Analysis: Europe's ag. revolution - I

By SAM VAKNIN, UPI Senior Business Correspondent

SKOPJE, Macedonia, Nov. 28 (UPI) -- One of the undeniable benefits of the forthcoming enlargement of the European Union accrues to its veteran members rather than to the acceding countries. The EU is forced to revamp its costly agricultural policies and attendant bloated bureaucracy. This, undoubtedly, will lead, albeit glacially, to the demise of Europe's farming sector as we know it.

Contrary to public misperceptions, Europe is more open to trade than the United States. According to the United Nations, the International Monetary Fund and the Organization of Economic Cooperation and Development, its exports amount to 14 percent of gross domestic product compared to America's 11.5 percent. Europe is also the world's second largest importer. In constant dollar terms, it is the world's largest trader.


A recent Trade Policy Review released by the World Trade Organization mentions two notable exceptions: farm products and textiles. Europe's average tariff on agricultural produce is four times those levied on non-agricultural goods. Yet, a number of trends conspire to break the eerie stranglehold of 3 percent of Europe's population -- its farmers -- on its budget and political process.


The introduction of the euro rendered prices transparent across borders and revealed to the European consumer how expensive his food is. Scares like the mishandled mad cow disease dented consumer confidence in both politicians and bureaucrats. But, most crucially, the integration of the countries of east and central Europe with their massive agricultural sectors makes the EU's Common Agricultural Policy untenable.

The CAP guzzles close to half of the EU's $98 billion budget. Recent, controversial reforms, introduced by the European Commission, call for a gradual reduction and diversion of CAP outlays from directly subsidizing production to WTO-compatible investments in agricultural employment, regional development, environment and training and research. Unnoticed, support to farmers by both the EU and member governments has already declined from $120 billion in 1999 to $110 billion in 2000. This decrease has since continued unabated.

Still, the EU is unable to provide the candidate countries with the same level of farm subsidies it doles out to the current 15 members. Close to one quarter of Poland's population is directly or indirectly involved in agriculture -- 10 times the EU average. The agreement struck between Germany and France in September and adopted in a summit Brussels in October freezes CAP spending in its 2006 level until 2013.


This may further postpone the identical treatment much coveted by the applicants. Theoretically, subsidies for the farm sectors of the new members will increase and subsidies flowing to veteran members will decrease until they are equalized at around 80 percent of present levels throughout the EU by the end of the next budget period in 2013.

But, in reality, the entire CAP stands to be renegotiated in 2005-6. No one can guarantee the outcome of this process, especially when coupled with the Doha round of trade liberalization. The offers made now to the candidate countries are not only mean but also meaningless.

A recent tweak by Denmark, the current president of the EU, to peg support for farmers in the accession countries at two-fifths the going rate, won a cautious welcome by the applicants. Some of this novel subventionary largesse will be deducted from a fund for rural development in the new members. Additionally, national governments will be allowed to top up inadequate EU dollops with governmental budget funds.

Even this parsimonious offer -- still disputed by the majority of contemporary EU members -- will cost the EU an extra $500 million a year. It also fails to tackle equally weighty wrangles about production quotas, EU protectionist "safeguard" measures, import tariffs imposed by the applicant countries against heavily subsidized European farm products, reduced value added taxes on agricultural produce and referential periods and yields -- the bases for calculating EU transfers.


It also ignores the distinct and thorny possibility that the new members will end up as net contributors to the budget. Quoted by Radio Free Europe/Radio Liberty, Sandor Richter, a senior researcher with the Vienna Institute for International Economic Studies, concluded that the first intake of applicants will end up underwriting at least $410 million of the EU's budget in the first year of membership alone. With the GDP per capita of most candidates at one-fifth the EU's, this would be a perverse, socially unsettling and politically explosive outcome.

Aware of this, the European Commission denies any intention to actually accept cash from the candidates. Their net contributions would remain theoretical, it pledges implausibly. Yet, as long as a country such as Poland is incapable of absorbing -- disseminating and utilizing -- more than 28 percent of the aid it is currently entitled to, veteran EU members rightly question its administrative ability to tackle much larger provisions -- about $20 billion in the first three years after accession.

Part 2 of this analysis will appear Friday.

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