Article

The Financing of the Common Market’s Agricultural Policy

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1968
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OVER THE PAST FEW YEARS, the member countries of the European Economic Community (EEC) have elaborated a common agricultural policy (CAP), as expressly provided for in the Treaty of Rome, which went into effect on January 1, 1958. This task has proven to be much more difficult than the creation of a common market for industrial goods, because the existing agricultural policies of the member countries, designed largely to protect farm incomes, were so divergent. The long series of negotiations to achieve a common agricultural policy were begun about eight years ago, and, after various crises and round-the-clock sessions, they have now been virtually completed. The CAP becomes fully operative in July 1968.

The implementation of the CAP has two main direct effects on the balance of payments of member countries. On the one hand, the common financing of the CAP gives rise to rapidly increasing financial transfers between the member countries. On the other hand, the protection provided in the CAP against imports from outside the EEC is inducing certain EEC countries to shift agricultural imports from cheaper non-EEC sources to more expensive EEC sources. Correspondingly, some member countries (particularly France), instead of exporting to third countries, are able to export at higher prices to their EEC partners (particularly Germany).1 This paper deals with the first effect, i.e., the financial arrangements of the CAP and their implication for the balance of payments of member countries.

There are also two main indirect balance of payments implications of the agricultural policy. The CAP will increasingly affect the volume and composition of the EEC countries’ agricultural production and trade.2 In France, for example, the common EEC prices which are becoming effective for the various agricultural products in 1967 and 1968 are, in general, higher than those that prevailed before. So in France one may expect an increase in agricultural production and exports, and at the same time a reduction in imports relative to what would have happened in the absence of the CAP. In order to measure the net effect of the CAP on the French balance of payments, it would then be necessary to determine how French imports and exports would have been affected if the additional resources devoted to agriculture in France as a result of the CAP had been put to other use. Another indirect balance of payments implication of the CAP is the impact on the relative competitive position of the EEC countries, resulting from changes in food prices and, consequently, the cost of living index and wage costs.

I. Main Characteristics and Short History of the Common Agricultural Policy

The Treaty of Rome provided that the EEC would establish a common policy governing the agricultural commodities produced within the six member states by the end of the transitional period, which was then set at December 31, 1969. The aims of the CAP, as laid down in Article 39 of the Treaty, are to ensure a “fair” standard of living to the agricultural population and “reasonable” retail prices for consumers, to increase productivity in agriculture, to stabilize markets, and to guarantee the regularity of supplies.

In order to achieve these goals, the Council of Ministers of the EEC, on proposals made by the Commission, has gradually worked out the CAP.

The provisions of this policy, though complex and differing for the various farm products, can be broadly summarized as follows:

1. Trade in farm products among the Six is gradually being freed from all restrictions, so as to create a market in which farm products may be bought and sold as freely throughout the EEC as they have been within each country’s domestic market. This objective would be achieved by mid-1968 when a single price level for each product has become effective throughout the Community.3 In the meantime, the EEC countries have enjoyed preferential treatment on each other’s market vis-à-vis third countries, the intra-Community levies being lower in relation to extra-Community levies.

2. A common commercial policy governs trade in farm products with countries outside the Community. Previous barriers to trade, such as quotas and tariffs, have for most products been replaced by a levy system, which should offset the difference between the world market price and the price which the EEC judges to be acceptable. The general effect of this levy system is that markets of the Community will first be cleared of the domestic production available for sale at prices not exceeding the target price before it becomes profitable to import from third countries.

Similarly, a common marketing policy is applied to exports of the Community’s surpluses of certain farm products in the form of export subsidies or refunds—sometimes called negative levies, since they are calculated in a manner similar to that applied to levies.

3. The price level of most farm products is supported on the internal Community market. The costs of supporting prices (as well as of subsidizing exports) are reimbursed to the member countries by the European Agricultural Guidance and Guarantee Fund (EAGGF).

Farm price setting thus plays a central role in the CAP. With the exception of sugar, the CAP has not relied on production quotas to influence the volume of production and the direction of trade, but on prices alone.

4. The Community contributes to the cost of modernizing the agricultural economy by financing specific projects for structural reform in farming and for improvement of marketing conditions.

The Common Market policies for industrial goods and for agricultural products are alike in the sense that all restrictions, such as customs duties and import quotas, are being eliminated on intra-Community trade, and that products may be bought as freely throughout the EEC as they have been within each country’s market. But the policies differ with regard to the treatment of competition from outside and from within the Common Market. Imports of industrial products from outside the Community are subject, with effect from July 1, 1968, to a common external tariff, levied on an ad valorem basis. When, in spite of the tariff, an imported product can be offered in the EEC market more cheaply than a comparable EEC product, it will be imported. This is not so for EEC agricultural imports, however, for the import levy tends to make most such imports unattractive unless the EEC internal market price has risen above the target price. Furthermore, while producers of industrial goods will be exposed to practically unrestricted competition within the Common Market, the Community’s farmers, in order that they be ensured of a “fair” income, will benefit from a guarantee for the sale of their products at a minimum price, even if there is a surplus of these products.

The EEC Commission formulated its first proposals for the CAP in November 1959. Taking into account the observations of the Economic and Social Committee and the Parliamentary Assembly, the Commission submitted a revised version of its proposals to the Council of Ministers in June 1960. The Council, after lengthy discussion late in 1961, failed to reach agreement on the Commission’s proposals. This threatened to cause a crisis in the Community, since France refused to enter the second stage of the common market for industrial products, effective January 1962, if no agricultural policy was initiated at the same time. France argued that some of its partners would benefit relatively more from the freer trade in manufactures and sought the introduction of the agricultural policy as a quid pro quo.

On January 14, 1962, after a marathon of meetings, the Council of Ministers agreed on a set of market regulations for six major commodities (grains, pig meat, poultry, eggs, fruits and vegetables, and wine) to become effective in August 1962. The market regulation for grains, which was the first to be adopted, set the pattern for the market regulations for most other products. It provided for support prices (varying from country to country), which were 5 per cent to 10 per cent below the target price, so as to guarantee producer sales at a price close to the target price. In each country the official support agency was obliged to buy up at this support price any home-grown grains which the farmer could not sell at better prices. The regulation also provided for a variable levy to protect home producers against imports from non-EEC countries at prices lower than the target price. In addition, surplus grain production would be exported at subsidized prices.

On December 23, 1963 the Council of Ministers agreed on proposals made by the Commission for the establishment of three additional market organizations, viz., for beef and veal, dairy products, and rice, to enter into force late in 1964. The Council also agreed on the principles of a common policy for fats and oils. The products for which market organizations were adopted in January 1962 and December 1963 together account for about 85 per cent of the total value of EEC agricultural production.

The grain market regulations adopted in January 1962 created a uniform system for supporting grain prices and calculating levies, but did not establish community-wide grain prices. In November 1963 the EEC Commission had made proposals for common grain prices, but the Council of Ministers could not reach an agreement. The stumbling block to grain price unification was the large difference between high grain prices in Germany and lower prices in the other EEC countries, especially France (for wheat) and Italy (for barley). The French authorities were reluctant to agree to a level of prices much higher than those prevailing in France because of its potential inflationary impact and because such prices might unduly encourage German and other EEC producers to expand output to the point where surpluses would be difficult to dispose of. Germany, on the other hand, was under pressure from its farmers and insisted that it could not accept a substantial reduction in its prices. This problem was finally resolved in December 1964, when the Council of Ministers agreed on uniform prices (to become effective on July 1, 1967) that were about halfway between the then current French and German prices. On the latter date, intra-Community trade in grains, and also in pig meat, eggs, and poultry—the prices of which depend largely on the level of feedgrain prices—was completely freed.

In January 1962, the Council also agreed on the financing of the CAP until mid-1965; the financing after that time was the subject of the third EEC agricultural crisis. In March 1965 the EEC Commission submitted its proposals to the Council of Ministers, including proposals for the replacement of member governments’ financial contributions by independent Community revenues. However, no agreements could be reached in the Council. France broke off the negotiations on July 1, 1965 on the ground that its partners had failed to make good their earlier promises by adding new conditions for the common financing which would make the Community organizations financially independent of the governments of the member states. After France’s seven-month absence from the Council of Ministers, negotiations were resumed, and on May 11, 1966 the Council agreed on regulations governing the financing operations of the EAGGF—see Section II, below—until the end of 1969.

Another important step was taken on July 24, 1966, when the Council of Ministers agreed on the organization of the market for oils and fats, a supplementary regulation for fruits and vegetables, and the broad outline of the organization of the sugar market. The Council also fixed common prices for milk, beef and veal, sugar, oilseeds, and olive oil, which come into force between November 1966 and the summer of 1968, depending on the product.

In March 1968 the Commission made proposals for a scaling down of the CAP measures for the dairy sector because of the large expenditures they would involve. As no agreement could be reached in the Council of Ministers, and to allow more time for negotiations, the entry into force of the common market for dairy products and beef and veal was delayed from April to June 1968.

Table 1 summarizes the timetable of the introduction of market regulations and common prices for the various agricultural products. Some member countries have called for the CAP to be expanded to include additional products, viz., potatoes, flax, hemp, sheep, and cork. Thus far, no decisions have been made on these proposals.

Table 1.Common Agricultural Policy: Timetable
ProductsDate of Council of Ministers

Decision on

Market

Regulation
Date of

Introduction of Market

Regulation
Date of

Common Market and Common

Price
Date Envisaged for Implementation

of Market

Regulation
GrainJanuary 1962August 1962July 1967
Pig meatJanuary 1962August 1962July 1967
EggsJanuary 1962August 1962July 1967
PoultryJanuary 1962August 1962July 1967
Fruits and vegetables IJanuary 1962August 19621
Wine IJanuary 1962August 19621
RiceDecember 1963September 1964September 1967
Milk and dairy productsDecember 1963November 1964June 1968 2
Beef and vealDecember 1963November 1964June 1968 2
Fruits and vegetables IIJuly 1966January 1967January 1967-July 1968
Olive oilJuly 1966November 1966November 1966
OilseedsJuly 1966July 1967July 1967
SugarJuly 1966July 1967July 1968
TobaccoJuly 1968
Wine IINovember 1969
Nonedible horticultural productsJuly 1968
HopsJuly 1968
Fishery productsJuly 1968
Source: European Economic Community, Information Memo, P-46/66, Brussels, Belgium, July 1966.

The first regulations for fruits and vegetables and for wine did not provide for a common market and common prices.

In March 1968, the entry into force of the common markets for dairy products and beef and veal was delayed from April to June 1968.

Source: European Economic Community, Information Memo, P-46/66, Brussels, Belgium, July 1966.

The first regulations for fruits and vegetables and for wine did not provide for a common market and common prices.

In March 1968, the entry into force of the common markets for dairy products and beef and veal was delayed from April to June 1968.

II. The Common Financing of the CAP

On January 14, 1962, when the first set of market regulations was agreed upon, the EEC Council of Ministers created the EAGGF to carry out the financial provisions of the common agricultural policy.

The EAGGF was set up to absorb collectively part of the expense of supporting the market prices for farm products inside the Community and the cost of subsidizing exports to countries outside the EEC, as well as part of the cost of modernizing EEC agriculture. It is divided into two main sections: The Guarantee Section reimburses member governments directly for the cost of subsidizing farm exports and for the cost of supporting prices of farm products in the domestic market. The Guidance Section finances expenditures for structural reforms in agriculture. It pays subsidies for selected projects directly to those responsible for the projects, which may be designed to improve either the structure of production (for example, soil improvement) or the structure of marketing (for example, the construction of grain elevators). From 1966/67, a Special Section has been added. (See Tables 3 and 6.)

Table 2.European Agricultural Guidance and Guarantee Fund: Fixed Scales of Contributions, 1962/63–1968/69(In percentages)
1962/63–1964/6511965/6621966/6721967/68–1968/693
France28.032.5829.2632.0
Germany28.031.6730.8331.2
Italy28.018.0022.0020.3
Belgium7.97.957.958.1
Netherlands7.99.589.748.2
Luxembourg0.20.220.220.2
Sources: European Community Information Office, Common Market Farm Report, Washington, D.C.; European Communities, Joint Information Service, Newsletter on the Common Agricultural Policy, Brussels, Belgium.

Scale laid down in Article 200 (1) of the Treaty of Rome and applicable to all EAGGF expenditures in 1962/63 and to 90 per cent and 80 per cent of all EAGGF expenditures in 1963/64 and 1964/65, respectively.

Applicable to the financing of all EAGGF expenditures.

Applicable to all EAGGF expenditures of the Guidance Section, and to those expenditures of the Guarantee Section that are not met by 90 per cent of levy proceeds.

Sources: European Community Information Office, Common Market Farm Report, Washington, D.C.; European Communities, Joint Information Service, Newsletter on the Common Agricultural Policy, Brussels, Belgium.

Scale laid down in Article 200 (1) of the Treaty of Rome and applicable to all EAGGF expenditures in 1962/63 and to 90 per cent and 80 per cent of all EAGGF expenditures in 1963/64 and 1964/65, respectively.

Applicable to the financing of all EAGGF expenditures.

Applicable to all EAGGF expenditures of the Guidance Section, and to those expenditures of the Guarantee Section that are not met by 90 per cent of levy proceeds.

Table 3.European Agricultural Guidance and Guarantee Fund: Estimated Expenditures, 1962/63–1967/68(In millions of U.S. dollars)
1962/63

Actual
1963/64

Actual
1964/65

Provisional
1965/66

Provisional
1966/67

Provisional
1967/68

Preliminary

Estimate
A. Guarantee Section28.750.7162.9240.1370.41,313.0
Distribution by type of expenditure28.750.7162.9240.1370.41,313.0
Refunds for export subsidies22.241.8191.8
Refunds for domestic market support6.58.944.3
Other4.013.41
Distribution by product28.750.7162.9240.1370.41,313.0
Cereals28.049.0126.8120.4136.5535.0
Pig meat7.714.415.3
Eggs0.51.01.21.20.7
Poultry0.20.71.22.12.9
Dairy products25.298.0131.7370.0
Beef
Rice0.80.6
Oils and fats79.2195.0
Fruits and vegetables0.1
Sugar4.013.41
Processed agricultural products
B. Guidance Section9.117.154.680.1123.5285.0
C. Special Section2.0208.0
Total (A plus B plus C)37.867.8217.5320.2495.91,806.0
Sources: For 1962/63–1966/67, see Table 2 and European Economic Community, Press Release IP (67) 163, Brussels, Belgium, November 1967; for 1967/68, see Parlement Européen, Documents de séance: Rapport sur le projet de budget des Communautés européennes pour l’exercice 1968, Document 213, March 11, 1968.

Payment granted to Belgium for the marketing of sugar.

Sources: For 1962/63–1966/67, see Table 2 and European Economic Community, Press Release IP (67) 163, Brussels, Belgium, November 1967; for 1967/68, see Parlement Européen, Documents de séance: Rapport sur le projet de budget des Communautés européennes pour l’exercice 1968, Document 213, March 11, 1968.

Payment granted to Belgium for the marketing of sugar.

Table 4.European Agricultural Guidance and Guarantee Fund: Contributions from and Receipts by EEC Countries, 1962/63–1964/65 1(In millions of U.S. dollars)
I

Contribution to EAGGF
II

Gross Receipts from

Guarantee Section of EAGGF
III

Gross Receipts from

Guidance Section of EAGGF 2
Net Receipts from

EAGGF

(I+III–I)
1962/631963/641964/651962/631963/641964/651962/631963/641964/651962/631963/641964/65
Belgium3.05.618.40.30.42.00.70.73.3–2.0–4.5–13.1
France10.617.552.924.545.4122.01.93.78.9+ 15.8+ 31.6+ 78.0
Germany10.619.163.71.82.68.92.65.011.6–6.2–11.5–43.2
Italy10.618.960.91.30.75.23.15.926.8 3–6.2–12.3–28.9
Netherlands3.06.521.10.91.524.80.81.53.1–1.3–3.5+ 6.8
Luxembourg0.20.50.30.9+ 0.1+ 0.4
Total37.867.8217.528.750.7162.99.117.154.60.00.00.0
Sources: See Table 2.

Figures may not add to totals because of rounding.

The accounting year of the Guidance Section does not coincide exactly with that of the Guarantee Section.

Including a special contribution of $8 million to improve the structure of olive oil production in Italy.

Sources: See Table 2.

Figures may not add to totals because of rounding.

The accounting year of the Guidance Section does not coincide exactly with that of the Guarantee Section.

Including a special contribution of $8 million to improve the structure of olive oil production in Italy.

Table 5.European Agricultural Guidance and Guarantee Fund: Contributions from and Receipts by EEC Countries, 1965/66–1966/67
I

Contribution to

EAGGF
II

Gross Receipts from Guarantee Section of EAGGF
III

Gross Receipts from Guidance Section and Special Section of EAGGF
Net Receipts from EAGGF

(I+III-I)
1965/66

(1)
1966/67

(2)
1965/66

(3)
1966/67

(4)
1965/66

(5)
1966/67 1

(6)
1965/66

(7)
1966/67 1

(8)
Belgium25.439.410.617.82.0(8.9)–12.8(–12.7)
France93.7145.1144.0154.15.8(26.7)+ 56.1(+ 35.7)
Germany98.7152.916.227.37.2(34.7)–75.3(–90.9)
Italy70.4109.14.896.162.8 2(41.6)–2.8(+28.6)
Netherlands31.248.364.474.92.0(9.8)+ 35.2(+ 36.4)
Luxembourg0.71.10.10.10.2(3.9)–0.4(+2.9)
Total320.1495.9240.1370.380.0125.60.00.0
Sources: Columns 1 and 2—Table 2; columns 3 and 4—European Economic Community, Press Release IP (67) 163, Brussels, Belgium, November 1967; column 5—European Economic Community, Information Memo, P-18, Brussels, Belgium, March 1968.

The allocation of the aid from the Guidance Section for 1966/67 has not yet been made. The present estimate is made by extrapolating to 1966/67 the shares obtained by each country from the Guidance Section in the period 1962/63–1965/66. The special benefits granted to Italy in 1964/65 and 1965/66 were not taken into account in establishing past shares. The shares so obtained were applied to the $123.6 million of the Guidance Section in 1966/67, and $2 million from the Special Section was added for Luxembourg.

This includes a special contribution of $45 million to improve the structure of olive oil production and the marketing of olives, olive oil, and fruits and vegetables in Italy.

Sources: Columns 1 and 2—Table 2; columns 3 and 4—European Economic Community, Press Release IP (67) 163, Brussels, Belgium, November 1967; column 5—European Economic Community, Information Memo, P-18, Brussels, Belgium, March 1968.

The allocation of the aid from the Guidance Section for 1966/67 has not yet been made. The present estimate is made by extrapolating to 1966/67 the shares obtained by each country from the Guidance Section in the period 1962/63–1965/66. The special benefits granted to Italy in 1964/65 and 1965/66 were not taken into account in establishing past shares. The shares so obtained were applied to the $123.6 million of the Guidance Section in 1966/67, and $2 million from the Special Section was added for Luxembourg.

This includes a special contribution of $45 million to improve the structure of olive oil production and the marketing of olives, olive oil, and fruits and vegetables in Italy.

Table 6.European Agricultural Guidance and Guarantee Fund: Forecast of Expenditures, 1968/69(In millions of U.S. dollars)
A. Guarantee Section1,735
Cereals510
Of which
Export subsidies350
Domestic market support160
Dairy products800
Of which
Export subsidies260
Measures to eliminate butter surplus 1250
Subsidy for skim milk used as animal feed223
Other 267
Olive oil150
Oilseeds65
Sugar110
Other100
B. Guidance Section285
C. Special Section140
Total (A plus B plus C)2,160
Sources: For dairy products—European Economic Community, Rapport de la Commission au Conseil sur la situation économique du secteur laitier dans la Communauté, SEC (68) 216, Brussels, Belgium, January 1968. For olive oil and oilseeds—European Economic Community, Mémorandum et Proposition de la Commission au Conseil concernant l’établissement à moyen terme de l’équilibre structurel sur le marché du lait, COM (68) 151, Brussels, Belgium, March 1968. For cereals, sugar, and other products—author’s estimate.

These measures were decided in July 1966 and apply for the first time in 1968/69.

Some of the measures included here also apply for the first time in 1968/69.

Sources: For dairy products—European Economic Community, Rapport de la Commission au Conseil sur la situation économique du secteur laitier dans la Communauté, SEC (68) 216, Brussels, Belgium, January 1968. For olive oil and oilseeds—European Economic Community, Mémorandum et Proposition de la Commission au Conseil concernant l’établissement à moyen terme de l’équilibre structurel sur le marché du lait, COM (68) 151, Brussels, Belgium, March 1968. For cereals, sugar, and other products—author’s estimate.

These measures were decided in July 1966 and apply for the first time in 1968/69.

Some of the measures included here also apply for the first time in 1968/69.

The expenditures of the Guarantee Section are determined mainly by the following: (1) The level of the target prices set by the Community for its farm products. The more these prices exceed the “equilibrium price” of the Community—i.e., the price at which the Community’s own supply and demand are in balance—and exceed world market prices, the larger will be the expenditures for both domestic support and export subsidies. (2) The range of products for which market regulations are adopted, i.e., products that are eligible for Community price support and export subsidies. By the end of the transitional period in 1968 all major farm products of the Community will be eligible for price support. (3) The proportion of eligible expenditures for price support and export subsidies that can be reimbursed to governments. For 1962/63,4 the Guarantee Section reimbursed only one sixth of the expenditures eligible under the CAP, the remainder being financed by the member governments themselves. Since July 1, 1967 the Guarantee Section has fully covered all eligible expenditures of member governments for price support and export subsidies.

With regard to the expenditures of the Guidance Section, the Council of Ministers has limited the total outlays, at first in relation to the expenditures of the Guarantee Section and later by setting an annual expenditure ceiling.

The revenues of the EAGGF derive from contributions by member governments. Different methods have been used to calculate these contributions. For a more detailed analysis of the operations of the EAGGF and of net benefits accruing to or net contributions made by member countries, it is convenient to distinguish between the periods July 1962-June 1965 (for which the Council of Ministers adopted the basic rules in January 1962) and the periods July 1965-June 1967 and July 1967-December 1969 (the basic rules for which were adopted in May 1966). These are the periods to which the receipts and expenditures of the EAGGF applied, but not those in which the actual settlements took place, since there was a considerable time lag in the settlement of contributions and receipts.

A. July 1962–June 1965

For the first year, 1962/63, the share of each country was assessed on the basis of the scale of contributions contained in Article 200 (1) of the Treaty of Rome (Table 2). For the next two years, 1963/64 and 1964/65, 90 per cent and 80 per cent, respectively, of total EAGGF revenues were assessed in accordance with the scale in Article 200 (1), while the remaining amounts were assessed in proportion to each country’s net agricultural imports from outside the Community. During this period, however, ceilings on each country’s total contribution were fixed at 31 per cent for Germany, 28 per cent each for France and Italy, 13 per cent for the Netherlands, and 10.5 per cent for the Belgian-Luxembourg Economic Union.

(1) Expenditures of the Guarantee Section covered cereals, eggs, poultry, and pig meat for 1962/63, and, in addition, dairy products, beef and veal, and rice for 1964/65. The share of expenditures covered was one sixth for 1962/63, two sixths for 1963/64, and three sixths for 1964/65. Export subsidies were calculated on the basis of net quantities exported and of the refund rate of the member country with the lowest subsidy rate.

The ceiling on the expenditures of the Guidance Section was one third of the expenditures of the Guarantee Section. The Guidance Section can contribute up to 25 per cent of the cost of a project; the remainder is to be divided between the government of the member country where the project is located and its immediate beneficiaries.

Table 3, which summarizes the expenditures of the EAGGF, shows that total outlays of the Guarantee Section rose rapidly (from $28.7 million in 1962/63 to $162.9 million in 1964/65), as the share of reimbursed expenditures increased and the list of farm products covered was enlarged.5 The outlays of the Guidance Section remained within the agreed ceiling. More than 50 per cent of total outlays of the Guarantee Section was for refunds of export subsidies on cereals (almost exclusively for France). In 1964/65 refunds for export subsidies (and domestic market support) of dairy products (mainly for the Netherlands) also became important. In the aggregate, 80 per cent of the Guarantee Section’s outlays was for export subsidies and 20 per cent, for domestic market support.

Prominent among the investments subsidized by the Guidance Section were irrigation projects, consolidation of land holdings, construction of factories for animal feedstuffs, grain elevators, slaughterhouses, cold storage, and auction installations. Most of these projects were located in Germany and Italy.

(2) Contributions and net benefits 6 are given in Table 4, which shows the geographical distribution of member country contributions to the EAGGF and the receipts from the Guarantee and Guidance Sections.

In summary, France, Germany, and Italy were the main gross contributors to the EAGGF. Most of the outlays of the Guarantee Section were to the benefit of France, and, to a lesser extent, in 1964/65, of the Netherlands. Italy and Germany, the two countries in the Community where agriculture is the least productive, received the largest share of the outlays of the Guidance Section. In 1962/63–1964/65 France was the main net beneficiary of the operations of the EAGGF, to the extent of $125.4 million, while the Netherlands and Luxembourg derived small net benefits ($2.0 million and $0.5 million, respectively). Net contributions were made by Germany ($60.9 million), Italy ($47.4 million), and Belgium ($19.6 million). These payments were effected with considerable delay. Claims relating to 1962/63 were settled only in 1965, and those for 1963/64 were not settled until 1966. Part of the payments for 1964/65 were made in 1967, and the remainder will be paid at the end of 1968.

B. July 1965–June 1967

The system of contributions used in 1963/64 and 1964/65 was abandoned in 1965. For 1965/66 and 1966/67 a new scale of fixed contributions by each country to cover all expenditures of the EAGGF was negotiated in the Council of Ministers. As a result, the shares of Germany, France, and the Netherlands were raised markedly, while that of Italy declined (Table 2).

(1) Expenditures of the Guarantee Section covered the products of the previous period; for 1966/67, olive oil and certain fruits and vegetables were added (no limitation for export subsidies, but certain ceilings for domestic market support).7 The share of expenditures reimbursed was six tenths for 1965/66 and seven tenths for 1966/67.

The expenditures of the Guidance Section were subject to the same ceiling as in 1962/63–1964/65, i.e., one third of those of the Guarantee Section.

As a temporary measure, the Council of Ministers agreed to extend certain special benefits to member countries which have been large net contributors in the financing of the EAGGF and have a particular interest in new market arrangements that have not yet come into force. These benefits would be paid by the Community until the new market organizations begin to operate. The Council decided that $45 million would be paid to Italy from the Guidance Section for 1965/66 for investments in production and marketing of olives, olive oil, and fruits and vegetables and that this payment would not disqualify Italy from other aid granted by the Guidance Section for structural projects. Similarly, Belgium would receive a refund from the Guarantee Section for expenditures incurred in the marketing of sugar (up to $4 million for 1965/66).

Total outlays rose to $320 million in 1965/66 and to almost $500 million in 1966/67. (See Table 3.) Compared with 1964/65, the largest increases in outlays in 1966/67 were for dairy products and for oils and fats (not covered before).

(2) For the scale of contributions, see Table 2; net benefits for 1965/66 are shown in Table 5. As the allocation of aid from the Guidance Section has not yet been made for the 1966/67 season, the author has made an estimate by extrapolating to 1966/67 the shares received by each country in the period 1962/63–1965/66. (For details, see footnote 2 of Table 5.) Italy’s net contribution decreased sharply between 1964/65 and 1965/66 as a result of its smaller share in total contributions and the large benefits received from the Guidance Section. For 1966/67 Italy would become a net beneficiary, mainly because of the inclusion of oils and fats among the products covered by the Guarantee Section. The Netherlands’ net benefits would rise to more than $35 million in both years as a result of large export subsidies for dairy products. France’s net benefits declined from $78 million for 1964/65 to an estimated $35.7 million for 1965/66, as its share in total contributions was raised and Guarantee Section expenditures for cereals leveled off. Germany’s net contribution increased to $75 million in 1965/66 and would reach $91 million in 1966/67, while Belgium would also remain a net contributor.

C. July 1967–December 1969

(1) The expenditures of the Guarantee Section in 1967/68 covered the same products as in 1966/67, plus oilseeds, sugar, and processed agricultural products. Additional market arrangements have still to be worked out for a number of minor products before the end of 1969. The share of expenditures covered was set at 100 per cent from July 1, 1967, when the EAGGF began making full reimbursements to member countries for their eligible expenditures on subsidies for exports to third countries and for market support. Export subsidies are to be given to member countries on the basis of gross exports rather than of net exports (since the proceeds of import levies accrue largely to the EAGGF) and according to the effective rate of subsidies in the Community rather than that of the member country with the lowest subsidy rate.

These changes, together with a significant increase in the supply of dairy products and cereals, account for the dramatic rise in the expenditures of the Guarantee Section from $370 million for 1966/67 to an expected $1,313 million for 1967/68. (See Table 3.) The latter figure is the estimate included in the 1968 budget of the European Community presented to the European Parliament in March 1968; 85 per cent of this amount would be spent for cereals, dairy products, and oils and fats.

In September 1967 the Commission forecast that once the CAP was fully operative (thus from 1968/69 on) the “cruising” altitude of the Guarantee Section’s expenditures would amount to $1,355 million.8 Since this forecast was made, however, the rapidly mounting surpluses of dairy products led the Commission to revise sharply upward (to $800 million)9 its estimate of the cost of the dairy arrangements for 1968/69, the first year of full operation. On the basis of this factor and the recent estimates of expenditures for 1967/68, the author has revised the forecast of the Guarantee Section’s expenditures for 1968/69 from $1,355 million to $1,735 million. The latter figure is tentative, as it involves forecasts of production and consumption of the various agricultural products in the EEC. Moreover, the Council of Ministers may yet take measures (for instance, in the dairy sector) that would affect this estimate. Table 6 shows how the estimated $1,735 million would be distributed, by product.

Annual outlays of the Guidance Section are subject to a ceiling of $285 million. The Guidance Section may cover up to 45 per cent of the total cost of a project, instead of the earlier limit of 25 per cent. To qualify for aid from the Guidance Section, projects must form part of a Community program. The Commission in June 1967 published proposals for ten such programs with a value of $672 million for the period from 1967/68 to the end of 1969. The ten programs, and the amounts involved, are $130 million to develop backward farming regions; $100 million to improve the quality and to rationalize distribution in the dairy industry; $90 million for the meat sector; $80 million for fruit and vegetable marketing; $70 million to encourage better use of farm larbor; $50 million each for irrigation, drainage, and olive oil production; $40 million for production of better quality wine; and $12 million to foster the use of marginal farming land for forestry.10

The decision to make an earlier move to a common price level for grains (the original deadline was December 31, 1969) has meant a sudden drop in prices for some Community farmers (in Germany, Italy, and Luxembourg). The Council of Ministers therefore decided to allot Community funds from a Special Section for compensation of these farmers over the period 1967–70. The sums involved are as follows (in millions of U.S. dollars):

1967/681968/691969/70
Germany140.0093.5046.75
Italy65.0044.0022.00
Luxembourg1.250.750.50

See European Community Information Service, The Common Agricultural Policy (Washington, July 1967).

In addition, Luxembourg will receive in 1968 and in 1969 a special contribution of $2 million from this Special Section to improve the structure of its agriculture.

(2) Contributions from July 1967 to the end of 1969 are as follows. Member governments turn over to the EAGGF 90 per cent of the proceeds from levies on farm imports from outside the EEC. (For the statistics on intra-EEC and extra-EEC trade in products regulated by the CAP, see Table 7.) The Commission estimates the revenue from this source in 1967/68 at $589 million.11 Germany and Italy would be the principal contributors of this amount to the extent of 31.2 per cent and 29.1 per cent, respectively, followed by the Netherlands (18.5 per cent). France, an importer of few agricultural products subject to levies, would contribute only 9.4 per cent, Belgium, 11.4 per cent, and Luxembourg, 0.4 per cent. The remainder of the outlays of the Guarantee Section and the whole cost of the Guidance Section are shared by member countries according to the schedule shown in the last column of Table 2. The financing of the Special Section is to be shared according to the scale in Article 200 (1) of the Treaty of Rome. (See also Table 2.)

Table 7.European Economic Community: Trade in Agricultural Products Regulated by the Common Agricultural Policy, 1958–66 1(In millions of U.S. dollars)
YearGermanyFranceItalyNetherlandsBelgium-LuxembourgTotal
Intra-EECExtra-EECIntra-EECExtra-EECIntra-EECExtra-EECIntra-EECExtra-EECIntra-EECExtra-EECIntra-EECExtra-EEC
Imports
1958412.2711.953.9720.156.1245.941.9224.074.1159.0638.22,061.0
1959508.8838.385.3518.563.7246.843.2262.086.8166.7787.72,032.3
1960581.8818.0112.4540.299.5374.247.0266.489.9152.6930.52,151.5
1961661.8873.477.9531.795.9418.752.4263.697.0153.1985.02,240.5
1962748.01,053.5103.6604.4102.8406.151.6304.689.6191.11,095.72,559.6
1963750.4773.6167.6560.5187.0652.950.1335.5115.6186.71,270.72,509.2
1964821.4836.2229.8654.5215.6645.665.4375.6140.3211.91,472.52,723.8
19651,045.7975.6231.1621.0265.5834.995.8358.8185.3235.31,823.43,025.6
19661,108.7929.8212.9668.2303.1947.3102.8339.9195.1268.91,922.53,154.2
Exports
195832.851.477.1257.2143.6208.5302.7285.747.723.5603.9826.3
195935.560.5118.5233.2160.7198.7392.4298.756.120.6763.2811.9
196046.867.0202.2327.5185.2182.7413.6324.366.521.8914.3923.3
196137.075.0256.2397.1196.1188.0422.4323.772.424.1984.11,008.0
196235.478.8258.7400.2243.4206.9441.7338.095.834.51,075.11,058.5
196343.293.2351.2471.7222.8223.7509.5373.8134.952.61,261.71,215.0
196457.5119.3426.9570.6251.2212.1579.4381.5133.946.31,448.81,329.8
196579.1158.5538.2600.6334.5246.5675.8399.2181.670.61,809.21,475.5
196678.1133.4652.7604.2336.6231.7579.1434.4200.481.41,846.91,485.1
Source: European Communities, Statistical Office, Agricultural Statistics, No. 10, Brussels, Belgium, 1967.

Includes cereals, pig meat, eggs, poultry, fruits and vegetables, wine, rice, milk and dairy products, and beef and veal.

Source: European Communities, Statistical Office, Agricultural Statistics, No. 10, Brussels, Belgium, 1967.

Includes cereals, pig meat, eggs, poultry, fruits and vegetables, wine, rice, milk and dairy products, and beef and veal.

There are no official estimates on the classification of EAGGF expenditures by member countries in the period under review and thus no official forecasts of net benefits or contributions. Some tentative estimates have been made, however, of the net benefits and contributions of member countries to the EAGGF for 1968/69, based on forecasts in each country of production, consumption, and intra-Community and extra-Community exports and imports of agricultural products. A fairly comprehensive forecast of the distribution of Guarantee Section expenditures for 1968/69 by product and by country appeared in the June 1966 issue of Common Market.12 The author has updated and revised this forecast on the basis of more recent estimates of expenditures for each product and a new classification of the dairy expenditures by country. The result is shown in line 2 of Table 8. The largest share of Guarantee Section expenditures would be spent in France, mainly in the form of export refunds for cereals and domestic subsidies for dairy products. Italy would derive its largest benefits from expenditures on olive oil, while the Netherlands would receive substantial refunds for its exports of dairy products. The tentative character of the estimate shown in line 2 of Table 8 should be underlined, as it involves for each country forecasts of production, consumption, and intra-Community and extra-Community trade in agricultural products. In addition, the Council of Ministers could still take measures which would alter the estimates of total expenditures or their distribution among different countries. To calculate the contributions to the Guarantee Section (line 1 of Table 8), it was assumed that each country would turn over to the EAGGF the same amount of levies as in 1967/68.13 The expenditures not covered by the levy proceeds are shared according to the scale presented in the last column of Table 2.

Table 8.European Agricultural Guidance and Guarantee Fund: Estimated Distribution of Financial Contributions and Benefits of EEC Countries, 1968/69(In millions of U.S. dollars)
FranceGermanyItalyNetherlandsBelgium-

Luxembourg
Total
Guarantee Section
1. Contributions–422–540–404–204–165–1,735
2. Benefits7382643252821261,735
3. Net316–276–7978–39
Guidance Section
4. Contributions–91–89–58–23–24–285
5. Benefits6280962225285
6. Net–29–938–11
Subtotal
7. Contributions–513–629–462–227–189–2,020
8. Benefits8003444213041512,020
9. Net287–285–4177–38
Special Section
10. Contributions–39–39–39–11–12–140
11. Benefits0934403140
12. Net–39545–11–9
Total EAGGF
13. Contributions–552–668–501–238–201–2,160
14. Benefits8004374653041542,160
15. Net248–231–3666–47
Sources: Lines 1–3, Common Market, The Hague, Netherlands, June 1966; line 4, Table 2; line 5, extrapolated on same basis as column 6 of Table 5; line 10, Table 2; line 11, tabulation on page 282.
Sources: Lines 1–3, Common Market, The Hague, Netherlands, June 1966; line 4, Table 2; line 5, extrapolated on same basis as column 6 of Table 5; line 10, Table 2; line 11, tabulation on page 282.

To allocate the aid of the Guidance Section (line 5, Table 8) the author has extrapolated to 1968/69 the share each country obtained in the period 1962/63–1965/66. (See footnote 2, Table 5.) To cover these expenditures, contributions are made according to the same scale as for the Guarantee Section’s expenditures not covered by levies.

Net contributions to and benefits from the Special Section (line 12, Table 8) can be calculated, since the amounts of cash compensation to be received by each country have been decided (see p. 282) and contributions are fixed in accordance with the scale in Article 200 (1) of the Treaty of Rome. The main effect of this Section is to reduce the over-all net contribution of Germany to the EAGGF and the over-all net benefit derived by France.

Line 15 of Table 8 shows the estimated over-all net contributions by Germany ($231 million), Belgium-Luxembourg ($47 million), and Italy ($36 million). Net benefits would accrue to France ($248 million) and the Netherlands ($66 million).

III. Conclusions

Initially, the expenditures of the EAGGF were relatively modest ($38 million for the year July 1962-June 1963—see Table 9) because the market regulations applied to only a few products and the EAGGF met only a small share of the cost of supporting internal farm prices and subsidizing exports. But, as the range of products covered by market regulations widened and the EAGGF gradually took over the full cost of stabilizing internal farm prices and subsidizing exports, total expenditures rose rapidly, to $500 million for the season 1966/67 and to an estimated $1.8 billion for 1967/68. Recent indicators—including large surpluses of dairy products—suggest that total outlays may rise considerably further in 1968/69.

Table 9.European Agricultural Guidance and Guarantee Fund: Summary of Total Expenditures and Net Benefits or Contributions per Country, 1962/63–1968/691(In millions of U.S. dollars)
YearTotal

Expenditures
Net Benefits or Contributions
FranceGermanyItalyNetherlandsBelgium-

Luxembourg
1962/63 23816–6–6–1–2
1963/64 26832–12–12–4–4
1964/65 321878–43–297–13
1965/66 332056–75–335–13
1966/67 449636–912936–10
1967/68 41,806
1968/69 52,160248–231–3666–47
Sources: Tables 4, 5, and 8.

Rounded off to nearest million.

Actual.

Provisional.

Estimate.

Forecast.

Sources: Tables 4, 5, and 8.

Rounded off to nearest million.

Actual.

Provisional.

Estimate.

Forecast.

The EAGGF derives its revenues from contributions by member governments according to formulas fixed through negotiation in the Council of Ministers. Receipts from and contributions to the EAGGF by each country are not equal, so that financial transfers arise among the Common Market countries. Up to now, the size of actual transfers has been moderate, not only because the total financing involved in the first years of operation of the EAGGF was not large ($38 million for 1962/63 and $68 million for 1963/64) but also because of the time lag between the moment claims arose and actual payments. Indeed, claims for 1962/63 were not settled until 1965, and those for 1963/64 were settled only in 1966.

In the next few years, however, the transfer will become more significant, as the total cost of the CAP is increasing rapidly, and the shortening of the time lag for settlement of claims which was decided in October 1967 temporarily produces a “bunching” of transfer payments. Tentative forecasts included in this paper show that financial arrangements for July 1968-June 1969, presumably to be settled in 1970, could involve (excluding “bunching” of transfer payments) net contributions of $231 million by Germany, of $47 million by Belgium-Luxembourg, and of $36 million by Italy. Net benefits would accrue to France ($248 million) and the Netherlands ($66 million).

The “cruising” altitude of the EAGGF expenditures after 1969 can be expected to be more than $2 billion annually. The financing of these outlays has not yet been decided, except that the full proceeds from the levies on imports of agricultural products from outside the Community will accrue directly to the EAGGF. The negotiations on the financing will thus center on a formula to cover the remaining costs.

Le financement de la politique agricole du Marché Commun

Résumé

Après avoir décrit les principaux aspects de la politique agricole commune (PAC) de la Communauté Economique Européenne (CEE), cette étude en analyse le financement. L’instrument de la politique agricole commune est le Fonds Européen d’Orientation et de Garantie Agricole (FEOGA); la section “Garantie” prend à sa charge les frais encourus pour stabiliser les prix agricoles intérieurs et subventionner les exportations de produits agricoles effectuées par la Communauté, tandis que la section “Orientation” finance les dépenses afférentes à la réforme des structures agricoles et commerciales.

A l’origine, les dépenses engagées par le FEOGA étaient relativement modestes (38 millions de dollars pour l’année s’étendant de juillet 1962 à juin 1963), mais à mesure que l’éventail des produits ayant fait l’objet d’un accord financier s’élargissait et que le Fonds augmentait sa participation aux frais entraînés par la stabilisation des prix agricoles sur le marché intérieur et la subvention des exportations, jusqu’à les prendre totalement à sa charge, le chiffre total des dépenses s’est fortement accru. On prévoit que pour 1968/69 (première année où la politique agricole commune s’exercera à plein) les dépenses se chiffreront à plus de 2 milliards de dollars et l’on s’attend à ce qu’elles restent à peu près à ce niveau par la suite.

Le FEOGA est financé par des contributions des Etats membres fixées en fonction d’une formule négociée au sein du Conseil des Ministres.

Etant donné que le montant des fonds reçus du FEOGA et celui des contributions qui lui sont faites ne sont pas égaux dans chaque pays, ces différences donnent lieu à des transferts entre les différents membres du Marché Commun. L’auteur étudie ceux qui ont déjà été effectués (dont la France a été le principal bénéficiaire et auxquels l’Allemagne a contribué le plus lourdement) et tente de prédire comment ces transferts évolueront dans l’avenir.

El financiamiento de la política agrícola del Mercado Común

Resumen

Este trabajo, luego de describir las principales características de la política agrícola común de la Comunidad Económica Europea (CEE), pasa a presentar un análisis de cómo se financia esa política. La misma se lleva a cabo por intermedio del Fondo Europeo de Orientación y de Garantía Agrícola; la Sección Garantías de dicho Fondo tiene a su cargo la financiación del costo de estabilización de los precios internos de los productos agrícolas y el de los subsidios a las exportaciones agrícolas de la CEE, en tanto que la Sección Orientación financia los gastos que se precisan para las reformas estructurales en materia de prácticas agrícolas y de comercialización.

Al principio los gastos del referido Fondo europeo eran relativamente modestos (US$38 millones en el ejercicio de julio de 1962 a junio de 1963), pero según fue aumentando el número de productos comprendidos en los acuerdos financieros, y dicho Fondo fue encargándose gradualmente de todo el costo de la estabilización de los precios agrícolas internos y del de los subsidios a las exportaciones, sus erogaciones totales se elevaron notablemente. Se prevé que las erogaciones en 1968/69 (primer año en que la política agrícola común se aplicará en su totalidad) ascenderán a más de US$2.000 millones, y se espera que de ahí en adelante las erogaciones de cada año permanecerán aproximadamente a ese nivel.

Los recursos del aludido Fondo agrícola provienen de las contribuciones que los países miembros efectúan de acuerdo con una fórmula determinada de antemano mediante negociación en el Consejo de Ministros.

El hecho de que los ingresos que cada uno de los países miembros del Mercado Común percibe del Fondo agrícola y de que sus respectivas aportaciones a ese Fondo difieran entre sí ocasiona transferencias de fondos entre dichos países. El artículo que antecede analiza las transferencias que ya han ocurrido (en las cuales Francia y Alemania han sido, respectivamente, los principales beneficiarios y los mayores contribuyentes) y brinda un pronóstico provisional de lo que podrán ser las transferencias futuras.

Mr. van Ypersele, an economist in the European Department of the Fund when this paper was prepared and now in the Asian Department, is a graduate of the University of Louvain and of Yale University. He has contributed articles to several economic journals.

A French Government study is reported to have estimated that the benefits derived by France because of this factor amounted to $47 million for 1964/65 and would rise to $77 million in 1969/70. The study was made by the Secrétariat Général du Comité Interministériel pour les Questions Européennes. It was quoted in Le Monde (Paris) on November 6, 1965.

For a discussion of this impact, see Lawrence B. Krause, European Economic Integration and the United States (The Brookings Institution, Washington, 1968), pp. 94–109.

For the dates on which common prices come into force for the various products, see Table 1, page 272.

Year beginning on July 1 and ending on June 30.

It should be noted that the EAGGF expenditures do not all constitute entirely new expenditures additional to those already undertaken in each country. A sizable share of these expenditures replaces national expenses which would have been undertaken by each country even in the absence of the CAP.

The net receipts or contributions to the EAGGF by each country are such in a balance of payments sense but not in a budgetary sense, as the aid given by the Guidance Section is given not to the governments but directly to those organizations responsible for the projects that are financed.

For fruits and vegetables, a joint market organization has been operating since August 1, 1962. However, common financing arrangements were adopted only in January 1967. According to these arrangements, expenditures of member governments on subsidies for exports of certain fruits and vegetables to non-member countries will be taken over completely by the Community. Market support, however, continues to be optional: member countries are not obliged to take market support measures, and a ceiling of $60 million (of which $40 million is earmarked for Italy) has been set for the annual expenditures on such measures.

See European Economic Community, Avis de la Commission au Conseil concernant les demandes d’adhésion du Royaume-Uni, de l’Irlande, du Danemark et de la Norwège, COM (67) 750 (Brussels), September 1967.

See the analysis of this estimate and its source in Table 6.

See European Community Information Service, The Common Agricultural Policy (Washington), July 1967.

See Parlement Européen, Documents de séance: Rapport sur le projet de budget des Communautés européennes pour l’exercice 1968, Document 213, March 11, 1968.

Common Market (The Hague), June 1966.

In estimating the amount of levies contributed to the EAGGF by each country, one should, for the purpose of this study, take into account only those levies paid on imports consumed in the importing country and not on those re-exported to another member country. Also for this study, export refunds should be ascribed to the producing country if it differs from the exporting country.

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