Enlargement
On May 1, 2004, after a 14-year transition from central planning
to market economies, eight Central and East European (CEE) countries
(Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Estonia,
Latvia, and Lithuania), plus Cyprus and Malta, became members of
the European Union (EU). Bulgaria and Romania are preparing for
accession and are expected to join in 2007. Croatia submitted its
application for membership in 2002, and it is possible that Croatia,
too, will be ready to join in 2007. Macedonia submitted its application
in 2004. Turkey also wants to join the EU, but its request to initiate
negotiations has been deferred pending further political and civil
rights reforms.
The expansion from 15 to 25 countries has added about 100 million
new consumers to the EU market and doubled the number of farm employees
governed by the EU's Common Agricultural
Policy (CAP), while increasing total gross domestic product
(GDP) by less than 5 percent.
The agricultural integration of the new member states into the
EU will be challenging due to drastic differences in agricultural
policies, structures, and development. The EU, one of the world's
largest regional trade blocs, has a single market with no internal
agricultural trade barriers and a cohesive agricultural policy.
The CAP provides high levels of support to farmers through price
supports, import protections, and direct payments, but it is costly
to maintain and uses over 50 percent of the EU's budget. In contrast,
most of the new members did not have the same means to support their
farmers or insulate their markets. Farming efficiency and incomes
in the new member countries are far lower than in member states
of the former EU-15.
By adopting the EU's CAP, new member countries will benefit from
unrestricted access to EU markets, generally higher prices, and
increased financial support for farmers. However, in the years leading
up to enlargement, EU policymakers became increasingly worried about
the cost of providing current levels of CAP support to millions
of new farmers. This concern was one of the factors prompting the
EU to reduce agricultural support in a package of financial and
agricultural policy reforms entitled Agenda
2000. This concern also led to the Copenhagen compromise of
December 2002, in which the new member governments were forced to
accept a 10-year phase-in of direct payments for farmers.
Commodity Impacts of Enlargement
ERS carried out a simulation of the impacts of enlargement
on production and trade in the acceding countries and
the enlarged EU. The largest potential changes are significant
increases in output of feed grains and beef. In contrast,
enlargement could lead to slight declines in wheat output
by new member states. Combined beef output could increase
significantly, leading to substantial exportable surpluses,
but there could be only small changes in pork and poultry
output.
Impacts on world trade are likely to be small. Net exports of barley
may increase, and the enlarged EU could be a modest net exporter
of corn. At the same time, net exports of wheat by the enlarged
EU could decline. Enlargement could bring short-term losses in U.S.
exports to the region. U.S. grain exports to the CEEs have fallen
almost to zero since the early 1990s. After enlargement, U.S. wheat
exports could rise once Poland adopts EU phytosanitary requirements,
which are less strict than Poland's former restrictions. But the
United States could lose a large poultry market due to EU sanitary
requirements, which are stricter than the former regulations of
new member countries. In the longer term, however, if CEE incomes
rise, there could be opportunities for larger exports of other high-value
products. (See EU
Enlargement: Implications for New Member Countries, the United States,
and World Trade for a further discussion of ERS model results.)
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Preparations for Enlargement
Preparation goals. Successful integration
of new member agricultural sectors into the EU will require
considerable restructuring. Candidate countries were required
to adopt all EU legislation immediately upon becoming
members, and they needed to create new bureaucratic structures
to implement EU programs. Regulations in the agricultural
sector affect the movement of live animals, meat and meat
products, fruits, vegetables and plants, and a wide range
of activities in the farming, production, and processing
industries. New members must now meet EU labeling requirements
and quality standards, including veterinary, sanitary,
and phytosanitary measures. The EU and candidate countries
negotiated brief transition periods for some of these
regulations.
Preparation Activities. The EU took a multi-pronged
approach in preparation for enlargement. A series of trade
agreements, beginning with the 1994 Europe Agreements,
gradually reduced or eliminated tariffs on agricultural
products traded between the EU and candidate countries.
As a result of these agreements, over 90 percent of trade
between the EU-15 and the acceding countries was fully
liberalized before accession.
The EU also funded an extensive program of technical
assistance for the CEE region to improve agricultural
structures and market mechanisms, food production, processing
and distribution, and infrastructure. This program,
known as PHARE (the French acronym for Poland-Hungary
Action for Economic Reconstruction), began as general
technical assistance, but in the final years leading
up to accession, it focused on training government staffs
to administer the EU programs.
The EU also established two pre-accession funds to
improve infrastructure and rural efficiency in CEE countries:
- Instrument for Structural Policies for Pre-Accession
(ISPA), to support infrastructure projects in transportation
and the environment, with an annual budget of 1.04
billion euros; and
- Special Accession Program for Agriculture and Rural
Development (SAPARD), targeted specifically to support
sustainable agricultural and rural development during
the pre-accession period through improvements in conversion
structures, marketing channels, and food quality control.
The EU budgeted 520 million euros annually for SAPARD.
Both funds carried a 50-percent cofinancing requirement,
and CEE governments were required to demonstrate they
have established government structures capable of administering
the funds.
The SAPARD Program began in 2000 but did not gain momentum
until 2003. Initial delays were caused by difficulties
in setting up appropriate government agencies—called
"paying agencies"—to administer the funds.
Farmers also had trouble accessing funds due to complicated
forms; the requirement that they provide up-front cash
to be reimbursed later; and strict age, education, and
farm ownership criteria. But in 2003, most of the acceding
countries had obligated nearly the full amount allocated
to them under the program. The main beneficiaries were
processing firms, but a number of larger farms also
took advantage of the program. Beneficiaries have until
the end of 2006 to complete their projects.
These funds will now be replaced by the EU Structural
and Cohesion Funds, which are available to all regions
of the EU whose per capita income is less than 75 percent
of the EU average.
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Pressures for Reform
Application of CAP mechanisms existing in the early 1990s
to candidate countries would have been very costly for
the EU. It would have increased prices and stimulated
agricultural production in the new member states, thereby
increasing their reliance on export subsidies. The EU
was already close to meeting its WTO
commitments on allowed volume and value of export
subsidies, and with the addition of 10 new countries,
the expanded EU would have exceeded its export subsidy
constraints. These factors, among others, spurred the
EU to adopt the Agenda
2000 reforms, further reducing price support to farmers
(thus lowering the need for export subsidies) and expanding
agricultural reforms undertaken in 1992.
Similar concerns lay behind the EU-15's drive to limit
direct payments to farmers in the new member countries.
A major issue of contention in the negotiations leading
up to the 2002 Copenhagen Summit was whether producers
in candidate countries would be immediately eligible for
the full range of direct payments that EU producers currently
receive. These were originally known as "compensation
payments," intended to offset cuts in EU grain and
oilseed prices that were part of the 1992 CAP reform and
Agenda 2000. They are paid on a per hectare basis and
calculated from per ton amounts tied to regional historical
average area and yields. EU cattle and sheep breeders
also receive direct headage and per hectare payments tied
to historical herd levels and regional stocking densities
(animals per hectare).
EU negotiators were extremely concerned about the budgetary
implication of extending these payments to new member
countries. In light of those concerns, the initial EU
proposal regarding direct payments called for a 10-year
phase-in, with the new members receiving only 25 percent
of the payments in the first year. The compromise reached
at the Copenhagen Summit keeps the 10-year phase-in, and
the EU will still provide only 25 percent of the payments
during the first year. However, national governments will
be allowed to top off these payments by a maximum of 30
percent, so that payments during the first year of accession
could be as much as 55 percent of what current EU farmers
receive. CEE governments will be allowed to fund the extra
30 percent in part by diverting up to 20 percent of rural
development funds that the EU will provide after accession.
But they will need to match all such funds with additional
funds from their own budgets.
There were also serious disputes about the various supply
controls imposed by the CAP. EU policy imposes dairy and
sugar quotas. Direct payments referred to above are tied
to historical "reference" areas, yields, and
herd levels. The original EU position was that these controls
would be fixed at 1995-99 averages for each country. CEE
negotiators requested higher quotas, insisting that these
be based on potential production rather than recent actual
production, which they believe has been below potential.
But the EU did not compromise very much on supply controls.
Final quotas are only marginally higher and, in a few
cases, actually lower than the original EU offers. The
EU agreed to minimal compromises on sugar, isoglucose,
and dairy quotas. In particular, the EU agreed to a "milk
quota reserve" that will be added to each new member's
dairy quota in 2006 to account for an expected increase
in retail demand for milk, which should result from a
decrease in on-farm consumption as farm populations migrate
to urban areas.
These compromises will have important impacts. Direct
payments are only partially decoupled from production
decisions: producers must produce in order to receive
payments. ERS analysis suggests that increased direct
payments do lead to somewhat higher output. But the most
significant impact will be on farm income.
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CAP Reform and Enlargement
It is too early to forecast the implications of CAP
reform for the new member countries. It is likely that
the commodity impacts will be minimal. With the elimination
of intervention in rye markets, CEE rye output will likely
decline. But it is not clear what CEE producers will do
with the land that would be planted to rye under the current
CAP. Since cross-compliance provisions will require that
producers keep land in good agricultural condition, producers
may want to keep it under cultivation. Some might plant
more barley. On the other hand, farmers can convert the
land to pasture and still receive payments. The smallest
farmers in countries such as Poland may find it most profitable
to do exactly that.
More analysis is needed to determine the impacts of the
proposed cuts in dairy support. The dairy quotas that
the acceding countries agreed to at the Copenhagen Summit
are for the most part less than current fluid milk output.
CEE milk output will be severely constrained, so much
so that the proposed cuts in support prices for butter
and skim milk powder may not constitute any further constraint.
In anticipation of the single farm payment (see Common
Agricultural Policy, policy instruments for more information),
most new member countries have chosen to implement the
so-called "simplified scheme" of administering
direct payments. According to the simplified scheme, which
new members are allowed to use during the first 3 years
of membership, governments can calculate the payments
that all farmers together can receive and allocate the
money to all farmers based on farm size, regardless of
actual production. However, the top-off payments from
the national budgets must be allocated according to actual
herd levels and area planted to eligible crops. Thus,
payments are still partially coupled, but less so than
under the traditional payment scheme. CEE governments
have not yet decided whether payments will be 100-percent
decoupled after implementation of recent CAP reforms (see
Common Agricultural Policy).
The cross-compliance provisions could hurt CEE producers.
Many of the smaller producers do not currently meet all
the EU requirements. Upgrading their farms will require
large investments, and smaller farmers do not have the
necessary capital.
On the other hand, modulation and financial discipline
provisions will not be enforced on the new members until
their payments reach 100 percent of the level in the former
EU-15, so the reductions will not take effect until 2010
or 2013. Also, farms with an income under 5,000 euros
will be exempt from payment reductions. This provision
will benefit Poland, where most farms remain under that
ceiling. But it could discourage farm consolidation that
EU officials insist is essential if Polish agriculture
is to become competitive.
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References
Cochrane, Nancy and Seeley, Ralph, EU
Enlargement: Implications for New Member Countries, the
United States, and World Trade, USDA, ERS, WRS04-05-01,
April 2004.
Cochrane, Nancy, A
Historic Enlargement: Ten Countries Prepare to Join the
European Union, Amber Waves, USDA, ERS, April
2004.
Cochrane, Nancy, EU
Enlargement: Implications for U.S.-EU Agricultural Relations,
in U.S.-EU Food and Agricultural Comparisons, Mary
Anne Normile and Susan Leetmaa (editors), USDA, ERS, WRS04-04,
February 2004.
Cochrane, Nancy, EU
Enlargement: the End Game Begins, Agricultural
Outlook, USDA, ERS, AGO-296, November 2002.
Cochrane, Nancy, Pressures
for Change in the Livestock Sectors of Eastern Europe,
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2002.
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Enlargement: Negotiations Give Rise to New Issues,
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2001.
Cochrane, Nancy, EU
Enlargement: Impacts on CEE Wheat Markets, Wheat
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March 2000.
Cochrane, Nancy, Agriculture
in Poland and Hungary: Preparing for EU Accession,
Agricultural Outlook, USDA, ERS, AGO-267, December
1999.
Cochrane, Nancy, Enlargement
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Mary Burfisher and Elizabeth Jones (eds.), USDA, ERS,
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Liapis, Peter S., and Marinos E. Tsigas, CEEC
Accession to the EU: A General Equilibrium Analysis
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AER-771, November 1998.
Josling, Tim, David Kelch, Peter Liapis, and Stefan Tangermann,
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Union Enlargement, USDA, ERS, TB-1865, February 1988.
Cochrane, Nancy, et al, Europe:
International Agriculture and Trade Report, USDA,
ERS, WRS 96-4, January 1997.
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