Stefan Tangermann Department of Agricultural Economics and Rural Development

Direct Payments in the CAP post 2013

EP Workshop "CAP towards 2020", Brussels, 7 February 2011

The challenges

• The Communication explicitly identifies three

challenges external to the CAP

– food security – environment and climate change – territorial balance • However, there is one additional challenge

internal to the CAP: What is the future of direct payments?

Stefan Tangermann, University of Göttingen

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Direct payments: backbone of the CAP?

• Originally, direct payments had an important role,

to compensate farmers for price cuts … but no decision on their future was taken

• The Communication now suggests (implicitly) that

they are to remain a permanent feature of the CAP … and proposes only very limited changes of other instruments

• The Communication is essentially about the future

of direct payments

Stefan Tangermann, University of Göttingen

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Direct payments and the challenges

• Provision of important public goods requires policy

support, but …

• Food security: no need for DP to stimulate extra

production in Europe … and DP cannot enhance 'true' competitiveness

• Environment/climate change: requirements are

location-specific → Pillar 2 measures work best

• Territorial balance: needs differ from place to

place → Pillar 2 measures work best

Stefan Tangermann, University of Göttingen

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Which role for direct payments?

• The Communication suggests that DP are needed – to provide basic income support – as precondition for provision of basic public goods • Income support for equity reasons should be based

on household income, like in other sectors

• Provision of 'basic public goods' depends on land use

… which would continue in most of the EU even in the absence of direct payments

• DP per hectare to all farmers are a blunt instrument Stefan Tangermann, University of Göttingen

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The "active farmers" issue

• Objectives cited in Communication do not provide

basis for any definition of "active farmers"

– agricultural activity vs other enterprises:

management of natural resources can also be achieved by other activities

– working farmers vs absent landowners:

DP are capitalised in land values → tenants have little benefit, territorial development is not enhanced

– 'normal' farm size vs super large farms:

large farms can also provide public goods

• "Active farmers" is a matter of public perception,

rather than consistency with CAP objectives

Stefan Tangermann, University of Göttingen

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Treatment of small farms

• Providing more support (per hectare) to small farms

is neither justified, nor would it enhance their 'true' competitiveness

• Reducing transaction cost makes sense

… not through making larger payments (e.g. same payment to all farms below threshold) … but through less requirements (cross compliance)

• Payments could be made once in five years,

or through marketable certificates ("bonds") to provide means for investments (on or off farm)

Stefan Tangermann, University of Göttingen

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Impact on supply, and WTO compatibility

• Communication proposals would not have

noticeable impact on supply … unless "voluntary coupled support" were to become larger element

• DP would probably continue to be compatible

with WTO Green Box, unless

– "active farmers" definition were to require production – "greening" component were to undermine decoupled

nature of payments (e.g. permanent pasture, crop rotation)

Stefan Tangermann, University of Göttingen

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Basic component of direct payments

• Redistribution among Member States is a purely

political matter, and no economic advice can be given regarding 'right' distribution

– equity would require means testing – public goods provision requires specific targeting to

natural, economic, social conditions

• "Capping", in absence of means testing, does not

improve equity … but distorts land market and has negative implications for structural development

Stefan Tangermann, University of Göttingen

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"Greening" component

• Would substitute for part of current payments

… but generates less farm income

• Which role is "greening" component thought to play? • 'Super cross compliance'? – new environmental issues? Why not yet included? – why not revise current cross compliance? • Moving measures from Pillar 2 to Pillar 1? – why is Pillar 1 better place? – would budget also move? And co-financing? Stefan Tangermann, University of Göttingen

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"Greening" component for public goods?

• "Green" public goods are location-specific,

because of either their nature or their costs → EU-wide policy under Pillar 1 is less efficient than more differentiated policy under Pillar 2

• Member State governments will be under pressure

to make sure 'money from Brussels' actually flows

• "Greening" component is not a convincing way to

achieve better targeting

• "Greeenig" component is proposed to make

payments "more understandable to the taxpayer"

Stefan Tangermann, University of Göttingen

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"Areas with specific natural constraints" and "voluntary coupled support"

• Would areas with specific natural constraints

receive larger payments than today?

… or would budget be shifted from Pillar 2 to Pillar 1 (and why so?)

• There are no good reasons to provide any coupled

support … which effectively makes farmers pay for the costs of producing the outputs considered desirable (for which reasons?)

Stefan Tangermann, University of Göttingen

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Conclusions (1)

• Communication identifies important challenges

… but proposes only limited changes to CAP … not a real reform

• Meeting the challenges requires new policies – food security and 'true' competitiveness are enhanced

through more innovation, R&D, education, training, less red tape, better functioning land markets, lower land prices

– environment, climate change require location-specific

measures on contractual basis, with local engagement

– territorial balance is achieved through broad-based support

to rural areas, infrastructure, social services, education

Stefan Tangermann, University of Göttingen

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Conclusions (2)

• "Greening" component is not a convincing way of

achieving better targeting

• Redistribution among Member States may be

politically necessary, but there is no economic advice regarding 'right' distribution

• "Capping" does not achieve equity, distorts land

market

• Coupled support should be terminated Stefan Tangermann, University of Göttingen

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Conclusions (3)

• Provision of public goods is an important objective

of the CAP, and requires public support … but support must be specific

• Payments should be provided not per hectare,

but per unit of public good provided (Pillar 2)

• CAP should now enter into a new phase:

market support → decoupling → targeting (1960s-1980s) (1990s-2000s) (post 2013) support per tonne … per hectare … per public good

Stefan Tangermann, University of Göttingen

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