International Policy Analysis Unit Working Group on European Integration Working Paper No. 9 May 2000 The EU Needs Further Reforms of the CAP Prior to Eastward Enlargement 1. The present system of farm price support and direct income support is unsustainable in the long term, given a potential increase of some 50% in agricultural production in the accession countries. There is a risk of large surpluses and hence a renewed rise in agricultural expenditure within the EU budget. Neither can be in the long-term interest of the EU. 2. Under the German Presidency(Berlin European Council in March 1999) the EU did decide: • to further reduce the prices of the most important products(cereals, milk, beef); • to substantially restructure agricultural expenditure, moving away from price support and export subsidies to direct income support and structural improvements of the rural envi­ronment; • to freeze farm spending in the years 2000-2006 at a level of approx. EUR 41 billion and to reduce it as a proportion of the EU budget to 39%. 3. But these reforms fall short of the long-term requirements: • EU price levels still lie well above those on the world market; thus EU agriculture still cannot compete internationally without export subsidies; • the danger that the accession countries – especially Poland, Hungary, Bulgaria and Romania, and in the long term above all Turkey – will raise their farm price levels to the inflated EU level, thereby granting their producers price incentives which would lead to a renewed rise in surpluses in the EU, has not been overcome; • farm spending still represents a disproportionately high share of the EU budget. 4. The reform moves decided on in Berlin in March 1999 therefore need to be supplemented prior to the next enlargement of the EU. The EU must address itself to two questions in this regard: • Does it make economic sense to apply the present system of farm market organisations (cereals, milk, sugar, tobacco, wine, fruit and vegetables, etc.) unchanged to the EU of 28? Should not each individual market organisation undergo a critical review in respect of its workings and its compatibility firstly with an enlarged EU and secondly with WTO com­mitments? • Is it legally and socially defensible to refuse to grant direct income support to future Member States on the grounds that this is granted as compensation for price reductions – which are in Friedrich Ebert Foundation, International Policy Analysis Unit, Godesberger Allee 149, 53170 Bonn phone:(xx49.228)883-212, fax: 883-625; e-mail: Werner.Kamppeter@fes.de