The possibilities of a bond scheme

If the basic payment is withdrawn overnight in 2020 after Brexit or becomes a limited payment confined to marginal upland farms, the effect on farming could be catastrophic. For many farms, probably the majority, it is the difference between running at a profit and making a loss.

Some sort of transitional arrangement is needed. It could be a phased reduction in payments, or it could be a government backed bond which could either be sold to invest in the farm business or would generate an income from interest for a period of time.

I have been sceptical about such schemes in earlier postings because of the current low interest rate environment and that does remain a challenge. However, writing in Agra Europe distinguished agricultural economist Stefan Tangermann has revived the idea with his usual eloquent advocacy.

A time limited annuity scheme would offer a soft landing, and would be far preferable to a phased removal of the existing system of support that is still linked to land and farmers. As Stefan says in his article, if these entitlements are 'in the form of a bond-type entitlement document that is saleable on the capital market' this would give farmers confidence that the 'future stream of payments is irrevocably determined'.

With the current state of financial markets, however, it is open to question whether there would be a robust market for this "bond". Most recipients would, I suspect, simply collect their annual compensation payments, rather than exchanging the entitlement for a cash sum for investment purposes.

Is Europe losing touch with reality?

Stefan Tangermann

Is Europe losing touch with reality? One might think so given the surprise Greek decision to hold a referendum on the austerity package. The fear of contagion is very real and if the euro is confined to a small core of northern member states, the single market project will be undermined. One of the main justifications for creating the euro was the need to avoid competitive devaluations between member states.

It also ended the nonsense of green money, now largely forgotten, but one of the more bizarre and distorting aspects of the CAP (which is saying something). Somewhere in Brussels we should have a sculpture commemorating the switchover mechanism as an awful warning.

However, it is also a question that leading agricultural economist Stefan Tangermann has posed in relation to the CAP reform proposals announced last month.

The former OECD director for trade and agriculture argues that the reform proposals do not reflect the economic realities that Europe currently finds itself in. It is unfortunate that the policy planning calendar dictates that the European Commission must make vital decisions on the CAP through to 2020 but Tangermann claims the proposals fall short of an adequate response to perhaps the biggest crisis the trading bloc has ever faced.

But he is not alone in his criticism of the reform plans. It appears that dissatisfaction with almost every aspect of the proposals is rife and MEPs were given the opportunity to vent their frustrations at the Special Committee on Agriculture (SCA) meeting in Brussels last week.

In stark contrast to farm commissioner Dacian Cioloş’ assertion that the reform proposals would simplify the various administrative mechanisms within the CAP, MEPs claimed that the European Commission’s proposals for CAP reform are costly, complex and fail to distribute fairly between member states.

Ciolos is in danger of being seen as the least effective farm commissioner since Réne Steichen who was also seen as a trojan horse for France. Like Ciolos, he was educated in France but at the end of the day he turned out to be somewhat less beholden to France than expected.

The European Parliament is also concerned about moves by national governments to cut almost €500 million from CAP spending in 2012 last week. Instead, they re-affirmed their backing for the European Commission’s draft budget plan issued in April, which proposes a 2.3 per cent CAP budget rise within a wider 5.2 per cent year-on-year increase in commitments.

This is, of course, a dangerously nonsensical proposition against the background of serious budget deficits in Europe. If there is a collapse of the eurozone it will look even more so.

How can direct payments be justified after 2013?

This is the question that former OECD trade and agriculture supremo Stefan Tangermann poses in a recent issue of Agra Europe. In effect the answer that the agricultural economist gives is that they can't be, although he is too canny to say that in so many words. But he takes each argument for the SFP in turn and demolishes it.

He points out that direct payments make up nearly three-quarters of EU expenditure on the CAP, equivalent to about one third of the Union's total budget. The argument that they are compensation for earlier reforms can no longer be used to justify their continuation.

What about the view that farm incomes lag behind incomes in other parts of society, which in fact is not necessarily the case? Then payments would have to be in line with the criteria for other income support policies. It would have to be means tested so that better off farm families received less. Moreover, payment would have to be higher in member states where the gap was greater which is not compatible with the idea of a level playing field in a single market.

What about the food security argument, the desire to safeguard a viable agriculture in Europe? Tangermann points out that empirical studies show that farm support is largely capitalised in land values. Where land is rented, most of the direct payments flow to landlords. If support was eliminated, 'Land rents will adjust and farming continues.' This perhaps reveals an economist's faith in automatic adjustment in functioning markets. In fact adjustment would probably only occur after a time lag and then not fully. That delay could be cricial for some farmers.

What about enhancing competitiveness? Tangermann points out that competitiveness depends on productivity, know-how, product quality and the like. Education, training, extension services and research and development are the policies that help, not per-hectare payments.

What about the argument that environmental and other standards are more demanding in Europe than other parts of the world? Tangermann notes, 'Research has shown that they differ very much from sector to sector within the farming industry, but also from farm to farm. Overall, though, any such extra costs are relatively small, certainly much smaller than the level of payments currently granted to EU farmers.'

What about cross-compliance? Most of the requirements under cross-compliance would have to be respected anyway: 'Justifying payments on these grounds is akin to granting payments to all car drivers, which are then claimed back from drivers exceeding speed limits.'

So Tangermann concludes that it is doubtful whether any credible justification can be developed for direct payments. But when he gets on to political ground is touch is less sure. Having a good case matters, but there is also a lot of raw power politics surrounding agriculture with many member states willing to spend political capital to defend their farmers. Tangermann says that 'Europe's taxpayers are keen to know why they are expected to finance such payments', but I see little evidence of such interest. Hence, it is possible for agricultural lobbies to mount 'business as usual' arguments with little effective challenge.