European Studies Essays (5384 words) - Economy Of The European Union

European Studies annon Discuss the relative merits/demerits of an agricultural policy oriented to price reform rather than one based upon structural reorganisation 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. Farmers 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 1960s 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 farms 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 1970s 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