Tuesday, February 10, 2009

Can the old policy instruments have any effect?

The resort to intervention buying and export refunds in the dairy sector has been predictably bad PR for the EU, especially in the southern hemisphere. But a more fundamental question is, can these tired old policy instruments work any magic in a deep economic crisis?

What is likely to happen, judging by past experience, is that exporting countries like New Zealand will lower their prices in response in order to retain global market share. The net effect is that world prices are depressed even further and this does not help EU producers or certainly not the more efficient ones who are seeking to compete on the world market.

Wheeling out the old policy instruments may give partial satisfaction to farm lobbyists, but it is not really going to help prices or farm incomes. The unpalatable fact is that an internationally competitive EU dairy industry might have a better chance of bringing prosperity to EU dairy farmers. But that would mean marginal farmers in politically sensitive areas like Bavaria and Britanny going out of production. And that is too high a price to pay for a net efficiency gain.

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