Direct Payments in the CAP post 2013 EP Workshop "CAP towards 2020", Brussels, 7 February 2011 Stefan Tangermann Department of Agricultural Economics and Rural Development

Stefan Tangermann, University of Göttingen 2 The challenges The Communication explicitly identifies three challenges external to the CAP –food security –environment and climate change –territorial balance However, there is one additional challenge internal to the CAP: What is the future of direct payments?

Stefan Tangermann, University of Göttingen 3 Direct payments: backbone of the CAP? Originally, direct payments had an important role, to compensate farmers for price cuts … but no decision on their future was taken The Communication now suggests (implicitly) that they are to remain a permanent feature of the CAP … and proposes only very limited changes of other instruments The Communication is essentially about the future of direct payments

Stefan Tangermann, University of Göttingen 4 Direct payments and the challenges Provision of important public goods requires policy support, but … Food security: no need for DP to stimulate extra production in Europe … and DP cannot enhance 'true' competitiveness Environment/climate change: requirements are location-specific → Pillar 2 measures work best Territorial balance: needs differ from place to place → Pillar 2 measures work best

Stefan Tangermann, University of Göttingen 5 Which role for direct payments? The Communication suggests that DP are needed –to provide basic income support –as precondition for provision of basic public goods Income support for equity reasons should be based on household income, like in other sectors Provision of 'basic public goods' depends on land use … which would continue in most of the EU even in the absence of direct payments DP per hectare to all farmers are a blunt instrument

Stefan Tangermann, University of Göttingen 6 The "active farmers" issue Objectives cited in Communication do not provide basis for any definition of "active farmers" –agricultural activity vs other enterprises: management of natural resources can also be achieved by other activities –working farmers vs absent landowners: DP are capitalised in land values → tenants have little benefit, territorial development is not enhanced –'normal' farm size vs super large farms: large farms can also provide public goods "Active farmers" is a matter of public perception, rather than consistency with CAP objectives

Stefan Tangermann, University of Göttingen 7 Treatment of small farms Providing more support (per hectare) to small farms is neither justified, nor would it enhance their 'true' competitiveness Reducing transaction cost makes sense … not through making larger payments (e.g. same payment to all farms below threshold) … but through less requirements (cross compliance) Payments could be made once in five years, or through marketable certificates ("bonds") to provide means for investments (on or off farm)

Stefan Tangermann, University of Göttingen 8 Impact on supply, and WTO compatibility Communication proposals would not have noticeable impact on supply … unless "voluntary coupled support" were to become larger element DP would probably continue to be compatible with WTO Green Box, unless –"active farmers" definition were to require production –"greening" component were to undermine decoupled nature of payments (e.g. permanent pasture, crop rotation)

Stefan Tangermann, University of Göttingen 9 Basic component of direct payments Redistribution among Member States is a purely political matter, and no economic advice can be given regarding 'right' distribution –equity would require means testing –public goods provision requires specific targeting to natural, economic, social conditions "Capping", in absence of means testing, does not improve equity … but distorts land market and has negative implications for structural development

Stefan Tangermann, University of Göttingen 10 "Greening" component Would substitute for part of current payments … but generates less farm income Which role is "greening" component thought to play? 'Super cross compliance'? –new environmental issues? Why not yet included? –why not revise current cross compliance? Moving measures from Pillar 2 to Pillar 1? –why is Pillar 1 better place? –would budget also move? And co-financing?

Stefan Tangermann, University of Göttingen 11 "Greening" component for public goods? "Green" public goods are location-specific, because of either their nature or their costs → EU-wide policy under Pillar 1 is less efficient than more differentiated policy under Pillar 2 Member State governments will be under pressure to make sure 'money from Brussels' actually flows "Greening" component is not a convincing way to achieve better targeting "Greeenig" component is proposed to make payments "more understandable to the taxpayer"

Stefan Tangermann, University of Göttingen 12 "Areas with specific natural constraints" and "voluntary coupled support" Would areas with specific natural constraints receive larger payments than today? … or would budget be shifted from Pillar 2 to Pillar 1 (and why so?) There are no good reasons to provide any coupled support … which effectively makes farmers pay for the costs of producing the outputs considered desirable (for which reasons?)

Stefan Tangermann, University of Göttingen 13 Conclusions (1) Communication identifies important challenges … but proposes only limited changes to CAP … not a real reform Meeting the challenges requires new policies –food security and 'true' competitiveness are enhanced through more innovation, R&D, education, training, less red tape, better functioning land markets, lower land prices –environment, climate change require location-specific measures on contractual basis, with local engagement –territorial balance is achieved through broad-based support to rural areas, infrastructure, social services, education

Stefan Tangermann, University of Göttingen 14 Conclusions (2) "Greening" component is not a convincing way of achieving better targeting Redistribution among Member States may be politically necessary, but there is no economic advice regarding 'right' distribution "Capping" does not achieve equity, distorts land market Coupled support should be terminated

Stefan Tangermann, University of Göttingen 15 Conclusions (3) Provision of public goods is an important objective of the CAP, and requires public support … but support must be specific Payments should be provided not per hectare, but per unit of public good provided (Pillar 2) CAP should now enter into a new phase: market support → decoupling → targeting (1960s-1980s) (1990s-2000s) (post 2013) support per tonne … per hectare … per public good