The Common Agricultural Policy is emblematic of all that is wrong with the EU

The Common Agricultural Policy is emblematic of all that is wrong with the EU

The oldest and largest of the EU’s policies, the Common Agricultural Policy (CAP), is emblematic of why a majority of people voted for Brexit last year. Its objectives have focused for forty years on the interests of the producers, creating distorted markets, hindering trade deals, reducing farmers’ productivity and increasing prices for consumers. How on earth have we ended up with such a nonsensical system to disentangle?

Between the passing of the Corn Laws and the outbreak of World War I, British agriculture largely acted as a free market, with little government intervention, subsidy or protection. Although politicians such as Joseph Chamberlain urged the introduction of new tariffs, many in Britain remained passionately committed to the consumer benefits of low prices and the ‘cheap loaf’. Unlike continental Europe, Britain did not try to protect its agriculture — one reason why, despite a booming industrial sector, German agricultural productivity lagged substantially far behind Britain’s until well into the second half of the twentieth century.

After two world wars had brought about a new focus on food security and self-sufficiency, the Agriculture Act of 1947 made more state intervention routine. Under the new system, annual price reviews set guaranteed prices for key agricultural products and ‘deficiency payments’ were paid to farmers to cover the difference between the guaranteed and market price. However — again in contrast to Europe — Britain still maintained relatively low tariffs for agriculture, preferring to support farmers with direct payments.

This changed when we joined the EU. From the beginning, the CAP was seen as less than ideal for the UK, with the 1971 White Paper, The United Kingdom and the European Communities, warning that ‘membership will affect food prices over a period of about six years with an increase of about 2.5 per cent each year’.

Originally, the CAP represented a compromise between French and German interests. In the early 1960s, German farms were relatively small, and farmers wanted a guaranteed income for small amounts of output. In contrast, French farmers mostly enjoyed economies of scale and were more efficient, so wanted to be guaranteed the purchase of large amounts of production. The Commission guaranteed a price for each product, and if the farmer could not sell the product for the agreed price, the unsold produce would be purchased, taken into intervention, and stored for future sale or disposal. The Commission swiftly learnt that the repercussions of guaranteed prices were more difficult than it had anticipated.

The result was repeated overproduction – the so-called ‘butter mountains’ and ‘milk lakes’. High tariffs excluded foreign exports from the Common Market, reducing the incomes of emerging economies where the only comparative advantage was often in agricultural products. In distributional terms, the policy was regressive: given that food makes up a higher proportion of the budget of a low-income household, higher food prices placed a disproportionate burden on low-income households.

Whilst some tinkering around the edges took place, only with the proposed expansion of the EU to the former socialist economies of central and Eastern Europe was the need for reform taken seriously. Their economies had large agricultural sectors and poorer farmers, so part of their attraction to the EU was to have access to the subsidy regime of the CAP.

In order to avoid a significant expansion of the farm costs that accounted for about 70 per cent of the total EU budget, spending on agriculture had to be capped and finally the link between production and subsidy was broken. The 1991 reforms then brought in by Ray MacSharry — the Irish Commissioner responsible for agriculture — moved away from reliance on price support to direct income payments, which decoupled income support from production. In 2003, the Austrian Commissioner Franz Fischler took things a stage further when all farm payments were merged into a ‘single farm payment’ based on land rather than production. As ever, the producers were still privileged over consumers.

Successive UK governments have continued to try to reform the CAP, through cutting farm subsidies, ending any links between farm payments and direct agricultural production, and attempting to steer CAP spending towards policies intended to improve the environment. For one illustration of how that has failed, take the Treasury’s 2005 analysis, which concluded that CAP “imposes substantial costs on consumers and taxpayers but is inefficient in delivering support to farmers and promoting an attractive rural environment. Indeed, much of the CAP still has a negative impact on the environment.”

While CAP has improved since its origin, it remains highly imperfect, with much of this reform agenda still left to implement. Now the UK has a real opportunity to shape this important sector for itself. No wonder that in Policy Exchange’s latest report, published earlier this week, we call for all of this to be put behind us, and for a new British Agricultural Policy. We recommend the unilateral removal of tariff barriers on food and for public money to be spent on public goods like biodiversity and flood prevention. It will take some years to phase in, but finally we can manage our agricultural policy for the benefit of consumers and our landscape for the benefit of all who live in, or visit, our beautiful countryside.