EU faces intense pressure from other trading blocs for further farm reforms

Date: 16/09/1999

By Simon Taylor

LIKE a workman painting a long bridge, Farm Commissioner Franz Fischler will have to begin work again before he has completed on his current project.

The next round of World Trade Organisation talks will force Fischler to launch a new reform of the Union's farm policy by 2003 at the latest, before the extensive package of changes agreed earlier this year have been fully introduced. What is more, the changes could be the biggest thing to hit EU farmers since the birth of the Common Agricultural Policy in the 1950s.

Fischler has already warned that the CAP will need yet another overhaul. In a speech to a farming conference at the end of June, he conceded that he might need to reassess the Agenda 2000 deal agreed by EU leaders in Berlin in March. "The mid-term reviews might indicate that new problems are coming up on agricultural markets and the CAP has to react," he said.

Those reviews are scheduled for 2002-2003, and will come at a crucial time for Fischler. By then, two or three years into the WTO talks, he will know more or less what he has to do to meet the demands of the Union's trading partners.

The main agricultural exporting nations such as the US, Australia and Canada have already called for an end to some of the key elements of the Union's farm support policy.

One target is the insidious practise of subsidising exports of agricultural products which costs the EU more than €3 billion a year. Worse, they will probably challenge the direct payments which the Union makes to farmers to protect their incomes and which now account for a major chunk of the EU's annual 40-billion farm budget.

Fischler has already tried to get the CAP in shape for the new trade round.

Throughout the negotiations on the Agenda 2000 proposals, he fought hard for a package of deep price cuts with compensation. But a series of compromises culminated in the deal being watered down by EU leaders in Berlin in March. Proposed reductions such as the 30% cut slated for beef were scaled back and a tentative attempt to reform the dairy sector was put off until 2005-2006. Significantly, EU leaders turned the screws on the farm budget more tightly than ever before, limiting the budget to an average of €40.5 billion a year for the next seven years.

What will this setback mean for incoming Trade Commissioner Pascal Lamy in his battle to defend the Union's farm policy in the WTO?

The EU will already be on the back foot by 2002-03 when the trade negotiations really hot up. Prices for farm goods are expected to remain low for the next couple of years, making it difficult for the Union to sell its higher priced farm goods on the world market without export subsidies. Commitments made by the EU in 1994 to reduce spending on export subsidies by more than 30% by 2001 means that any surpluses will have to go into expensive public storage, putting a strain on the Union's budget.

The simple answer, as Fischler already knows, would be to cut prices down to world market levels, allowing the EU to wave goodbye to export subsidies. The only problem is that compensation for price cuts is expensive.

Fischler himself admitted in a recent speech that solving the problem would be difficult given the budget restrictions imposed by Union leaders. The Commis-sioner floated the option of reducing prices without compensating farmers, but added: "We will see whether the member states would then accept such an option."

Fischler may find, however, that the EU's trade partners force member states to rethink direct aid payments to farmers.

While Australia, Canada and the other agricultural trading nations accept that the Union is entitled to pay its farmers to keep them on the land, they want to ensure that payments do not distort world markets by allowing the EU to dump surpluses. This might mean converting payments into social aids, based on historical income instead of the current system which uses the amount of grain grown or the number of animals a farmer keeps.

But the scale of the concessions the EU will have to make will depend on the strength of the attack on the CAP from Washington. This might not now be as fierce as had been expected following the US' decision to shell out nearly h6 billion to farmers hit by bad weather, floods and low prices this year. That has undermined Washington's claim that its system is more free-market than the CAP.

But if the EU is forced to switch to giving farmers generous handouts without necessarily growing anything, there would be an intense public debate about the agricultural community's entitlement to such payouts.

If the Union has to move to a more socially-based system because of pressure from the WTO, it could force the radical cut in the lifeline farmers have enjoyed since the CAP's inception.

Article forms part of a survey on world trade, p13-20.