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Full phd2

Full phd2



This is my PhD analysing the influence of voting power by member states in the decision-making on agricultural policy and the impacts of enlargement. It uses both political economy and power indexes ...

This is my PhD analysing the influence of voting power by member states in the decision-making on agricultural policy and the impacts of enlargement. It uses both political economy and power indexes from game theory. Just in case anybody is interested. Completed in 2000, awarded 2001.



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    • MEASURING THE INFLUENCE OF VOTING RULES IN THE COUNCIL OF THE EU ON THE COMMON AGRICULTURAL POLICY PAST, PRESENT AND FUTURE by Jorge Núñez Ferrer T.H. Huxley School Imperial College of Science, Technology and Medicine Wye, University of London July 2001Thesis submitted for the award of the Degree of Doctor of Philosophy at the University of London 1
    • Statement of OriginalityI hereby certify that the work embodied in this thesis is the result of original research.Some sections of the thesis have been already published jointly with work from otherauthors, references have been included in the text. The work presented in this thesisdraws only on my own contribution. This thesis has not been submitted for a higherdegree to any other University or Institution.Date Jorge Núñez Ferrer 2
    • To FrancescoAcknowledgementsThe greatest gratitude I owe to my son Francesco for surviving with a great sense ofhumour all the ups and downs of a life with a research student. I would like to thankmy father for the financial help that allowed me to continue this research in difficulttimes. I am very grateful for my wife Ana, for her patience and encouragementespecially in the final stages. I would like to give special thanks to Professor AllanBuckwell, whose lectures on Agricultural Policy hooked me completely to thissubject. His enthusiasm was contagious, and his patience and support has been crucialto keep me going on in this research. As with so many other students wishing to buildmathematical models and programmes, I have to thank Dr Kelvin Balcombe, whohelped me to make a mathematical idea into a usable reality. I also wish to show mygratitude to Mario Alessi, whose help and encouragement in the past was instrumentalto help me to reach this level. I want to acknowledge the role of the Centre forEuropean Policy Studies (CEPS) for letting me continue working on this subject andfor the in depth knowledge I gained from my colleagues on the workings of theEuropean Union. I also thank the Centre for Agricultural Policy Studies (CEAS) foroffering me the grant that financed three years of my PhD research. Finally, a lovingwelcome to little Clara. 3
    • AbstractThe Common Agricultural Policy of the EU is widely considered to be an inefficientand highly distortive policy. On the one hand, the result can be considered aconsequence of the democratic wishes of the population. On the other, there is awidely held suspicion that the institutional setting of the EU has had a strong negativeimpact on the policy. Various analysts have claimed that the voting rules at theAgricultural Council of the EU foster the status quo in the Common AgriculturalPolicy, preventing necessary reforms which might otherwise be accepted under aproper democratic system. Proposals by the Commission to improve the policy arehighly diluted to the level of the ‘lowest common denominator’ between the memberstates.There has never before been an attempt to systematically quantify the impact of thevoting rules – implicit or explicit – on the quality of the policies negotiated at theCouncil, nor has there been a convincing quantification of the influence of nationalpreferences on the outcome of negotiations in the Council.This thesis presents two analyses of the behaviour of the Council. The first is anempirical analysis based on the development of the negotiations over the Agenda2000 CAP reforms. The second develops a mathematical tool which quantifies thereduction in the probability of reform proposals by the Commission being adoptedand represents an indirect measure of the pressure on the Commission to dilute andreduce the number of proposed changes. This model is then applied to the Agenda2000 negotiations. The results of both studies show sufficient theoretical andempirical evidence that the voting rules exert very strong pressure to keep the CAPunchanged. Building on these results, possible reforms to the decision-making rules ofthe Council and to the CAP are proposed in the concluding chapter. 4
    • TABLE OF CONTENTSABSTRACT .....................................................................................................4TABLES.........................................................................................................10FIGURES .......................................................................................................12ABBREVIATIONS..........................................................................................14CHAPTER 1. THE AGRICULTURAL COUNCIL: A BROKER OR BREAKEROF DECISIONS .............................................................................................161.1 Reasons for concentrating on the CAP and the Agricultural Council of the EU..............171.2 The importance of the research.............................................................................................20CHAPTER 2.... APPROACHES TO POLICY DECISION-MAKING ANALYSIS .....................................................................................................232.1 Approaches to Policy decision analysis.................................................................................242.2 Welfare economics..................................................................................................................24 2.2.1 Welfare Economics, the rational actor and the CAP.......................................................252.3 Political Economy models ......................................................................................................262.4 Political Preference Functions...............................................................................................282.5 Public Choice ..........................................................................................................................29 2.5.1 The power maximising-politicians, the voters and interest groups.................................312.6 Bureaucracy............................................................................................................................39 2.6.1 Organisational process and bureaucratic politics............................................................402.7 Political Market ......................................................................................................................422.8 Partisan Mutual Adjustment.................................................................................................422.9 Institutional Approach...........................................................................................................44 2.9.1 Functionalism .................................................................................................................44 2.9.2 Economic Institutionalism ..............................................................................................45 5
    • Transaction Cost Economics (TCE)...........................................................................45 Principal-Agent theory...............................................................................................46 2.9.3 Political Institutionalism .................................................................................................462.10 Functionalism and Neo-functionalism .............................................................................47 2.10.1 Liberal inter-governamentalism......................................................................................492.11 Dynamic policy-making approach ...................................................................................502.12 Game Theory .....................................................................................................................51 2.12.1 The Power Index Analysis for the EU ............................................................................522.13 Searching for the appropriate tools for the analysis.......................................................56CHAPTER 3. THE PERFORMANCE OF THE CAP FROM 1958 TO 1998..583.1 CAP developments .................................................................................................................58 3.1.1 Productivity vs. overproduction......................................................................................60 3.1.2 Distribution of CAP benefits and farm incomes .............................................................63 The price support system as means to support farm incomes ....................................63 Farm income support distribution from the EAGGF among EU countries................643.2 The CAP and the EU Budget.................................................................................................68 3.2.1 The European Budget in the 1990s – the increase of a paradox .....................................723.3 Environmental effects of the CAP.........................................................................................753.4 Welfare costs of the CAP .......................................................................................................763.5 The increase in complexity ....................................................................................................773.6 Decision-making speed in the EU’s Agricultural Council of Ministers .............................783.7 Assessment and conclusions on the past development of the policy...................................79CHAPTER 4. THE FORMAL AND INFORMAL EU DECISION-MAKINGPROCEDURES WITH SPECIFIC REFERENCE TO AGRICULTURE ..........814.1 The legislative bodies..............................................................................................................814.2 The Commission .....................................................................................................................814.3 The Council.............................................................................................................................83 4.3.1 Organisation of the Council Meetings ............................................................................85 6
    • 4.4 Working Groups, COREPER AND SCA.............................................................................864.5 The European Parliament ..................................................................................................... 874.6 Economic and Social Committee (EcoSoc)...........................................................................874.7 Other statutory committees ...................................................................................................884.8 The creation of CAP legislation ............................................................................................884.9 The evolution of the Council of Ministers ............................................................................914.10 Voting Rules - their development, the formal procedures, actual behaviour...............93 4.10.1 Qualified Majority Voting for the CAP ..........................................................................944.11 The Sectoral Bias in the Council ......................................................................................984.12 The dominance of net budgetary balance considerations ..............................................994.13 Conclusions on QMV ......................................................................................................100CHAPTER 5..........................................THE AGENDA 2000 NEGOTIATIONS ...................................................................................................1015.1 Introduction ..........................................................................................................................1015.2 Methodology of the budgetary analysis..............................................................................1025.3 The Birth of Agenda 2000....................................................................................................1035.4 The German Presidency – Setting the parameters for negotiation..................................1085.5. CAP negotiations ..................................................................................................................1105.6 The European Council Summit in Berlin...........................................................................1135.7 The Final Agricultural Reform - An Analysis ...................................................................117 5.7.1 Price cuts and WTO commitments ...............................................................................118 Aggregate Measure of Support commitments..........................................................119 Export subsidy value and volume commitments......................................................120 5.7.2 The Budget for Agriculture...........................................................................................1255.8 Consequences of the Berlin agreement on Enlargement...................................................127 5.8.1 Effects of CAP enlargement on production levels........................................................128 5.8.2 Towards a budgetary crisis ...........................................................................................131 The direct payments .................................................................................................133 7
    • 5.8.3 Side effects of a failed CAP reform..............................................................................134 Future pressures on the enlarged EU budget............................................................1365.9 Conclusions ...........................................................................................................................141CHAPTER 6. FILTERING PROPOSALS THROUGH THE DECISION-MAKING INSTITUTIONS - THE POWER OF QMV.....................................1436.1 Development of a Model for the Council of Ministers ......................................................1436.2 Statistical Consequences of the Bargaining Process - a Model.........................................1456.3 Primary general results on the effects of the QMV system for the decision-makingefficiency of the EU’s CAP.................................................................................................................146 6.3.1 Base scenario ................................................................................................................146 6.3.2 Alternative Scenario I - Coalitions ...............................................................................149 6.3.3 Alternative scenario II - Implicit vetoes .......................................................................1516.4 Incorporating specific preferences for the member states................................................1546.5 The position of the member states vis-à-vis the original proposals..................................1576.6 Calculating the preferences of member states ...................................................................162 6.6.1 The Calculation of pn - the probability of voting against or level of non-support for the proposal for each member state .......................................................................................................167 Share of importance of the cereals, oilseeds, beef and diary sectors........................167 The Net Balances .....................................................................................................168 Shares of importance of individual changes proposed and the effect of farm income changes 169 Shares of importance of individual changes proposed and the level of non-support1726.7 The blockage or rejection probability of Agenda 2000 .....................................................1766.8 The preferences of the final Berlin Agreement..................................................................1786.9 Conclusions ...........................................................................................................................184CHAPTER 7... THE EFFECTS OF ENLARGEMENT ON DECISION-MAKING ...................................................................................................1867.1 Continuation of the present Decision-Making System in an Enlarged Union.................189 7.1.1 The Power of a CEEC coalition....................................................................................190 7.1.2 Implicit veto power for Poland .....................................................................................191 8
    • 7.2 The effects of introducing the Nice Treaty changes to the QMV rules............................1937.3 The effects of enlargement on future reform prospects ....................................................196CHAPTER 8.SUMMARY AND CONCLUSIONS .........................................1988.1 The selection of the analytical tools ....................................................................................1998.2 The Council’s performance along the history of the CAP ................................................2008.3 The decision-making system for agriculture......................................................................2018.4 The Agenda 2000 negotiations.............................................................................................2028.5 Modelling the decision-making process..............................................................................2058.6 Results of the analysis on the decision-making procedures of the Council .....................2078.7 Recommendations ................................................................................................................209 8.7.1 Reform of the decision-making procedures ..................................................................211 8.7.2 Reforming the CAP ......................................................................................................2128.8 A view of the future..............................................................................................................215REFERENCES.............................................................................................216ANNEX A. THE AGRICULTURAL POLICY IMPACT MODEL....................235ANNEX B. THE EU BUDGET MODEL ........................................................252Annex B.I Budgets, year 1997 and Agenda 2000 proposals..................................................260Annex B.II Negotiation of Agenda 2000 and decision ............................................................264Annex B.III Longer term effects of the Agenda 2000 agreement............................................267ANNEX C. ....................................................THE SHAPLEY - SHUBIK INDEX .......................................................................................................271ANNEX D. THE WEIGHTING OF VOTES IN THE COUNCIL AGREED ATNICE ...................................................................................................272 9
    • AbbreviationsA AustriaAMS Aggregate Measure of SupportB BelgiumCAP Common Agricultural PolicyCEECs Central and Eastern European CountriesCKR Czech CrownCoA Court of AuditorsCOREPER Committee of Permanent RepresentativesCSE Consumer Support EstimateD GermanyDK DenmarkDG AGRI Directorate General for Agriculture and Rural DevelopmentDP Direct PaymentsDUP Directly Unproductive Profit-Seeking€ EuroE SpainEAGGF European Agricultural Guidance and Guarantee FundsEC European CommunityECU European Currency UnitEcoSoc Economic and Social CommitteeEU European UnionEEC European Economic CommunityEFTA European Free Trade AgreementEL GreeceEP European ParliamentF FranceFEOGA French version of EAGGFFin FinlandGATT General Agreement on Trade and TariffsGDP Gross Domestic ProductGNP Gross National ProductHF Hungarian Forint 14
    • I ItalyIGC Intergovernmental ConferenceISPA Instrument For Structural Policies for Pre-AccessionIrl IrelandLux LuxembourgMEP Member of the European ParliamentNL NetherlandsNVA Net Value AddedOECD Organisation for Economic Co-operation and DevelopmentP PortugalPSE Producer Subsidy EstimateS SwedenSCA Special Committee on AgricultureSEA Single European ActSLK Slovak CrownsSMV Simple Majority VotingTCE Transaction Cost EconomicsTEU Treaty of the European UnionTOR Traditional Own ResourcesUK United KingdomURAA Uruguay Round Agreement on AgricultureUSA United States of AmericaUSD US dollarQMV Qualified Majority VotingUK United KingdomUN United NationsVAP Value of Agricultural ProductionVAT Value Added TaxWTO World Trade Organisation 15
    • Chapter 1. The Agricultural Council: A broker or breaker of decisions I stared at him gloomily. ‘What is it all for, Bernard?’ I asked. ‘What are we all doing? What is the point of it all?’ He looked momentarily nonplussed. ‘I didn’t read theology, Minister.’ I tried to explain my concerns to him. ‘What I mean, Bernard, the waste of it all. Paying a lot of people to produce masses of food. Paying another lot to destroy it. And paying thousands of bureaucrats to push paper about to make it all happen. Doesn’t the futility of it all depress you?’ ‘Not really,’ he replied slightly puzzled. ’I’m a Civil Servant.’ Conversation between the Minister, Hacker, and Bernard, his personal secretary, in ‘The Complete “Yes, Prime Minister”’ by J. Lynn and A. Jay, BBC Books, 1986.The objective of this research is to explore the idea that the decision-makingprocedures at Agricultural Council of the EU not only have a negative effect on therationale and effectiveness of the Common Agricultural Policy (CAP), but also areunfit for the future. The underlying hypothesis is that the CAP is strongly affected bysectoral and national interests of the member states, and that this influence isdetrimental to European interests. The stress of the research lies in the analysis of themechanisms in the Council which allow sectoral, national interests to influence theCAP excessively ensuring a sub-optimal policy outcome.This research has the following aims:1. To test the hypothesis that the decision-making procedures in the Council of Ministers encourage the status quo for the CAP when reforming the policy and that there is a drift towards the lowest common denominator.2. To test the hypothesis that national interests and the sectoral character of the Agricultural Council of the EU affect the efficiency of the CAP. Each member state negotiates its position under the following conditions for itself: a) Negative changes in net contributions should be minimised. 16
    • b) Changes in the distribution of the benefits should be minimised, i.e. target groups should as much as possible remain unaltered. c) Considerations, which transcend the agricultural sector, are often neglected, due to the exclusive presence of Agricultural Ministers in the Council.3. To analyse the process of decision-making using the Agenda 2000 proposals by the Commission as an empirical proof of the hypothesis.4. To examine if the outcome of the Agenda 2000 negotiations left the EU unprepared for its forthcoming enlargement and for the WTO negotiations.5. To test the hypothesis that the enlargement of the EU will further delay the possibility of reforming the policy after enlargement.6. To discuss possible solutions to the institutional problem of decision making in the EU.1.1 Reasons for concentrating on the CAP and the Agricultural Council of the EUThe CAP is a unique case of international co-operation. It is the first and only trulycommon policy of the European Union, introduced in the Treaty of Rome of 1957.The powers for drafting proposals and the implementation of legislation were given tothe European Commission and the decision-making capacity was delegated to theAgricultural Council of the EU. It is remarkable that the founding Member States ofthe EEC were ready to put their agricultural policies in the hands of anintergovernmental or supranational body. This Council will be often referred to as theAgricultural Council of Ministers.The member states gave up the ability to introduce separate national policies. Thereasons for such a pooling of sovereignty for the agricultural sector were multi-dimensional, but three points seem to be the most important:1. The depressed and inefficient state of the agricultural sector in Western Europe in the 1950s. Farms were in general small and farmers incomes low. Moyer and Josling (1990) and Tracy (1989) describe clearly the poor state of agriculture in Western Europe. 17
    • 2. It was thought that trade liberalisation in Europe would reduce the low incomes in agriculture even further without improving productivity. With this belief in mind, agricultural policy had to create a common system that avoided competition between the members of the European Community in agricultural products (Fennell, 1987), as well as protecting the farmers from adverse market developments in the international markets.3. The need for a trade-off between the Federal Republic of Germany and France. Germany was interested in free access to the French industrial market. In exchange, France would be able to enter the German agricultural market. The CAP would allow the entrance of French agricultural products in Germany while protecting the German farmers from the cheaper French produce. This was achieved by lifting trade barriers and simultaneously introducing relatively high intervention prices (see Swann, 1988; Tracy, 1989; and Moravcsik, 1993).The Treaty of Rome establishing the EEC set out the objectives of the CAP inArt.39.1:(1) to increase agricultural productivity by promoting technical progress and byensuring the rational development of agricultural production and the optimumutilisation of the factors of production, in particular labour;(2) thus to ensure a fair standard of living for the agricultural community, in particularby increasing the individual earnings of persons engaged in agriculture;(3) to stabilise markets;(4) to assure the availability of supplies;(5) to ensure that supplies reach consumers at reasonable prices.These are the most quoted objectives. However, there are other objectives in theTreaty and in subsequent reforms of the CAP. In Art. 41, provision was made formeasures to be taken in the fields of vocational training, research and dissemination ofagricultural knowledge, as well as for promotional activities for the consumption ofcertain products. Particular attention should be given to Art.43, which lays down thatdecisions should be made under qualified majority voting (QMV) in the AgriculturalCouncil. Nevertheless, it took thirty years to enforce this rule. Until 1986, the use of 18
    • unanimity was the rule and even today, QMV is still not applied strictly. The reasonsfor the use of unanimity in the Council are explained in Chapter 4.Another important point in the Treaty is the claim in Article 39 that the CommonAgricultural Policy “... recognises the need to take account of the social structure ofagriculture and of the structural and natural disparities between the variousagricultural regions.”In general, the CAP was supposed to be build upon three principles which were toguide every Community policy:A single market: the free movement of agricultural products within the Community.Community preference: protection from world market competition.Financial solidarity: Sharing the cost of the CAP and centralisation of the funding.Subsequent Council decisions have added other objectives such as latelyenvironmental sustainability or the protection of rural areas. These objective are,however, not included in the Treaty and are just part of Council Regulations. Itrequires a revision of the Treaty to change or add Articles, the Council cannevertheless approve objectives which become an integral part of the set ofregulations of the CAP.Despite the fact that the budgetary outlays of the CAP have steadily increased and thatthe number of norms and regulations have grown to ‘Byzantine’ proportions (Rieger,1996), the general view is that the CAP is inadequate to face the realities of themarket and achieve efficiently a number of the objectives stated. The dissatisfaction isat all levels from politicians and researchers to consumers, even beneficiariescomplain of its inadequacy. There is a very large literature which documents theinefficiency of the CAP. Whilst the CAP has its defenders, principally amongstgroups representing the beneficiaries, there is a general presumption that the policy isnot a cost-effective way of delivering its objectives.The decision-making procedures of the European Union (EU) have been recurrentlycriticised as being the source of inefficiencies and inappropriate agricultural policies 19
    • (Scharpf, 1988, 1994; Kirman and Widgren, 1995; Swinbank, 1989; and manyothers).There are clear symptoms, which point to the conclusion that the Council is unable tohandle the problems of European agriculture. The agricultural sector is dynamic andinfluenced by an array of shifting variables caused by changing weather conditions,falling employment levels, technical change, farm restructuring, strong productivityincreases and fluctuating world prices. Nevertheless, most of the main features of theCAP survived unaltered from the foundation of the policy in 1968 until 1992, and anychanges which were made occurred only after painful crises and difficult bargainingin the Agricultural Council of Ministers. It therefore seems reasonable to question theeffectiveness of the decision-making process.1.2 The importance of the researchThe future of the agricultural sector faces difficult challenges in the future. TheUruguay Round Agreement on Agriculture (URAA), agreed under the GeneralAgreement of Trade and Tariffs (GATT) and now incorporated into the World Tradeorganisation (WTO), restricted agricultural support and introduced a real ceiling onthe level of subsidies to agriculture in the Union. Export subsidies for surpluses areconstrained in both value and volume. The costs of the CAP are not any more a‘simple’ problem of finding willing contributors to pay for the surpluses through abargaining process among the members, it has also become an important part of tradenegotiations at WTO.The AMS (Aggregate Measure of Support) limit agreed at the URAA is high enoughnot pose an immediate threat, but for how long? If intervention stocks pile up, there isa strong probability that the costs of the CAP will soon drift up. This is even morelikely with the prospect of a future enlargement with the applicant Central and EasternEuropean Countries (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania,Poland, Romania, Slovenia), Cyprus, Malta and Turkey.It is questionable if the EUs CAP is the appropriate tool for the applicant states, allhaving incomes per capita below (often considerably) the Union’s average GDP.These countries also have (with the exception of the Czech Republic) a higher 20
    • proportion of the population in an underdeveloped, problem-ridden agricultural sector.Under these circumstances, it is important to have a well-designed policy, as well as adecision-making body, which is ready and able to react swiftly and efficiently toproblems emerging from the enlargement process. The present situation in theagricultural sector seems to validate the belief that the decision-making procedures areunable to react to unexpected developments. Given the ample evidence of the failuresof the CAP, it seems reasonable to suggest that at least some of the deficienciesoriginate at the level of decision-making.It is not enough to find inefficiencies in the policy to prove that the Council is unableto handle agricultural policy; these do not represent sufficient proof that they originatefrom the Council. Apparently policy failures may exist because the policy transfersinvolved represent the democratic will of the population.This research argues, however, that the decision mechanisms of the Council distortsthe democratic process and increases a drift towards a kind of ‘agrosclerosis’. Theterm is borrowed from ‘Eurosclerosis’ that has been widely used to describe thestagnation of EC until the 1980s. This ‘agrosclerosis’ cannot be justified solely by theinteraction of voters, interest groups and politicians, but has allegedly been fosteredby the decision-making institutions of the EU and in particular the Council ofMinisters. Sectoral and national interests and the rules of unanimity voting until the1980s, and QMV since, are suggested to be an underlying cause for the stagnation ofthe integration of the EU in general and the CAP in particular.This research shows strong evidence that the CAP decision-making procedures areinefficient. The voting model developed in chapter 5 and the empirical evidence fromthe Agenda 2000 negotiations, leave little doubt that an reform of the decision-makingprocess is necessary if the EU wants to enlarge and face the growing demands of adynamic open world market in agriculture.The thesis has eight chapters. After this introduction, Chapter 2 reviews the literatureon public choice. This is followed by a review of the historical development of theCAP (Chapter 3), a theoretical description of the decision-making procedures(Chapter 4), a description of the Agenda 2000 negotiations (Chapter 5), a 21
    • mathematical model of the Council’s voting system (Chapter 6), an analysis of thesituation after an enlargement (Chapter 7), and the conclusions (Chapter 8). Thecombined explanatory power of the formal voting model and the less formal analysisof the Agenda 2000 negotiations provides the basis for the judgement that the futurefeasibility of the decision-making process is in severe doubt. 22
    • Chapter 2. Approaches to policy decision-making analysis “Not the least of the reasons that public policy has proven so unwieldy is that it is the property of everyone and no one. The disciplines required to understand public policy cut right across the old academic lines of demarcation. (...) But the flipside of such splendid single market of ideas and techniques wherein all the borders between disciplines and sub-disciplines are breached is that the subject is verging on complete fragmentation. This becomes very evident when public policy is taught.” Parsons (1995, p. XV)This chapter searches for an analytical framework capable of explaining the role ofdecision-making on the CAP. There is a large literature concerned with the waypolicy decisions are taken by governments or international organisations. This chapterpresents a general review of various approaches to policy analysis. The reason forreviewing all these frameworks follows the opinion of Parsons (1995) that the analystshould accept the pluralistic nature of research in policy analysis.The importance of this exercise can be appreciated following Allison (1971), whodemonstrated how different methodologies can give conflicting accounts of the samephenomena. His analysis of US decision-making in the Cuban missile crisis fromthree different perspectives gave three different explanations for the same events, eachapparently as convincing as the others. Policy analysis is a multi-disciplinary subject,a fact that often seems to be forgotten by researchers. Given the volume of the printedwork on policy choice it is certainly a great temptation to stick closely to the knownframework and to avoid entering the confusing world of interdisciplinary research, amove that would force the analyst to digest decades of results by numerous authors. Itis logical to fear such a move, as it would certainly put into question many of theanalytical techniques and assumptions in the familiar framework. However, byembarking upon a review of the different approaches to policy analysis, researcherscan improve their own framework by complementing it with the strengths of otherschools of thought. 23
    • 2.1 Approaches to Policy decision analysisThere are numerous analytical frameworks that attempt to give insights into publicpolicy decision-making. This section revises a large number of those as well as someof their sub-disciplines:• Welfare economics• Politico-economic models• Political Preference Functions• Public Choice• The theory of Bureaucracy• Political Market• Partisan Mutual Adjustment• Institutional Approaches• Functionalism and Neo-functionalism• Game Theory2.2 Welfare economicsWelfare economics has always constituted a core component of policy analysis.Gravelle and Rees (1992) give it a short description: “The subject matter of welfareeconomics is the ethical appraisal of economic systems.” It is the branch of economicsdealing with normative issues, not describing how but how well it works. Two mainthemes are researched in welfare economics, allocative efficiency and equity. Anequity test for the CAP would be the analysis of the ability of the policy to makeincomes in agriculture comparable to incomes in other sectors in the economy. Theallocative test would study the capacity of the policy in place to improve overallwelfare in the economy. For the CAP welfare economics would study the existence ofa market failure in the agricultural sector and advocate for a correction which wouldmaximise total welfare.Generally speaking, welfare economics categorises markets and policies by theirability to maximise welfare. The origins of this term can be traced back to AdamSmith and his advocacy of a free market in which the “invisible hand” of competitionwould allocate efficiently resources maximising the welfare of the economy(Nicholson, 1992). The role of the authorities is to help create a competitive marketand only intervene were a market failure or imperfection occurs, i.e. where particular 24
    • circumstances do not allow an efficient competitive market to exist, for example inthe case of natural monopolies. The welfare economic framework of policy research isintrinsically connected to the rational choice theories. The rational political actor, acentral national actor, possesses complete information and the power to create andimplement policies. Policies are devised with the objective of correcting imperfect ormissing markets. These models are easy because they do not require any informationon the workings of the policy process.The dominant school of welfare economics is the Paretian one. The search for “Paretoefficiency” is the core of the welfare economics. Pareto optimal solutions maximisethe overall welfare of the economy. A perfectly competitive market will equatedemand and supply for goods at certain prices. The market will be Pareto optimal,hence the central importance of Pareto efficiency in welfare economics. At this pointno change can make anybody better off without making someone else worse off. Theproblem of Pareto optimality is that it does not concern itself with equity issues. Theallocation of resources may be efficient but not ‘fair’.Welfare economics therefore usually analyses the capacity of a relocation of resourcesof achieving its intended equity goals with the best allocative efficiency. Welfareeconomics has had a very big impact in economic policy. For example, theprivatisation of public utilities has been done following the welfare economictheories. Welfare economics is often used to calculate the effectiveness of the CAP,estimating the costs and efficiency of the policy to attain the desired results.2.2.1 Welfare Economics, the rational actor and the CAPIt is not necessary to be an expert in the CAP to understand that welfare economicscan only measure the welfare costs of the policy but not explain the reason for theparticular selection of policies. It is true that to a certain extent, the aim of agriculturalpolicies is to eliminate a supposed number of market failures in the agricultural sector.There has always been a widespread belief that agricultural markets suffer from amarket failure and that prices for agricultural products do not reflect the real costs ofthe product. However, the CAP was not only introduced to correct for this failure, butalso to stabilise markets, increase productivity and ensure a ‘fair’ standard of livingfor farmers (see section 1.1). Agricultural policies are therefore not solely conceived 25
    • to correct for market failures and target the maximisation of economic welfare of thewhole economy. In fact, the actual impact of the policies is largely far from theallocative efficiency required by welfare economic considerations. The rational actorwould eliminate the commodity price and income support, as these create distortionsin the economy, causing considerable efficiency and welfare losses. However,defenders of the CAP claim that it is important to consider the “non-economic”objectives and that the overall policy effect is welfare maximising, but given theirnature (e.g. landscape effects, avoidance of rural depopulation) these cannot be valuedin pure economic terms.Winters (1990) criticises heavily the notion used by decision-makers in the EU andother OECD countries that agricultural policy has “non-economic” objectives. Hisarticle shows that the policies have an economic impact and furthermore it is negative.Thus according to him the “non-economic” objectives are economic. Winters defendshis position further asking how efficiently the policies reach their objectives.Economic or not, agricultural policies should be efficient and cost effective inachieving specified goals. According to Winters the CAP as well as other OECDagricultural policies are sub-optimal. Most policies fail to target the problems of thesector efficiently and to fulfil the stated objectives. His analysis does not answer oreven address, however, why the decision-makers have opted for these apparentlyirrational policies.In any case, the way in which CAP support regimes are devised actually violates theassumptions based on the notion of the ‘benevolent dictator’ in welfare economicsand rational choice models.2.3 Political Economy modelsThe main category of models dealing with the interaction between voters andgovernment that consider politicians as real decision-makers are the political-economy models. According to Frey and Schneider (1979, p.203): “The basic idea ofa politico-economic model is that the voter’s evaluation of government performance,and therefore government chance of staying in power, depends substantially oneconomic conditions; and that the government in turn seeks to manipulate the 26
    • economy in order to stay in power and to maximise its utility”. This theory follows theeconomic assumption that voters are rational utility maximisers.The voters evaluate the government’s performance and vote for the incumbentgovernment if they are satisfied or for the opposition if they are not. The need for thegovernment to please the voters causes it to choose policies that boost the economybefore an election, even though these may be distortionary and inflationary. For thebeginning of its mandate, the next government will then have to adopt disinflationaryrestrictive policies to reduce inflation and bring the economy nearer to equilibrium.When the elections approach again the government will be tempted to reintroduce aneconomic boost to the economy. This behaviour is partly responsible for the so-called‘business cycle’.The classical authors for the business cycle phenomenon are Nordhaus (1975),Lindbeck (1975) and Mc Rae (1975). They suggested a trade-off betweenunemployment and inflation as an important factor in generating the business cycle.Frey and Schneider (1978; 1979) included growth in the equation. All authors withthe exception of Mc Rae assume that the voters are myopic, while for Linbeck (1975)the voters are furthermore irrational in their expectations, a contradiction of theassumption of rationality of the voters. The myopia argument allows the governmentto manipulate the economy during election years, aiming to boost employment orgrowth. This provides an incentive to create cyclical economic conditions and Fair’s(1988) empirically based model of voters’ myopic behaviour for US elections seemsto support this.Fair developed an econometric model for the USA that estimates the outcome ofelections based on past inflation and per capita income growth in the election year. Hepredicted that the voters look back six to nine months regarding the real (per capita)growth rate and two years regarding inflation rates to decide on the party to elect. Thepredictions for the model were only wrong in three of 19 past elections, and predictedthe re-election of the Republican Party in 1992.Politico-economic models have mostly been used to study macroeconomicrelationships. The importance of this analytical tool is that many other schools on 27
    • public policy derive their methodology from the politico-economic models. In fact,most models presented in this chapter fall under the category of ‘new politicaleconomy’, denoting their origins. However, in this thesis the term ‘new politicaleconomy’ has been avoided, as there does not seem to be a precise definition of whatshould be included under this title or not. More precise terms have been used to avoidthis vague and unnecessary classification.2.4 Political Preference FunctionsPolitical Preference Functions (PPF) are popular with agricultural economists. Thismethodology assumes that current policies are a result of past political bargainingprocesses. Policy actions are observable and therefore it is possible to estimate agovernance criterion function through ‘revealed preferences’. Rausser and Freebairn(1974) list the steps necessary to specify and estimate a PPF. First, it is necessary todetermine the relevant variables, such as consumer and producer welfare, budgetexpenditures and foreign influence (e.g. trade). The second step is to find theappropriate mathematical model describing the relationship between the variables.This allows the analyst to perform the next step of estimating the parameters. PPFsenable analysis of economic policies to avoid the use of (unobservable) utilityfunctions. Incomes of individuals are used as a measure of utility and policies areassumed to affect the PPF only by influencing people’s incomes.A problem arises from the use of individuals’ incomes as a proxy of their utility, i.e.in measuring the impact of non-income related policy targets. Gardner (1989) solvesthe problem by aggregating the individuals in interest groups, thus e.g. environmentalbenefits can be valued as an increase in the “income” of environmental groups. Whilethe losers, e.g. farmers, suffer a fall in income because of the costs of complying withthe new regulations. The level of political success by interest groups is measured bythe change in their aggregate “income” brought by a policy change. Gardner does not,however, explain how to measure the environmental benefits for example. He juststresses the need to quantify the value of non-economic objectives.Preferences of individuals and interest groups are assumed to be stable, like the utilityfunctions derived in consumer theory. Gardner (1989) argues that this is a reasonableassumption, policy preferences are generally very stable, in any case not less stable 28
    • than consumer preferences. The model uses convex political indifference (PI) curveswhich describe the welfare or “income” combinations of two groups, which arepolitically equally acceptable. Convexity follows Peltzman’s (1976) argument that thepolitical weight rises, when people’s incomes fall. This has been generally accepted astrue for the agricultural sector, so that as farmers’ incomes fall relative to incomes inother sectors their political weight increases.There is a possible paradox that contradicts Peltzman’s assumptions. If the politicalweight of the interest groups depends on their expenditure in lobbying, then the richerthe group, the stronger its political influence. This could cause concave politicalindifference curves with no internal maximum. Peltzman considers that the resultwould be the unlikely but theoretically possible event of one interest group getting allthe income, i.e. dominate the economy. To avoid this paradox, Peltzman assumed thatthe marginal costs of a policy increase and that marginal income gains decrease whenincomes of the interest group increase. Marginal dead-weight losses rise as aconsequence. These assumptions guarantee the convexity of the PI. Most studies,however, have used linear indifference curves. Baffes and Chambers (1989) havecriticised this approach because it neglects the importance of having second-orderconditions. In any case, the biggest problem lies in determining the PPF. Rausser et al.(1982) complain that the estimation of the policy behaviour equation is largelydetermined by the beliefs of the analyst.2.5 Public Choice“Public Choice can be defined as the economic study of non-market decision-making,or simply the application of economics to political science. The subject matter ofpublic choice is the same as that of political science: the theory of the state, votingrules, voter behaviour, party politics, the bureaucracy and so on. The methodology isthat of economics, however” (Müller, 1979, p.1). The main characteristic of thismethodology is the assumption of rational self-interested individuals who try tomaximise their utility subject to certain constraints.The public choice framework is the most widely used tool used to try to understandthe policy choice in the agricultural sector. The focus on bureaucracy is a basicelement of the public-choice school. The theories had strong influences in setting the 29
    • political agenda in the 1970s and 1980s. The approach originates in the works byDowns (1957 and 1967) Buchanan and Tullock (1962), Tullock (1965) and Niskanen(1971). These state that the characteristic of the modern state is that the bureaucracyhas gained power by serving itself rather than the public. This is one of the mainfocuses of Galbraith (1974), who describes the bureaucracy as a technostructure thatincreases its power by planning the state system for its own purposes. He makescomparisons between the maximising behaviour of firms and the behaviour of thestate as a ‘seller’ of public goods and policies.Downs (1957) wrote the first positive theory of political economy for a democracy.He assumed that agents in the society are rational, that there exists uncertainty andthat information has a price. Politicians make political decisions with the objective ofremaining in power. They need to win votes and therefore need to maximise popularsupport. Voters vote for the politicians they perceive will defend their interests best.The existence of absenteeism and interest groups is explained through the transactioncost of acquiring information. The benefits of voting and being a member of apolitical group have to be higher than the costs, otherwise the voter will not vote.Pressure group formation is a cause of the asymmetries of information. They arebetter informed about voters’ preferences and government policies, thus becoming asort of mediator between the two. Interest groups seek to exploit their informedposition to influence political decisions.Buchanan and Tullock (1962) writings on party competition and its consequences,and the later work by Tullock (1965) on the self-serving nature of bureaucracy in theUS State Department are considered to be the foundations of the public choice school.For Tullock, the analysis of policy-making has to follow the same set of theories asthe behaviour of the firm and consumers. Self-interest, i.e. the maximisation of utility,is the key. The monopolistic position of the state is a market failure that has to besolved by introducing market forces into the bureaucratic process, by contracting out,privatisation and competition among government departments. This debate has beenof great importance since the 1980s. Many countries are adopting the principles ofprivatising state owned utilities and contracting out. 30
    • Downs (1967) offered a more complex set of bureaucratic behaviour laws.Bureaucratic decision-making follows a set of 16 laws in the pursuit of self-interest.The laws derive from the structure and life cycle of a bureau. The size and age of thebureau affects its behaviour. The objective of a bureau is to grow bigger. Niskanen(1971) who applies neo-classical economics to the bureau follows a similar line ofthought. Bureaucrats are interested in maximising their budgets in a similar manner asprofit-maximising firms. The maximisation of their budgets is the only way in whichbureaucrats can maximise their utility. According to Niskanen, the politicians arepressurised to make spending promises. The bureaucrats’ behaviour is rationalbecause of the absence of a way to calculate the returns for extra bureaucratic input. Itis impossible to calculate the difference between marginal costs and marginal revenueto maximise profit as firms do.From these origins, public choice theories developed in different directions searchingfor answers to the relationships between voters, pressure groups and politicians aswell as for the workings of international organisations. An independent bureaucraticschool developed, which is presented in Section The power maximising-politicians, the voters and interest groupsIn a public choice framework, politicians are assumed to want to maximise theirpower and prestige. They all face the re-election constraint in their home countries.For the CAP this assumption is very important, as the final stage of the negotiationson a policy proposal is the approval at the Agricultural Council of the EU. ThisCouncil is composed of the ministers of the member states. As ministers, they areaccountable in their home countries to parliament for their actions, and thus implicitlyunder the scrutiny of the voters. The ministers’ interest is to secure the re-election oftheir party to office. Thus they will be interested in maximising the benefits in thenegotiations for their home country. Hence, they will protect and foster the interests ofthe most influential and powerful domestic pressure groups.Vaubel (1986) uses a public choice framework to analyse the origins of internationalorganisations and in particular of the EC. He presents a new model, in which hepinpoints the importance of the power-maximising behaviour by the politicians, thesignificance of voters and in particular, the lobbies. He argues that the conventional 31
    • theories for the reasons of the existence of international organisations were based onthree pillars that neglected these dimensions. The original pillars are the following:• The international organisation allows reducing the negative international externalities in the form of underproduction of international public goods and the over-exploitation of common resources.• International economies of scale in the production of national public goods would not be exploited in the absence of such an organisation.• International co-operation can improve the benefits for the participants compared with policy decisions in a national game framework. This theory is based on the results of game-theoretic approaches.Vaubel considers that politicians at international negotiations are not completelydependent of the wishes of their voters, as often assumed in the literature oninternational negotiations. National aspects are neglected. Politicians are able andbiased towards pursuing their own interests which are not shared by the voters.Vaubel presents his own model, in which politicians attempt to maximise their utilityby maximising their power through the introduction and implementation of policiesthey favour in the international organisation.Constrained by the need to stay in power in their home countries, politicians areeffectively restricted in their actions by the need of being re-elected. The freedom ofthe politicians in the international organisation is limited further by the rulesgoverning the organisation itself and the binding nature of agreements. Politicians willtherefore only participate in the international organisation if:• it allows them obtain agreements which satisfy him/her personally, or• it helps their party getting re-elected, or• it reduces the cost (in the form of lost votes) of implementing his/her preferred policies domestically. 32
    • International agreements increase the information costs for the voters and thus reducethe unpopular effects of policies as voters lose touch with the decision-makingprocess. Politicians can use the international agreements to draw attention to othermore popular policies, to hide unpopular policies or to disseminate false information.Vaubel builds on these points, in particular claiming that the member countries try toshift the unpleasant and unpopular tasks to the international organisation. The treatiesand the machinery of the organisation are used as ‘policy dustbins’. Vaubel givesexamples in the EC of such a shift of unpleasant policies from the national level to asupranational common policy. The CAP is his preferred example. The controversialand distortive policies such as higher prices, intervention buying, degrading,destroying or dumping the excess output, have been transferred to a supranationallevel. There seems also to be ample evidence in the EU of politicians shifting theblame on EU institutions for such unpopular measures. Blaming ‘Brussels’ for theevils in one’s country has become common throughout Europe.International organisations also introduce various costs that are either none existent orsmaller at the national level. Brooks (1996) claims that voters are generally ignorantof the consequences and causes of agricultural policy. This is in part caused by theinformation costs induced by an international organisation like the EU due to thereduced transparency and the distance of the decision-making institutions. Vaubel alsomentions the information costs for politicians, the multitude of languages and thedistance of the international institutions all affect the policies. Consequently, theseorganisations have more slack in their policies. Brooks (1996) goes as far as to claimthat the lack of transparency created by international agreements and therefore theincrease in information costs, give an incentive to politicians to participate in theorganisations.As for the role of civil servants, international bureaucrats have the same utilityfunctions as national bureaucrats and the international setting of the organisationallows them more freedom in pursuing their interests of maximising power (Vaubel,1986). Applying these theories, Vaubel (1994) makes a critical appraisal of thedifferent approaches in the public choice framework of the integrative process of theEU. Vaubel’s theories are not aimed directly at the CAP, but he used the CAP 33
    • explicitly as an example of his theories. His main interest lies in analysing why thepoliticians of the member states transfer powers to the EU and permit or even promotecentralisation. In his opinion, the problems of the CAP are a combination of the‘policy dustbin’ effect and the economically inefficient distribution of benefits whichhave been fostered by the unanimity principle followed during most of the existenceof the EU. As all governments have the same voting weight under the unanimityprinciple, each member is likely to claim an equal share of benefits regardless of itspopulation size. Thus the per-capita receipts from the budget tend to be largest for thesmaller countries.Vaubel also attempts to explain the situation the effects of QMV. He discusses thevoting power of the members and the importance of the decisive members. Further hediscusses the power of lobbies and their crucial importance. Vaubel claims that theEU suffers from a democratic deficit that increases the power of lobbies atCommunity level. Information costs for individual voters are too high, thus leavingthe policy-making arena to an exclusive club of politicians and lobbyists. Lobbyistsrepresent groups of individual voters, but this does not guarantee that these lobbiesrepresent the views of the majority.However, Garcia Raoul-Jourde (1997) criticises Vaubel’s approach, which assumesthat the EU institutions work like other international organisations, e.g. the UN. InVaubel’s view international organisations consist of bureaucracies, which have astheir only goal the increase in their influence and budget. The Commission would alsoonly be a ‘taker’ of policies, completely dependent on the Council’s preferences. TheCommission should therefore not have any interest in the work it is supposed to do,i.e. protect the interest of the European Union. Garcia Raoul-Jourde’s thesis showsevidence that the Commission is not a pure bureaucracy as Vaubel presents. TheCommission consists of the bureaucratic services and the political structure of theCollege of Commissioners. The link between the Commission and the Member Statesis also closer than in other international organisations. She shows that the goals of theCommission are more complex and do incorporate interests well beyondcentralisation of power and increase in budgets. The Commission has also the powerto influence the decision-making process due to the sole power of initiative in theconception of the proposals for the Council. According to her, the Commission is 34
    • actually a counterweight to the inter-governmentalist structure of the Council andavoids the creation of the ‘junk’ policies Vaubel refers to.This brings us to the issue of lobbies and their influence. The origins of the researchon the importance of lobbies can be traced to Olson (1965), who analyses the powerand formation of lobbies. According to him, smaller lobbies have greater power thanbigger lobbies as the bigger ones suffer from free riding and a lack of a strong set ofcore interests. However, he fails to explain what the optimum size is, and it seems thatthis varies according to the sector. The agricultural lobby has been very influentialdespite its large size. Recently, moreover, the importance of the farmers’ lobbiesseems to be decreasing even though their size has been steadily falling. Olson’s theoryalso does not explain the following paradox: If the government needs to gain amajority of votes to stay in power, it will not be interested in granting favours to asmall group if their views are not well accepted by the general public. On thecontrary, large groups have often a strong influence on the voting patterns. It will bein the interest of the politicians to please the larger lobbies.Olson’s work nevertheless influenced the work of many economists. For example, theeconomists Barro (1973), Peltzman (1976) and Stigler (1971, 1972 and 1974) of theChicago School determined that the politicians do not act for altruistic reasons withthe interest of eliminating negative externalities in the economy. The reasons for theirprotectionist and regulative policy decisions are to be found in the trade of votesbetween the government and the demands by industry. Their work, together with thefindings by the Public Choice School founded by Buchanan and Tullock (1962),paved the way for the rent-seeking theories.The most influential works on the rent-seeking society are Krueger (1974), whodescribes the government as a discriminating monopolist allocating import licences,and Bhagwati (1982) who created the famous DUP term, the Directly UnproductiveProfit-seeking activities. DUP activities by bureaucrats for personal gains createdistortions in the economy. This theory is of great importance for the analysis ofdecision making in countries where corruption is high. 35
    • The outcome of the interest group theories is that lobbies are the cause of inefficientand distortive policies. The lobbies encourage increasing governmental protection atthe cost of taxpayers and consumers, by obtaining from the state a number ofprotectionist policies and subsidies. The harms done by the policies are thensubsequently compensated by other policies instead of removing the cause. ForVaubel (1994) the lobbies are a prime cause for the selection of distortionary policiesin the EU. The democratic deficit incites the lobbies to ‘rent-seeking’. Senior Nello(1984), Andersen and Eliassen (1991), De Gorter and Tsur (1991), Swinnen (1994)and Adshead (1996) (as well as many others) have discussed in detail the importanceof the interest groups in agriculture. Senior Nello’s (1984) application of the publicchoice and pressure groups theories for the CAP concludes that there is a drift toincreased protection for agriculture in individual Member States and at the EU level.However, in the 90s this drift was been attenuated due to the URA. Nevertheless,from 1997 to 1999 the PSE (Producer Subsidy Equivalence) level has increased in theEU and other OECD countries (OECD, 2000).The fact that all Member States of the Union are to a lesser or grater extentbeneficiaries from the agricultural budget makes them also less inclined to seekreforms while more interested to attempt increasing their own benefits at the costs ofother members. The costs of information also play an important role. The benefits of areduction in protection are lower for the individual consumer than the cost ofgathering the necessary knowledge on the technicalities of the CAP to lobby forreforms. This is not so for farmers who would lose proportionately much more fromany reductionist change (Koester, 1978, 135-139; Moyer and Josling, 1990, pp. 8-9;Senior Nello, 1984, p.265).Senior Nello (1984) also uses Hirshman’s (1970) concepts of ‘exit’ and ‘voice’.Farmers have difficulties to ‘exit’ agriculture and many are unwilling to do so. Thisdoes not mean that there has not been a drastic reduction in agricultural employment,but this reduction is not as smooth as in sectors where assets are easily transferred, i.e.skills. The outcome is a ‘sub-optimal’ and difficult exit rate. As Moyer and Josling(1990) point out, the farmers cannot easily shift their fixed capital resources out offarming to more productive endeavours and so are often reluctant to leave the land.These farmers rely heavily on the use of political ‘voice’. This explains why they have 36
    • a strong tendency to group into more homogeneous and efficient lobbies to protecttheir interests. Farm groups can also form successful lobbies more easily than othersocial groups, because they are more homogeneous, and therefore suffer less fromOlson’s (1965) free rider problems.The large farmers generally run farm organisations. Smaller farmers joinorganisations because of the large information costs, which fall considerably throughmembership (Moyer and Josling, 1990). This dominance of the large and wealthierfarm owners can explain why the CAP has been devised in a way that benefitsprimarily large farmers. This follows Downs’ (1957) theories, in that the informationand signalling costs involved in forming and expressing policy preferences are largefor the single individual. Unless the benefits are larger than the costs, the individualfarmer will not participate directly in the political lobbying process. The owners oflarge farms, i.e. rich farmers, have an incentive to lobby and to rally the small farmowners to their cause by making the costs of participating lower and financiallyrewarding. The benefits that can be acquired through the lobbying group are higherthan the costs. The outcome, however, is that the policies lobbied for will be largelyinfluenced by the interests of the richer farmers who obtain higher benefits then thepoorer farmers.Lobbying in the EU also becomes even more important than at national level.Andersen and Eliassen (1991) and Adshead (1996) defend the theory that membershipof the EU reinforces rather than weakens interest groups of the member states.Another approach to explaining the size of the agricultural policies in the EU has beenpresented in De Gorter and Tsur (1991) and Swinnen (1994). Their research shedssome light on the situation of the highly protected agricultural sector in the EU andthe origin of the CAP. The strong increase in protection until the early 1990s is basedon the relationship between voters and politicians. Their models divide voters intointerest groups wishing to maximise values which are important to them asindividuals, while the politicians are interested in maximising the support by voters.Politicians are assumed to try to find the balance between the demands for higherprotection by the agricultural sector and the demands for lower taxes by the generalpopulation. Voters and politicians are assumed to be rational and fully informed. The 37
    • models are based on a model of a two sector economy, agriculture and manufacturing.The individuals in the economy have identical preferences and maximise their indirectutility functions. It is assumed that each sector has identical individuals with a ‘pre-policy endowment’ income. Income transfers are possible between the two sectorsusing redistributive policies which represent the total size of the income transfer fromindustry to agriculture. Swinnen deduces that “agricultural protection will increase ifagricultural income falls relative to income outside agriculture” (p.4), that “anincrease in industrial employment and/or a decrease in agricultural employment willincrease agricultural protection (...)” (p.5) and that the share of income spent on foodis negatively correlated with the production subsidy, i.e. the richer the consumers theeasier it is to ask them to pay for subsidies to agriculture. The model does not explainthe developments at the supranational level, but does present an explanation forMember States having a preference for high protection in the agricultural sector. Itcan also explain why the UK is less protectionist than France or Germany. Theaverage incomes from farmers compared with incomes in other sectors are lessfavourable in these two countries than in the UK. However, it can hardly explain theposition of countries like Denmark, which have farm incomes higher than or equal tothe average incomes in the economy (Hill, 1996).In a later article, Swinnen (1995) argues that the decision-making system for the CAPfosters the status quo. According to him, only “minimal damage” reforms have beendone until now, and everything indicates that this will continue to be so in the future.There is no incentive for politicians to press for substantial changes, as these wouldstill be against their political interests at home. He argues that there is no pressure onthe politicians to push for reform. The agricultural lobbies will push for thepreservation of the CAP, and there is no counterbalancing pressure by similarly sizedinterest groups by consumers or taxpayers in the member states to take a differentstance. Reforms will therefore follow the road of ‘minimal changes’ under budgetaryconsiderations and will only reflect partially environmental and social concerns thatinterest some other pressure groups. Swinnen therefore predicts only changes thatnarrowly allow the EU to keep its agreements in the Uruguay Round and to admit theCEECs to the EU. 38
    • The public choice school in all its different analytical forms can give importantinsights on the influence of different groups on the choice of policies. It can givecoherent explanations of the reasons for the CAP being particularly protectionist andwhy the agricultural lobbies are able to obtain political concessions. However, thearguments fail to address a whole dimension in the political process. In particular, theinstitutional setting of decision-making is neglected. The rules under which decisionsare taken seem to affect the outcome considerably as well as the strength of theinfluence of lobbies. To limit the explanation to a relationship between voters, lobbiesand politicians on the basis of income relationships (Swinnen, 1994), size of lobbies(Olson, 1962) or the information costs in an international setting (Vaubel, 1986) failsto explain the distortions caused by the decision-making procedures such as QMV inthe EU. This also does not allow the models to give any precise reasons for themagnitude of CAP protection.2.6 BureaucracyWhile public choice further developed into the relationship between politicians, votersand lobbies, another branch of research continued concentrating deeper into theworkings of bureaucratic structures and their efficiency. While public choice theoriesdiscuss the reasons for politicians to favour or not certain policies or other ones, thebureaucratic models concentrate on the intermediate stage, the relationship betweenthe politician and the bureaux in charge of implementing policies.Niskanen (1971) was the pioneer of the bureaucratic framework. Bureaucrats canaffect the level of expenditure given their power to manage funds. Bureaucratictheories are important for the implementation stages of policies, these probably havethe potential to clarify some aspects of the decisions taken by the EuropeanCommission. However, the literature on bureaucratic behaviour is scarce. Most of thetheories are based on the assumptions that the bureaucracy wants to increase thebudget in one way or another (Migué and Berlanger, 1974; Aubin et al., 1987).However, the movements of privatisation in Britain and the USA in the 1980scontradict this.Dunleavy (1986 and 1991) shows in his bureau-shaping model that the budget and thetypes of bureaucrat and differences in power are much more complex than the theories 39
    • based on Niskanen (1971). Senior bureaucrats are more interested in shaping theirdepartments and budgets to get advancement. Their bureaux therefore suffered from areshaping following the interests of politicians and the trends in the successful areasof the business sector. Contracting out and privatising was a power maximising moveby the top civil servants at the expense of the rank and file: “Rational officials want towork in small, élite, collegial bureaux close to political power centres. They do notwant to head up heavily staffed, large budget but routine, conflictual and low-statusagencies” (Dunleavy, 1991, p.202).2.6.1 Organisational process and bureaucratic politicsThe ‘organisational process’ and ‘bureaucratic politics’ models presented by Allison(1971) can also shed some light into policy decision-making. He relaxes theassumptions of neo-classical models on maximisation and perfect information andintroduces the concepts of processes at the organisational level as well as bureaucraticconsiderations. Organisations deal according to inflexible rules and proceduralchanges are difficult, thus in Allison’s models, the actors do not search to find asolution that maximises their utility, but which satisfies their minimum requirements.They will stop when they find a solution that is good enough. He argues that the morecomplicated and decentralised and the larger the number of actors in a bargainingprocess, the higher the bargaining costs of any change. These facts create, followinghis assumptions, a strong bias towards maintaining the status quo in large decision-making institutions.One of the most relevant factors that emerges from his analysis is the importance ofpower by the actors at the negotiating table, considering their ability to find like-minded members. The previous decisions of the decision-making body are importantto understand what it will do in the future. According to Allison, the past record setsthe future constraints.Organisations tend to act on the basis of standard procedures and rules. Allisonintroduces an interesting theory, the government politics paradigm (Allison, 1971, Ch.5). This paradigm focuses on the bargaining process among players in positions. Thebargaining stance of each player depends on his or her role and interests. The political 40
    • decision is the outcome of the bargaining. Different actors are likely to have differentperceptions of the problem, what is at stake, and the feasible options. However, theywill adapt their perceptions and demands to the bargaining process. Acceptability of apolicy becomes the most important criterion and the players will not maximise theirinterests. Given these circumstances, knowing the rules and procedures of thebargaining process is important. Another important factor is the need to build winningcoalitions. To build such a coalition, and because the preferences of different playersare seldom identical, the player that actively seeks to form a coalition will have toaccept the need to make compromises or side payments for other players who join.What is clearly crystallised from Allison’s work is the fact that the institutionalframework has an important impact on the type of policies that are decided in theprocess. For the EU, this would mean that the bargaining process itself affects theoutcome.Recent research on bureaucracy and organisational choice can be found in the thesisby Garcia Raoul-Jourde (1997) on the European Commission’s role in policy choicesfor agriculture. She describes the policy process for agriculture from the moment theEuropean Commission initiates the process of putting together a proposal to themoment it is voted in the Council. She shows how the organisational structure of theCommission and the different stages in the process to define it, influence thepreferences of the Member states in the Council. By carefully designing policypackages which attempt to balance the interests of member states and by linkingparticular issues to overall policy packages, the Commission is able to ensure enoughsupport for proposals which would otherwise fail to pass the Council.Interestingly, she finds evidence that the combined political and bureaucratic structureof the Commission preserves the EU from the more narrow-minded interests of theCouncil’s inter-governmentalist structure. Nevertheless, Garcia Raoul-Jourde is notcomplacent. The system has loopholes, and the College of Commissioners, whichrepresents the political arm of the Commission, faces problems in agreeing on policiesand is often influenced by the link the Commissioners often have with their country oforigin. The pressures to incorporate national priorities into the policy formulationstage are strong and the Commission is under constant pressure to conform to theinter-governmental model of decision-making. 41
    • 2.7 Political MarketAccording to Magee et al. (1989) there is a political market that operates in a similarmanner to an economic market. In this market, policies take the role of prices. Interestgroups spend resources to gain political influence until the marginal gains equal themarginal costs of lobbying. Politicians will similarly redistribute welfare in theeconomy in favour of interest groups, until the marginal loss of support by the taxedequals the marginal gains in support from the beneficiaries. The market is inequilibrium when these two points are reached.The political process chosen by Magee et al. to find the equilibrium is divided intothree levels, political parties, interest groups and voters. The political parties behaveas Stackelberg leaders towards interest groups and voters, the former in their turnbehave as Stackelberg leaders towards the voters1. For Magee et al. the politicalmarket is perfectly competitive, i.e. if a party in power fails to deliver the policieswanted by the pressure groups it will be replaced. This forces the government tointroduce distortionary policies in favour of the interest groups.There are problems in these theories. The perfect competition assumption isquestionable. Furthermore, supply and demand for policies have to be independent tofollow the micro-economic theory of markets. The Stackelberg leader theory violatesthis rule. Politicians (suppliers) are Stackelberg leaders for the interest groups andvoters (demand). Furthermore, this analytical tool does not take into account thedecision-making institutions and their influence.2.8 Partisan Mutual AdjustmentThis approach originates from Lindblom (1959, 1965) and Baybrooke and Lindblom(1963). Partisan mutual adjustment model analyses policy decisions reached underbargaining and consensus building. The model arrives to the conclusion that thebargaining process will be more successful and efficient than policy decisions under acomprehensive cost-benefit analysis (CBA). The reasons are that CBA tends to failfor complex situations where there is no agreement on the objectives. There are1 The Stackelberg model originates from the Cournot oligopoly model. Contrary to Cournot’sassumption that each firm reacts to the price decisions taken by the other firms, Stackelberg analysesthe case of a firm knowing the reaction curves of its competitors (for a summary of the models seeNicholson, 1992). 42
    • problems with the selection of variables. This means that there is no perfectinformation available.Partisan mutual adjustment allows for a dialogue permitting a consensus on the meansand the objectives of policies. As different people with different perceptions andknowledge participate, it allows them to find a better solution. It reduces the influenceof special interest, and the process will reflect better the wider interest of the public.This gives the outcome a higher degree of legitimacy, maybe with a sacrifice ineconomic efficiency.However, Moyer and Josling (1990) question the optimism of the partisan mutualadjustment theory. Bargaining has high costs and encourages the status quo, and it iseasy for players to avoid change by preventing the reaching of consensus. When theinstitution is a legislative body of politicians, the players are often more interested intaking a visible position (i.e. populism) and get themselves noticed than they have inseeking the development of effective policies. For the EU’s Council this would meanthat the ministers are more interested in publicity for their domestic constituency (seealso Vaubel, 1994). Reforms and changes only come at times of acute crisis and theforced response is often less than optimal and incremental, i.e. a new policy is addedinstead of abolishing damaging policies already in place.Scharpf (1988) also questions the partisan mutual adjustment. The bargaining processin the EU is just this: bargaining. There is no real interest in problem-solving: theplayers’ objective is to reap the highest benefits for their own constituency. Thepolicy target becomes secondary. Scharpf (1988) notes that “ (...) unanimity andPareto optimality (...) seem to be restricted to single-shot decisions. In ongoingdecision-making systems, by contrast, unanimity is likely to be associated with asystematic deterioration of the ‘goodness of fit’ between public policy and relevantpolicy environments - unless there should be very powerful mechanism of consensusformation” (p.257). The mechanisms of consensus formation among independentsovereign nations, with an interest in showing as much as possible their influence inthe Council, are certainly of varying strength. The long history of unsolved issues inthe EC is a proof of the lack of consensus building mechanisms. Fennell (1997), whoclaims that the objectives of the CAP are often forgotten by the decision-makers 43
    • provides further support of this idea. Under a properly functioning system, such adevelopment should not have happened.2.9 Institutional ApproachWhat is particularly clear from the bureaucratic models of Allison (1971), is thatwhile all other socio-economic factors have an important influence, the decision-making outcome is strongly affected by the institutional setting. The failure to do so inthe public choice literature has already been mentioned. Three analytical frameworkson the influence of the institutional setting will be presented:• Functionalism• Economic institutionalism• Political institutionalism2.9.1 FunctionalismThe concern of the developers of this framework was to go beyond the formalstructures of institutions and examine how these work in practice, abandoning theideal rational actor assumptions. The approach is very empirical, and Parsons (1995)remarks on its simplistic language and the use of case studies, contrary to thetheoretical model building that constitutes most of the economic approaches to policyanalysis. It prefers the use of historical approaches to case studies and focuses onactual public institutions rather than on theories of the ‘firm’ or the ‘bureau’.The origins of this framework can be traced to Selznick (1948, 1949, and 1957).According to this author, organisations adapt to their external environment to survive,rather than existing solely for the pursuit of some objectives. This creates a tensionbetween the ‘rational’ formal goals of an organisation and the need to maintain thesystem which is often not ‘rational’ or consistent with these goals. Apart from theexternal environment, organisations encounter problems from within. The individualswithin the organisations have their own personal objectives and problems. This candisrupt or alter the type of decisions actually taken at the end. Decision-making maybe driven by an inner logic created by the values and interests of its members ratherthan by rational calculation. 44
    • A weakness of Selznick’s approach is that the possibility of the organisation to shapeits environment and to structure the goals of its individuals is neglected. He considersthat organisations are helplessly confronted by external and internal reality, whereasthe institutions themselves can affect their environment (see Garcia Raul-Jourde(1997) on the capacity of the European Commission to shape its position.2.9.2 Economic InstitutionalismEconomic institutionalism goes back to the foundations of the theory of firms and hasconnotations of the management theories introduced by Taylor (1911). The basicassumption is again the attempt by individuals to maximise their own utility.Economic institutionalism discusses the role of the institutions in controlling andmonitoring the behaviour of the economy to counteract market failures andimperfections caused by uncertainty and asymmetric information. There are two mainschools of thought emerging from this analytical framework, transaction costeconomics and principal-agent theory. Transaction Cost Economics (TCE)TCE introduces to the neo-classical model the costs of transactions. These werepreviously neglected given the assumptions of perfect competition and perfectinformation. Williamson (1975, 1979) developed a theory of how firms grow and howthese face and solve the cost of transactions caused by the following: uncertainty;limited bargaining possibilities caused by the dependence with other firms, workersand customers; bounded rationality (i.e. imperfect information); and opportunism (i.e.asymmetric information, adverse selection and moral hazard). The firm will tend togrow to lower its transaction costs. It will expand to avoid having to deal withexternal suppliers and contractual forces by producing in its own organisation thegoods and services previously contracted outside.The obvious objection to this theory is that recent trends of contracting out servicescontradict these findings. Williamson further assumes that internal transaction costsare lower than external ones. This also seems to be contradicted by facts, especially inthe public sector. The public sector in the USA and UK has been privatising utilities,because their internalisation was causing severe transaction costs. The same ishappening to large companies under the theory that contracting out creates 45
    • competition between the providers, thus lowering costs. These trends are betterexplained by the principal-agent theory. Principal-Agent theoryThis theory emerged in the early 1980s and is strongly related to TCE. The mainproponents are Alchian and Demetz (1972), Fama (1980) and Stiglitz (1987). Thistheory focuses on the problems in the relationships between the principals(purchasers), contracts and agents (providers). These problems are the same as theones outlined in the transaction cost theory. What this framework offers for decision-making is a theory on the choices of institutions - markets of hierarchies - so that thecosts of monitoring can be held down.Parsons (1995) gives an example to explain the divergence between TCE andprincipal-agent theories. If the government is introducing a policy needingimplementation agencies, they could choose to follow the TCE theory and create agovernment agency to cut the transaction costs caused by the need of monitoringoutside agents. However, if they follow the principal-agent logic then the governmentcould well decide to use an outside agency. By using short-term contracts that awardthe principal (i.e. the government) with the ability to control the agents and toterminate the contract in case these do not deliver the proper services, the transactioncosts can reduced. The competitive forces between the suppliers cause this reduction,i.e. forces that are absent in internalised bodies. An important point in the principal-agent theory is that the type of institutional arrangement chosen affects the policychoice (Garcia Raul-Jourde, 1997).2.9.3 Political InstitutionalismThis framework moves away from the public choice school in which the state decidespolicies according to ‘exogenous’ pressures. The state has here often the leading role,and policies are the outcome of the internal agenda of state institutions. Skocpol(1985) created the term ‘political institutionalism’. He was concerned with the factthat the state has the capacity to be insulated from social and economic forces inliberal democratic states as well as in developing countries. Skocpol shows how inFrance, Britain, Sweden and the USA, the institutions and the civil servants haveformulated important policy areas. 46
    • Earlier work using this method can be found in the following three texts: Heclo(1974) uses this methodology on the analysis on social policies for Britain andSweden, Krasner (1978) on US foreign policy and Skocpol and Finegold (1982) onthe American agricultural policy of the New Deal. This approach does not seemappropriate for the decision-making process of the EU. According to most research onCAP decision-making, farmers’ lobbies have strongly influenced policy choices.2.10 Functionalism and Neo-functionalismThe origins of functionalism can be traced to Mitrani, an analyst of the early 1930s.This approach is a theory of regional integration and should not be confused with thefunctionalism presented in Section 2.9.1. He developed a theoretical model of theerosion of national sovereignty through the delegation of powers to supranationalbodies. Mitrani was not considering the elimination of national states, he evenopposed this, but favoured the creation of an irreversible interdependence of nationswith the adoption of common policies in some areas. This would reduce and possiblyeliminate military conflicts among the states. It is in recognition of the work byMitrani that the US academic theory of Western European integration is known asneo-functionalism.George (1985) offers a good explanation of the ideas of neo-functionalism andcompares the theory with the actual developments in the EU. Moravcsik (1993), in hisappraisal and critique of this framework, considers neo-functionalism the mostcomprehensive and sophisticated attempt to provide a general theory of Europeanintegration. It was developed and refined between 1955 and 1975 and the majorexponents of this school are Haas (1958), Lindberg (1963), Nye (1968) and Lindbergand Scheingold (1970).The neo-functionalist approach predicted that integration would be self-sustaining,whereby initial steps towards integration would trigger endogenous economic andpolitical dynamics leading to further co-operation. This phenomenon was labelled‘spillover’, i.e. previous commitments by the governments cause impacts in othersectors that force them to co-operate further. There are two sorts of spillover, thefunctional spillover and the political spillover. The former occurs when incompleteintegration undermines the effectiveness of existing policies, in integrated and related 47
    • areas. Haas (1976) describes the intermediate state between integration andsovereignty as unstable given these factors. Without a continuous strengthening ofpolicy co-ordination, the European Union would fail to cope with the modern natureof economic interlinkages between sectors, and would lose its legitimacy. The latterspillover occurs when the existence of a supranational body creates a self-reinforcingmotion of institution-building. For the EU this body is represented by theCommission, the Court of Justice and the EP.The problem of this theory lies in the prediction of a ‘gradual’, ‘incremental’ and‘automatic’ progression towards integration (Haas, 1964, 1967, 1976). This has nothappened, e.g. when the EC suffered a prolonged period of stagnation, often referredas ‘Eurosclerosis’. Even one of the strongest advocates of neo-functionalism, Haas,accepted this fact (Haas, 1975). Moravcsik (1993), nevertheless, did not consider thisas the main weakness. According to him the problem lies in the lack of a cleartheoretical core. Researchers using the neo-functionalist framework included so manydifferent aspects that by the end of the 1960s almost any process of decision-makingamong democratic states was consistent with the theory (Lindberg and Scheingold,1971; Moravcsik, 1993).In particular, the theory lacked the more specific tools that would identify thepoliticians’ choices or the nature and interest of other social actors. Policy preferencesof the member states do not play any important role in the process of integration. Theanalysis suffered from being apolitical and was too much based on generalisations(Moravcsik, 1993).The recent successes of the EU in moving towards integration, e.g. the SingleEuropean Act and the Maastrich Treaty, has induced researchers to resurrect the neo-functionalist approaches, in particular because of several unintended (by the memberstates) developments that transfer political power to bodies like the Commission andthe EP (Ross, 1992; Peterson and Bomberg, 1993; Sandholz, 1992; Pederson, 1992).Moravcsik (1993) warns, however, that this new research still does not address theweaknesses of the approach that neo-functionalists themselves discovered twodecades earlier. 48
    • An example of a weakness of the approach given by Moravscik directly relates to theCAP. Neo-functionalists emphasise the Commission’s success in creating a policyformally under the control of the European Community. The researchers, however,overlooked the down-side of this for the Commission. The Council did not accept theoriginal and substantially different Commission’s proposal for a self-financing,limited and low-price regime.Another possible criticism of neo-functionalism that Moravscik does not address isthe problem related to the type of policies that have been transferred to the EC.According to Vaubel (1986) the CAP has been a sort of ‘policy dustbin’. TheEuropean institutions have been used to take off the shoulders of the nationalgovernments the difficult task of managing and justifying a very costly, wasteful anddistortionary policy. The neo-functionalists also neglected the motivations for co-operation, which may be very important to understand the style and speed ofintegration.2.10.1 Liberal inter-governamentalismThis approach is presented by Moravscik (1993) as a response to the weaknesses ofthe neo-functionalist framework. The liberal inter-governamentalist approachproposes to analyse the development of policy-making in the EU as a ‘two-levelgame’, i.e. there are two stages in decision-making. The first stage is at national level.National preferences are constrained by the limits and opportunities imposed by thedomestic political and economic situation and the interdependence with the othermembers of the Union. The preferences can be calculated through the analysis of thenet economic interests by producers and the popular demand for public goods. Thepreferences explain the extent to which governments will be ready to compromise. Atthe second, supranational, stage, the outcomes of negotiations between the MembersStates are determined by their relative bargaining power and the functional incentivesfor institutionalisation created by high transaction costs and the desire to controldomestic agendas.Moravscik considers that on a theoretical level negotiations in the EU do not needspecial theories as neo-functionalists have claimed. The theories of internationalpolitical economy, negotiation analysis, and regime theory are enough. The EU 49
    • institutions can be explained by an extended regime theory which predicts the creationof international agreements through the increase in efficiency provided by thesupranational institutions.Vaubel (1986, 1994) also points this out. Supranational institutions provide a set ofpassive transactions cost-reducing set of rules. However, the theories need extension,as the original ones do not take into account the pooling of sovereignty. Moravscik(1993) provides this extension; the delegation of authority and the provision ofqualified majority as a measure to increase the efficiency of decision-making willoccur when the costs of not reaching an agreement outweigh the benefits. The theorieshe presents give a very plausible account for the developments in the Union. Theseare also able to explain why in some areas compromise is possible, while in otherareas log-rolling or solutions reaching only the lowest common denominator are thepossible outcomes.2.11 Dynamic policy-making approachFor agricultural policy analysis in the EC, the most important representatives of thisapproach to policy analysis are Petit (1985) and Moyer and Josling (1990). Petit’s(1985) work is concerned with the policy formation mechanism and was applied inPetit et al. (1987) to analyse the formation of the milk quotas in the EC. Thehypothesis presented is that the policy formation process can be explained in the shortrun by the behaviour of the actors involved in the process. The policy decisionsaccording to this approach come from a political bargaining process at a certain periodof time (t). The bargaining process is shaped by the state of economic interests andthat of the institutions at that time (t). To perform an analysis of the interaction of theactors in the policy formation process, it is necessary to create an hypothesis about thebehaviour of each individual actor and on the type of interactions between the actors.Furthermore, it is assumed that the actors are all pursuing individual goals. The policyprocess is divided for the EU in two, the national level and the Council level.Moyer and Josling (1990) present a number of criticisms on this approach. Inparticular it fails to incorporate some important determinants of policy choice, inparticular past policy decisions. Other loopholes are the failure to incorporate theinfluence of economic shocks, the downplaying of outside pressure by public opinion 50
    • and the work of lobbies as well as the general political environment. Moyer andJosling (1990) build their analysis on the policy process in the EU and the USA on amodified version of the dynamic policy process and incorporate the missing elementsin Petit’s (1985) approach.The work presented in the works by Petit (1985), Petit et al. (1987) and Moyer andJosling (1990) are very important for the research that will be presented here. Theiranalysis of preferences of the actors and the outcomes of negotiations can be used tohelp to understand the preferences of the member states as well as to test thepredictions by the new model presented here on the outcome of negotiations. Theweakness of both analyses is the lack of the determination of magnitudes. Theapproach is historical and descriptive, and outlines the political reasons for outcomesbeing more or less reformist. The influence of the institutions on policy decisions aswell as the relationship between the output of the negotiation and the policypreferences of the actors is not clearly described. There is no quantitative measure onhow the outcome could have changed or by how much, if the decision-making ruleswere changed.2.12 Game TheoryThe modern theory of games traces its origins to the 1944 book by Von Neumann andMorgenstern, Theory of Games and Economic Behaviour. Their idea was to findsimple models of the strategic environment in which actors operate. Game theoryseeks to explore how people make decisions if their actions depend on the actions ofothers (Ordeshook, 1986, p. XII). Each individual decision-maker has a set ofpreferences, and game theory summarises the policy alternatives into a single number.The theory states that the decision-maker will select from the different alternatives theone that maximises the expected value of his utility function. The expected utilitytheory that emerged as a solution to the need to value quantitatively differentalternatives has had an enormous impact on economic theory.The concepts of game theory have been widely used in attempts to explain policychoice. However, the use of an explicit game theoretic model to analyse policychoice, in particular for the EU, is rare. The reason behind such a lack of gametheoretic models lies in the requirements demanded by such an approach. Binmore 51
    • (1992) enumerates these requirements. Players are assumed to be rational, the gamemust be simple, the players must have played the game many times and have had theopportunity for trial-and-error learning, and the incentives for playing are adequate.Furthermore, the preferences by the players must be perfectly determined as well asthe rules of the game, i.e. the institutional setting.For the analysis of policy decisions in the EU, the information needs are too high for apure game theoretic approach. The EU’s bargaining process is too complex, and astrict game theoretic approach is not feasible, or would oversimplify the process.There have nevertheless been attempts by game theorists to analyse the decision-making process of the EU. A remarkable attempt comes from the application of powerindexes developed by Shapley (1953), Shapley and Shubik (1954) and Banzhaf(1965).2.12.1 The Power Index Analysis for the EUThe power index models by Shapley and Shubik (1954) and Banzhaf (1964) havebeen adapted by Widgren (1993, 1994a, 1994b, 1994c, 1995a, 1995b), Kirman andWidgren (1995) and Hosli (1993, 1996) to try to understand the how policies for theEU are decided upon in the Council. Even though these are considered game theoreticmodels the analysis done until now falls short of Binmore’s (1992) requirementsnecessary to perform game theoretical analysis as well as the precise solutionsexpected from such an approach. The insights gained from this research give theimpression of being the first stages of the development of a game. The lack ofcomplete (or even partial) information about EU members’ preferences, and theeffects of issue linkages, constrain the model’s predictive power considerably, givingvague indications about results. The main insight gained from these models is the waythe voting rules affect the relative power of the EU member states at the negotiatingtable.Thus Shapley and Shubik had the idea of creating a formula to approximate the votingpower (influence over the outcome) for any number of n voters. The Shapley-Shubikindex is based on the calculation of the voting power of the members in a bargaininggame. This voting power represents the percentage of times each member can bepivotal in a coalition, i.e. can turn a losing into a winning coalition. This simple 52
    • calculation grows in complexity as the number of voters grows. For the EU-15 withn=15, the number of possible country combinations is of the order 1012 (Hosli, 1996).The Shapley-Shubik index provides a preference-free analysis in that the members donot particularly prefer one policy to another or belong to pre-set coalitions. This is,however, often not the case in negotiations. In the EU, for example, there arecountries that have similar interests and that often create coalitions, even before thediscussions start. Sweden is more likely to create a coalition with Finland andDenmark than with Spain. Often countries prepare joint strategies prior to thenegotiation at the Council. To be able to introduce this type of consideration into themodel is crucial. Another consideration is the need to incorporate defacto votingprocedures. As Hayes-Renshaw and Wallace (1997) warn, the set of formal rules forvoting is not the same as the actual practice of voting in the Council.In the history of the European Council, formal voting has indeed been rare andconsensus has been sought very often regardless of the voting rules. “Irrespective ofthe voting rules, the reflex within the Council has mostly been to operate byconsensus” (ibid., p.18). This gives every country an implicit veto power. However,since the Iberian enlargement and the Single European Act (SEA), QMV voting isbecoming more important and will grow further in importance as the Union expands.Hosli adapted the Shapley-Shubik model to the EU and calculated for the Council ofthe EU the voting power of the Member States in different periods. She compares thenumber of votes to the voting power of countries. In the case that members voteindependently from each other, and there is no factor beyond the number of votes toinfluence the bargaining process. The indexes are shown in Table 2.1. These figuresrepresent the distribution of power when voting for a policy, when there are no knownpreferences before the decision. In this situation the rules set on voting are alsosupposed to work in practice, so that no member has power beyond its mere numberof votes. Thus e.g. Germany and Britain have the same influence on decisions.The Shapley-Shubik indices describe the percentage of voting orders (times) amember can turn a losing coalition into a winning coalition. The table just explainsthat in all possible combinations of votes a country able to turn a losing to a winning 53
    • coalition a certain percentage of times. For example, from 1995, under QMV, Britaincan turn a losing coalition into a winning coalition in 11,67 % of all possible votingorders. This is every time a coalition, not including Britain already, of course, needsfrom 1 to 10 votes more to ‘win’.This is a simplistic view of the power of MS in the Council and most people, lay aswell as expert would, with reason, look at it sceptically. However, even this simplisticanalysis gives some interesting, though not surprising, results. As the EC hasexpanded, the voting power of its bigger members has decreased. The magnitude ofthis drop is considerable, with Germany and France losing more than half theirbargaining power in Qualified Majority Voting (QMV).Table 2. 1 The Shapley-Shubik Power Index for Qualified Majority Votes inthe Council of MinistersTime Period 1958-73 1973-81 1981-85 1986-95 Since 1995Member StatesAustria - - - - 4.54Belgium 15 8.1 7.14 6.37 5.52Denmark - 5.71 3.02 4.26 3.53Finland - - - - 3.53France 23.33 17.86 17.38 13.42 11.67Germany 23.33 17.86 17.38 13.42 11.67Greece - - 7.14 6.37 5.52Ireland - 5.71 3.02 4.26 3.53Italy 23.33 17.86 17.38 13.42 11.67Luxembourg 0 0.95 3.02 1.18 2.07Netherlands 15 8.1 7.14 6.37 5.52Portugal - - - 6.37 5.52Spain - - - 11.13 9.55Sweden - - - - 4.54United - 17.86 17.38 13.42 11.67KingdomSum 100 100 100 100 100Source: Hosli (1996). Table 2, p. 265However, for some countries the situation is reversed. For Luxembourg for example,the increase in the number of members has raised its voting power, because it canmore often be the pivotal member. While in the EEC-6 its vote was irrelevant, since1995 it could turn a losing into a winning coalition in 2.07% of combinations, in the 54
    • EEC-10 its power was at maximum with a 3.02%. For the bigger members power hascollapsed.Hayes-Renshaw and Wallace (1997) mention the disproportionate high leverage that‘small’ players may exercise. Widgren (1993) shows the importance of smallcountries for blocking minorities in her analysis of the voting power of Scandinaviancountries if all had joined the EU-12. This is caused by their crucial role in tipping thebalance between a winning and a losing coalition.Hosli (1996) expanded the analysis by assuming that there are some solid blocks, i.e.predetermined coalitions. In this case their votes are summed together. As a coalition,the percentage of times it can turn a loosing into a winning coalition is higher than thepower of its members individually. These a priori blocks are the Benelux countries,the ‘Paris-Bonn axis’, the ‘south’ (including Ireland, but excluding Italy) and the‘Nordics’ (since 1995). The ‘south’ is often referred to in the literature as the‘cohesion countries’. Table 2.2 shows these results.Table 2. 2 The Shapley-Shubik index for a priori voting alliances within theCouncil of the EUTime Period 1958-73 1973-81 1981-85 1986-95 SinceCoalition/Members 1995Benelux 16.67 18.33 17.38 11.67 14.52(B, Lux, NL)‘Axis Paris-Bonn’ 66.67 48.33 45.71 26.67 24.52(D,F)‘South’ - - - 26.67 24.52(GR,E,Irl,P)‘Nordics’ - - - - 11.19(DK,F,S)Other members G(4.05) A(2.86) Irl (1.67) Irl(2.38) DK(1.67) DK(2.38) DK(11.67) I(16.67) I(15) I(14.05) I(11.67) I(11.19) UK(15) UK(14.05) UK(11.67) UK(11.19)Source: Hosli (1996), Table 3, p. 266The table suggests that the ‘Axis Paris-Bonn’ as an a priori union has lostconsiderable relative voting power. The entrance of new members has not the Beneluxcountries affected in the same way. Their relative power under the QMV even 55
    • increased with the accession of new countries in the 1973-81 period and the lastenlargement of 1995. This is caused by the greater need by the ‘Axis Paris-Bonn’ andthe ‘South’ for more coalition partners, the Benelux countries becoming more oftenthe pivotal coalition member.Hosli proceeds to show how the influence on decision-making by the member states isaffected by defacto alterations in the voting rules, i.e. the actual practice of votingbeyond the official rules. Defacto veto power has been often possessed by France andGermany. No proposals were approved that would be against their interest, regardlessof the fact that a qualified majority could in theory have overridden their opposition.This fact has greatly altered the balance of power in the Council of Ministers andaffected the shape and objectives of the outcome of negotiations.Hosli further demonstrated that it is possible to assign on the basis of empiricalanalysis an a priori probability p to the formation of the respective ‘voting block’.Hosli’s paper is limited to describing the use of the Shapley-Shubik index withoutshowing examples of how these power balances have affected decisions in the past.Widgren (1995a) and Kirman and Widgren (1995) have attempted to explain policydecisions in areas of trade policy and social regulation. Unfortunately the theory isweak in explaining the bargaining process and in assigning policy preferences for themember states. The preferences of the members are very crude and there is little aboutthe precise outcome of the negotiations or the bargaining among alternatives. Theproposed packages of policies are not discussed in detail and the authors just indicatethat the final outcome would more or less protectionist or social under theirassumptions. As far as the author knows, no publication on these indexes which dealsin particular with decisions on agricultural policy.2.13 Searching for the appropriate tools for the analysisThe principal aim of this thesis is to understand the extent to which and how themechanism of decision-making in the Agricultural Council affects the policyoutcomes. Two methodologies have been selected; a political-economy approach,more precisely the dynamic policy approach (see section 2.11), and a mathematicalmodel derived from the game-theoretic models of voting power indexes. 56
    • These very contrasting methodologies complement each other out. The results of thegame-theoretic model reinforce the dynamic policy model, based on the analysis ofactual events and vice-versa.The game-theoretic model has been adapted for the purposes of this research, tocalculate the extent to which different voting rules enhance or restrict the area ofcompromise. That the area of compromise is smaller under unanimity than underQMV is obvious; the question is by how much. If also the defacto voting rules areobserved to be different from the formal rules, then the model also has the capacity tocalculate the implications of such behaviour.The dynamic policy model will follow the system used by Petit (1985) and Moyer andJosling (1990). It interprets the initial preferences of the member states givenhistorical behaviour and the political and agricultural situation in the countries, andthen follows the development of the bargaining process during the negotiations.Empirical analysis will be conducted using the example of the Agenda 2000negotiations. Combining this with knowledge of preferences and the voting systemshould clarify the influence of the voting system on the final outcome.These two approaches are independent and provide insights to the decision-makingprocess by themselves. Their combined power should be able to reveal a fuller pictureof the implications of the Council’s voting methods on agricultural policy. Of course,the opposite may also be true, in that the mathematical model fails to confirm theactual developments in the negotiations as described by the dynamic policy analysis.In this case it would cast a shadow over the validity of the voting power studies bygame theorists which form the mathematical foundations of the model. 57
    • Chapter 3. The performance of the CAP from 1958 to 1998 “(...) Most important, however, the centrepiece of European economic integration, the Common Agricultural Policy, is now almost universally considered a grandiose failure”. (Scharpf, 1988, p. 241)It is widely believed by academic researchers that the CAP is inefficient. Thisinefficiency is usually attributed to the Member States’ protective interests towardsagriculture and to inappropriate decision-making rules at EU level. The general viewis that the CAP has developed to be an inflexible agricultural policy unable to react tothe changing economic environment. Allegedly, this has had the effect, over time, ofincreasing market distortions in the agrarian sector, as well as creating new problems.This chapter will review the literature on the history of the CAP to find the distortionsin the sector and to assess if these can be attributed to the inefficiency of the EUinstitutions.3.1 CAP developmentsAt the time when the Common Agricultural Policy was formulated in 1958, theagricultural sector was suffering from low productivity and an insecure food supply.The CAP was therefore conceived mainly to tackle these problems. The use of pricesupport mechanisms was at the time rational (Rieger, 1996; Barnes and Barnes, 1995;Tracy, 1989). The members of the EEC-6 underestimated the possibility ofoverproduction, despite the warnings by Commissioner Mansholt. He foresaw thisoverproduction just as he was presiding over the policy developments which made itinevitable. As a result, the CAP was created based on wrong assumptions on worldmarkets and the EU trade balance (Moyer and Josling, 1990). As early as 1972 theCAP became a net budgetary loss for the Union, when the receipts from the borderlevies were far below the expenditures for export subsidies. The EEC-9 was not ableto change the policy. The need for unanimity to amend the CAP until 1986 madereform difficult to impossible. Although QMV was introduced in the Treaty of Rome,the 1966 ‘Luxembourg Compromise’ de facto installed unanimity as the defaultsystem in the EC. Only administrative and budgetary affairs were allowed to bedecided by majority vote. The Single European Act of 1986 included the provision ofqualified majority for decisions regarding the establishment and functioning of the 58
    • internal market and generally reinforced the use of majority voting, 20 years after itsfirst intended introduction in 1966 failed.Furthermore, farmer associations were putting strong pressure on the governments toincrease protection (Tracy, 1989). “Reform, in the CAP, consists of delayed responseto accumulated pressures. The inertia of the policy process as much as market eventshas made reform a pressing issue. In terms of European unity, the CAP has becomenot the solution but part of the problem” (Moyer and Josling, 1990, p.27). The build-up of commodity surpluses and costs of their disposal showed that agricultural policywas not able to respond fast enough to these events. The difficulty was to find reformsthat were accepted unanimously by the members of the Union or, since 1986, byqualified majority. The policies that emerged from the bargaining process among themembers of the EEC did not treat the objectives2 as goals to be achieved efficiently,but only as vague guidelines. The consequences have been the following:Objective (1) was not well aimed at, as production was fostered directly and notproductivity. The result has been endemic overproduction and an internationallyuncompetitive agricultural sector.The use of price support has not been the appropriate tool to target farm incomes asstipulated in objective (2). Furthermore, large farmers have benefited most, eventhough one of the aims of the CAP is to support the family farm (not in the Treaty, buta principle incorporated into the CAP legislation). Monocultures and the increase inthe farm size have been fostered.Even though objectives (3) (food security) and (4) (stability of supplies) have beenfulfilled, this has been done at high deadweight costs and large overproduction.Objective (5) (reasonable prices) has not been fulfilled. Prices in the EU are higherthan the world market price, often by far and have taxed the citizens twice. Not only isthe cost of food higher, but the costs of subsidising exports, storing and disposing ofexcess production, and since 1992 the direct payments, are financed through taxation.2 The objectives are listed in Chapter 1 59
    • As will become obvious in this chapter the Treaty’s claim that the CAP “... recognisesthe need to take account of the social structure of agriculture and of the structuraland natural disparities between the various agricultural regions and to effect theappropriate adjustments by degrees” can be easily dismissed. The CAP is a sectoralpolicy based on commodity production and have until recently bluntly disregarded theneed to take into account social or regional differences and the environment.3.1.1 Productivity vs. overproductionOne of the pillars of the agricultural policy of the EU has been to give incentives tofarmers to increase productivity, the first objective of Article 39. However, when theEEC introduced price support at a level higher than the market-clearing level as anincentive to increase productivity, it did not take into consideration the possibility ofan endemic overproduction as a consequence (Tracy, 1989). Furthermore, the use ofprice support as main policy tool does not really address the first objective: “toincrease agricultural productivity by promoting technical progress and by ensuringthe rational development of agricultural production and the optimum utilisation of thefactors of production, in particular labour.” The objective speaks of productivity, notproduction. Price support only indirectly promotes productivity, through the incentiveto produce. The treaty lacks any clear policies towards rational development ofagricultural production and the optimum utilisation of the factors of production. Onthe contrary, responding to the supported prices, farmers will set their input useaccordingly. It will induce them to have production costs that are higher anduncompetitive at free market prices, i.e. at world prices.Overproduction has shown up as intervention stocks or export subsidies.Commissioner Mansholt already warned farm ministers at the Stresa conference in1958 of the dangers of price support in the form of surplus production or budgetexpenditures. His attempts to redress the situation in 1968 with the Mansholt Plan (theoriginal plan was a discussion document with proposals for reform) did not work. TheCouncil of Ministers watered down substantially the plan (Fearne, 1991). TheCommission hoped to get a policy agreement from the Council of Ministers beforeproducing a detailed legislative draft. 60
    • Fennell (1997) describes it as an utter failure for the Commission. The Councilregarded the Mansholt Plan as political dynamite and neither discussed it nor gave anyindication of the acceptability of the approach. The first signs that the decision-making mechanisms fostered the status quo soon became visible. The slow responseof the EU in the case of dairy products was a sign of the pressures in the Council. Thefirst part of the Mansholt Plan’s document (1968), entitled “Memorandum on thereform of Agriculture in the European Economic Community”, discussed the rise inthe self-sufficiency levels and the appearance of the problems of surpluses in variouscommodities - in particular soft wheat, milk and sugar. This indicates that the dangersof overproduction were already present and understood at the start, yet the first strongreform to reduce the dairy surplus was only taken in 1984 with the introduction ofmilk quotas. However, the introduction of quotas could be criticised, and wascriticised, as being a minimalist reaction. It reduced production but kept prices high.Fennell (1997) criticises the quotas, because these have been set too high and becausethe initial rules on penalising overproduction were changed, in a way that severelyundermined the enforcement. In 1986 it was clear that production was increasing andintervention stocks of butter and skimmed milk powder accumulated. It was onlywhen the situation got out of hand that the Council introduced in December 1986stronger quota and penalty measures. Quotas are in any case distortive for theeconomy and an inefficient way to control production leaving even the farmersdissatisfied. There are problems with the compliance of the regulations, i.e. somefarmers are believed to produce over-quota in the expectation that other farmersunderproduce (ibid.,1997). The weakness of the policy became obvious in 1996, whenItalian farmers broke the quota limits by 477,826 tonnes, complaining thatconsumption in their country was much higher than the quota restriction of 10 milliontonnes. They argued Austria is allowed 12 m tonnes with a population five timessmaller. The Italian authorities complained that Italy has the lowest self-sufficiencylevel of the EU at 60% (according other sources it is 75%). The total quota breach inthe EU was 1,119,448 tonnes in 1996, this is after deducting the underfulfilment byother countries, Portugal was more than 200,000 tonnes short (Agra Europe, No.1739,January 24, 1997). The difficulty of reaching an effective agreement on milkoverproduction, and the fact that these distortive quotas were actually seen as an 61
    • important and radical reform, is an indication of the limitations in the efficiency of thepresent decision-making procedures.Later, in 1992, the EU started reducing price supports in the cereal, oilseed and beefsectors as a way to reduce overproduction with the MacSharry reforms. Theseproposals were made in the light of increased problems with budget expenditures forintervention and export subsidies and especially under the pressures to find anagreement at the Uruguay Round of GATT. The limited nature of these reforms isreflected by the fact that the intervention price set for cereals, oilseeds and beef werestill over the market-clearing level. As a consequence it was necessary, just as in themilk sector, to add a set-aside scheme for cereals and oilseeds. Farmers have to set-aside a proportion of their arable area the EU dictates, but have to produce in theremaining area to get compensation payments (with some flexibility introduced forsome voluntary increases in the set-aside areas). For beef the (also compensated) pricereduction was only 15% when its support price was approximately double the price inthe world market.The continuation of the quota system in the dairy sector and the use of compulsoryset-aside with non-decoupled compensation payments in the cereals sector,demonstrates the reluctance by the member states to allow more radical reforms,which may affect incomes and demand quick structural changes. The MacSharryreforms were a big step in the right direction, introducing a novelty, which wouldhave been impossible some years earlier, i.e. the direct payments. However, theMacSharry reforms were based on rather optimistic world market predictions andwere not prepared for the continued rise in intensification of production. TheCommission’s long term outlook for cereals, oilseeds and protein crops (EuropeanCommission, 1997b) soon warned of the complications. It warned of strong surplusesfor cereals, 58 Mt. by 2005/06, 25 Mt. over the GATT limits on subsidised exportvolumes. The surplus was calculated including a 17.5% set-aside already. The reformsneeded to curb the trend in the cereal production increases are very strong, a severecut in intervention prices (20% recommended by the Commission) or stronglyincreased set-aside areas. 62
    • 3.1.2 Distribution of CAP benefits and farm incomesAnother pillar on which the CAP is based is the support of farm incomes. Objective(2) of Article 39 of the Treaty of Rome states: “thus to ensure a fair standard ofliving for the agricultural community, in particular by the increasing of the individualearnings of persons engaged in agriculture.” The problem in this objective is the lackof clear targets. Whose incomes is the CAP supposed to increase and what is a fairstandard of living? The article could be interpreted logically as the aim of raising theincomes of individuals engaged in agriculture that do not reach a fair standard ofliving, to such an extent as to allow them to do so. However, the is no clear measurefor ‘a fair standard of living’ and still needs defining.However, a possible measure would be to compare the income of the farm householdto the average household in the economy, taking into account the difference in theaverage number of members of the household, farm households being in averagelarger. Farm households should be used as the unit, given that these often have animportant income from non-farming activities (Hill, 1996; Blandford and Dewbre,1994). The study of farm incomes is very cumbersome and as Hill (1996) warns: “Thecentral aim of the Common Agricultural Policy is to support the incomes of farmers.Yet reliable information on the overall incomes of farmers and their households isscarce. Earnings from the non-farm jobs and businesses in which many farmers andtheir households engage have been ignored by official measures, as have pensions,investment returns and other forms of income.” To try to answer how effective theCAP is in protecting the incomes of farmers two aspects of farm income support areanalysed, the price support system and the EAGGF (European Agricultural Guidanceand Guarantee Fund) distribution of funds to farmers. The price support system as means to support farm incomesThe price support system is an inefficient way of solving the farm income problem.Blandford and Dewbre (1994) point out that the transfer efficiency ratio, i.e. the farmhousehold income gain as a ratio of consumer and taxpayer cost, is low. This isbecause (1) higher output induces farmers to spend more money on purchased inputs,(2) there are opportunity costs for the diverted resources and (3) there are likely to belosses in terms of trade. To the first it also can be added that input prices also rise with 63
    • higher output prices. Land, the least elastic input, is regarded as the main absorber ofthe price farm income effect (often named as the land sink).The distribution of the benefits also makes the desirability of price support and directpayments questionable, as Brooks (1996) describes: “The majority of assistance isstill provided via output related-price support, while the level of direct incomepayments is typically related to farm output or area. Given that a minority of the totalnumber of farms is responsible for the majority of output, this means that thepayments are disproportionally skewed in favour of large scale farmers” (p.369). Themain beneficiaries of the price support system are therefore the larger farmers, who insome countries have at least the same, if not a better, standard of living than theaverage household. The CAP also does not take into account off-farm incomes, whichfor a number of farms are a considerable source of income. AgriculturalCommissioner MacSharry claimed before the his 1992 reforms that 80% of thebenefits of the price support system ends in the hands of the largest 20% of farmers,although the origin and accurateness of this declaration are unclear.However, the 1992 CAP reforms did not change significantly the income distribution.The skewedness of price and direct support towards larger farms, and the insensitivityof the policy on off-farm incomes, introduces an element of policy-fostered inequalitythat is very controversial.Winters (1990) has noted that a broader range of objectives, such as reduced rural-urban income inequality or the preservation of family farms, are seldom pursued inthe most efficient or coherent way. Furthermore, urban poverty has become a strongsocial problem. The need of income support of farmers as a group of particularlydeserving people becomes questionable, in particular if this support is based on ahigher price level that damages the poorer consumer disproportionately. Farm income support distribution from the EAGGF among EU countriesA way to compare the distribution of support amongst different kinds of farmers is thedistribution of EAGGF funds amongst member states, comparing the number offarmers and the NVA (Net Value Added) of the average farms. The average NVA of 64
    • farms in member states is readily available and can be used as a proxy for farmincomes.In Table 3.1 we can see a that comparing the net value added (NVA) of the averagefarm in € to the average receipts by EAGGF per person employed in agriculture thereis a clear higher transfer of financial resources towards farms with a higher NVA.This is clearly apparent in Figure 3.2, which shows a positive relationship between theaverage receipts from the CAP and the NVA of the farms (which is used as a proxyfor farm incomes) amongst the member states in 1996.Given the income objectives of the CAP, it would be normal to expect the funds to bespecially directed to the poorest farmers. In this case we would have the dotsrepresenting the countries on the diagonal continuous line in Figure 3.1, the countrieswith the farms having the lowest value added getting more than the richer ones. Thegraph however demonstrates that the policies are not following this (with theexception for Ireland and the UK), they seem to work in the opposite direction,allocating funds to the countries with the highest average Net Value Added farms.The regression line represents this. The fit is surprising even to the naked eye, inparticular for the lower end of the NVA. For example, Portugal has the poorestfarmers and benefits least while Denmark’s and Belgium’s better-off farmers arestrongly benefiting from the CAP. This is evidence that the CAP is not supporting theincomes of the poorest farmers. 65
    • Table 3. 1 Average farm net value added per country Farm NVA Persons employed EAGGF receipts Av. EAGGF 1996, in agriculture1 1996 receipts per farmer (‘000) € (‘000) Million €2 €Belgium 50,3 104 1192,5 11466,35Denmark 46,9 102 1387,5 13602,94Germany 30,9 1046 6855,5 6554,02Greece 10,9 784 3129,9 3992,22Spain 15,1 1065 4749,6 4459,72France 42,3 1072 10098,4 9420,15Ireland 16,9 146 1961,1 13432,19Italy 15,5 1332 4659,3 3497,97Luxembourg 41,4 4 24,4 6100,00Netherlands 71,1 247 1563,3 6329,15Austria 33,1 269 1336,9 4969,89Portugal 4 541 1025,4 1895,38Finland 26,1 161,00 751,6 4668,32Sweden 16,8 130 689,6 5304,62UK 70,1 511 3586,1 7017,81Source: Court of Auditors 1996 Report1. ‘Persons employed’ includes all persons working for remuneration or self-employed, plus unpaid family workers. Persons employed in more than one economic sector are counted only in the sector in which they mainly work.2. European Commission (1997e)The figures do not take off-farm incomes into consideration, and many small farmshave off farm incomes. However, the countries in the positions where incomes andreceipts from the CAP are low, are also countries where high value off-farmopportunities are certainly rarer. 66
    • Figure 3. 1 Average Farm Net Value Added compared to per farmer receiptsfrom EAGGF3, Year 1996 Ave rage FEOGA e xpe nditure pe r farme r 16000 14000 Irl DK 12000 B 10000 F (ECU) 8000 NL Sw D Lux 6000 A UK E Fin 4000 EL I 2000 P 0 0 10 20 30 40 50 60 70 80 N VA-Farm (ECU 1000)Fennell (1997) criticises the MacSharry reforms for practically not doing anything toshift support for the disadvantaged farmers. A northern bias in the support policies byEAGGF is clearly visible. Ireland, whose agricultural production is of the northerncategory, i.e. milk products, and beef/veal, has therefore high returns per farmer bythe EAGGF. Consequently, the Mediterranean countries (Portugal, Greece, Italy andSpain) get the lowest benefits per farmer.On the other hand, to compensate for the described bias, one can claim that the EUhas structural funds and cohesion funds. However, these are funds which havealtogether another function and should in theory be treated as a separate issue.Structural funds and Cohesion funds are allocated on the basis of competition betweenprojects, which are in general unrelated to the farming sector. These are not automaticpayments to them. This is not a criticism of the cohesion and structural funds. Thesefunds are more targeted, thus probably more effective and beneficial for the entireeconomy, than payments to farmers. EAGGF would certainly benefit in terms ofeconomic and social efficiency from more targeted forms of distribution.3 European Agricultural Guidance and Guarantee Fund 67
    • 3.2 The CAP and the EU BudgetThe distribution of EU budgetary resources among member states has influencedstrongly the political development of the European Union. The shift of financialresources from national governments to a supranational institution has been asignificant building block in the process of European integration. The signing of theSingle European Act (SEA) in 1987 with the introduction of a new article on socialand economic cohesion gave the EU budget a crucial role in the integration process ofthe European Community (Laffan and Shackleton, 1990).However, the building block has also become a stumbling block as the size of thebudget has increased and a number of imbalances have grown. The imbalances of thebudget are the result of the policy mix financed by the budget and the differenteconomic structure of the member states. Laffan (1997) offers a very extensivedescription of the development and functioning of the budget. He describes thedevelopment of the budget and how it has often been the main trigger of disputesbetween member states and between EU institutions (the Council of the EuropeanUnion, the European Parliament and the Court of Auditors).The EU budget is dominated by two kinds of expenditure, agricultural and structural.Both raise questions about the eligibility and distribution of the funds. However, thegreatest issue of concern is the CAP. This policy was created to suit the needs and theobjectives of the Community of six in the late 1960s. The policy mix that wasacceptable for the members at the time soon grew into an open-ended financialabsorber. While generally accepted as a badly targeted and economic distortivepolicy, the influence of the agricultural community ensured its quasi-unalteredsurvival until 1992. Furthermore, the CAP, like other policies of the EU, finds itself ina budgetary trap. Each member state tries to limit their contributions to the budget,while trying to obtain highest return. Until the production-limiting measuresintroduced progressively after the 1984 milk quotas (i.e. set aside) the CAP waslargely based on a open-ended support mechanisms like price support. Thusexpenditures were difficult to control. On the other hand, the EU, depends on fixedcontributions according to certain guidelines. It does not possess the power ofborrowing or increasing revenues as governments of individual states do. Thus the EUhas faced numerous budgetary crises, most of these mainly caused by the CAP. 68
    • The imbalances in the CAP are the results of the system of support in place. The CAPbenefits mainly larger, more prosperous farmers (often in more prosperous regions)and supports some products substantially more than others. This has damagedconsiderably the coherence of the distribution of funds. Disputes over the CAP’sfinancial structures have had large consequences, such as the UK rebate agreed in1984. Through this rebate, the CAP has been indirectly responsible for the latestrebate systems agreed in the Berlin European Council in March 1999, for Austria, theNetherlands, Sweden and Germany, (Núñez Ferrer and Emerson, 2000).The growing budgetary burden of the CAP forced the introduction of a milk quotasystem in 1984 and induced the Commission to propose the introduction of stricterbudgetary controls in its proposals for further reforms in 1992 and 1999.Nevertheless, while the reforms in agriculture ensure a better control over themovements in expenditure levels, the size of the agricultural budget has increased.This is due to the compensation to farmers for the reduction in the intervention prices;costs have shifted from the consumer to the taxpayer. The reforms traded budgetaryexpenditures for budgetary stability.The Structural Funds do not suffer from the same lack of coherence of the agriculturalpolicy and are better related to their objectives. Nevertheless, the transfer of resourcesamongst regions and countries has lately started some serious dispute between the netbeneficiaries and the net contributors. As the structural funds have multiplied in valuesince the SEA declarations on social and economic cohesion of the EU, the tensionshave increased. Consequently, the flow of funds to the ‘Southern’ countries has beenunder criticism by various politicians belonging to the net contributing countries ofthe Union, in particular the rationale for cohesion funds.The growth of the two main items of expenditure has fostered disputes over the levelof contributions required from the member states. It soon became impossible to ensurethe implementation of the Treaty provisions4 requiring the budget to be entirelyfinanced by “own resources” (customs duties, agricultural levies and 1% of VAT4 Article 269 of the Treaty of the European Union 69
    • receipts in the member states). In addition, the lack of harmonisation in the VATsystem of the Member States was providing for dissatisfaction.Since the early 1980s, pressures due to the size of the budget and the imbalances inthe expenditure and own resources systems introduced a rising dispute. The mostpowerful protest came from the UK. Its smaller agricultural sector, its trade patternand the different VAT taxation rate was penalising the country making it a major netcontributor despite being one of the less prosperous states. In 1984, underMitterrand’s French Presidency, an agreement was reached in Fontainebleu thatallowed the UK to get the rebate it is enjoying today. This agreement did calm someof the waters temporarily, but other Member States are today using it themselves as aprecedent to call for rebates. It is worth noting that some of these states consideredunacceptable the practice of rebates when Britain asked for it, but are today asking forthe similar treatment.Fennell (1997) attributes the underlying cause of the budgetary problem to theinefficiencies of the CAP, such as the ones discussed in this chapter. However, someproblems are embedded in the nature of the budget itself. The budget has its limits inflexibility, while the CAP has been working in many aspects as an open-endedfinancial support. Moyer and Josling (1990) criticise the institutions of the EC for notbeing well adapted to keep agricultural spending under control. One of the reasonslies in the fact that spending has been largely determined by the Council ofAgricultural Ministers which has little incentive to give much attention to non-agricultural priorities. Many member states are also net beneficiaries, and for thesethere is an incentive to keep expenditure high. This changes the focus of the budgetaryproblem and as a consequence the problems of the CAP. While the finance ministersfight a bitter battle to reduce their net contributions to the EU, the agriculturalministers (as do ministers in other sectors) try to extract the highest benefits possible.This is not mutually exclusive, as reforming the budget can reduce net contributionsas well. For many years price support was not constrained. The policy had no definedframework and had no production or trade targets. It was supposed to achieve twocontradictory goals, increase the incomes of farmers and control production. Asfarmers’ incomes have long been the main preoccupation, budgetary or productioncontrols were not the worry of the agricultural ministers. Here lies the cause for the 70
    • seemingly desire of all members states to pay less and gain more, and the reason forall the disputes over the budget. The budgetary stabilisers introduced in 1988 (and theUK rebate) are a clear example of this. The inability to control expenditures by theAgricultural Council, because of its unwillingness and/or inability to reform the priceand market policies, other decision-makers intervened, particularly the FinanceMinisters. The CAP was confining their budget allocations (Fennell, 1997; Laffan andShackleton, 1996). There were also major changes planned in the Community, thenegotiations for the Single Market, the reform of the financial resources, the increasein importance of the Structural Funds and the administration of the budget, as well asthe negotiations of the Uruguay Round of GATT.There had been nevertheless attempts in the past to curb expenditure. Productiontargets were set in 1981, with the statement that growth in agricultural expenditureshould be slower than the growth in the Community’s budgetary resources (EuropeanCommission, 1981). In 1984 the Council of Ministers had endorsed it (Bull. EC 12-1984). It was to no avail, as there were no mechanisms to enforce it.Finally, in 1988 the budget stabilisers were agreed. The CAP budget could only growby 74 per cent of the annual growth of the Community’s GNP. Measures wereintroduced to curb farm commodity production based on maximum guaranteethresholds with an introduction of a co-responsibility levy if the threshold is exceeded.However, this was not sufficient. In 1991, the growth in stocks was causing theCommission great concern, and the budgetary ceiling was in danger of beingbreached. The CAP expenditures rose from 1990 to 1991 by 22 per cent (Rieger,1996).Fennell (1997) sees the massive overrun of production in some crops as suggestingthat the price support was too high and the co-responsibility levies too low. Thestabilisers were not very effective as the penalties started afresh each year. Forexample, the overrun in rapeseed in 1988/89 was 17.7 per cent, and so theintervention price fall was 7.6 per cent. However, because the year before an overrunhad reduced the price by 10 per cent, the price actually rose by 2.4 per cent. Otherstrong overruns (44 per cent in sunflower and 23.1 per cent in soya) showed thatintervention prices were far too high to make the levy effective. This was due to the 71
    • usual behaviour of the Agricultural Council which attempts to minimise change whenreforms are inevitable. Agreements often fall short of solving the problem.Nevertheless, the 1990s were a time of transformation in the debate on the Europeanbudget and the CAP. The EU entered a difficult period through a combination ofrecession, globalisation and political turmoil (German unification, the fall ofCommunism and ensuing Eastern European economic crisis). The negotiations on theDelors II5 package was very strained and a lower ceiling of expenditure as demandedby the Commission was agreed, 1.27% of EU GNP compared to 1.37%. An era ofbudgetary austerity began which corresponded to parallel programmes of nationalausterity in the member states.3.2.1 The European Budget in the 1990s – the increase of a paradoxThe EU budget showed in the decade of the 1990s its political weaknesses as well asan interesting expenditure paradox, which is unique to a supranational budget. Thebest reform for the EU budget would be to increase the coherence of policies andreduce expenditure. The first logical target would be to reduce the expenditures onagriculture by refocusing the support where needed. Changes could make the CAPeconomically more efficient, reduce the welfare loss and help prepare better the Unionfor enlargement and the WTO. Reducing the size of structural funds first would beless logical, as it is a more rational policy and targets poor regions and areas in need.However, the regressive nature of the CAP introduces a difficult paradox. While thenet contributors are complaining of the size of the budget, it is difficult for them toaccept a reform of the CAP that cuts expenditure. This is the result of a policychallenging the convention that the intensity of income support should be inverselyrelated to the wealth of the target group. The CAP favours larger farms and more“Nordern” products, which are generally placed in areas of the net-contributors. Thuscuts would reduce receipts from the EU budget for the net contributors. The loss couldupset the gain of a reduced contribution depending on the kind of reform. In any case,all net contributors have important and politically active farm lobbies. This makes areduction of CAP expenditures very difficult. 72
    • One particularly difficult case is Germany. While the reduction in agriculturalexpenditure in the EU would offset the loss in receipts, the loss in support for farmersseems politically unpalatable. Therefore, Germany has apparently still today only twoviable options in negotiations, either to ask for a rebate for its contributions or for co-financing6 of the CAP, in both cases de-facto maintaining the same level of transfersto its farmers.It is important to note that the size of the budget is not the main problem. Theproblems lie in the distribution of the budget. Fennell (1997) makes clear that ifconsiderably less than 1 per cent of the EU’s GDP is spent on agriculture, this ishardly a wild extravaganza. In the eyes of many academics, civil servants andpoliticians, this might sound heretical. However, Fennell’s claim has goodfoundations, and academics probably would be less worried by the size of theexpenditure if it was efficiently distributed. Fennell (1997) attributes the underlyingcause of the budgetary problem to the inefficiencies of the CAP, such as the onesdiscussed in this chapter. However, some problems are embedded in the nature of thebudget itself.The budget has its limits in flexibility, due to budgetary limitations. In spite of these,the CAP worked until the 1990s in many aspects as an open ended financial support.Moyer and Josling (1990) criticised the institutions of the EC for not being welladapted to keep agricultural spending under control. One of the reasons presented isthat the Council of Agricultural Ministers has largely determined spending which haslittle incentives to give much attention to non-agricultural priorities.For many years price support kept rising relatively unconstrained. The policy had nodefined framework and had no production or trade targets, and so the consequences ofthe policy were not dealt with properly into consideration. Farmers’ incomes fromproduction have long been the main preoccupation, while budgetary or productioncontrols were not the worry of the agricultural ministers. There were attempts in the5 Under the Commission President Jacques Delors the system of multi-annual programmes with apredetermined budget was established. The Delors II package is the second one decided under hisleadership for the period from 1995 TO 2000. 73
    • past to curb expenditure. For example production targets were set in 1981, with thestatement that agricultural expenditure should be slower than the growth in theCommunity’s budgetary resources (European Commission, 1981). In 1984 theCouncil of Ministers had endorsed (Bull. EC 12-1984). It was to no avail, as therewere no mechanisms to enforce it.As more resources were diverted into agriculture, largely to pay for excess productionin the form of export refunds, storage or the plain destruction of stocks, other sectorsgot involved into the debate on the future of the CAP (Fennell, 1997; Laffan andShackleton, 1996). First, the budgetary waste, and the lack of capacity to control it,led the finance ministers to intervene determinedly with the introduction of budgetarystabilisers in 1988.In 1991, the growth in stocks was causing the Commission great concern. Thebudgetary ceiling was in danger of being breached. The CAP expenditures rose from1990 to 1991 by 22 per cent (Rieger, 1996). The CAP was also increasinglyinterfering with other major Community developments, i.e. the negotiations for theSingle Market, the reform of the financial resources and, the administration of thebudget, as well as the negotiations of the Uruguay round of GATT.All these factors finally led to the 1992 MacSharry reform. This started the process ofa rethinking the CAP which is still going on today. For cereals and oilseedsintervention prices were lowered and compulsory set-aside was introduced. For beefprice support has only fallen by 15 per cent leaving the intervention price still wellabove the world price and the EU market-clearing price.An interesting factor of the reform is the relative importance of the budget’s size,which was considered a crucial factor for reform. The reformed CAP ended beingmuch more costly. This was to be expected, as the price support was replaced bydirect payments, thus shifting the burden of the CAP partially from consumers to thebudget. It proves that there is a partial fallacy in the budgetary argument. Of course,some type of limitation was needed to comply with the GATT agreements. Initially6 Term used for the mechanism in which member states partially finance direct payments to farmers. 74
    • the most pressing budgetary problem was its unreliability, and therefore the constantbudgetary crises as expenditures threatened to breach the agreed budgetaryallocations.To summarise, the main problem of the CAP’s budget is apparently not its size, atleast under the Agenda 2000 negotiations. It is its distribution and the automatic ‘cashon demand’ supports on which it was based. The fact that the EU appears to considerthe agricultural sector worthy of special treatment compared to other sectors in theeconomy is also causing increasing unease in the EU. This special treatment hashistorical reasons that may well have been rational in the past, but today it is beingincreasingly contested.3.3 Environmental effects of the CAPThe CAP has neglected explicit environmental protection and only introducedsignificant measures in this area in 1992. The CAP encouraged degradation throughthe output-promoting price support policy. Winters (1990) criticises the price supportpolicies as fostering environmental degradation. This is not surprising, as the systemrewards financially the farmer that produces a higher output. A higher output isachieved by intensifying the application of fertilisers and pesticides and pollutiontherefore increases. Any claims that the milk quotas with high prices for productionhave been designed for environmental reasons, to keep the cattle farmers in uplandregions, are dubious. While it may be true that this may have been one consideration,other more political issues governed the agenda. If the environment had been part ofthe consideration, there are more efficient ways to pay for environmental services andfor farmers to stay in the region. There was no need to keep high prices for the wholemilk industry.There is little doubt that in the past preserving the environment was not a mainconcern for the CAP. The direct link between the environmental degradation and theCAP is, however, not straightforward. Countries with much lower price support haveseen just as much environmental damage, i.e. the USA. Mechanisation is one of thebiggest factors affecting the environment – yet the trend of mechanisation and farmsize change is hardly related at all to the CAP or protection levels. The other bigenvironmental impacts are caused by the use of fertilisers and crop protection 75
    • chemicals and animal paramedical products. There is no clear proof of a directrelationship with the levels of support, although a correlation between intensificationand price support is likely.The extent of the environmental damage is not clear, while the damage that wouldhave occurred without the CAP is unclear. However, as environmental degradationhas only recently been considered an important social cost, it is difficult to accuse thepolicy-makers of not addressing the problem earlier. There was little demand for suchpolicies until recently.3.4 Welfare costs of the CAPA measure of the gap between the socially desirable policies and the implementedCAP would be a welfare-cost measure over time. However, there are no calculationsof the welfare cost deterioration over time, These are available only for specific yearsand with different methodologies, thus making inferences and comparisons in timedifficult and unreliable. Table 3.2 presents some of the attempts to calculate thewelfare costs that were compiled by Demekas et al. (1988). Unfortunately differencesin methodology give different results even for the same years. However, all indicatethat the costs are not negligible.Table 3. 2 Welfare effect of the CAP on the EC members as % EC GDPSource / year 1978 1980 1980-82 1983 1985Morris (1980) -0.53Australian Bureau of -0.48 -0.32Agricultural ResourceEconomics (1985)Buckwell et al. (1982) -0.55Tyers and Anderson -1.1(1985)Spencer (1986) -0.9Tyers and Anderson -0.27 -1.3(1986 ,1987)Source: Demekas et al. (1988)There are other calculations which give an indication of the welfare cost. The OECDpresents the Consumer and Producer Support Estimates (CSE and PSE) for agriculturein the EU (OECD, 2000). Table 3.3 lists results from 1990 to 1999. 76
    • Table 3. 3 CSE and PSE Estimates for the EU in the 1990s 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999Total % CSE -39.1 -44.2 -35.6 -33.7 -30.9 -28.3 -22.4 -24.9 -32.6 -36.2Consumer NAC1 1.6 1.8 1.6 1.5 1.4 1.4 1.3 1.3 1.5 1.6Total Consumers’ 81.4 91.3 74.2 69.9 68.0 61.9 48.4 54.9 67.2 67.4transfer2Total Taxpayers’ 34.9 44.9 44.6 49.6 44.6 50.1 57.4 56.8 55.4 53.9transfer2PSE2 99.4 116.2 98.3 101.0 100.4 100.8 93.7 99.4 110.7 108.2PSE – total -17.0 -19.9 -20.4 -18.6 -12.1 -11.2 -12.1 -12.3 -11.9 -13.0transfers1. The Nominal Assistance Coefficient measures the ratio between the farm gate price and the border price2. in billion €Source: OECD (2000)The burden for the consumers is measured by the Consumer Support Estimates(CSEs). This calculates to which extent the consumers are implicitly taxed throughprice intervention. The results show that consumers paid farm gate prices over 60%higher prices than the border price in 1999. Even when world prices were unusuallyhigh in 1996-7, the differential was 30%. More revealing is that the sum of theconsumer and taxpayer transfers to agriculture only partially reach the producers. In1999 13 billion € of consumer support were lost in the transfer, more than 10% of thevalue of support to producers (108 billion €). This loss can be interpreted as a measureof the welfare loss in the system. However, this is an underestimation of the loss inthe transfer to farmers. PSEs do not only measure the extra receipts for farmers. TheOECD (2000, p.45) estimates that only around 23% of price support reaches actualfarmers and only 73% of the direct payments. Direct payments are mostly absorbedby land prices if farmers do not own the land. The OECD calculates that if a farmerowns 50% of the land cultivated he or she will only benefit from 36% of the directpayments.3.5 The increase in complexityThe CAP has grown in complexity. This has been one of the consequences of theinability to reform the policy. Even without being able to solve problems in the mostefficient way, the EU had to find a way to prevent the worsening of some problems, inparticular to avoid budgetary crises or the breach of international trade treaties.Because of this, special arrangements, derogations and complicated compromiseswere introduced to counterbalance the detrimental effects of the CAP as significantreforms could not be agreed (Tracy, 1989). A complicated agrimonetary system, 77
    • special treatment of some regions and not least the introduction of controversial milkquotas and compensation payments are the legacy of such changes. Rieger (1996)describes the agricultural policy developed during the 1970s and 1980s as havingreached “Byzantine” complexity. Even the MacSharry reform of 1992, that has beenheralded as a breakthrough in agricultural policy, was conceived to allow the EU tofulfil its obligations with GATT and avoid a budgetary crisis with the ever-increasingexport subsidies given the structure of the CAP. It has not attempted (as it announcedit would) to simplify the policy. On the contrary, it has added more complexity to thesystem.3.6 Decision-making speed in the EU’s Agricultural Council of MinistersHayes-Renshaw and Wallace (1997) describe how there have been numerous claimsby analysts that the EC has a slow and inefficient decision-making process. The ECsuffered from decision-making stagnation in the 1970s and the beginning of the1980s. Nationalist positions strongly affected the process. General de Gaulle’sstubbornly nationalist behaviour in the 1960s and 1970s often derailed the process ofintegration in the Community. The decision-making process of the EU was describedas inter-governmentalist and not supranationalist. There were, however, importantfactors that can explain the decision-making difficulties in the Council of Ministers.These are the economic recession in the mid-1970s and the enlargements of 1973 and1986. The 1973 enlargement had to accommodate Britain, Ireland and Denmark.Britain did not share the same commitment to integration as the other members. Theenlargement to Portugal and Spain (in 1986, following Greece’s accession in 1980)brought to the EC a new dimension of diversity and problems to which the EC had toadapt.However, during the 1980s the Council’s regulatory activity improved. Hayes-Renshaw and Wallace (1997) attribute the increase in the Council of Minister’s outputto the advent of the Single European Act and the 1992 programme for a EuropeanUnion. Sloot and Verschuren (1990), argue that the time taken by the Council to reachdecisions fell after the second half of the 1980s. However, their analysis did not relateto the CAP. Given the special nature of the CAP, apparently the increase in the outputof the Councils does not seem to have taken place for agricultural policy. This may in 78
    • part lie in the fact that in contrast to other policy areas the decision-makingprocedures were not altered with the SEA.The reason for the problems in reaching an efficient reform decision for agriculture inthe Council may also lie in the nature of the CAP. A policy that has a common budgetinduces the single members to try to get as much back from it as possible. Scharpf(1994) complained that the decision-making procedures are not well designed for theaims of the European Union. More powers have been transferred to Brussels, but theEuropean decision process has not improved sufficiently. It is too complicated, timeconsuming and the increase in the issues to address has made the process morecumbersome. This would not contradict the results by Sloot and Verschuren (1990),the increase in the output of the EU institutions does, according to Scharpf, not matchthe increase in the responsibilities of the Union.Unfortunately, Scharpf does not refer in his 1994 article to the specific situation of theCAP, as he did in 1988. All indications, however, are that the CAP is particularlyaffected by the inefficiencies of the decision-making process.3.7 Assessment and conclusions on the past development of the policyThe development of the CAP consistently presents problems in the targeting ofobjectives and the efficiency of its delivery of these objectives. Vague and conflictingobjectives and highly confusing policy complexities have caused an array of problemsfor the policy domestically and in the international trade arena. There are goodreasons to believe that a reason behind this situation is the decision-making system.The decision-makers either have problems to agree on the policies they shouldintroduce or are consciously trying to pursue their own interests largely disregardingthe overall coherence of the policy.There are indications that the decision-makers are pursuing their national interestsdisregarding the interests of the Union. Moreover, the Council generally downplayedthe proposals of the Commission that were in most cases moderate. The ministersnever strengthened the proposals, but rather postponed, weakened or rejected them inthe short-term interests of their direct constituencies. The ‘short-termism’ of populist 79
    • political strategies has been damaging for this sector where long-term planning isessential.However, while it is true that the political elite of the European Union has not beenwilling or has not managed to avoid the increasing rise in distortions and problems ofthe CAP, the extent the Council’s decision-making procedures are responsibleremains unclear. An historical analysis can not really clarify if a different decision-making system in the Council would have given better results, or if in the absence ofthe CAP national policies on agriculture would not have been even more damagingand distortive. The answer can only be approached by an analysis of the actualnegotiations in the Council.It is unclear to which extent the decision-making process has affected the policyoutcomes. Decision-making procedures are complex and the Council’s participation isonly one step in the process. The question that needs to be answered is how strong andhow restrictive is the Council. Does the bargaining process really foster the statusquo? These are the questions at the core of the research. The next chapter describesthe decision-making process, not only under the formal rules but also the observedpractice. 80
    • Chapter 4. The formal and informal EU decision-making procedureswith specific reference to agriculture “But there is ultimately no way to make government by the people truly be government for the people. That is what rat [rational] choice teaches, and nobody has yet proved it wrong – even in theory.” (Paul Krugman (1996), The Accidental Theorist, Penguin Books, p. 183)The decision-making structures of the EU are complex for all policy areas. The CAPis not an exception. The difficult process of accommodating the wishes of fifteenstates causes the complexity. Four major institutions and a number of lesser bodies areinvolved in the legislative process. However, for the CAP the two main EUinstitutions are the European Commission and the Council of Ministers. This chapterattempts to summarise and clarify the role of the different legislative bodies of theEU. It first gives a basic description of the functioning of the Agricultural Council andthen describes the practice and evolution of the Council procedures since theintroduction of the CAP.4.1 The legislative bodiesThe major legislative institutions are the Commission, the Council, the Parliament andthe Court of Justice. The most important lesser bodies are the Economic and SocialCommittee (EcoSoc), various committees attached to the Commission, twocommittees attached to the Council, the Committee of Permanent Representatives(COREPER) and the Special Committee on Agriculture (SCA). For the purpose ofthis research and the type of legislative decisions under scrutiny, the Court of Justicewill not need to be taken into consideration. The Court of Auditors (CoA) should alsobe mentioned, even though it is not a legislative body. The CoA has gained influencethrough very thorough and critical studies on the workings of the EAGGF. As the ideaof ex-post evaluation of the CAP increases in importance, so do the reports of theCoA.4.2 The CommissionThe task to initiate a legislative process has been laid upon the European Commission.This independent technocratic body facilitates and ensures policy co-ordination 81
    • among countries. Proposing legislation that is acceptable to all Member States (or atleast most of them in the case of qualified majority voting) introduces a high level ofcomplexity. In agriculture, the heterogeneity of the Member States’ agriculturalsectors makes the task extremely difficult.The Commission is constitutionally endowed with quasi-governmental powers, but isnot comparable to any government. It is officially a “college” of 20 members, eachappointed by his or her government for four years. There are two from France,Germany, Italy, Spain and the UK and one from each of the other Member States. Inprinciple every commissioner is equal. The Commission service is divided into 26Directorates General (DGs) in charge of different topic areas; the Directorate Generalfor Agriculture and Rural Development (DG AGRI) is in charge of agriculture. TheCommissioners are assigned a personal policy portfolio, and the political andoperational responsibility for the work of the DGs is assigned in the portfolio. TheCommissioners are individually responsible for contributing to the decision-makingprocess. This process is officially egalitarian and is based on dialogue among thecolleagues.The Commission has a president who is selected separately and prior to the othercommissioners by the heads of state and government. This president has the role ofco-ordinating the work of the Commission to ensure that it has a recognisable andcoherent program. Until the resignation of the Santer Commission the president didnot have the power to arbitrate decisions, and had the same power as any othercommissioner (Ross, 1995). This rule has been changed in with the Treaty of Nicesigned on 26 February 2001. The President was given powers which allow him/her tocontrol more effectively the work of the other Commissioners. In particular, thePresident has been given the power to demand the resignation of individualCommissioners, which was not possible during the Santer period, whereCommissioners had either to resign as a group or be voted down by an absolutemajority in the European Parliament.The Commission’s four responsibilities are set out in Article 155 of the Treaty ofRome:1. It must ensure that the provisions of the Treaty are applied. 82
    • 2. It is to make recommendations or give opinions on matters arising out of the Treaty.3. It has its own power of decision and must participate in the formulation of measures taken by the Council and Parliament.4. It exercises the powers conferred on it by the Council.In summary, the Commission is the guardian of the treaties of the European Union. Ithas the power to bring to the Court of Justice any Member State government,organisation or individual infringing the provisions laid out in the Treaties orlegislation which flows from the Treaties.The Commission has two crucial roles to play. The first is role is that of initiatingproposals for legislation, and the second is its power to manage and execute thepolicies of the Union and of international trade relationships. These powers are thebackbone of the influence and importance of this body in policy-making. TheCommission alone has the power to initiate a proposal for legislation and hastherefore the capability to decide and shape the form of the policies to negotiate. Theinfluence in the management and execution of policies and trade relationships givesthe Commission some freedom through the way policies are interpreted by it.There is little doubt that the Commission has had a very important role in directing thedevelopment of the Union. Ross (1995) supports the view that the EuropeanCommission under the direction of the powerful personality of Jacques Delors,President of the Commission in the years 1985 to 1993, has played the central role inthe ‘renaissance of ambition’ of Europe. What emerges from Ross’s book is that theCommission can influence the developments in the European Union. However, for theCAP this is less obvious. The Council of Ministers has always downsized theCommission’s proposals severely.4.3 The CouncilThe Council of Ministers was established under the 1965 Merger Treaty, as was theCommission, to take the place of the Special Council of the ECSC, and the Councilsof the EEC (European Economic Community) and Euroatom. The Council has twofunctions according to Art. 145 of the Treaty of Rome, to ‘ensure the co-ordination of 83
    • the general economic policies of the Member States’ and to take decisions. TheCouncil is the primary legislative organ.The Council consists of persons delegated by the Member States. It meets regularly inBrussels or, in April, June and October, in Luxembourg. Occasionally the meetingsmay take place in the country of the Presidency. The Agricultural Council is ofparticular importance as the whole sector is regulated on a European level. To theCouncil meetings the governments normally send ministers with the relevantresponsibilities, but it is not uncommon that other senior civil servants represent them.The Treaty of the European Union (TEU) specifically refers to ‘a representative ofeach Member State at ministerial level, authorised to commit the government of thatMember State’. However, the quorum may be challenged if too many ministers aremissing (Hayes-Renshaw and Wallace, 1997). It is also possible for each country tovote for one other government, so technically only eight ministers have to be present.Meetings of ministers are for final decisions or high-level discussions. In fact, thereare 150 or so committees structured in a similar fashion as the Council; the SCA isone of these committees. These have an important role for the final output of theCouncil as they pre-negotiate the points that will be on the Council agenda for voting.Roughly 70 per cent of the legislative output is actually negotiated at their levelbefore the Council officially discusses it.Increasingly important in the decision-making process is the European Council, whichis composed of the Heads of State. The meetings are referred to as IGCs(Intergovernmental Conferences). The Heads of State meet at least twice a year at theend of each Presidency to adopt the guidelines for the future and agree on otheroverall European policy questions. These IGCs are increasing their influence over theactivities of the Commission and the sectoral Councils. With the increasingcompetencies of the EU institutions, the Heads of State have increased their directintervention in sectoral policies at EU level. The IGCs have developed from being theinitial pro-forma meetings of Heads of State to the supreme decision-makingauthority. 84
    • 4.3.1 Organisation of the Council MeetingsMost meetings are held since 1995 in the new Justus Lipsius Building in Brussels.7The Ministers and representatives meet around long rectangular tables as in Figure4.1, the Presidency at one end and the Commission at the other. The positions moveeach six months around the long sides following the order of the Presidency rotation.The order does have importance, as the informal links between delegations may beaffected (ibid.). Historically, the order was alphabetical but was modified for the 1995enlargement with the three EFTA countries (Austria, Finland and Norway).The Presidency has an important influence on the decision-making procedures as itsets the agenda for discussion. This gives it the power to slow down or increase theoutput of the Council, and to strategically shift issues it might not like. The Councilagenda is technically set by the Presidency 14 days in advance. This is split into twosections: ‘A’ points and ‘B’ points. ‘A’ points are approximately 85-90 per cent of thebusiness. These are points that have been substantially endorsed by officials (70 percent at working group level, 15-25 percent by COREPER) and only have to beendorsed (ibid.). ‘A’ points can always be reopened as ‘B’ points. ‘B’ points have notbeen agreed at the COREPER level and have to be discussed by the ministers. VanSchendelen (1996) checked the complete agendas for the Agricultural Council in theyears 1992-1993. There were 321 ‘A’-points and 173 ‘B’-points, thus 65% of theAgenda items were of category A. Much lower than the 85-90% percentage of itemsin the Councils in general.7 Ironically, the first barrier for the Union to enlarge is the Building itself. This new Building wasplanned in the mid-1980s and is not conceived for an enlargement. The rooms and facilities may not beable to accommodate several new members, with all their need for interpreters and offices. 85
    • Figure 4. 1 Layout of Council MeetingsFirst half 1998, the UK Presidency Council Legal PRESIDENCY Council Service UK Secretariat Luxembourg Netherlands Austria Ireland Germany Italy Finland Spain Portugal Greece France Denmark Sweden Belgium COMMISSION4.4 Working Groups, COREPER AND SCAIn the EU there are large number of committees involved in discussing and agreeingon technical or legislative matters. In short, their function is to do all the work thatdoes not need to be done at the level of the Council. Most of the work is of a technicalmatter. The numbers involved are impressive: 3000 to 4000 officials from theMember States meet daily in the Council building in Brussels. For the CAP,COREPER, SCA and some working groups are of interest, as these are involved inthe discussion of the items on the Agriculture Councils agenda and setting up themeetings. COREPER has two bodies I and II. COREPER II consists of theambassadors or permanent representatives in Brussels, COREPER I are deputies.Each Member State has a permanent representative accredited to the EU, in the same 86
    • way as it has ambassadors accredited to other countries. They co-ordinate the work ofspecial committees and working parties which prepare Council meetings. PermanentRepresentatives are supposed to be the guardians of the interests of the MemberStates. This is sometimes contested (by some of the EU governments): Alan Clark (aformer British minister) has accused the UK Representation to the EU as totallyeurophyle, Heyes-Renshaw and Wallace (1997, p.82).Given the technical nature of agriculture policies the SCA is of special importance.This working group is itself supported by sub-groups. Its functions are to discuss thepolicy and technical aspects on agricultural policy proposals. COREPER, however,deals with matters on harmonisation of legislation, the budget, commercial relationswith third countries, and fisheries. Thus COREPER can be found working on thesame proposal as the SCA, but concentrating on different aspects, e.g. the budget.4.5 The European ParliamentThe European Parliament (EP) is directly elected by universal suffrage in the MemberStates every five years. Direct election was introduced in 1979 rather than beingappointed from the ranks of national parliamentarians as was the case previously. Forthe EU-15 there are 626 parliamentarians. Until the SEA (Single European Act) of1986 the EP was only granted supervisory and advisory powers. The influence of theParliament in the legislative process was negligible, and the Council viewed it as apurely consultative body. With the Single European Act and the Treaty of theEuropean Union in 1991 the Parliament obtained stronger legislative powers with theintroduction of co-operation and assent procedures. Nevertheless the Council hascontinued to view the Parliament as less than an equal partner (Hayes-Renshaw andWallace, 1997). This is particularly true for the CAP. The procedures for thelegislative process were not altered for the agricultural sector thus the EP has little ifany influence on the CAP.4.6 Economic and Social Committee (EcoSoc)EcoSoc was created by the Treaty of Rome to play an advisory role for the Counciland Commission. It was to consist of the ‘representatives of the various categories ofeconomic and social activity, in particular, representatives of producers, farmers,carriers, workers, dealers, craftsmen, professional occupations and representatives ofthe general public’ (Art.193, Rome Treaty). In practice, the members of EcoSoc can 87
    • be grouped in to three main categories - employers, trade unions and independents(Fennell, 1987). According to the treaty, EcoSoc has to be consulted by theCommission and Council on certain subjects and in all cases where these institutionsfind it appropriate. For the CAP, consultation with EcoSoc was required for itsestablishment. Consultation for its operation and development remains purelyoptional. Fennell (1987) claims that little attention is paid to the opinion of EcoSoc.Even though since 1972 EcoSoc was allowed to give advice on any issue affecting theEC, its role in the legislative process is very limited.4.7 Other statutory committeesAs mentioned earlier there are many committees that have been created with the taskof assisting in the decision-making and implementation process. For the CAP themost important after SCA and COREPER are the management committees which areresponsible for the technical aspects of the day-to-day operation of the CAP. Thecommittees have been set up for each of the commodities for which there are marketregimes. Each committee is composed by up to five representatives of each MemberState. The Committee is presided by a member of the Commission. There is a votingprocedure similar to the QMV (Qualified Majority Voting) system in the Council. TheCommission representative has no vote. Parallel to these management committeesthere are Agricultural Advisory Committees. These are purely advisory bodies,helping the Commission to understand the position of the people involved inproduction, processing, trading and use of the various commodities.4.8 The creation of CAP legislationThere are three forms of Community Legal Acts: Regulation, Directive and Decision.Regulations override national law and are legally binding on every citizen of theUnion. Those are the most important of the EU’s legal instruments and most of theCAP is found in Regulations. It is on the creation of the regulations that the empiricalpart of this research is going to concentrate. A Directive is a “framework” withinwhich the Member States are required to adapt their existing legislation to conformwith a common objective. It could be seen as a legal convergence instrument thatdefines the objective to be reached. Decisions are specific and bind the persons whoare mentioned and are thus not EU-wide. 88
    • The Regulations, and to a lesser extent the Directives, are to be considered here. Thereare four procedures of passing legislation that creates instruments (laws) of generalapplication such as Directives and Regulations. The list shows the procedures in orderof incremental influence by the European Parliament:1. The consultation procedure2. The co-operation procedure introduced by the Single European Act (SEA)3. The codecision procedure introduced by the Treaty of the European Union4. The Assent procedureFor the CAP the system that is applied is the Consultation Procedure. The EP hasonly the power to present its opinion to the Commission and the Council, but cannotimpose any alterations. Figure 2 describes the legislative process. The consultationprocedure consists in three stages, formulation, consultation and enactment(Goodman, 1996). The Commission has the right of initiative, thus it is the only bodythat can propose new laws. A draft is prepared in collaboration with a number ofbodies according to its subject and complexity, such as civil servants of the MemberStates, experts, academics, trade associations, etc. Once the proposal is finalised byDG Agriculture and consulted with the Cabinet for agriculture it is sent to otherrelevant DGs for inter-service consultation. The proposal is amended and adaptedfollowing the internal discussions. Following this inter-service consultation, the EPhas to give its opinion on the draft proposals before these are officially presented tothe Council. The EP produces a formal written opinion, which may contain proposedchanges. The Commission is not bound to take the EP’s opinion into consideration.The Economic and Social Committee may also give advice on a proposal. The role ofthis Committee is however of little relevance, as its influence is very limited. Anotherround of inter-service consultations may occur, time permitting. When theDirectorate-General for Agriculture considers the draft completed and is approved bythe responsible Commissioner, it submits it for approval by the whole Commissionand once approved it becomes a ‘Commission Proposal’ and is submitted to theCouncil. The Council can to consult other bodies. For CAP legislation it normallyinstructs the SCA, consisting of senior agricultural civil servants from the MemberStates, to make a technical review of the proposal. The SCA usually sends the draft toa Working Group of experts from the EU-15 set up for each specific proposal. It 89
    • reports back to the SCA, which makes a political examination and passes it to theCouncil for resolution and adoption. At all levels the Commission is represented todefend its proposals and to find compromises to achieve the best policy mix whichwill secure a qualified majority vote in the Council. The Council can suggest changesto the proposals, but only the Commission has the power to amend them. No memberstate can require the Commission to include changes or to present a new legislativetext unless it gets the unanimous backing of all member states.Figure 4. 2 The agricultural decision making process Commission Proposal P preparation ECON & R EUROPEAN SOCIAL E PARLIAMENT COMMITEE S COMMISSION S Opinion Advice PROPOSAL U R E COUNCIL presure on ministers Council working through domestic pressure G groups group R O SCACOREPER U P COUNCIL S Commission proposal COUNCIL Rules implementation DECISION Management Commitee Implementation Commission Decision Member States Rules implementation Advice formal influence pressure group influenceModified version of the diagram in Meester and Van der Zee(1992)After the consultations and the examination by specialists and COREPER the Councilmay adopt the proposal. It is published it in 11 official languages. To adopt the 90
    • proposal the Council has to agree. For the CAP it has to vote according to the rules setin the Treaty of Rome using the QMV (Art. 43). There are 87 votes available anddistributed among the member states. The votes of the members are weighted veryroughly in accordance with population size. The distribution of votes and the numberrequired to pass legislation are presented in Table 4.1. Although QMV was providedfor in the Treaty, it was hardly ever used until 1986. Abstentions are regarded as avote in favour, this ensures that proposals are not stalled in the Council and are eitherrejected or approved.Table 4. 1 Votes in the Council of Ministers under QMVTime Period 1958-73 1973-81 1981-85 1986-95 SinceMember States 1995Austria - - - - 4Belgium 2 5 5 5 5Denmark - 3 3 3 3Finland - - - - 3France 4 10 10 10 10Germany 4 10 10 10 10Greece - - 5 5 5Ireland - 3 3 3 3Italy 4 10 10 10 10Luxembourg 1 2 2 2 2Netherlands 2 5 5 5 5Portugal - - - 5 5Spain - - - 8 8Sweden - - - - 4United Kingdom - 10 10 10 10Total 17 58 63 76 87Qualified Majority 12 41 45 54 62% of total vote 70.6 70.7 71.4 71.1 71.3Blocking Minority 6 18 19 23 26% of total vote 35.3 31 30.2 30.3 29.94.9 The evolution of the Council of MinistersThe importance of the Council as prime decision-maker has been widely accepted inthe literature on the EU (Kohane and Hoffmann, 1991; Kirman and Widgren, 1995;Widgren 1993, 1994a, 1994b, 1994c, 1995a, 1995b; Hosli, 1996; Hayes-Renshaw andWallace, 1997; Westlake, 1996 and many others). The Council of Ministers is alsobelieved to be particularly important for the CAP (Swinbank, 1989; Wessels, 1991;Teasdale, 1996; Scharpf, 1988). The dissenting voice of Van Shendelen (1996)remains a solitary challenge to the importance of the Council. His argument is that inmost cases the working groups have already prenegotiated the issues. The Council 91
    • just ratifies and therefore has little actual importance on the decision. He has,however, no proof that the working groups are not influenced by the need to have thenew legislation approved in the Council. Ministers can always reopen an issue as a‘B’ point and it is in the interest of the Committee members to create an acceptablecompromise.The Agricultural Council is particularly attentive controlling the outcome ofnegotiations, because the policy runs all aspects of agricultural policy in a great dealof detail, commodity by commodity. The only way governments can alter policies isby changing EU legislation. In addition to this, the CAP has important implications inthe allocation of the EU budget and therefore the net budgetary position of theMember States. As an intergovernmental body, the negotiations at the AgriculturalCouncil of Ministers are heavily influenced by the domestic interests of the ministers(Scharpf, 1988; Vaubel, 1986; Wessels, 1991; Hayes-Renshaw and Wallace, 1997;Moravcsik, 1994). They have to be able to sell the outcome of the negotiation to theirconstituency.This aspect of the process can be characterised as a two-level game, as proposed byPutnam (1988) for international negotiations, with one political game at national andone at international level. However, the EU is designed to seek consensus and the twolevels are interlinked.Member states’ preferences may be affected by changes in the national politicalsituation during the negotiations. For example; France’s difficult domestic situationblocked the GATT negotiations for three years until a new government took power in1993. This new government had its power base in industry and finance and thereforethe pressures from the agricultural sector lost some of their political strength. Thischanged France’s position in the negotiation and allowed a deal to emerge (Epstein,1997).Evidence of the Agricultural Council’s importance can be found in the composition ofthe Council’s agendas is presented by Culley (1995) who describes how for the CAP,Ministers control the negotiation. This evidence is also reinforced by the continuationof the Consultation Procedure. This can be interpreted as a result of the resistance by 92
    • the Member States to delegate agricultural policy to the European Commission or theEuropean Parliament (EP). Agricultural policy has the peculiarity of being an entirelycommon policy, but controlled exclusively by an intergovernmental procedure.4.10 Voting Rules - their development, the formal procedures, actualbehaviourThe EU has three ways in which decisions can be taken at the level of the Council ofMinisters: unanimity, QMV and simple majority voting. Simple majority voting isvery rare. The most important decision under simple majority is the calling of anintergovernmental conference (IGC). Each member is treated equally in this case andapproval is by half plus one members in favour. Until 1986 unanimity was the rule,even if the Treaty of Rome provided for QMV. Unanimity is reached if no membervotes against; abstentions count as approvals.This state of affairs was the outcome of General De Gaulle’s refusal to accept thepossibility of being outvoted. France forced the acceptance in 1966 of a clause knownas the Luxembourg Compromise. This clause states that each member has the powerto veto any policy where ‘very important interests of one or more partners are atstake’ (Bull. EEC 3/66). The possibility by any member to invoke the Luxembourgcompromise de-facto forced the need for unanimity in the Council. It effectivelyconstrained policy-making and is considered the one of the primary causes for thelong period of ‘Eurosclerosis’ (1966-1986).According to Teasdale (1996), QMV was nevertheless used for the EC budget and theCAP from 1966 onwards, on the grounds that this was necessary for their successfuladministration. However, this is contradicted by Swinbank (1989) who reports that thefirst time the QMV rule has been used for the CAP was in 1982 to agree on the fixingof prices.Despite de Gaulle’s record, it was a French initiative to increase the use of QMV inthe EU. The French President François Mitterrand, declared in a speech at the EP, thatthe universal application of the unanimity rule was inadmissible (EuropeanParliament, 1984, p.261). In 1986 an agreement was reached in which the use of theLuxembourg Compromise was reinterpreted. The Luxembourg Compromise could 93
    • only be invoked in cases where ‘vital national’ interests are at stake. This is a changecompared to the former ‘very important interests’.Since 1986 the use of the Luxembourg Compromise has been rare, and QMV hasbeen the rule in many areas. This change in attitude by the Member States was causedby the need of speeding up the process of economic integration and the introductionof the Single European Act (SEA) (Teasdale, 1993, 1996). Most Member Statesperceived that progress was not possible under unanimity.Formally the Compromise is still valid, but Teasdale (1993) goes as far as declaringthe Luxembourg Compromise dead. Hayes-Renshaw and Wallace (1997) find this anoverstatement, but it is true that its use has been very restricted. In any case, theLuxembourg Compromise is part of the Treaty and as such of dubious legal validity.4.10.1 Qualified Majority Voting for the CAPThe decision-making rules relating to the CAP specify that the Council of Ministerswill vote on the Commission proposals under the rules of QMV. The distribution ofvotes, the population size and the relationship between both are presented in Table4.2. 94
    • Table 4. 2 The distribution of votes in the Council of Ministers, 1997Member States Number of Population size Inhabitants per votes in m. 1997* vote (m.)Austria 4 8,1 2,0Belgium 5 10,2 2,0Denmark 3 5,3 1,8Finland 3 5,1 1,7France 10 58,7 5,9Germany 10 82,1 8,2Greece 5 10,6 2,1Ireland 3 3,6 1,2Italy 10 57,4 5,7Luxembourg 2 0,4 0,2Netherlands 5 15,6 3,1Portugal 5 9,9 2,0Spain 8 39,37 4,9Sweden 4 8,9 2,2United Kingdom 10 59 5,9Total 87 374 4,3* European Commission (1997d)The current distribution of votes far from reflects the relative size of the MemberStates’ population. Large countries have always been underrepresented compared tothe smaller ones in terms of citizens per vote in the council. However, the unchangednumber of votes after the German unification has exacerbated this. Germany isparticularly underrepresented in the Council. The range goes from one vote for each200.000 inhabitants for Luxembourg to one in eight million in Germany. This state ofaffairs has already caused some complaints, and in 1993 French and German MEPscalled for a so-called double majority rule for the Council. This involves a qualifiedmajority of votes along with a qualified majority of citizens. This discussionculminated with the Nice Treaty of March 2001 with a new voting system to startfrom the 1st of January 2005. The modification does introduce a double qualifiedmajority rule, which is discussed in Chapter 7.The Nice Treaty has not been ratified by all member states and Ireland has evenrejected it. It is likely, however, that a compromise with Ireland will be reached on themost arduous points of the Treaty, which are not based on the voting system. Amodified and ratified version should follow, but probably will not amend the votingsystem. 95
    • During the history of the CAP, the Council has been reluctant to dismantle itsintergovernmental and consensus-based approach. Table 4.1 shows the developmentin the rules of QMV since 1958. There is an apparent sign of a reluctance to move thesystem to far away from the unanimity rule. In the 1995 enlargement the UK resisteda weakening of its influence in the Council and was not ready to allow the number ofcountries needed to form blocking a coalition to rise with the entrance of the threeEFTA countries. The UK lost the battle except for a small concession in the IoanninaCompromise (Council Decision of 29 March 1994, OJ C105/1). If 23 to 26 votes arecast against a proposal, this should be further discussed to try to find more consensusbefore having it formally approved. It is very difficult to assess if such circumstanceshave occurred and to which extent this new ruling has affected at all Council decision-making. It has been common for the Council to avoid decisions with an oppositionclose to a blocking majority. One wonders if this compromise has been a face-savingdeclaration tailored for the UK, just formalising a behaviour that is already common.In fact, according to Heyes-Renshaw and Wallace (1997), there is a ‘grey area’between the formal voting procedures and actual behaviour. Practice can differsubstantially and, unfortunately, there is little open evidence on the actual systems inthe past 40 years and leaving too much room for speculation.However, at least for the CAP there seems to be a drift towards unanimity and anavoidance whenever possible of formal voting. The latest Agenda 2000 negotiationsdescribed in Chapter 6 gives a clear picture of the actual process. Increasedtransparency of the negotiations and the time pressure on the negotiators to find anagreement before the Berlin European Council has revealed many aspects of theinformal Council rules in the Agricultural Council of Ministers.It appears that proposals are negotiated until the broadest possible acceptance hasbeen reached, thus the Council operates a system close to unanimity which has theeffect of further restricting the number of acceptable policy options. There are threepossible reasons for this:1. The Ministers are reluctant to outvote their counterparts. 96
    • 2. Some Member States have a status that allows them to have an implicit veto power.3. The more the rules move towards simple majority rules, the stronger the negative effects of inappropriate voting weights will become apparent.The third point has implications. A move towards greater majority voting will affectthe legitimacy of the Council. Furthermore, the Council’s raison d’être will fade themore ‘democratic’ and transparent it becomes, because this increases the pressure todelegate decision-making to the EP, which claims to be the democratic institutiondirectly representing the citizens of the member states. This is another reason forMember State governments to be reluctant to change the decision-making proceduresof the EU.The remainder of this research will be concerned primarily with the effects of thedecision-making process on the legislative output for the CAP and will not dwell toomuch on the democratic correctness or legitimacy of the process. It is worth notingthat the notion that the European Parliament can take over the legislative role of theCouncil is not shared by a large number of policy analysts. Höreth (1999) gives areview of the arguments. In summary, he claims that without the existence of a properEuropean polity and constitution, the EP does not have the constitutional legitimacy tooverrun national Governments at EU level. This is the raison dêtre of the Council.Allowing the EP to take over decision-making, it becomes theoretically possible for agovernment in power to have to accept the possibility that the majority of the MEPs inthe Parliament are members of the opposition party. This is synonymous to an officialacceptance that the opposition has the main say on European legislation, which issuperior to national legislation according to the treaties.The present reluctance to move towards a wider use of majority voting is therefore notsurprising and highly visible. For example, in the Council of Ministers for Agriculturevotes have often not been taken until the powerful dissenting members agreed. Theproposals have to be adapted to their demands. A memorable case was that no effortwas made to outvote France, by use of the QMV, on the dispute on the terms of theBlair House agreement in the URAA, even though this was technically possible 97
    • (Hayes-Renshaw and Wallace, 1997; Epstein, 1997). A similar situation emerged inthe Agenda 2000 negotiations (Chapter 5).There are other examples where Member States do not outvote large Member Statesin a systematic way, particularly France and Germany. It is rare for a small MemberState to sustain opposition and highly exceptional for it to try to veto a proposal whichother members have agreed. However, the literature on the subject seems to fail tomention that for the UK this rule does not seem to hold. While it is a large country,Member States, large or small, do not appear to have a problem in opposing theinterests of the UK.Teasdale (1996) mentions another discrepancy with the formal rule. He claims that thePresidency avoids formal voting when it is believed that a qualified majority can befound. It announces that unless a Member State objects the decision will be deemed tohave been taken. This is because often ministers can face domestic political costs inbeing seen outvoted in the Council. For the same reason, when a vote is taken,countries which would like to reject a proposal, might decide to abstain to avoid theembarrassment of defeat in the Council. More transparency in the Council canactually reduce the visibility of the preferences in the bargaining process, as memberstates will avoid revealing their true preferences. Interestingly enough the practice ofavoiding the formal vote was applied in the Agricultural Council at the negotiationsfor Agenda 2000. For this reason, France challenged the ‘formal’ agreement on 11March 1999 and Portugal immediately after the agreement was reached8, this isexplained in detail in Chapter 5. This event gives substantial grounds to believe thatTeasdales opinions are correct, the Council does not follow the rules of QMV, but hasvery particular rules, which attribute a different political power to the Member Statesthan it does formally.4.11 The Sectoral Bias in the CouncilCouncils are single-issue negotiations. The EU suffers in all Councils a sectoral bias.This bias is the excessive power of sectoral interests and the lobbies that operate in thearea of European legislation. The Ministers of Agriculture discuss among themselves8 The Ministers of France and Portugal considered the outcome not binding, because a ‘formal’ votewas not taken. 98
    • concerns of the agricultural sector. In this Council, no Ministers of other areas arepresent. This differs from national parliaments or the meetings of the Cabinet inMember States. In both cases, the representatives of other sectors participate in theformulation of policies and can affect the direction of the decisions taken.Although, formally, Parliaments and Cabinets should have a say on decisions taken atthe Council of Ministers, their influence is very limited during negotiations. Hayes-Renshaw and Wallace (1997) discuss the weakness of national parliaments and evengovernments in controlling the actions of the Ministers in the Council. The problemsare related to the increased ‘costs’ discussed by Vaubel in international organisations(see section 2.5.1).The only moment when the legislation discussed passes clearly through the hands ofother interests is in the preparation stages in the Commission. A proposal has to seekthe approval of the College of Commissioners, which means that it has to be discussedand approved by other DGs. After this, the policy becomes a nearly exclusively asectoral issue. This is so for all areas of EU legislation, but particularly for agriculture,where even the EP has no power to impose changes to Council decisions.4.12 The dominance of net budgetary balance considerationsAgricultural policy has an important impact on the distribution of the budget amongthe Member States. Changes in policies have the potential to change substantially thefinancial benefits from the policy and therefore also their position as net beneficiaryor contributor to the budget.The allocation of funds is of crucial importance to understand the puzzling lack ofchanges in the distribution of funds despite the clear incapacity of the policy to targetits objectives. The lack of logic of the policy has been widely discussed in Chapter 3.The lack of willingness by any Member State to give away any of the present benefitsfrom the CAP has frozen the distribution of financial benefits structure since thecreation of the policy. The lack of any substantial change in the share of the budgetaryreceipts after two successive radical reforms (MacSharry and Agenda 2000) only 99
    • reinforces this point. The way the budget distribution dominates negotiations isdocumented in detail in the next chapter.4.13 Conclusions on QMVThe formal decision-making rules in the Agricultural Council and the theoreticalfunctioning of QMV do not seem to reflect the actual functioning of the decision-making process. Furthermore, the decision-making process seems to encourageparalysis and does not allow the EU to face problems in the agricultural sectorefficiently. The following elements, which are appear to be particularly important,have to be tested:1. QMV limits the capacity to change the CAP efficiently.2. Actual rules in the Council are even more restrictive than QMV, and approach unanimity requirements.3. Some Member States have an implicit influence which is well above the one attributed by the formal distribution of votes.4. National and sectoral interests dominate the negotiations in the Council.5. Budgetary considerations, especially net budgetary balances, overshadow the negotiations and the final decisions.These six points will be the focus of attention in the next chapters. Evidence of thesepoints will be sought in theory and practice. 100
    • Chapter 5. The Agenda 2000 negotiations “Just to the left, and not very far away, were the Triple Demons of Compromise – one tall and thin, one short and fat, and the third exactly like the other two. As always, they moved in omnious circles, for one said “here”, the other said “there”and the third agreed perfectly with both of them. And, since they always settled their differences by doing what none of them really wanted, they rarely got anywhere at all – and neither did anyone they met.” (Norton Juster (1961), The Phantom Tollbooth, Collins Modern Classics, Collins,Londo, p.231)5.1 IntroductionThe present chapter follows the development of the Agenda 2000 negotiations,searching for evidence of links between voting rules, the EU budget, the MemberStates’ political preferences and the efficiency of CAP reforms. The methodology isbased on the dynamic policy model of section 2.11. The Agenda 2000 negotiationsmade visible many links to non-agricultural issues, links that were often discussed inacademic literature, but could not be formally proven as proceedings of Councilmeetings were held confidential. Due to the increase in the transparency of Councilmeetings, many suspicions have now become visible.The aim of this chapter is to find evidence of the inability of the Council’s decision-making system to handle the problems facing the agricultural sector. This requiresfocusing on many aspects of the negotiations and their outcome. An inefficientdecision-making process for agriculture can have an array of damaging effects on alarge number of areas. The following points will be addressed here:• A description of the negotiations for the Agenda 2000• Effects of the policy reforms on the agricultural sector• The WTO implications• Consequences of the Berlin agreement for the EnlargementThe Agenda 2000 negotiations are a good case study. It was one of the rare occasionswhere the agricultural Council received the media’s full attention. This occurred 101
    • because the results of the Council were seen as a crucial ingredient of the wide-ranging proposals of the Agenda 2000, which reformed other major aspects of theUnions finances. Interestingly, the member states had the task to change the directionof the agricultural policy to avoid future problems in the sector. A crisis was notpresent during the negotiations. Therefore, under these circumstances, member statescan be assumed to defend their national interests more openly, and to reveal bettertheir preferences.This study closely follows the consequences of different policy options for the overallnet budgetary expenditure. This should reveal to which extent the net budgetarybalances of member states influence the outcome of the negotiations. The models usedare briefly mentioned in Chapters 1 and 5 and are described in Annexes A and B. Thisallows the reader to place the CAP in the right context, which requires breaking theboundaries of disciplines beyond agricultural economics and policy.If the hypothesis of this thesis is correct and reflects the reality in the Council, thereshould be strong visible evidence of the following:• Strong pressure to reach a unanimous solution• French and German influence superior to their number of votes.• Strong pressure for keeping the status quo, due to a strong heterogeneity of interests.• The effect of reforms on member states’ net balances playing a decisive influence in the negotiations.• The outcome of the negotiations being short-sighted and only addressing immediate concerns.5.2 Methodology of the budgetary analysisThe analysis of the effects of the budget on decision-making of the CAP has beenhighly complex, and has required the construction of models of the EU budgetexpenditures and resources. The author encountered numerous, intricate sets oflinkages between the budget and the CAP. Furthermore, the policy accounts for halfthe EU budget. It is not possible to seriously address the linkages of the CAP to it 102
    • without taking into account all expenditures and the debate on net balances. Chapter 3already has discussed the importance of the budget in CAP decision-making.The complex relationship between the CAP expenditure and the budget’s ownresources and expenditures requires the negotiations about fundamental CAP reformsto precede decisions on the financial framework of the Union. This has taken placebecause any changes in the fundamental mechanisms of this policy at any other timewould most likely force a re-opening of the financial settlements agreed for a periodof six or seven years, unless the reforms were making the policy cheaper. Given thenature of reforms to date, with ever-larger compensation packages, this is not to beexpected. Revoking a the financial framework once set is a complex issue andpolitically controversial, requiring a unanimous agreement at the level of theEuropean Council.5.3 The Birth of Agenda 2000The European Council Meeting in Madrid in December 1995 asked the EuropeanCommission to prepare an outlook for the development of the European Union. InJuly 1997 the European Commission presented its Agenda 2000 (EuropeanCommission, 1997a) as a response. This document outlined the Commission’sstrategic proposals to tackle the problems of the future, particularly the enlargement ofthe Union. This was followed by detailed reform proposals for the CAP (EuropeanCommission, 1998a), the Structural and Cohesion Funds (European Commission1998b, 1998c, 1998d), the Instrument for Structural Policies for Pre-Accession (ISPA)(European Commission, 1998e, 1998f) and a financial perspective for the Union withand without enlargement (Commission, 1998g).The proposals of the Commission were wide-ranging, and aimed, at least officially, athelping the Union to prepare for enlargement and to improve its negotiating positionin the WTO talks for agriculture. The most important proposals for agriculture can besummarised as follows.These presented substantial cuts in the institutional prices for cereals, arable crops,beef and milk, compensated partially by direct payments to farmers. A “horizontal”regulation introduced cross-compliance with environmental conditions, modulation 103
    • and ceilings in the level of direct support to individual farmers. It also discussed thefinancing of agriculture and presented a new system of support for rural development.The main reform proposals are summarised in Table 5.1.Table 5. 1 Agenda 2000 proposalsSectors ProposalCereals and oilseeds Ø a reduction of the cereal intervention price to 95.35 €/t in the year 2000 in one step (the price was set for 1997 at 119.19€). Ø a non-crop-specific area payment of 66 €/t Ø the abolition of compulsory set-aside; voluntary set-aside to be allowed; set-aside areas to get the non-crop-specific area payments of 66 €/t.Beef Ø A gradual reduction in the intervention price from the present level of 2780 €/t to 1950 €/t over the period 2000-2002. This basic price works indirectly through aid to private storage measures, not by intervention purchases. Ø a gradual increase the direct income payments on a per head of cattle basis.Dairy Ø an extension of the quota regime to 2006 Ø a gradual decrease support prices by an average of 10% (the period is not indicated, it probably refers to the years until 2006) Ø introduce a new yearly payment for dairy cow units (5600 kg of milk), at a level of 145 €Horizontal Ø Ceilings:Measures - where the total amount of payments which would be granted to a farmer under the support schemes in respect of a given calendar year exceeds € 100 000, that amount shall be reduced by: - 20% of the part of that amount which exceeds € 100 000 but is not more than € 200 000, - 25% of the part of that amount which exceeds € 200 000 Ø Cross Compliance: - Member States shall take the environmental measures they 104
    • consider to be appropriate and link these to direct payments. - Member States shall decide the sanctions for ecological consequences of not observing the mandatory environmental requirementsRural Development Ø Measures aimed at supporting rural development - no funds were specifiedThe financial framework (Commission, 1998h) presented a real rise in theexpenditures of budget for the EU-15, caused mostly by the proposals to reform theCAP and the Structural Funds. While for agriculture the amount allocated increasedby 35,76 billion € in 1999 prices for the period 2000-2006, the Structural andCohesion Funds added 32 billion € (these sums exclude enlargement). Thisexpenditure, combined with the expected − and probably some feared unpredictable −extra costs of enlargement, worried the net contributors considerably. The financialframework did not breach the EU budget ceiling of 1.27% of GNP (although itsreliability and accurateness has been often questioned), but it would have significantlyincreased the negative balances of the net contributors (or so the concerned memberstates claimed). The effects on net balances compared with the year 1997, ascalculated by the author are depicted in Figure 5.19.Given the margin of error in calculating the Structural Fund allocations and theexpenditures for the CAP, the net balance estimates have to be taken with care. The1997 budget itself is affected by the differences between appropriations and actualexpenditures and the corrections to the UK rebate, which occurs with a two-year timelag.The deterioration of balances for the net contributors incited some controversialdebates from the time of the publication of the proposals. Four net contributors(Austria, Germany, the Netherlands and Sweden) protested about their budgetaryburden, which they regarded as ‘excessive’. This movement culminated in a proposal9 When comparing the budgetary balances, the special circumstances of the year 1997 have to be takeninto account. The expenditures were considerably higher than the contributions due to the rollover fromfunds of the previous year. Furthermore, the UK’s net contribution is small, because of the combinationof a particularly high rebate combined with receipts of funds due to other factors such as the BSE 105
    • by the Austrian Presidency to reform the own resources system in view to correct the‘excessive’ net balances. The proposal was based on the Fontainebleau EuropeanCouncil of 1984, according to which ‘any Member State sustaining a budgetaryburden which is excessive in relation to its relative prosperity may benefit from acorrection at the appropriate time’ (European Council, 1984). This discussionheralded a strong budgetary dispute for the agricultural reform negotiations.The Austrian Presidency offered as an option to introduce a generalised correctionmechanism, which would work in a similar manner as the UK rebate. This proposalwas strongly contested by Spain. It threatened to veto the concluding EU summit inVienna (11 and 12th December 1998) unless the issue was withdrawn from the table.Fearing an inconclusive presidency, the Austrian government opted for dropping theissue, probably in the knowledge that the German Presidency would take up thesubject of net balances again. It was with this background that the negotiations forAgenda 2000 began, with an important emphasis on the EU budget.crisis. The high rebate was caused by refunds for after the definitive calculations of past rebates andexchange rate fluctuations. All the details are explained in Commission (1998h). 106
    • Figure 5. 1 Net balances in 1997 compared with the Agenda 2000 proposals inthe year 2006 (at 1999 prices) with and without enlargement as calculated in thefinancial perspectives Belgium Denmark Germany Agenda 2000 proposals - year Greece 2006 EU 20 Spain France Ireland Italy Agenda 2000 Luxembourg proposals - year 2006 EU15 Netherlands Austria Portugal Finland 1997 real Sweden UK CEEC 5 -20000 -10000 0 10000 20000 million euroData source: Annex B.I 107
    • 5.4 The German Presidency – Setting the parameters for negotiationThe Spanish reaction at the Vienna Summit did not deter Germany from presentingsimilar proposals on a budgetary rebate together with a number of other measures toreduce the EU budgetary burden, two of which targeted directly the CAP. Themeasures discussed by the Presidency can be summarised as follows:1. Change the budget own resources system by scrapping the VAT resource and only keep the TOR10 and GNP resources.2. Introduce a correction mechanism for “excessive net contributions” for member states11.3. Renegotiate the budget rebate of the UK.4. Co-financing of the direct payments to farmers.5. Phase out Cohesion Funds for the member states which enter the single currency.6. Reduce or limit the Structural Funds expenditures.7. Introduce a ceiling to agricultural spending, limiting its size to an annual average for the period 2000 to 2006 of 40.5 billion € (the expenditure for 1999).The German Presidency began a process of negotiations with the principal aim oflimiting EU expenditures and reducing the burden to the net contributors, particularlyits own net contribution (see Figure 5.2). In so doing, the package of reformsdemanded sacrifices of different kinds from the member states. The idea was to haveall member states giving up benefits from the budget [which can be contested as beingtoo generous or unbalanced]. The benefits for France were from the CommonAgricultural Policy, of which it is the main beneficiary. For the UK, Germanyrequired a reduction in the size of its budgetary rebate. The Cohesion countries had togive up some of the transfers to their economy in the form of Structural or CohesionFunds. The Presidency even mentioned abolishing the Cohesion Funds for thosecountries, which became members of the Euro-zone. Finally, Italy was supposed toaccept a switch in the own resources mechanism of the EU budget from the VAT key10 Traditional Own Resources: customs duties and agricultural levies11 The mechanism to cut the net contributions to the Budget would follow a similar system then the onepresented by the Commission (1998h). Member States which exceeded in their net contribution to theEU budget 0.3 or 0.4% of GNP would be eligible to a rebate of 66% of the sum over this level. Thisfollows the rationale of the system of the UK rebate, with the exception that the UK’s threshold is 0%.Thus, the UK rebate is valid for the whole net contribution. 108
    • to GNP; until now Italy was unfairly benefiting from VAT system. Other countrieswould also be affected negatively by a combination of the above measures.Due to uncertainties on the actual date of enlargement and the magnitude of the actualcosts, negotiations concentrated on the costs and net balances amongst the EU15.Enlargement was not given proper attention, but issues related to this were‘ringfenced’ or left untouched. This prognosticated a result far from satisfactory forthe future. All of Germany’s proposals were openly mainly for its own benefit, whichantagonised other member States.First of all, however, the most important deal to be struck, and one that would affectall other items in the agenda, was the reform of the CAP. This was the first policy tobe discussed. Due to the particular importance of the policy for the size of the EUbudget and the effect it has on net contributions, no deal on any other items was to bepossible without a successful conclusion the CAP reform negotiations.Figure 5. 2 Possible effects of German proposals on net balances for selectedcountries, after full implementation of Agenda 2000 5000 4000 Co-financing of CAP 3000 Constrained general million euro 2000 correction mechanism for A, D, NL, Sw 1000 No Cohesion Funds for E, P and Irl 0 Total shift from VAT to -1000 GNP key -2000 Implementation of all UK Germany Italy Spain Netherlands France measuresSource: Own calculations. Note that changes are calculated first individually, the overall combinedeffect is therefore not equal to the sum. Figures in Annex B.II.Positive figures are improvements in the net balance, negative are deteriorations. 109
    • 5.5. CAP negotiationsAt the beginning of the negotiations, it was possible to identify a division in theAgricultural Council in the form of four – more or less stable – coalitions, led byGermany, France, Spain, and the UK, and a group with less clear preferences (seeFigure 5.3). This group is composed of Belgium, Finland and Luxembourg; thesecountries appeared to have their own position in reform, although Belgium partlyfollowed the French position. Some member states have been attributed to twogroups. This is because, while they have many points in common in one group, theydo not share all the leaders opinions.Figure 5. 3 Negotiating Positions D Co-financing of CAP (A, NL) Direct Payments Milk quota increase Balance benefits north- south Full compensation No Co-financing F No milk reform (Irl, B) E (EL, P, I) Maximum liberalisation DP phasing out UK B, Fin, Lux I, DK, S Pressure:Figure 5.3 presents how the coalitions related to each other. The arrows show thepressures of the coalitions on other coalitions to accept their position. Mainly thepressure was on the German coalition, as Germany had the presidency. The positionof the French and German coalitions are incompatible. Germany and France attemptto impose their own view on each other.In the Agricultural negotiations the overall Agenda 2000 proposals loomed in thebackground and a ceiling to spending had to be included. The influence from the 110
    • overall package beyond agriculture became evident as the negotiations proceeded. Allcoalitions had weakpoints, due to the different positions on the issue of netcontributions and the Structural Funds. If the Agenda 2000 as a whole was analysed,the coalitions would often be different. For example, the UKs position of defendingits net contribution rebate mechanism would isolate it in the overall package. In fact,in the Berlin European Council Summit of Heads of State showed a differentconstellation of coalitions, with serious consequences for the agricultural deal.The negotiations began with the reform proposals for the agricultural sector. From thebeginning, an impasse occurred between France and Germany. France could notaccept co-financing of direct payments, which to an extent was accepted by mostother member states (not without reservations). This measure was unpalatable for thefarmers in France, which claimed that this would be a move towards futurediscrimination among producers in member states.Behind the French position, however, was probably much more than this. Francewould have to spend more of its own state funds to finance the direct payments for itslarge agricultural sector (see figure 5.2 for the budgetary effect). Farmers, particularlythe vociferous French farmers, have generally been worried that this would speed upthe process of reducing the size of the direct payments. Rational governments, theyprobably fear, would be more prone to press for the elimination of direct payments ifthe burden were not shared among other member states.The co-financing dispute can be seen as the influence of net balances and of nationalexpenditures on the negotiations. For Germany, it would allow maintaining thesupport for its farmers at the same level while reducing Germany’s overall budgetaryexpenditure for agriculture and its net budgetary contribution deficit with the EU. ForFrance the effect would be the reverse. As one of the main beneficiaries of the CAP,co-financing would increase the national budgetary expenditure, as the net balancewith the EU deteriorated. The dispute perfectly reflected the behaviour expectedunder preferences controlled by budgetary considerations.However, France accepted to a certain extent that agricultural spending wouldincrease too much with the reform proposals by the Commission. It thereforeproposed a reduction in the size of the price cuts in cereals and beef, to abandon the 111
    • milk reforms and to introduce a gradual fall by a small percentage every year of thedirect payments, for the largest beneficiaries.Germany could not accept the degressive gradual reductions in direct payments. Itwas here that the German intentions became obvious. After bilateral negotiations withFrance, the German Presidency offered a highly diluted proposal, without co-financing nor degressivity. The status quo solution par excellence, whichdemonstrates that it did not regard substantial agricultural reforms as necessary.This situation reveals the concern of some member states about changes in thebenefits by farmers. Nevertheless, it is interesting that France was ready to acceptdegressivity in direct payments and one has to bear in mind that the East Germanfarmers are under financial strain.What clearly crystallised at this stage was the ability of France and Germany todominate the negotiations. It was clear that without France there would be no reform,but was also clear that with Germanys refusal degressivity was impossible. None ofthe other member states proposed to outvote one or the other. Most members acceptedco-financing as a possible solution at an early stage, but Frances refusal was enoughto make the proposal non-viable. This indicates that France and Germany did defactopossess an implicit veto power.The behaviour by Italy was interesting. It openly threatened to veto the BerlinEuropean Council unless the agricultural reform was not stronger, in particular for themilk proposals. This is important, because the need for a wider deal beyondagriculture allowed curtailing QMV rules. The agricultural Council was to a greatextent openly operating by unanimity.The German Presidency made a final move and proposed a package which was verysimilar in format to the original Commission proposals, but with the most ‘radical’ideas omitted. It reduced overall expenditure for the period until 2006 by delaying theintroduction of the milk reforms and introducing transitional periods for the remainingreforms. Ironically, yearly expenditure at the end of the period was practicallyidentical to the original proposals and there were no long-term savings over the whole 112
    • period. Thus without further reform, the cost of the CAP beyond 2006 would not becheaper. Interesting is also the deletion of Article 6 of the horizontal measures, whichproposed a ceiling for direct payments over a certain sum. This article would affectnegatively East German farmers. At the end, the option to reduce direct payments by acertain percentage every year was kept open for discussion in the European Council inBerlin, but not agreed upon.The Agricultural Council dissolves with a non-voted “agreement”, with openreservations by France and Portugal. The illusion that France had been outvoted soonfaded. The Agricultural Council de facto left the situation unresolved and open tochange in the Berlin Summit, partly because there was no time to further delay theissue. France and some other member states clearly did not share the Presidency’sclaim that an agreement was reached. A formal qualified majority vote wouldprobably not have made any difference to the events that were to develop in the BerlinEuropean Council.5.6 The European Council Summit in BerlinThe long and arduous negotiations on the agricultural package had delayed anymeaningful negotiations on other items of the Agenda 2000. In fact, by reducingagricultural expenditure only cosmetically, Spain and the UK clearly decided not toco-operate much. Both were not ready to accept big changes in their interests now thatFrance and Germany had not given up any significant point on their CAP interests.Figure 5.4 describes the initial negotiating positions at the Summit and the pressureseach coalition was applying on others to make these agree with their position.The expected agenda for the Summit ended as a set of “fine tunings”, i.e. smallchanges here and there that allow a conclusion of the negotiations. A fundamentalchange in the Union’s policies was already out of sight.• Structural Funds: “Fine tuning” consisted of a “cosmetic” reduction in Structural and Cohesion Funds, Scrapping the Cohesion Funds was out of the question. Some compensation for negative impacts for Ireland and Portugal for Structural Funds losses in the changes of Objective 1 criteria were announced. 113
    • • Financing (Budget rebates): “Fine tuning” here consisted of technical adjustments to the financing of the UK rebate and some compromise on the treatment of future enlargement costs. Expenditures to the CEECs before accession, which are external to the Union and excluded from the rebate, would not be included in the rebate calculation after enlargement.• The constrained general correction mechanism for net balances disappeared from the programme.• Financing (own resources): VAT to GNP key was expected to go through, mainly because until then it was not contested seriously.• Agriculture: “Fine Tuning” consisted in reintroducing optional ceilings on direct payments (modulation) or using a system of degressive direct payments.Figure 5.4, shows how in the European Council, where the whole of the Agenda 2000is negotiated the reformist coalition for agriculture was diluted and dispersed. The UKbudget rebate put the country in the defensive. The pressure is strong on the cohesioncountries to accept a reduction in the cohesion and structural funds. The constellationis particularly favourable for France for not only is the coalition for reform diluted,but the Presidency is in a weak position. While it strongly argued for budget rebatesand for a reduction in structural spending, it suffers from a lack of credibility, as itrefuses to take the option of introducing degressive direct payments. France couldapply pressure, without being a target itself. 114
    • Figure 5. 4 Negotiating positions: Berlin Summit D (A, NL, S) “Fine Tuning” “Fine Tuning” Structural and of CAP Cohesion expenditure Expenditure Degressive cuts? F E (EL, P, Irl) UK rebate reform “Fine Tuning” UK I ( B?, DK?, Fin?, Lux?) Pressure for Cut in UK rebate: Pressure for Degressivity of CAP Direct Payments: Pressure for Cohesion and Structural Fund cuts:The German Presidency was not having any breakthrough but needed it for reachingan agreement to conclude the Presidency. France took advantage by reopening theCAP reform in an unexpected move. The French president, Chirac, played an astutecard. Due to the crucial importance to reach an agreement on the future finances andpolicies of the Union, Germany could not afford to end the presidency with a non-agreement. France therefore managed to reduce considerably the scope of theagricultural reforms. Price cuts for cereals were reduced and the mechanism to cutdirect payments yearly was abandoned. Milk reforms were postponed until 2005,while the milk quotas were increased for various member states. This quota increasewas particularly important to appease Italy, which was very concerned over the size ofits quota allocation. Therefore, the reforms in agriculture were less expensive then theoriginal Agenda 2000 proposals, because the magnitude of the price cuts has beenreduced and the reform of the milk quotas postponed (Table 5.2). This outcomeprobably damaged the discussions on the reform of the structural funds and other.What is particularly important, and maybe most striking was the power of theEuropean Council on agricultural matters. Agricultural policy has an important impacton the EU budget and the member states’ net balances. This importance lifted the finaldecision to a superior body of decision-makers, the European Council. Major 115
    • agricultural policy reforms will always have to be decided in advance and close to thefinancial framework. Thus it is an integral part of a much wider programme. TheAgricultural Council is therefore weakened. This has its positive and negative aspects.The negative aspect is that, instead of losing power to a less exclusive centre ofdecision-making, such as the European Parliament, the CAP has become an item ofthe most exclusive body. While it is true that in the European Council the CAPconfronts a more wide set of interests (it is not a sectoral body), it seems even lessvulnerable. No decisions were to be taken until the issue of the CAP is solved, anddue to the nature of the European Council, decisions are taken practically underunanimity. Since the CAP budget had been stabilised with the MacSharry 1992reform, Member States are now interested in maintaining the level of financialbenefits from the budget. Finance Ministers have now apparently become friends andnot foes of the CAP. Decision-making for the main items of the CAP has becomemore intricate than the traditional descriptions of Chapter 2.While decision-making literature mostly neglects the European Council, because itsformal powers are unclear and apparently weak, its power has increased steadily. Forexample, Hayes-Renshaw and Wallace (1997) hardly mention the European Councilin their analysis of the Council of Ministers of the EU. This is generally visible inmost work on the decision-making of the Union. However, while formally with alimited treaty base and without a clear legal basis, the European Council of Heads ofState has become a crucial decision-maker. Nugent (1999) is one of the few authors,and probably the one that has understood best, the role of this Council.It appears that the Ministers in the Council and the Heads of State have protected theirnational interests and neglected the reasons for reform. The next sections willhighlight to which extent the agreed reforms have failed to address efficiently theproblems facing the agricultural sector. This is a good measure of the inefficiency andincapacity of the Council to face the problems in the agricultural sector. Three crucialaspects of the Agenda 2000 reforms will be analysed. The first is the EU’s positionafter the agreement towards the WTO commitments. The second will concentrate onthe budgetary implications for the EU-15 and the third will analyse the short- and 116
    • medium-term implications for the enlargement. These results should give anindication of the Council’s ability to deal with oncoming problems.5.7 The Final Agricultural Reform - An AnalysisThis reform was supposed to have paved the way for a smooth enlargement to theCEECs and to give the EU a strong position in the WTO negotiations. Do thesereforms really fulfil these requirements? Unfortunately the answer is no. They help, ofcourse, but they have not tackled some of the most problematic and controversialissues. One may argue the contrary, claiming that the main problem was interventionprice levels in the agricultural sector and that these have been cut. Prices are without adoubt an important, but not the only, element; direct payments to farmers involve alarge number of problems that have not been really solved in the negotiations. Alsoworrying is the postponement of the milk reform. The timetable for reforms brings thequota system well into the years after the expected first wave of enlargement. Thequota regime will bring not only technical difficulties for accession, but will introducesome paradoxes that are presented below. As for whether the price reductions areadequate, future developments in the world market will decide for the EU if the cutwas enough, but an analysis by Brenton and Núñez Ferrer (2000) does not give afavourable picture. 117
    • Table 5. 2 Agenda 2000 proposals - Berlin OutcomeSectors Final DecisionCereals and oilseeds Ø A reduction of the cereal intervention price to 101.3 €/t in the year 2001 in two steps (110.25 in year 2000). Ø A non-crop specific area payment of 63 €/t from 2001 (58.67 in year 2000) Ø Compulsory set-aside left at 10%; improvement of voluntary set-aside (i.e. environmental conditionality) areas to get the non-crop specific area payments of 63 €/t.Beef Ø A gradual reduction in the intervention price from the present level of 2780 €/t to 2224 €/t over the period 2000-2002. Price will be a basic price (similar to a target price), with a safety- net intervention price of 1560 €/t. Ø To gradually increase the direct income payments on a per head of cattle basis.Dairy Ø Extend the quota regime to 2005/6, increases in quotas in 2000/01 and 2001/02. Ø Intervention prices for butter and skimmed milk powder will be reduced by 15% in three equal steps, starting from 2005/6 Ø Introduce a new yearly premium per tonne and payments through national envelopes from 2005 onwards.Horizontal Ø Ceilings:Measures - No ceilings Ø Cross Compliance: - Member States shall take the environmental measures they consider appropriate, linking these to direct payments. - Member States shall decide the sanctions for ecological consequences of not observing the mandatory environmental requirements.Rural Development Ø Measures aimed at supporting rural development – no funds were specified, but agricultural expenditure ceiling restricts any possible programmes.5.7.1 Price cuts and WTO commitmentsAn analysis of the Agenda 2000 negotiations (Brenton and Núñez Ferrer, 2000)considers the outcome of the negotiations for agriculture as failing to ensure that theEU can maintain the Uruguay Round GATT commitments on agriculture.Furthermore, in so doing, the Council has left the EU in an awkward negotiatingposition for the present round of WTO negotiations. The EU has to adopt a defensiveposition with little room for manoeuvre. This is a weak position and leaves the EUwithout the capacity to bring much of a constructive dialogue to the negotiations. Itsstrategy will be probably to limit itself to pinpointing the failures of other agriculturalpolicies, such as the recurrent yearly ‘one-off’ and ‘decoupled’ US support payments. 118
    • This will have the only ‘honourable goal’ of defending its own failures and not tobring any improvement in world agricultural trade and protection practices. Theresults of the study and the consequences are presented here. Aggregate Measure of Support commitmentsTable 5.3 shows the AMS commitments made by the EU and the applicant countries fortheir agricultural sectors until the year 2000. For the EU, the calculated base AggregateMeasure of Support (AMS) level leaves a huge amount of slack. This is good news, itis the only area where the EU has some area of respite. The GATT Uruguay Roundcommitment to reduce the AMS by 20% up to the year 2000 imposed no adjustmentneeds on the CAP and should allow the accommodation of the new member states inthe first wave of accession.It is assumed that the EU would add to its commitment the AMS limits of the newmembers. The sum of the AMS in the final year is below the commitment. As predictedby Buckwell et al. (1994), the EU should have enough slack in its commitments toaccommodate the acceding countries, despite the erosion of their currencies’ value byhigh inflation rates. Poland had the foresight to fix their commitment in US$,eliminating the effect of an erosion of the real value of the protection. Slovenia also setthe commitments in € (then ECU) when it acceded to the WTO. The level of the AMSin 1997 was 51 billion €, well under the maximum ceiling of 73.8 billion € at that yearand considerably below the final commitment of 65 billion € (1998 exchange rate) forthe year 2000.After the Agenda 2000 reforms, the total AMS of the Union should fall further andaccommodate easily the new entrants, leaving some space for further reductions of thelimits at the WTO negotiations. Therefore, there would also appear to be scope for theEU to make further significant commitments on the AMS during the next round ofagricultural negotiations unless the exclusion of blue box payments from thecalculation of the AMS is successfully challenged. 119
    • Table 5. 3 AMS levels in 2000 under different exchange rate assumptions AMS 2000 AMS in million € AMS in million Percent (as in GATT (1986-1988 € (1998 change: schedules) average exchange rate) 2000/Base exchange rate)EU 61,204 m € 61,204 61,204 0Czech Republic 13,611 m CKR 859 376 -71Hungary 33,808 m HF 644 140 -77Poland 3,329 USD 2,563 2,996 +10Slovak Republic 10,140 m SKR 640 256 -72Slovenia (est.) 62 62 0 62 m €Total 64,881 65,034 -2Estonia is excluded as no commitment has yet been agreed.Source: Moehler, Núñez Ferrer and Fernandez (2000); own calculationsThe EU is now the only WTO member wishing to keep a ‘blue box’ item since the UShas reformed its agricultural policy and eliminated its deficiency payments. The EU hasto keep the ‘blue-box’ intact or it will fail to comply with the limits. The peace clauseprotects its domestic support against action under the GATT and under the Agreementon Subsidies and Countervailing Measures because of impairment of concessions orbecause of causing injury, but it only applies until 2003. Support under the ‘blue-box’could be challenged from that year onwards. In the present WTO negotiations, the EUwill insist on keeping the ‘blue-box’ in order to continue to exempt direct paymentsfrom the commitment to reduce domestic support. The Cairns group of countriesstrongly opposes the idea of maintaining the ‘blue-box’, and the US no longer has aninterest in keeping it. Export subsidy value and volume commitmentsIt is in the subsidised export commitments that the EU may well face the strongestconstraints. The EU has agreed limits on export subsidy values and volumes. Anumber of studies suggest, usually on the basis of simulation models, that the EU willhave difficulty meeting its commitments on export subsidies, particularly for grainsand dairy (see, for example, Josling et al. (1998)). Export volumes for the year 1997are shown in Table 5.4 together with the volume commitments for the year 2000. For 120
    • the EU the figures represent actual exports (source DGVI Web site, statistical data).For the CEECs the difference between domestic supply and consumption is used.12In the year 2000, for most of the key agricultural products the levels of exports orexportable surplus exceeded the subsidised export volume commitments for the year.However, higher world prices or intervention storage have prevented breaking thecommitments. The ability to meet these commitments will depend upon developmentsin world market prices and changes in domestic demand and supply in response to thereform of the CAP. Even in the case of cereals the price reduction appears to be toosmall to ensure that it does not keep continuously over the world price.Table 5. 4 Export volume commitments and exports or exportable surplusesA)Wheat Max. sub. Export 1997 Exports Quantity over limit % over limit volume (1000t), (1000t) (1000t) year 2000 2EU-15 13437 17109 10112 75.3 1 1Czech Republic 65,5 -51 -286,5 n/aHungary 1141 1954 813 71.2Poland (1) 0 -287 -287 n/a 1 1 1Slovak Republic 109 134 152 139Total 14752,5 18859 10503,5 71.21 Total Cereals (quantities and % over limit for wheat + coarse grains)2 Marketing year 1996/97B)Coarse Max. sub. Export 1997 Exports Quantity over limit % over limitGrains volume (1000t), (1000t) (1000t) year 2000 2EU-15 9973,4 16414 6441 64.5Czech Republic -170 -170 n/aHungary 1641 2.109 1.945 n/aPoland (1) 0 257 257 n/aSlovak Republic 127 127 n/aTotal 10138 18737 12271 1211 Corn2 Marketing year 1996/97B) Beef Max. sub. Export 1997Exports Quantity over limit % over limit volume (1000t), (1000t) (1000t) year 2000 1EU-15 817 971 154 18.8Czech Republic 49.8 11 -39 -78.3Hungary 83 173 90 108.4Poland(1) 40.9 10 -31 -78.8Slovak Republic 28.4 4 -24 -84.5Total 1019 1169 150 14.71 Note that intervention stocks in 1998 exceeded 500000t.12 Data for domestic consumption and production supplied by Wolfgang Münch from GöttingenUniversity. 121
    • C) SMP Max. sub. Export 1997 Exports Quantity over limit % over limit volume (1000t), (1000t) (1000t) year 2000EU-15 243 224 -19 -7.8Czech Republic 66.9 24 -43 -68.7Hungary(2) 0 14 14 n/aPoland(1) 37 131 94 254.1Slovak Republic 15 4 -11 -73.3Total 362 397 35 9.6D) Sugar Max. sub. Export 1997 Exports Quantity over limit % over limit – volume (1000t), (1000t) (1000t) quantity year 2000EU-15 1151 3835 2684 233.2Czech Republic 4.9 217 212 4328.6Hungary 32 199 167 521.9Poland(1) 104.4 395 291 278.3Slovak Republic 3.9 8 4 105.1Total 1296 4654 3358 259.0Table source: Brenton and Núñez Ferrer (2000);(1) 1998 (2) average exports 1995-98Let’s now proceed to a more detailed analysis of the WTO problems facing the EU inthe cereals sector, and particularly wheat. The principal mode of reform in the EU hasbeen to reduce the intervention price, but not to fully liberalise to the world pricelevel. Compensatory payments have been introduced which are linked to initialproduction levels with a requirement for a certain portion of cultivated land to be set-aside. However, a very crude and simple analysis of the price sensitivity of wheatoutput in the EU, as shown in the following Figure 5.5 which covers the period of thefirst reform of the CAP, suggests a high degree of inelasticity of production to worldprices. Production in the EU during the 1990s appears to have been unresponsive toprice falls. Indeed production has continued to rise despite a fall in the interventionprice. Yields since the MacSharry reforms continue to rise and land under oilseedproduction has shifted to cereals. 122
    • Figure 5. 5 Price Responsiveness of Wheat Price Responsiveness of Supply of Wheat, EU-12 180 160 140 120 100 Wheat intervention price € 80 World prices € 60 40 Production (mt) 20 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Source: Brenton and Núñez Ferrer (2000)Thus, despite the MacSharry reforms and the set-aside area obligations, production inthe EU has increased steadily, with little apparent reaction to changes in theintervention price or the world price. Nevertheless, internal consumption of cerealshas increased strongly, which has reduced the level of exportable surplus. The reasonsare analysed further below. The following table summarises the extent of variability inworld prices and in production during the 1990s in the EU, the USA and in Australia,a country with relatively little policy intervention.Table 5. 5 Summary Measures of Price Variability and Production of Wheatin the 1990s Standard deviation Mean Coefficient of variation (std.dev./mean)World Price 30.84 € 100.51 € 30.7Production:EU-12 6.52 Mt 89.38 Mt 7.2USA 4.73 Mt 63.39 Mt 7.5Australia 4.88 Mt 16.94 Mt 28.9Data Sources: World Prices - Eurostat c.i.f. Rotterdam 91-93, 93-99 FAO Commodity review (1999) Production - Web site of FAO statistical officeThis again indicates inelastic responses to the variability in world prices in both theEU and US, which reflects the isolation of farmers in these countries from worldmarket movements. The comparison with Australia is informative where variability in 123
    • output has been substantially greater than that in the other regions. So, this crudelysuggests that the price elasticity of supply is very low and that supply change is moststrongly affected by technical growth and farm restructuring. During the period sincethe recent CAP reforms there has been a rise in the average size of farms as well as anincrease in the area of land under crop production.To precisely estimate the supply price elasticity in the EU for many agriculturalproducts is difficult due the high degree of interference in the market and thedifficulty of accurately capturing the impact of the raft of policies which affect outputdecisions. In addition, the price elasticity has probably been changing (becomingmore inelastic) as a result of policy intervention which has de-sensitised farmers tochanges in world market conditions, and expectations concerning future intervention.This suggests some difficulty for simulation models which predict the long-run impactof policy changes with fixed elasticity values. In addition, the observed movements inagricultural supply may reflect a form of hysteresis whereby large upward movementsin prices lead to significant adjustments in production, whilst price falls have asmaller impact upon output decisions.The profile of supply over time also reflects the nature of the reform in the EU. Thedirect payments made as compensation for the fall in the intervention price are linkedto production. To qualify for the payments, farmers have simultaneously to set-aside acertain amount of land, but are in principle not allowed to exceed the specified levelof set-aside. The area under cultivation is insensitive to market circumstances.In terms of value commitments there are unlikely to be any problems for wheat. Thevalue of subsidised exports by the EU in 2000 was around 80 per cent below thecommitment.The above analysis has concentrated upon the wheat sector, although it is applicableto a number of sectors facing similar issues. The beef sector reforms appear to be tolow with price cuts not probably reaching a level sufficient to allow unsubsidisedexports. This is grave, as stocks in the EU reached over 500000t in 1998, whileexports, as the tables show were at the maximum allowed for 1997. With the 124
    • continuing low confidence by consumers of the EU, stocks can be expected tocontinue growing.However, the milk sector also appears to be particularly problematic since to date ithas remained outside of the reform of the CAP which will make any concessions inthis area at the WTO impossible, something which will be compounded byenlargement to the CEECs.5.7.2 The Budget for AgricultureAccording to the agricultural model estimates the Berlin agreement poses seriousproblems to the budget ceiling for agriculture. The expenditure forecasted for 2006 is42,3 b € without any funds allocated to rural development (Annex A.II). With the4.370 m € for rural development proposed in the Berlin Summit, there would be afinancial overrun of more than 5 billion €. Even accepting a margin of error in thecalculations, it is clear that the Berlin conclusions are not leaving any room formanoeuvre. Due to the compulsory nature of CAP expenditure, the rural developmentfunds may well suffer a squeeze to compensate for the overrun.The changes in agricultural policy have left nearly unaffected the distribution of thefunds among member states. The policy still suffers from the same level ofregressivity as before. Comparing receipts per farmer from EAGGF for 1997 toreceipts per farmer for 2006 there are hardly any changes. The number of farmers andthe NVA of farms have been left equal to the figures in 1997 for purposes ofcomparison.Agriculture is the main cause for the imbalances in the net budgetary contributions.Calculations of level of net contributions by the member states show that after Berlinthese are still very imbalanced. The new balances have not improved the relationshipbetween the ability to pay and the net contributions. The whole budgetary balances forthe EU 15 after the Agenda 2000 Berlin Summit decisions have been estimated. Table5.6 shows the relationship between GNP per capita and net contributions for the year1997 and 2006. 125
    • Figure 5. 6 Receipts per Farmer, 1997 14000 average FEOGA expenditure per farmer (ECU) Irl DK 12000 B 10000 F 8000 D UK 6000 Swe Lux NL E A 4000 Fin EL I 2000 P 0 0 10 20 30 40 50 60 70 80 NVA-Farm (ECU 1000)Figure 5. 7 Receipts per Farmer, 2006 14000 average FEOGA expenditure per farmer (euro) DK 12000 Irl F B 10000 Lux UK 8000 Swe NL 6000 D Fin A E 4000 I EL 2000 P 0 0 10 20 30 40 50 60 70 80 NVA-Farm (euro 1000) 126
    • Table 5. 6 Net contributions and GDP per capita, EU 151, at 1999 prices 1997 2006 GNP per Net GNP per Net capita contribution/ capita2 contribution/ (000 €) capita (000 €) capitaBelgium 22,39 175 Belgium 27 170Denmark 27,28 18 Denmark 34 -17Germany 23,53 -145 Germany 29 -118Greece 10,58 427 Greece 13 466Spain 12,43 147 Spain 16 181France 21,82 -31 France 27 -20Ireland 15,86 796 Ireland 21 371Italy 18,30 -10 Italy 23 -26Netherlands 21,45 -82 Netherlands 27 -125Austria 23,59 -112 Austria 29 -81Portugal 9,27 282 Portugal 12 329Finland 20,81 0 Finland 26 -1Sweden 22,67 -139 Sweden 28 -86UK 20,21 -12 UK 26 -601 no enlargement included2 Projection, 2% GNP growth rate per capita, constant population.Source: Table B.II.2 and population count in 1997 by EurostatThere seems a very weak improvement in the already bad fit between the ability topay and the net balances of the EU budget. The ability to pay is assumed to based onGNP per capita. Everybody does not necessarily share this definition, andCommission (1998h) discusses various other interpretations for the ability to pay.Putting aside differences of purchasing power due to price differences, a properlyfunctioning EU budget following the solidarity and convergence criteria of the EUfinances would show a negative linear relationship between net balances and GNP perhead. The relationship is there, but relatively weak.5.8 Consequences of the Berlin agreement on EnlargementIt was claimed by the heads of state that the Berlin Summit made the necessarychanges to pave the way for accession. However, the final agreement on Agenda 2000paid only lip service to the enlargement. The heads of state just declared theircommitment to enlargement and ringfenced the resources programmed for the processin the financial framework. These resources were based on the notion that directpayments will not need to be granted to the new members. 127
    • The EU-15 has agreed on reform concentrating primarily on its internal intra-budgetary problems. Little or no attention was paid to the consequences ofenlargement. The consequence is that the EU is marching towards enlargement ill-equipped for known and unknown consequences.Two crucial aspects have been neglected, which are the most important problems ofenlargement. The first is the potential effect on production of an introduction of theCAP in the CEECs, the second is the associated cost of this. The following analysiswill describe to which extent the Council has left the EU unprepared to embark in oneof the most complicated enlargement processes in its history. If the Council is unableto handle such obvious and clear problems for the near future one must question itsrole and efficiency as a decision-maker.5.8.1 Effects of CAP enlargement on production levelsLevels of market support in the CEECs are still generally lower than, and oftensubstantially below, that in the EU. This is particularly the case in the milk and beefsectors. In aggregate, agricultural protection in 1997 was only one quarter of that inthe EU in the Czech Republic, 38% in Hungary and 50% in Poland (Banse, 1999).Only Slovenia has a level of support comparable to the EU. Although it is verydifficult to predict the medium-term evolution of these protection gaps, an immediateextension of the CAP would substantially raise levels of market support, encouragingincreases in production and induce major changes in the agricultural sectors of theCEECs. In addition, accession to the EU will also encourage agricultural growth byproviding free access to the large EU market.The encouragement for increases in production will occur particularly in the beef andmilk sector. Even after the Agenda 2000 reforms beef support prices will still be 45%higher in the EU than in the CEECs. The EU’s cereal prices are in contrast similar tothose in the CEECs. Poland, for example, had an intervention price higher than in theEU, at 141 € per ton compared with 119 in the EU in 1999. 128
    • Table 5. 7 Differences in support prices EU-CEECs % difference EU vs. Polish intervention prices, 1997Beef 81.2Milk 93.8SMP 42.7Butter 67.8Source: Brenton and Núñez Ferrer (2000)Using a simulation model, Münch (1998) calculates that after accession agriculturalproduction will exceed domestic demand for most agricultural products in the Centraland Eastern European countries. These production surpluses will have to be exportedoutside of the Union. These calculations were based upon the reforms in the Agenda2000 proposal. The actual reforms agreed at the Berlin Summit were less bold and sowill accentuate the cost of these problems in the Union. Using a similar modellingapproach, Swaminathan et al. (1997) predicted strong increases in agriculturalproduction in the CEECs after integration into the unreformed CAP. For example,production of wheat rises by almost one quarter in Eastern Europe whilst output of milkproducts increases by over 70 per cent.However, for certain products, particularly processed foodstuffs, current variations inprices will only partly reflect differences in agricultural policies. Food quality issuesare also likely to be significant. In addition there are a range of structural barrierswhich may be constraining current agricultural output in many of the CEECs.Agricultural production in the CEECs is characterised by relatively lowmechanisation levels and by a low level of training of the workforce. The quality ofrural infrastructure is also poor, with a low density of roads, telephone lines,electrification, water supply and sewage disposal.Pouliquen (1998) discusses the problems of lack of investment and hence slowprogress in capital intensification of agriculture in the CEECs. The problem is notseen as transitory in nature and is not related to the transition period to a newcompetitive status, but reflects deeply set structural problems, which discourageinvestment and growth. Inefficiencies remain in the upstream and downstream sector,where the process of restructuring and privatisation has been rather slow. In the foodprocessing and marketing industry, the poor state of the marketing and distributionchannels represents a major problem. 129
    • In countries such as Poland and Slovenia, the fragmented farm structure is anadditional problem, which prevents the utilisation of efficient production techniques,and poses a major obstacle for agricultural investment, since small land plots arerarely accepted as collateral for loans. On the other hand, the European Commission(1998i) estimates that the average size of the former state-owned farms is decreasing,which will contribute to increased efficiency as these large units reach proportionsthat are more manageable. In fact, former public state-owned farms could be regardedas the most promising production units for agriculture in the CEECs. However, thedevelopment of agricultural production in these farms still requires the conclusion ofthe restructuring and privatisation process. In relation to this last aspect, a majorchallenge that most CEECs are still facing, is to increase the degree of certainty overproperty rights.On the other hand, there are reasons to suspect that agricultural production in theCEECs may expand more quickly in response to the incentive of higher prices.Fertiliser use has collapsed in the CEECs due to the lack of supply and distributionchains, absence of finance and lack of farmer education and training. Data from theInternational Fertiliser Industry Association show that the CEECs are exporting mostof their fertiliser production due to lack of internal demand (reported in Moehler etal.). A return to normal levels of fertiliser use would lead to a greater increase inoutput than a number of models are predicting. In addition, rural infrastructure willimprove and awareness of techniques and skills will spread more widely.The CAP will introduce a level of stability and incomes in the agricultural sector,which will without much doubt strongly stabilise the agricultural sector. Thisstabilisation is most likely going to be of paramount importance in promoting andimproving the investment and restructuring process, i.e. causing an increase inproductivity. The potential for problems with surpluses is there, but the Council is notready to acknowledge this fact seriously. In an enlarged Union, and without muchdeeper reforms, there is a real risk that the WTO commitment will impose a severeproblem to dispose of rising surpluses into the world market. 130
    • 5.8.2 Towards a budgetary crisisFigure 5.8 shows the results of the Agenda 2000 negotiations for the EU budget,comparing it with the costs of the proposals by the Commission. The picturerepresents the net balances according to the final financial framework. Apparently, asthe Heads of State proclaimed, the Budget is ready for enlargement. What the Headsof States do not stress is that the calculations on the costs of enlargement are based onassumptions which have had already been under strong questioning.The importance of the enlargement for the EU’s budget is misrepresented in theCouncil conclusions, as the final impact will be larger. First and foremost, theoutcome of the Berlin European Council assumed that CEECs were not eligible forthe direct payments of the CAP. Second, the financial framework resulting from theSummit assumes that member states accede in 2002 and are in 2006 still on atransitional period. The final effect will be much greater due to the apparentlyinevitable introduction of the direct payments in the CEECs, the further increase instructural funds expenditure and the late introduction of the milk reforms. These areprogrammed to be completed in 2008, beyond the final year of this programme andlikely after the enlargement. The delay in the enlargement to 2003 or 2004 will allowthis financial framework to survive, with the added problem of shifting the crisis tothe next programming period. This will have to be decided with an EU of 20 or morecountries. A budgetary crisis shortly after enlargement would be most inconvenient,as new Member States will hardly be willing to give up benefits they have not yetenjoyed in full, but have nevertheless agreed in difficult negotiations. 131
    • Figure 5. 8 The budgetary impact of Agenda 2000 proposals compared withthe Berlin outcome in the year 2006, EU 15 and EU 20 (at 1999 prices) Belgium Denmark Germany Berlin - 2006 Greece EU 20 Spain France Agenda 2000 Ireland proposals - year 2006 EU 20 Italy Luxembourg Berlin - 2006 Netherlands EU15 Austria Portugal Agenda 2000 proposals - year Finland 2006 EU15 Sweden UK CEEC 5 -20000 -15000 -10000 -5000 0 5000 10000 15000 million euroThe remaining part of this chapter will look beyond the official assertions and the year2006 into the more likely effects of enlargement. The budget calculations that will bepresented are for 2010, a year assumed to have an enlarged Union with all transitionperiods completed. 132
    • The direct paymentsThe CAP reform was based on the weakly founded assumption that enlargement willnot entail making any direct payments to the new members. This assumption has itsorigins in the White Paper published in the Madrid EU summit in 1995 and wasalready before 1999 accepted as unsustainable (Buckwell et al., 1994; Münch, 1996and 1998, and many others). Today, this belief is being questioned severely, and eventhe Commissioner of Agriculture openly admitted that this position is no longer valid.Münch (1998) estimated the total cost of the introduction of direct payments to reachapproximately 6 to 7 billion €, a sum which the financial framework cannotaccommodate, without a further agreement by the European Council.There are many valid arguments for denying direct payments to CEECs. TheCommission (1995) gives a number of these, which in most cases still hold today.However, the regulations of the CAP on direct payments fail to give any legalgrounding to a denial of direct payments (Buckwell and Tangermann, 2000; Moehleret al., 1999; Brenton and Núñez Ferrer, 2000; Núñez Ferrer and Emerson, 2000).Furthermore, most arguments to deny the payments to the CEECs can be also used inpresent member states.It stands also to reason that reforming the direct payment levels and distribution afterthe accession of the first group of six applicants (including Cyprus) would be verydifficult, as the ministers of the CEECs will be sitting at the Council, increasingnumber of decision-makers to 20 or more.The milk reform has been postponed again, this time until 2005. What will this mean?First and foremost it reduces the expenditures of the CAP for the period until 2005.The reform would have been costly. This is another sign that most of the “reformsavings” have been created by reforming less and by postponing the implementation.The milk quota reform is now, however, scheduled for a year after the expected entryof the first CEECs to the EU. This has the unfortunate implication that CEECs mayhave to adopt the quotas and then participate in the reform of the regime. The failureto abolish quotas before enlargement, or even to expand them, may become verycostly. If the CEECs implement the quota system and guarantee high prices for themilk producers, the EU will find itself in a dilemma when reducing prices. The 133
    • farmers of the CEECs will claim with reason the direct payments, thus reinforcing theargument above. There will be no getting round the compensation problem. For anenlarged Union, Brenton and Núñez Ferrer (1999) estimate that a liberalisation of themilk market in the EU15 with compensation payments would cost between 6 billion(50 per cent compensation) and 12 billion € (full compensation). The cost wouldincrease considerably after enlargement. It seems irrational to introduce a complicatedpolicy like the milk quota regime in the new member states to then subsequentlyabolish it. Apart from these problems, the highly fragmented farm structure in some ofthe applicant states and in particular Poland will make the imposition of quotas atechnical nightmare.5.8.3 Side effects of a failed CAP reformThe ‘failed’ CAP reform has affected the remaining items in the Berlin Summitnegotiations. The continuation of the distortive policy may have been an importantreason for reducing the quality of decision in other financial items, that is structuralfunds and the own resources system.One of the most damaging decisions in the Berlin Summit have been the renewedtampering with own resources. Four member states decided to follow the steps of theUK in asking for rebates. The results are interesting and affect the overall distributionof the budget.Own resources were modified to correct ‘excessive’ net contributions (as well as toreduce ‘unfair’ benefits). In order to achieve this, reductions of the VAT calling rate13to 75 per cent by 2002 and to 50 per cent by 2004 were scheduled. For traditional ownresources, the percentage retained as the share of so-called collection costs will beincreased from 10 to 25 per cent. The system of financing of the UK rebate by theremaining 14 Member States has been altered in an ad-hoc fashion, reducing thecontribution towards the rebate for Germany, the Netherlands, Austria and Sweden to25 per cent of the unadjusted amount. The UK rebate itself has remained practicallyuntouched.13 Percentage of VAT receipts collected from the Member State as part of the Own Resources of theEU budget. 134
    • This reform is another corruption of the EU’s financial system, Member States havepreferred to introduce complicated and theoretically questionable “rebate systems”,rather than to reform the imbalances on the expenditure side. The new ingenious“rebate on the rebate” for example has no clear theoretical foundations, shifting theburden of the budget to poorer regions. The system is a bad political signal in generaland a way to increase the lack of transparency of the Union, despite the high priorityattributed in the Agenda 2000 to the opposite aim.The effectiveness of the rebate to reduce the net balances significantly is highlyquestionable, as the increase in expenditures due to the enlargement will affect netcontributions to such an extent as to make them insignificant. Table 5.8 compares theresults of the rebate system inside the EU 15 in 2006, with an enlarged Union of 20.Given the size of the increase in expenditure, one wonders if the rebate has anysignificant meaning. It seems wiser to have concentrated more on the expenditureside, i.e. the CAP.Table 5. 8 The effect on net budgetary balances of the rebates for netcontributors, EU 15 and EU 20, million € (1999 prices) Net balance Berlin outcome Berlin outcome Year 2010, Berlin outcome, EU15 – 2006 EU20 – 2006 potential old mechanism, balances (1) EU 15 – 2006Germany -11,366 -10,071 -13,529 -15,881Netherlands -2,569 -2,164 -2,782 -3,413Austria -787 -653 -998 -1,213Sweden -960 -843 -1,215 -1,439UK -2,736 -3,007 -3,673 -4,025(1) This is a potential scenario (scenario 2) presented in section 5.7.3. It represents a maximumexpenditure case (Annex B.III).For Germany the rebate reduced in the EU15 the net contributions by 1,3 billion €.This rebate is assumed to stay valid in all scenarios. Without a strong reform of theUnion, the rebates will remain in place. It is clear that the rebate, based on the UKformula, has its limits. The rebate for the net contributors will increase afterenlargement, but this increase is obviously relatively small compared to the increasein contributions. The UK has also to deduct the so-called ‘UK advantage’ (seetechnical annex B) and the rebate from expenditures that were previously for pre-accession items, which will become enlargement expenditure. It has been assumed 135
    • that the UK cannot demand a rebate on 2 billion € of the new expenditures of theUnion after enlargement, which would actually just be present money forpreaccession (external expenditure), which is not accounted when calculating therebates.These are worrying consequences of the unwillingness of the present EU15 toappreciate the realities of enlargement and the shortcomings of the present agriculturalpolicies and pressures approaching in the structural operations. The obsession with netcontributions and the own resources system among the 15 has allowed the uncheckedmaintenance of unsustainable policies, such as the CAP. Future pressures on the enlarged EU budgetThe moment has arrived to face the realities of the budget under an EU of 20 or moremembers. There is no doubt that solutions can be found, but the options look sub-optimal and the costs high. The outcome of Agenda 2000 has complicated the processof future negotiations for enlargement and reforms considerably. This could havebeen avoided, if the negotiations had focused more on the realities of the policyshortcomings in time.The EU is now facing enlargement with a number of sub-optimal and incoherentpolicies, and with a shortsighted financial framework. The EU will have to bear theconsequences and the Member States should be ready to take their part in helpingrather than complicating the evolution of the EU. Enlargement is politicallyunstoppable or, in any case, politically wise not to stop.The EU has various options to follow. The first option would be to avoid reforms,continue with the policies as present and to “squeeze” through the enlargement. Thesecond option would be a fast and thorough reform of the way the Union works, fromthe budgetary expenditure side to the institutional framework. The third option wouldbe to delay indefinitely or block enlargement altogether, which would represent, atthis stage in the process, a political disaster.This analysis is concerned with the consequences of the first option, which is the mostlikely scenario given the present circumstances. The postponement of the enlargement 136
    • to 2004 will free enough financial resources yearly to allow generous transitionalpayments in the CEECs for direct payments. Expenditures are budgeted yearly andremain unchanged. If the enlargement occurs in 2004, the level of funds available isthe one decided for 2004. If the first year of the enlargement is assumed to cost asimilar amount as the amounts scheduled for 2002, then, an enlargement in 2004 willhave a 5 billion € margin. The financial framework agreed in Berlin allocates over 11billion € in 2004 to the enlargement. Figure 5.9 shows this effect. The originalfinancial framework excluded the direct payments for agriculture. If the Commissionfails to defend the argument, it has enough resources freed to introduce part of thedirect payments from the 2004. Of course, if more countries join than expected at thetime of calculating the financial framework, this margin would fall.Figure 5. 9 Effect of the delay to 2004 of the enlargement on the budgetaryallocation available for enlargement 18000 16000 Berlin Financial 14000 Perspectiv 12000 € Accession 10000 mio 2004 8000 6000 Enlargement delay Possible 4000 phasing of 2000 payment 0 2002 2003 2004 2005 2006The decision-makers will soon face the following financial calculations if the CAPremains untouched. Without a reform of the CAP the EU budget debate will take avery difficult turn. Two scenarios will be presented that assume the continuation ofthe present policies and assume that in the negotiations for the next financialframework 2006-2012, most variables will remain untouched. To believe that an EU 137
    • of 20 countries (22 including Cyprus and Malta) will agree on reforms on agricultureor structural funds which reduce the benefits just agreed a year or two earlier, seemsunreasonable. The new Member States will be undergoing a transition period to adapttheir policies in order to fully benefit of the advantages of the CAP and structuralfunds. Cutting these benefits will be unacceptable.In both scenarios the CAP will continue very much as it is, and undergo the reformproposed in Berlin for the years 2005-2008 in the milk sector. It is assumed that theCEECs will be eligible for all direct payments in agriculture. The calculation of thecosts of the dairy policy is rough, because it is unclear what the intervention costs willbe, nor how the CEECs will benefit from the policy. It is assumed that the CEECs willreceive the direct payments and the national envelopes for the dairy cows.The structural funds are a crucial variable in the calculations. The regulations specifythat regions with GDP per capita under 75% of the EU average are eligible forObjective 1 support. With enlargement, the average EU GNP per capita will fall.Using the data available from Eurostat14 and assuming a real growth of 4% in theapplicant countries, the average real GDP per capita in 2006 for the EU will be 7%lower. This can potentially put out of the Objective 1 area all regions with a GDP percapita over 68% of the EU average15. This could have important repercussions for thepresent Member States, while most regions in the CEECs will be eligible. It is in thisrespect that both scenarios will diverge. One scenario assumes that despite the fall inthe EU average GDP, the Objective 1 eligibility criteria will remain unchanged. Thesecond scenario assumes that the threshold for Objective 1 eligibility will be raised tomake up for the change and keep the present Objective 1 regions in. In the scenarios,it is assumed that Cohesion Funds are all phased out by 2010.In the first scenario the net contributions and the size of the budget are calculatedassuming a continuation of the present policies without a change in the rules ofObjective 1 eligibility. The losses in Objective 1 funds are replaced by Objectives 214 It is important to note that some regions in CEECs will not be eligible. Eurostat has released thelatest statistical data on CEECs showing that some regions are getting close to the EU average. Pragueeven has a GDP level above the EU average (Eurostat news release No 48/2000, 18 April 2000).15 Except for regions where GDP per capita is not the eligibility criteria, i.e. ultraperipheral regions andregions with a very low population density. 138
    • and 3 at a third of the value. The second scenario calculates a situation in which thepresent 15 Member States maintain their level of receipts by changing the thresholdfor eligibility of Objective 1 funds. Both are set in the year 2010, giving a medium-term effect of a continuation of the present policy. The results are depicted in Figure5.10. Annex B.III shows the data.Figure 5. 10 EU budget net balances under Scenarios 1 and 2, year 2010 –compared with the Berlin financial framework year 2006 (1999 prices) Belgium Y ear 2010, Denm ark s c enario2 - S F Germ any levels equal Greece Spain France Ireland Y ear 2010, s c enario1 - Italy S truc tural Fund Luxem bourg c riteria unchanged Netherlands Austria Portugal B erlin - 2006 E U Finland 20 Sweden UK CEEC 5 -20000 -10000 0 10000 20000 30000 million e uroData Source: Annex B.III 139
    • The consequences are clear. A continuation of the present policies is bringing the EUinto a crisis in the longer term. Particularly important is the relatively small effect onnet contributors, if the Structural Funds Objective 1 eligibility criteria are notchanged. The biggest shock is on the net beneficiaries, especially Spain, which hasmost areas of Objective 1 with GDP per capita levels above 68%. Spain could loosethe Objective 1 status of 9 out of 11 regions. This scenario is politically unsustainable,as Spain will try to protect its receipts. A collapse in the net balances of the Spanishmagnitude will create certainly a strong response.The coalition of the Cohesion countries may well push to a solution that will helpmaintaining the levels of receipts, e.g. by increasing the threshold of GDP per capitato 82% of the EU average, thus neutralising the effect of that change in the average.The net contributors would suffer the brunt of this outcome. Again, Spain poses aproblem here. The loss of the Cohesion Funds and the increase in the GNPcontributions as the country grows richer, causes it to still suffer considerably theenlargement. The Spanish case is difficult under any angle. In any case, thedeterioration in the net contributions of Italy and France become serious enough tofind another net contributor problem arising.The picture shows one important aspect from enlargement. The budgetary costs aresubstantial. The Berlin European Council made it impossible to limit transfers to theCEECs by its inability to reform the direct payments of the CAP. The structural fundsexpenditures are also sizeable. Assuming that these reach the 4% limit of nationalGDP agreed in the Berlin European Council, the expenditures in the CEECs couldpotentially rise to 18 billion € for the first group of applicants. The combined extraexpenditure for the CEECs is estimated to be over 10 billion € on top of the sum of 17billion € of the financial framework for enlargement in 2006 (Gros, Pelkmans andNúñez Ferrer, 2000).A bigger problem is the introduction of five new members into the future negotiationson the EU budget. The new members will be strong net beneficiaries of the EUbudget. The Member States have missed a timely opportunity to revisit the system oftransfers. Present net contributors and net beneficiaries are certainly going to be hit by 140
    • the enlargement beyond the line of political acceptability. Furthermore, there is thequestion of the second enlargement. Even if this one seems at the moment distant, itshould be a matter of a few years by 2010, i.e. shortly after the end of transitionperiods in the first five entrants from the CEECs.The second enlargement will bring a second round of similar problems. Most likely,the countries that will oppose a further enlargement will be the new Member States.These will be worried about the loss of benefits they have just managed to obtain.Together with some cohesion countries, the pressure not to allow a secondenlargement will be strong.5.9 ConclusionsVarious conclusions can be drawn from the behaviour of the member states in thenegotiation process and the problems left unsolved, which indicates that thehypothesis of this thesis is likely to be correct:• QMV rules are not strictly adhered to. The more frequently used decision rule is effectively the need for consensus. The rules are very informal, and although member states have been outvoted, it appears that no formal voting round took place. The Presidency and the behaviour of the members formed the Council rules more than any pre-established routine.• The EU cannot reach agreements unless France and Germany reach a compromise position, i.e. these member states possess an implicit veto power.• The EU budget and the net contributory position of the member states have a strong impact in the reform process.• Generally, member states defend their national interest in the Council and do not seek the general welfare of the EU.• The outcome of the negotiations remained a highly inefficient policy despite the dangers ahead.The chapter shows to what extent narrow national interests and considerations aboutthe net contributions to the EU budget were dominating the negotiations, while theoriginal aims of the reforms to prepare the Union for enlargement and for the nextround of WTO negotiation were practically forgotten. The semi-unanimity 141
    • requirement in the negotiations proves how narrow the options of reform became. Thepressure is towards the lowest possible level of reform (lowest common denominator),with less reformist members being able to dominate the negotiations, especially whenthese are France and Germany, as was the case.One of the most significant changes in the decision-making procedures has been theappearance of the European Council as the final decision-making body for agriculture.Most impressively, changes in the CAP are becoming even more difficult to achieve.With the stabilisation after the MacSharry reforms of the EAGGF expenditures,keeping the assured benefits of the CAP in place seems to be the new goal of theMember States. Finance Ministers have now become champions of maintaining thebenefits of the CAP unchanged. This new aspect in the political life of the CAP isworrying.The chapter has also analysed the effects of the reforms agreed in Berlin on theprocess of enlargement and the WTO negotiations. The analysis shows that thereforms did not change much the problems facing agriculture after enlargement. Thelack of fundamental reforms will ultimately result in the introduction of most of theCAP policies in the CEECs, even direct payments. The postponement of reform in thedairy and sugar sectors means that any further reforms will have to be negotiated in anenlarged Union. A council of 20 or more countries, with five more low-incomecountries at least, will make it more than difficult to discuss any reduction in supportfor farmers.The Agenda 2000 negotiations showed a large number of symptoms that the decision-making rules in the Council exert a strong pressure to keep the CAP unchanged. Thedevelopments indicate that Scharpf’s (1988) assertion that the Council (not only onagriculture) only agrees on the ‘lowest common denominator’ is valid. However, thispressure to keep the status quo should be measurable. The next chapter will addressthe question how strong is the restrictiveness of the decision-making system. Itcalculates the probability of proposals being accepted or blocked under differentvoting rules, using a probability theory originating from game theory. It also attemptsto model what has happened in the Agenda 2000 negotiations for agriculture. 142
    • Chapter 6. Filtering Proposals through the Decision-makingInstitutions - the Power of QMV "When buying and selling are controlled by legislation, the first things to be bought and sold are legislators." P. J. ORourkeThis chapter develops a model which has the aim of quantifying the effects of QMVon the process of passing new legislation. It quantifies through a probability model theextent to which (alterations in) the voting rules facilitate or complicate the reaching ofa sufficient consensus in the Council. Two analyses are performed. The firstcalculates the general effects of different voting rules in the Council, and the secondapplies the model to a particular policy proposal negotiated.Despite the limitations imposed by the simplification of a complicated politicalbargaining process into a set of mathematical formulae, the model quantifies theincrease or decrease in the probability of a proposal of being adopted under differentsets of preferences by the member states or under different voting rules. It transformsthe qualitative descriptions of the effects of QMV into a percentage change in thechances of a policy being accepted. This percentage change can be interpreted as aproxy for the number of possible compromises.6.1 Development of a Model for the Council of MinistersThe negotiations of the Ministers in the Council follow a set of formal and informalrules. The informal rules vary according to the issues at stake. Any model attemptingto analyse the outcome of negotiations at the level of the Council has to be able toincorporate all these aspects. The model presented here is capable of:1. calculating all different voting combinations taking into account the voting weights of the member states;2. incorporating voting preferences for the member states;3. allowing the formation of coalitions; and 143
    • 4. changing the voting rules to allow the incorporation of de-facto voting procedures not embedded in the formal voting rules16.The fact that this is essentially a bargaining model between different players wouldsuggest that this is a game theory problem. However, the requirements for a gametheory approach are too stringent. In particular, the need for perfect information aboutpreferences and the need for clear rules of the game pose a problem. As alreadymentioned, the voting rules are not applied strictly in the Council. The objective ofthis model is also not to find a unique solution to the bargaining process for aparticular policy process, but to find evidence that voting rules have detrimentaleffects on the capacity of the Council to agree on needed reforms.The model adopted in this research originates from a game theory model first devisedby Shapley and Shubik (1956) and then used for the EU by numerous researchers.This was briefly introduced in Section 2.12.1. The model is presented in Appendix C.The weakness of the Shapley-Shubik (1956) model is that it only calculates thepercentage power of the member states or coalitions of member states in thebargaining process. The model does not give much information about the pressureswhich the member states exert on the Commission proposals or the chances ofsurvival of a proposal.The model has been adapted here to provide more information the actual probabilityof proposal being accepted or rejected. The power of the member states is embeddedin the model itself and is not a solution per se. The model calculates directly theprobability of a proposal being accepted under different voting rules, formal andinformal, and different preferences by member states or coalitions of member states.Outcomes under different voting rules with identical national preferences show theimpact of QMV compared with SMV or unanimity.It is safe to assume that proposals from the Commission have generally sought theimprovement of the policies in the interest of the European Union. Instead, changesby the Council have generally been reductionist and have damaged the efficiency of16 There has been ample evidence that some members have had in certain issues a veto power. 144
    • the policy and the attainment of the objectives of the Agricultural Policy. The pressureon the Commission to alter proposals and the difficulties in reaching the necessarylevel of consensus are, not surprisingly, dependent on the formal voting rules and theimplicit voting behaviour or de facto negotiating behaviour of the member states inthe Council.6.2 Statistical Consequences of the Bargaining Process - a ModelThis section outlines a probability model that provides a measure of the impact ofvoting rules on the success of having proposals adopted. Proposals are influenced bythe expected probability of adoption in the Council. The calculation of this probabilitycan give a measure of the magnitude of changes required in the proposal. The resultdepends on the preferences of the member states and the rules governing the votingrequirements.Let there be N voters: 1, 2,..., N each denoted as the nth voter.Each of the (N) voters has a certain number of votes denoted as wn. The total numberof votes (W) is the sum:W = åwn (EQ.1)The voter (n) can cast, in each voting round j, a vote δ nj for or against a proposal. ì1 if n th country votes against ïLet δ nj = í (Eq.2) ï0 if n th country votes in favour îEach voter has his own agricultural policy preferences. These are a proxy for the‘average level of support’ for a proposal. This proxy is represented by the probability(pn) of voting against a proposal, and therefore a probability (1-pn) to vote in favour(abstentions under QMV are considered approvals). These probabilities can beinterpreted as a reflection of each country’s preferences.A given voting outcome (j) is denoted as~δ j = (δ 1 j ,..., δ n j ) (Eq.3)and the order of votes ~w = ( w , ..., w ) (Eq.4) 1 nunder the assumption of independent voting strategies.The probability of a particular combination of votes is 145
    • ( ) é N (1 − δ ) ùPr ob δ j = ê ∏ p n nj (1 − p n ) nj ú ~ δ (Eq.5) ë n =1 ûIt is necessary to select the combinations of votes blocking the proposal, given thenumber of votes (wn) attributed to each voter. The negative votes have to be sufficientto reach the blocking minority (b). The selection is through the function B for eachcombination j. ~ ~ ì= 1 if δ j w ≥ b ïBj = í (Eq.6) ï= 0 else îIt follows that the probability of a proposal being blocked or rejected (Prob (R)) is 2n æ N (1−δ ) öPr ob (R ) = å1 ç ∏ p n nj (1 − p n ) nj ⋅ B j ÷ δ ç ÷ (Eq.7) j = è n =1 øThis final equation can also be explained as share of all possible voting combinationswhich create a blocking minority. This model offers the opportunity to change thevoting rules in the Council. By changing the function Bj it is possible to integratevarious possible scenarios (e.g. the introduction of implicit vetoes for some members,the existence of leaders and followers in the Council, and a direct influence by moreinfluential members (leaders) on the preferences of the followers). The votingbehaviour of some members may affect the behaviour of some others. Several of thesepossibilities are explored in the next section.6.3 Primary general results on the effects of the QMV system for the decision-making efficiency of the EU’s CAPThis section will analyse the general impacts of QMV on the probabilities of aproposal being accepted under the following scenarios. Base scenario: voters voteindependently and there are no implicit or informal rules affecting the behaviour ofthe voters. In alternative scenario I, voters have formed groups of a priori coalitions.Alternative scenario II, France and Germany hold a veto.6.3.1 Base scenarioIn this scenario it is assumed that members vote independently and there are noimplicit or informal rules affecting their behaviour. The results are shown in Figure 1and are compared for illustrative purposes with the unanimity and simple majorityvoting (SMV) rules. The SMV rule depicted assumes that the usual voting weights(Table 4.1) are applied. In practice, when applicable, under SMV each member has 146
    • one vote. The horizontal axis in Figure 6.1 represents the preferences of the memberstates, i.e. the probability of rejecting a proposal (pn), denominated as the level of non-support. The vertical axis represents the probability that the proposal is rejected Prob(R). The results mapped are for all possible preferences from total non-support pn =1to total support pn = 0.The implementation of a QMV system improves the probability of proposals beingaccepted relative to unanimity. If all the member states are indifferent/undecided on aproposal (i.e. pn=0.5), the probability of blockage is slightly over 91%. Theprobability of rejection/acceptance is only 50% if preferences are all approximately70% in favour. These results show how difficult it is for a proposal to be accepted bythe Council unless the preferences of the member states are highly favourable. Therationality of the use of package deals by the Commission is partly explained by theseresults. Package deals are aimed at improving the overall probability of havinglegislation approved. Controversial points that would not pass by themselves areaccepted if coupled to concessions in another area. The need for a high approval rateimplies that the concessions have to be significant.Figure 6. 1 Probability of a proposal being rejected under unanimity,qualified and simple majority rules Probability of a proposal being rejected under unanimity, qualified and simple majority rules 100% 90% unanimity proposal is blocked 80% Probability that a 70% Qualified 60% majority 50% Simple majority 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% Level of non-support 147
    • An important consequence of these results is that the probability of rejection ofproposals is high, even with a relatively strong support level. This is a problem for acommon policy in a Union of 15 countries with heterogeneous agricultural policypreferences and powerful farm lobbies. QMV assures that the group comprising themost reluctant countries can easily control the policy outcome by rejecting anysubstantial reform package. As there is a wide consensus that CAP reforms arerequired in the direction of deregulation and reduction of protection, this is a seriousproblem.Generally, it is politically easier to introduce protective measures than to explain tothe beneficiaries of support systems in place why these will be reduced ordiscontinued. The recalcitrant member states will have a higher incentive to protecttheir interests than reformist countries. This situation is caused by the fact thatreducing subsidies to agriculture has a political cost (losing the support of farmers)that defenders of protectionist policies do not have to pay. By contrast, given thenature of agricultural policy, advocating protectionist policies and higher prices forfarmers apparently increases domestic political support for the government (Koester,1978; Senior Nello, 1984; Swinnen, 1994). Because of this, and QMV, to getagreement for reform, concessions will have to be offered to the less reformistmembers of a higher value than the economic costs of introducing a reformed policy.The outcome of negotiations will therefore tend to be close to the ‘lowest commondenominator’ as described by Scharpf (1988). The ‘lowest common denominator’ isthe minimum change necessary to allow a policy to continue in place. No reforms areintroduced unless absolutely necessary and the costs of no reform are consequentlyhigher for all members.Nevertheless, the outcome described above is likely to be an improvement comparedto the situation where unanimity is required. Figure 6.2 presents the magnitude of thegap between the probability of rejection under unanimity and QMV compared toSMV. The difference between the unanimity rule and the SMV is very large indeed,with highly acceptable proposals having nearly no chance of approval underunanimity. Allison (1971) was certainly right in insisting that the institutionalstructures had a strong effect on policy outcomes. 148
    • This is the first important conclusion, which voter-politician models cannot reflect intheir results. Under unanimity, policies, which in would have been acceptable undermajority rules of a normal parliament, will be rejected. Thus it is safe to assume thatwhen the Council has acted under unanimity requirements the outcome has been moreinefficient and less wide-ranging than in a more direct voter-politician interaction in ademocratic parliamentary process. Of course QMV can also be found in parliaments.Figure 6. 2 Status Quo Gap Status-Quo Gap - The increse in the probability of rejection under unanimity and QMV compared with SMV 100% Increase in the probability 90% 80% 70% of blockage 60% QMV 50% 40% Unanimity 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 70% 80% 90% 100% 60% Level of non-support6.3.2 Alternative Scenario I - CoalitionsThe next step towards approaching the complexity of voting in the Council is to builda priori coalitions in the fashion presented by Hosli (1996). There is ample evidencethat the formation of coalitions is one of the principal strategies followed by themember states to increase their influence (Hosli, 1996; Hayes-Renshaw and Wallace,1997; Kirman and Widgren, 1995). Table 6.1 presents one possible pattern ofcoalitions built on the basis of past recurrent behaviour, geography and economicstatus (Hosli, 1996, p. 266).Some coalitions are built according to the relative levels of prosperity. This explainsthe odd position of Ireland in the ‘southern’ coalition. This coalition consists of thegroup of Cohesion countries from the year 2000 Ireland will not fall in this category.These countries often form a coalition resisting reductions in agricultural protection as 149
    • they have among the poorest farmers in the Union. For poorer countries, budgetaryreceipts through the CAP are a significant source of income. Transfers through theCAP are considered by them an important part of the transfers required to ensureeconomic convergence in the Union (Hayes-Renshaw and Wallace, 1997). The Paris-Bonn Axis has an historical background. France and Germany are not only consideredthe originators of the CAP, but they have a record of direct bilateral negotiations toshow a common position on a range of issues (George, 1985; Moyer and Josling,1990).Table 6. 1 Coalitions in the Council of Ministers and their votes.Coalition/Members Votes in the CouncilBenelux (B, Lux, NL) 12‘Axis Paris-Bonn’ (D, F) 20‘South’ (GR, E, Irl, P) 21‘Nordics’ (DK, Fin, S) 10A 4I 10UK 10Coalitions can have an important role in facilitating the outcome of negotiations, butnot necessarily (see Figure 6.3). Under QMV, there is a lower probability of rejectionwhen preferences are against it, but also gives higher probability of blockage whenthe proposal is favoured, compared with the case of no coalitions. This outcome iscaused by the greater weight of the sum of the votes of the coalition. The number oftimes the coalition can be pivotal is higher. With indecisive preferences (50%), theblocking probability of rejection under QMV is reduced from 91% to 80%. Withfavourable preferences the rejection probability can increase by over 5%. Forunanimity decisions, coalitions reduce the probability of rejection in all cases.What Figure 6.3 shows is that when preferences are negative, it is important that theproposals are based on package deals and compromises that allow the appearance offavourable coalitions. The converse is also true. If some member states want to blocka proposal which is relatively acceptable for most, negative coalitions will reduce theprobability of adoption. At a level of non-support under 30% the probability ofrejection increases with coalitions. 150
    • Figure 6. 3 Probability of a proposal being rejected under unanimity andQMV with and without coalitions Probability of a proposal being rejected under unanimity and QMV with and without coalitions 100% independent - 90% QMV probability of blockage 80% 70% coalition - QMV 60% 50% independent - 40% unanim. 30% coalition - 20% unanim. 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Level of non-support6.3.3 Alternative scenario II - Implicit vetoesIt is widely believed that some member states have the power to bypass the QMV ruleon some issues. It is claimed in general that the approval by France and Germany is aprerequisite for accepting a policy (Hayes –Renshaw and Wallace, 1999).Three cases are compared in which there are implicit veto powers by France (F) andGermany (D) with the normal outcome under QMV. The results are presented inFigure 6.4. Again for this general analysis it is assumed that all members have thesame probabilities of voting against the proposal. In the first case France is assumedto hold a veto power, which has the effect of rejecting any proposal that France votesagainst. This is achieved in the model by changing the conditionality in formula P6to: ì= 1 if δ Fj = 1 or δ j w ≥ b ~Bj = í (Eq.8) î= 0 elseIn the second case France and Germany each have an independent veto; thereforeeach are able to block a proposal with which it disagrees. For this case the propositionP8 is changed to take this case into account as follows: 151
    • ì= 1 if δ Fj = 1 or δ Dj = 1 or δ j w ≥ b ~Bj = í (Eq.9) î= 0 elseIn the third case France and Germany hold a veto only if both disagree with theproposal together. ~ ì= 1 if (δ Fj = 1 and δ Dj = 1) or δ j w ≥ bBj = í (Eq.10) î= 0 elseFigure 6. 4 Different implicit veto effects Different implicit veto effects 100% Probability of blockage 90% no veto 80% 70% 60% France has 50% veto 40% F and D 30% independent 20% F and D 10% together 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% Level of non-supportAs expected, there is in all cases a higher probability of rejection when these vetoesare introduced. The highest shift occurs for independent vetoes for France andGermany. What seems surprising is the low significance of a joint veto requirement.The probability of both countries voting against a proposal simultaneously andindependently, with the further requirement that there are not enough other negativevotes to form a blocking minority, is low.Figure 6.5 shows the case where France and Germany form an a priori coalition, thusdeciding always to vote jointly on an issue in advance, i.e. to show a unified front. Inthis case their votes are summed together as the Paris-Bonn Axis in Table 6.1. 152
    • Figure 6. 5 Effects of different implicit veto combinations by France andGermany Probability of proposal Effects of different implicit veto combinations by F and D 100% 90% 80% being blocked 70% no veto 60% 50% 40% Coalition and 30% veto 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% Level of non-supportThe probability of a proposal being blocked is marginally higher at more positivepreferences. As preferences become more negative the probability of blockage falls.This is a consequence of their combined weight, their joint power can tip the balance.Table 6.2 summarises the results of these scenarios to show the probabilities of aproposal being accepted under three different (common) probabilities of rejection.The results point to the conclusion that QMV and most other implicit voting practicesin the Council have a strong influence in limiting possible the area of compromise.The general results and the heterogeneity of the agricultural sector indicate that thereshould be a remarkable tendency for the Agricultural Council to resist reforms of theCAP, unless grave political events change domestic preferences strongly. This is inaccordance with past behaviour in which apparently only strong budgetary or politicalcrises were able to force the agreement of reform measures. Examples budgetarypressures leading to the milk quotas in 1984 and the pressures from the GATTUruguay Round on agriculture that contributed to the MacSharry reforms. Similarbehaviour can be found in the Agenda 2000 negotiations, and this model will be usedto see to what extent the voting rules of the Council complicated the negotiations toreach an agreement. 153
    • Table 6. 2 Preferences, vetoes, QMV and the probability of a proposal beingblocked by the CouncilPreferences (probability of voting against) 30% 50% 70%Probability of blockage under:QMV, independent voting (Base scenario) 46.9% 91.0% 99.7%Unanimity 99.5% ~100% ~100%Simple majority voting1 7.3% 50.0% 92.7%Coalitions as in Table 6.3 45.0% 79.7% 96.5%France has veto power 57.5% 93.3% 99.8%France and Germany: independent veto power 64.6% 94.3% 99.8%France and Germany: joint veto power 50.3% 92.3% 99.8%France and Germany: a priory coalition and veto 49.5% 88.6% 99.5%1 Countries weighted as for QMVThe model is now used to show the application of this theory to explore voting on theAgenda 2000 proposals from the Commission. The specific question to be answered isthe extent to which the voting rules were responsible for the strong dilution of theoriginal proposals.6.4 Incorporating specific preferences for the member statesThe preceding sections constructed a model based upon probabilities of voting infavour or against a proposal. These probabilities can be considered to be a proxy forthe policy preferences of the member states. Until now, it was assumed for simplicity(and to show some general results) that the probabilities of voting against a proposalwere the same for each member state at each voting round. This is, of course, a strongsimplification. In theory, it should be possible to calculate for each member state aspecific voting probability for any particular proposal or package of proposals. Inpractice, this calculation is ridden with difficulties and the risk of oversimplifyingpolicy preferences. The probability of any Member State voting against or in favourof a proposal can only be approximated through past revealed preferences andknowledge of the effects of the proposals on their agricultural sector.Two models have been used to calculate the impacts of policy changes on theagricultural sector and on the EU’s own resources. The models are described inAnnexes A and B. The results give a good approximation to gains and losses of achange in the agricultural policy and give indispensable information to be able tocalculate the policy preferences. However, the results of the models are not enough.The acceptability to a government of a fall in farm incomes or of a degradation of the 154
    • net budgetary balance cannot be determined only by economic arguments. These areoften strongly affected by political considerations.For this reason, before calculating the policy preferences using economic data, thedeclarations of the ministers of the Member States prior to the start of the negotiationsare listed. These declarations help reaching some conclusions on the followingquestions: What is the importance given by a Member State to a change in theintervention price and is the opinion against or in favour? The preferences at this levelhave to be based fully on informed guesswork. We have to decide the importanceattached to each change, e.g. change in intervention prices, and we have to decide ifthe intervention price change is acceptable or not. To do so, reports have been usedfrom the period of publication of the proposal to determine the values for thevariables. The declarations are listed in section 6.5.The revealed initial position of the member states combined with the calculatedexpected effects of the proposals can provide enough information to build plausiblepreferences. The objective is to recalculate the chances of the proposal to be rejectedor accepted from the outset. This probability can already preannounce the level ofcomplexity and the magnitude of amendments required to have the proposals adopted.A high probability of rejection would forewarn a drastic downsizing of the proposalsand vice versa. Given the outcome of the Agenda 2000 negotiations, this modelshould be showing a very high probability of rejection.To a certain extent, this undoubtedly questionable attempt to predict the behaviour ofthe Member States is being performed constantly by decision-makers. Whenformulating a proposal and negotiating amendments, policy-makers implicitlycalculate the chances (i.e. probabilities) of a proposal going through. This exerciserequires the negotiators to estimate the probable behaviour of other Member Statesand to calculate their policy preferences. In the end what negotiators do is implicitlyto calculate the probabilities of the other Member States agreeing on a certaincombination of measures proposed. This section can be viewed as a transcription ofthe process into a statistical model. 155
    • The results can also give an insight into the relationship between the Commission, theCouncil Presidency and the Council. The Commission and the Presidency have to takein to account the preferences of member states and work towards a compromiseposition. These preferences change at each stage of the negotiations as proposals areamended. The Commission’s aim is to find the best possible configuration for havingproposals accepted (i.e. the lowest possible probability of blockage of a proposal).This requires the Commission, together with the Presidency, to offer a deal for whichenough Members will show a high ‘individual’ probability of approval to form aqualified majority.Even though votes are not taken during the preparation and negotiation of legislation,the bargaining process is implicitly a continuous process of voting and weighingprobabilities. It is the expected outcome of a vote at each stage that will drive theCommission and the Council to continue bargaining or to take a vote.The voting model will now be used to calculate the probability of acceptance of theoriginal Agenda 2000 proposals for agriculture (European Commission, 1998a). Asimplified package is used, based on the main items (Table 6.5). The package isreduced to the bare minimum in order to facilitate the description of the model’scapabilities. In any case, the products and the proposed changes in the list likely themain items of dispute, determining the overall direction of the negotiations. This is infact what occurred in the negotiations. Horizontal measures and rural developmentproposals have not been included in order to avoid unnecessary complications. Theirimportance is unfortunately rather minor compared to the direct payments and marketmeasures. 156
    • Table 6. 3 Agenda 2000 proposalsSectors ProposalCereals and oilseeds Ø reduction of the cereal intervention price to 95.35 €/t in the year 2000 in one step (the price was set for 1997 at 119.19). Ø non-crop-specific area payment of 66 €/t Ø abolition of the compulsory set-aside; voluntary set-aside to be allowed; set-aside areas to get the non-crop-specific area payments of 66 €/t.Beef Ø gradual reduction in the intervention price from the present level of 2780 €/t to 1950 €/t over the period 2000-2002. Ø gradual increase in the direct income payments on a per head of cattle basis.Dairy Ø extend the quota regime to 2006 Ø gradually decrease support prices by an average of 10% over a period to be defined (the period is not indicated, it probably refers to the years until 2006). Ø introduce a new yearly payment for dairy cows, at a level of 145 €6.5 The position of the member states vis-à-vis the original proposalsThis section summarises the reactions of the Member States to the package at thespecial Agricultural Council in March 31, 1998, as published by Agra Focus (April1998), and some other reports revealing opinions on a preliminary draft of the Agendain Agra Europe (18 July, 1997 and 14 November 1997). It is clear that these wereinitial and politically charged declarations, knowing that the negotiations would start ayear later. At the time, farmers’ protests at the proposals were numerous, and it isnormal that Ministers at such occasions may not be willing to reveal positions whichwould spark a domestic controversy. This has been taken into account to a certainextent. To do so, past behaviour or results from the models on agricultural farmincomes or the net balances have been taken into account. The positions can besummarised as follows: 157
    • Belgium:At the time of the publication of the proposals, the Belgian Minister of Agriculture,Mr Pixten, placed strong emphasis on the negative effects on farm incomes. Heshowed concern over the price support reductions and considered partialcompensation unacceptable. Furthermore, he declared that direct payments are not acorrect method to substitute for price cuts, as these increase the budget expenditures.In fact, the net balance effects of a shift from price support to direct payments affectsBelgium’s net balance considerably (see Table 6.7). Belgium is a considerable budgetnet beneficiary due to the CAP and the administrative expenditures of the institutions.The increase in the EU budgetary expenditures, the important share of dairy productsin farm incomes and the high GNP per capita of the country has the effect ofincreasing the contributions of Belgium due to the CAP far in excess of the returns.The fall of the net benefit is more than half its value in 1997, from 1.7 billion € to justover 800 million (at 1999 constant prices).Denmark:Denmark’s State Secretary, Poul Ottosen, showed an overall positive attitude to theproposed changes in the special Council. However, some months earlier, Agra Europesummarised Denmark’s ideas on agricultural policy in another light (Agra Europe, 14November 1997). The report placed Denmark in opposition to cereal price cuts.Denmark also preferred a two-tier price system for dairy, as for sugar, with A and Bquotas. Therefore, it is assumed that Denmark had an interest to see the pricesmaintained, searching for alternative solutions, i.e. it was in favour of reform, but notto the extent presented.Germany:Mr Johen Borchert, the Agricultural Minister, was reported as the most hostile to theproposals and declared that the price cuts would a negative step. He found theproposed direct payments system inadequate and the loss in farm incomesunacceptable. This is not surprising, because Germany has to deal with therestructuring of large farms in the Eastern German Länder. The partial compensationproposed and the direct payment modulation directly affects the large buteconomically precarious farms in these regions, which explains the interest inimposing co-financing at the actual negotiations. Furthermore, the increase in the 158
    • agricultural budget has a negative effect on the net balance of Germany, whichdeteriorates, as the contributions for the new CAP system would surpass the receipts.Overall, the first declaration was strongly negative.Greece:Greece complained of the bias against smaller Mediterranean farmers. The Minister,Mr Stephanos Tzoumakas, showed great concern over the loss in farm incomes andthe regressivity of the policies. The system of direct payments does little to redressthis. Overall the proposed link between direct payments and price support wasunacceptable for the Minister at that time.Spain:The Spanish Government, in the spring of 1998, was attempting to project a strongimage as the new party in power, which was initially accused of a lack ofqualifications to represent Spain. The negotiation arena in the EU provided a goodplace to change the party image. This is a frequent tactic of Member States. TheMinister, Loyola de Palacio, vigorously rejected the underlying principles of thereforms, with similar arguments as other Southern countries, i.e. that the CAP wasbiased in favour of nordern EU members. This followed the strong rejection of theintended olive oil proposals, which did not even leave the drawing board.17 TheMinister was primarily concerned with increasing the milk quota, and without aconsiderable quota concession the milk proposal was unacceptable. The price supportchanges were also not acceptable, nor the direct payments, due to their regressivenature.France:The Minister, Luis de Pansec, was unhappy about the price reductions. Practically allthe proposals were unacceptable, with the exception of cross-compliance and amodulation of direct payment ceilings. Intervention price cuts were unacceptable, andthe dairy quota should remain in place even after the period proposed by the17 As an interesting anecdote, a civil servant and agricultural specialist of the Ministry of Agriculture ofSpain regretted this behaviour in a private conversation with the author. In his opinion, the Ministerwent for the popularity of defeating the Commission. The consequence was the loss of a proposal,which could have been very positive with some adaptations. 159
    • Commission. The Minister called for a ‘true reform’, which was not directed to theworld market. One can only wonder what such a ‘true reform’ should be ifintervention prices and quotas (i.e. all the crucial variables) have to be continued. It isinteresting to note that the negative net budget balance for France falls considerablyfor the EU-15. Something similar occurs with other countries which have animprovement in the net balances. This seems to support the assumption that MemberStates only consider their net balances when these deteriorate, as the model indicates.Ireland:Ireland’s Agricultural Minister, Joe Walsh, was very disappointed by the packageproposed. The beef and dairy sectors would suffer from the proposals severely. TheMinister rejected practically the whole package outright.Italy:The Italian position at the time of publication was controversial. On the one side,Italy, was a member of the reformist ‘London group’18, but the radical reform interestwas less than obvious. Minister Michele Pinto’s remarks were low-key compared withthe strong arguments used by other Ministers. This can be attributed to the Italy’s less-than-solid position in the reformist group. While it could not defend the CAP’ssystem, Italy had no real interest in attacking its fundamentals. Somehow, Italy’sposition was suspected to depend largely on the dairy policy, in particular the size ofquotas. This poses a problem as it means that the opinion on each individual item issubject to the quota decision. It is difficult to decide what Italy was in favour of oragainst it at the outset. Italy was apparently in favour of price cuts, but against thecompensatory system proposed. It also regarded the quota proposal unacceptableunless the size increases or it is abolished. Italy seemed to put less emphasis on farmincomes or on maintaining intervention prices.Luxembourg:The Minister, Fernand Boden, found the proposals largely unacceptable. He foundprice reductions too drastic and the beef and dairy proposals far too large. The18 The UK, Sweden and Italy, formed the so-called London Group, which officially called for a radicalreform of the CAP. 160
    • Minister argued that the suckler cow premia proposed were biased againstLuxembourg. The estimations of the author do not point to this conclusion if thenumber of potential rights were fully used. Net balances and farm incomes were notaffected too unfavourably and therefore did not play a large part in it position.Netherlands:This country’s position is prime example of the ‘deteriorating net balance theory’.Netherlands was traditionally a great defender of the principle of a common EUbudget without rebates and distortions, until it crossed the line from net recipient tonet contributor to the EU budget. Since the MacSharry reforms, the fall of exportrefunds and tariff revenues changed the budgetary position, The Netherlands hasbecome Eurosceptic. The reforms would have damaged the net balance considerablyand Minister Jozias Van Aarsten criticised directly the budgetary effects from theoutset as expected. The Netherlands questioned the need for the price reforms and thedairy quota changes. The opinion was rather bleak.Austria:Austria’s Minister, Wilhelm Molterer, welcomed the overall financial impact of thepackage. There is no surprise in this. Austria was putting a strong emphasis on the netbalance and the reforms were going to benefit Austria and help to reduce the negativenet balance. However, the price support cuts and the fall in the oilseed revenuescaused by the policy (see Annex A.I) were not acceptable.Portugal:The Minister, Fernando Gomes da Silva, did not seem to object to the principle ofprice cuts but to the system of direct payments. He protested against the ‘nordern’ biasof the policy, as the country is the smallest beneficiary of the CAP despite having thelowest agricultural incomes (see Figure 3.1 in Chapter 3). In fact his criticisms seemto be centred at the direct payment system and on a strong worry about the fall of thealready low farm incomes.Sweden:Annika Ahnberg, the Minister, regarded the proposals as an inadequate step in theright direction’. The main items against the proposals seemed to be the continuation 161
    • of the milk quota and that direct payments are not phased out. In general, the viewwas that Sweden would vote in favour for most of the package even though some ofthe reforms were not large enough. Sweden has not shown any great concern overfarm income issues.UK:The UK has always been in favour of a more market-oriented policy. The UK seemsto have a preference for a freedom to produce and trade in the world markets withoutmuch intervention. The Parliamentary Secretary, Lord Donoughue, was quoted aswelcoming the direction of the reforms, but with some disappointment about the lackof some more radical reforms, such as making direct payments temporary, giving thefreedom to choose the set aside area and cutting the dairy intervention price to half ofthe proposed level. On farm incomes the UK has shown itself quite indifferent, as ithas usually been in the past.Despite the radical declarations of the UK, one wonders if a real reform was in itspolitical interest, as it would challenge the validity of the budget rebate, which hasbecome an object of national pride. This has already been mentioned in Chapter 5, butthe net balance deterioration brings the UK up from a probability of rejection of 20%to 62% in the model. This may seem rather unrealistic at first, but an analysis of theAgenda 2000 overall negotiations shows that the net balance issue takes a strongimportance when the budget increases. It would have been very counterproductivefrom a strategic point of view to launch an attack on the reforms based on netbalances at that initial stage. The battle to settle the larger budgetary issues wouldhave probably appeared later, if the final agreement were to grow costly. In any case,the UK must have anticipated that the German crusade against the budget would allowBritain to ride the wave, defending the rebate when required and leaving thebudgetary cost minimisation for Austria, the Netherlands, Germany and Sweden tohandle.6.6 Calculating the preferences of member statesThe procedure to find the preferences is to analyse each country’s agriculture andsubdivide it into its components: number of sectors, size of sectors, farm incomes, andvalue of the agricultural products, etc. The influence of budgetary receipts of the 162
    • member states through the EAGGF should also be considered. As already mentioned,given the size of the agricultural budget, changes in the receipts from, andcontributions to, the budget can have a considerable effect on national preferences.Proposals changing the CAP can have strong distributional effects.Many aspects of the member states have to be taken into account, and a precise andunique solution cannot be found. However, preferences can be approximated anddespite the margin of error, a voting behaviour can be implied. In this example, twosteps will be performed to calculate the probability of voting against or in favour of aproposal as proxies to the preferences. First, it is necessary to find the share of theproposals that are unacceptable for each sector in each member state. Finally, thesehave to be weighted according to the sector’s importance in the national context. Theresults allow to reach an approximation of the national position towards the proposal.Assuming that the voting behaviour will be driven by the proposed changes in thethree main agricultural products supported by the CAP: 1) cereals and oilseeds, 2)beef and 3) dairy, the changes in farm incomes and the budget net balances. Thesesectors are the main target of CAP support and also have a strong effect on incomesand balances. We can build a probability function for each sector by calculating thepercentage of the proposal not acceptable for the decision-maker (Minister) of theMember State in question. This is the probability of the Minister of voting against theproposal for the individual agricultural product, if it was presented on its own. This isrepeated for each agricultural product.To calculate the voting position of the Minister on the whole package one mustcalculate the weighted average position of the proposals, i.e. the overall policypreference. This will depend on the relative importance, each sector in size of netvalue added, employment, intensity of support and size of the receipts from the EUbudget together with any other variable which might be of particular importance forthe Member State. This is in fact a very difficult task that undoubtedly requiresassumptions and simplifications since Member States do not give the sameimportance to the different components of the policy, preference functions can bedifferent from country to country. 163
    • It is therefore possible to create a formula for the probability of voting against apackage deal in agriculture by the Commission, which can be generalised with thefollowing equation: p n = å si pi (Eq.11)pn can neither be under 0 nor over 1, soås i =1 (Eq.12)i= co, b, dco… Cereals and Oilseedb… Beefd… DairyThe probability p of a negative vote by country n (pn) is the sum of the shares s ofimportance of the affected variables sectors i multiplied by the percentage probabilityof rejection of the proposal for the individual sectors pi (pco, pb, pd). For this model itis assumed that the shares si are their share of the value of agricultural production(VAP) of the combined three sectors. Without any other external influence, theformula is as follows: p n = s co p co + sb pb + s d p d (Eq.13) VAPisi = (Eq.14) åVAPiHowever, it is further suggested that the Member States place a very high importanceon overall net budgetary balance effects of policy changes. It is also logical to supposethat only a deterioration of the balance is of concern, not an improvement. The shareof importance of the net budgetary balance on the voting behaviour is denoted as snb.The net budget balance variable (NB) is a dummy variable, it will only matter if thenet balances deteriorate in the overall budget19. If this is the case it will become 1,otherwise it is 0. As the sum of si and snb has to equal 1 even if NB equals 0, theformula has been adapted to introduce the importance of the Net Balance in the19 For the calculation of the preferences, the net balance changes taken into account are only due to theCAP proposals. Agriculture was going to be negotiated first. It is reasonable to think that, whencalculating budgetary effects, the future shape of other expenditure was not seriously taken intoaccount. On the contrary, it is the result of the agricultural negotiations, which would affect the shapeof other policy decisions. 164
    • equation only for negative changes in the balance. Therefore, the formula for pn forthe three sectors affected should be amended as follows:p n = [ s co − ( s co s nb NB)] pco + [ s b − ( s b s nb NB )] pb + [ s d − ( s d s nb NB)] p d + s nb NB (Eq.15)if the change in the net balance is < 0, then NB = 1;otherwise NB = 0.This equation conforms to the prerequisite of P12, becauseå [s i − ( s i s nb NB )] + s nb NB = 1 (Eq.16)The probability of rejection of a proposal for a particular agricultural sector (pi) has tobe calculated separately. It is assumed here that deteriorating net balances are veryimportant for all member states, but given the circumstances of the negotiations wehave to attribute more weight to the net contributors than to the net beneficiaries ofthe budget. It is assumed here that the net beneficiaries will be attributed a 10%weight to their decision to vote against a proposal if their net balance deteriorates,while net contributors place 30% importance on this item. In particular cases were apositive net balance deteriorates considerably, 30% will also be used. This is the caseof Belgium. The importance attributed to the net balances is based on repeatedsimulations using different levels for snb. They are in any case subjective and based onthe researcher’s personal evaluation of the impact of net balance considerations.Various figures above and below the ones presented were used in voting simulationswith a fictitious package, which the member states largely accepted (probability ofrejection 10%). Budgetary considerations were in the author’s personal opinion giventoo much or too little relevance with other figures.The question now arises on how to calculate the level of non-support of proposals foreach individual agricultural sector affected (pi), for example Cereals and Oilseeds(pco). This will again depend on the acceptability and the importance of each changeproposed. The equations are built similarly as for the overall probability pn. Eachchange proposed will have more or less importance for the decision-maker, a share ofimportance s of each policy change pck created by the proposals, therefore denoted as 165
    • sck. If there are k different changes, the probability of rejection of the proposal forsector i (pi) can be represented as:pi = å sc k pc k (Eq.17)k = int, dp, sa, qin: change in the intervention price proposeddp: change in the direct payments regime proposedsa: change in set aside areaq: change in the quota regime proposedå sc k =1 (Eq.18)However, while each change in itself may be acceptable, the effects of thecombination on farm incomes may not. It is realistic to assume that farm incomes playa role, thus a dummy similar to the net balances dummy of the (Eq.15) equationshould be introduced. If farm incomes fall, the probability of rejection will be greater.Each Member State is assumed to attribute a share of importance sfin to farm incomes.If farm incomes increase, the Member State will not consider this a problem. So, FINis a dummy, which becomes 1 if farm incomes fall, but is 0 otherwise. Again a similarobservation can be made, that FIN is insensitive to the magnitude of the farm incomedeterioration, but its importance in the final decision can take this into account. Thefinal equation for the cereals and oilseeds sector takes the following format:p i = [ sc in − ( sc in s fin FIN )] p in + [ sc dp − ( sc dp s fin FIN )] p dp + (Eq.19)+ [ sc sa − ( sc sa s fin FIN )] p sa + [ sc q − ( sc q s fin FIN )] p q + s fin FINif the change in the farm incomes is < 0, then FIN = 1;otherwise FIN= 0.å [sc k − ( sc k s fin FIN )] + s fin FIN = 1 (Eq.20)For the changes proposed, it is necessary to decide the level of rejection by theMinister. The variable pck represents the level of non-support for the change. Whilethe change may be considered necessary, the magnitude proposed may not. This willbe discussed in more detail at a later stage. 166
    • Complicated as the calculations already are, it is acknowledged that they neglect otheritems beyond farm incomes, such as the effects of the proposed changes on theenvironment and employment. While such factors may have some influence, there is aneed for simplification and the historical track record of the Council shows a neglectof these issues. The Agenda 2000 proposals were in any case mostly an attempt toredirect support from market instruments to direct payments with the aim of leastdamage to farm incomes and the budgetary costs.6.6.1 The Calculation of pn - the probability of voting against or level of non-support for the proposal for each member stateThis section fixes step by step all the variables needed. The following items arepresented and described:1. Calculation of the shares of importance of the cereals and oilseeds, beef and dairy sectors (si).2. Calculation of the effects on net budgetary balances of the Member States of the full implementation of Agenda 2000.3. Attribution of a share of importance of each change in the individual proposals (sck) and calculation of the probability of a negative vote for each proposal in the package (pi), incorporating the influence on farm incomes.4. The calculation of the probability of voting against the package for each member state (pn).Section 6.6 calculates the probability of rejection of the package in the AgriculturalCouncil (Prob (R)). Share of importance of the cereals, oilseeds, beef and diary sectorsIt is assumed in this model that the share of importance of the proposals isproportional to the share of the value of the final agricultural production (VAP) asdefined in equation P14. This is based on 1997 values and the results are presented inTable 6.4.This calculation has a problem, as it does not allow for some sectors having a higherpolitical sensitivity than their economic value. For example, the importance of Italy’s 167
    • dairy sector is much larger than the VAP number conveys. Of course, the shares couldhave been based on political sensitivity, but the economic value is often veryimportant and not arbitrary. If the probability of rejection is similar in all theproposals, then this will ensure that the result is roughly the same. If the probability ofrejection were much higher than for other sectors, a low share of economicimportance would distort the solution by attributing to the package a lower rejectionprobability than politically plausible.Table 6. 4 Value of final agricultural production (VAP), 1997 Cereals and oilseeds Beef Dairy production Mio € sco Mio € sb Mio € sdBelgium 2352 0,57 861 0,21 936 0,23Denmark 1957 0,51 412 0,11 1495 0,39Germany 13045 0,53 3421 0,14 8154 0,33Greece 6237 0,85 232 0,03 902 0,12Spain 15509 0,81 1718 0,09 2009 0,10France 24450 0,65 5732 0,15 7596 0,20Ireland 548 0,16 1462 0,42 1493 0,43Italy 20930 0,74 3103 0,11 4268 0,15Luxembourg 28 0,18 45 0,29 81 0,53Netherlands 8212 0,63 1422 0,11 3432 0,26Austria 1212 0,49 513 0,21 755 0,30Portugal 1942 0,68 313 0,11 583 0,21Finland 698 0,40 212 0,12 821 0,47Sweden 1016 0,41 323 0,13 1127 0,46UK 6912 0,53 1620 0,12 4590 0,35Source: European Commission (1998), The Agricultural Situation in the European Union, Table The Net BalancesTable 6.5 uses the results of the budget model (Annex B) which calculates the netbalances of member states under different policy scenarios. The model is described inAnnex B. This estimation is based on the budgetary change resulting only from theagricultural policy changes, without taking into account the Agenda 2000 proposalson other expenditure, or enlargement. It is the author’s assumption that MemberStates at the initial stages were basing their position only on a before and afteranalysis of the agricultural policy, as there was little point in taking into account otherchanges in structural funds and enlargement. Agriculture was in any case the first itemto be negotiated, other issues were not going to influence the CAP in any remarkableway, on the contrary, the outcome of the agricultural reforms would create the basis 168
    • for negotiating other the remaining items of the financial framework. As explained inequation (Eq.15), the net balances would only be a politically important item if therewere a deterioration. Net contributors will place a higher importance to net balances(30%) than net beneficiaries (10%), unless, as for Belgium, the change in the balanceis particularly strong. The UK’s position is also special. Despite being a netcontributor, it is the beneficiary of a generous rebate and is therefore not going todispute net balance deteriorations.Table 6. 5 Change in net balances caused by the proposals for agriculture 1997 Agenda2000 Change NB snbBelgium 1781 818 -963 1 0,3Denmark 98 105 7 0 0,1Germany -11919 -10879 1040 0 0,3Greece 4489 4652 163 0 0,1Spain 5761 6580 820 0 0,1France -1828 490 2318 0 0,1Ireland 2914 2290 -624 1 0,1Italy -587 -1166 -579 1 0,1Luxembourg 744 741 -3 1 0,1Netherlands -1273 -2532 -1259 1 0,3Austria -909 -512 397 0 0,1Portugal 2783 2936 152 0 0,1Finland 1 215 213 0 0,1Sweden -1243 -972 271 0 0,1UK -685 -2765 -2080 1 0, Shares of importance of individual changes proposed and the effect offarm income changesTo find the level of non-support of the individual proposals for each product, it isnecessary to find the importance of each element in the proposals, such asintervention prices, direct payments, set-aside and dairy quotas. As the effect on farmincomes also influences the voting pattern, an agricultural revenue model was created,which is described in Annex A. The calculations presented here are based on theassumption that member states will calculate the potential income level under thestatus quo and the proposed policies and compare them. The potential income will bebased on institutional prices and the direct payments, a sort of worst case scenario,where world prices are below the proposed prices.This model calculates total income based on the maximum income possible if allagreed rights are fully utilised, such as base areas, headage numbers or milk quotas. It 169
    • is possible that the Member states do calculate the effects on land use and headage ofthe proposals, but this goes beyond the intentions of this research, and politicaldecisions may often be made without an extensive economic simulation model. Thismodel tells which is the income guaranteed by the policy under the CAP system inplace at the time or under reformed policies. The results are summarised in Table 6.6,these figures have been calculated with the agricultural model described in Annex A.Not surprisingly, except for beef in the UK, the model predicts a fall in comes for allsectors affected in all countries. 170
    • Table 6. 6 Change in potential gross farm incomes from original Agenda 2000 proposals, mio € Cereals and oilseeds Beef Dairy status Agenda Change FIN status Agenda Change FIN status Agenda Change FIN quo1 2000 quo1 2000 quo3 2000Belgium 615 516 -99 1 1101 915 -186 1 963 906 -57 1Denmark 2165 1988 -177 1 566 493 -74 1 1380 1288 -92 1Germany 11369 10349 -1020 1 4545 3888 -656 1 8602 8078 -524 1Greece 925 907 -18 1 252 233 -19 1 195 187 -9 1Spain 5338 4267 -1072 1 1967 1785 -182 1 1685 1622 -63 1France 17463 15835 -1628 1 5948 5351 -597 1 7358 6965 -392 1Ireland 409 355 -54 1 1983 1904 -78 1 1622 1529 -93 1Italy 5576 5069 -507 1 3519 2851 -668 1 3005 2865 -139 1Luxembourg 41 34 -7 1 29 28 -1 1 83 78 -5 1Netherlands 564 493 -71 1 1650 1287 -364 1 3404 3180 -225 1Austria 1231 1164 -67 1 743 676 -67 1 738 731 -7 1Portugal 594 569 -25 1 360 333 -27 1 569 543 -26 1Finland 911 843 -69 1 318 297 -21 1 739 727 -11 1Sweden 1537 1333 -204 1 451 417 -34 1 1022 963 -59 1UK 5600 4937 -662 1 2570 2610 40 0 4442 4159 -283 1Own estimations1. These figures are based on the potential income from intervention prices and direct support of the CAP pre-reform.3. Old quota * target price. 171
    • Shares of importance of individual changes proposed and the level of non-supportThe next step is to divide the individual product proposals by the main componentsand attribute to these an importance. In other words, the question is how much will thepositive or negative opinion on one specific item of the proposal affect the negativeopinion on a proposal. By how much does the opinion on, for example, a change inthe set-aside areas affect the overall support for the cereals and oilseeds proposal?Here we have to base the intentions of the Ministers through revealed preferences,such as past behaviour or public declarations. If a Minister has announced that he/sheis against the change, it is necessary to attribute it a weight in the overall proposal. Byhow much will this negative view affect the overall probability of the proposal beingrejected? It may be that this country has very little interest in the issue in this case it ispossible to attribute it a low 10% weight in the final decision. This share ofimportance is denoted as sck.Then sck has to be multiplied by the Minister’s position on the proposed change. Aswe are calculating probabilities of rejection, we denote this as the level of non-supportfor the change (pck). This level of non-support is equivalent to a probability of votingagainst the change or the percentage of the change not accepted. Table 6.7 shows thedetermination system for levels of non-support. The classification is largelysubjective. However, the figures are listed have been developed taking into accountthe behaviour of member states in the past. While it is possible to argue that dairyquotas are not less important than price cuts, changing the figures has not providednoticeable changes in the results. 172
    • Table 6. 7 Classification tables of levels of non-support for the Commission’sproposalsIntervention price cuts pcint % dislikedNo change acceptable 100Strong doubts on the need of a cut 90Cuts accepted as necessary, but proposed cuts unacceptably large 70Cuts accepted as necessary, but proposed cuts considered rather large 50Cuts proposed too low or acceptable1 01 A country will hardly vote against price cuts if these are considered too small.Direct payments pcdp % dislikedRejection of partial compensation 100Full compensation strongly demanded 70Larger direct payments preferred 50Accepted as proposed, but phasing out of the payments preferred 30Acceptable as proposed 0Set Aside pcsa % dislikedNot accepted 100Strong preference for none or only voluntary 50Acceptable as proposed 0Extension of dairy quotas pcq % dislikedImmediate abolition 100Abolition by 2006 70Extension accepted but with an increase in quotas 50Extension of quotas, but without changes in quota rights 30Acceptable as proposed 0With formula P19, the final overall negative rating is calculated for each singleproposal. This can be viewed as the probability of voting against the proposal on itsown, i.e. not as part of a package, denoted by sector pco, pb, pd. Tables 6.8 to 6.10presents the authors’ selected weights for the proposed changes sck and level of non- 173
    • support for each change pck. For the intervention price, which is highly sensitive,some pcint are values in-between the figures proposed in Table 6.8. This is a furthersubjective nuance introduced by the author, when a preference was unclear andreflected more an intermediate position.Table 6. 8 Level of non-support for the cereals and oilseeds proposal Shares of importance and acceptability sint pcint sdp pcdp ssa pcsa sfin FIN pcoBelgium 0,7 0,8 0,15 0,7 0,15 0 0,5 1 0,83Denmark 0,4 0,5 0,3 0,3 0,3 0 0 1 0,29Germany 0,6 0,9 0,3 0,7 0,1 0 0,5 1 0,88Greece 0,4 0,4 0,5 0,7 0,1 0 0,5 1 0,76Spain 0,5 0,6 0,4 0,7 0,1 0 0,5 1 0,79France 0,7 0,9 0,2 0,7 0,1 0 0,5 1 0,89Ireland 0,5 0,6 0,3 0,7 0,2 0 0,8 1 0,90Italy 0,4 0,2 0,4 0,5 0,2 0 0,3 1 0,50Luxembourg 0,4 0,5 0,4 0,7 0,2 0 0,3 1 0,64Netherlands 0,6 0,6 0,3 0,5 0,1 0 0,5 1 0,76Austria 0,4 0,7 0,4 0,7 0,2 0 0,5 1 0,78Portugal 0,4 0,6 0,5 0,7 0,1 0 0,5 1 0,80Finland 0,4 0,7 0,5 0,7 0,1 0 0,5 1 0,82Sweden 0,6 0 0,2 0,3 0,2 0 0 1 0,06UK 0,8 0 0,1 0,3 0,1 0 0 1 0,03Table 6. 9 Level of non-support for the Beef proposal Shares of importance and acceptability sint pcint sdp pcdp sfin FIN pbBelgium 0,7 0,5 0,3 0,7 0,5 1 0,78Denmark 0,7 0,5 0,3 0,3 0 1 0,44Germany 0,6 0,7 0,4 0,7 0,5 1 0,85Greece 0,5 0,5 0,5 0,7 0,5 1 0,80Spain 0,5 0,5 0,5 0,7 0,5 1 0,80France 0,5 0,5 0,5 0,7 0,5 1 0,80Ireland 0,5 0,5 0,5 0,7 0,5 1 0,80Italy 0,5 0,5 0,5 0,5 0,3 1 0,65Luxembourg 0,6 0,7 0,4 0,7 0,3 1 0,79Netherlands 0,6 0,5 0,4 0,5 0,5 1 0,75Austria 0,7 0,7 0,3 0,7 0,5 1 0,85Portugal 0,5 0,5 0,5 0,7 0,5 1 0,80Finland 0,5 0,5 0,5 0,7 0,5 1 0,80Sweden 0,7 0 0,3 0,3 0 1 0,09UK 0,9 0 0,1 0,3 0 0 0,03 174
    • Table 6. 10 Level of non-support for the dairy proposal Shares of importance and acceptability sint pcint sdp pcdp sq pcq sfin FIN pdBelgium 0,5 0,5 0,1 0,7 0,4 0,3 0,5 1 0,72Denmark 0,4 0,5 0,3 0,3 0,3 0,7 0 1 0,50Germany 0,7 0,7 0,1 0,7 0,2 0 0,5 1 0,78Greece 0,5 0,5 0,2 0,7 0,3 0,5 0,5 1 0,77Spain 0,4 0,5 0,2 0,7 0,4 0,5 0,5 1 0,77France 0,4 0,7 0,2 0,7 0,4 0 0,5 1 0,71Ireland 0,3 0,5 0,4 0,7 0,3 0 0,8 1 0,89Italy 0,4 0,5 0,2 0,5 0,4 0,6 0,3 1 0,68Luxembourg 0,4 0,7 0,4 0,7 0,2 0 0,3 1 0,69Netherlands 0,5 0,5 0,1 0,5 0,4 0,3 0,5 1 0,71Austria 0,5 0,7 0,3 0,7 0,2 0 0,5 1 0,78Portugal 0,4 0,5 0,5 0,7 0,1 0 0,5 1 0,78Finland 0,4 0,5 0,4 0,7 0,2 0 0,5 1 0,74Sweden 0,3 0 0,2 0,2 0,5 0,7 0 1 0,39UK 0,5 0 0,1 0,2 0,4 0,7 0 1 0,30With these results for the probability of rejection of the single proposals (pi) and theprevious Tables, the probability of rejection of the package for each country (pn) canbe calculated. The rejection probability of each member stateTable 6.11 presents the variables and the final calculation of the member states. Atfirst glance, it is clear that the results do not promise an easy outcome for Agenda2000. The probabilities of voting against are very high. 175
    • Table 6. 11 Calculation of pn - the probability of voting against or level ofsupport for the proposal Shares of importance Probabilities of Net Result voting against Balance dummy sco sb sd snb pco pb pd NB pnBelgium 0,57 0,21 0,23 0,3 0,83 0,78 0,72 1 0,86Denmark 0,51 0,11 0,39 0,1 0,29 0,44 0,50 0 0,39Germany 0,53 0,14 0,33 0,3 0,88 0,85 0,78 0 0,84Greece 0,85 0,03 0,12 0,1 0,76 0,80 0,77 0 0,76Spain 0,81 0,09 0,10 0,1 0,79 0,80 0,77 0 0,79France 0,65 0,15 0,20 0,1 0,89 0,80 0,71 0 0,84Ireland 0,16 0,42 0,43 0,1 0,90 0,80 0,89 1 0,87Italy 0,74 0,11 0,15 0,1 0,50 0,65 0,68 1 0,59Luxembourg 0,18 0,29 0,53 0,1 0,64 0,79 0,69 1 0,74Netherlands 0,63 0,11 0,26 0,3 0,76 0,75 0,71 1 0,82Austria 0,49 0,21 0,30 0,1 0,78 0,85 0,78 0 0,79Portugal 0,68 0,11 0,21 0,1 0,80 0,80 0,78 0 0,79Finland 0,40 0,12 0,47 0,1 0,82 0,80 0,74 0 0,78Sweden 0,41 0,13 0,46 0,1 0,06 0,09 0,39 0 0,21UK 0,53 0,12 0,35 0,1 0,03 0,03 0,30 1 0,216.7 The blockage or rejection probability of Agenda 2000With the individual preferences, or probabilities of voting against the package, it ispossible to see the overall probability that the Council will reject or accept theproposal. This will be done under a number of different voting rules, the formal QMVrules with and without coalitions, the implicit rules, such as veto by France, and theoutcome under a simple majority rule. This experiment should give an indication ofthe effect the formal explicit and the implicit rules have on the future of the proposals,as described earlier in the chapter. A high probability of refusal will generally requirea very large change in the proposal. For the CAP this means a strong reduction in thedepth of the proposals. The result of the probability of rejection under three scenariosis presented in Table 6.12. 176
    • Table 6. 12 The probability of rejection of the original Agenda 2000 proposalsto reform the CAP Probability of Probability of blockage acceptance Prob (R) 1-Prob (R)QMV – independent voting 0,9988 0,0012SMV – weights of Member States unchanged 0,93 0,07SMV – each member State one vote 0,96 0,04The results are not very encouraging. In all three cases the rejection probability ishigh. However, QMV does increase the probability of blockage. In any case, theproposal was clearly doomed to be strongly changed. Does the small difference implythat the effect of QMV is negligible? Not at all; QMV and other implicit rules in theCouncil can have in other circumstances a marked effect in reducing the chances forlegislation to be adopted. A sensitivity analysis for the Agenda 2000 is not relevant,because any variables which realistically represent the policy preferences of theMember States keep the probability of rejection near to 100%.Therefore, considering as an example a more advanced stage in the negotiations, therewas a moment were the Member States were ready to consider the Germanpresidency’s proposal for co-financing, certainly with some further concessions andchanges. It is reasonable to expect that the preferences would become morefavourable at that stage. Co-financing would have allowed avoiding a reduction in thedepth of the reforms while keeping the levels of subsidies high and avoiding an‘excessive’ increase in the EU budget. France, however, rejected outright anyproposal containing co-financing. Unless the item was deleted from the negotiations,France’s probability of rejection was going to be at 100%. Assuming that othermember states reduced their disapproval to pn= 20%, the probability of rejection(without a veto power for France) is 45%. This is markedly higher than for SMV,which is at 3.6% if the voting weight of the countries is kept or 1.2% if each countryhas one vote! Of course, given the capacity of France to impose an implicit veto therejection probability was 100%. Table 6.13 summarises the results: 177
    • Table 6. 13 Effects of QMV and implicit veto, the co-finance case % Probability % Probability of blockage of acceptance Prob (R) 1-Prob (R)QMV 45 55Implicit veto by France 100 0SMV, voting weights preserved 3.61 96.39SMV, one country one vote 1.16 98.84These results are graphically clear. The capacity of the voting rules to block and dilutethe depth of reform proposals is very large indeed, even when preferences aregenerally positive.6.8 The preferences of the final Berlin AgreementThe negotiations for the reform of the Common Agricultural policy concluded withthe agreement at the Berlin Summit. It is reasonable to question to which extent thisreform has a lower probability of rejection under the model. If there was anagreement, then the probability of rejection should have been lower if this packagehad been presented as the initial proposal. It is well possible that the final agreementreached still has a high probability of rejection and that the only reason it wasaccepted is that it was necessary to reach to a successful conclusion of the negotiationfor political reasons.The author notes that the agreement reached at the European Council was not thedefinitive consensus at the Council of Ministers. However, Chapter 6 has discussedhow some Member States strongly disputed the validity of the agreement reached inthe Agricultural Council and no formal vote had been taken. It is unclear if it ispossible to declare the outcome of the Agricultural Council a valid outcome, if theconclusions had been really binding, the negotiations may well have continued. It is inany case more realistic to analyse if the definitive agreement would have been moreacceptable for the Council. Is the rejection probability using this model lower? Mostlikely, the difference should be minimal. There is a good reason, the final outcomewas less damaging for the agricultural sector than the original proposal, but it will stillaffect it negatively. The Berlin outcome is the result of long and painstakingnegotiations. If the Berlin result had been presented to the Council as a startingposition, a number of Member States would have fought to restrict the reform and the 178
    • result would have been weaker than the Berlin outcome. The strength of the reforms islinked to the severity of the proposals and the European Commission’s power ofinitiative. It is also important to realise that the negotiators do not only compare theBerlin agreement with the status quo, but also with the initial Agenda 2000 proposals.While compared with the status quo a proposal may not be acceptable, it may well bean important improvement (seen from the point of view of a Member State) from theoriginal proposal.The variables needed for the model to test the acceptability or rejection probability ofthe Berlin outcome are listed in table 6.14. Details of the agreement and the budgetaryand farm income impacts are presented in Annex A.Table 6. 14 Berlin AgreementSectors AgreementCereals and oilseeds Ø a reduction of the cereal intervention price to 101.3 €/t in the year 2000 in one step. Ø non-crop specific area payment of 63 €/t Ø Compulsory set-aside at 10%; improvement in voluntary set-aside conditions; set-aside areas to get the non-crop specific area payments of 63 €/t.Beef Ø a gradual reduction in the intervention price from the present level of 2780 €/t to 2224 €/t over the period 2000- 2002. Ø a gradual increase the direct income payments on a per head of cattle basis.Dairy Ø an extension of the quota regime to 2005/6, quotas are increased. Ø a gradual decrease support prices by 15% in three equal steps starting 2005/6. Ø an introduction of new yearly premiums per ton and payments through national envelopes. 179
    • Fitting the agreement to the model the Tables 6.15 to 6.20 are generated. The sharesof importance of the different commodities are the same as in Table 6.4 and are notrepeated.Table 6.15 presents the effects on net balances of the reform, in isolation of thestructural reforms and other items of the budget. The table incorporates the Agenda2000 proposal, because it gives an interesting insight. The negative Net Balanceeffects for the net contributors are much lower.Table 6. 15 Changes in net balances caused by the Berlin agreement foragriculture 1997 Agenda2000 Berlin Change* NB snbBelgium 1781 818 1865 84 0 0,1Denmark 98 105 82 -16 1 0,1Germany -11919 -10879 -10508 1411 0 0,3Greece 4489 4652 4313 -176 1 0,1Spain 5761 6580 6968 1207 0 0,1France -1828 490 667 2495 0 0,3Ireland 2914 2290 2022 -892 1 0,1Italy -587 -1166 -1664 -1077 1 0,3Luxembourg 744 741 1013 269 0 0,1Netherlands -1273 -2532 -2180 -906 1 0,3Austria -909 -512 -501 408 0 0,3Portugal 2783 2936 3023 239 0 0,1Finland 1 215 141 140 0 0,1Sweden -1243 -972 -909 334 0 0,3UK -685 -2765 -4332 -3647 1 0,1*Berlin agreement compared with 1997Table 6.16 presents the changes in gross farm incomes of the Berlin agreement.Interesting to note is the difference in the impact compared to the Agenda 2000proposals, particularly for dairy. But this is understandable, as the quota levels havebeen increased and the reform only starts in. One of the key components that allowedthe reaching of an agreement has been the delay of the reforms until practically thefollowing decision of the financial perspectives (from 2007 to probably 2013). 180
    • Table 6. 16 Change in potential gross farm incomes from the Berlin decision, 2006, mio € Cereals and oilseeds Beef Dairy status Berlin Change FIN status Berlin Change FIN Status Berlin Change FIN quo1 quo1 quo3Belgium 615 547 -99 1 1101 1043 -58 1 963 973 10 0Denmark 2165 1928 -177 1 566 564 -3 1 1380 1380 0 0Germany 11369 10034 -1020 1 4545 4358 -187 1 8602 8602 1 0Greece 925 887 -18 1 252 258 6 0 195 195 0 0Spain 5338 4137 -1072 1 1967 1989 22 0 1685 1691 6 0France 17463 15363 -1628 1 5948 5829 -119 1 7358 7371 14 0Ireland 409 344 -54 1 1983 2011 28 0 1622 1622 0 0Italy 5576 4938 -507 1 3519 3311 -208 1 3005 3005 0 0Luxembourg 41 33 -7 1 29 32 3 0 83 83 0 0Netherlands 564 477 -71 1 1650 1520 -131 1 3404 3405 1 0Austria 1231 1129 -67 1 743 743 0 1 738 788 50 0Portugal 594 570 -25 1 360 369 9 0 569 569 0 0Finland 911 817 -69 1 318 332 14 0 739 742 3 0Sweden 1537 1291 -204 1 451 466 15 0 1022 1022 0 0UK 5600 4789 -662 1 2570 2767 197 0 4442 4453 11 0Own estimations1. These figures are based on the potential income from intervention prices and direct support of the CAP pre-reform.3. Old quota * target price. 181
    • This information is sufficient to continue to the next stage, the calculation of thelevels of non-support for the individual products. Table 6.7 listed the classificationtables on the level of non-support for the individual proposals (in this case the actualagreement). The level of acceptance for the individual items changes under the newdecisions, tables 6.17 to 6.20 present the estimations on the new position of theMember States.Table 6. 17 Level of non-support for the Cereals and oilseeds proposal Shares of importance and acceptability sint pcint sdp pcdp ssa pcsa sfin FIN pcoBelgium 0,7 0,5 0,15 0,5 0,15 0 0,5 1 0,71Denmark 0,4 0,3 0,3 0 0,3 0 0 1 0,12Germany 0,6 0,3 0,3 0,5 0,1 0 0,5 1 0,67Greece 0,4 0,3 0,5 0,5 0,1 0 0,5 1 0,69Spain 0,5 0,3 0,4 0,5 0,1 0 0,5 1 0,68France 0,7 0,3 0,2 0,3 0,1 0 0,5 1 0,64Ireland 0,5 0,5 0,3 0,5 0,2 0 0,8 1 0,88Italy 0,4 0 0,4 0 0,2 0 0,3 1 0,30Luxembourg 0,4 0,5 0,4 0,5 0,2 0 0,3 1 0,58Netherlands 0,6 0,5 0,3 0 0,1 0 0,5 1 0,65Austria 0,4 0,5 0,4 0,5 0,2 0 0,5 1 0,70Portugal 0,4 0,3 0,5 0,3 0,1 0 0,5 1 0,64Finland 0,4 0,3 0,5 0,3 0,1 0 0,5 1 0,64Sweden 0,6 0 0,2 0,3 0,2 0 0 1 0,06UK 0,8 0 0,1 0,3 0,1 0,5 0 1 0,08Table 6. 18 Level of non-support for the Beef proposal Shares of importance and acceptability sint pcint sdp pcdp sfin FIN pbBelgium 0,7 0,3 0,3 0,5 0,5 1 0,68Denmark 0,7 0,3 0,3 0,3 0 1 0,30Germany 0,6 0,3 0,4 0,5 0,5 1 0,69Greece 0,5 0 0,5 0,5 0,5 0 0,25Spain 0,5 0 0,5 0,5 0,5 0 0,25France 0,5 0,3 0,5 0,5 0,5 1 0,70Ireland 0,5 0,3 0,5 0,5 0,5 0 0,40Italy 0,5 0 0,5 0,5 0,3 1 0,48Luxembourg 0,6 0,3 0,4 0,5 0,3 0 0,38Netherlands 0,6 0,3 0,4 0,5 0,5 1 0,69Austria 0,7 0,3 0,3 0,5 0,5 1 0,68Portugal 0,5 0,3 0,5 0,5 0,5 0 0,40Finland 0,5 0,3 0,5 0,5 0,5 0 0,40Sweden 0,5 0 0,2 0,3 0 0 0,06UK 0,9 0 0,1 0,3 0 0 0,03 182
    • Table 6. 19 Level of non-support for the dairy proposal Shares of importance and acceptability sint pcint sdp pcdp sq pcq sfin FIN pdBelgium 0,5 0,5 0,1 0,7 0,4 0,3 0,5 0 0,44Denmark 0,4 0,5 0,3 0,3 0,3 0,7 0 0 0,5Germany 0,7 0,7 0,1 0,7 0,2 0 0,5 0 0,56Greece 0,5 0,5 0,2 0,7 0,3 0,5 0,5 0 0,54Spain 0,5 0,5 0,2 0,7 0,4 0,5 0,5 0 0,59France 0,5 0,7 0,2 0,7 0,4 0 0,5 0 0,49Ireland 0,5 0,5 0,5 0,7 0,3 0 0,8 0 0,6Italy 0,4 0,5 0,2 0,5 0,4 0,6 0,3 0 0,54Luxembourg 0,4 0,7 0,4 0,7 0,2 0 0,3 0 0,56Netherlands 0,5 0,5 0,1 0,5 0,4 0,3 0,5 0 0,42Austria 0,5 0,7 0,3 0,7 0,2 0 0,5 0 0,56Portugal 0,4 0,5 0,5 0,7 0,1 0 0,5 0 0,55Finland 0,4 0,5 0,4 0,7 0,2 0 0,5 0 0,48Sweden 0,3 0 0,2 0,2 0,5 0,7 0 0 0,39UK 0,5 0 0,1 0,2 0,4 0,7 0 0 0,3Table 6. 20 Calculation of pn - the probability of voting against or level ofsupport for the proposal Shares of importance Probabilities of Net Result voting against Balance dummy sco sb sd snb pco pb pd NB pnBelgium 0,57 0,21 0,23 0,1 0,71 0,68 0,44 0 0,64Denmark 0,51 0,11 0,39 0,1 0,12 0,30 0,50 1 0,36Germany 0,53 0,14 0,33 0,3 0,67 0,69 0,56 0 0,63Greece 0,85 0,03 0,12 0,1 0,69 0,25 0,54 1 0,69Spain 0,81 0,09 0,10 0,1 0,68 0,25 0,59 0 0,63France 0,65 0,15 0,20 0,3 0,64 0,70 0,49 0 0,62Ireland 0,16 0,42 0,43 0,1 0,88 0,40 0,60 1 0,60Italy 0,74 0,11 0,15 0,3 0,30 0,48 0,54 1 0,55Luxembourg 0,18 0,29 0,53 0,1 0,58 0,38 0,56 0 0,51Netherlands 0,63 0,11 0,26 0,3 0,65 0,69 0,42 1 0,72Austria 0,49 0,21 0,30 0,3 0,70 0,68 0,56 0 0,65Portugal 0,68 0,11 0,21 0,1 0,64 0,40 0,55 0 0,59Finland 0,40 0,12 0,47 0,1 0,64 0,40 0,48 0 0,53Sweden 0,41 0,13 0,46 0,3 0,06 0,06 0,39 0 0,21UK 0,53 0,12 0,35 0,1 0,08 0,03 0,30 1 0,24Table 6.20 shows that according to the author’s estimates, the member states wouldstill have had a rather negative view of a package like the one agreed in Berlin, if thiswere presented as the original proposal. The model estimates that the probability ofrejection under QMV is similar, with only a slight improvement by 3% (Table 6.21). 183
    • However, the great surprise, and an indication of the restrictiveness of the QMV, isthe considerable reduction in the rejection probability by up to 20% to 30% dependingon the voting weights of the member states. This demonstrates that QMV has aconsiderable effect in fostering the status.Table 6. 21 The probability of rejection of the Berlin agreement Probability of Probability of blockage acceptance Prob (R) 1-Prob (R)QMV – independent voting 96,65% 3,35%SMV – weights of Member States unchanged 63,39% 36,60%SMV – each member State one vote 78,26% 21,73%As the analysed package is the one actually approved, one can also claim that thestrength of the initial proposal by the Commission is crucial in determining the depthof the actual reforms.6.9 ConclusionsThe voting model presented in this Chapter has explicitly shown the strong difficultiesfor the Council to reach the necessary consensus for adopting legislation. QMV andthe implicit capacity of some member states to impose a de facto veto drasticallyreduces the area of manoeuvre of the Commission when drafting legislation.In a heterogeneous sector such as agriculture, satisfying sufficiently the interests ofthe Member States to have a reform adopted, can only lead to weakly targeted policiesor to costly compensations for changes. As the EU budget has lost its capacity toaccommodate significant, country-specific side-payments and compensations, theability to reform the CAP has become very constrained.This chapter indicates that the inefficiencies of the Agenda 2000 agreements arestrongly linked to the Council rules. Mathematically, the Council’s decision-makingcapacity is very constrained, and new rules are necessary if the CAP is to be able toadapt to new challenges or even to prevent future crises. It is also reasonable to expect 184
    • a deterioration of the decision-making capacity of the Council after an enlargement.This is analysed in the next chapter. 185
    • Chapter 7. The Effects of Enlargement on decision-making “Men marry because they are tired; women because they are curious. Both are disappointed.” Oscar WildeThe previous chapters have concentrated on the functioning of the decision-makingprocess for the present EU-15. This chapter goes further, discussing the likely effectsof the next Enlargement on the decision-making process in the Council and itsimplications for the ongoing process of reform of agricultural policies.Enlargement to Central and Eastern Europe poses a difficult challenge to the EU.With the exception of the Czech Republic and Slovenia, the first group of candidatecountries20 (see Table 7.1) have a level of employment in agriculture considerablyhigher than the EU, while the value of agricultural production only reaches a tinyfraction of the EUs. The levels of GDP per capita are lower than in any member state.All this is creating considerable worries in both sides. The CEECs are worried abouttheir lack of competitiveness inside the EU, and the EU members are concerned aboutthe political and economic costs of enlargement. The alterations in EU budgettransfers are expected to be negative for all the present EU member states. New coststo the agricultural budget and transfers under the Structural Funds to disadvantagedregions in the East will principally be paid by higher contributions of the presentmember states and by reductions in the level of structural funds for them. The averageGDP per capita in the Union will be altered too, creating future economic uncertaintyfor regions which risk losing their eligibility for the Structural Funds.After the first wave of enlargement the new members will be comparable to a newgroup of cohesion countries, but predominantly ‘North European’ as far as soil andclimatic conditions is concerned, in contrast to the present cohesion three (Greece,Portugal and Spain). The candidate countries have an important potential in Nordernagricultural products and most regions are eligible for Objective 1 structural funds.20 Until the year 2000, only six countries were expected to join in the first wave of enlargement. 186
    • With such a different new set of circumstances there is little doubt that the politicalpreferences in the Union will become more varied. An increase in heterogeneity ofpolicy preferences can only cause more difficulties in reaching decisions.Table 7. 1 Comparative data on agriculture in the CEECs and the EU, 1996 Agricultural Agricultura GDP/capita Employment Food Production l Area in expenditure 1996 Agriculture First group billion % million ha % of EU % % of € GDP household income Czech 1.2 2.9 4279 64 4.1 31 Republic Estonia 0.3 8.0 1450 34 9.2 30 Hungary 2.1 5.8 6184 47 8.2 24 Poland 6.5 6.0 18474 34 26.7 35 Slovenia 0.7 4.4 785 66 6.3 23 Group I 10.6 5.3 31172 18.4 Second group Bulgaria 0.9 12.8 6164 25 23.4 54 Latvia 0.3 7.6 2521 25 15.3 39 Lithuania 0.5 10.2 3151 29 24.0 52 Romania 5.3 19.0 14789 32 37.3 58 Slovak 0.7 4.6 2445 44 6.0 35 Republic* Group-II 7.8 13.1 29070 27.9 CEEC-10 18.4 7.0 60242 22.5 EU-15 117.5 1.7 135260 100 5.1 18.0Data Source: Moehler et al. (1999) and Eurostat News release 48/2000, 18 AprilKirman and Widgren (1995) claim that an enlargement of the EU would reduce theefficiency of the Council of Ministers. The planned increase in EU membership willincrease the heterogeneity of positions, thus handicapping the efficiency of decision-making. This section will discuss the effects on the power distribution in the Councilfor the first planned enlargement to the first group of CEECs plus Cyprus and Malta. 187
    • All indicates that the already considerable heterogeneity in the Union, which ispresently causing problems to reach agreements at all levels, will be reinforced. Theissue is recognised by the EU member states and the debate on the future structures ofthe EU has been increasing in importance. In the March 2001 European Council inNice a new Treaty (OJ 2001/C 80/01) amending the Treaty of the European Uniontried to solve the problem by reforming the EU institutions, amongst which theCouncil. These reforms are supposed to clear the way for enlargement and to simplifythe decision-making procedures.The amendment changes the votes of the member states and the rules of qualifiedmajority. It specifies how many votes the member states will have after the 1st ofJanuary 2005 and how many votes will each candidate country have with theexception of Turkey. Annex D lists all the votes for the enlarged EU. Under thisenlarged EU there would be 345 votes, and 258 votes would be required to adopt aregulation. Due to some misgivings by some large member states, which complainedthat the small countries would still be disproportionally represented, a populationrestriction was added (Article 3b). Member states may request verification that theMember states constituting the qualified majority represent at least 62% of the EUpopulation. This, de facto, introduces a new restriction to the voting system, as it isunlikely that member states wishing to block a proposal will not request to check theshare of the population represented by the qualified majority.It is very unlikely that all the applicants will enter the EU together in the years up to2006. In this research it is assumed that a first group of candidates may accede before2005, and the most prepared and likely candidates are the Czech Republic, Estonia,Hungary, Poland, Slovenia, Cyprus and Malta. The calculations in this chapter willonly concern these countries.Although a full analysis of the consequences if the Nice Treaty were to be ratified isnot possible at this stage, the model has been adapted to show preliminary results andcompare them with the old system. Therefore, this study consists of two parts. Thefirst analyses the effects of enlargement under an unchanged decision-making systemand the second the results using the Nice agreement. 188
    • 7.1 Continuation of the present Decision-Making System in an Enlarged UnionIf the present system of Decision-Making had not altered, the new member stateswould be allocated an appropriate number of votes in the Council automaticallyincreasing the number of votes needed for a blocking minority following the normalprocedure. Table 7.2 shows the number of votes for the new entrants, as calculated byKirman and Widgren (1995).Table 7. 2 Votes and blocking minority in the Council EU-22Austria 4 Spain 8Belgium 5 Sweden 4Denmark 3 United Kingdom 10Finland 3 New membersFrance 10 Czech Republic 5Germany 10 Estonia 2Greece 5 Hungary 5Ireland 3 Poland 8Italy 10 Slovenia 3Luxembourg 2 Cyprus 2Netherlands 5 Malta 1Portugal 5 Total 113Expanding the present QMV rules to incorporate the new members, the blockingminority would likely be 33 votes, and a qualified majority would be reached with71.68% of the votes. Qualified Majority 81 % of total vote 71,68 Blocking Minority 33 % of total vote 29,20Using the basic test of equal level of non-support for a proposal by the member states(see section 6.2), it is calculated that the probability of rejection increases (Figure 7.1)in an enlarged Union. 189
    • Figure 7. 1 Effect of QMV in an enlarged Union Effect of QMV in an enlarged Union 100% Probability that a proposal is 90% 80% 70% blocked 60% EU-22 50% EU-15 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Level of non-supportAt a 50% level of non-support, the increase in the probability of rejection is by virtueof enlargement 4,6 %, reaching 96%. The increase in the number of countries makesthe area of compromise smaller. However, when preferences are very favourable(level of non-support <20%), then the probability of rejection falls. Thus enlargementdilutes the power of some coalitions and member states to block proposals when theseare generally acceptable.The only case in which the ability to reach agreements is increased is if the newmembers join existing coalitions. Unfortunately, the CEECs will increase theheterogeneity of policy preferences. These countries are mostly producers ofnorthern products, but are economically weaker and will still be suffering the strainof restructuring. Once under the protective umbrella of the CAP there is a highprobability that these member states will wish to maintain whatever EU policy andbudgetary support they can achieve in the accession negotiations. It is likely thereforethat they will oppose reforms.7.1.1 The Power of a CEEC coalitionChapter 6 has described to which extent the CAP reforms of Agenda 2000 areinsufficient. For political reasons there is, however, very little hope of seeing asignificant reform before Eastern enlargement. In this case it is reasonable to analyse 190
    • a possible scenario in which reform becomes imperative. It is easy to imagine thepresent EU-15 deciding that the budgetary effects of the enlargement are far too heavyon their net balances. The preceding chapter has shown how net beneficiaries andcontributors suffer under unchanged policies after an enlargement. However,reforming after accession is a delicate matter. This section analyses a hypotheticalcase after enlargement where the CEECs form a coalition to reject reform proposalsthat the EU-15 plus Cyprus and Malta regard as positive. The Member states vote ingroups of coalitions as presented in Chapter 6, Cyprus and Malta join the Southerncoalition.Realistically, most or all members will want some changes to any reform proposal,regardless of the importance and urgency of reforms; thus the probability of rejectionis always present, if their demands are not taken into account. For illustration, all thecoalitions of the 15 members are given a proxy for their preferences in which there isa probability of rejection of 20%. Under normal QMV rules with independent votingbehaviour, the probability of rejection is 14%. In such circumstances, it seems likelythat the reform package could be easily altered to ensure approval in the Council.In an enlarged Union, the very special conditions in the CEECs may well block anychanges in the policies. If they all form a coalition to reject the reforms (pn=1), theincrease in the probability of rejection rises from 14% to 53%.7.1.2 Implicit veto power for PolandIt is reasonable to question how the future process of decision-making will look usingthe behaviour during the negotiations of the Agenda 2000 as an example. Given thesize and the strength of its agricultural lobby, it is not unrealistic to expect Poland tohave an implicit veto power or close to it. It is possible that Poland can makesuccessful use of the Luxembourg compromise. With 20% of the population engagedin agriculture, or at least a large share of the population related to agriculture, theinternal political difficulties for reforms which reduce the support provided forfarmers could be very damaging indeed.Supposing that Poland does manage to acquire an implicit veto power in the Council,similar to the one brandished by Germany and France in Berlin, the area of 191
    • compromise would further restrict itself strongly. Figure 7.2 shows the cumulativerejection curves for the EU-22 under three cases. The first assumes no implicit vetopower for any country, the second assumes that France and Poland possess one, andthe third assumes that France, Germany and Poland all have an independent veto overproposals. The Council has never wished to undermine ‘vital’ interest of any of itsmembers. Stability in Poland’s large agricultural sector is a political priority of thecountry. The Council will hesitate to take any decision that could have a strong effecton Poland. The EU can also not afford to loose popularity in the CEECs before andduring the transition periods.The results show that if Poland joins France and Germany in the power to impose aveto, proposals that are accepted by a large majority of member states could be easilyblocked. Under normal QMV rules, if all countries have a probability of votingagainst the proposal of 10%, the chances that a blocking minority is formed is verylow, below 5%. The fact that in a small percentage of cases France, Poland or bothvote against, immediately increases the probability of rejection to 20%. If Germanyalso can block a proposal single-handedly, this jumps up to 30%.Especially strong is the case, where there is a level of non-support of member states of20% the probability that a blocking minority is formed stands at 20%. Implicit vetoesby these three countries increases the rejection probability group by an extra 30%. 192
    • Figure 7. 2 Effects of implicit vetoes in an enlarged EU Effects of implicit vetoes in an enlarged EU 100% 90% no probability of blockage 80% veto 70% 60% vetoes 50% F and 40% D 30% vetoes F, D 20% and P 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Level of non-supportA possible veto power of Poland could well bring the EU to a very difficult positionfor further reforms. The chances of finding a compromise reform are greatlydiminished under this scenario. Compared with the normal QMV the effect of afurther implicit veto is considerable. The reduction in the area of compromise isclearly visible in figure The effects of introducing the Nice Treaty changes to the QMV rulesThe Nice Treaty has adapted the QMV with the aim to improve the structure of theCouncil and to adapt it to enlargement. It is very often perceived that the aim of areform of the Council was to improve the capacity of the Council to take decisions ina larger Union. However, the French presidency’s information web-site does notmention this aim at all. It declares that the aim of the reform is to reduce the trendtowards the over-weighting of the least-heavily-populated states of the EU in theCouncil. Not a word is mentioned on efficiency of the process or easing the capacityto take decisions. Table 7.3 lists the new number of votes for each country in anenlarged Union of 22 countries after the 1st of January 2005, if the Nice Treatyagreement survives the ratification period. The total number of votes is 303. 193
    • Table 7. 3 Votes and blocking minority in the Council EU-22 after NiceAustria 10 Spain 27Belgium 12 Sweden 10Denmark 7 United Kingdom 29Finland 7 New membersFrance 29 Czech Republic 12Germany 29 Estonia 4Greece 12 Hungary 12Ireland 7 Poland 27Italy 29 Slovenia 4Luxembourg 4 Cyprus 4Netherlands 13 Malta 3Portugal 12 Total 303To model the effects of the new qualified majority model, it is necessary to calculatethe blocking minority requirement. The treaty is rather vague on this issue, it onlyrequires that the maximum threshold for a qualified majority should not exceed73.4%. Today the threshold stands at 71.3%. This is relevant, because if the thresholdremains at 71.3% the requirement for a qualified majority with 22 countries is 216votes and for a blocking minority 88 votes. If the threshold goes to 73.4% the numberof votes change to 222 and 82 respectively. It is also necessary to introduce anotherrestriction, the requirement for the group of countries forming the qualified majorityto represent more than 62% of the EU population.Before analysing the results for an enlarged Union, it is interesting to answer thefollowing question: If applied solely to the EU-15, would the system increase orreduce the probability of proposals being blocked? In other words, the question is ifthe new system would be more or less restrictive. Will it reduce or increase the drifttowards maintaining the status quo. Figure 7.3 presents the results of the model fortwo scenarios, one with a qualified majority requirement of 71.3% and another with74.3%. Table 7.4 presents the number of votes and other restrictions. These two arecompared with the results of the current system. 194
    • Table 7. 4 The EU-15 QMV before and after Nice Present system Nice at 71.3% Nice at 73.4%Total votes 237 237 237Qualified 62 169 174majority 71.3% 71.3 73.4Blocking 26 69 64minority 29.9% 29.1 27%Population none 62% 62%restrictionFigure 7.3 plots the probability of proposals being blocked under the new Treaty witha threshold of 71.3% and 73.4% respectively, as well as the result with the old system.Figure 7. 3 The Nice Treaty effect for the EU-15 The Nice Treaty effect for the EU 15 100% 90% probability of blockage 80% present 70% system Nice 60% 71,3% 50% Nice 40% 73,4% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% level of non-supportThe results are self-explanatory, as the probability of rejection is in all cases somepercentage points more restrictive than with the present system. This indicates thatsome coalitions, which could form a qualified majority today, will fail to do so underthe new system. Interestingly enough, under the 73.4% rule no coalition whichachieves a qualified majority fails the population test, only at 71.3% some coalitionsfail to fulfil the population restriction. For instance a big coalition without Germany,the UK and Sweden, would fail to pass. It would have only 60% of the votes.Figure 7.4 shows the effect of the Nice Treaty in an enlarged Union of 22. In all casesthe probability of blockage increases. If the Nice system is used but with the threshold 195
    • of 71.3% of votes, the result is practically equivalent to keeping the current system.However, if the qualified majority requirement is for 73.4% of the votes theprobability of blockage increases markedly. With the new system requiring 73.4% ofvotes and 62% of population, the probability of rejection at 50% non-support ispractically 100%. If all ministers randomly vote in favour or against, there is only a0.005% probability that the proposal is not blocked, compared to 9% today.Interesting is the strong increase for at of 40% non-support level. There is a 22%increase in the rejection probability compared to the present situation and a 14% to15% increase from the less stringent Nice rule or the present system in an enlargedunion.Figure 7. 4 The present system compared to the Nice Treaty agreement for thean EU of 22 member states The present system compared to the Nice Treaty agreement for an EU of 22 countries 100% probability of blockage 90% present 80% system 70% EU15 60% present 50% system 40% EU22 30% Nice EU22 - 71,3% 20% 10% Nice EU22 0% - 73,4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% level of non supportIt is also clear that the implicit veto powers of some member states would reduce thechances of proposals being accepted. This indicates that the drift towards keeping ofthe status quo for the CAP will be as strong or stronger than before.7.3 The effects of enlargement on future reform prospectsThere is little chance that the enlargement would create an atmosphere predisposed toreforms. On the contrary, it is probably going to exacerbate the difficulties alreadypresent. What the present study has shown is that in all cases the enlargement wouldreduce the chances of proposals to be accepted by the Council. It also shows that thereforms proposed in the Nice Treaty were clearly not aimed at increasing the approval 196
    • rate. On the contrary, it is more likely that the reform will reduce the number ofpossible winning coalitions compared to the preservation of the present system.As illustrated earlier, problems are to be expected in finding working compromises forthe enlarged EU. It is assumed here that the new members behaviour will be tomaximise the benefits from membership, trying to maximise the receipts from the EUbudget and avoiding any negative change to the net contributions. Given theireconomic position as the weakest EU members, they are expected to be reluctant toforfeit any benefits by the CAP or Structural Funds. This behaviour will only bereinforced if these members consider their treatment as discriminatory.There is of course an exceptional case. If the negotiations for enlargement concludedwith a weak deal for the applicants on agriculture, they might well support a reformthat reduces the level of subsidies for the EU-15. For example, if the CEECs weredenied direct payments for farmers, they would either try to get them introduced soonafter enlargement or abolished altogether in the name of fairness. Nevertheless, thereare indications that the EU would never be able to refute direct payments for anindefinite period. If the direct payments are withheld only for a transition period, it isunlikely that the CEECs will vote for their disappearance, because they would morelikely request for an earlier introduction or wait. 197
    • CHAPTER 8. Summary and Conclusions “Democracy is a device that insures we shall be governed no better than we deserve.” George Bernard ShawThis research aimed at finding evidence that the decision-making procedures in theCouncil of Ministers encourage the status quo for the CAP. There should therefore bea drift towards the lowest common denominator when reforming the policy. Themaintenance of the status quo has often been attributed to the fact that member statesare generally more interested in defending their national interest than in findingsolutions which maximise the benefits for the EU. Member states are also ratherreluctant to accept reforms of the CAP, because these normally attempt to reducesupport to the agricultural sector and to redistribute the EAGGF more efficientlyfunds. Member states prefer to minimise negative changes in net contributions to thebudget and avoid changes in the distribution of the benefits, i.e. to ensure that targetgroups remain as much as possible unaltered.The methodology was the following: a) to analyse the process of decision-makingusing the Agenda 2000 proposals by the Commission as an empirical proof of thedecision-making inefficiencies; b) to analyse if the outcome of the Agenda 2000negotiations was sub-optimal, leaving the EU unprepared for the forthcomingenlargement and the WTO negotiations; and c) to test if the enlargement of the EUwill further retard the possibility of reforming the policy in the future.To do so the thesis follows the structure hereunder:a) It reviews the public choice literature in search for the most appropriate analytical tools to undertake this research.b) It summarises the historical developments of the CAP pinpointing possible evidence of policy deficiencies originating from an inefficient decision-making system.c) It analyses and presents the formal and informal voting procedures in the Council, based on the literature on the Council. 198
    • d) It constructs a voting model for the Council to allow the calculation of the probabilities of proposals being approved or rejected in the Council under different voting rules.e) It follows the negotiations of the Agenda 2000 proposals searching for evidence of implicit voting rules often mentioned in the literature, such as the implicit veto power of France. It also studies the links between the agricultural sectors of the member states, the EU budget and the development of the negotiations.f) It calculates the policy preferences of the member states to derive the probability of the Agenda 2000 proposals being approved, and explains why some policies, which did not survive the negotiations, could have been approved with a significantly higher probability under simple majority rules.g) It proceeds to analyse the effect of an enlargement on decision-making and adapts the model to take into account the latest reforms agreed at the Nice Summit but not yet ratified.This chapter summarises the findings of this research and discusses possible solutionsto the problems pinpointed in the thesis.8.1 The selection of the analytical toolsChapter 2 reviewed a large number of policy analysis tools in search for themethodology best adapted to test the hypotheses of this thesis. This review did notlimit itself to tools usually used by agricultural policy analysts, but searched acrossmany different frameworks, from welfare economics to game theory.The combination of two very different analytical frameworks was selected due to theircomplementarity. Each method analysed the Council from a very different angle, andthe joint results gave a fuller picture of the effects of the decision-making mechanism.The first is an adaptation of a game-theoretic model capable of giving a measure ofthe difficulty of reaching agreements in the Council under different voting rules. Thesecond model is the so-called ‘dynamic policy model’ (Petit, 1985 and Moyer andJosling, 1990), which analyses the actual policy preferences of the member states inthe Council depending on past revealed preferences and the situation in theagricultural sector. It then follows how these preferences change and interact duringthe negotiations on agriculture. Each stage in the negotiation changes the policy 199
    • package for reform and this in turn affects the position of the member states in theCouncil.8.2 The Council’s performance along the history of the CAPIt is widely believed by academic researchers that the CAP is inefficient, and manyclaim that it originates from inappropriate decision-making rules at the EU level, inparticular in the Agricultural Council. The general view is that the CAP has developedan inflexible agricultural policy unable to react to the changing economicenvironment. Allegedly, this has had the effect, over time, of increasing marketdistortions in the agrarian sector, as well as creating new problems. Chapter 3reviewed the literature on the history of the CAP, describing the distortions in thesector and attempting to assess if these can be attributed to the inefficiency of the EUinstitutions.The chapter lists evidence that agricultural policy in the EU is very inefficient anddistortive. It also shows that the Council of the EU has repeatedly been unable orunwilling to accept the introduction of corrective policies. There are also solidindications that the decision-makers are pursuing their national interests disregardingthe interests of the Union. Fennell (1997) argues that in the second half of the 1980sthe way in which the Council of Ministers discussed the CAP indicated that therelevant articles of the Treaty of Rome had long been forgotten. Moreover, theCouncil generally downplayed the proposals of the Commission that were in mostcases moderate. The ministers never strengthened the proposals, but rather postponed,weakened or rejected them in favour of the short-term interests of their directconstituencies. The ‘short-termism’ of populist political strategies has probably beendamaging for this sector.However, these developments might be the reflection of the wishes of the ministersand the citizens. It may well be that the policy was performing the tasks politicianswished, regardless of the decision-making process. If the policy accurately revealedthe preferences of the EU member states, then no other democratic decision-makingsystem would be able to produce other results. However, the models find evidencethat the Council’s decision-making procedures do indeed increase the inefficiency ofthe CAP. 200
    • It is true that the political elite of the European Union has not been willing or has notmanaged to avoid the rise in distortions and problems of the CAP. What remainsunanswered is to which extent the Council’s decision-making procedures areresponsible for this situation. A historical analysis can not really reveal if a differentdecision-making system in the Council would have given a better result It is also notpossible to ascertain with precision if, in the absence of the CAP, national policies foragriculture would been less or more damaging. The answer can only be approachedby an analysis of the actual negotiations in the Council to see which policies fail topass, which would have been adopted under a less stringent voting system, such assimple majority.8.3 The decision-making system for agricultureChapter 4 described the decision-making system for agriculture, explaining the role ofthe different EU institutions and the formal process of decision-making. Particularlyinteresting for the CAP has been the interest of the member states keeping the controlof the policy in the sole hands of the Ministers of Agriculture.In contrast to most other EU policies, the European Parliament has not been given anypower on agricultural policy proposals beyond the capacity to give non-bindingrecommendations. Council records reveal that the Agricultural Council is particularlyzealous to keep control of the policy at the level of the Member State representativesin the Council. In many Councils, a large number of points are negotiated and agreedat the level of Permanent Representatives to the EU (COREPER II) or at workinggroup level. For agriculture, the share of items which are left to the Ministers tonegotiate and agree at the Council level is higher than in other policy areas. Thisprovides at least some evidence that the most likely origin of problems in theagricultural policy is the Council.The CAP has a especially high input by the Council, because it runs all aspects of EUagricultural policy in a great deal of detail, commodity by commodity. The only waygovernments can support their agriculture is through mechanisms approved at EUlevel. In addition to this, the CAP has important implications in the allocation of theEU budget and therefore the net budgetary position of the Member States. As an 201
    • intergovernmental body, the domestic interests of the ministers heavily influence thenegotiations at the Agricultural Council of the EU.Evidence from the literature indicates that the voting behaviour at the AgriculturalCouncil of the EU does not follow the formal QMV rules as stipulated in the Treaties.During the history of the CAP, the Council has been reluctant to give away itsintergovernmental and consensus-based approach. It has been common for theCouncil to avoid having decisions taken with an opposition close to a blockingmajority.The CAP is a common policy with large distributional effects. The member states areparticularly worried about the budgetary implications of policy changes. It appearsthat Council decision-making is strongly overshadowed by the budgetary implicationsof the proposals. There is evidence that member states tend to concentrate on theredistributive effects of the policy rather than on the economic rationale of reforms.The chapter concludes by listing six observed problems in the Agricultural Council ofthe EU, namely: 1) QMV limits the capacity to change the policy efficiently; 2) actualrules in the Council are even more restrictive than QMV and approach unanimityrequirements; 3) some Member States have an implicit influence which is well abovethe one attributed by the formal distribution of votes; 4) national interests control thenegotiations in the Council; 5) sectoral interests dominate negotiations; and 6)budgetary considerations and the net budgetary balances overshadow the negotiations.8.4 The Agenda 2000 negotiationsChapter 5 followed the behaviour of the Council of Ministers in the negotiations forCAP reform of the Agenda 2000. The task of the research was to find empiricalevidence of the link between the voting rules, the EU budget, the political preferencesof the Member States, and the efficiency of agreed CAP reforms. In this connectionthe following four issues were addressed:1. The negotiations for the Agenda 20002. The effects of the policy reforms on the agricultural sector3. The WTO implications 202
    • 4. The consequences of the Berlin agreement for the EnlargementThe Agenda 2000 negotiations are a good case study, as it proposed reforms not onlyfor agriculture, but also for all other major aspects linked with the Unions finances.The CAP was a crucial and integral part of the decision on the financial perspectivesfrom the year 2000 to 2006. This is important, as the role of the overall EU budget onCAP decision-making can therefore be revealed. Furthermore, the member states hadthe task of preventing future problems in the agricultural sector and not dealing with acurrent crisis. Under these circumstances, member states can be assumed to defendtheir national interests more openly, and to reveal better their preferences.The Chapter follows step by step the development of the negotiations, analysing theMember states’ preferences whenever the proposals were amended during thenegotiation. To understand the position of the Member states a budgetary model forthe EU budget was constructed which incorporates the agricultural budget. Theoverall model calculates the expenditures from and contributions to the EU budgetfollowing the budgetary procedures of the EU. This model is a key element in theanalysis as it allows making links between different policies, like agriculture andstructural funds, which are financially inter-linked through the EU budget. Due to thebudgetary importance of the CAP, a reform of this policy preceded all other reformsrelated to the financial framework.Throughout the negotiations it was clear that net balance considerations were stronglyaffecting the negotiating positions of the member states. Of course, this was justanother concern on top of considerations such as farm incomes. The step by stepanalysis of the negotiations revealed many weaknesses which the literature on EUdecision-making repeatedly mentions. QMV rules were not strictly adhered to and theneed for consensus dominated the negotiations. The observed rules were veryinformal, and although member states have been outvoted, it appears that no formalvoting round took place. The behaviour of the Presidency and the member statesformed the Council rules more than any pre-established rule. The European Councilof heads of state in Berlin put pressure for a consensus agreement, as any memberstate is capable of vetoing the Summits of Heads of State and a veto would invalidateany decision, even an agreement on agriculture. 203
    • During the negotiations, France and Germany led the discussions. At one point,France was isolated in its refusal to accept co-financing. It was very clear during thenegotiation that no agreement was possible unless France and Germany reached acompromise position, i.e. these member states possessed an implicit veto power.Germany’s veto power was undermined in the negotiations. In the role of thePresidency, Germany could not threaten to veto its own European Summit, even ifthis was technically possible. In the attempt to save the EU Berlin Summit, Germanyhad to start giving in to pressure, especially from France.The analysis shows a remarkable link between the EU budget net contributions of themember states and the CAP negotiations. This link also operated in reverse, in that thebudgetary effects of CAP reforms then fed back into the negotiations on otherpolicies. For example, the failure to reform agriculture significantly appears to havedamaged the results on the reform of the Structural Funds.The Agenda 2000 negotiations provide very strong evidence that member statesdefend first and foremost their national interest and do not seek the general welfare ofthe EU or to increase the efficiency of the CAP. This in turn ensured that the outcomeof the negotiations maintained a highly inefficient policy despite the challenges ofenlargement and the WTO negotiations ahead.The chapter shows to what extent narrow national interests and considerations aboutthe net contributions to the EU budget were dominating the negotiations, while theoriginal aims of the reforms to prepare the Union for enlargement and for the nextround of WTO negotiation were practically forgotten. The semi-unanimityrequirement in the negotiations proves how narrow the options of reform became. Thepressure is towards the lowest possible level of reform (lowest common denominator),with less reformist members being able to dominate the negotiations, especially whenthese are France and Germany as was the case.One of the most significant changes in the decision-making procedures has been theappearance of the European Council as the final decision-making body for agriculture.Most impressively, changes in the CAP are becoming even more difficult to achieve. 204
    • With the stabilisation of the EAGGF expenditures, keeping the assured benefits of theCAP in place seems to be the new goal of the Member States. Finance Ministers havenow become champions of maintaining the benefits of the CAP unchanged. This newaspect in the political life of the CAP is worrying.Chapter 5 also analysed the effects of the reforms agreed in Berlin on the process ofenlargement and the WTO negotiations. It lists a large number of areas where thereformed CAP has not done enough to face these challenges. For enlargement, theCAP reform has not solved the most controversial issues, such as the move away fromdirect payments or the introduction of dairy quotas in the CEECs. The EU is headingtowards a post-enlargement crisis in agriculture, and CAP reform will be moredifficult with the new member states.The chapter demonstrates that the Agenda 2000 negotiations attested that thedecision-making rules in the Council exert a strong pressure to keep the CAPunchanged. The developments indicate that Scharpf’s (1988) assertion that theCouncil (not only on agriculture) only agrees on the ‘lowest common denominator’seems to be valid when analysing the development of the negotiations.8.5 Modelling the decision-making processChapter 6 described a model to analyse the extent to which the QMV rules in theCouncil restrict the area of compromise, i.e. reduce the probability of a given proposalto be approved. This model was then extended in Chapter 7 to analyse the effects ofenlargement under the present voting system and the recently agreed Nice Treaty.The model originates from a game theory model first devised by Shapley and Shubick(1956) which calculates the share of influence of each country in the voting. Shapleyand Shubick’s model calculates the share of all voting combinations in which onecountry becomes the decisive voter, turning a losing coalition to a winning one. Thiscalculation, however, does not give any information on the probabilities of aparticular proposal being approved or not. However, by adapting the model, it waspossible to calculate the percentage probability, or the percentage of all votingcombinations, where a proposal is adopted or alternatively blocked. 205
    • The model then was modified further to incorporate a proxy for preferences ofmember states. This idea is an adaptation of Hosli’s (1996) introduction ofprobabilities of coalitions being created. This means that by increasing the chances ofsome member states voting in favour of a proposal, the number of times certainmember states can become the pivotal voter increases or falls, but it also increases orreduces the probability of a proposal being approved or rejected. Therefore, if one cancalculate the probability of a member state rejecting a proposal, this can be used as aproxy for a policy preference. This probability will then affect the overall chances of aproposal being accepted.The model was then used to calculate the probability of proposals being accepted orrejected under different proxies for policy preferences and different voting rules. Theresults are unequivocal. For the EU-15, the QMV rule reduces considerably theprobability of proposals being accepted, compared to the SMV rule. The increase inthe rejection probability is from 50% to 91%. This means that 41% of the winningcoalitions are losing coalitions under the QMV rules. Nevertheless, QMV is a markedimprovement to the unanimity requirement. If the Member States have slightreservations on a proposal, for example may vote against it with only a 15% chance,the probability that all member states vote in favour, i.e. approve the proposal isapproximately 10%. For QMV the probability of approval is approximately 97%.Interesting is also the result if member states decide to form coalitions. The resultunder coalitions is that when preferences are negative, the probability of rejection ofthe proposal falls. However, coalitions also make the probability of rejection higherfor favourable preferences.The model has further allowed the analysis the effect of observed but non-officialrules in the Council, such as implicit vetoes by France and Germany. The influence ofthese vetoes is significant in constraining the set of compromise proposals possiblewhich would be approved by the Council.The study moves forward by creating a model to calculate the preferences of memberstates in such a way that these can be introduced in the model to calculate the actualprobability that a package of proposals such as the Agenda 2000 is approved by theCouncil. The model estimates for each member state the probability of voting against 206
    • the proposal by calculating the effect of each item in the proposal on the memberstate. The relevance of each proposal for the member state is calculated according tothe economic importance of each product in the agricultural economy and the pastpolitical importance given by the country to farm incomes and the budgetary netbalance. The proposed reform for each individual product and its effects on farmincomes and the budget determines the probability of rejection. For the originalproposals of the Agenda 2000, the outcome of the calculation shows a highprobability of rejection for most member states. It was highly unlikely that withoutamendments the Agenda 2000 would have been approved by the Council even underSMV.Chapter 6 also estimates the rejection probability of the actual final outcome of thenegotiations: the Berlin agreement for Agriculture. The result shows that the rejectionprobability does not improve much under QMV, which can be interpreted as asignthat the outcome is related to the strength of the initial proposal. However, theprobability of rejection of the Berlin outcome under SMV rules up to 37% higher,which shows that QMV does have a strong influence on the probability of a proposalbeing adopted.The analysis was extended to incorporate EU enlargement by another six memberstates. In most cases, enlargement will reduce the probability of proposals to beapproved compared with the situation in the EU15. This is not a great novelty, but thefact that the Nice Treaty does not improve but can aggravate considerably thesituation is a novelty.8.6 Results of the analysis on the decision-making procedures of the CouncilThe empirical and mathematical models in this thesis appear to offer enough evidenceto conclude that in fact the hypotheses of the thesis are correct. The empirical analysisand the mathematical model results demonstrate the following:• The QMV voting rules reduce considerably the area of possible compromise. The pressure for maintaining the status quo is indeed very strong. 207
    • • Based on historical observations, the introduction of implicit vetoes for France and Germany further reduces the zone of compromise and makes reforms less likely.• Due to the heterogeneity of the agricultural sectors in Europe, the interests of the member states vary considerably. For this reason, policy preferences are quite dissimilar, making it very difficult to create qualified majorities but making it easy to find blocking minorities.• The original Agenda 2000 proposals of the Commission faced a very low probability of acceptance, close to nil. QMV rules gave it a substantially lower chance of approval than simple majority voting.• Given the results of the model, a severe reduction in the depth of reform was foreseeable.• The Agenda 2000 negotiations showed often the capacity of some member states to control the negotiations single-handedly, in particular France and Germany. As a result, negotiation was dominated by a quasi-consensus rule, i.e. unanimity.• The policy preferences were strongly influenced by budgetary net balance considerations. The EU budget overshadowed decisions. This was a further pressure for keeping the status quo, as reforms to reduce distortions appear require compensation payments, which increase the budget expenditures. While financial considerations gave an important impetus to the 1992 reforms, today they have become a barrier to reforms.• The situation will deteriorate in an enlarged Union, making it dangerous to attempt a reform after enlargement.• Perhaps the most worrying observation is the growing influence of the European Council. Due to the weight of the CAP in the European budget, any change of the CAP affects the financial perspectives of the Union. Consequently, major reform 208
    • proposals will be linked with the seven-year financial programming periods of the budget. The CAP becomes an integral part of a much larger decision, which has its final stage at the level of Heads of State where, at the European Council, decisions are taken by consensus, i.e. unanimity. In the Agenda 2000 negotiations, the ability of any member state to veto the Berlin European Council influenced the Agricultural Council, restricting even more the area of compromise. In fact, France’s reopening of the agricultural package, and downsizing of the reforms, just shows how strong is the pressure to use the unanimity rule in the Council.8.7 RecommendationsThe system of decision-making of the EU is unable to provide for agricultural policescapable of facing the challenges to this sector under the changing political andeconomic climate. There is a need either to change radically the decision-makingsystem, or change the CAP to such an extent that it is not so strongly affected by it, orboth.Two possible reforms, one for the CAP and one for the Council are presented below,neither of which seems to have a chance to become reality soon, as the consequencesare rather radical. The reforms of the Council’s decision-making procedures do notimprove the capacity of the EU to take appropriate actions to adapt the CAP to theeconomic, rural development and trade needs of an enlarged Union. The increasingpower of the European Council is also generally fully ignored. The EU seems to beincreasing majority voting while at the same time shifting decision-making to theEuropean Council through the back door, which in balance has the potential to beeven more restrictive. Nugent (1999) for example, does not even discuss seriously thealternatives of reform of the decision-making process, despite his book completelycentred on decision-making. This is because he finds that the challenge of institutionalchange is only partly met and still only focuses on issues such as the number ofCommissioners and a re-weighting of votes to a certain level. In all cases no reform isin the agenda to dissolve substantially the consensus driven nature of the EU. While inmany areas this may be defendable, for the CAP it is not, and much more is needed.First of all, it is important to find a satisfactory answer to the role of the CAP in theEU. Formally it was a system to support farmers, but it is clear that it has deeply 209
    • embedded inefficiencies in this respect. A reason for this is that the role of the CAPgoes beyond farmer support. The CAP is also considered an important common policyfor the EU and is supposed to contribute to the integration of the Member States.Today this can be easily challenged, while the CAP may have had an important role toplay in the past, the time in which the EU could mostly identify itself as a system ofagricultural support is over. The EU has in the meantime created the structural funds,eliminated all trading barriers, allowed free movement of people and capital andintroduced a common currency. European identity and integration are, despite all theirweakpoints, quite developed. The CAP is not only dispensable in this new Europeanpolicy framework, but is at the moment counterproductive and weakening integrationrather than reinforcing it. It contributes to the difficulties of enlargement, it increasesthe budgetary imbalances and budgetary disputes and it is damaging the EU’s positionas a world-trading partner. It is time to consider seriously the role of the CAP underthe present situation, and if it is acceptable to have a decision-making system thatdefends it despite the negative effects.It is probably time to reduce the political influence of the member states onagricultural support instruments and devise socially and economically efficientmechanisms for the CAP. Key points for the reforms of the CAP and its decision-making system are a renationalisation and regionalisation of measures. This may beconsidered unacceptable, as it may cause ‘unfair competition’. This is questionable.First within the single market there can be no protective border measures. Second,there are already strict rules on state aids to minimise distortions to competition fromnational policy measures. Third, today’s system fosters unfair competition, supportingthe most economically efficient farms more than farms in difficulties. Protectionsystems based on production per hectare cannot be considered a well functioningsystem of income support. It is equivalent to a welfare system devised on the size ofthe house people live, the larger the house the bigger the income benefits. The wordsmultifunctionality and the European model of agriculture paraded by the EU at theWTO only have sense if the policy targets payments in relation to explicitenvironmental goals, or other market failures. 210
    • The recommendations therefore are based on a reform of the decision-makingprocedures, a radical change of agricultural policy and a devolution of power andobligations to national and regional authorities.8.7.1 Reform of the decision-making proceduresThe Nice Treaty reform is not enough. Realistically, there are little chances of achange in the agreement before enlargement. In any case, a reweighting of votes andthe introduction of co-decision could be a first step. It is certainly a good step and theco-decision procedure would take away some of the exclusive control out of theagricultural Council. It is true that the European Parliament has shown little interest asa whole to deal with agriculture with the exception of the agricultural committee andsome few other MEPs. But this is also a reflection of the lack of influence of theParliament on the CAP. The CAP affects taxpayers, consumers, the environment,health, trade and animal welfare, and MEPs involved in this issues would probablyfind reasons to get involved in agricultural policy formation. For the moment there islittle incentive if decisions in the Parliament carry little weight.An important reform would certainly be the change from a qualified majority to asimple double majority voting system, a simple majority in the Council and a simplemajority of the population. Baldwin et al. (2000) has proposed this system.Probably the most important deficit that the policy has is its universality, i.e. its‘commonness’ despite the heterogeneity of the agricultural sector in Europe. TheAgricultural Council has to delegate more power, not to a higher body as theEuropean Council, not even only to the EP, but to the national or even regionalauthorities. The CAP can neither be governed only by considerations akin to the farmlobbies nor by EU net budgetary balances.Changing the CAP’s decision-making may be a first step towards reforming it indepth. A proposal for reforming the CAP itself is presented below. It is certainlyunimaginable in the short run, but with a proper information campaign, it could gainthe popular support needed in front of the expected resistance of farm lobbies. 211
    • 8.7.2 Reforming the CAPThe CAP is out of date, but it has the capacity to resist change due to the decision-making system and the power of agricultural lobbies. Nevertheless, this is not a reasonto accept that the CAP should remain unchanged. It is time to tackle the issues ofefficiency and the need for a sustainable policy. The Amsterdam Treaty has added thefollowing to Article one of the Treaty of the European Union: "(The EU is)DETERMINED to promote economic and social progress for their peoples, takinginto account the principle of sustainable development and within the context of theaccomplishment of the internal market and of reinforced cohesion and environmentalprotection, and to implement policies ensuring that advances in economic integrationare accompanied by parallel progress in other fields. Furthermore it asks for theinsertion of the following text in article 3: ‘Environmental protection requirementsmust be integrated into the definition and implementation of the Community policiesand activities referred to in Article 3, in particular with a view to promotingsustainable development.Under this circumstances the CAP has to be reformed substantially to fulfill theseprerequisites. Changes in the CAP have a long way to go to adopt this resolutionsatisfactorily. A long way in this direction are the recommendations in the commonlyknown ‘Buckwell report’ (European Commission, 1997f) to reform the CAP. There isno need here to repeat the proposals, but it is becoming impossible to imagine theirimplementation under the present system of decision-making. The start of a successfulreform can only be introduced before an enlargement, and this is already nearlyimpossible, due to the time constraints and the process of enlargement itself. It isstrongly recommended however, that a switch from the present policy to one linkingdirect payments to environmental prerequisites be decided. The best timing underpresent conditions is 2003, before enlargement. The new entrants would then have atransition period introducing them into the new system while the present memberstates would have a period of phasing in the new arrangements. Both the presentMember States and the new entrants would converge therefore to a common newpolicy. 212
    • Núñez Ferrer and Emerson (2000) present a possible reform and phasing in system forsuch a policy. The following reform package is proposed:1) The present system of direct payments based on the principle of price compensation, should be decoupled from production, phased out and not be available to any farmers within the EU which enter the market after this reform. This eliminates the problem of eligibility with farmers in the CEECs.2) The support system should be replaced by decoupled payments. Production decisions and set aside areas should be based on market conditions and be of a voluntary nature. This would bring the EU direct payments in line with WTO ‘green box’ rules.3) These decoupled payments should be “green payments” linked to the application of improved environmental farming techniques.4) A greater share of the Common Agricultural Policy budget should be directed to rural development programmes. Farming is not the only activity in rural areas. On the contrary, it is the lack of other services and activities, which fosters the depopulation and degradation of rural areas. Problems, a rural policy should be addressing.5) Except for the compensatory payments, which are phased out, all funds should be available for the CEECs after accession.6) Export subsidies should be abolished, through the abolition of intervention prices.7) The milk reforms should be speeded up and the quota system should be abolished to avoid introducing the present system to countries such as Poland. Introducing quotas in Poland would be a technical nightmare and detrimental to the sector’s restructuring. This would be very disruptive. The reform of the direct payment system in place could potentially free enough budgetary resources for time-limited compensatory payments for the dairy sector, which should also be phased out.8) The sugar policy should be reformed; there is no need to maintain the excessively high price levels presently in operation. Degressive time-limited compensation payments could be introduced.The proposals above mean making clear a missing element in the EU’s presentstrategy and introducing a double transition and convergence policy. A transitionperiod in agriculture is introduced in the CEECs, for them to adapt to the CAPpolicies, which are themselves changing over the same transition period. Policies on 213
    • both sides should converge on a common denominator, for example by 2010. By thisdate, the EU should have completed all of the above-mentioned changes.Figure 8.1 below describes a possible accession strategy with a six-year transitionperiod, assuming accession in 2004. The phasing out of the present direct paymentsshould go hand in hand with the increase in funds in other support measures, whichshould also be available in the new member states. The CEECs would receivetherefore not only equal treatment, but would introduce a reformed agriculturalsupport system simultaneously with the EU.Figure 8. 1 Adapting the EU direct payments to Enlargement – a transitionsystem 40 Direct payments 35 Rural development 30 Environmental 25 payments billion euro 20 Dairy and sugar compensatory payments 15 Total new system EU 15 10 CEECs 5 Total new system 0 EU 21 2004 2005 2006 2007 2008 2009 2010Note: This Figure includes only the direct payments and their replacement with other forms of support,not the totality of the policies.The direct payments of the CAP would be phased out completely from 2004 to 2010,as would export subsidies (not shown in the figure), and reforms of the dairy andsugar regimes would see the scrapping of quota systems. There would becompensating measures, with permanent environmental payments and ruraldevelopment aids, and transitional aids to the milk and sugar sector. Under thisscenario, there could be a considerable budgetary saving, in addition to which therewould be the abolition of export subsidies (which have already fallen by about 6 214
    • billion € a year). These savings leave ample room for manoeuvre for the subsequentfurther enlargements.The CEECs’ receipts from the budget through the new agricultural support systemwould be also lower, compared to the case of a full introduction of the present directpayments.8.8 A view of the futureUnfortunately, the reforms presented here have hardly any chance to be implemented.The mechanisms of muddling through are strongly settled and resilient to change.Foreseeable changes are cosmetic reforms in the institutions and the CAP, with arather dim change that the WTO might force a substantial reform (unless worldmarkets reverse their trend). The most probable outcome is that efforts to stronglyreform the institutions and the CAP will only be taken under an enlarged union. It isto be hoped that by then the Member States recognise that a well functioning EU isimportant to maintain political stability in Europe. The recent protests againstglobalisation, GMOs, liberalisation and generally against the EU are a consequence ofthe incapacity of the political system to respond efficiently to the needs in a changingenvironment. The citizens sense that the political elite is apparently unable to respondto today’s problems. The response of governmental institutions across countries is inthe direction of protectionism again, due to the short-term benefits such a move canaccrue. Despite the much bigger long-term benefits of proper reforms andsubsequently a better functioning governance and policy system, politics is controlledby short-termism. The consequences can be very harmful, but this is for anothergeneration of politicians to solve. 215
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    • Annex A. The Agricultural Policy Impact ModelThis annex explains in reduced form the methodology and the results. For thisresearch, it was necessary to calculate 23 scenarios, which amounts to more than 130spreadsheets of calculations and results. It is not possible to give a full account of allsteps performed. Here, only the basic methods and results are presented for theAgenda 2000 proposals and the Berlin conclusions.The agricultural model calculates the effects of policy changes on the budget of theEAGGF and of aggregate farm incomes for each member state at constant 1999prices. It estimates the costs to the budget of the direct income payments for thecereals, oilseeds, beef and dairy sectors, as these are the main products for which thepolicy has been reformed. Expenditures on all remaining products are assumed to beequal to the 1997 copsts at 1999 prices (Commission, 1998i).The Agenda 2000 proposals and the final decision reform decision for the CAPspecify for each member state the number of hectares, heads of cattle and tons ofmilk, which will be eligible for support. Together with the average regional baseyields, the model calculates what the expenditure on direct payments would be, if theMember States claim all their allocated limits. Farm incomes per tonne of produce isassumed to be the intervention price, target price or basic price, whichever applies.In this annex are presented tables with the calculations for the effects of the fullimplementation of the original Agenda 2000 proposals and the decision in Berlin. It isassumed that for cereals and beef there are no export refunds or storage costs. Fromthe one side, this underestimates the budget cost. However, member states do notreach the maximum ceilings allowed for area and cattle payments, which causes anoverestimation of the costs. Both occurrences cancel out to a significant extent and theauthor’s estimations of expenditures for the Agenda 2000 proposals are similar tothose of the Commission. 235
    • Methodology product by productCereals:The reference yields for cereals are used to calculate the direct payment income per hafor each country. Where reference yields vary regionally, an average of the referenceyields is used. This is then multiplied with the reference area for cereals. This includesautomatically the payments for set-aside area, which are the same. For the referencearea for durum wheat the calculations are done separately by multiplying thereference areas for durum wheat (traditional and semi-traditional variety) by theirrespective direct payment per ha.The model is not dynamic and does not introduce any effects or trends for yields nor,is there a response of production to changing prices. This research bases the incomeanalysis on with and without policy scenarios given equal production levels. It isassumed that the magnitude of the impact should not invalidate the conclusions.The calculations are made using the following policy support measures:Agenda 2000 proposals Berlin agreementIntervention price: 93,5 €/ton Intervention price: 101,3 €/tonDirect payment: 66 €/ton Direct payment: 63 €/tonSet aside payment: 66 €/ton Set aside payment: 63 €/tonObligatory set-aside: 0% Obligatory set-aside: 10%Supplement for durum wheat: traditional Supplement for durum wheat: traditional344,5 €/ha; semi-traditional 138,9 €/ha 344,5 €/ha; semi-traditional 138,9 €/ha 236
    • For the Agenda 2000 proposals the calculations are the following: Set Reference reference reference potential income set aside Durum Durum Direct Potential aside area area area production from payment wheat wheat Payments income cereals durum durum tons produce DP mio € semi- mio € from wheat1 wheat2 (000´)3 mio €4 traditional support DP mio € mio €Belgium 0 479 0 0 3651,18 340,84 0 0 0 170,72 511,55Denmark 0 2018 0 0 12128,2 1132,17 0 0 0 695,24 1827,41Germany 0 10156 0 10 62738,7 5856,66 0 0 1,39 3734,94 9591,59Greece 0 1492 617 0 5184,7 483,99 0 212,56 0 410,49 894,48Spain 0 9220 594 4 23027 2149,57 0 204,63 0,56 1747,18 3896,74France 0 13526 208 50 91266,7 8519,75 0 71,66 6,95 5408,12 13927,86Ireland 0 346 0 0 2259,38 210,91 0 0 0 138,84 349,76Italy 0 5801 1646 4 27279,2 2546,51 0 567,05 0,56 2030,15 4576,66Luxembourg 0 43 0 0 226,395 21,13 0 0 0 12,09 33,22Netherlands 0 436 0 0 3355,02 313,19 0 0 0 174,09 487,29Austria 0 1203 7 0 6616,5 617,65 0 24,12 0 420,84 1038,49Portugal 0 1054 59 0 2221,31 207,36 0 20,33 0 305,54 512,90Finland 0 1591 0 0 5492,93 512,77 0 0 0 297,17 809,93Sweden 0 1737 0 0 7655,83 714,67 0 0 0 518,18 1232,85UK 0 4461 0 5 30591,3 2855,70 0 0 0,69 1714,25 4569,951. Traditional variety2. Semi-traditional variety3. Calculated as the reference area minus the set aside area times the yield per ha using the average 1994-98 yield4. Production multiplied by the intervention price 237
    • For the Berlin agreement the calculations are the following: reference Set aside reference reference potential income DP set Durum Durum Direct Potential 1 area (000´) ha area area produce from aside wheat wheat Payments income cereals durum durum tons produce DP mio € semi- mio € from (000´) ha wheat2 wheat3 (000´)4 mio €5 traditional support (000´) ha (000´) ha DP mio € mio €Belgium 521 47,9 0 0 3606,2 365,31 16,3 0 0 177,249 542,557Denmark 2018 201,8 0 0 10915,4 1105,73 66,36 0 0 663,636 1769,37Germany 10156 1015,6 0 10 56464,8 5719,88 356,38 0 1,389 3565,23 9285,11Greece 1492 149,2 617 0 4666,23 472,69 18,89 212,557 0 401,485 874,174Spain 9220 922 594 4 20724,3 2099,37 147,19 204,633 0,5556 1677,09 3776,46France 13526 1352,6 208 50 82140 8320,78 508,73 71,656 6,945 5165,87 13486,7Ireland 346 34,6 0 0 2033,44 205,99 13,25 0 0 132,529 338,516Italy 5801 580,1 1646 4 24551,3 2487,05 139,61 567,047 0,5556 1963,67 4450,72Luxembourg 43 4,3 0 0 203,756 20,64 1,15 0 0 11,5363 32,1768Netherlands 436 43,7 0 0 3018,75 305,80 16,66 0 0 166,185 471,985Austria 1203 120,3 7 0 5954,85 603,23 39,94 2,4115 0 401,819 1005,05Portugal 1054 105,4 118 0 1999,17 202,52 27,22 40,651 0 312,894 515,41Finland 1591 159,1 0 0 4943,63 500,79 28,37 0 0 283,663 784,453Sweden 1737 173,7 0 0 6890,24 697,98 49,46 0 0 494,625 1192,61UK 4461 446,1 0 5 27532,2 2789,01 163,57 0 0,6945 1636,37 4425,381. To estimate the 10% set aside area, the reported set aside area for 1996, when 5% was compulsory, has been multiplied by two.2. Traditional variety3. Semi-traditional variety4. Calculated as the reference area minus the set aside area times the yield per ha using the average 94-98 yield5. Production multiplied by the intervention price 238
    • OilseedsFor oilseeds the calculation of the potential income per country for the Agenda 2000proposals scenario and the Berlin decision (full application of the reform) is based onthe reference price and the support per ha according to the regionalisation plans(Commission Regulation (EC) No 1500/98).The total income from oilseeds is calculated by estimating the average yields foroilseeds and multiplying it by the reference area and the reference price. The directpayment is then added. Due to the small budgetary and income effect, no set-asidewas introduced.Agenda 2000 proposals Berlin agreementreference price: 235,64 €/t reference price: 235,64 €/tdirect payment 66 €/t direct payment 63 €/tAgenda 2000 proposals, aggregate farm income and budgetary effect - Oilseeds Reference reference yields income Direct Direct Total Yields price aver. from payment paymentc income €/t t/ha prices ost mio € €/ha €/ha mio €Belgium 3,32 235,64 2,25 530,19 219,12 1,31 4,50Denmark 2,70 235,64 2,13 501,91 178,20 42,06 42,06Germany 3,04 235,64 2,61 614,23 200,64 186,39 186,39Greece 2,05 235,64 1,53 360,53 135,30 3,52 3,52Spain 2,53 235,64 0,63 149,42 167,24 195,34 195,34France 5,97 235,64 3,01 708,37 394,02 681,65 681,65Ireland 3,30 235,64 3,50 824,74 217,80 1,09 1,09Italy (1) 3,27 235,64 2,94 693,46 215,62 116,87 116,87Luxembo 2,70 235,64 0,00 0,00 178,20 0,36 0,36urgNetherlan 6,05 235,64 1,65 388,81 399,30 2,80 2,80dsAustria 2,74 235,64 2,85 670,98 180,84 26,58 26,58Portugal 4,10 235,64 0,79 186,16 270,60 33,28 33,28Finland 1,59 235,64 1,55 365,24 104,94 7,35 7,35Sweden 3,12 235,64 2,22 523,12 205,67 28,18 28,18UK 3,07 235,64 3,19 751,69 202,62 78,01 78,01 239
    • Berlin agreement, aggregate farm income and budgetary effect - Oilseeds Reference reference yields income Direct Direct Total Yields price aver. from payment paymentc income €/t t/ha prices ost mio € €/ha €/ha mio €Belgium 3,32 235,64 2,25 530,19 209,16 1,25 4,44Denmark 2,70 235,64 2,13 501,91 170,10 40,14 158,60Germany 3,04 235,64 2,61 614,23 191,52 177,92 748,55Greece 2,05 235,64 1,53 360,53 129,15 3,36 12,73Spain 2,53 235,64 0,63 149,42 159,64 186,46 360,99France 5,97 235,64 3,01 708,37 376,11 650,67 1876,16Ireland 3,30 235,64 3,50 824,74 207,90 1,04 5,16Italy (1) 3,27 235,64 2,94 693,46 205,82 111,55 487,41Luxembo 2,70 235,64 0,00 0,00 170,10 0,34 0,34urgNetherlan 6,05 235,64 1,65 388,81 381,15 2,67 5,39dsAustria 2,74 235,64 2,85 670,98 172,62 25,38 124,01Portugal 4,10 235,64 0,79 186,16 258,30 31,77 54,67Finland 1,59 235,64 1,55 365,24 100,17 7,01 262,68Sweden 3,12 235,64 2,22 523,12 196,32 26,90 98,56UK 3,07 235,64 3,19 751,69 193,41 74,46 363,86BeefCalculations for the Agenda 2000 and the Berlin outcome are based on the followingpolicies:Agenda 2000 proposals Berlin agreementBasic price 1950 €/t basic price 2224 €/tSuckler cow premium 180 €/head Suckler cow premium 200 €/headExtensification premium 100 €/head Extensification premium 60 €/head+ for density below 1 LU/ha 52 €/head + for density below 1 LU/ha 52 €/headbulls 220 €/head bulls 220 €/headSteers (twice a year) 170 €/head Steers (twice a year) 150 €/headDeseasonalisation premium 72.5 €/head Deseasonalisation premium 80 €/head Slaughter premium bulls, steers, dairy and suckler cows and heifers 80 €/head calves 50 €/head 240
    • The calculations also include the amounts in the national envelopes. The dairy cowpremium is included in the calculations for the dairy policy (see below).National envelopes, million €Agenda 2000 Berlin agreement 2002 onwards 2002 onwardsBelgium 80,9 Belgium 39,4Denmark 49,2 Denmark 11,8Germany 368,8 Germany 88,4Greece 15,9 Greece 3,8Spain 138,2 Spain 33,1France 390 France 93,4Ireland 131,3 Ireland 31,4Italy 273,7 Italy 65,6Luxembourg 1,9 Luxembourg 2,9Netherlands 105,7 Netherlands 25,3Austria 50,2 Austria 12Portugal 25,9 Portugal 6,2Finland 25,9 Finland 6,2Sweden 38,4 Sweden 9,2UK 266,3 UK 63,8The methodology is as follows:Suckler cow premium:Payment per animal multiplied by the potential rights in the number of animals.Beef Special premiumThe share in each country of bulls and steers for 1997/98 is assumed to stay constant.These shares are used to determine the average premium per eligible animal accordingto the ceilings agreed.Extensification premiumIt is assumed that the same area as in 1996 is covered and then multiplied by the baseextensification premium of 100 €/t for the proposals and 60 €/t for the Berlinconclusions. The calculation is based on the number of premiums paid in 1996.Deseasonalisation paymentThe calculation is based on the actual number of payments in 1996, multiplied by thenew payment level.Slaughter premiumThe ceilings for each country are used to calculate the potential payments. 241
    • Beef: Agenda 2000 proposals, full implementation Suckler National Special extensific deseasonali Total direct cow envelopes beef ation sation payments premium premium premium premiumBelgium 70,39 80,9 57,10 17,80 0 226,18Denmark 19,99 49,2 62,51 5,80 0,15 137,64Germany 98,58 368,8 454,42 75,10 1,31 998,21Greece 23,73 15,9 33,63 21,20 0 94,47Spain 242,55 138,2 146,57 155,60 0 682,92France 673,04 390 444,53 460,60 0 1968,17Ireland 183,71 131,3 325,09 200,30 20,74 861,13Italy 104,12 273,7 135,02 32,80 0 545,64Luxembourg 2,52 1,9 4,77 3,20 0 12,39Netherlands 11,05 105,7 37,05 1,90 0 155,69Austria 50,94 50,2 106,61 35,30 0 243,05Portugal 48,56 25,9 40,47 23,50 0 138,43Finland 5,10 25,9 56,50 21,90 0 109,40Sweden 23,85 38,4 61,29 26,80 0 150,34UK 293,27 266,3 414,98 268,80 0 1243,35Total 1851,38 1962,30 2380,53 1350,60 22,19 7567,00 Production income income TOTAL in 1996 from from direct mio € (000 t) intervention payments price mio € mio €Belgium 353 688,35 226,18 914,53Denmark 182 354,9 137,64 492,54Germany 1482 2889,9 998,21 3888,11Greece 71 138,45 94,47 232,92Spain 565 1101,75 682,92 1784,67France 1735 3383,25 1968,17 5351,42Ireland 535 1043,25 861,13 1904,38Italy 1182 2304,9 545,64 2850,54Luxembourg 8 15,6 12,39 27,99Netherlands 580 1131 155,69 1286,69Austria 222 432,9 243,05 675,95Portugal 100 195 138,43 333,43Finland 96 187,2 109,40 296,60Sweden 137 267,15 150,34 417,49UK 701 1366,95 1243,35 2610,30Total 7949 15500 7567 23067 242
    • Beef: Berlin agreement, full implementation Suckler National Special extensific deseason Slaughter Total cow envelopes beef ation alisation premium direct premium premium premium premium paymentsBelgium 70,39 80,9 57,10 17,80 0 73,68 226,18Denmark 19,99 49,2 62,51 5,80 0,15 58,99 137,64Germany 98,58 368,8 454,42 75,10 1,31 365,13 998,21Greece 23,73 15,9 33,63 21,20 0 22,8 94,47Spain 242,55 138,2 146,57 155,60 0 158,45 682,92France 673,04 390 444,53 460,60 0 419,59 1968,17Ireland 183,71 131,3 325,09 200,30 20,74 121,12 861,13Italy 104,12 273,7 135,02 32,80 0 338,93 545,64Luxembourg 2,52 1,9 4,77 3,20 0 1,78 12,39Netherlands 11,05 105,7 37,05 1,90 0 154,38 155,69Austria 50,94 50,2 106,61 35,30 0 49,14 243,05Portugal 48,56 25,9 40,47 23,50 0 29,55 138,43Finland 5,10 25,9 56,50 21,90 0 31,06 109,40Sweden 23,85 38,4 61,29 26,80 0 41,66 150,34UK 293,27 266,3 414,98 268,80 0 262,58 1243,35Total 1851,38 1962,30 2380,53 1350,60 22,19 2128,84 7567,00 Production income income TOTAL in 1996 from from direct mio € (000 t) intervention payments price mio € mio €Belgium 353 785,07 226,18 1042,99Denmark 182 404,77 137,64 563,78Germany 1482 3295,97 998,21 4357,59Greece 71 157,90 94,47 258,22Spain 565 1256,56 682,92 1989,49France 1735 3858,64 1968,17 5829,00Ireland 535 1189,84 861,13 2010,66Italy 1182 2628,77 545,64 3311,22Luxembourg 8 17,79 12,39 31,87Netherlands 580 1289,92 155,69 1519,67Austria 222 493,73 243,05 743,17Portugal 100 222,40 138,43 368,97Finland 96 213,50 109,40 332,22Sweden 137 304,69 150,34 466,10UK 701 1559,02 1243,35 2767,36Total 7949 17678,58 7567 25592,30 243
    • DairyCalculations for the Agenda 2000 (full implementation) and the Berlin outcome arebased on the following policies:Agenda 2000 proposalsThe reforms proposed introduced the notion of dairy cow unit (DCU) thus the dairycow premium is not paid per actual animal, but on the basis of the average yield percow in the EU, which is 5,8 tonnes of milk a year.The support proposed for the dairy sector consisted of a target price of 257,2 €/t, adairy cow premium, an additional premium (national envelope) and a dairysupplement per cow which was included in the beef proposals.To facilitate the calculation, the global amounts for each member state were dividedby the quota expressed in DCUs for each country at the end of the envisaged reform.The budgetary costs after 2003 for the Agenda 2000 proposals Dairy cow National Beef proposal TOTAL Support cost premium Supplement dairy Per DCU mio € supplementBelgium 100 47,56 37,70 185,26 100,12Denmark 100 44,59 28,70 173,29 134,09Germany 100 44,68 34,60 179,28 866,67Greece 100 44,15 45,40 189,55 21,04Spain 100 44,61 41,90 186,51 180,21France 100 45,11 35,20 180,31 751,09Ireland 100 44,75 44,90 189,65 172,49Italy 100 45,04 39,20 184,24 314,99Luxembourg 100 45,09 31,90 176,99 8,24Netherlands 100 44,95 29,00 173,95 332,04Austria 100 48,97 39,50 188,47 81,98Portugal 100 44,84 41,70 186,54 60,33Finland 100 42,57 30,50 173,07 75,62Sweden 100 44,22 27,60 171,82 99,48UK 100 45,40 32,30 177,70 442,66Total 3641,03 244
    • To calculate potential aggregate farmers’ incomes the target price per ton is multipliedby the quota allocated to the member state. The solution in mio € is added to thereceipts from the direct support.Total aggregate income for dairy farmers in million €: intervention income direct support Total income farmersBelgium 806,18 100,12 906,30Denmark 1154,33 134,09 1288,42Germany 7211,30 866,67 8077,97Greece 165,55 21,04 186,59Spain 1441,38 180,21 1621,59France 6214,11 751,09 6965,20Ireland 1356,75 172,49 1529,23Italy 2550,44 314,99 2865,43Luxembourg 69,47 8,24 77,72Netherlands 2847,49 332,04 3179,52Austria 648,89 81,98 730,87Portugal 482,44 60,33 542,76Finland 651,82 75,62 727,44Sweden 863,68 99,48 963,16UK 3715,97 442,66 4158,63 30179,80 3641,03 33820,83The dairy policy has considerable costs due to export subsidies for skimmed milkpowder, cheese and butter. Therefore it was assumed that for the total budgetary costof the policy the difference between the figure given in the financial perspectives bythe Commission and the one calculated by the author represents the cost of thesemeasures. The difference is distributed among the Member States according to theircorresponding 1997 share in the dairy expenditures in the final figures.Berlin Agreement for dairyThe Berlin agreement is considerably different. The Council decided to increase thequotas allocated to the member states and postpone the start reform in 2005. Thecalculations for this research take into account only the quota increase and not thereforms starting in 2005. The reason for this is the upcoming mid-term review and therenegotiations of the financial perspectives in 2005 for the period 2007 to 2012.This thesis uses the Commission estimate of the dairy cost for 2003 in the financialperspective of the Berlin council conclusions (European Council, 1999) and the shares 245
    • of expenditures of each member state in 1997 to distribute the allocation of the budgetfunds.For the aggregate income of farmers the new quota multiplied by the target pricegives the result.Aggregate farm income: Old quota aggregate New quota aggregate income mio € income mio €Belgium 3109639 963,37 3140696 972,99Denmark 4454639 1380,05 4454640 1380,05Germany 27764778 8601,53 27767036 8602,23Greece 629817 195,12 629817 195,12Spain 5438118 1684,73 5457564 1690,75France 23749650 7357,64 23793932 7371,36Ireland 5235723 1622,03 5236575 1622,29Italy 9698399 3004,56 9698399 3004,56Luxembourg 268098 83,06 268098 83,06Netherlands 10988039 3404,09 10991900 3405,29Austria 2382377 738,06 2543979 788,12Portugal 1835461 568,63 1835461 568,63Finland 2384327 738,66 2394528 741,82Sweden 3300000 1022,34 3300000 1022,34UK 14338375 4442,03 14373969 4453,06Total 115577440 115886594 246
    • Sugar and other sectorsFor sugar the model uses the global Commission estimations and then distributes itaccording to the share of 1997 sugar budget expenditure in each member state. Forother sectors the model uses the expenditures of 1997 in 1999 real prices. For ruraldevelopment the model estimates that the amount allocated will be distributedproportionally to the budgetary receipts for each member states from the EAGGF. 247
    • The Agenda 2000 proposal budget expenditures estimation in million €, compared to 1997 (continues next page) Arable crops Sugar Dairy Beef/veal Other Total ag. products 1997 Agenda 1997 Agenda 1997 Agenda 1997 Agenda 1997 Agenda 1997 Agenda 2000 2000 2000 2000 2000 2000Belgium 182,7 172,0 208,8 228,5 258,6 198,9 213,1 240,1 109,4 113,8 972,6 953,4Denmark 681,7 737,3 70,8 77,5 217,0 215,3 137,2 161,8 128,6 133,8 1235,3 1325,7Germany 3563,0 3921,3 259,6 284,1 400,4 943,9 986,5 1153,6 565,3 588,1 5774,8 6891,1Greece 458,8 414,0 6,2 6,8 -2,4 18,7 45,5 88,9 2221,7 2311,5 2729,8 2839,9Spain 1651,7 1942,5 81,2 88,9 -29,7 161,7 437,9 637,8 2453,0 2552,1 4594,1 5383,0France 5235,7 6089,8 611,8 669,6 849,6 997,1 1231,7 1857,8 1212,9 1261,9 9141,7 10876,2Ireland 124,2 139,9 9,7 10,6 297,3 246,5 1195,0 851,9 408,0 424,5 2034,2 1673,5Italy 2207,9 2147,0 84,1 92,0 -110,0 289,2 316,7 604,3 2622,7 2728,7 5121,4 5861,2Luxembourg 9,5 12,4 0,0 -0,2 7,0 7,6 12,2 5,9 6,1 22,8 37,8Netherlands 229,1 176,9 58,4 63,9 695,9 608,9 248,4 213,1 524,9 546,1 1756,7 1609,0Austria 373,8 447,4 21,2 23,2 16,3 72,0 146,0 246,6 301,3 313,5 858,6 1102,7Portugal 211,1 338,8 2,7 3,0 5,6 60,0 88,5 140,4 347,0 361,0 654,9 903,3Finland 249,0 304,5 16,1 17,6 85,3 101,3 45,9 113,8 172,0 178,9 568,3 716,2Sweden 475,2 546,4 28,1 30,8 47,1 105,0 82,8 154,0 112,0 116,5 745,2 952,6UK 1808,6 1792,3 149,3 163,4 370,3 524,4 1492,8 1182,1 580,2 603,6 4401,2 4265,9Total 17462,0 19375,5 1608,0 1760,0 3101,1 4550,0 6675,6 7658,6 11764,9 12240,2 40611,6 45391,4 248
    • The Agenda 2000 proposals budget expenditures estimation in mio €, compared to 1997 (cont.) Shares of total by Rural Totals in 1999 real prices product develop. 1997 Agenda mio € 1997 Agenda 2000 2000Belgium 2,39 2,10 90,32 Belgium 1012 1044Denmark 3,04 2,92 125,59 Denmark 1285 1451Germany 14,22 15,18 652,80 Germany 6008 7544Greece 6,72 6,26 269,03 Greece 2840 3109Spain 11,31 11,86 509,94 Spain 4780 5893France 22,51 23,96 1030,32 France 9511 11907Ireland 5,01 3,69 158,53 Ireland 2116 1832Italy 12,61 12,91 555,24 Italy 5328 6416Luxembourg 0,06 0,08 3,58 Luxembourg 24 41Netherlands 4,33 3,54 152,42 Netherlands 1828 1761Austria 2,11 2,43 104,46 Austria 893 1207Portugal 1,61 1,99 85,57 Portugal 681 989Finland 1,40 1,58 67,84 Finland 591 784Sweden 1,83 2,10 90,25 Sweden 775 1043UK 10,84 9,40 404,11 UK 4579 4670Total 100,00 100,00 4300 Total 42252 49691 249
    • Estimate of the budgetary effects of the Berlin conclusions compared to 1997 in mio €, full adoption Arable crops Sugar Dairy Beef/veal Other Total ag. products 1997 Berlin 1997 Berlin 1997 Berlin 1997 Berlin 1997 Berlin 1997 BerlinBelgium 182,70 178,50 208,80 228,54 258,60 204,17 213,10 243,10 109,4 94,47628 972,6 948,7894Denmark 681,70 703,78 70,80 77,49 217,00 177,27 137,20 170,41 128,6 111,0571 1235,3 1240,005Germany 3563,00 3743,15 259,60 284,14 400,40 418,99 986,50 1155,25 565,3 488,185 5774,8 6089,714Greece 458,80 404,84 6,20 6,79 -2,40 4,65 45,50 99,16 2221,7 1918,628 2729,8 2434,074Spain 1651,70 1863,55 81,20 88,88 -29,70 37,71 437,90 727,93 2453 2118,376 4594,1 4836,444France 5235,70 5816,54 611,80 669,63 849,60 672,94 1231,70 1992,49 1212,9 1047,443 9141,7 10199,04Ireland 124,20 133,57 9,70 10,62 297,30 196,91 1195,00 789,45 408 352,343 2034,2 1482,888Italy 2207,90 2075,23 84,10 92,05 -110,00 70,69 316,70 705,40 2622,7 2264,926 5121,4 5208,291Luxembourg 9,50 11,88 0,00 -0,20 0,39 7,60 14,65 5,9 5,095156 22,8 32,01472Netherlands 229,10 168,85 58,40 63,92 695,90 569,43 248,40 268,33 524,9 453,2962 1756,7 1523,836Austria 373,80 427,19 21,20 23,20 16,30 12,39 146,00 250,94 301,3 260,1984 858,6 973,9238Portugal 211,10 344,67 2,70 2,96 5,60 22,64 88,50 150,64 347 299,6643 654,9 820,5692Finland 249,00 290,68 16,10 17,62 85,30 66,82 45,90 124,28 172 148,5367 568,3 647,9312Sweden 475,20 521,52 28,10 30,76 47,10 36,92 82,80 166,96 112 96,7216 745,2 852,875UK 1808,60 1710,83 149,30 163,41 370,30 278,09 1492,80 1213,00 580,2 501,0525 4401,2 3866,386Total 17462,00 17541,95 1608,00 1760,00 3101,10 2,77 6675,60 8072,01 11764,9 10160 40611,6 41156,8 250
    • The Berlin conclusions budget expenditures estimation, compared to 1997 (cont.) Shares of total by Rural Totals in 1999 real prices product develop. 1997 Berlin mio € 1997 BerlinBelgium 2,39 2,31 100,7418 Belgium 1012 1050Denmark 3,04 3,01 131,6629 Denmark 1285 1372Germany 14,22 14,80 646,6018 Germany 6008 6736Greece 6,72 5,91 258,4483 Greece 2840 2693Spain 11,31 11,75 513,5304 Spain 4780 5350France 22,51 24,78 1082,928 France 9511 11282Ireland 5,01 3,60 157,4521 Ireland 2116 1640Italy 12,61 12,65 553,0129 Italy 5328 5761Luxembourg 0,06 0,08 3,399301 Luxembourg 24 35Netherlands 4,33 3,70 161,7999 Netherlands 1828 1686Austria 2,11 2,37 103,4106 Austria 893 1077Portugal 1,61 1,99 87,1275 Portugal 681 908Finland 1,40 1,57 68,79691 Finland 591 717Sweden 1,83 2,07 90,5577 Sweden 775 943UK 10,84 9,39 410,5303 UK 4579 4277Total 100,00 100,00 4370 total 42252,3 45527 251
    • Annex B. The EU Budget modelTechnical aspects and assumptions used in the calculations of net balancesThe estimations on budget expenditures and own resources are the result of twomodels. The first agricultural model is described in Annex A and estimatesexpenditures for agriculture. The second model estimates the expenditures forstructural funds and uses the results from the agricultural model to estimate the totalEU budget expenditure. The same model then calculates the contributions of eachmember state to the EU budget, following closely the own resources system asdescribed by European Commission (1998h).The system used to calculate different scenarios and the final results following thedecision in the Berlin European Council is as follows. A base scenario is constructed,which simulates the budgetary expenditures and the contributions of each memberstate in the hypothetical case that the Agenda 2000 proposals were accepted andimplemented in full. The base scenario is therefore the estimated budget for the year2006. All differences between this scenario and any other agreements in the Council,hypothetical or real, are simulated by changing the parameters in the models.I. Base scenarioAgricultureThe agricultural model analyses the effects on the budget of changes in the CAP forcereals, oilseeds, beef and dairy, as these are the main items of reform. A detailedexplanation of this model can be found in Annex A. The proposals and the finaldecision of the Agenda 2000 reforms for agriculture specify for each member state thenumber of hectares, head of cattle and tons of milk, which will be eligible for directpayments. Together with the average regional base yields for oilseeds and cereals, themodel calculates what the expenditure on direct payments would be, if the MemberStates claim all their allocated limits. Expenditures on other items are assumed to beequal to the 1997 figures (European Commission, 1998i) for all remaining products(set at 1999 prices). For cereals and beef, no export refunds or storage costs are 252
    • included. As the national maximum allowed support claims have not been usuallyused in full, this partially counterbalances any excessive fund allocations by themodel. For dairy, the difference between the Commission predictions (EuropeanCommission, 1998a) and the calculations of the expenditure on direct payments formilk are assumed to be expenditures for other costs and export refunds. Thedifference is distributed among the Member States according to their corresponding1997 share in the expenditures.Structural FundsFor the Agenda 2000 initial proposals, the budget model allocates the structural fundsusing the following criteria:1. The structural funds budget line in the proposals has to be fully utilised in 2006.2. It uses the expenditure on Structural funds for 1997 (at 1999 prices) as a base forestimation as follows. • New Objective 1: Regions which have crossed the 75 per cent of the average EU GDP per capita have been removed from the areas eligible for Objective 1 support. The average yearly expenditure for these regions between 1995 and 1999 has been deduced from the 1997 expenditure. The funds have been redistributed among the Member States according to the share of Objective 1 allocations in the Member States, assuming that the global expenditure on Objective 1 does not fall. The expenditures on Objective 6 have been added to Objective 1. • New Objective 2: Objectives 2 and 5b have been added together. • New Objective 3: Objectives 3 and 5a have been added togetherAfter these operations 4,5 billion € were not allocated (excluding pre accession aid,which is treated as external expenditure). These funds have been redistributed amongthe Member States according to their shares in total receipts under the structuralfunds. 253
    • Cohesion FundsThe 3 billion € programmed in the financial framework for 2006 have been distributedas follows: • No funds for Ireland. • The distribution among the remaining 3 countries Greece, Portugal and Spain usees 1997 shares as base. These were 18 per cent for Greece, 55 per cent for Spain and 18 per cent for Portugal. Assuming a similar distribution, their shares have been increased by 3% each to cover the exit of Ireland.Own ResourcesThe methodology used follows the rules of the calculation of budget balancesincluding the UK budgetary rebate as presented in European Commission (1998h).The UK rebate has been calculated using few simplifications, but trying to stay asclose to the actual mechanism as possible. The methodology is as follows: • TOR and VAT are the same as estimated for 1999 by the European Commission (1998h) throughout the simulations. • The UK rebate is equal to 66% of its budgetary imbalance. This imbalance is calculated by multiplying the difference between the UK’s average of the sum of the percentage shares in VAT and GNP payments and its share in allocated expenditure times allocated expenditure. In the actual rebate only the share in VAT is used, using the old pre–1988 contributions system as a calculation tool and then deducing the UK advantage after the 1988 reforms, which have introduced GNP as a resource. The calculations in the present paper try to evade complications by using the average of the sum of shares in VAT and GNP contributions. The European Commission (1998h) also does not use the UK advantage in their simulations to avoid unnecessary complications. • The rebate used is for the net contributions of the year analysed. The actual two-year time lag in the budgetary procedures is eliminated for mathematical simplicity. 254
    • EnlargementThe costs of enlargement have been introduced as in the financial framework. Thefirst group of five countries has been introduced as a block in the model. Theircontributions for the budget are based solely on their GNP share, as it is not possibleto know their future VAT and TOR payments.Other costsOther costs constitute the sum of internal policies and administration budgeted. Costsfor external action are added to the EU15 expenditures separately. There is noreduction in funds for external action related to pre accession measures, because it isassumed that the second group will be getting increasing amounts of support in thefuture.Net balancesNet balances calculations follow the system used by the Commission and described intheir publication (1998h).II. SimulationsFive hypothetical policy scenarios and the actual outcome of the Berlin EuropeanSummit have been performed, see Table below. 255
    • Simulation scenarios, changes with respect to base scenarioScenario Agricultural Policy Structural and Cohesion Own resources Other costs FundsCo-financing in Co-financing is introducedAgriculture for direct payments and rural development funds. No change No change No change 25 per cent for arable crops, beef and dairy and 30 per cent for rural development. This allowed agricultural expenditure to approximate the 1999 budget expenditure on agriculture.Elimination of theCohesion Fund No change Cohesion Fund set to 0 No change No changeIntroduction of a All member states forconstrained generalised which the net contributionscorrection mechanism No change No change exceed the threshold of No change 0,3% of their GNP are eligible for a 66% reduction in their net contribution above this threshold. Member states do not pay for their own rebate, but have to contribute for the rebate of any other member state. 256
    • The UK rebate remains unchanged.Berlin Council The expenditures for the The Structural Funds are The amount retained as The amounts forconclusions CAP are recalculated using allocated according to collection costs by the administrative the final agreed lower average yearly allocations Member States form TOR expenditures and internal direct payments per following the distribution increases from 10% to action are changed hectare. The expenditures of the funds as published 25%. VAT is cut by 50%. according to the financial for the dairy policy also by the European In both cases, the base perspective agreed in follow the new direct Commission (1998h). scenario figures are used Berlin. External action is payments regime and The Cohesion Funds are as reference. The UK also amended accordingly. adapts the refunds and allocated with the same advantage is taken into storage expenditures in shares as in the base account and deducted from accordance with the new scenario, but using the the rebate. budget line in the financial budgetary outlay agreed in Contribution towards the perspective. Berlin. UK rebate cut for Germany, the Netherlands, Austria and Sweden is 25 per cent of the sum under the original system. Remaining Member States (excluding the UK) make up for the rebate according to their GNP share. It is assumed that 2 billion € for the pre accession measures will become expenditures for new Member States. The UK cannot include these for 257
    • the rebate calculation.Year 2010 The expenditures for the It was estimated that if the System equal as Berlin Equal as Berlin councilScenario 1 CAP are expected to be the CEECs have a real council conclusions conclusions, figures forObjective 1 criteria stay same as in 2006, except economic growth by 4% a year 2006 for the dairy payments. year compared to 2% in These are estimated in the the EU 15 (except for agricultural model for the Spain 4%, Greece and EU 15 following the quota Portugal 3%), the EU allocations and the average GDP per capita at amounts agreed in march PPP in 2010 would fall by the 23 in the Agricultural 7%. Every region of the Council for direct EU with above 68% of EU payments and national GNP today has been envelopes. Intervention assumed to be ineligible and storage costs are for Objective 1 funds (the reduced by slightly more increased economic than half from the 1997 growth has not been costs (European applied to Objective 1 Commission, 1998j). No regions, they grow at the payments for dairy were same speed as the EU calculated for the CEECs. average growth rate). A share of funds for the Direct payments for the Objective 1 (as yearly CEECs were assumed to average 200-2006) for the reach 7 billion €, as countries has been estimated by Münch deducted equal to the share (1998). of regions that become ineligible. 1/3 of the funds remain as Objective 2 or 3. 258
    • Cohesion fund has been eliminated. The CEECs are assumed to get 4% of their GDP in 2010 as structural funds. This is 18 billion €.Year 2010 Equal as scenario 1 Same receipts as in 2006, System equal as agreed in Equal as Berlin agreementScenario 2 except for the cancellation Berlin for year 2006Objective 1 are changed of the Cohesion Funds.to maintain benefits fromstructural funds 259
    • Annex B.I Budgets, year 1997 and Agenda 2000 proposalsTable B.I.1 Net contributions, Agenda 2000 proposals, EU15 (1999 prices),million € 1997 Agenda 2000 Agenda 2000 year 2006 EU15 year 2006 EU 20Belgium 1781 1824 1248Denmark 98 -41 -416Germany -11919 -12775 -17638Greece 4489 5373 5102Spain 5761 7589 6310France -1828 -743 -4015Ireland 2914 1941 1785Italy -587 269 -2424Luxembourg 744 1153 1113Netherlands -1273 -2694 -3563Austria -909 -661 -1146Portugal 2783 2529 2290Finland 1 86 -193Sweden -1243 -797 -1320UK -685 -3053 -3912 260
    • Table B.I.2 1997 own resources at 1999 prices (1999 prices) , million €1997 TOR VAT GNP UK TOTAL correctionBelgium 1091 944 955 102 3092Denmark 300 641 560 65 1567Germany 3571 10414 7575 514 22074Greece 170 575 433 48 1226Spain 657 2680 2018 228 5584France 1613 6536 4987 582 13719Ireland 234 261 198 22 715Italy 1166 3587 3814 450 9017Luxembourg 23 86 62 7 178Netherlands 1798 1749 1335 151 5033Austria 265 1077 768 86 2196Portugal 161 552 367 41 1121Finland 150 488 419 47 1105Sweden 378 1129 825 89 2420UK 3167 5020 3660 -2558 9289Total 14745 35739 27977 -126 78335Table B.I.3. Expenditures 1997 (at 1999 prices) , million € Agriculture Structural Cohesion Other TOTALBelgium 1023 372 0 2819 4215Denmark 1286 176 0 176 1638Germany 6012 3783 0 894 10689Greece 2841 2154 596 183 5774Spain 4792 5575 1059 334 11760France 9519 2560 0 828 12906Ireland 2116 1040 221 123 3500Italy 5296 3012 0 645 8953Luxembourg 24 21 0 888 932Netherlands 1828 438 0 398 2665Austria 896 379 0 168 1443Portugal 683 2521 539 209 3953Finland 594 395 0 174 1163Sweden 777 240 0 228 1245UK 4577 2007 0 833 7417Total EU (1) 42264,5 24673,1 2415,39 8900,73 78254 Non EU 5435Total 83689(1) Only expenditures inside the EU 261
    • Table B.I.4 Estimated own resources in the year 2006 for the Commissionproposal (1999 prices), EU-15, million € TOR VAT GNP UK TOTAL correctionBelgium 1133 790 1757 202 3881Denmark 290 516 1143 131 2081Germany 3219 8080 14825 1703 27826Greece 166 456 826 95 1542Spain 705 2096 3898 448 7146France 1547 5194 9973 1145 17860Ireland 221 273 478 55 1027Italy 1202 3402 8211 943 13758Luxembourg 14 61 125 14 213Netherlands 1589 1428 2648 304 5968Austria 276 820 1479 170 2745Portugal 166 425 729 84 1404Finland 124 395 850 98 1467Sweden 387 820 1595 183 2986UK 2791 5619 9764 -5574 12600Total 13829 30374 58301 0 102504Table B.I.5 Estimated expenditures for the year 2006, Commission proposals(1999 prices), EU 15, million € Agriculture Structural Cohesion Other TOTAL & rural dev. InternalBelgium 1062 308 4086 5455Denmark 1476 146 255 1878Germany 7647 4001 1296 12944Greece 3107 2796 630 265 6798Spain 5765 6191 1740 484 14180France 11861 2638 1200 15699Ireland 1833 889 179 2900Italy 6415 5510 935 12860Luxembourg 41 21 1287 1349Netherlands 1774 546 577 2897Austria 1228 402 244 1873Portugal 960 1935 630 303 3829Finland 859 320 253 1431Sweden 1046 585 330 1962UK 4810 2140 1207 8158Total EU 49884 28430 3000 12900 94214 Non EU 8290Total 102504 262
    • Table B.I.6 Estimated own resources in the year 2006 for the Commissionproposal , EU 20 (1999 prices), million € TOR VAT GNP UK TOTAL correctionBelgium 944 395 2632 229 4199Denmark 242 258 1713 149 2362Germany 2682 4040 22211 1929 30862Greece 138 228 1325 115 1806Spain 587 1048 6690 581 8906France 1289 2597 14942 1298 20126Ireland 184 137 716 62 1099Italy 1002 1701 12302 1068 16073Luxembourg 12 30 187 16 245Netherlands 1324 714 3967 344 6349Austria 230 410 2215 192 3048Portugal 138 213 1251 109 1711Finland 104 197 1273 111 1685Sweden 322 410 2390 208 3330UK 2326 2810 14629 -6690 13074CEEC-5 3228 280 3508Total 11523,93 15187,1 91673,27 0 118384Table B.I.7 Estimated expenditures for the year 2006, Commission proposals EU20 (1999 prices), million € Agriculture Structural Cohesion Other TOTAL & rural dev. InternalBelgium 1062 308 4086 5455Denmark 1476 146 255 1878Germany 7647 4001 1296 12944Greece 3107 2796 630 265 6798Spain 5765 6191 1740 484 14180France 11861 2638 1200 15699Ireland 1833 889 179 2900Italy 6415 5510 935 12860Luxembourg 41 21 1287 1349Netherlands 1774 546 577 2897Austria 1228 402 244 1873Portugal 960 1935 630 303 3829Finland 859 320 253 1431Sweden 1046 585 330 1962UK 4810 2140 1207 8158CEEC-5 3400 12080 1300 16780Total EU 53284 40510 3000 13300 110094 Non EU 8290Total 118384 263
    • Annex B.II Negotiation of Agenda 2000 and decisionTable B.II.1 Possible effects of original German proposals to EU net balances -own estimates, million € (1999 prices) Co-financing Constrained No Cohesion Total shift Implementati of CAP general Funds for E, from VAT to on of all correction P and Irl GNP key measures mechanism for A, D, NL, SWBelgium 122 -165 103 -110 3Denmark -119 -107 67 -70 -194Germany 625 3160 869 1143 4141Greece -36 -78 -582 32 -638Spain -151 -366 -1511 99 -1812France -859 -936 585 84 -825Ireland -269 -45 28 29 -243Italy 405 -771 482 -805 -442Luxembourg 10 -12 7 -3 6Netherlands 190 672 155 71 923Austria 8 -139 87 63 63Portugal -36 -68 -587 52 -618Finland -28 -80 50 -41 -72Sweden 25 -150 94 3 19UK 112 -916 153 -545 -312 264
    • Table B.II.2. Effects of the Berlin agreement on net balances, 2006, million €(1999 prices) 1997 real Agenda 2000 Agenda 2000 Berlin - 2006 Berlin – proposals proposals EU15 2006 EU20 year 2006 year 2006 EU15 EU 20+Belgium 1781 1824 1209 1552 1095Denmark 98 -41 -347 -113 -411Germany -11919 -12775 -16001 -10071 -13529Greece 4489 5373 5093 5151 4854Spain 5761 7589 5845 7169 5361France -1828 -743 -3160 -1134 -3729Ireland 2914 1941 1854 1383 1258Italy -587 269 -2166 -1469 -3606Luxembourg 744 1153 1031 990 957Netherlands -1273 -2694 -3134 -2164 -2782Austria -909 -661 -991 -653 -998Portugal 2783 2529 2210 3221 2883Finland 1 86 -156 -12 -233Sweden -1243 -797 -1176 -843 -1215UK -685 -3053 -3677 -3007 -3673CEEC 5 0 0 13564 0 13767 265
    • Table B.II.3 Estimated own resources for the year 2006, Berlin outcome, EU 15(at 1999 prices) , million € TOR VAT GNP UK TOTAL CorrectionBelgium 944 395 1992 240 3571Denmark 242 258 1297 156 1953Germany 2682 4040 16814 326 23863Greece 138 228 937 113 1415Spain 587 1048 4421 532 6588France 1289 2597 11311 1361 16559Ireland 184 137 542 65 928Italy 1002 1701 9313 1121 13136Luxembourg 12 30 141 17 200Netherlands 1324 714 3003 58 5099Austria 230 410 1677 33 2350Portugal 138 213 827 100 1277Finland 104 197 964 116 1381Sweden 322 410 1810 35 2577UK 2326 2810 11074 -4273 11937Total 11524 15187 66123 0 92834Table B.II.4 Estimated expenditures for the year 2006, Berlin outcome, EU 15(1999 prices) , million € Agriculture Structural Cohesion Other TOTAL 1 & rural dev. internalBelgium 1042 269,352 3579 4890,6Denmark 1356 109,313 223 1688,3Germany 6616 4084,24 1135 11835Greece 2671 3026,75 527,1 232 6457,1Spain 5128 6233,2 1455,8 424 13242France 10922 2133,52 1051 14106Ireland 1636 454,643 157 2247,4Italy 5640 4122,3 819 10581Luxembourg 34 11,703 1127 1173,4Netherlands 1692 388,248 506 2585,4Austria 1073 215,54 213 1501,8Portugal 862 2747,78 527,1 266 4402,3Finland 768 267,537 221 1256,5Sweden 916 318,26 289 1523,8UK 4318 2277,6 1058 7652,9Total EU 44674 26660 2510 11300 85144 Non EU 7690Total 928341 The expenditures differ slightly to the ones presented in Annex A. The figures for Annew A foragricultural expenditures are a last minute more accurate estimate. Nevertheless, the difference is notsufficiently large to revise all Tables and the conclusions remain unaffected. 266
    • Table B.II.5 Estimated own resources for the year 2006, Berlin outcome, EU 20+(1999 prices) , million € TOR VAT GNP UK TOTAL CorrectionBelgium 944 395 2380 298 4016Denmark 242 258 1549 194 2243Germany 2682 4040 20087 419 27228Greece 138 228 1198 150 1714Spain 587 1048 6050 757 8442France 1289 2597 13513 1690 19089Ireland 184 137 647 81 1049Italy 1002 1701 11125 1391 15219Luxembourg 12 30 169 21 232Netherlands 1324 714 3588 75 5700Austria 230 410 2003 42 2685Portugal 138 213 1132 142 1624Finland 104 197 1151 144 1596Sweden 322 410 2162 45 2939UK 2326 2810 13230 -5812 12553CEEC – 5 2919 365 3284Total 11524 15187 82903 0 109614Table B.II.6 Estimated expenditures for the year 2006, Berlin outcome, EU 20+(1999 prices) , million € Agriculture Structural Cohesion Other TOTAL & rural dev. internalBelgium 1042 269 3579 4891Denmark 1356 109 223 1688Germany 6616 4084 1135 11835Greece 2671 3027 527,1 232 6457Spain 5128 6233 1455,8 424 13242France 10922 2134 1051 14106Ireland 1636 455 157 2247Italy 5640 4122 819 10581Luxembourg 34 12 1127 1173Netherlands 1692 388 506 2585Austria 1073 216 213 1502Portugal 862 2748 527,1 266 4402Finland 768 268 221 1257Sweden 916 318 289 1524UK 4318 2278 1058 7653CEEC - 5 3400 12080 1300 20780Total 48074 38740 2510 12600 101924 Non EU 7690Total 109614Annex B.III Longer term effects of the Agenda 2000 agreement 267
    • Table B.III.1 Berlin Conclusions, year 2006 and 2010 (1999 prices) , million € Berlin outcome - Year 2010, Year 2010, 2006 EU 20 scenario1 - scenario2 - SF Structural Fund levels equal criteria unchangedBelgium 1095 810 569Denmark -411 -569 -666Germany -13529 -15342 -15881Greece 4854 3712 4164Spain 5361 1582 3043France -3729 -4856 -5831Ireland 1258 1037 876Italy -3606 -5357 -5163Luxembourg 957 948 937Netherlands -2782 -3185 -3413Austria -998 -1117 -1213Portugal 2883 1819 1797Finland -233 -416 -398Sweden -1215 -1387 -1439UK -3673 -3909 -4025CEEC 5 13767 26230 26642 268
    • Table B.III.2 Scenario 1 – No change in the Structural Funds’ criteriaOwn resources, year 2010, EU 20 (1999 prices) TOR VAT GNP UK TOTAL CorrectionBelgium 944 395 2538 348 4225Denmark 242 258 1652 227 2378Germany 2682 4040 21416 491 28629Greece 138 228 1278 175 1819Spain 587 1048 6451 885 8971France 1289 2597 14407 1977 20271Ireland 184 137 690 95 1106Italy 1002 1701 11862 1628 16192Luxembourg 12 30 180 25 247Netherlands 1324 714 3825 88 5951Austria 230 410 2136 49 2825Portugal 138 213 1207 166 1723Finland 104 197 1228 168 1697Sweden 322 410 2305 53 3090UK 2326 2810 14105 -6836 12405CEEC - 5 3364 462 3825Total 11524 15187 88642 0 115353Table B.III.3 Scenario 1 – No change in the Structural Funds’ criteriaExpenditures, year 2010, EU 20 (1999 prices) Agriculture Structural Cohesion Other TOTAL & rural dev. internalBelgium 966 269 3579 4815Denmark 1333 109 223 1666Germany 6931 3363 1135 11430Greece 2685 2503 232 5420Spain 5223 4346 424 9993France 10981 2134 1051 14165Ireland 1603 323 157 2082Italy 5804 3182 819 9806Luxembourg 40 12 1127 1179Netherlands 1540 388 506 2434Austria 1120 189 213 1523Portugal 885 2287 266 3438Finland 777 176 221 1174Sweden 968 246 289 1503UK 4446 1769 1058 7272CEEC - 5 10400 18064 1300 29764Total 55702 39361 0 12600 107663,5 Non EU 7690Total 115354 269
    • Table B.III.4 Scenario 2 – Structural Funds’ criteria changed to protect EU 15levels - Own resources, year 2010, EU 20 (1999 prices) TOR VAT GNP UK TOTAL CorrectionBelgium 944 395 2663 365 4367Denmark 242 258 1733 238 2471Germany 2682 4040 22473 515 29710Greece 138 228 1341 184 1890Spain 587 1048 6769 929 9333France 1289 2597 15118 2075 21079Ireland 184 137 724 99 1145Italy 1002 1701 12447 1708 16857Luxembourg 12 30 189 26 257Netherlands 1324 714 4014 92 6144Austria 230 410 2241 51 2933Portugal 138 213 1266 174 1791Finland 104 197 1288 177 1766Sweden 322 410 2418 55 3206UK 2326 2810 14801 -7174 12762CEEC – 5 3530 484 4014Total 11524 15187 93015 0 119726Table B.III.5 Scenario 2 – Structural Funds’ criteria changed to protect EU 15levels - Expenditures, year 2010, EU 20 (1999 prices) Agriculture Structural Cohesion Other TOTAL & rural dev. internalBelgium 966 171 3579 4716Denmark 1333 105 223 1662Germany 6931 3905 1135 11972Greece 2685 3027 232 5944Spain 5223 6169 424 11816France 10981 1967 1051 13999Ireland 1603 201 157 1961Italy 5804 4042 819 10665Luxembourg 40 11 1127 1178Netherlands 1540 354 506 2399Austria 1120 201 213 1534Portugal 885 2333 266 3484Finland 777 263 221 1261Sweden 968 311 289 1568UK 4446 2010 1058 7513CEEC – 5 11000 18064 1300 30364Total 56302 43134 0 12600 112035,9 Non EU 7690Total 119725,9 270
    • Annex C. The Shapley - Shubik IndexThere is a set N of n voters (players). S is a randomly chosen subset of N having splayers. Let 2N be a class of all coalitions (subsets) in N and let W denote the class ofwinning coalitions, i.e. those having the necessary number of votes to win (forexample 62 out of 87 in the case of the EU’s council of ministers when the qualifiedmajority rule applies). The voting game is characterised by a function v:2N → R,where R is a subset of games from the universe of all possible games U. Any playernot included in the subset R has no influence on the game, it is a null player. Thenotation for voting game with s players v(S) is as follows: ì1, S ∈Wv( S ) = í (B1) î0, S ∉WThis is referred to as the coalitional form of a game or characteristic function v of avoting game. Equation (B1) simply makes a distinction between the winning and theloosing coalitions. Shapley (1953) demonstrated that there is a unique value (n − s)!( s − 1)!φ i (v ) = å n! [v ( S ) − v ( S − {i})] (B2) S⊂ Nfor each player i in a game. Formula (B2) expresses the Shapley value for the player iin the game v as a weighted sum of its marginal contribution to the coalitions S. TheShapley Shubik index for i is the probability that i is pivotal for the coalition of allvoters preceding i. The term (n-s)!(s-1)!/n! describes of all combinations theprobability of each possible order, while [v(S) - v(S - {i})] represents the marginalcontribution of player i to the coalition. This marginal contribution is shown informula (B3), and is logically the derivative to member i of the Shapley-Shubikformula.∆ iv(S) = [v(S) - v(S-{i})]. i∈ S, S≠ ∅ (B3)This is an indicator variable. Using formula B1 it is clear that the marginalcontribution can only be 1 or 0. 271
    • Annex D. The weighting of votes in the Council agreed at NiceGermany 29United Kingdom 29France 29Italy 29Spain 27Poland 27Romania 14Netherlands 13Greece 12Czech Republic 12Belgium 12Hungary 12Portugal 12Sweden 10Bulgaria 10Austria 10Slovakia 7Denmark 7Finland 7Ireland 7Lithuania 7Latvia 4Slovenia 4Estonia 4Cyprus 4Luxembourg 4Malta 3Total 345 272