table 3.4. Contributions to and payments received by the agricultural policies

Table 3.5. Basic data — key EU agricultural statistics

Table 4.1 Estimated expenditure, total direct payments by candidate country.

Table 4.2 Estimated expenditure, with indicative allocations, per new Member State for market support

Graph 3.1. Breakdown of budgetary expenditure on agriculture


Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

The focus of the thesis is the Direct Payments Systems of the Common Agricultural Policy of the European Union as introduced as part of the MacSharry reform and extended under the Agenda 2000. The objective is to analyse the current system and the proposals made by the Commission in January 2003 regarding a decoupling of these payments.

“The Common Agricultural Policy was one of the first policies developed in the European Union, and one of those regulated in the greatest detail.”[1] Among the European Union's policies, the CAP is regarded as one of the most important policy areas. This is justified not only because of its share of the EU budget, the vast number of people and the extent of the territory directly affected, but also because of its symbolic significance and the extent of sovereignty transferred from the national to the European level. The significance of the CAP, nowadays, is also portrayed by the fact that it is directly related to the Single Market and the EMU, two key areas in achieving the European integration.[2] The objective of the CAP was to support the agricultural sector in the Member States.

The second chapter of this thesis will provide general legal background information on the institutions of the EU and the functioning of the decision-making processes with regards to the agricultural sector. The history of the CAP, it’s functioning, the reasons for its creation and some general information will be outlined in chapter 3. Special emphasis will be on the common market organisations, the second pillar of the CAP, the rural development policy and the system of Direct Payments. The history will also cover the Agenda 2000, the Mid-term review and especially the latest reform proposals of the EU in January 2003. The proposals with regard to the Direct Payments, such as the decoupling and the modulation, will be subject to a closer analysis in chapter 7. The chapter 4 covers the EU enlargement and gives an overview of the new challenges arising by that for the EU. Even though the consequences of the enlargement are significant in some areas of the CAP, this thesis will not provide a closer analysis of all the dimensions. The topic of the EU enlargement itself is too extensive to be covered by a single chapter. The focus of this thesis is on the Direct Payment system of the CAP and thus the consequences of EU enlargement will only be portrayed on this background. Chapter 6 provides a short evaluation of the overall gains and losses of the CAP for the EU, citizens and with regards to the WTO and the US. The US system itself will be portrayed shortly in the following chapter. Thereby the different approach and attitude of the USA will be explained.

The following chapter will then, on the background of the information provided before, discuss the Direct Payment system of the CAP with regards to the proposals of the European Commission. The chapter also introduces the Bond scheme, which provides an overview about how a decoupling could possibly take place.

The findings will be shortly summarized in the last chapter.

2. Legal Background

The legal basis of an agricultural policy for the whole Community is defined in Articles 32 to 38 in Title II of the EC Treaty. The Treaty of Amsterdam deleted Articles 44, 45 and 47, which had become obsolete.[3] For a further understanding on the functioning of the decision making process within the EU especially with regards to the CAP it is essential to give a short overview of the major institutions of the EC. In order to concentrate on the most relevant details, this work only covers the European Council and the Commission, but leaves out the Parliament and the Court of Justice. These two institutions are also important institutions of the EU and contribute their parts to the law making process, but the general reforms and processes of the CAP are mostly pushed or hindered by the Commission and the Council. Thus the negligence of giving greater details on the other two can be justified in order to give a better understanding and overview of the law making process within the CAP for the following chapters.

2.1. Institutions of the EC

The general sources of EC law are the EC treaty and Protocols, judicial legislation, which is carried out by the European Court of Justice, international agreements that are entered into by Community institutions on behalf of the Community itself, and finally, EC secondary legislation. The Council and the Commission carry out the secondary legislation in form of Regulations, Directives and Decisions.[4]

2.1.1. Commission

The Commission consists of 20 members chosen on the grounds of their general competence and ‘whose independence is beyond doubt’.[5] The big four countries and Spain appoint each two commissioners while the other Member States appoint one. After the enlargement of the EU each Member State will only appoint one commissioner. Once the EU comprises 27 States the number of commissioners will be lower than the number of States. The new Member States of the EU 25 will be integrated in the Commission on the 1 may 2004.[6]

The commissioners must ‘neither seek nor take instructions from any government or from any other body’.[7] The period of office is five years and renewable. The Commission is headed by a president who is appointed from among the commissioners by common accord with the consent of the parliament. Each commissioner is given responsibility for a particular directorate. The commissioner for agriculture is momentarily Franz Fischler.

The functions of the Commission are as follows:[8]

- Initiator and motor: all important decisions made by the council must be made on the basis of proposals from the Commission; it sets the legislative timetable for the year and formulates more general policy guidance through its white papers.
- Watchdog: The Commissions task is to seek out and bring to an end any infringements of EC law by Member States, if necessary by proceedings under Article 226 (ex 169) EC before the ECJ. For doing so the Commission has been entrusted with extensive investigative powers.
- Executive: The Commission implements the policies being decided on by the Council.
- Negotiator: In external policies the Commission is required to act as a negotiator leaving agreements to be concluded by the Council.

2.1.2. The Council of the European Union

The Council consists of representatives from each Member State of the European Union. These representatives must be “at ministerial level, authorised to commit the government of that Member State.”[9] Depending on the topic under discussion the membership may fluctuate, i.e. if the topic is agriculture normally the Ministers of Agriculture will participate. The Council is not a fixed body, thus it is often criticised for lacking coherency.[10]

The function of the Council is “…to ensure that the objectives set out in this treaty are attained.”[11] It “shall…ensure coordination of the general economic policies of the Member States; have power to take decisions…and confer on the Commission, in the acts which the Council adopts, powers for the implementation of those rules which the Council lays down”.[12] “The European Council is the architect of European construction. It provides the Union with the necessary impetus for its development, it defines the general political guidelines thereof and resolves the most important problems of the construction.”[13]

The Council has the final power of decision on most secondary legislation. In the majority of cases though it can only act on the basis of a proposal of the Commission. In certain areas of the decision making process other institutions may be involved. Due to the procedures introduced by the Single European Act (SEA) the Council may have to override the Parliament’s opposition by unanimously voting, or it may amend the Commission’s proposals by unanimous vote. Since the Treaty on European Union (TEU) and furthermore through the Treaty of Amsterdam (ToA) the Council shares the decision-making power with Parliament in some areas.[14]

While in some rather sensitive areas the Council still has to make decisions on a unanimous basis, in more and more areas the Council can vote on a qualified majority, thus providing a more rapid and effective decision making.

The Member States have a different number of votes according to the new Article 205 EC.[15] The European Council decided in Copenhagen that parts of the Enlargement protocol agreed on in Nice in December 2000 will enter into force already on the 1 November 2004. Accordingly the number of votes for each Member State will be reorganised to enable a fast integration of the new Member States in the institutional system of the EU. The smallest States in population will from then on have 3 votes, while the biggest States in population will have 29.[16] Thus all States will gain more votes, the larger ones though more in percentage than the smaller ones. The objective of the new system is to alter the balance in the Council between the bigger and the smaller States in favour of the bigger States.[17] According to the new weighting of votes the qualified majority will also change from now 88 of the 124 votes now (70.97%) to 232 of 321 (72.27%). The blocking minority will then be at 90 votes. Furthermore the Treaty of Nice provides that a valid majority must also represent the majority of Member States. Additionally, to ensure that decisions represent the majority of the population, any Member State can request that a qualified majority must also represent 62% of the total population of the European Union. All these measures agreed on in Nice will most likely make the decision making process in the Council more difficult. It is worth to be noted that according to the new system the old EU 15 States will have a majority in the number of votes (237), a majority in the number of Member States and they represent more than 62% of the total population. The four biggest States will be able to block all decisions since they have together 116 votes.[18]

2.2. General Principles of law

The ECJ has introduced into the corpus of EC law the general principles of law. General principles of law are relevant in the context of EC law in a number of ways. They may be invoked either as an aid to interpretation, or in order to challenge Community action or action by a Member State or to support a claim for damages against the Community.[19]

General principles of law constitute the “unwritten” law of the Community. Examples to the General principles of law are besides the principles of equality and subsidiarity described below the principles of legal certainty, proportionality or procedural rights.

2.2.1. Equality

The principle of equality means in its broadest sense that persons in similar situations are not to be treated differently unless the difference in treatment is objectively justified. In the field of agricultural policy, Article 34(3) thus prohibits ‘discrimination between producers or consumers within the Community’.[20]

2.2.2. Subsidiarity

Community has exclusive competence in areas relating to the creation of the internal market, for example, in free movement of goods, persons and services; in the Common Commercial Policy; and in relation to the Common Agricultural Policy. This wide conception is not unchallenged, and the precise meaning of subsidiarity will not be identified until either the Treaty is amended or the ECJ gives a ruling on the matter.[21]

3. The Common Agricultural Policy

3.1. Reasons for development

Agriculture sat high on the agenda of European policymakers, especially at the time when the Treaty of Rome was being negotiated. Several major reasons justified a common agricultural policy. First, the member countries were at a comparative disadvantage with regard to agricultural producers in other parts of the world. Secondly, the memory of post-war food shortages was still vivid. At the beginning of the European integration process the member countries were only to a level of about 40% self-sufficient, thus they were highly import dependent, similarly as in the energy sector. Thirdly, 25% of those in employment worked in the agricultural sector with low-income levels. Thus they represented an interesting base for political parties as potential voters. Fourthly, social considerations led to the conclusion that agricultural subsidies would help to prevent the migration of rural population to the cities, which would have led to further costs and social conflicts. Moreover a common agricultural policy was already required with regard to the intended creation of a common agricultural market that would not have functioned properly if the system of national subsidies had been allowed to be maintained.[22]

Accordingly, the Treaty of Rome defined the general objectives of a common agricultural policy. The main objectives are specified in Article 33 (ex-Art. 39) of the EC Treaty[23]:

- Increase of agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour
- Guarantee of a fair standard of living to farmers
- Market stabilisation
- Supply security
- Reasonable prices for consumers

Some of the above-mentioned reasons are still valid today, while others are not. Reasons for that are the achieved level of production, the level of incomes that are often on a par with comparable non-farming incomes and the productivity improvements that no longer justify systematic support through the entire major commodity markets anymore.[24] Thus the focus of the CAP has constantly changed over the years and other aspects such as food security have gained importance over the years.

3.2. History of the CAP

The principles of the Common Agricultural Policy (CAP) were set out at the Stresa Conference in July 1958. In 1960, the six founding Member States adopted the CAP mechanisms and two years later, in 1962, the CAP came into force. At the same time the European Agricultural Guidance and Guarantee Fund (EAGGF) was set up to finance it. By 1963, after long negotiation rounds for the various agricultural products, a common organisation of the agricultural markets (COM) existed for almost 85% of the agricultural output of the then six member states.

In 1965, when the Council failed to meet the deadline on the proposal of the commission to control the Member States’ expenditures in order to complete the common agricultural policy, the CAP and thus the Community underwent a serious crisis. After a seven-month period of an “empty chair” policy by the French president de Gaulle the crisis was eventually set aside by the Luxembourg compromise in 1966. Afterwards the Council was able to progress in the completion of the common market organisation for practically all agricultural products, even though the requirement of unanimity for almost all subsequent decisions of any importance led very often to “packages” in which every minister obtained some concessions in order to reach agreement in the long negotiation rounds. This led to the high complexity of the CAP.

When the customs union was created in 1968, the agricultural market played an integral part in it.[25] Subsequently the CAP was reformed four times. The first reform, which was already in 1972, introduced structural measures into the CAP with the aim of modernising European agriculture. But despite continued structural changes in the following years, problems persisted; the supply and the demand of agricultural products were not in balance, resulting in ever-growing surplus. Farmers were offered guaranteed prices for everything they produced, set far above world levels, while the Union’s internal market was protected from imports by tariffs. Therefore farmers produced irrespective of whether a market existed or not. The more farmers grew or the more animals they raised, the more money they received. When the mountains of excess wheat or beef had grown too high, the products were bought by “public intervention stores” and then sold abroad with the help of export subsidies or they were simply destroyed. First measures taken in order to control the increasing surpluses were taken in 1984 with the introduction of milk quotas and in 1987 with the introduction of a set-aside system and furthermore in 1988, by the adoption of stabilizers for the main commodities. These stabilizers were not individual production quotas, but global disincentives whereby prices and/or subsidies would be cut if production exceeded certain ceilings.[26] Another criticism of the CAP was that ¾ of all farm subsidies were spent on grain, milk, meat and sugar. As these basic products were mostly produced in the northern countries of the EU, many people claimed that the farmers in the Southern Europe, with a stronger focus on olive trees or grapevines, were neglected and that the reason for that was that the stronger countries as France and Germany had influenced the CAP in order to make it more fit for their own purposes.

With the second reform in 1988 the European Council agreed on a package of measures, including the "agricultural expenditure guideline", which limited the percentage of CAP expenditure in the overall budget.[27] The third reform followed in 1992. Thereby the Community responded externally to the obligations agreed on in the GATT Uruguay Round Agreement on Agriculture. One of the great achievements of the Uruguay Round trade negotiations was to start the process of placing national agricultural policies under GATT discipline at last. It was decided that the only permissible form of protection in trade policy should be the customs tariff. Thus the EC committed itself to the abolition of import levies, a reduction of internal subsidies by 20% and the reduction of export subsidies and customs tariffs by 36% within six years. Other measures of the 1992 reform that was known as the MacSharry reform were as follows:[28]

- Lying out of land from agricultural use. The compulsory “set-aside” policy paid farmers not to use all their land to produce crops or raise livestock.
- Separation of prices and incomes policies. Thus a mixed system was introduced. Price support was reduced for cereals, oilseeds and beef. The farmers’ revenue was maintained at its previous level by area and headage payments, i.e. compensatory payments. In the case of cereals and oilseeds the farmers had to comply with the set-aside requirements. In the case of beef there were increased premiums for extensive (grass-based) production. Thus these payments, later referred to as Direct Payments, were conditional on the fulfilment of certain requirements.[29]

- Reduction of guaranteed prices, to approximate closer to world market prices
- Production quotas, thus support only up to a certain quantity
- Re-training programs that aimed at withdrawing labour from agriculture
- Early retirement support
- Support of young farmers
- Encouragement of more environment friendly production methods

The reform of 1992 was not as radical as most economists would have desired, but was generally still regarded as successful, with positive effects on European agriculture, such as an increase in ‘reasoned agriculture’, even though a number of provisions had the opposite effect to that intended.[30] The so-called food mountains had shrunk and farm incomes rose by 4.5% a year after the reforms, faster than before; in most countries they are now above the national average. Some people though profited more than others. Farmers that could cut their cost structure through further investments and thus increased efficiency profited significantly. Besides the Direct Payments income they could, due to their higher efficiency, generate income by selling their products with profit margins at the new market price. The marginal revenue became the only real production increasing input factor within the new system of the CAP. Some producers though, especially the smaller farmers, that were lacking efficiency and could not reach a higher productivity due to a lack of capital or land, actually gave up farming. In fact, while in 1960 almost 1 in 6 Europeans worked the land, in 1996 only about 1 in 20 remained. Between 1995 and 1997, the number of agricultural holdings in the EU decreased (- 5.2 %) while the average size of holdings in utilised agricultural area (UAA) increased (+ 5.4 %).[31]

Certainly, there are several factors that have to be taken into consideration to explain this trend, such as for example the emigration from agriculture. But the process of bigger farms buying out the smaller inefficient ones played a significant part in it. Partly this was indirectly financed through the new payments. 80% of the funds in 1992 went to only 20% of all farmers. Therefore many argue that the larger farms profited overall significantly more than the smaller.[32]

There were also external effects of the reform that have to be looked at. First, the reform did not change the protectionist nature of the CAP. Thus the substantial protection against imported cereals was in general maintained. Secondly, the Community prices remained for most products above the world market prices, therefore the prices for export products had still to be depressed by export subsidies, which led to serious trade distortions and trade conflicts. With regards to the GATT agreement it is important to note that the deal secured at Blair House placed the Compensation payments introduced by the MacSharry reform in the “Blue Box”, reserved for payments linked to supply control programmes. This meant that they were not count toward the level of support that needed to be reduced and were sheltered from most WTO challenges unless support was increased.[33]

It was soon recognized that despite an improvement of the market balance and reduced public stocks further adoptions of the CAP were required.[34] Several developments in the ensuing years - international trends, the enlargement towards Central and Eastern Europe, the preparation of the single currency causing budgetary constraints, the increasing competitiveness of products from third countries, the integration of consumers interests in food quality, safety and animal welfare, environmental concerns and a new upcoming round of World Trade Organisation negotiations – enforced another reform.[35]

The Commission’s outlook paper “Agenda 2000” resulted in the fourth reform of the CAP on the Berlin European Council in March 1999. The last reform took account of the future enlargement of the EU and the reform included regulations that aimed to develop a more modern and sustainable European agricultural sector, “…thus ensuring that agriculture can be maintained over the long term at the heart of a living countryside.”[36] This included a major change to the common agricultural policy. From then on the CAP not only targeted at agricultural producers but also at the rural population, consumers and society as a whole. Thus it recognized the multifunctionality of agriculture, which meant that not only the production of food was to be supported but also other features such as the creation of new job opportunities, the conservation of the natural sources of life such as e.g. water or the preservation of the countryside to provide a attractive living. Furthermore the Agenda 2000 CAP reform involved changes in the COMs of arable crop (cereals, oilseeds and protein crops) and beef meat, since the system of Direct Payments was extended in these sectors. The Agenda 2000 reform measures were set up till the year 2006.

In particular, the reform comprised measures for:[37]

- The reinforcement of the competitiveness of agricultural commodities in domestic and world markets;
- The promotion of a fair and decent standard of living for the farming community;
- The creation of substitute jobs and other sources of income for farmers;
- The formation of a new policy for rural development, which became the second pillar of the CAP after the market- and price policies of the CAP; the policy seeks to establish a coherent and sustainable framework for the future of Europe’s rural areas;
- The integration of more environmental and structural considerations into the CAP;
- The improvement of food quality and safety;
- The simplification of agricultural legislation and the decentralisation of its application, in order to make rules and regulations clearer, more transparent and easier to access.
- Introduction of a system of modulation of direct payments on a voluntary basis
- Introduction of a fixed financial budget limit till 2006

Achievements of the Agenda 2000 among other things were a further decrease in the support of prices in the cereals and beef sector, compensated by increased area and headage payments. For instance, the cereal intervention price was reduced by 15 % in two equal steps in the years 2000-01 and 2001-02. The arable area payments were increased to compensate for half of the price cuts. The arable areas payment on oilseeds and linseed are reduced over a 3-year period to equate with that on cereals from 2002. The compulsory set-aside was retained at a base rate of 10% until 2006. Similar reforms have been planned for the milk sector in 2005. The prices for cereals are now close to the world market prices.[38] Overall, the consumers’ benefits of the reform are estimated at around EUR 10 billion across the EU. In the long term however the economic benefits from the reform will be significantly greater for two reasons: First, because taxpayers` expenditure on the disposal of surpluses would have probably continued to grow. Second, because re-structuring will reduce producers` costs and improve the competitiveness of the European agro-sector.

In general, the Agenda 2000 enabled a stronger integration in the world market, but at the same time it did not ensure economic efficiency. The price and Direct Payments structure still leads to distortions and the level of bureaucratisation is still very high. The fixing of the annual budget for the CAP increased the pressure to work more efficiently, and with regards to the enlargement it pushes the need for further reforms since from then on more countries will have to be dealt with from the same budget. It is noteworthy, that the budget of the CAP has indeed been contained, or even under spent in the last years.

The Agenda 2000 was again a far less radical reform of the CAP than had been expected and proposed by the Commission. In fact, the Agriculture Council had accepted a more radical version just two weeks before the European Council agreed on the final package on 26 March 1999. The reform failed to refashion European farm support in a manner compatible with the “Green Box” of the WTO, therefore the pressure from the WTO to reform the Direct Payments did maintain.

The objectives of the Agenda 2000 were corresponding to the objectives for the sustainable development strategy agreed on by the European Council in 2001 in Goeteborg. This strategy contained the basic principle that all economic, social and ecological consequences of all political decisions should be analysed in a coordinated way and be taken into consideration when new decisions are agreed on.

The European Council invited the European Commission during the Berlin meeting to present a mid-term review of the Agenda 2000 in the year 2002. With the mid-term review of the Agenda 2000 on 10 July 2002 the Commission had the opportunity to analyse the effects of the Agenda 2000. In general, the Commission reaffirmed the objectives of the Agenda, but the Commission used this chance also to propose, in their opinion, necessary further steps. These proposals included improvements of the market management, the strengthening of the eco-conditionality[39], the Modulation[40] as a mandatory instrument and the decoupling of Direct Payments.[41] [42] Some ministers of agriculture interjected that the European Commission had gone too far with these proposals and had stepped across the limits set by the Agenda 2000 for the Mid-term review, which was meant, by their interpretation, only to review certain market mechanisms e.g. the beef sector and the development of financial expenditures.

In October 2002 the European Council set up a financial plan for the Common Agricultural Policy till the year 2013. By this agreement the expenditures of the original CAP were frozen on the 2006 (ca. EUR 45 bn.) level till 2013, besides an annual inflation compensation of 1%. All annual expenditures for the EU-25 will have to fall within these limits; only restacking of the current funds can thus finance new reforms and expenditures.

The European Commission presented a number of proposals for further reforms for the CAP on the 22 January 2003. These recent proposals are a conversion of the mid-term review proposals of the Agenda 2000. They shall give the farmers a clear political perspective within the financial limits agreed on by the Council in October. The reforms’ objectives are an increase of the competitiveness and the market orientation of the European Agricultural sector, a simplification of the CAP regulations, the enablement of a smoother EU enlargement and a strengthening of the position of the EU in further WTO negotiation rounds. Furthermore the reforms increase the focus on the sustainable development of the agricultural sector, a higher quality of the products, protection of animals welfare and removes incentives to farmers to pollute the environment. Some parts of the reform shall already be implemented by 2004, even though the Agenda 2000 set the frame for the CAP till 2006. The Commission argues that reforms are necessary in order to maintain the functioning of the CAP within the financial limits set for the next years, to meet the needs of the consumers, to deal with the enlargement, to strengthen the position for the next WTO negotiations and to enable a stronger control of the payments distribution by the Member States themselves and thus provide the chance to take into account regional differences in the policy.

The proposals still have to be approved by the European Council, which might prove difficult due to the requirement of unanimous voting. France has, for example, always denied any reforms of the Agenda 2000 before the agreed on life span expires in the year 2006.

Main aspects of the reform proposals are as follows:[43] [44]

- Decoupling of the Direct Payments for cereals, beef and sheep from production from 1 January 2004 on.[45] Thus all payments received from then on will be bundled to a single payment per farm. All the old rules for Direct Payments (need to count cattle, measure areas) will fall away. There will be no obligation on recipients to produce anything.
- Linking of Direct Payments to certain standards with regards to environment, food quality security and animal health and welfare (Cross-compliance requirements). The proposals cover 38 regulations. In case of failure, the Direct Payments shall be decreased.
- Introduction of a mandatory system of modulation in order to free funds for the rural development and for further reforms (modulation/Degression) by cutting the Direct Payments in the period from 2006 – 2012 up to a total of 19%. Exempted are small farms with a threshold of EUR 5000.
- Changes and improvements in the price support mechanisms.
- Introduction of a farm-auditing system. The farm advisory system shall be introduced for all farms that either receive more than EUR 15.000 in Direct Payments or have an annual turnover of more than EUR 100.000. The system shall control and display the functioning of the farm and is also a basis for the cross-compliance regulation
- Compulsory long-term (10 years) non-rotational set-aside shall be introduced on arable land. Farmers will be obliged to put an amount equivalent to current compulsory set-aside into long-term set-aside as an element of the cross-compliance rules.

The Commission assumes that the proposals will keep the budget of the CAP within the financial limits set in October 2002.

3.3. Functioning

The Common Agricultural Policy is comprised of a set of rules and mechanisms, which regulate the production, trade and processing of agricultural products in the European Union, with attention being focused increasingly on rural development and environment.

Three main principles, defined in 1962, characterise the common agricultural policy, even though they have never been written into any legal Community text:[46]

- A unified market: this denotes the free movement of agricultural products within the area of the Member States similar to an internal market; for the organisation of the unified market common means and mechanisms should be used throughout the EU.
- Community preference: EU agricultural products are given preference and a price advantage over imported products; protection against external competitors and considerable fluctuations on the world market.
- Financial solidarity: joint financing of all expenses and spending which result from the application of the CAP.

3.3.1. Common market organisations

The basic instruments of the common agricultural market are the common market organisations.[47] They remove obstacles to the intra-Union trade of agricultural products and maintain a common customs barrier with respect to third countries. The common agricultural policy has gradually replaced national market organisations in most sectors. The market organisations seek primarily to achieve the objectives of the common agricultural policy. The first COMs were adopted on 14 January 1962. These concerned cereals, cereal-based products and wine. Today, the COMs cover about 90% of final agricultural production in the Community.[48] The responsibility for the establishment and implementation of market organisations lies with the European Council and Commission.

The Council, acting by a qualified majority on a proposal by the Commission and after consulting the European Parliament, sets up the market organisations.[49] The Commission, assisted by a committee, carries out the necessary implementation measures for the operation of the market organisations. Each organisation is run by a management committee, comprising representatives of the Member States and chaired by a representative of the Commission, which gives its opinion on draft measures. If the Commission does not wish to accept the committee's opinion, it falls to the Council to take a final decision.

The main tasks of the market organisations include fixing single prices for agricultural products on all European markets, granting aid to producers or operators in the sector, establishing mechanisms to control production and organising trade with non-member countries. It also encourages farmers to form producer organisations. Other provisions regulate state aids for products and relations between the Member States and the Commission.

At the beginning of each marketing year[50] the Council, acting by a qualified majority after consulting Parliament and on a proposal by the Commission, or the Commission, fixes three different notional prices for products:[51]

- The indicative price (basic price or guide price): This is the price at which the Community authorities consider that transactions should take place. Although it is artificial, the indicative price is close to the price, which the products would normally command on the Community market.

- The threshold price (sluicegate price): It is the minimum price at which imported products may be sold. It is higher than the intervention price and encourages Community economic operators to buy within the Community and thus respecting the principle of Community preference.
- The intervention price: This is the guaranteed price below which an intervention body designated by the Member States buys in and stores the quantities produced. In order not to burden the Community budget, the Council encourages private storage by granting a premium to producers who store products themselves. Since the 1992 reform, in some sectors higher direct payments to farmers offset lower guaranteed prices. The products stored may be denatured, used for humanitarian purposes or sold by the Commission. Sales are by tender and the Commission decides in advance on the destination of the products. If it sells on the internal market, it ensures that markets will not be disturbed.

“Aid is granted in the form of area payments, production aid, aid to encourage livestock-farming and compensatory payments. Finance may also be provided for the marketing of production, to increase competitiveness and for the establishment and operation of groups of producers or operators in the agri-foodstuffs sector. Aid may also encourage the abandonment of certain types of production or the conversion of land and/or holdings. Market support measures are adopted if animal diseases break out.“[52]

Measures taken by the Commission to control of agricultural production and the limitation of surplus production and storage are:


[1] Palánkai, T., Economics of European Integration, Part 1, Budapest 2002, P. 76

[2] Cp. w/o author, Agriculture: Introduction, the 15.01.2003

[3] EC Treaty Article 32 - 38

[4] Cp. Steiner J./ Woods L., Textbook on EC LAW, P. 45 et seqq.

[5] EC Treaty Article 213 (ex 157)

[6] Cp. Brusis, M./ Emmanouilidis, J. A./ Hofbeck, C.: EU 25+, eine Bestandsaufnahme nach dem europäischen Rat von Kopenhagen, Januar 2003, the 20.01.03

[7] EC Treaty Article 213(2) (ex 157(2))

[8] Cp. Steiner J./ Woods L., Textbook on EC LAW, P. 23 et seq.

[9] EC Treaty Article 203 (ex 146)

[10] Cp. Steiner J./ Woods L., Textbook on EC LAW, P. 20

[11] EC Treaty Article 202 (ex 145)

[12] EC Treaty Article 202 (ex 145)

[13] Moussis, N., Guide to European Policies, Rixensart – Belgium 2001, P. 32

[14] Cp. Steiner J./ Woods L., Textbook on EC LAW, P. 20

[15] Thereby the distribution of votes: Belgium 5; Denmark 3; Germany 10; Greece 5; Spain 8; France 10; Ireland 3; Italy 10; Luxembourg 2; The Netherlands 5; Austria 4; Portugal 5; Finland 3; Sweden 4; Uk 10

[16] Germany 29; France 29; UK 29;Italy 29; Spain 27; Poland 27; The Netherlands 13; Greece 12; Czech Republic 12; Belgium 12 ; Hungary 12 ; Portugal 12 ; Sweden 10; Austria 10; Slowakia 7; Denmark 7; Finland 7; Ireland 7; Lithuania 7; Latvia 4; Slovenia 4; Estonia 4; Cyprus 4; Luxembourg 4; Malta 3

[17] Cp. Giering, C.: Die Institutionellen Reformen von Nizza – Anforderungen, Ergebnisse, Konsequenzen, in Nizza in der Analyse (Gütersloh, 2001), P. 76-87

[18] Brusis, M./ Emmanouilidis, J. A./ Hofbeck, C. : EU 25+, eine Bestandsaufnahme nach dem europäischen Rat von Kopenhagen, Januar 2003, the 20.01.03

[19] Cp. Steiner J./ Woods L., Textbook on EC LAW, P. 108

[20] Cp. Steiner J./ Woods L., Textbook on EC LAW, P. 123

[21] Steiner J./ Woods L., Textbook on EC LAW, P. 40

[22] Cp. Palánkai, T., Economics of European Integration, Part 1, Budapest 2002, P. 76 et seq.

[23] Cp. EC Treaty Article 33

[24] Cp. Buckwell, Allan: If … Agricultural economics in a brace liberal world, in: european review of agricultural economics, 24/3-4, Proceedings 8th Congress of the E.A.A.E. ‘Redefining the Roles for European Agriculture’, Meppe, 1997, P. 349

[25] Cp. Moussis, N., Guide to European Policies, Rixensart – Belgium 2001, P. 354 et seq.

[26] Cp. Tracy, M.: The spirit of Stresa, Theme paper, in: Mouton de Gruyter: european review of agricultural economics,, seventh Congress of the E.A.A.E., 21-3/4, 1994, P. 368

[27] Cp. w/o author, Agriculture: Introduction, the 15.01.2003

[28] Cp. Palánkai, T., Economics of European Integration, Part 1, Budapest 2002, P. 79

[29] e.g. producers of cereals with big areas were only entitled to receive payments on the condition to set aside some of the land.

[30] Cp. European Commission: Agriculture, environment, rural development; Facts and Figures, A challenge for agriculture, Luxembourg 1999, P. 12

[31] Cp. Eurostat: Eurostat yearbook 2002, the statistical guide to Europe – Data 1990-2000, Luxembourg

[32] Cp. w/o author: Handouts to Europe's Farmers Slip Away, The Christian Science Monitor, August 11, 1997 Edition, the 10.03.2003

[33] Cp. Josling, T./Tangermann, S.: Implementation of the WTO Agreement on Agriculture and developments for the next round of negotiations, April 1999, in: European Review of Agricultural Economics, Volume 26 Number 3 September 1999, Special Issue for the Ixth Congress of the Euorpean Association of Agricultural Economists August 24-28, Warsaw, Oxford, 1999, P. 377

[34] Cp. European Commission: The Agricultural Situation in the European Union, 1997 Report, Brussels Luxembourg, 1998

[35] Cp. w/o author, Agriculture: Introduction, the 15.01.2003

[36] Moussis, N., Guide to European Policies, Rixensart – Belgium 2001, P. 355

[37] Cp. w/o author, Agriculture: Introduction, the 15.01.2003

[38] Cp. Kommission der europäischen Gemeinschaften, Mitteilung der Kommission an den Rat und das europäische Parlament, Halbzeitbewertung der Gemeinsamen Agrarpolitik, KOM(2002) 394 endgültig, Brüssel 10.07.2002

[39] Already part of the Agenda 2000 reform, the proposals cover further standards for animal health and welfare, food safety, occupational safety and environmental standards that should be mandatory for producers that receive more than EUR 5,000

[40] The Modulation was already introduced as an voluntary action by the Agenda 2000. Its objective is to increase the funding for the second pillar of the CAP by decreasing the Direct Payments for the first pillar. The new proposals include a dynamic modulation (i.e. reduction) of 3% a year of an indivdual farm’s decoupled direct payments (exepted is a treshold of EUR 5000 per farm + an additional EUR 3000 for every additional full time employee) up to a total of 20% in the year 2010.

[41] Cp. w/o author: Lecture 10, The Mid-term review of the CAP,, the 22.01.03

[42] A more detailed overview of the July proposals is presented in the Appendix A

[43] Cp. w/o author: Die GAP-Reform: langfristige Perspektiven für eine nachhaltige Landwirtschaft,, the 22.01.2003

[44] There are also more paricular measures such as e.g. that the current regulation for the milk quota shall be continued till 2015. The price support for butter and skimmed milk pulver shall be decreased by up 35% and 17% repsectively. The cuts shall be compensated to 60% by payments. For cereals the intervention price shall be cut by 5%, the loss of income shall be compensated up to a level of 50%, the intervention price for rye shall completely be abandoned. A detailed overview and comparison to the status quo can be viewed in Appendix B

[45] The payments in the dairy sector shall be decoupled from 2005/2006 on. Other sectors will follow later.

[46] Cp. w/o author, Agriculture: Introduction, the 15.01.2003

[47] Article 34 of the EC Treaty provides for the creation of the COMs, according to this article they shall take one of the following forms: common rules on competition; compulsory co-ordination of the various national market organisations; a European market organisation.

[48] Including cereals, pig-meat, eggs and poultrymeat, fruits and vegetables, bananas, wine, milk products, beef and veal, rice, oils and fats (including olive oil and oil plants), sugar, flowers, dry fodder, processed fruit and vegetables, tobacco, flax and hemp, hops, seeds, sheepmeat and goatmeat and other agricultural products for which there is no specific market organisation. Because of the particular location of parts of the Union, special arrangements exist for products from Madeira and the Canary Islands, the islands of the Aegean and the French overseas departments. There are no market organisations for alcohol or potatoes.

[49] Cp. EC Treaty Article 34

[50] Marketing years begin on different dates – depending on the product – and last for 12 months.

[51] Cp. w/o author: Common organisation of the agricultural markets: introduction, the 15.01.2003

[52] w/o author: Common organisation of the agricultural markets: introduction, the 15.01.2003


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Budapesti Corvinus Egyetem – International Business and Economics
landwirtschaft agrarpolitik



Titel: Outlook on the common agricultural policy of the European Union