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Thursday, November 29, 2012

EU farm subsidies - the mother of all misallocations

Its been a busy few days on the EU budget front with the inconclusive EU leaders’ summit on the EU’s long term budget, and the Commission’s new proposal for the 2013 annual budget (largely unchanged from the version MEPs and member states were unable to agree on). Much of the attention in the talks were given to absolute numbers over substance, which is why Tuesday's Court of Auditors' report on the 'single farm payment' – accounting for roughly one third of the EU budget – is very interesting. The CAP as a whole (comprising the rural development component and the remaining market distorting subsidies) accounts for around 40% of expenditure - €56.8bn this year alone.

Specifically, the report looks at the effectiveness of the ‘Single Area Payment Scheme’ (SAPS) which is just EU jargon for the bulk of farm subsidies to most of the new EU12 member states under the CAP (The EU15 states plus Malta and Slovenia have a different support scheme called the Single Payment Scheme. A unified scheme for all 27 states is due to be introduced in 2014. The generic terms for both is usually 'the single farm payment').

The language is, as usual, cautious but it's quite clear that by EU standards, the Court of Auditors absolutely slams these subsidies. In the report’s executive summary we read that:
  • The definition of ‘farmers’ is inadequate leading to subsidies being paid out to "beneficiaries not or only marginally involved in farming". In some of the Member States concerned, SAPS aid was paid to organisations not involved in farming, including public entities managing state land, hunting associations, fishing clubs and ski clubs. So the farce continues.
  • The subsidies fail to take into consideration either the specific regional characteristics of farming activity, nor the contribution of farmers to the production of public goods. 
  • The payments disproportionately benefit large landowners (who are more likely to be relatively wealthy) while the majority of farmers receive very small amounts of aid. 
  • There is no option to differentiate payments within member states to take into account the agricultural potential of regions or environmental criteria. In other words, those who say the CAP in its current form is the best tool for delivering 'food security' or environmental objectives (including bio-diversity) don't know what they're talking about.
  • The Commission has not analysed the effects of SAPS aid on the restructuring of the farming sector - a huge 'blind spot' given that modernising agriculture is one of the stated objectives of the CAP, and given that by giving people income support irrespective of the economic activity their engaged in (if any) is usually an active disincentive for reform. 
  • The Commission has also not yet analysed the effects of the subsidies on land prices. Again a massive blind spot given that the regime is effectively subsidising landowners. 
So in other words, the single farm payment is a ill-targeted subsidy with no clear links to either the delivery of public goods or economic reform. In today's economic climate, to maintain such a fundamentally irrational policy must be considered something of an accomplishment.

What should we have instead? As we argue in our dedicated report on this issue, there could be a broad rationale for having a publicly subsidised system for delivering public goods in the countryside such as bio-diversity. One way of achieving something at least remotely sensible, would be for the CAP to be slimmed down (we proposed a 30% to the direct subsidies which would have saved over €12bn this year) and refocused to deliver a range of environmental benefit through a system of transferable agri-allowances (if intrigued, check out the full study).

But the current system just has to go. 


Bugsy said...

So, as with all other areas of financial concern in the EU, why has it taken so long to isolate the problems. What solutions are being considered?

Rollo said...

This analysis has not mentioned that the food thus subsidised is still more pricey than the world market. And it still leads to surpluses which are subsidised again to sell into third world markets. Nothing could be better designed to destroy development of poor countries. Shame on all those who take part.

christina speight said...

Rollo is absolutely right - the whole scheme is utter madness. If you have to have anything (which at EU I doubt) the simple answer is deficency payments to raise product prices to those on the world open market Which is - incidentally - what we had here from the end of the war till joining the EU - it worked well.

An ADDED cause of fury in Britain. When we surrendered half of our Rebate it was in return for a promise to reduce the CAP budget. That promise (at French insistence ) has been cynically broken

No wonder we hate the EU. and want rid of it

Rik said...

Problem with the CAP, absolutelutely not helpful the create a viable agricultural sector.
It subsidises the status quo.
If you pay for the staus quo that is what you will get.

With as further problem as Rollo mentioned it creates substantially higher consumerprices. Which will likely cost the average consumer more than his share of the 'membership fee'.

Anonymous said...

at the end of the day these payments are simply bribes to encourage countries/people to like the EU

Rik said...

Hardly working. It makes at least most of the UK citizens think they pay a lot and for rubbish and only very few receive something like 2% of the population.
Every simpleton knows the trick is to 'Robin Hood' as that gives the opportunity to get money from a few and give it to many.

This is only keeping relatively small groups as well as certain governments happy. Which is not the thing to do when the decision moves like via a referendum to the voters in general.