1 Community Budget and Agricultural Policy Reform: The Tony Blair Proposal A German Point of View Ulrich Koester University of Kiel Germany

2 Outline A need for further reforms of the CAP ? Budgetary effects are certainly important, but not the main concern Concern 1: Lack of achievement of agricultural policy objectives Concern 2: Negative effects on well-being of the society at large Concern 3: The CAP contravenes main principle of good governance

3 The budget problem Tax money needed for a specific policy is only a main concern if the society at large would be better off with less public expenditure Hence, the main question is: Is this amount of expenditure needed to achieve specific policy objectives? What does the taxpayer get for his money? Good value for money?

4 The CAP and agricultural policy objectives as quoted in the Treaty Productivity objective By thus achieve fair standard of living Stability of markets Secure food security Secure adequate consumer prices

5 Message 1 The Common Agricultural Policy has not achieved the main agricultural policy objectives as laid down in the Treaty

6 The CAP and European Integration Integration of markets requires that production moves to the region and farms which are most efficient (have a comparative advantage) CAP decision makers have instituted policy instruments which are conflicting with the main principle of integration – Quotas milk and sugar – Set-aside program for land – Subsidies for disadvantaged regions

7 Message 2 The CAP has not contributed or only little to the process of European economic integration

8 The Cap and well-being of the society at large The CAP has evolved into a mechanism of transferring income among member countries and from non-farmers to farmers The process of income redistribution is not in line with general principles in most market economies The process of income distribution has made are society poorer

9 Message 3 The CAP has reduced well-being of non- farmers in the EU more than it has contributed to an increase in income of farmers. Thus the society at large is poorer due to the CAP

10 The CAP and the principles of good governance Governance includes Who decides on what and on what basis? Who monitors policies, Who enforces policies, How are decision makers and others held accountable?

11 Some criteria for good governance Transparency Voice Accountability Subsidiarity Overall criteria

12 Some specific criteria Instruments should only be considered if they can be monitored and enforced Instruments should not be applied if it is not possible to assess the effects The beneficiaries policies should only be allowed to participate in the decision if the losers are involved at the same extent Any policy which is inherently unenforceable, or hard to enforce, should be replaced

13 Transparency The electorate should know – what are specific decisions taken, – what are the alternatives – What are the economic and financial costs – who voted for what The EU Council is still the main legislative body Meetings are not public

14 Lack of transparency in CAP decision making contradicts good governance Message 4

15 Voice means Participation of people in defining the issues and solving the problems Polls on EU level clearly indicate that Brussels is far away for most people in the Union. Most of them feel that they are not well represented

16 Message 5 The principle of voice is not adequately applied in the CAP.

17 Accountability Accountability implies that those who decide and implement have to bear some negative effects. Accountability requires that the effect of policies is investigated.

18 Accountability The European Court of Auditors proved regularly in the annual and numerous audit reports: The CAP includes the application of some policy instruments for which it is impossible to prove positive effects. Other instruments have no proven positive effect but are nevertheless continued.

19 “The Court found that the vast majority of the payments budget was again materially affected by errors of legality and regularity in the underlying transactions” “In the case of Common Agricultural Policy expenditure (€43.6 billion), the Court concludes that expenditure which is not subject to IACS or where IACS has been inadequately applied, is at greater risk because the control systems are not effective.” In the case of organic farming the Court found: “Even if the inspection system were complete and accurate –(which it is not – insertion by presenter) the information requested would not give assurance about the objectiveness and effectiveness of inspections carried out”.

20 In the case of environmental measures the Court concluded: The verification of the environmental measure poses particular problems and is far more resource intensive than verification of the first pillar measure and indeed other rural development measures. Such verification can rarely lead to even reasonable assurance at a reasonable cost.”

21 Message 6 The principle of accountability is not adequately applied in EU agricultural policy

22 Subsidiarity According to this principle, the Community or Union should undertake actions if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States. The first pillar contravened this principle from the very beginning. Why? The second pillar is even worse

23 Who decides? Allocation of competence is not in line with the principles of good governance CAP used to be and still is focused on the income objective Income objective is part of social policy Social policies generally belong to national competence It is even worse with the second pillar with focus on environmental objectives

24 Message 7 The allocation of competence in EU agricultural policy is increasingly is not in line with the principle of subsidiarity.

25 Summary of messages Message 1: The Common Agricultural Policy has not achieved the main agricultural policy objectives as laid down in the Treaty. Message 2: The CAP has not contributed or only little to the process of European economic integration. Message 3: The CAP has reduced well-being of the society at large in the EU and not only there.

26 Summary of messages Message 4: Lack of transparency in CAP decision making contradicts good governance. Message 5: The principle of voice is not adequately applied in the CAP. Message 6: The principle of accountability is not adequately applied in EU agricultural policy

27 Summary of messages and conclusion Message 7: The allocation of competence in EU agricultural policy is increasingly is not in line with the principle of subsidiarity Conclusion: Blair’s demand for CAP reform is well founded. His blackmail seems to be the only chance to reshape the CAP.

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29 What policies may cause governance problems? I The intensity of regulation; the higher the intensity of regulation the more serious are governance problems; The incentives to break the rules; the higher the incentives to break the rules, the more serious are governance problems; The costs of controlling the activities of those who break the rules; the higher the costs of monitoring and control, the higher is the probability of breaching contracts;

30 What policies may cause governance problems? II The likely costs of breaching or bending the rules; the higher the costs for breaching the rules, the smaller is the probability of breaching the contract The interests of the principal to monitor and to enforce contracts; the higher the incentive of the principal, the stronger will be controls and sanctions. The probability of being caught if the rules have been broken;

31 What policies may cause governance problems? III The penalty which has to be paid for breaking the rules; The importance of embedded institutions (moral, specific cultural beliefs, ethic attitudes, etc) for the society. E.g., low moral of a society requires higher control costs and higher sanctions.