The European Union

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The most important institutional event in the European Union (EU) over the last year with wider implications for the European Community (EC) and its agricultural sector was the progress made towards further enlargement of its membership. Indeed, in early 1994 the EU reached agreement on conditions of accession with four applicant countries: Austria, Finland, Norway and Sweden. Subject to approval by referendums, the four countries will become new members of the EU on 1 January 1995. Austria, the first country to hold such a referendum (12 June 1994) has already pronounced itself in favour of accession.

The demographic impact of the EUs enlargement will be relatively modest. The four new member countries will add only 26 million people to the current EU population of close to 350 million. The impact on the EC's Common Agricultural Policy (CAP) and market balances is also expected to be relatively moderate. The contribution of agriculture (including forestry and fisheries) to the GDP in the four countries ranges from 2.1 percent in Sweden to 3.8 percent in Finland (1991). The addition of the four new countries would increase the ECs total area of arable and permanent cropland by about 9 percent. Its agricultural labour force of 8.6 million would increase by some 0.7 million.

All four new member countries are major agricultural net importers. However, in aggregate they are net exporters of cereals, dairy products and meat. Their average yearly cereal production over the period 1989-93 amounted to approximately 15 million tonnes. Their net exports of cereals in the 1989-1992 period have ranged from a minimum of only 1 million tonnes to 3.2 million tonnes. For meat, total production in the four new member countries represents about 6 percent of production in the EC-12. Their net exports of meat in recent years have represented significantly less than I percent of EC-1 2 total production. Milk production in the four new member countries is fairly significant, representing 9 to 10 percent of EC-1 2 production. The value of their net exports of dairy products has dropped from 1990 to 1992, failing from more than 10 percent of EC-12 exports to only about 4 percent

The main problem of the accession, as far as the agricultural sector is concerned, stem from the higher levels of support and the often particular regional-circumstances (difficult climatic and mountainous conditions) characterizing agriculture in the new member countries. According to OECD estimates, in the new member countries levels of agricultural support in relation to the value of agricultural production expressed in percentage PSEs are substantially higher than in the EC, with the exception of Sweden, where agricultural support has dropped significantly since 1991 (in large part owing to a significant depreciation of the Swedish currency reducing the gap between domestic and international prices). When measured in terms of total transfers to agriculture per full-time farmer equivalent, agricultural support levels, according to the OECD, exceed those of the EC in all four applicant countries.

Table 5: Aggregate production of main agricultural commodities in the four new member countries as a percentage of production in EC-12

Commodity

1989

1990

1991

1992

1993

 

(%)

Cereals 8.8 10.2 8.2 6.9 8.5
Meat 6.2 6.1 6.0 6.1 6.2
Milk 9.6 9.6 9.4 9.5 9.6
Sugar 5.7 5.7 5.1 5.2 5.7

Source: FAO.

Table 6: Net exports of major agricultural commodities from the four new EC member countries

Commodity

1989

1990

1991

1992

CEREALS
Million tonnes 1.04 2.29 3.16 2.34
Million $ 121 202 244 210
MEAT
'000 tonnes 69 75 45 39
Million $ 102 118 31 24
DAIRY PRODUCTS
Million $ 286 346 222 149

Source: FAO.

All four countries provide support to their agricultural sector, to varying degrees, both through market price support and direct payments to producers. Market price support is high in all four countries, as their average domestic producer prices are well above world market levels. With the exception of Sweden, all the new member countries also have rates of market price support that are significantly above those of the EC, which are also expected to decline in the medium term as a result of the implementation of the 1992 CAP reform.

The obverse of market price support to agricultural producers is the implicit taxation of consumers by keeping domestic consumer prices above world market levels, although consumer subsidies may in some cases reduce, if not altogether eliminate, the price wedge. According to OECD estimates, the price wedge between domestic and world market prices on the consumption side is substantial in the EC-1 2, but even more so in the applicant countries (with the exception of Sweden, which approaches EC-1 2 levels). Membership in the EU should thus be followed by lower prices for consumers in the new member countries.

As regards the modalities of the accession, the fourth enlargement of the EU occurs within a significantly different framework from the three previous ones. The creation of a single market no longer admits border controls on the movement of goods and services between the member countries, As a consequence, unlike the case of previous enlargements, the new member countries will be adopting the basic mechanisms of the CAP - including its institutional prices - from the day of accession. In order to facilitate the adjustment of agricultural producers in Austria, Finland and Norway to the lower support levels prevailing in the EC and to avoid undue strain on producer incomes, degressive national aids paid from national budgets will be authorized for a transitional period of up to five years. in addition, adjustment assistance is also authorized for facilitating adjustments in the food Industry.

On accession, the new member countries will be able to benefit from a wide range of EC programmes, i.e. for disadvantaged areas, structural adjustment and regional development. They will become eligible for structural support for mountainous and less-favoured areas within the framework of existing EC programmes as well as for support in favour of agro-environmental measures. They will also be eligible for the direct payments introduced within the context of the 1992 CAP reform to compensate farmers for the reduction in support prices. In addition, the accession agreement allows the payment of long-term national aid in certain areas - in principle, north of the 62nd parallel - in the Nordic countries, in order to ensure continued agricultural activity without leading to an increase or intensification of production. Specific conditions for such assistance are that the eligible areas have a low population density (less than ten inhabitants per kmē) an agricultural area representing less than 10 percent of total area and arable cropland representing less than 20 percent of agricultural land. The national aid should not be distortive and should not be linked to current agricultural production, but rather to physical factors of production (e.g. hectares of land) or historical levels of production. Likewise, Austria will be allowed a ten-year transition period to continue national aid to small-sized farms, in case EC rules do not offer equivalent compensation for natural handicaps.

For the period 1995-1998, the four new member countries will be granted compensation from the EC budget for a total of about ECU 3 billion to take account of problems deriving from adjustment to the CAP. A part of this compensation, to be provided in 1995, is to take account of the impossibility or applying certain CAP aids in the new member countries already in 1995, as well as the necessary lags involved in implementing structural policies introduced with the 1992 CAP reform. The other part of the compensation will be provided to the new member countries in order to take account of the costs of assisting the adjustment to lower EC agricultural support levels.


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