House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Written Evidence

Memorandum submitted by Consumers International

AGRICULTURE AND EU ENLARGEMENT

PREAMBLE

1. Consumers International is pleased to give evidence to the enquiry. It is based on research carried out by ourselves and our members, especially the Association of Polish Consumers, plus work commissioned by us, CI, and European Research into Consumer Affairs (ERICA) from Professors John Marsh (Emeritus Professor, University of Reading) and Secondo Tarditi (Director, Interdepartmental Centre on Agri-food Environmental Policy, University of Siena). Their research was published by CI in 2003, Cultivating a Crisis: the global impact of the Common Agricultural Policy.

2. Consumers International (CI) is a global federation of consumer organisations dedicated to the protection and promotion of consumers' interests worldwide through institution building, education, research and lobbying. Our UK members, with whom we work closely on trade issues, are Consumers Association and the National Consumer Council. We also work closely on CAP matters with our Brussels-based colleagues, the Bureau Européen des Unions de Consommateurs. We have members in all the accession countries where we have been very active during the accession period, on food, agriculture, trade and other matters. The work which forms the basis of this particular paper was carried out in the programme Consumers in the Global Market with the support of the European Commission.

3. We should make clear that we have not been active on this issue in Cyprus and Malta. Our inability to comment on the implications for them signifies no disrespect, but simply lack of analysis in those countries.

INTRODUCTION AND SUMMARY

IMPACT ON CONSUMERS

4. Consumer organisations including Consumers International (CI) and the Bureau Européen des Unions de Consommateurs (BEUC), have long argued that the CAP is disadvantageous to EU consumers, because of the prices set above market levels. The impact on EU consumers is regressive because food figures heavily in the budgets of poorer families. In the EU countries with the lowest per capita incomes, Portugal and Greece, more than a quarter of family expenditure goes on food. The overall range, according to the EC (2000) is from about 13% to about 35%, with an EU average of 17%[11]Central Europeans in the eight accession countries spend between 21% (Slovenia) and 39% (Lithuania) of their household expenditure on food. Any boosting of food prices will inevitably penalise poorer households disproportionately. Marsh & Tarditi calculate that in the CEEC8, consumers will spend 12% more on food, equivalent on average to 127 Euro per annum for a four person family[12]. Our advice to our Central European colleagues has therefore been most definitely to argue against copying the CAP[13].

5. If the price of farm gate produce were the only concern, our worries would be fewer, since the farm gate prices only account for a minority of the final costs paid by consumers (as little as 12% is calculated by Marsh & Tarditi for the UK, probably an extreme example). But there are other more subtle effects of the CAP which have longer-term consequences for consumers, and are of particular concern to our colleagues in the Eastern European countries not admitted to the EU and also to developing countries. These relate in particular to the use of export subsidies which in theory `compensate' EU exporters for the fact that their products cost more than world prices due to the arrangements made on their behalf to provide guaranteed prices. Without these subsidies, the surplus would be unsellable on world markets. It is the consumer in Europe that foots the bill, both in the shopping basket through the high internal price and as taxpayers to pay for the export subsidy. Yet, the effect on food producers outside the EU is also considerable as the dumping of subsidised exports from the EU reduces prices on their markets to derisory levels; sometimes even negative prices have been offered to importers by EU exporters.

CAP REFORM

6. Despite limited reforms during the 1990s, the cost of the CAP has continued to rise. This increase came in the form of direct income aids to farmers rather than price support, including compensatory payments for price cuts that were instigated after 1992 in some sectors (the MacSharry reforms). In 1999, a further package of "reforms" was agreed in the "Agenda 2000" programme, with further price cuts and compensation. The EC did not (and does not) want to extend Eastwards the payments that are being given to EU farmers to compensate them for the price cuts. As the CEEC farmers are not having to apply cuts in EU prices (because they are not members of the EU yet), it is logical to exclude them from eligibility, especially as the prices they receive will rise after accession. However, the merits of this impeccable logic are lost on farmers in the accession countries. This was a major issue not only in Poland, the most vocal of the negotiators, but also in the Hungarian election of 2002. Victor Orban, the then Prime Minister, warned of a two-tier membership, with the CEEC farmers operating at a disadvantage compared with the heavily subsidised farmers of the EU Fifteen[14]. President Palisas of Lithuania came to office in January 2003 with a pledge to renegotiate the terms of Lithuania's accession[15]. This proved to be impossible given that terms were agreed in the preceding December, but it signifies the potential for the trouble over this issue. This is especially clear when the EC argues that too high a level of direct aid to CEEC farmers will discourage restructuring. As Julie Wolf points out: "While this may be true, the candidate countries are justified in wondering why direct payments are good for EU farmers but bad for those in Central and Eastern Europe[16]."

7. A programme for reform was put forward by the EU's Consumer Committee with the active participation of many members of the Bureau Européen des Unions de Consommateurs (BEUC) between 1998 and 2000[17]. Such a policy could have helped CEEC economies to develop and accession to take place without excessive disruption. EU price cuts would bring prices closer to CEEC levels. EU production subsidy cuts would reduce surpluses and restrict dumping in third countries. Diminishing EU border protection would provide markets for CEEC producers. Compensation at national level would enable EU Member States to help their own farmers at a level commensurate with income levels in the respective Member States. CEEC countries would be free to do the same in theory, though they would not have to compensate farmers for price cuts if prices are not raised in the first place. And that is why such a programme would be in the interest of CEEC consumers too. Simply importing the CAP to Central Europe will see price rises, ultimately penalising poorer families.

ACCESSION

8. This is what we feared would happen when agriculture took centre stage in the December 2002 Copenhagen summit at which the terms of accession for the 10 new entrants were announced. All efforts were concentrated on the subsidy share out. The outcome was that the EU's basic negotiating position was adopted. Accession countries will receive 25% of direct payments going to EU farmers in 2004, 30% in 2005, 35% in 2006 and a gradual increase to 100% in 2013[18]. Any extra amounts to be paid in 2004 to 2006 will have to come from national finances. On the face of it this deal seems unfair to the CEECs. But the injustices are not evident simply along East versus West fault lines, as was presented to the CEECs' publics. They are also consumer versus producer. As ever in the CAP, things are not quite what they seem. We need to take a step back, to set the historical context in the region.

9. Farm subsidies can be broadly divided between those that are intended to benefit consumers (usually through keeping prices down) and those that are intended to benefit farmers (through guaranteeing prices or through direct income aids). The traditional point of contrast between East and West was that the EU kept food prices up and the socialist countries kept food prices down. In fact, traditionally, the socialist countries subsidised both producers and consumers, a policy which proved to be unsustainable. For the accession countries, then, moving to an unchanged CAP in the EU means a huge shift in agricultural policy.

10. Following the seismic changes of 1989 to 1991, the effect of EU policies on agriculture throughout the CEEC region was profound because of subsidised exports. In 1990, exports from Poland, Hungary, Czechoslovakia, Romania and Bulgaria gave these countries, taken together, a positive trade balance of 960 million ECU with the EU. By 1993 this had shifted to a negative balance of 424 million ECU, with only Hungary retaining a positive balance of trade in agriculture[19]. This was still the case eight years later in 2001[20].

THE EXAMPLE OF POLAND

11. At the same time as the EU subsidies reached a plateau around 1986-88, the economies to the East were collapsing. Thus Poland, the largest of the candidate countries, witnessed a forced change of policy which made it one of the least subsidised agricultural sectors in the Organisation for Economic Co-operation and Development (OECD). In 1988, just before the transition, Poland's direct and indirect agricultural support amounted to 24% of total farm revenue compared with 46% in the EU. That is, its farmers were subsidised, but only half as much as those in the EU as a proportion of output. By 1993, while the EU's level had risen to 48%, that of Poland had dropped to 16%. Even more dramatically, consumer support in Poland was 52.9% in 1989 (ie the subsidy in relation to expenditure), but by 1991, only two years later, it had dropped to 0.2%[21]. In other words, price subsidies to consumers had virtually disappeared in only two years from a level at which half of food prices had been discounted by subsidy.

12. There is an argument that EU export subsidies provide cheap imports to Central Europe and therefore could benefit consumers there in such circumstances. This did not happen in Poland. The flood of cheap imports did not translate into low prices to consumers, rather it appears that some traders bought cheap and sold dear. In this they were aided and abetted by the policy of the Polish government which witnessed a shift to price support rather than direct payment to farmers. Hence, by the end of the 1990s, 76% of farm support was borne directly by consumers through such mechanisms as intervention buying[22]. These mechanisms were also applied to sectors which were relatively unsubsidised in the EU, such as pork, for which the intervention price was some 50% higher than the market (or border) price[23].

13. The Polish Central Statistical Office, using 1990 as the baseline date with an index of 100, calculates that food prices were 439.6 by 1995 and 635.4 by 1999. Yet, by the end of the 1990s, food prices were scarcely rising at all, indeed they declined in some years. Thus, in recent years, both food prices and agricultural incomes have been extremely volatile, prices fluctuating between hyperinflation and stagnation, and agricultural earnings going from growth to collapse to stagnation, with continued decline in the late 1990s (30% decline of farm income over the four years 1996-99)[24].

14. Of course, as Polish agriculture lost its subsidies and Polish consumers suddenly had to pay higher prices, it was very easy for the subsidised EU exporters to enter the Polish market and undermine Polish agriculture still further. Faced with this intense competition from EU agriculture, Poland failed to take up its full quota of agricultural export opportunities to the EU, as allowed for in the Europe Agreements which followed on from the transition. It never exceeded 80% of its permitted quotas despite the fears expressed by Western European farmers that they faced competition from the CEECs because of their lower labour costs[25].

15. Faced with this volatility, it is not surprising that the Polish public saw the EU as a beacon of hope. Tarditi has calculated what would happen if, as of 2001, the CAP were extended directly to the 2004 entrants, for just 11 principal commodities. He concluded that direct payments to farmers would rise from 10% to 36% of current farm receipts and market price support from 14% to 35%[26].

16. However, as in the EU, subsidising producers does not mean that consumers pay less, as common sense might suggest. Polish farm gate prices for the 11 products would rise by some 11%. Tarditi further calculates that the CEEC Eight would see a 12% rise in prices on average, deviating from 28% in Estonia to 1% in Slovenia (confirming reports by our Slovene colleagues that prices there tend already to be at EU levels)[27]. It is important to note that increases in farm gate prices do not necessarily translate into commensurate increases in retail food prices. But they certainly lead to increased price pressure on an already hard-pressed population, while some pro-EU campaigners are unwisely suggesting that prices will fall. Tarditi and Marsh conclude that: "The implication of applying the CAP is a substantial transfer of real income from consumers and taxpayers to producers." Furthermore, they point out that: "As farmers receipts increase and they seek to expand, much of the added revenue is absorbed in higher input prices, particularly for land. Thus the remaining benefit to farmers' incomes is substantially less than the amount paid by consumers and taxpayers. . . . it is clear that the beneficiary is not actually the hired farm worker but the owner of the farm business . . . on large scale enterprises there is no guarantee that the benefits of farm support will be passed on to the worker[28]."

17. It would be some consolation to consumers if they could see their higher prices going to a useful social goal. Yet, this would appear not to be the case, or at least only to a limited extent, as has also happened inside the EU.

A PARADOX

18. So there is a paradox in that the erstwhile command economies of the Central and Eastern European Countries (CEECs) are meant to be moving towards a market economy through EU accession, while the CAP, with its quota systems and price guarantees, represents a Western version of precisely the kind of command economy, highly bureaucratic and centralised, from which the CEECs are supposed to be escaping. A further paradox is that the kind of policy which EU consumer bodies have advocated is not unlike that which Poland and Hungary adopted during the course of the 1990s, only to abandon during the process of EU accession. For example, within the CEECs, there was only modest reliance on price setting, usually at prices below world markets, unlike the CAP.

19. Hungary was particularly active in defending this policy. It was the only European member of the "Cairns group" of agricultural exporters during the Uruguay Round of the General Agreement on Tariffs and Trade Agreement (GATT) negotiations, and the CEECs comfortably met the terms of the WTO Agreement on Agriculture because they had cut their subsidies so severely. Hungary has since left the Cairns group, doubtless in view of EU accession. So, perversely, our praise for the Hungarian position during the 1990s, was not welcome to the Hungarian government.

20. The advice of consumer organisations has been overridden, with consequences that stretch beyond the borders of the CEEC accession countries. After accession, the new members will be able to apply export subsidies. The WTO 2000 Trade Policy Review on Poland concludes the following:"Although Poland will not have to contend with subsidised EU exports following accession, its agricultural sector will be subject to greater competition from EU producers. . . On the other hand, following EU accession, Poland's agricultural production may be eligible for increased EU export subsidies. This could transfer the burden onto third country markets and world exporters through the depressing effects of such policies on world commodity prices[29]."

21. In other words, any increase in export subsidies will probably be at the expense of other non-EU CEEC countries, such as Ukraine and neighbouring accession candidates, such as Romania and Bulgaria. Thus, Moldova, Europe's poorest country, finds that not only is its internal market undermined by subsidised exports from the EU, but it cannot export to the EU and finds its traditional Russian market undermined by cheaper EU exports. We will be working with our Russian colleagues on these matters during the coming years.

22. So now that the CEEC8 are about to join the EU, they become absorbed into a system which underwrites over production. So from being part of the solution as we had hoped, (because they had hit upon better policies than the CAP during the 1990s) they are becoming part of the problem from the point of view of other Eastern European countries

PUBLIC OPINION

23. Westerners should take note that the challenges facing the CEEC region are unprecedented, and that EU experience, while useful as a "pointer", may have limited applicability. The region is having fundamentally to restructure its system of governance for the third time in less than a century. Louis Emmerij from the Inter American Development Bank points out: "What is unprecedented is that (trade) liberalisation took place in economies with rapidly shrinking GDP and domestic demand accompanied by the loss of their Eastern markets. . . The argument (used by the EU during recession) that the 1 or 2% economic decline justifies protectionism can hardly be sold in Central and Eastern Europe[30]."

24. Yet, despite this, the Western negotiators have appeared apprehensive at the prospect of greater integration, indeed more so than the general public, since opinion in the EU is in favour of accession, according to a Eurobarometer survey (October 2002)[31]. In the EU Fifteen, 51% supported accession and 30% were against. These majorities could be fragile and vulnerable to change in economic or political circumstances. But the fears of EU citizens would be misdirected if they singled out the accession process as a threat. The weight of the GDPs of the 10 new members is a mere 6% of the EU's GDP, and the EU had a 17 billion Euro trade surplus in 2000. Moreover, the budgetary cost of enlargement is a mere one thousandth of EU GDP[32]. What kind of threat is this?

THE LAST WORD

25. The haggling over subsidy has brought out the worst in Europeans on all sides. The Southern Europeans worry that they will lose regional aid to the poorer newcomers, the Irish and the French worry about low-cost competition, the Germans worry about the cost, and the British hang on to their rebate. Laszlo Csaba of the Central European University calls for a more broad-minded approach: He dates what he calls an "obsession with transfers" to Mrs Thatcher's strident (and successful) demands for a "British rebate" on its contributions during the 1980s, justified on the grounds that the UK gained little from the CAP. He points out that: "Being a net contributor surely has not hurt German interests, and conversely, being a net recipient has not been of much help to Greece in its first decade of EU membership[33]."

26. In their eagerness to demonstrate their negotiating prowess to their electorates, political leaders in the accession countries are rushing to reproduce in the CEECs the errors of the CAP against which we have long campaigned. An opportunity has been lost for us to learn from our Central European neighbours.

Consumers International

January 2004

11 Secondo Tarditi and John Marsh, Cultivating a Crisis, Consumers International 2003. Back

12 Secondo Tarditi and John Marsh, Cultivating a Crisis, Consumers International 2003. Back

13 Robin Simpson, Bureau European des Unions de Consommateurs, The CAP and the Accession of the CEECs, Seminar of the National Association for Consumer Protection, Budapest 1997. Back

14 Financial Times, 31 January 2002. Back

15 European Voice, 6-12 February 2003. Back

16 Julie Wolf, The future of European Agriculture, Centre for European Reform 2002. Back

17 European Commission, Report of the CC on reform of the CAP, adopted 8 December 1998. Back

18 Heather Grabbe, The Copenhagen Deal for Enlargement, Centre for European Reform briefing note 2002. Back

19 The Agricultural Situation and Prospects in the CEECs, EC DG6 (Agriculture) 1995. Back

20 Business Central Europe, July/August 2001. Back