sou · GLB3151 · 1998-01-01 00:00:00 — The huge changes in Central and Eastern Europe resulting from the changeover from plan- to free market economies have, however, had severe effects within the agricultural sector through major reductions in production. The Baltic countries account for the largest reductions in agricultural production, equivalent to almost between the years of 1989 and 1994. and have experienced a decline of or more. This decline has been somewhat smaller in the and , and smallest of all for . On the other hand, has increased its production during this period. Reduced production is due to a series of factors such as lower consumer and food industry demand, the abolition of food subsidies, competition from outside players including Union on domestic markets, a shortage of investment and credit, and most of all the major problems associated with questions of ownership and privatisation. Table 4 Agricultural data for Central and Eastern Europe and the EU15 in 1993 Central and Eastern Europe10 Agriculture´s share of GDP % employed in agriculture 42,3 m. hectares 77,1 m. hectares *refers to 1994 Source: 1995:8, Rabinowicz 1996. However, a certain recovery in production appears to have taken place recently. In 1995 all countries apart from Estonia and showed an increased gross value in agricultural production. 56 CAP facing the future accounted for the strongest increase, but livestock, with the exception of milk production, also broke the downward trend. The agricultural sectors in the countries in Central and Eastern Europe are also struggling against major problems, although conditions do vary greatly between the countries. In 1994 the average production level for cereals in Central and Eastern Europe was more than a third lower than corresponding levels in the EU15. Where livestock is concerned, differences in production levels are even greater. There is a large land area, equivalent to of the EU land area, and more than a quarter of the population of central and eastern Europe are employed in the agricultural sector. Thus in theory, the agricultural sector in these countries could develop enormously. However, in order for the agricultural sector to develop beneficially, conditions for production and sales must be changed for the better. In this respect the process of privatisation and economic development is of vital importance. The structure of agricultural companies creates a problem in the privatisation process, with, on the one hand, very large collective production units, and on the other very small private plots. In this respect, and are something of an exception. Agreements, i.e. trade agreements to promote exports from Central and Eastern Europe, were set up in order to facilitate future membership of Union. In spite of these agreements, agricultural trade has, in practice, been to the EUs advantage. Instead of the agreements promoting export from Central and Eastern Europe, these countries have experienced increasing competition from Union on their domestic markets. The situation in Central and Eastern Europe is also made more difficult by the uncertainty created by possible EU membership. There is aa ambition for negotiations to begin six months after Governmental Conference. In their wait for EU membership, certain countries have, instead, introduced various agricultural subsidies. 3.7.2 Effects of enlargement to the East An enlargement of Union to the East would affect both Union and the central and eastern European countries (CEE countries) in many ways. As mentioned previously, peace and security are the sole major reasons for an enlargement. But there are also many other beneficial effects of enlargement, not least on an economic level. An enlargement should also provide Central and Eastern Europe CAP facing the future 57 with major opportunities to develop within the agricultural sector. There will, however, be a number of problems relating to enlargement, especially if the CAP remains unchanged. Expert group 1 (SOU 1996:171) has reviewed the effects of an enlargement to the East on the agricultural sector. Estimates have been made based on the current CAP, although there are many indications that the CAP will be reformed before the event. This section looks at the problems which an enlargement to the East could lead to with an unaltered agricultural policy in Union. It is impossible to foresee precisely the effects of an enlargement since there are so many uncertain factors. There are many question marks over how agriculture is set to develop in Central and Eastern Europe. Just how the changeover to a market economy progresses generally in the economy and the conditions on offer are central issues for the development of the agricultural sector in Central and Eastern Europe. This process is affected both by internal and external political and economic conditions. Where external factors affecting Central and Eastern Europe are concerned, Union obviously plays an important part, since the conditions which will apply to membership will have an extensive effect on the progress of agriculture. In the same way there are also many elements of uncertainty inside Union, and in this respect the CAP reform process is especially important. Both Central and Eastern Europe and Union are also influenced by uncertainties in the world at large, through factors such as market developments and international agreements, chiefly within the framework of the WTO. In spite of major problems of uncertainty, it is nonetheless important to attempt to assess the effects of an enlargement. An enlargement without reform of the CAP would, without special interim solutions, result in the imposition of the CAPs entire regulations and relevant administration into Central and Eastern Europe. This administration is extensive and complex, and can lead to practical problems in meeting requirements such as in matters of quality regulations and sanitary and phyto-sanitary rules. Furthermore, current EU structural and regional support, along with environmental payments, requires an element of national financing. It should also be emphasised that structural and regional support up until now have been changed each time new Member States have joined. EU market regulation in general supports a price level in Europe which is much higher than the prices which apply in Central and Eastern Europe. Introducing the CAP to the CEE countries would therefore lead to higher support and higher 58 CAP facing the future prices, which would favour the agricultural sector in general. However, this is not solely to the good for producers, whose structural development would be hampered by such measures as production quotas. It would be the consumers who would largely have to pay for this via higher prices. By introducing the CAP an imbalance would arise to the detriment of other sectors in society. For Union, an enlargement with an unchanged CAP would also have several noticeable effects. Most studies in this area concentrate on budget effects, yet their conclusions differ widely. This is partly due to uncertainty as to the quotas which would be imposed on the CEE countries and how much of the CAP can be put into effect, something which depends on both economic and social factors. Among all the estimations which have been made regarding budget costs, it is worth mentioning that Commission calculations estimated that the costs for the Guarantee Section, (i.e. not including the Guidance Section) would be around ECU 9 billion by the year 2000 and 12.2 billion by 2010. has estimated the costs for the Guarantee Section in the event of enlargement at ECU 9 billion for the year 2000 with historical production, yet at 20 billion if the countries were able to exploit their entire potential for production. A CAP reform with probable requirements for compensation for reductions in market price support would probably be more costly if the CAP gives support to 25 or 26 instead of 15 Member States. Section 3.6 described the effects on Union of current and future WTO commitments, where current commitments to reductions in export support are already causing problems for Union. Six of the CEE countries also have commitments to the WTO at very low levels. According to forecasts for future production in the CEE countries, cereals production is expected to increase, which should in general lead to increased need for exports and thereby further problems in sticking to the permitted WTO limits for export support in a future, expanded European Union. In the case of livestock, production increases are expected to take place more slowly, yet a certain level of production surplus is expected for beef and poultry meat. Bearing in mind the current surplus of beef in Union owing to the BSE crisis, beef production is also expected to lead to problems in meeting WTO commitments in an expanded European Union. As dealt with earlier, strong demands for further reductions in levels of support and export subsidies can be expected at the next WTO CAP facing the future 59 round, and this would further complicate the situation with a maintained CAP for 25 or 26 Member States. To keep the current CAP in un-reformed state for current Member States without introducing EU agricultural subsidies in the CEE countries as an interim measure, for example, would be one way of limiting EU budget costs. Furthermore, if the CAP were not introduced into the CEE countries there would not be an imbalance in the economies in Central and Eastern Europe, neither would consumers be burdened by major food price increases. However, such a solution is contrary to basic EU principles of a single internal market and to the principle that the agricultural policy should be common to all. Not introducing current EU support into Central and Eastern Europe would lead to different levels of subsidy and thereby different grounds for competition. An enlargement of Union to the East would lead to a series of advantages both for Union and Central and Eastern Europe. The most significant effects are peace and security coupled with increased opportunities for economic development. However, in the case of agriculture, enlargement is made more difficult by the current CAP in that conditions for the potential members differ so widely from those of current members. As discussed, an enlargement which maintains current Common Agricultural Policy would lead to several problems both for Union and for Central and Eastern Europe. Even if certain problems could be solved by interim measures, an enlargement is made more difficult by a maintained, un- reformed Common Agricultural Policy. A reform of the CAP would therefore provide help for many problems relating to agriculture and facilitate a development of agriculture both in European Union and central and eastern European countries. 4.A new Common Agricultural Policy 4.1 Needs for changing the CAP 4.1.1 Why should the CAP be changed? There are a number of factors both inside and outside Union which lead to the conclusion that the Common Agricultural Policy is in need of reform. In this section we have chosen to review the most important reasons why the CAP must be reformed. Firstly, it is important to discuss the objectives of an agricultural policy. In this respect we have come to the conclusion that the objectives need to be adapted to the food situation in Union and the rest of the world, and that our values have changed over the forty years since the CAPs objectives were formulated. Consumer issues, environmental issues, animal welfare issues and questions of regional development must be afforded greater attention in the agricultural policy of the future. Secondly, we see a series of shortcomings and disadvantages in the way in which CAP instruments are designed. CAP measures are currently complex and difficult to grasp. Certain instruments work against each other, leading to questions as to the efficiency and legitimacy of these instruments. Furthermore, the CAP leads to excessive food prices and high budget costs. We also consider that the CAPs actions on behalf of animals, the environment and rural development are insufficient. Greater consideration must be taken to the commitments agreed at the 1992 UN conference on the environment in . Moreover, producers in developing countries are disadvantaged by the EUs high levels of border protection and subsidised exports which lead to low world market prices. Commitments relating to world food security agreed at the 1996 Summit in are not met sufficiently by the current CAP. Thirdly, there are also several factors in the rest of the world which require changes to the CAP. The coming negotiations in the WTO will most probably involve demands for significant reductions in agricultural subsidies. Increased liberalisation of agricultural trade would also favour producers in many developing countries. Furthermore, an enlargement of Union towards the East is an important issue and 62 A new Common Agricultural Policy everything possible should be done to make it possible. A reform of the CAP would facilitate an enlargement, and is therefore of pressing importance. 4.1.2 CAP objectives are in need of reform The Common Agricultural Policy has been one of the cornerstones of EU cooperation. The principal reason for the inception of Union was to maintain peace in Europe. Europe was badly damaged by the second world war, during which time agricultural production had decreased. For Union to be self-sufficient in food supply was therefore a justifiable objective of agricultural policy. The fact that agriculture at that time accounted for one fifth of total employment and thereby played an important part in the economy, was a further reason for the objectives to be largely producer-oriented. However, after 40 years the objectives remain unchanged despite the fact that the situation is completely different. Today there is no longer a shortage of food. Union has become one of the worlds major producers of food, exporting vast quantities to the rest of the world. At the same time, the risk of disturbances in production are considerably lower now than they were during the 1950s. Moreover, our preferences have changed. We value to an increasing degree biodiversity, cultural heritage and a varied farming landscape. We make higher demands, not only of our surrounding environment, but on how animals are treated. Production with stringent animal welfare requirements is important both in the interest of the animals and for the quality of our food. Current consideration for consumer demands for food quality and food prices is insufficient. Furthermore we believe that there must be a regional balance within Union, in which respect agriculture is a vital component. We believe that it is natural that these values are taken up in the modified objectives of agricultural policy in order to achieve a greater understanding of the need for such a policy on the part of the general public. 4.1.3 Current CAP is complex and costly the years, the Common Agricultural Policy has become more and more complex. interests, which have often diverged, have been balanced against each other, often leading to complicated A new Common Agricultural Policy 63 Instead of making a change from the foundations, new regulations have often been added to old ones. The form which regulations take varies greatly from area to area. The complexity reduces the ability to gain a general overview, makes both production and administration difficult and reduces the general publics faith in the policy. In recent years various types of production limitations have been introduced, reducing the producers room to manoeuvre and hampering efficiency and structural development. Various instruments within the CAP work against each other. For example, market price support, i.e. border protection, export support, intervention, etc., stimulates higher production which leads to environmental problems which the environmental payments programme then attempts to alleviate. Market price support, which was originally introduced to improve incomes, pays most money to large producers in areas where production is high. Small producers, especially producers in less favoured areas (LFAs) are disadvantaged, something for which regional support attempts to compensate. An agricultural policy made up of irreconcilable elements is not efficient. Moreover, market price support is an inefficient means to achieve an income objective, since it generally links in with effects such as higher land prices, and it also costs the consumer considerably more than any net gain in income for the farmer. The CAP redistributes resources in society, favouring the agricultural sector, but this can involve an economic burden for society as a whole. The direct payments which were introduced by way of compensation for price reductions when the CAP was reformed in 1992 are permanent, and have also led to overcompensation due to high market prices. This cannot be reasonable. The more time which passes since the price reductions were introduced, the less direct payments can be justified. Neither is it possible in the long term to have a system of compulsory set aside of land which in addition gives higher direct payment per hectare than if the same land had been in cultivation. The high level of CAP support to EU producers is paid for by consumers in high food prices and by taxpayers via the budget. The EU price for many agricultural products is more than double that of the world market, and this especially affects people with low incomes who spend a proportionally larger amount of their income on food. Despite the fact that the significance of agriculture for the overall economy has been greatly reduced, the budget costs have not been cut. Roughly half of the EU budget still goes to costs for the agricultural policy. 64 A new Common Agricultural Policy the subsidies and grants are expensive: costs for administration and control are also considerable. 4.1.4The current CAP progress in the agriculture of developing countries The CAP stimulates production in Union, leading to higher prices in Union, yet to lower world market prices. High levels of border protection for the import of agricultural products to Union makes export to Union from other countries difficult, whilst at the same time EU export refunds encourage export from Union. The overall effect is low world market prices. The EUs influence on world market prices thereby puts producers in the rest of the world at a disadvantage, especially in the agricultural sectors in developing countries where only a low level of support, or even no support at all, is available. In certain developing countries agricultural production is even taxed. In the world today there are some 800 million people who do not get sufficient food. This is because they cannot afford to buy food, despite the fact that there is sufficient food in the world. War and natural disasters are also other causes of famine. In the declaration from the 1996 Summit in it was agreed that to reduce the number of undernourished people, political and economic development is needed in the developing countries alongside sustainable agricultural production. One way to achieve this would be to liberalise trade throughout the world. Paying due consideration to the developing countries is thus a matter of urgency to reform the CAP. 4.1.5The CAPs actions on behalf of animals, the environment and rural development are insufficient Interest and knowledge in society relating to issues of the environment and animal health and well-being have increased. The significance of agriculture in a society in ecological balance, for biodiversity, cultural heritage and a varied farming landscape have not been paid sufficient attention within the framework of the CAP. Furthermore, at the 1992 UN conference in commitments were A new Common Agricultural Policy 65 entered into on achieving sustainable production, something which the CAP has failed to take into sufficient consideration. Moreover, agricultural production leads to a series of environmental problems, such as leakage of fertilizers and pesticides and reduction in the variety of species. These need to be resolved if production is to be sustainable. These problems are partly due to the fact that the CAP lacks sufficient instruments to reduce the environmental loadof agriculture. The CAP still lacks any environmental objectives, but such objectives, come under the umbrella of the EUs general environmental objectives. Whilst it is true that in recent years certain environmental measures have been introduced inside the framework of the CAP, these measures are insufficient. Alongside environmental issues, animal health and well-being is also a subject of major interest which is not sufficiently covered by the CAP. In addition to the actual care of animals, their breeding and transportation are also important issues not dealt with to a desired extent by the CAP. In this area, as in environmental matters, there is a lack of satisfactory regulations within Union. In many cases common animal welfare regulations are lacking. Instead, certain aspects of market regulation stimulate intensive and unacceptable production methods. Within Union there is a series of measures aimed at structural and rural development. These measures, which are partly outside the sphere of the CAP, only comprise a very small share in comparison with the resources which are made available for market regulating measures. Market regulation creates a situation in which those areas with the best natural conditions also receive the highest subsidies. This means that overall, the less favoured agricultural areas are disadvantaged by the CAP. Not only are resources for rural development insufficient, but the form which support take varies between various sectors resulting in considerable complexity. Structural measures even include examples of actions which can work against each other. Investment support encourage agricultural production whereas other kinds of support stimulate a change over from agriculture to other sectors. Thus a review of all measures of structural and regional support would appear to be justified. 66 A new Common Agricultural Policy 4.1.6 WTO demands for increased liberalisation The CAP has already been affected by current WTO commitments to the year 2000 to reduce levels of support. Union is not currently able to export the quantities of certain agricultural products that it wishes. There are many indications that demands for significant reductions in agricultural support will be made at the next WTO negotiations, mainly due to the fact that the has changed direction in its agricultural policy. The will probably make demands for increased liberalisation of trade, principally for products in which the has major export interests. It is assumed that one consequence of this will be that the has no interest in maintaining US and EU exemptions from subsidy reduction (EU area and headage payments, see section 3.6). Alongside the are a number of other countries within the who are advocates of increased free trade. Demands for major reductions in support to the agricultural sector are expected to have considerable impact on Common Agricultural Policy. The coming WTO negotiations are therefore one further reason for a reform of the CAP. It has long been a general principle in to press for increased liberalisation of world trade. Increased liberalisation of trade in agricultural goods would result in lower food prices in Union. Liberalisation would also assist agricultural production in the developing countries. 4.1.7 EU enlargement poses new demands on the CAP We view enlargement as a high priority issue since it would favour peaceful, democratic and economic development both in Central and Eastern Europe and Union.