EMU and CAP: Currency, Crisis, and Agriculture
Benefits and Costs of a Currency Area
Some benefits of a currency area include diminished transaction costs, directly comparable prices across countries (increased competition), decreased uncertainty regarding exchange rates, and limited speculation and competitive devaluations. However, costs can include asymmetric shocks or symmetric shocks with asymmetric effects that increase macroeconomic instability. The EMU does not fulfill all criteria to be an optimum currency area because, when faced with asymmetric shocks, some factors are missing, such as flexibility in the labor market, a system of fiscal transfers, and solidarity.
The Long Road to the Euro
The first attempt at a currency union was the Werner Report in 1970, which failed. Later, the Delors Report (1989) laid out the stages to create the EMU. The Treaty of Maastricht (1992) determined that the common currency should be created by 1999 and established five entry conditions:
- Limited Inflation
- Limited and stable long-term nominal interest
- Stable exchange rates
- Budget deficit (<3% GDP)
- Public debt (<60% GDP)
In 1998, the ECB was created, and ECOFIN determined which countries fulfilled the criteria (11). By 2002, Euro banknotes and coins were in circulation, and currently, 19 countries share the euro.
Monetary Policy in the EMU
The Maastricht Treaty assigns the ESCB the design and implementation of monetary policy in the Eurozone. The main goal is price stability in the medium run (maintaining inflation under 2%). To achieve this, a two-pillar analysis is performed: analysis of economic dynamics and shocks, and analysis of monetary trends. Other measures include improving the system of financial supervision, financial assistance (bailouts), increased economic governance, and reforms to increase competitiveness.
Economic Policies in the EMU
Fiscal policies started with the TEU (1992). The Stability and Growth Pact (SGP) limits national fiscal policies and provides a framework for the coordination of national fiscal policies. The prevention measures were that budget deficits and public debt should not be excessive (<3% and 60% of GDP, respectively). France and Germany failed to comply with this in 2002. The aim of the Lisbon Strategy was to make the EU the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion by 2010 (not achieved). Then, Europe 2020, monitored by the European Semester, aims to create conditions for smart, sustainable, and inclusive growth, focusing on:
- Employment (75% of 20-64 year-olds)
- 3% of GDP to be used in R&D
- Reducing greenhouse gas emissions
- Reducing the rates of early school leaving
- Fighting poverty
The Euro Crisis
From 2000, countries started breaking the rules in the SGP, leading to a loss of credibility and divergences in wages, productivity, etc., resulting in imbalances. The beginning of the crisis (2007-09) coincided with the start of the financial crisis in the USA (subprime lending bubble). Bankruptcies began, and there was massive intervention by Central Banks (recession in 2009). In 2009, many governments adopted Keynesian policies (increasing government spending), leading to budget deficits and a huge increase in public debt. This created a sovereign debt crisis (2010), which, in turn, affected bank accounts.
In 2009-2010, the first joint actions were taken, including proposals to improve financial supervision (European Systemic Risk Board, European Supervisory Agencies), financial assistance, measures to increase government governance, and reforms to increase competitiveness. In 2010, interventions were made to guarantee stability, including two temporary instruments for providing financial assistance to Eurozone states in economic difficulty: the European Financial Stability Facility and the European Financial Stabilization Mechanism.
In 2011, new financial supervisory authorities began operating, and the European Semester started a yearly cycle of economic policy coordination. A bailout loan for Greece was also provided. Fiscal surveillance and enforcement provisions of the SGP were reinforced with a new package of measures named the “Six Pack” (to avoid imbalances). In 2012, the new Treaty on Stability, Coordination, and Governance in the EMU aimed to strengthen fiscal discipline through automatic sanctions, surveillance, and the balanced budget rule, but without economic stimuli. Austerity plans were also implemented, aimed at reducing budget deficits, but led to a recession in 2012 and difficulties in financing public debt.
From 2013-2016, there was a danger of devaluation in the Eurozone, a migrant crisis, and banking crises in Portugal, Italy, and potentially Germany. Proposed long-term solutions included a banking union, deeper economic union, European fiscal union, Eurobonds, or Euro exits.
The Common Agricultural Policy (CAP)
The aims of the CAP are to:
- Encourage productivity in the food chain
- Ensure fair standards of living for the agricultural community
- Stabilize markets
- Ensure the availability of food supplies at reasonable prices to EU consumers
The EAGGF finances CAP operations: the Guarantee section for income support (90%) and the Guidance sector for structural measures/rural development (10%).
Market Support Policies: These are measures of income support for farmers (called the First Pillar). It establishes common agricultural prices and organizes border protection.
Structural Measures and Rural Development (called the Second Pillar) have objectives such as modernization of farms, facilitating generational renewal, reforestation, and environmental protection.
Reforms of the CAP
The causes for reform were that border protection and market support prices led to an increasing gap between supply and demand (surpluses) and a huge financial and economic cost. There was also financial insufficiency in the EU budget and conflicts with other countries at the GATT.
The objectives of the reforms were to reduce surpluses and the budgetary cost, acting on two aims: cutting down production (1980s) and reforming the financing system (1990s).
Measures in the 1980s: These included measures regarding product support policy (quotas) and measures regarding structural policy (strategy for less developed areas).
Measures in the 1990s (MacSharry 1992): These were created to limit rising production and adjust to a more free agricultural market. It meant a shift from product/market support (through prices) to producer support (through income support). The aims were to improve competitiveness in agriculture, protect the environment, stabilize EU budget expenditure and agricultural markets, etc. The measures included a decrease in intervention prices to bring EU prices closer to world prices, compensated by direct payments linked to compulsory set-aside.
Agenda 2000: Objectives included market orientation and increased competitiveness (reduction in EU prices), food safety and quality, and stabilizing agricultural income. Measures included continuing with reductions in price support plus direct aids linked to compliance with environmental requirements and modulation regarding employment or income thresholds. It divided the CAP into two pillars: production support and a new rural development policy.
Measures in 2003
These were aimed at enhancing competitiveness, promoting market-oriented sustainable agriculture, and strengthening rural development. It involved rebuilding the CAP: decoupling income support payments from production (SPS per farm) subject to cross-compliance, modulation, and financial discipline. The EAGGF was replaced by the EAFG and EAFRD. The SPS was a yearly payment independent of production, replacing most existing direct aids. Farmers did not have to produce to receive the SPS, just maintain their land in good condition and respect cross-compliance standards. The aims were to promote sustainable farming and allow farmers to produce according to market demand. All farmers receiving any kind of direct payment would be subject to cross-compliance. Stricter budgetary ceilings on Pillar 1 (price support) were introduced, starting in 2007, transferring the funds to Pillar 2 (modulation). There was a reduction in all direct payments (2005-12) to all but the smallest farmers (<€5000).
The Health Check Reform (2008)
This was created to modernize and simplify the CAP, make the direct aid system more effective and simpler, and make market support instruments relevant to confront new challenges, from climate change to biofuels, etc.
Assessment:
- Positive effects: Single agricultural market, modernization, increase in production, productivity, trade, and farmers’ income.
- Negative effects: Permanent surpluses, distorted world market, costly and unequal income support.
The CAP Post-2013
This reform was needed because of economic, environmental, and territorial challenges (viable food production, sustainable management of natural resources and climate action, and balanced territorial development). To achieve this policy, instruments had to be adapted: the two-pillar structure was kept, creating three blocks: direct payments + market measures (end of quotas) (Pillar 1) and rural development (Pillar 2). Direct Payments (DP) replaced the SPS (removal of historical references), aiming for a more equitable system promoting convergence between Member States, regions, and farmers. It might be compulsory for all Member States (Basic Payment Scheme, Green Payment, Young Farmers Scheme) or voluntary (Coupled Support, Support in Natural Constraint Areas, Redistributive Payment), or a simplified scheme for small farmers (voluntary for Member States).