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Fair Competition on the Internal Market

What old-style CAP defenders claim

The CAP ascertains fair competition among farmers across the EU. If subsidies were left to the member states, differences in agricultural support would distort competition.

The CAP distorts competition

Undistorted competition is indeed an important objective. It is not only a matter of fairness among farmers but also of economic efficiency: differences in agricultural support can result in production patterns that contradict member states’ comparative advantage. However, this objective does not justify the current CAP – quite to the contrary.

Coupled subsidies

Member states have the right to use EU funds for subsidies that are coupled to the production of certain agricultural goods. For instance, arable crops receive support in France but not on the other side of the Rhine in Germany.

Direct income support

The Single Farm Payment is distributed highly unevenly across member states. A farmer in Greece gets more than € 500 per hectare, whereas his colleague in Latvia obtains less than € 100 per hectare. Although these payments are not formally coupled to production, they influence production and thus distort competition through their sheer size.

Second pillar payments

The benefits farmers obtain from rural development programs differ across the EU. Member states receive very different amounts of second pillar payments under the CAP, ranging from less than € 30 per hectare in Denmark and the UK to about € 100 per hectare in Finland, Greece and Portugal. Also, some governments are more generous with national subsidies to top up the EU subsidies for the second pillar. Italy pays more than € 1 billion per year out of its own pocket, leaving much bigger Germany and France far behind.

Furthermore, member states run their rural development policies differently. Only some countries focus on helping farmers to become more competitive, such as Belgium, which decided to spend 50% of its second pillar payments for the 2007-2013 programming period on this objective. Ireland, in contrast, spends only 10% to enhance farm competitiveness, but 80% to improve the environment.

Hidden national subsidies

The hidden subsidies farmers receive vary from one member state to another. Some countries support their farmers with extraordinarily low prices for water used in agriculture, tax reductions for fuel and privileged social security arrangements.

Production standards

Not all member states show the main ambition to limit the negative environmental effects of agriculture. Some member states are slow to implement and enforce EU directives, for instance on water management and birdlife protection, that are costly to farmers. Others go beyond EU law and impose taxes on fertilizers and pesticides.

Conclusion

It is an illusion that the CAP creates a level playing field for EU farmers. Its budget could be reduced and more responsibility be shifted to the member states while, at the same time, competition on the internal market could become fairer. This can be attained if the EU and the member states

  • phase out the Single Farm Payment and all coupled subsidies
  • remove all second pillar payments that are aimed at increasing productivity at the farm level
  • target all CAP payments at public goods, trying to reduce excess payments that go beyond the levels needed to encourage farmers to deliver the desired public goods
  • improve oversight of national agricultural policies through the European Commission
  • stop hidden subsidies in the form of subsidized water prices and tax concessions on energy and fuel
  • ensure compliance with EU regulation of responsible farming practices and introduce harmonized minimum taxes on environmentally harmful inputs used in agriculture

Studies