LEADERS
	Europe’s farm follies
	The answer to Europe’s wasteful and inefficient farm policy is to cut prices and let governments subsidise their farmers themselves
An EU plan to reform farming	IT IS the source of many of the European Union’s worst lunacies. Over the years, the common agricultural policy (CAP) has created beef and butter mountains, paid farmers not to grow crops, destroyed millions of tons of fruit and vegetables and fostered fraud on a gargantuan scale. It almost wrecked the last round of world trade talks. It has gobbled up over half the EU’s entire budget. Yet, despite this coddling, farmers remain unhappy. There must be a better way. Next week the European Commission will set before the EU’s farm ministers its latest proposals (see article). In line with the logic of the reforms made in 1992, the commission wants further sharp cuts in the guaranteed prices that the CAP offers to farmers for most of their products, and to make direct compensatory payments, unrelated to production, instead. The long-term aim is to get the EU’s guaranteed prices down close to world levels, and to give farmers direct aid, if necessary, to ensure them a decent standard of living. This plan is not popular with farmers, who do not want to seem like welfare recipients. So why should ministers adopt it? Because they have little alternative. The wheat and beef mountains, which have disappeared since the 1992 reforms, are expected to return within five years. It will by then be impossible, under world trade rules, to subsidise their export. A further round of trade talks is due soon, and the Americans will be seeking more cuts in the EU’s farm subsidies. Later on, the EU is meant to take in new countries from the east, most with big farming populations. Unless its farm prices are reduced, the new members could bankrupt the Union. Paradoxically, reform should also be good for many farmers. The CAP has put them in a straitjacket. High support prices and a limit on export subsidies have acted as two vicious cords tying farmers into a highly controlled market in which output is artificially constrained. Cut CAP prices to world levels and, hey presto, all those controls—milk quotas, cereal set-asides and the rest—could be scrapped as well. The 1992 reforms, remember, fiercely resisted by farmers, actually led to faster increases in farm incomes. Not all farmers would gain. This is where compensatory payments come in. The beauty of these is that they can be divorced from production, and so count under trade rules as non-distorting. They can be more precisely geared to their objective, maintenance of farm incomes, than can guaranteed prices. They can be varied to foster other practices, such as environmentally friendly farming. And they can be adjusted to help small farmers more than big ones, who ought to compete unassisted in world markets. Nationalised assistance Yet there is one big problem with these payments: their financing and direction from Brussels. Not only does this offend against the EU’s principle of subsidiarity—assigning tasks to the lowest appropriate level of government. It is also economically illogical: why should a Portuguese farmer expect the same income as a Bavarian? It distorts the EU budget: countries that are net beneficiaries try to boost spending, those that are net payers try to cut it. And it makes it harder to win approval for CAP reform from Germany, the biggest obstacle. If the Germans were free to pay higher subsidies to their own farmers, they would be less hostile to price cuts. In the past, the EU has resisted “nationalisation” of the CAP because it would jeopardise the common market in food and put poorer countries at a disadvantage. The first objection would fall so long as income aids were decoupled from production, though they would need policing to ensure they were not trade-distorting. The second could be met by setting a minimum level of EU-financed income support, but letting members top it up if they chose. National treasuries would be no pushover. But it would be no bad thing if farmers had to justify support against other claimants on the public purse, instead of getting it unnoticed from Brussels.  © Copyright 1997 The Economist Newspaper Limited. All Rights Reserved