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Electronic copy available at: http://ssrn.com/abstract=1333090
THE PERFECT STORM
Electronic copy available at: http://ssrn.com/abstract=1333090
THE PERFECT STORM
THE POLITICAL ECONOMY
OF THE FISCHLER REFORMS
OF THE COMMON AGRICULTURAL POLICY
JOHAN F.M. SWINNEN (EDITOR)
CENTRE FOR EUROPEAN POLICY STUDIES
B
RUSSELS
The Centre for European Policy Studies (CEPS) is an independent policy research
institute based in Brussels. Its mission is to produce sound analytical research leading
to constructive solutions to the challenges facing Europe today. The views expressed
in this report are those of the authors writing in a personal capacity and do not
necessarily reflect those of CEPS or any other institution with which the authors are
associated.
ISBN-13: 978-92-9079-766-1
© Copyright 2008, Centre for European Policy Studies.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means – electronic, mechanical, photocopying, recording or
otherwise – without the prior permission of the Centre for European Policy Studies.
Centre for European Policy Studies
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Tel: 32 (0) 2 229.39.11 Fax: 32 (0) 2 219.41.51
e-mail: info@ceps.eu
internet: http://www.ceps.eu
CONTENTS
Preface & Acknowledgements.......................................................................................i
1. Introduction...........................................................................................................1
Johan F.M. Swinnen
Part 1. Theory
2. Impact of External Changes and the European Commission on CAP
Reforms: Insights from Theory.............................................................................9
Jan Pokrivcak, Christophe Crombez & Johan F.W. Swinnen
3. Institutional Reform and Agricultural Policy Reform in the EU.........................25
Christophe Crombez
4. EU Enlargement: Driver of or Obstacle to Future CAP Reforms? .....................41
Christian H.C.A. Henning
Part 2. Empirical Analyses
5. External Influences on CAP Reforms: An Historical Perspective ......................57
Tim Josling
6. The Internal and External Forces Driving CAP Reforms ...................................76
Rolf Moehler
7. Constraints and Causes of the 2003 EU Agricultural Policy Reforms................83
Alessandro Olper
8. An Inside Perspective on the Political Economy of the Fischler Reforms........102
Corrado Pirzio-Biroli
9. An Uncommon Policy: Theoretical and Empirical Notes on Elite
Decision-Making during the 2003 CAP Reforms .............................................115
Barbara Syrrakos
Part 3. Conclusions and Implications
10. The Political Economy of the Fischler Reforms of the EU’s Common
Agricultural Policy: The Perfect Storm?...........................................................135
Johan F.M. Swinnen
11. Implications for Future Reforms.......................................................................167
Wyn Grant
Glossary......................................................................................................................179
Contributors ..............................................................................................................180
It was ‘the perfect storm’ – a tempest that may happen only once in
a century – a nor’easter created by so rare a combination of factors
that it could not possibly have been worse.
Sebastian Junger
The Perfect Storm: A True Story of Men Against the Sea
Glasgow: HarperCollins Publishers (1999)
| i
P
REFACE & ACKNOWLEDGEMENTS
his book has a long intellectual history and a short production period. The
intellectual history goes back to my early work, jointly with many colleagues,
on the political economy of agricultural and food policies in the late 1980s
and early 1990s. It continues through my later work on the reforms of the common
agricultural policy (CAP) in the late 1990s and early 2000s, both within and outside
the European Commission, again benefiting from the exchange of views and insights
with many colleagues.
The history of the book itself is much shorter. It is a direct result of a workshop I
organised at the Centre for European Policy Studies (CEPS) on the political economy
of the mid-term review (MTR) of the CAP in the spring of 2007. The workshop
brought together a relatively small group of those involved in the policy-making
process surrounding the MTR and outsiders, from both the academic world and the
policy world. The exchange of views provided such a rich set of arguments and
hypotheses that many participants encouraged me to pursue the idea of publishing a
book on the topic, including some of the main contributions to the workshop. The
book is unusual and unique in its effort to bring together contributions from
academics and policy-makers, and from different disciplines.
The organisation of the workshop and the publication of the book were financially
supported by CEPS, the LICOS Centre for Institutions and Economic Performance of
the University of Leuven and the European Commission. Eleni Kaditi, as always,
ensured impeccable organisation and administration.
Kathleen King and Els Van den Broeck at CEPS did a wonderful job in copy-
editing the book and designing the page lay-out. I would also like to thank Anne
Harrington for her continuous encouragement and patient guidance throughout the
book publishing process.
Allan Buckwell, Jorge Núñez Ferrer, Ewa Rabinowicz and Alessandro Sorrentino
made important contributions during the workshop (and in the many years before) by
sharing their many insights and critical comments, which are very much appreciated.
Jan Falkowski and Robin Smith of LICOS assisted with the processing of the
discussions from the workshop.
Finally, I also want to thank several colleagues at the European Commission for
their time, discussions and insights on these issues, including in particular Franz
Fischler, John Bendsen-Smith, Tassos Haniotis, Wolfgang Münch, Martin Scheele
and Rainer Wichern. Needless to say, none of these persons is responsible for the
arguments and conclusions of the book, which are the sole responsibility of the
respective authors of the chapters.
Jo Swinnen
Brussels, September 2008
T
| 1
1. I
NTRODUCTION
JOHAN F.M. SWINNEN
Franz Fischler est l’architecte de la réforme la
plus profonde de la Politique Agricole Commune
Henri Nallet
Former French Minister of Agriculture
(September 2007)
n 1995 when Austria joined the European Union, Franz Fischler, a then largely
unknown Austrian politician, obtained the post of European Commissioner for
Agriculture. Previously, Fischler had been Minister of Agriculture in Austria and
had led the Austrian accession negotiations. There was some surprise that a new
member state had been given the powerful agricultural Commission chair, but no
major expectations surrounded his arrival in Brussels.
A decade and two tenures later, Fischler leaves behind a common agricultural
policy (CAP) that is dramatically changed from the one he inherited and he is
recognised by friend and foe as the architect of the most radical reforms of the CAP.
The Fischler reforms
First, let us define ‘the Fischler reforms’. There were several reforms prepared and
implemented over the two terms that Franz Fischler was Commissioner for
Agriculture and Rural Development of the EU, which spanned almost a decade
(1996–04). Some of the reforms, such as the Agenda 2000 package, were very
important. Still, his name is most closely associated with the reforms of 2003, which
at the time were generally referred to as the ‘mid-term review’ (MTR), a term that in
hindsight does not do justice to the extent and substance of the reform package that
was decided in 2003. These reforms are assessed by many experts as the most radical
reforms of the CAP since its creation.
The essence of the Fischler reforms is well summarised in various publications,
including those by the European Commission and in several chapters in this book,
and reference is made to these chapters and some Commission publications for
details. The 2003 Fischler reforms contain the following main elements (see Tables
A1.1-A1.3 in the appendix to this introduction for a more detailed summary):
I
2 | SWINNEN
1. The key innovation of the Fischler reforms was the introduction of the single farm
payment (SFP) on the basis of historical entitlements (although with some
flexibility of application), decoupling a large share of CAP support from
production.
2. Two new instruments, ‘cross-compliance’ and ‘modulation’, were introduced.
Cross-compliance requirements ensure that the SFP is only paid to farmers who
abide by a series of regulations relating to the environment, animal welfare, plant
protection and food safety. Modulation refers to the shift of funds to rural
development policies (i.e. from pillar I to pillar II) by reducing transfers to the
larger farms.
3. The reforms introduced changes in several market organisations, especially in the
dairy and rice sectors, by increasing dairy quotas and reducing rice support prices,
replacing them with direct support to be integrated in the SFP.
4. Financial discipline was another element.
Yet, as will become clear from the chapters in this book, the 2003 MTR cannot be
seen in isolation from other reforms and policy decisions. This point not only relates
to Agenda 2000, but also to several decisions on the EU budget of which the CAP
budget takes a very large share – and is thus a major aspect in the negotiations for the
budget decisions.
In particular, the budgetary decisions in autumn 2002, at the European Council
summits in Brussels and Copenhagen, are considered by Fischler himself to be major
achievements. The 2000–06 financial framework was decided at the Berlin meeting
of 1999, where also the Agenda 2000 CAP reforms were agreed. In the following
years, however, there was strong pressure to dramatically cut the CAP budget in
order to finance and to reduce the costs of enlargement among other things.
The European Council’s decisions in autumn 2002 not only enabled the fitting of
enlargement into the 2000–06 financial framework, importantly by imposing the
gradual introduction of direct payments in the new member states. At the Brussels
summit of October 2002, it was also decided that the CAP would continue to receive
very generous funding from the EU budget. More specifically, for 2007–13 the total
budget for expenditures on market interventions and direct payments was fixed at the
2006 level in real terms. In nominal terms, these expenditures could increase by 1%
per year. In addition, rural development spending was not constrained by these
maxima. While some judged these decisions as putting a maximum on future CAP
spending, Fischler and his colleagues saw this as a major political achievement: the
CAP budget was not just saved for the current financial framework, but even up to
2013 – and the cuts were much less than what had been demanded at the start of the
Prodi cabinet in 2000.
Such an outcome is hard to assess as a ‘reform’ of the CAP – rather quite the
contrary. Fischler and his colleagues nonetheless argue that without real reforms of
the CAP (such as in the 2003 MTR) this budgetary outcome would not have been
possible – and possibly vice versa, as we discuss further.
INTRODUCTION | 3
Focus of this book
The Fischler reforms were obviously not the first reforms of the CAP. In fact, the
CAP has been under fire since its creation in 1958 at the Stresa conference and its
introduction in the 1960s. Nevertheless, it has long been considered by foes, rightly
or wrongly, as a policy impossible to reform substantially, because of staunch
opposition to reform from powerful farm and agribusiness lobbies and because of
European politics, in particular the successful defence of France and its allies on the
CAP.
The question this book tries to answer is this: What made the radical reforms of
the CAP under Commissioner Fischler possible? Answering this question implies
addressing several sub-questions: Did Fischler want to reform the CAP, or was he
forced to accept it against his own judgment by a coalition of proponents of reforms
or because external factors made it impossible not to reform? If the former, why did
Fischler (and his allies) want such a radical reform of the CAP? How did Fischler
(and his allies) succeed in getting their proposals through despite strong opposition
by farm lobbies and by political opponents to reform of the CAP? These are only a
few of the questions that are addressed in this book.
The book is organised in three parts. The first part of the book has three
theoretical and conceptual papers. The first by Jan Pokrivcak, Christophe Crombez
and Johan F.W. Swinnen (chapter 2) provides a theoretical framework for
understanding how external changes and the voting procedures influence agricultural
policy changes in the EU and what power the European Commission has in this
institutional setting. In chapter 3, Christophe Crombez analyses the impact of
institutional reforms that have taken place in the EU in the past decades, such as the
introduction of qualified majority voting, on agricultural policy reform. The third
theoretical contribution is by Christian H.C.A. Henning. In chapter 4, he analyses
how EU enlargement has affected CAP reform – and how it will do so in the future.
The second part includes a series of empirical contributions, by both academics
and former Commission officials closely involved in some of the CAP reforms. In
chapter 5, Tim Josling gives a historical perspective on the evolution of the CAP and
factors that have shaped the policy. He evaluates how changes in external factors
(such as international trade negotiations, world market evolutions and exchange rate
developments) have affected the CAP since the 1960s. In chapter 6, Rolf Moehler
gives his perspective on which internal and external forces drove CAP reforms in the
past. Alessandro Olper focuses on the 2003 reforms and discusses how various
factors influenced them, or not, from the viewpoint of an outside analyst in chapter 7.
In chapter 8, Corrado Pirzio-Biroli, who was Chef de Cabinet at the time of the 2003
reforms, gives an insider’s perspective on them. In chapter 9, Barbara Syrrakos
analyses the decision-making processes and examines the role of the farm unions in
the 2003 reforms.
4 | SWINNEN
The last part of the book draws conclusions and implications. Chapter 10 (by this
author) is the concluding chapter, which attempts to present an integrated view and to
answer the basic question about the cause of the radical reforms under the Fischler
regime. In the last chapter, Wyn Grant draws on all the previous chapters and
insights and discusses implications for future reforms.
Finally, it should be emphasised that the title of the concluding chapter 10, which
is also the title of the book, reflects this author’s personal view and not necessarily
that of the other authors who contributed chapters to this book.
INTRODUCTION | 5
APPENDIX
Table A1.1 Agenda 2000 reforms of the CAP
Market support Reductions are to be made in market support prices of 15% for cereals,
15% for milk and milk products from 2005 and 20% for beef and veal.
The reduction in institutional prices will be phased in gradually and the
lower prices will be partly offset by an increase in direct aid payments.
Direct payments in the beef and dairy sectors will be paid to member
states in the form of national financial allocations.
Environmental
• Two pillars are introduced to the CAP: market and income policy
(‘first pillar’), and the sustainable development of rural areas
(‘second pillar’).
• Agri-environmental measures are the compulsory component of the
member states’ rural development programmes.
• The principle of cross-compliance is introduced: the optional use of
reductions of the direct payments for enforcing statutory
environmental legislation and the so-called ‘specific environmental
requirement’. Cross-compliance is compulsory under the
Disadvantaged Area Scheme.
Enlargement Under the SAPARD scheme, €520 million per year is set aside for
structural and rural development programmes. Priorities include
investing in farms, developing processing and marketing structures,
improving veterinary and plant health controls, and encouraging
economic diversification in rural areas.
Modulation Optional modulation of the direct payments is made to farmers under
the CAP based on criteria that can include the workforce on the holding,
the overall prosperity of the holding or the total amounts of payments
granted under support schemes (up to 20% of the direct payments); the
money remains in the member state to be spent on accompanying
measures.
Financial For the period 2000–06, the Council decided on a financial framework
of an average level of €40.5 billion plus €14 billion over the period
2000–06 for rural development as well as veterinary and plant health
measures. Finally, each year €520 million is made available for the
SAPARD programme.
Sources: European Commission, “Europe’s Agenda 2000 Strengthening and widening the European
Union”, Brussels (1999) (http://www.ec.europa.eu/agenda2000/public_en.pdf)
; European Commission,
Agenda 2000 – A cap for the future, Brussels (2003) (http://ec.europa.eu/agriculture/publi/
review99/08_09_en.pdf);
European Council, Presidency Conclusions of the Berlin European Council,
24–25 March 1999, SN 100/1/99, Brussels (1999) (http://www.consilium.europa.eu/
ueDocs/cms_Data/docs/pressData/en/ec/ACFB2.html).
6 | SWINNEN
Table A1.2 Mid-term review reforms of the CAP
Decoupling A single farm payment is introduced for EU farmers, independent of
production. Limited coupled elements may be maintained to avoid
abandonment of production (Single Payment Scheme). Aid is decoupled
for cereals, oilseeds, protein crops, flax, hemp, linseed, durum wheat
supplement, starch potatoes (40%), grain legumes, rice, seeds, dried
fodder, beef and veal, sheep and goats, milk (from 2006–07). There are
optional derogations at the level of the member state.
Market support
Revisions made to the market policy of the CAP include
• asymmetric price cuts in the milk sector – the intervention price for
butter will be reduced by 25% over four years, which is an
additional price cut of 10% compared with Agenda 2000; for
skimmed milk powder, a 15% reduction over three years (as agreed
in Agenda 2000) is retained;
• reduction of the monthly increments in the cereals sector by half,
while the current intervention price will be maintained; and
• reforms in the rice, durum wheat, nuts, starch potatoes and dried
fodder sectors.
Environmental
• Decoupled payments are linked to the respect of environmental, food
safety, animal and plant health and animal welfare standards, as well
as the requirement to keep all farmland in good agricultural and
environmental condition (cross-compliance).
• Rural development policy is strengthened with more EU money and
with new measures to promote the environment, quality and animal
welfare and to help farmers to meet EU production standards starting
in 2005.
Modulation Direct payments are reduced (modulation) for the larger farms (direct
payments >
€5,000) to finance the new rural development policy: by 3%
in 2005, by 4% in 2006 and remaining at 5% from 2007 onwards.
Farm advisory
system
Advice on farm management processes, notably in relation to the
environment, food safety and animal welfare, is available for farmers on
a voluntary basis; in 2010 the European Commission will decide
whether it will be made compulsory.
Financial A mechanism is created for financial discipline to ensure that the farm
budget fixed until 2013 is not overshot: direct aid will be adjusted when
forecasts indicate that spending in the relevant areas of the CAP (market
expenditure and direct payments) will exceed established ceilings,
reduced by a safety margin of €300 million.
Sources: European Commission, “CAP reform summary”, Newsletter Special Edition, Brussels, (July
2003) (http://ec.europa.eu/agriculture/publi/newsletter/capreform/special_en.pdf
); European Commission,
“CAP Reform – A Comparison of Current Situation, MTR Communication (July 2002), Legal Proposals
(January 2003) and Council Compromise (June 2003)”, Brussels (2003)
(http://ec.europa.eu/agriculture/mtr/avap_en.pdf
); European Council, Regulation No. 1782/2003 of 29
September 2003 establishing common rules for direct support schemes under the common agricultural
policy, OJ L 270/1, 21.10.2003 (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003
:270:0001:0069:EN:PDF).
INTRODUCTION | 7
Table A1.3 EU financial agreements and the CAP
Berlin
European
Council, 1999
Financial framework 2000–06 and SAPARD programme for the
new member states (NMS)
The financial framework sets an average level of €40.5 billion + €14
billion of expenditures over the period for rural development as well as
veterinary and plant health measures. This framework should allow
agricultural expenditures to stabilise over the period. The Council
decided on the amounts in heading 1 in the table below. During the
Copenhagen summit, the Council decided on the adaptation of the
financial perspective for an EU of 25 countries, which raised the
amounts provided for this heading in 1999.
Table A1.3a Financial framework 2000–06 (€ million, 1999 prices)
Heading 1
CAP expenditure (excl.
rural development and
accompanying measures)
Rural development
and accompanying
measures
2000
2001
2002
2003
2004
2005
2006
40,920
42,800
43,900
43,770
42,760
41,930
41,660
36,620
38,480
39,570
39,430
38,410
37,570
37,290
4,300
4,320
4,330
4,340
4,350
4,360
4,370
Source: (See below).
The applicant countries were facing major difficulties in adapting to a
rather complex Community and completing the institutional process of
privatisation and transformation of agricultural structures. Concentrating
on the particular needs for agriculture, the Council made available €520
million of pre-accession support each year for the SAPARD programme.
Brussels
European
Council, 2002
Introduction of the direct payments in the NMS
Direct payments are to be introduced in the NMS in accordance with
the following schedule of increments expressed as a percentage of the
level of such payments in the Union:
2004, 25%
2005, 30%
2006, 35%
2007, 40%
and thereafter in 10% increments so as to ensure that the NMS reach in
2013 the support level then applicable in the current EU.
8 | SWINNEN
Table A1.3 cont’d
Brussels
European
Council, 2002
The total annual expenditure for market-related expenditure and direct
payments in a Union of 25 cannot exceed the amount in real terms of
the ceiling of category 1.A for 2006 agreed in Berlin for the EU-15 and
the proposed corresponding expenditure ceiling for the NMS for the
year 2006. The overall expenditure in nominal terms for market-related
expenditure and direct payments for each year in the period 2007–13
shall be kept below this 2006 figure increased by 1% per year.
Copenhagen
European
Council, 2002
Budget 2004–06 for the NMS
The budget for agriculture in the years 2004–06 is increased with extra
money for the 10 NMS. These amounts are given in the table below.
Table A1.3b Agricultural budget 2004–06 for the NMS (€ million, 1999
prices)
Heading 1
CAP expenditure
(excl. rural development and
accompanying measures)
Rural develop-ment
and accompanying
measures
2004
2005
2006
1,897
3,747
4,147
327
2,032
2,322
1,570
1,715
1,825
Source: (See below).
Sources: European Council, Presidency Conclusions of the Berlin European Council, 24–25 March 1999,
SN 100/1/99, Brussels (1999) (http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/
ACFB2.html
); European Council, Presidency Conclusions of the Brussels European Council, 24–25
October, SN 14702/02, Brussels, 26 November (2002) (http://ue.eu.int/ueDocs/cms_Data/docs/
pressData/en/ec/72968.pdf
); European Council, Presidency Conclusions of the Copenhagen European
Council, 12–13 December, SN 1591/02, Brussels, 29 January (2003) (http://ue.eu.int/ueDocs/cms_Data/
docs/pressData/en/ec/73842.pdf).
| 9
2. I
MPACT OF EXTERNAL CHANGES AND
THE
EUROPEAN COMMISSION ON CAP
REFORMS: INSIGHTS FROM THEORY
JAN POKRIVCAK, CHRISTOPHE CROMBEZ &
J
OHAN F. W. SWINNEN
his chapter presents some key findings from recent theory on the impact of
external changes on reform of the EU’s common agricultural policy and on
the influence of the European Commission. Theory predicts that the voting
and amendment rules in the Council, the number of policy instruments and external
changes have important effects on the occurrence and extent of CAP reform and on
the influence of the Commission. External changes that are more significant result in
more reform and more Commission influence.
2.1 Introduction
The political economy of the common agricultural policy (CAP) has been discussed
widely with a view to understanding the large EU budget expenditures on the CAP
and the distortions within the EU and on world markets.
1
The decision-making
1
There is a rich body of literature on the political economy of the CAP, mostly using
either reduced form empirical models, relating indicators of policy distortions to a set of
political indicator variables, or more descriptive methods to analyse the historical
development of the CAP and its context, as well as motives behind certain decisions (e.g.
Tracy, 1984; Neville-Rolfe, 1984; Harvey, 1982; Fearne 1991; Josling & Moyer, 1991;
Moyer & Josling, 1990; Ackrill, 2000; Olper, 1998; Pearce, 1983; Wallace, 1983). Yet,
these approaches lack detailed modelling of the decision-making process and its effect on
policy outcomes. While there have been studies discussing how the decision-making
structure of the EU has affected agricultural subsidies (e.g. Runge & von Witzke, 1987;
Mahé & Roe, 1996; Pappi & Henning, 1999; Pokrivcak et al., 2001; Henning, 2004),
there has been no formal analysis of how the EU decision-making process affects CAP
reforms.
T
10 | POKRIVCAK, CROMBEZ & SWINNEN
process on the CAP is an institutionally complex procedure, in which the member
state governments, the European Commission (Commission), and the Council of the
European Union (Council) all play an important role. While the Council ultimately
takes the decisions, the Commission has the sole right of proposal. The Council
cannot formally consider any proposal that has not come from the Commission. If a
qualified majority in the Council does not approve the proposal, the Commission (in
cooperation with the Council) drafts a new proposal until a final compromise is
reached. This seems to put the Commission in a privileged and influential position in
the decision-making process.
2
In recent reforms, the Commission does indeed appear to have played an
important role. More specifically, the reform proposals launched by Commissioner
Franz Fischler in the summer of 2002 for the mid-term review led member states to
accuse the Commissioner of going beyond the mandate given by the Council. These
developments and their impact on global trade negotiations motivate our study of
what causes (the lack of) changes in the CAP.
The objective of this chapter is therefore to summarise insights from recent
theoretical work on CAP decision-making in the EU, how the EU decision-making
process affects the likelihood of CAP reforms, what the Commission’s influence is
and under what conditions external changes can trigger CAP reforms. More
specifically, this chapter presents some key insights from the theory on CAP
decision-making, drawing on our theory presented more formally in Pokrivcak,
Crombez & Swinnen (2006).
The public choice literature includes more theoretical work on the institutional
framework affecting decision-making in the EU. One type of study is based on Shapley
& Banzhaf indices (Winkler, 1998; Widgren, 1994; Hosli, 1996; Bindseil & Hantke,
1997 and others). But these studies typically assume that any coalition of member states
supporting a motion is equally probable, which makes them less appropriate for analysing
CAP decision-making wherein the preferences of member states are crucial.
Spatial models of EU decision-making provide more insight into the EU’s legislative
process, because they consider the players’ preferences, as shown by Tsebelis & Garrett
(1996). In particular, the spatial models of EU decision-making developed by Crombez
(1996, 1997 and 2000), Steunenberg (1994), Tsebelis (1994) and others are of interest.
The first applications of spatial models for analysing the CAP are by de Gorter et al.
(1998) and Pokrivcak et al. (2001) (on the impact of member state preferences on EU
policy-making), and Henning & Latacz-Lohmann (2004) (on the effects of EU
enlargement on CAP decision-making).
2
Studies differ, however, in their assessment of the Commission’s use of its agenda-
setting powers. For example, Coleman & Tangermann (1999) view the Commission as an
independent body that pursues its own interests. On the other hand, Moravcsik (1994)
argues that the Commission merely decreases the transaction costs of inter-country
bargaining.
IMPACT OF EXTERNAL CHANGES AND THE COMMISSION ON CAP REFORMS | 11
The chapter is organised as follows: section 2.2 presents a model of the CAP
decision-making process, which is used in section 2.3 to analyse the Commission’s
influence and the status quo bias. The final sections discuss empirical issues,
implications and conclusions.
2.2 A model of the CAP decision-making process
CAP subsidy decisions used to be made annually.
3
The MacSharry reforms and
Agenda 2000 changed this to multi-year period decision-making. During these
periods, external changes (such as developments in agricultural markets or
international trade issues) may occur that affect the Commission’s and member
states’ preferences regarding agricultural policy. Moreover, different parties may be
in power in the member states and the composition of the Commission may alter.
Such changes may provide opportunities for policy reform. Our model studies how
agricultural policy is set for a given period (which could be one season or several
years), and what determines whether policy reform occurs at the beginning of the
next period.
A simple consultation procedure applies to most policy issues within the
framework of the CAP. Under this procedure, the Commission makes a proposal and
the Council decides on the proposal, after receiving the opinion of the European
Parliament. Since the Parliament’s opinion is non-binding, the Commission and the
member states can ignore it. For this reason, we do not consider the Parliament’s role
in the process. Formally, we present a model with complete and perfect information,
in which the Commission and the member states know each other’s preferences and
the consequences of different policies. Since the Parliament has no private
information and its opinion is of no importance to the Commission or the member
states, including it in the model would be inconsequential.
We assume that the Commission has Euclidean preferences over policies, with
ideal policy P
C
#
. The Commission’s preferences, for example, may reflect the
personal preferences of commissioners or its concern for economic efficiency or for
the welfare of some interest groups.
3
The CAP was first implemented in the 1960s. The main instrument was an intervention
price for commodities, including cereals, sugar, beef and milk, combined with trade
instruments (variable import levies and export refunds). After several reforms, the CAP is
now more complex, including single farm payments, tariffs, quotas, payments per
hectare/animal, agri-environmental support, price support and various commodity-
specific measures.
12 | POKRIVCAK, CROMBEZ & SWINNEN
Decision-making in the Council proceeds by a qualified majority vote.
4
To be
accepted by qualified majority, a proposal must obtain 232 out of a total of 321 votes
in the EU-25 and 255 out of 345 votes in the EU-27 including Romania and Bulgaria.
Furthermore, a qualified majority requires the support of at least half the member
states, representing at least 62% of the EU population.
5
Initially, unanimity was
required, but this has long been abandoned for minor CAP decisions, and more
recently for major decisions. The 1999 CAP reforms were a watershed: for the first
time, a large country was outvoted with respect to a major policy reform. We refer to
the country with the median vote, the 161
st
, as the ‘median country’ with ideal
subsidy P
M
#
.
Each member state can propose an amendment to the Commission’s proposal, and
there can be a vote on this amendment. An amendment is adopted if it is accepted
unanimously. Still, while the Commission can stick to its proposal and wait for a vote
on amendments, it tends to adjust its proposal in the discussions leading up to the
vote to improve the political acceptability of its proposal by the Council (Fearne,
1991). It is important to take into consideration that the Commission has the right to
amend or withdraw its proposal as long as the Council has not taken a decision.
6
Empirical studies confirm considerable changes in Commission proposals during the
decision-making process in the Council.
7
What matters for this study is that a
member state can successfully propose an amendment if it obtains the support of the
Commission and a qualified majority. There are thus two ways for a member state to
get an amendment approved: by a unanimous Council, and by the Commission and a
qualified majority in the Council.
8
The process of setting EU agricultural policy for a multi-annual period is formally
modelled as follows. First, the Commission formulates a proposal for an EU subsidy.
Then, each member state j=1,…, k is given an opportunity to propose an amendment,
4
The vote distribution is 29 votes for Germany, France, Italy and the UK; 27 for Spain
and Poland; 14 for Romania; 13 for the Netherlands; 12 for the Czech Republic, Belgium,
Greece, Hungary and Portugal; 10 for Sweden, Austria and Bulgaria; 7 for Slovakia,
Denmark, Finland, Ireland and Lithuania; 4 for Latvia, Estonia, Slovenia, Cyprus and
Luxembourg; and finally, 3 for Malta.
5
We ignore these two extra requirements in the remainder of the chapter, because they
are usually fulfilled if the first requirement is met. More importantly, including them
would not alter our conclusions.
6
Crombez et al. (2006) consider that the Commission’s right to alter and withdraw its
proposals almost amounts to an ex post veto right.
7
See Tracy (1996), Ackrill (2000), Fearne (1991), Núñez Ferrer (2001), Katranidis &
Vakrou (2002).
8
The Commission considers amendments prior to the Council vote. Here we assume for
simplicity that the Commission and the Council consider amendments simultaneously.
This assumption does not affect our conclusions.
IMPACT OF EXTERNAL CHANGES AND THE COMMISSION ON CAP REFORMS | 13
according to a given order.
9
If a member state does not propose an amendment, the
next member state is given the opportunity to do so. If a member state does propose
an amendment, there is a vote on the amendment. The amendment succeeds if it is
approved either by all member states or by a qualified majority plus the Commission.
Then, the next member state has the opportunity to propose an amendment. When all
member states have been given the opportunity to propose amendments, a vote takes
place on the (amended) Commission proposal. It is adopted if it obtains the support
of a qualified majority. If the proposal is adopted, it becomes EU policy for the
duration of the multi-annual period. If it is rejected, the status quo subsidy P
EU
0
prevails, and an unreformed CAP remains in place for the duration of the period.
Reform is defined as the adoption of a new policy P
EU
N
≠P
EU
0
. Whether or not there
is policy reform, the policy that emerges from this process is the equilibrium subsidy
P
EU
*
for the duration of the period. The process is repeated at the beginning of each
period. The equilibrium concept is subgame perfect Nash.
We use backward induction to derive the equilibrium subsidy. We first look at the
last step in the process, and then work our way back through the different steps of the
process, until we reach the first step.
Consider the last step of the process. In that step, the member states vote on the
(amended) proposal. Each member state votes in favour of the proposal if the
proposed subsidy P
EU
N
is closer to its optimum than the current subsidy P
EU
0
(or if it
is the same). The proposal is accepted if it receives more than the qualified majority
level.
Assume the following order of the politically optimal subsidies, P
j
#
, of member
states: country 1 has the lowest politically optimal subsidy P
1
#
, country k has the
highest politically optimal subsidy P
k
#
, and P
1
#
< P
2
#
<… < P
k
#
.
Define country X as crucial for those who want a high EU subsidy level.
Countries with higher preferred optimal subsidies than the optimal subsidy of
country X (P
X
#
) cannot collectively obtain enough votes, while country X together
with all countries with higher optimal subsidies can obtain the qualified majority. By
analogy, define country Y as crucial for those wanting a lower EU subsidy level.
Countries with lower optimal subsidies than that of country Y (P
Y
#
) cannot
collectively obtain a qualified majority, while country Y together with all countries
with lower optimal subsidies can obtain sufficient votes.
Countries X and Y are the pivotal member states under qualified majority rule.
From this one can show that there is a so-called ‘qualified majority win set’
9
The specific order in which countries are recognised does not affect our conclusions,
nor does the assumption that there is a given order for member states to formulate
amendments. What matters is that each member state has a chance to formulate an
amendment. Alternative models that yield similar results include, for example, Baron–
Ferejohn models in which member states are selected with given probabilities and they
can then choose whether to propose an amendment or terminate the amendment process
(Baron & Ferejohn, 1989).
14 | POKRIVCAK, CROMBEZ & SWINNEN
W
QM
(P
EU
0
) =[2P
Y
#
-P
EU
0
, P
EU
0
], which includes all proposals that are preferred by
country Y over the existing subsidy (this win set is indicated in Figure 2.1). The
argument for P
EU
0
< P
X
#
is analogous.
Figure 2.1 The win set of the pivotal member state
2P
Y
#
- P
EU
0
P
Y
#
P
EU
0
P
k
#
P
1
#
P
X
#
W
QM
(P
EU
*
)
P
C
#
CS
Subsid
y
Consider now the amendment process for a proposal that belongs to the win set.
Proposals that belong to the support [P
1
#
, P
k
#
] of the member states’ ideal subsidies
cannot be amended by a unanimous Council, because not all member states want to
move in the same direction. Proposals that are to the left (right) of P
1
#
(P
k
#
) can be
amended by a unanimous Council, because all member states want to move to the
right (left). Similarly, policies that belong to the set [min(P
C
#
,P
X
#
), max(P
C
#
,P
Y
#
)]
cannot be successfully amended by a qualified majority plus the Commission.
Therefore, proposals that belong to the set [P
1
#
, P
k
#
] ∩ [min(P
C
#
,P
X
#
),
max(P
C
#
,P
Y
#
)] cannot be amended.
This yields the set CS. This is the set of policies that are preferred to the status
quo by a qualified majority in the Council, and cannot be amended by a unanimous
Council or by the Commission plus a qualified majority. The set CS is then equal to
the set [2P
Y
#
-P
EU
0
, P
Y
#
].
Proposals that are not in the set CS will successfully be amended. If such a
proposal belongs to the win set, it will be amended because either all of the member
states or a qualified majority plus the Commission want to move in the same
direction. If such a proposal does not belong to the win set, that is, if it does not
defeat the status quo in the last step of the process, the member states and the
Commission consider it a status quo proposal during the amendment process. An
amendment is then proposed and approved that does belong to the win set.
10
The
successful amendment is in the set CS, because it would also be amended if it were
not in CS. As a result, the equilibrium subsidy will always be in the set CS.
Consider now the Commission’s position in the decision-making process. The
Commission knows that the equilibrium policy will be in the set CS, whether or not it
10
If no policy is preferred to the status quo by all member states or by a qualified
majority plus the Commission, the status quo prevails. The status quo belongs to the win
set.
IMPACT OF EXTERNAL CHANGES AND THE COMMISSION ON CAP REFORMS | 15
proposes a policy in that set. Moreover, it knows that a proposal in CS will be
adopted. The size of the set CS can thus be considered an indication of the
Commission’s influence, as we discuss below. In equilibrium, the Commission then
proposes the policy in CS that it prefers most. The proposal is not amended, because
there is no policy that is preferred to it by unanimity or by a qualified majority plus
the Commission. The proposal is approved by a qualified majority and it becomes
EU policy. In the preference distribution as illustrated by Figure 2.1, the Commission
would successfully propose the policy 2P
Y
#
-P
EU
0
.
In reality, Commission proposals are not always approved unamended. With
perfect information, the Commission can anticipate amendments and make proposals
that will not be amended. If one assumes that perfect information on the member
states’ ideal subsidies and on the impact of policies is not available when the
Commission formulates its proposal, but that such information becomes available
during the process, the member state that is able to propose an amendment after the
information becomes available may in some cases succeed in doing so.
11
This
amendment would belong to the set CS, because the amendment needs the approval
of a qualified majority and because the member state would choose to propose an
amendment that cannot be amended by another member state.
These findings have important implications for policy reform, in particular
regarding the impact of exogenous changes and the influence of the Commission on
reform of the CAP.
2.3 Status quo bias and the influence of the Commission
2.3.1 Status quo bias: The importance of external changes for policy reform
A change in external conditions during a (multi-)annual period can alter the
preferences of the member states. As a result, the EU may opt for policy reform at
the start of the next period.
12
The idea that external events may help to overcome the
status quo bias and lead to changes in the CAP is not new and has been discussed by
many economists and political scientists,
13
most recently in the framework of the
impact of eastern enlargement on the CAP (e.g. Swinnen, 2001; Henning & Latacz-
Lohmann, 2004).
An important conclusion from the preceding analysis is that a subsidy within the
(P
X
#
,P
Y
#
) interval cannot be defeated. This conclusion has implications at the start of
a multi-annual period. As long as there are no changes in the external conditions, all
preferences are the same as at the start of the previous multi-annual period, and no
11
See Tsebelis (1994), in which the model of the cooperation procedure focuses on the
Parliament’s role at the amendment stage.
12
External change could also trigger the introduction of a policy or its removal. In terms
of our model, one could consider this a special case with P
EU
0
= 0 (either before or after).
13
See for example, Coleman & Tangermann (1999), Neville-Rolfe (1984), Moyer &
Josling (1990) and Olper (1998).
16 | POKRIVCAK, CROMBEZ & SWINNEN
proposal for policy reform is accepted. Moreover, the change in external conditions
needs to reach a critical magnitude in order to trigger a change in policy. Hence, the
decision-making rules lead to an inherent bias towards the status quo.
This leads to a fundamental result of the theory, which is the status quo bias:
policy reform requires a critical change in external conditions.
Suppose that the previous period’s equilibrium subsidy was the subsidy preferred
by the median country, but that changed external conditions have shifted member
state preferences towards lower subsidies. In Figure 2.1, this involves a shift of P
EU
0
to the right.
14
Whether this exogenous change triggers a change in the EU subsidy
level depends on the voting rule. Under the simple majority rule, there would be a
change in the EU subsidy policy. With the qualified majority rule, however, there
will not be enough votes for policy reform as long as P
X
#
< P
EU
0
< P
Y
#
, despite the
change in preferences. Hence, there will be no policy reform. Policy reform can only
be induced by a change in external conditions that shifts preferences so that P
EU
0
is
outside the P
X
#
- P
Y
#
interval.
It is easy to show that the critical change in external conditions required for policy
reform is larger for larger majority rules. With the simple majority rule, any change
prompts policy reform. The status quo bias is strongest with the unanimous voting
rule. As long as the existing subsidy is located between the two extreme politically
optimal subsidies of member states, there is no unanimous agreement on a change of
the existing subsidy and no policy reform. Thus, there is an extreme propensity to
favour the maintenance of the status quo under the unanimity rule. Unless dramatic
changes occur, the probability that the EU subsidy of the previous period is within
the P
1
#
- P
k
#
range is high, and higher the more diversified the countries are.
In summary, the likelihood of retaining the status quo (or the extent of the status
quo bias) is determined by the combination of the qualified majority rule and the
magnitude of the external change. With a greater change in external conditions and a
given majority rule, it is less likely that the status quo is maintained. Inversely, for a
given change in external conditions, policy reform is more likely with a lower
majority rule.
2.3.2 The influence of the Commission
As mentioned above, the size of the set CS (within which the Commission can
propose a subsidy that will be adopted) indicates the (potential) influence of the
Commission. The size of the set CS depends on the voting rules and the exogenous
changes.
The influence of the Commission increases as the external change is more
significant, as a smaller majority is required for the approval of proposals and as a
larger majority is needed for the amendment of proposals.
14
This is a simplified representation of the change. We could keep the subsidy P
EU
0
line
fixed and move the P
1
#
- P
k
#
. Moving P
EU
0
rather than the P
1
#
- P
k
line is entirely consistent
and less complex.
IMPACT OF EXTERNAL CHANGES AND THE COMMISSION ON CAP REFORMS | 17
The set CS increases in size as the qualified majority win set W
QM
(P
EU
0
)
increases. That is, the Commission’s influence rises as more policies defeat the status
quo under the qualified majority rule. The Commission thus becomes more
influential as the share of the vote required for a qualified majority decreases.
Furthermore, the set CS increases as the support [P
1
#
, P
k
#
] of the member states’
ideal policies increases. That is, the Commission’s influence rises as the ideal
policies of the member states that are pivotal under the amendment rule are farther
apart. The Commission thus gains influence if a higher share of the vote is required
for approval of amendments. Requiring unanimity for amendments grants the
Commission maximum influence, whereas the simple majority rule results in
minimal influence. If unanimity is needed, as is currently the case, no proposal
between the ideal policies of the two extreme member states can be amended
(provided it is in the win set W
QM
(P
EU
0
)). No policy in the win set can be amended by
unanimity, whatever the qualified majority rule for the adoption of proposals.
Importantly, the size of the set CS also depends on the extent of the external
change. The larger the change, that is, the farther away the status quo subsidy is from
the median country’s ideal subsidy, the larger is the win set W
QM
(P
EU
0
) of policies
that defeat the status quo under qualified majority.
2.3.3 Reform bias and the optimal reform context
One could define the external change required to trigger a policy change as the status
quo bias of a voting rule.
To analyse this further, we need to be more precise about the Commission’s
preferences. Assume first that the Commission favours economic efficiency and low
distortions, and hence prefers reducing subsidies.
15
In this case, the Commission will
introduce a proposal for subsidies that are the lowest that will be approved given the
exogenous change.
To see what this implies in terms of reform bias, we define reform bias as the
difference between the equilibrium policy chosen under the EU decision-making
rules and what would be chosen by the median voter, assuming that we start from the
same subsidy level, i.e. the median voter preference of the previous round.
Figure 2.2 shows the reform bias under qualified majority rules. The bold line
indicates the size of the policy reforms (subsidy reductions) implemented by a
Commission that prefers low distortions. There is a strong anti-reform bias when a
large majority is needed for adoption under the qualified majority rules: beyond the
qualified majority γ
2
there is no policy reform and the reform bias is maximal. The
dashed line in Figure 2.2 indicates the reform bias when the Commission prefers
higher subsidies. In this case, it will use its influence as an agenda-setter to minimise
the reforms and there will always be an anti-reform bias.
15
In this context, preferring lower subsidies means ‘pro-reform’. For the general
definition of reform we used earlier, this was not necessarily the case.
18 | POKRIVCAK, CROMBEZ & SWINNEN
Figure 2.2 Policy reform and preferences of the Commission
As Figure 2.2 indicates, there can also be a pro-reform bias. This is the case when
the Commission is pro-reform and the majority needed under the voting rule is less
than the qualified majority γ
3
. This is a paradoxical result: once external change is
large enough to create a sufficiently wide interval for reform proposals, the
Commission can use its agenda-setting powers to make a proposal that is lower than
the subsidy preferred by the median voter. This pro-reform bias can only emerge if
the external change is sufficiently large for a given majority rule.
Hence, this yields another key result, which we refer to as the ‘optimal reform
context’: the combination of an external change that moves preferences in a pro-
reform direction and is sufficiently large and a pro-reform Commission will lead to a
pro-reform bias. In all other cases, there will be an anti-reform bias.
2.4 Package deals
So far, we have assumed that there is only one policy instrument involved in the
decision-making. This does not allow for a trade-off between policy instruments as
part of so-called ‘package deals’. Ackrill (2000), Katranidis & Vakrou (2002), Núñez
Ferrer (2001) and others describe how the final decision-making on Agenda 2000
during the European Council summit in Berlin in 1999 involved changes in various
policy instruments as part of the process of reaching an agreement.
By using package deals, the Commission can make it more likely that a proposal
is approved. By including another policy in the policy package that benefits the
crucial country, it becomes more likely that this country will vote for the reform.
Pro-reform Commission
P
M
#
- P
EU
*
Anti-reform Commission
,0
Qualified
majority
rate (γ)
5
IMPACT OF EXTERNAL CHANGES AND THE COMMISSION ON CAP REFORMS | 19
Still, there are limits to this process of changing countries’ subsidy preferences
through package deals. First, there are no free lunches here, meaning that the benefits
given to one country through the other policy instrument will affect other countries.
Because of this, the subsidy preferences of the countries that are hurt by the other
policy change will increase.
A second constraint on changing the subsidy preferences of the crucial countries
is the availability of compensating policy instruments. As the preferred policy of
country k changes, another country will have the critical votes and will have to be
compensated, while avoiding hurting other countries such that they start opposing the
package. This process will gradually become more complex and will require
increasingly subtle policy instruments to fine-tune the package. Finally, transaction
costs and deadweight costs would reinforce the problems of compensating and fine-
tuning. It is plain that there is a limit to reducing the subsidy preferences of the
highest-preference country.
The principle is clear and important, however: by creating policy packages that
benefit the crucial countries, the Commission can change their subsidy preferences
and thus shift the critical vote.
These package deals affect the Commission’s influence and the likelihood of a
status quo. The Commission can assemble a package deal to create a winning
coalition that can overcome the status quo bias in some cases. If the Commission
prefers to decrease subsidies, it can try to assemble package deals to create a winning
coalition. Package deals may allow the Commission to break the status quo and to
organise a coalition that decreases the subsidy (and vice versa if the Commission
likes higher subsidies). Consequently, package deals reduce the likelihood of the
status quo, and more so when the majority requirements are less.
These results suggest that the influence of the Commission increases significantly
with package deals. This is true under the current amendment rules, which require
approval by a unanimous Council or by a qualified majority plus the Commission.
16
2.5 Discussion
Our analysis suggests that a decisive issue is whether countries can table
amendments to the Commission’s proposal. Empirical studies indicate that
adjustments are made to the Commission’s proposals in Council meetings in order to
reach an agreement, but that these adjustments are limited. During the decision-
making on Agenda 2000, a series of adjustments were made to the original proposal
to facilitate a conclusion. Núñez
Ferrer (2001) identified a set of relatively minor
changes compared with the original proposal, such as a mostly cosmetic reduction in
structural and cohesion funds, technical adjustments to the financing of the UK
16
Nevertheless, the Commission’s influence does not necessarily increase when package
deals are possible. If countries can approve amendments by simple majority, then there
may not be a stable equilibrium to this decision-making problem and the power of the
Commission may be reduced to zero.
20 | POKRIVCAK, CROMBEZ & SWINNEN
rebate and the reintroduction of optional ceilings on direct payments. With respect to
specific commodities, Katranidis & Vakrou (2002) identified various concessions
that were made at the Berlin summit. This evidence suggests that package deals have
enabled the Commission to break the status quo while limiting its loss of influence.
Realising the importance of the agenda-setting role, Nugent (2003) argues that in
practice the Council has tried, if not to circumvent the Commission, at least to take
on a significant policy-initiating role. Article 208 of the EC Treaty is useful in this
respect: “The Council may request the Commission to undertake any studies the
Council considers desirable for the attainment of the common objectives, and to
submit to it any appropriate proposals.” According to many observers, the use made
of this article, and the very specific instructions that have sometimes been issued to
the Commission under its aegis are against its intended spirit. As a result, the Council
has encroached on the Commission’s policy-initiating function (Nugent, 2003).
Yet, overall empirical evidence on CAP decision-making is sparse. In fact, a
major problem in this research field is the lack of empirical evidence and even basic
information on the stylised facts. There is little information on decision-making since
only the final decisions of the Council are available. Moreover, assessments of
member states’ positions and preferences can only be based on statements, but these
are often merely initial positions that can be biased intentionally for strategic
purposes (Núñez Ferrer, 2001). Hence, there is a strong need for better empirical
information and much scope for useful empirical research in this field.
2.6 Conclusions
This chapter summarises a formal model of decision-making in the EU and analyses
how it affects the likelihood of a CAP reform. We show that under various
assumptions, the institutional structure of decision-making has an impact on the
choice of the CAP subsidy.
Decision-making procedures in the EU allow the Commission to influence policy
decisions. In a one-dimensional framework, the Commission becomes less influential
as a higher share of the vote is required in the Council for the adoption of proposals
and a lower share is needed for the approval of amendments.
Changes in external conditions are crucial for triggering CAP reforms; however,
the change needs to be sufficiently large to induce reform because of the status quo
bias inherent in EU decision-making. The larger the external change, the more likely
the status quo bias will be overcome for a given voting rule.
The greatest status quo bias occurs when unanimous agreement is needed in the
Council for the adoption of proposals. Ceteris paribus, the larger the majority needed
for adoption, the larger the status quo bias is and the less likely is reform.
Somewhat paradoxically, certain conditions may result in a pro-reform bias. A
combination of a pro-reform Commission and a sufficiently large external change
may create the opportunity for a major reform (greater than would be preferred by
the median voter).
The impact of package deals can be very substantial, but is also complex. While
the availability of additional policy instruments may allow the Commission to
IMPACT OF EXTERNAL CHANGES AND THE COMMISSION ON CAP REFORMS | 21
overcome the status quo bias by compensating potential opponents, the option of
proposing amendments to package deals could yield multiple equilibria and reduce
the Commission’s influence, if amendments do not require the approval of all the
member states or the Commission.
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