Budget, Agriculture and Trade: The EU’s Intractable Economic Triangle Tim Josling FSI, Stanford and IC, London European RoundTable, Sat Feb 4, 2006

2 The Triangle Agriculture: The Common Agricultural Policy (CAP) EU Budget: Spending on EU activities EU Trade: External Trade Relations

3 The Triangle Agriculture: The Common Agricultural Policy (CAP) EU Budget: Spending on EU activities EU Trade: External Trade Relations CAP still disproportionate part of spending Budget costs drive CAP reform Trade policy determines CAP changes CAP still dominates EU response to trade demands

4 Budget EU budget 121 billion euros in 2006 –just over 1 percent of EU GNI –Small relative to national budgets (40-50 percent) –0.70 euro per day per person EU Budget must be balanced annually EU Budget horizon 6-7 years Mainly spent on EU programs –Agriculture and natural resources 47 percent –Competitiveness and Cohesion 39 percent –Foreign policy (aid, etc) 7 percent –Administration 6 percent

5 Budget, contd. Debate over budget perspective contentious –UK budget rebate –CAP spending –Cohesion Funds (transfer from Southern to Eastern Europe) –Regional policy spending –German contribution

6 Trade EU is now the leading trading entity in the World. –19 percent of goods trade –25 percent of services trade Trade more important to EU than to US –29 percent of GDP –1,977 trillion euro Major trade partner for Africa, Russia and FSU, Middle East, Med region, Latin America and Caribbean: lags in Asia Over 100 countries have trade arrangements with EU (ACP, Med, EFTA)

7 Trade, contd. Adopting leadership role in WTO Numerical dominance –EC and its twenty five countries all WTO members –Large majority of WTO membership (115 out of 149) is in EU or has free trade with EU EU helped to define the agenda for this current Round and controls the pace of the DDA EU holds key for the Round to conclude this year

8 Agriculture CAP substantially changed over past 14 years (1992, 2000, 2003 reforms) Still expensive, as direct payments increase budget exposure Still problematic for trade relations, as high tariffs and generous export subsidies help keep budget cost under control Effort to shift to “quality” encouragement and “stewardship” payments are underway

9 Agriculture, contd. Enlargement adds new burdens to CAP –Adds millions of new farmers –Poses threat of additional surpluses Turkish entry would pose serious problems for CAP –Huge farm population –Protected agriculture unable to meet competition Enlargement’s impact on agricultural markets are central issue in both trade and budget debates

10 Agriculture and the Budget UK trying to tie CAP spending to budget rebate France objecting, but Germany may switch sides: also concerned about spending Agreement to review agriculture in 2008, but no change in level projected till 2013 Same date as WTO end to export subsidies

11 Agriculture and Trade Agriculture holds back EU in trade diplomacy: relations with US, developing countries, Australia, Canada, etc soured Commission trying to get rid of the albatross: move to a trade-neutral CAP Opposition from main gainers from CAP (France, Ireland, also Spain, Portugal) Germany holds the “swing vote” on trade as well as budget

12 Future? Vicious circle: –France blocks trade deal in late 2006 –EU loses trade leadership credibility, blamed for DDA failure –US, Latin America, Asia negotiate trade deals excluding EU –Budget becomes political lever for UK, Sweden, Netherlands, etc. –Stalemate in internal reform (Lisbon process, etc) –Trade and budget woes sour political developments

13 Or …? Virtuous circle: –Trade deal goes ahead in 2006 –CAP completes reform as result of DDA in 2008 –Budget tensions eased as farm spending reduced –Steady growth and trade expansion make internal reforms easier –Even political relations get dividend from trade, budget and agricultural harmony

14 Follow-up? Contact me at