European Studies

Discuss the relative merits/demerits of an agricultural policy
oriented to price reform rather than one based upon structural
"The common market shall extend to agriculture and trade in agricultural
products. ‘Agricultural products’ means the products of the soil, of
stock-farming and of fisheries and products of first-stage processing
directly related to these products....The operation and development of the
common market for agricultural products must be accompanied by the
establishment of a common agricultural policy among the Member States” (1)
>From the beginning of the European Union, EU policy has given emphasis to
the agricultural sector. To this end, a Common Agricultural Policy (CAP)
was established in 1963. (2) Provisions for this policy were made in the

Treaty of Rome. The aims of this policy were to increase agricultural
productivity, to ensure a fair standard of living for the agricultural
community, to stabilise markets and to ensure reasonable prices for the
consumer. (3) This is unusual in the context of the Treaty of Rome which
provided for free trade and movement of resources. Agriculture was
ill-adapted for this approach. Protection was given, not only by customs
duties, but also by a variety of agricultural policies. This essay will
discuss the merits and demerits of a the pre-1992 CAP with its emphasis on
price reform, in comparison with the post-1992 CAP which was oriented to
structural reform.

It cannot be denied that there were merits of the pre-1992 price reform
policy. There was a bountiful food supply with an increased variety and
quantity of food. Farmer’s yields increased, particularly the large
farmers. Producers were protected from the external market due to community
preference and, therefore, domestic agriculture could develop. There were
also spin offs in food production. Although some of the policies created
good returns for farmers, the demerits of said policies far outweighed any
advantages they had. The core-periphery divide was widened, quantity became
more important than quality and consumers had to pay higher prices.

Agricultural practices caused damage to the environment and international
trading relations were strained.

Until 1993 the EU rarely supported farmers by paying them direct subsidies
from the taxpayers. (4) Instead the 30 billion ECU (and often more) was
spent in the buying up of surplus commodities at minimum official prices
and was also used to pay subsidies to traders to sell surpluses on the
lower-priced world markets. (5) During the 1960’s the price system was
devised. The first problem with price policies is that of fluctuating and
differing exchange rates. “Green Money” was the first solution to be
developed to counter the problem of differing exchange rates. This,
however, could be manipulated by politicians to achieve different price
levels in the member states than those indicated by the common price level.

The lowering of the green currency towards a depreciating average rate,
raised farm’s price levels in the national currency. (6) This meant that
while regular citizens suffered from the devaluation of the currency,
farmers were protected from this trend. Also although the higher prices
were an advantage for the farmer, they were a nuisance for consumers.

Monetary Compensatory Amounts (MCAs) were used in the 1970’s when
devaluations by France and revaluations by Germany made Green Money
redundant. MCAs operated as levies on the French exports and subsidies on

French imports. The reverse was applied to Germany. (7) MCAs, while
allowing Community trade to continue even though common pricing was never
established, had more disadvantages than advantages. They allowed the real
level of prices to vary from country to country. This led to the distortion
of production as farmers in the countries which have strong currencies,
were paid more than farmers in countries with a weak currency. MCAs are
also expensive to operate. MCAs were replaced in 1979 by the European

Currency Unit (ECU) as part of the European Monetary system (EMS) which had
been introduced in 1978. (8) An agricultural ECU which was 14% more
valuable than the ECU was introduced. Until 1993 and 1995, when adjustments
were made to this, vast amounts of officials were needed every day to
administer the agri-monetary system and the monetary amounts had to be
changed weekly. (9)

The original agricultural price policy in CAP had three main components.

The first of these was the target price, which was the basis for
establishing all other prices. It is meant to provide a satisfactory return
for the farmer. Threshold prices are the minimum entry prices for imports
(higher than EU prices for domestic products) and they also safeguard
against the undercutting of target prices. An intervention price is used if
the market prices fall. If surplus production occurs, the commodities are
bought by intervention agencies. This maintains a minimum market price
level. Variable