A Permanent Bailout

Fifty years of EU farm aid ought to make us fear too much state intervention.

The global financial crisis is raising profound questions about the role of the state in economic affairs. For some, the nationalization of the banking titans and a more activist industrial policy constitute the welcome new reality emerging from the ruins of a discredited “market fundamentalism.” As Italian Prime Minister Silvio Berlusconi put it last month: “State aid, which until yesterday was considered a sin, is now absolutely essential.”

But before lurching headlong into this new era we might want to examine the case of one economic sector that has seen more government intervention over the past half-century than any other: agriculture. Since the late 1950s, Europe had a command-and-control farm policy in which prices and output were set in Brussels and farmers were guaranteed good prices regardless of whether their products were actually needed. The result was a farm budget out of control and the infamous butter mountains and wine lakes.

Since 1992, the European Union has been moving — albeit at a glacial pace — toward a more market-oriented model. Last week, in a review of the Common Agricultural Policy, EU members took only a few more baby steps in this direction. The skeptics prevented more sweeping reforms, seizing on the recent volatility in global food prices as evidence of the failure of markets. The evidence, though, points in the opposite direction.

There are three principal causes of the food crisis, and each is an instance of too much government intervention, not too little.

Most significantly, and most entrenched, is the low productivity of farmers in the global south — most acutely in sub-Saharan Africa, the Indian subcontinent and parts of Latin America. Underinvestment in irrigation and the lack of access to credit, seeds, machinery and fertilizer keep yields low, while poor transport infrastructure makes it expensive to bring food to market. The world is reaping the whirlwind it sowed with decades of protectionism and export dumping by rich countries — policies that undermined agricultural development in the poorer countries.

Global food production is best helped by bringing the rest of the world up to the standards of the best, not by squeezing every last bit of output from European lands. Beyond a certain point, intensification will lead to degraded soil, drought and the loss of pollinating insects. Large areas in Europe — southern Spain, northern France and the Po plain in Italy — are approaching this point, if they are not already past it.

A second and more proximate cause of the food crisis was the government policy that encouraged the burning of food crops as transportation fuel. The worst culprit is the United States, which this year put one-third of the world’s largest corn harvest into its gas tanks. But the EU, too, is still cleaving to a biofuels target that is taking land out of food production. In the tropics the impact is doubly harmful, since cultivation of biofuel crops accelerates the destruction of rain forests and virgin grasslands, releasing huge volumes of carbon dioxide into the atmosphere.

Third, the recent tightening of food markets was amplified to crisis level when the governments of a handful of countries like Russia, Vietnam and Argentina, which traditionally grow a surplus of key crops, began restricting their exports to keep domestic prices low. The result was a downward spiral of beggar-thy-neighbor responses and a breakdown of trust in international commodity markets.

What is needed is a more dependable global trading system in foodstuffs and policy reforms that neither shut out nor undercut farmers in poor countries by heavily subsidizing rich-world farmers.

Those subsidies don’t even benefit the majority of Europe’s farmers. According to the Organization for Economic Cooperation and Development, most of the €54 billion in EU subsidies are passed straight through to landowners and big businesses, suppliers of farm machinery, chemicals and seeds. Europeans are romanced by the idea of the small farmer, but our taxes finance six-figure handouts to the Queen of England, Prince Albert of Monaco and the Duchess of Alba. Eighty-four percent of EU farm subsidies are paid to the biggest 18% of recipients.

Bailouts might be in vogue right now, but EU farm subsidies amount to a permanent bailout with a twist. They are paid whether times are good or bad; and the more land you own, the more fertile your land, the more help you get. Over the past 10 years, subsidies paid to Europe’s farmers could have bought outright 40% of Europe’s farms: land, buildings, machinery, livestock — the lot.

The CAP cannot even be described as a common policy ensuring a European level playing field. On average, farmers in the Netherlands receive double the subsidies per hectare than farmers in Poland. Last week’s reforms did not address this inequality and instead introduced a new raft of options for member states to tailor their subsidies to suit national priorities (and political lobbies).

The EU could do worse than follow this logic to its conclusion and retreat to a supervisory role ensuring that national farm policies and subsidies do not distort the single market. Fiscal responsibility at a national level might focus the minds on whether the current level of spending is really necessary. Such reforms could save tens of billions of euros.

As governments race to fill the vacuum left by the collapse of a particular model of financial capitalism, they would do well to remember that the perils of overly light regulation can be more than matched by heavy-handed interventionism of a kind that distorts and inhibits markets. They need only look at half a century of experience with agriculture policy.

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