Financing the CAP differently may lead to a better budget and policy

analyses show an overall regressive relationship, due to the lower yields in most poorer Member States when the reference years were fixed to determine compensatory payments after the 1992 MacSharry reform of the CAP. The original relative level of support for different agricultural products also affects the distribution of the funding today.

The CAP does not favour the UK (as many other Member States) because of the historical allocations based on specific products that were supported more than others. It is also not surprising that those net contributors to the EU budget that receive a ‘rebate’ on their contribution to the UK rebate are themselves also net contributors to the CAP. At the same time, some other countries in a similar situation do not get a rebate, as a result of receipts from other headings. Overall, the agreements on corrections seem to be merely based on ‘tolerable’ net balances agreed on an ad hoc basis and mainly a result of the CAP distribution directly or indirectly.

Let us therefore look at the UK case in isolation if the CAP direct payments were abolished. Just using the methodology of operational budgetary balances and looking at the situation before the rebate, the fall in the UK’s contribution shows that the country would see its gross contribution (excluding external action) fall by an amount similar to the average rebate for the MFF (2007–

13) (€5,493 million), namely €5.2 billion (UK column (4) minus column (5)).

Does this amount justify the rebate then? No, because if the CAP were not abolished the UK would also continue to receive payments. The UK receives direct payments (just over €3 billion in 2014). If the CAP were the only reason for a rebate, then the rebate is excessive by more than half its value. Then it may stem from the funding to wealthier regions, which the UK has already considered unjustified on numerous occasions. Yet, the House of Lords has not used this heading to justify the rebate, although, and as mentioned in earlier chapters, the investment generated in the UK from the EU’s ‘competitiveness funds’ may well bring more benefits than costs.

Particularly for some instruments, rather than ‘excessive, negative net balances’, we may be facing ‘excessive net investment benefits’ in favour of countries benefiting from corrections to their contributions.

What is particularly interesting, if the CAP and the UK rebate were to be abolished, are the positive effects for many net contributors, particularly in the case of France. Despite being a large beneficiary of the CAP, France also takes the brunt of the UK rebate, which is higher than the positive net receipts it enjoys from the CAP.

9.4.1 A cohesion-based system of direct payments

A simple example has been devised where the co-financing rates are based on GDP per capita in PPP. For illustration, countries whose GDP per capita is above 100% of the EU average would pay the full, direct payment support, those from 90 to 100% would pay 80%, those between 75 and 90% would pay 50% and below 75% (the cohesion countries) would be fully covered by the EU budget.

The first effect of applying a cohesion-based, GDP per capita formula (in Table 9-2) would be a drastic reduction of the direct payment costs of the CAP – down from €40 billion to under €11 billion under the assumptions above. That is not surprising, given the regressivity of the CAP budget. If we take out the 11 Member States from the 28 that have a GDP per capita of over 100% of the EU average, the budget would fall by more than half. For example, the link with the historical endowments based on farm structures enables France alone to receive nearly a fifth of the funding. While France stands out, it is sometimes less in terms of population size or agricultural land size than other smaller net beneficiaries of the policy that receive considerable transfers even when their farm sector is well developed. The real costs of the CAP are not generated by the restructuring of the farms in newer Member States with the largest problems in the sector, but by a historical legacy of the kind of farming that was most subsidised decades ago.

Under the co-financing system proposed here, the gross contribution to the EU budget for the CAP would fall considerably for a number of Member States. In the case of the UK, the fall would be equivalent to over €4.5 billion, but the actual reduction in the cost to the exchequer would be around €3 billion after co-financing, enough to reconsider the UK rebate. Co-financing should be considered part of a package deal, given the benefits it brings, involving a more rational policy discussion and the removal of barriers for better resources and a better budget.

Of course, this solution does not fully comply with the UK House of Lords opinion (2005 and 2014), that a change in the rebate should be accompanied by a reform of the CAP. This proposal offers as a first step a change in how the CAP is financed, not the way it works. Fundamental reform, however, is only possible if the resources and expenditures are dissociated and the main beneficiaries are also responsible for its costs nationally. The conflict on the costs of the CAP is also mainly a dispute between wealthy Member States – mainly between today’s net contributors.

Table 9-2. Share of contributions to the CAP and net contributions to the policy, 2014,

“cohesion” approach

(1) (2) (3) (4) (5) (6) (7)

National contribution to the CAP now

New contribution to the CAP

Change in contribution

Net CAP balance

Net balance (no rebate today) (%)

Net balance (with rebate today) (%)

New net (no rebate) (%)

BE 1,173.8 309.4 -864.4 -309.4 -0.29 -0.37 -0.08

BG 119.4 31.5 -88.0 547.2 4.59 4.45 4.80

CZ 421.2 111.0 -310.1 328.3 2.15 2.08 2.36

DK 772.1 203.6 -568.6 -203.6 -0.29 -0.32 -0.08

DE 8,664.3 2,284.1 -6,380.2 -2,284.1 -0.49 -0.52 -0.27

EE 55.5 14.6 -40.9 84.4 2.58 2.49 2.80

IE 465.6 122.8 -342.9 -122.8 0.08 0.02 0.30

EL 520.0 137.1 -382.9 986.1 3.05 2.89 3.27

ES 3,067.4 808.6 -2,258.8 174.3 0.21 0.10 0.43

FR 6,352.5 1,674.7 -4,677.9 -1,674.7 -0.27 -0.33 -0.06

HR 121.8 32.1 -89.7 61.1 0.48 0.42 0.70

IT 4,704.4 1,240.2 -3,464.2 -499.3 -0.20 -0.28 0.01

CY 48.3 12.7 -35.6 13.1 0.70 0.69 0.92

LV 69.6 18.3 -51.2 125.4 3.53 3.35 3.75

LT 102.6 27.1 -75.6 347.1 4.47 4.38 4.69

LU 85.9 22.7 -63.3 -22.7 0.22 0.27 0.43

HU 293.5 77.4 -216.2 1,207.3 5.70 5.64 5.91

MT 22.2 5.9 -16.4 -3.2 2.36 2.35 2.58

NL 1,931.2 509.1 -1,422.1 -509.1 -0.58 -0.71 -0.36

AT 958.8 252.8 -706.0 -252.8 -0.41 -0.38 -0.19

PL 1,154.6 304.4 -850.2 2,678.1 3.54 3.47 3.76

PT 498.8 131.5 -367.3 185.8 1.99 1.88 2.20

RO 427.0 112.6 -314.4 1,147.1 3.19 3.09 3.41

SI 106.9 28.2 -78.7 37.1 2.20 2.17 2.42

SK 215.3 56.8 -158.5 129.0 1.41 1.37 1.63

FI 594.6 156.8 -437.9 -156.8 -0.37 -0.40 -0.15

SE 1,297.7 342.1 -955.6 -342.1 -0.49 -0.52 -0.28

UK 6,338.3 1,670.9 -4,667.4 -1,670.9 -0.56 -0.23 -0.34

sum 40,583.7 10,698.8 -29,885.0 – – –

Source: Authors’ calculations using the EU budget tables and data for 2014 from the European Commission’s website.

9.4.2 An alternative co-financing system

There are a number of variations that could also be adopted and one of these is presented in Núñez Ferrer (2008) for the EU-15, based on the added value of farming in Member States. This system makes the EU financing level more progressive. The concept is that the rate of EU co-financing is inversely correlated with the added value of the sector. This means that indirectly, the wealthier the farming sector in a country and the more it contributes to the nation’s wealth, the more this generated wealth is used to finance its own subsidy. The results are complex, but it

more clearly reveals the imbalances within the agricultural sector in the subsidy levels and encourages debate on a more rational allocation of support.

9.4.3 Additional arguments in favour of such an alternative co-financing system

Short of reforming the CAP, the approaches presented above alleviate the net balance problems of the EU budget and open the door to a new (and likely healthier) policy debate. Detractors would likely claim that such approaches represent a distortion of the markets. That is not true, first because the support levels would not change without a reform agreement. The approaches change how the support is paid, not how much is paid. Second, the direct payments are decoupled, and the EU defends them at the WTO as non-market distortive. The payments cannot be defended externally by the EU as non-distortive while claiming internally that if co-financed they would be a market distortion.

Of course, reforming the way the policy is financed would most likely spark a debate on reform, which may well be very healthy. The CAP policy as it is today is distorting the agricultural sector.

It presents elements of regressivity in the support levels and distribution, generating actual unfair competition at the EU level between farmers. These effects stem from the link to historical allocation levels to support the farming sector, based on a logic that is no longer valid. Adjacent regions in Europe with similar farming structures can have widely different support levels per farm despite similar cost structures, only because they fall on different sides of a national (or sometimes even regional) border. A single market needs single support systems treating farmers the same based on justified and estimated needs. What this reform might well do is launch a debate as part of an active search for a better policy, rather than for ways to ‘maximise payments from Brussels’ while seeking to avoid ‘excessive’ net balances based on ad hoc political decisions.