European Economic Community Adopts the Common Agricultural Policy

Date July 1, 1967

The Common Agricultural Policy was adopted to guarantee price subsidies and favorable international competitive conditions for all European Economic Community farmers.

Also known as CAP

Locale Brussels, Belgium

Key Figures

• Sicco Mansholt (1908-1995), Dutch politician and EEC commissioner for agriculture
• Jean Monnet (1888-1979), French businessman and head of the Commissariat Général du Plan
• Charles de Gaulle (1890-1970), head of the French provisional government, 1944-1946, and president of France, 1959-1969

Summary of Event

In 1967, the European Economic Community (EEC) launched the comprehensive Common Agricultural Policy (CAP), the main goal of which was to create a large, intra-European agricultural market with common prices, external tariffs, and a financial structure to cover its costs. Although the CAP succeeded in achieving, indeed surpassing, Common Market agricultural self-sufficiency, one of its results has been higher food prices than in the rest of the world and a consistent pattern of European agricultural protectionism.

Negotiations for the Common Agricultural Policy started soon after the six Common Market founders—West Germany, France, Italy, Belgium, the Netherlands, and Luxembourg—signed the Treaty of Rome in 1957. The treaty signaled the six countries’ common intention to build an economic community comprising a growing number of sectors, including agriculture. The task was to extend the work of Jean Monnet, the father of the European Coal and Steel Community in 1950; that is, it was to fulfill the French businessman’s dream of a Europe consisting of large, ever-growing, and diversified markets. In such a world, war would be unthinkable. This was particularly true in the case of Franco-German economic integration: French farmers were more efficient than their German counterparts, especially in grain production; West Germans, however, surpassed the French in several industrial sectors. France, as a consequence, sought to establish common agricultural prices higher than France’s and lower than Germany’s. In 1962, French president Charles de Gaulle pressed for the establishment of a policy to achieve that goal. In exchange for the advantages granted to French farmers, West German access to French industrial markets would be facilitated.

Article 39 of the Treaty of Rome covered EEC goals with regard to agricultural policy. The community would seek to create stable markets with regular supplies and fair prices, while promoting an increase in agricultural efficiency and in farmers’ standards of living. The community set out to achieve these goals through a liberalization of intra-European trade, exposing farmers to competition from their European neighbors but protecting them from competition from their extra-European counterparts. Achieving such goals meant transforming the Community’s agricultural sector completely. When the Treaty of Rome was signed, the EEC’s agricultural sector was still labor intensive and technologically backward. It provided the farming population, frequently employed in inefficiently small farm units, with a low standard of living. The CAP thus also meant modernization.

As far as the agricultural sector was concerned, Monnet’s dream of European economic integration was put in the hands of a Dutchman, Sicco Mansholt, the Community’s first commissioner for agriculture. Mansholt drew up plans to implement the directives of Article 39 and led the process of agricultural price negotiation among the Community’s members between 1962 and 1967. His efforts were directed toward eliminating existing national systems of support for farmers and replacing them with an integrated support system based on common prices.

Mansholt’s task was not an easy one. When negotiating a common price, there was always the danger of damaging the relative competitive positions of farmers in one or more of the six countries. For all of their vaunted will to integrate, Community members feared the very liberalization of intra-European trade that was the EEC’s raison d’être. Political parties that drew support from agricultural voters feared losses at the polls whenever they accepted price compromises. Agreements were reached only after several crises in the process of integration. By 1961, there were general policy agreements concerning eggs, pork, poultry, and grains, but no definitive price system. By 1963, in the course of a marathon meeting, agreement was reached on the prices of milk and dairy products, beef and veal, rice, and fats.

At a similarly difficult session in 1964, the six Community members agreed on a most important price, that of grain. Grain affected several other agricultural sectors, such as pork and beef. By 1967, the price agreements covered 90 percent of all farm output in the EEC and approximately ten thousand workers in the agricultural sector. By and large, agreements were reached by establishing high prices that sheltered the least efficient and weakest competitors in the community. The EEC set out to maintain the high prices by effecting massive purchases of agricultural products whose supply exceeded demand. The goods thus purchased would either be stored for future sale, when demand increased, or sold at a loss outside the Community.

The commodity purchase feature of the CAP necessitated creation of reliable financial institutions. The first of these was the European Agricultural Guidance and Guarantee Fund (EAGGF), created in 1962. The fund’s capital would be supplied by the member countries, which committed themselves to deposit, in ever-increasing proportions, the proceeds of levies and customs duties on imports of foodstuffs. Later, the EEC’s financial needs increased to such an extent that 100 percent of all levies (by 1971) and 100 percent of all customs duties (by 1975) would be turned over to the community by member states. By 1975, the EEC pooled all levies and customs duties and harmonized value-added taxes. Thus, by the mid-1970’s, the CAP’s financial resources were in place, subsumed within an increasingly complex and vast financial system.

Significance

Negotiations for the establishment of common agricultural prices did not yield the structural reform foreseen in Article 39 of the Treaty of Rome. What was done by July 1, 1967, was almost immediately considered insufficient to meet the Community’s ambitious integration targets. As a consequence, Mansholt immediately set out to draw up new plans in order to improve on the 1967 CAP. By 1968, Mansholt had issued a new plan.

Mansholt pointed out that the CAP should encourage structural reform without creating excessive hardship for the farming population. The new plan called for increasing the size of farming units while decreasing the overall acreage under cultivation and encouraging occupational shifts away from the countryside toward industry. Such a reform, which promised to displace smaller family farms everywhere within the Community, would be accompanied by increased prices and further guarantees that extra-community products would be sold at the high EEC price levels. The community would intervene to maintain the high prices whenever necessary.

Despite such guarantees, EEC farmers almost unanimously opposed Mansholt’s new plan, as their way of life and livelihood both appeared threatened. Moreover, the interests of consumers had not been taken into due account: High agricultural prices would certainly mean a lower standard of living for nonagricultural workers. As a consequence, attempts at structural reform were considerably watered down, and the modified CAP of 1968 still did not address some of the community’s fundamental problems. In fact, the high prices guaranteed by the EEC simply encouraged overproduction and yielded large surpluses, which the EEC had pledged to buy. By the early 1970’s, critics ridiculed the community’s “mountains of grain” and “olive oil lakes.” Almost all EAGGF funds were expended to maintain the high price targets set by the EEC. The general results were little success in increasing the size of farms and EEC prices between two and five times as high as world market prices. A protectionist vicious circle had set in: Protected farmers could afford to avoid structural reform and thus encouraged the perpetuation of an inefficient system.

Paradoxically, the only sectors consistently forced to make structural adjustments were the food-processing industries. These were affected by the CAP’s harmonization of member states’ laws concerning the processing, packaging, grading, and labeling of almost all foodstuffs. The integrated legislation became increasingly complex over the years and required businesses to expend large amounts of capital in order to adapt to and comply with CAP regulations. Discontent on the food-processing industries’ part was not lacking.

For their part, consumers, who were generally otherwise highly taxed, paid excessive prices for their food; at the same time, potential extra-community competitors, especially from the United States, were cut off from European markets. To nobody’s surprise, the United States persistently attacked the CAP, which constituted a major stumbling block in the path toward a European-American agreement in the ambit of the General Agreement on Tariffs and Trade (GATT).

Another problem that surfaced over the years regarded the relative value of the community countries’ currencies. The common agricultural prices had been set by using a common accounting unit with a gold content equal to that of the U.S. dollar. It was assumed that the value of the EEC countries’ currencies would be maintained at the same levels; the possibility of monetary fluctuations was not fully taken into account. When such fluctuations did occur, it became apparent that the CAP, as originally designed, would largely fail in its intent to harmonize agricultural prices in EEC countries. If a country devalued its currency, that country’s farm prices would rise domestically but fall relative to those in the rest of the community.

Each time a devaluation occurred, it required complex agricultural price readjustments; these, however, could not offset the clearly intra-community protectionist aspect of the devaluation itself. Changes in the value of member countries’ currencies, therefore, tended to defeat the purpose of the CAP, which was to create a uniform EEC agricultural market.

Despite all the above-mentioned problems, the Common Agricultural Policy became one of the EEC’s “sacred cows,” not least because it was one of the few truly centralized and indeed common policies of the EEC. Despite the CAP’s many problems, the community’s population working on farms did decrease to 6 percent in the 1980’s from about 20 percent in 1960, while the amount of land under cultivation was reduced from 175 to 160 million acres. At the same time, the standard of living of the remaining farming population definitely increased, as did levels of mechanization. The CAP thus yielded mixed results, with a more negative appraisal in order when considering overall performance rather than the well-being of the farming population.

Bibliography

Marsh, John. “The Common Agricultural Policy.” In Britain and the EEC, edited by Roy Jenkins. London: Macmillan, 1983. An in-depth study of the CAP intended to demonstrate how the CAP, especially as seen from the British point of view, is a flawed policy. Marsh criticizes the whole CAP approach, forcefully arguing that its system of subsidies defeats the purpose of creating a truly integrated agricultural sector.

Pinder, John. European Community: The Building of a Union. 3d ed. New York: Oxford University Press, 1998. A generally optimistic appraisal of the European Economic Community and its future. Covers various aspects, including institutional, monetary, agricultural, and industrial. Pinder does not hesitate to expound his own pro-federation views and sees the CAP as one of several difficult but positive movements toward greater integration. Chapter 5 deals with the CAP in detail.

Swann, Dennis. The Economics of Europe: From Common Market to European Union. 9th ed. New York: Penguin Books, 2000. A general study about the complex mechanisms under which the EEC operated. Contains a thorough and straightforward account of the Common Agricultural Policy. The place to begin reading in order to learn more about the CAP.

Urwin, Derek W. The Community of Europe: A History of European Integration Since 1945. 2d ed. New York: Longman, 1995. Comprehensive survey of EEC history. Although only four pages deal directly with the CAP, the historical background that gave birth to the CAP is the heart of this book. This study takes into account a host of different elements affecting the process of integration, including the positions of various participating countries, particularly Great Britain.

Van der Noort, P. C. “The Common Agricultural Policy: Key to European Economic Integration.” In Main Economic Policy Areas of the EEC, edited by Peter Coffey. Boston: Martinus Nijhoff, 1983. Sets the CAP in a historical and theoretical background. Both favorable and unfavorable aspects are considered. Of particular interest is the discussion of how the CAP is a reflection of increased economic intervention by the European governments in their respective economies taking place at the same time that they sought to liberalize trade in agricultural products.