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 EU Reform
The Common Agricultural Policy (CAP)
What is the Common Agricultural Policy?
The CAP was formally introduced in 1962, but its origins lie in the aftermath of the Second World War and the need to safeguard Europe's food supply and eradicate shortages. The objectives of the CAP were as follows:
- Improve food productivity in the agricultural sector
- Ensure fair prices for consumers
- Ensure a stable food supply
- Ensure income stability for farmers
Methods used by the EU to achieve these objectives included the following:
- Taking produce off the market and into storage
- Direct income to support farmers
- Import restrictions (from outside the EU)
- The use of subsidies
Why did the CAP need to be reformed?
The CAP, though successful in some areas, led to a number of problems:
- The policy of storing products in order to regulate the market led to issues of the cost of storage, the morality of the policy when people in other parts of the world were starving, and the impression of an inefficient EU bureaucracy (epitomised by the infamous butter mountains and wine lakes of the 1980s).
- The cost of running the CAP is huge (45% of the EU budget is spent on the CAP (just under 45 billion euro in the 2003 budget).
- The policy was in direct contrast to free trade movements outside the EU, such as the WTO, which have put pressure on the EU to open up its agricultural markets to the outside world.
- The point above is particularly relevant to less developed countries who are trying to compete but are prevented from doing so by the restrictions they face in selling their products on EU markets.
Will EU CAP reform reduce grain surpluses? Is this a good idea anyway? © Kriss Szkurlatowski, Stock.Xchng
How is it being reformed?
The first reforms to the CAP began in 1983, with major reforms being agreed in the Agenda 2000 plan. CAP reform of some sectors will continue in 2002-3. The main areas of reform are as follows:
- Constraining production through methods such as quotas and set aside schemes.
- Encouraging farmers to diversify into other methods of income to reduce their dependence on subsidies.
- Supporting environmentally beneficial forms of farming and reducing support for environmentally damaging intensive farming.
- Giving direct payments to farmers in compensation for cuts in prices on their products - a transition towards further integration of a free market in agriculture.
Tax harmonisation
What is tax harmonisation?
Tax harmonisation is critical to the operation of the Single Market so that goods, services, people and capital can move freely around the EU. Basically, harmonisation of taxes means making the levels of taxation more consistent in each country. Harmonisation only affects indirect taxes, most notably corporation tax, which is much lower in the UK and Ireland than other Member States, and VAT (Value Added Tax) which ranges from 15 to 25% across the EU. At present, these taxes are not harmonised between the EU Member States, but it is one of the issues being debated in a proposed new EU constitution.
Different countries have different tax regimes for different reasons. For example, the duty on tobacco in the UK is much higher than that in Spain and France. The question of how such taxes could be harmonised triggers massive problems - for example, the UK might claim to have higher taxes to discourage smoking and to provide external benefits to health and welfare whereas the tobacco industry in Spain might be hit hard by any increases in tax causing unemployment.
What are the advantages of tax harmonisation?
- It would remove barriers to the freedom of goods, services, people and capital in the Single Market by creating equal conditions in all Member States, e.g. a proposal in 2002 for a harmonised diesel duty would create fair conditions for truck drivers across the EU.
- If VAT was the same rate across all Member States, it would enable companies to set one price EU wide, and save on administration costs.
 An even level of VAT would also be fairer on EU consumers. For instance, the cost of alcohol in France and England would be more equal. Such a situation might reduce the incentives to smuggle and possibly reduce criminal activities that tend to surround products that have wildly varying prices because of tax differences.- As other barriers to movement are removed, if corporation taxes are not harmonised, they may become increasingly used as a method of competition between countries. If corporation taxes are set lower and lower, it will leave a tax shortfall which will need to be made up by the ordinary tax payer.
- Tax fraud would be reduced by better monitoring taxation on investments.
Right: The fuel protests over the amount of duty compared with the rest of the EU caused a widespread shortage at petrol stations across the UK in 2000.
What are the disadvantages of tax harmonisation?
- Some Member States, particularly the UK, consider the setting of taxes by the EU as a 'step too far'. For the UK, raising corporate tax is a move away from the taxation policy of the last 20 years.
- Some poorer regions of the EU may wish to use lower corporation tax to encourage firms to establish themselves in the region. For instance, Ireland has used lower tax rates to bring in foreign investment.
- Firms will tend to establish themselves in clusters in order to benefit from having similar businesses in the same area. Therefore, the level of corporation tax may well be offset by other benefits.
- If Member States are able to increase taxes, they are better able to control their budget deficits - an important area of economic policy in the eurozone.
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