CAP reform can reshape the EU budget

France and Britain appear irreconcilably divided over the future of the EU budget. But the arguments posed by both countries in support of their contrasting positions are flawed. President Jacques Chirac has raised the issue of the British rebate in an attempt to divert attention away from his own political humiliation in the French referendum. For his part, Tony Blair had agreed in 2002 to freeze the size of the agricultural budget until 2013. So his recent criticisms of the Common Agricultural Policy (CAP) leave him open to the charge that he is trying to reopen what had already been settled.

Declaring an interest as a largish British farmer, I support the drift of the Blair argument. However, the British government’s view needs to be put in perspective. The EU has undertaken significant reforms to the CAP over the last few years, cutting the subsidies paid to farmers.

The member-states should accept the logical outcome of this reform process, which is to gradually reduce the CAP to a system of income support for farmers. The total cost of the future EU budget is unlikely to amount to more than 1 per cent of the Union’s GDP, which compares with an average of 47 per cent of GDP collected in taxes by national governments. However, the EU budget contains some glaring anomalies. The CAP absorbs just under half of the total. And the distribution of funding is inequitable: prosperous Britain gains from the rebate, while wealthy France also unfairly benefits as the largest recipient of funds, mainly through the CAP.

But critics of the CAP underestimate the significance of the reforms initiated by Franz Fischler, the former agriculture commissioner. Agriculture’s share of the budget, although still much too high, has declined from 70 per cent in 1985 to 46 per cent now, and is due to fall to 30 per cent by 2013. The Fischler reforms removed many market-distorting production subsidies and replaced them with more acceptable direct payments to farmers. Money was also switched from subsidies into environmental and rural development initiatives.

The Fischler reforms have paved the way for a further reduction in export subsidies and import tariffs in the current negotiations of the WTO’s Doha round. Progress on agriculture in the WTO would oblige the EU to make further CAP reforms – but the first step has to be the EU and the US making considerable concessions. The WTO could agree to phase out subsidised exports quite quickly, thereby stabilising world markets to the benefit of all farmers – but especially those in the developing world. The cost of these subsidies would also be removed from the EU budget. The UK government, which currently holds the EU presidency, is committed to ending EU export subsidies by 2010.

A WTO move to dismantle import tariffs would harm some poor countries. For example, banana producers in parts of the Caribbean and West Africa, and sugar producers in Mauritius, enjoy protected access to EU markets. If this preferential access were removed quickly it would devastate these economies. However, the EU and the US should take the lead in reducing barriers aimed at protecting their farmers, many of whom are making unacceptable profits out of the existing regime.

The elimination of export subsidies and import tariffs would undermine the case for a special EU regime – the CAP – to protect the interests of farmers. Stripped of these market interventions, the CAP becomes nothing more than a system of income support for farmers. There is no reason why the EU, rather than national governments, should provide such payments to European farmers. The EU should treat farming like any other EU industry, and merely oblige the agricultural sector to comply with the rules of the single market.

However, reformers should not ignore the social problems faced by rural populations in many parts of the EU. In the new member-states, and especially Poland, there are far too many uneconomic small farms and rural citizens living in poverty. The agrarian revolution, which has taken place in Western Europe, still has to take place in the East. The EU should allocate funds from the budget to help the new member-states to make this transformation.

There are also pockets of social distress in most of the old member-states, whether in mid-Wales, the Massif Central or Roscommon. Already farmers in these areas rely on subsidies for 80 per cent of their income. But old member-states do not need EU money to tackle these problems. After all, social policy remains the responsibility of each country. National governments should provide the subsidies, though the EU would need to keep a check on any national payment that might distort the single market.

Many proponent of CAP reform want money switched from farming to environmental and rural development schemes. However, with the exception of the special circumstances facing the new, poorer members, such schemes would also be best funded by national governments. They are better positioned to determine national and regional priorities.

The EU should begin reducing payments to individual farms in 2007 with the aim of phasing them out altogether by 2017 (assuming a WTO settlement along the lines I have indicated). The repatriation of most of the CAP budget to national governments should also begin in 2007. The UK should then be prepared to cut its budget rebate, because the issue which justified the rebate – the CAP – would no longer be there.

The usual suspects would fiercely resist such changes. France, which wants the EU budget to go on supporting its farming, would object strongly (certainly while Chirac remains president). More perversely, Britain’s rural communities, which have always been vigorously eurosceptic, fear that repatriation of the CAP would result in a less favourable deal from Westminster than they get from Brussels. They may very well be right. But long-term reform of the CAP would create a much more relevant EU budget: one which is funded more equitably, furthers fair global trade, increases support for the poorer new members, and addresses local rural and environmental needs more effectively. Above all, the credibility of the EU will rise if the anachronisms of the CAP are ended.

Lord Haskins is a member of the CER advisory board.