CAP reports

Impact analyses of Agenda 2000 decisions for CAP reform

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Overview

1. Introduction and summary results

The economic implications of the decisions ¹ on the reform of the Common Agricultural Policy adopted in Berlin at the end of March 1999 have been evaluated in three separate studies. The first study, carried out by the University of Bonn, has been undertaken at sector level based on the SPEL/EU-MFSS model and has been complemented by an overall evaluation of the CAP reform at macro-economic level.

The second impact assessment study has been undertaken for the agricultural sector by the Food and Agricultural Policy Research Institute (FAPRI) in the US and consists of two quantitative analyses. The first one has been conducted by the FAPRI unit at the University of Missouri using an experimental version of an EU model, whereas the second analysis was carried out in the FAPRI unit at the University of Iowa using their set of models of major world agricultural markets.

The Centre for World Food Studies of the University of Amsterdam ² (SOW-VU) undertook the third analysis using the CAPMAT model of the EU agricultural sector. Parts of this analysis was used by the Directorate General for Economic and Financial Affairs of the European Commission to conduct a quantitative assessment of the consequences of the CAP reform for the overall economy on the basis of the Quest II model.

The main results from these analyses ³, expressed in terms of deviations from a status quo scenario ⁴, can be summarised as follows:

Agricultural sector

• By 2005, cereal area -notably wheat area- is forecast to expand as compared to a status quo scenario thanks to the reduction in the rate of compulsory set-aside that would outweigh prospects for lower cereal returns. This would translate into a less than proportional increase in production due to slower yield growth. Improved competitiveness is foreseen to stimulate cereal internal demand, with a stronger pattern for coarse grains driven by increased feed use. Yet, the cereal net exportable surplus is projected to increase significantly. In that context, the outlook for EU cereal markets would remain dependent on the situation on world markets and the EUR/US $ exchange rate. Under favourable medium-term prospects for world markets -as forecast by most analysts- and a relatively weak EUR, wheat exports are foreseen to expand beyond the URA limits for subsidised exports, with world market prices (rather than intervention price) acting as price floor.

• Area allocated to oilseed is generally projected to decline in reference to a status quo scenario, although the magnitude of the fall remains mainly conditional on medium-term expectations on world oilseed markets.

• Reduced market prices and changes in the suckler cow premium system are expected to outweigh the increase in direct payments to the beef sector and result in a slight decline in beef production. The fall in market prices is foreseen to boost consumption levels that would be some 2 to 3 % higher than under a status quo scenario, thus leading to a significant reduction in stock levels. The magnitude of these changes would mainly depend on the Commission's policy in the management of the domestic market and subsidised exports.

• Lower beef prices are forecast to put pressure on the pork and poultry sectors, which should in turn benefit from lower cereal prices. The degree to which the feed cost reduction or the beef substitution effects influence the white meat sector differs across studies, although no significant changes are projected against status quo results. Yet, most studies foresee that lower prices may generate opportunities to increase unsubsidised exports, notably for poultry meat.

• The increase in milk quotas decided in Berlin is forecast to result in greater milk supplies, the magnitude of which differs across studies depending on the assumption made regarding the current over-quota production in some EU countries and the impact of reduced market prices on global milk supply. Most of the increase in the production of milk and dairy products is expected to be absorbed on the domestic market, although increased exports of dairy products are foreseen (notably for cheese). Nevertheless, the growth in domestic use and exports is projected to be outpaced by the production increase, resulting in higher stock levels (mainly in skimmed milk powder).

• Although developments in agricultural income under Agenda 2000 are expected to be slightly less favourable than in the theoretical -but in practice unsustainable- status quo scenario, total agricultural income in nominal terms would remain some 11 to 12 % above the high levels recorded over the 1992-1996 period. Moreover, when expressed per labour unit, agricultural income in 2005 would reach levels well above the 1992-1996 average, ranging between 16 % to 34 % in real terms (depending on the study, assumptions concerning inflation rate as well as future developments in the EU agricultural workforce).

Overall economy

• Consumers in the EU should benefit from the reduction in agricultural prices. Gains in consumer surplus have been estimated to reach around 9 bio EUR in 2005/06 and 10.5 bio EUR in 2006/07 for the EU as whole. The magnitude of these benefits depends mainly on future developments in the market prices of agricultural commodities. Generally speaking, a large proportion of these benefits should reach final consumers, whereas another part can be expected to be captured by the food and retailing sectors that would improve their profitability and competitiveness.

• On the basis of a certain number of assumptions, the fall in prices of agricultural products would translate into a reduction in the consumer price index of 0.25 % in 2005 and 0.33 % in 2010. This in turn would generate significant and permanent positive macro-economic effects that would come from both an increase in real private consumption and the positive supply response resulting from the reduction in wage costs faced by firms. Yet, this latter source of output growth is strongly dependent on the wage behaviour of the labour market. A rapid adjustment in wages to the reduction in consumer price is foreseen to generate a virtuous cycle that could lead to an expansion in investment, output and employment. A slower adjustment in wages could limit largely the macro-economic benefits to an increase in private consumption, without substantial lasting effect on the supply side of the economy.

• According to the Quest II results, real private consumption at EU level would increase by a further 0.2 % to 0.4 % in the long run. The impact on GDP growth would be significant, though more gradual, with an additional gain of 0.12 % in 2005 and a regular increase of up to around 0.25 % in the long-term. These positive outcomes would be lower in the event of a slower adjustment of real wages. Employment would increase by 0.14 % in 2005 as compared to a status quo scenario, then rising further by up to 0.24 % by 2030.

2. Modelling framework

As already mentioned, a set of models has been used for the impact analysis of the CAP reform decisions on the agricultural sector. The SPEL/EU-MFSS model has been developed by the University of Bonn and is currently run by Eurostat. It allows to forecast and simulate policy changes on various market (in particular production and consumption) and income variables of the agricultural sector. It consists of a supply component and a demand component. These components are dynamically linked in an overall system that enables price formation through the recursive interplay of supply and demand.

The FAPRI models used in this exercise consist of a set of non-spatial partial equilibrium models for major agricultural markets. The FAPRI-Iowa analysis was conducted with the standard models used every year to develop baseline projections of world agricultural markets. These models estimate production, consumption, stocks, trade and prices of major trading countries and agricultural commodities. The FAPRI-Missouri work used an experimental version of a more detailed EU module. This new model is of a similar general structure than the standard FAPRI models and provides details for four EU Member States.

The CAP Modelling and Accounting Tool (CAPMAT) is the successor of the ECAM project and has been developed by three Dutch institutes (CPB, LEI-DLO and SOW-VU). It performs dynamic policy simulations on the basis of an analytical model of the applied general equilibrium type that generates developments in supply, demand and cross-commodity substitution.

The economic implications of the agricultural decisions for the overall economy have been analysed using the Quest II model of the Directorate General for Economic and Financial Affairs of the European Commission.

The impact of the Agenda 2000 CAP reform is analysed for the year 2005 with reference to a status quo policy situation. These status quo scenarios vary substantially across studies with regards mainly to medium-term developments on world agricultural markets and key policy (e.g. compulsory set-aside rate) as well as economic variables (e.g. EUR/$ exchange rate). Therefore, for comparative purposes, the simulation results are presented in the form of deviations from the reference scenario. This allows to depict the likely impact of Agenda 2000 on the economy while reducing (though not avoiding) any potential bias generated by the models and the starting point, when both status quo scenario and Agenda 2000 situations are compared in terms of absolute levels. Furthermore, results should not be interpreted as changes relatively to the current (unreformed) situation.

The impact studies on the agricultural sector focus on the arable crops, meat and dairy production sectors, with particular reference to production, consumption, external trade and income changes. The macro-economic consequences are mainly assessed in terms of changes in the development of the EU private consumption, GDP growth and employment.

3. Simulation results

3.1 Consequences on EU agriculture

3.1.1 Crop sector

Despite the overall decline in arable crop returns, total area under cereals and oilseeds is generally foreseen to expand thanks to the reduction in the rate of compulsory set-aside ⁵. However, the fall in the rate of compulsory set-aside does not translate into a similar increase in cropped area due mainly to a projected rise in the level of voluntary set-aside ⁶ generated by lower cereal prices and increased uniform direct payments.

Table 1.1 Outlook for cereals & oilseeds area in 2005 under Agenda 2000

Both the University of Bonn and FAPRI expect cereals to benefit most from this expansion in arable area. Whereas area expansion is foreseen to be rather uniform across cereals in the Bonn University study (2.6 % for wheat and 2.2 % for coarse grains), FAPRI and SOW-VU results display stronger gains for wheat (that would be supported by higher prices in the FAPRI analysis).

The evaluation of the combined impact of the decline in the relative competitiveness of oilseeds vis-à-vis cereals and the reduction in the set-aside requirements on the development in oilseed area differs across studies. Bonn University expects a relative stagnation in total oilseed area, with the drop in rapeseed being broadly compensated by a rise in land allocated to sunflower and soya bean. In contrast, the FAPRI and SOW-VU project a drop in oilseed area by around 3 to 4 %.

It appears that the Agenda 2000 impact on the oilseed sector is very sensitive to the assumptions adopted in the scenarios regarding the medium-term development in world oilseed prices and on the translation of policy changes in the respective models. In the Bonn University analysis, oilseeds prices have been assumed at around 195 EUR/t for rapeseed and 215 EUR/t for sunflower seed over the medium-term, whereas FAPRI uses a price of about 215 EUR/t for both commodities in 2005. The SOW-VU assumes that oilseed prices are about constant in real terms between 2000 and 2005 (before rising by 5 % by 2010).

The University of Bonn expects area allocated to protein crops to increase by 5.1 %.

Table 1.2 Outlook for cereals production in 2005 under Agenda 2000

Total cereal production is forecast to increase in line with the rise in cereal area, although FAPRI expects yield growth to slow down following the fall in market prices.

Despite differing outcomes on total meat production cereal internal demand is forecast to increase thanks to an improved competitiveness of EU cereals vis-à-vis their main substitutes. All studies forecast a stronger pattern for coarse grains than for wheat. This seems to reflect a situation in which increased demand for cereals is mainly driven by feed usage. Growth in total cereal demand is estimated to range between 1.4 % (wheat) and 2.2 % (coarse grains) by the University of Bonn. In spite of an estimated slight decline in total meat production, feed use is estimated to increase by around 3 % for all cereals, whereas non-feed uses (other than seed) would remain stagnant due to the very low demand elasticity.

FAPRI foresees a more modest development in domestic use of cereals. Wheat usage would stagnate due to its relative high price (as compared to other cereals). Maize demand would rise by between 0.4 % and 1.2 %, whereas barley usage would display a stronger pattern with a growth estimated between 1.4 % and 2.4 % driven by increased feed use ⁷. The differentiated pattern of cereal domestic consumption is also pronounced in the SOW-VU study where wheat exhibits an increase of slightly less than 1 %, while coarse grains use would increase by more than 2 %.

Table 1.3 Outlook for cereal domestic consumption in 2005 under Agenda 2000

Since the increase in demand is forecast to be lower than the expansion of production, the cereal net exportable surplus increases significantly, in particular for wheat. The capacity of the EU to export much of these surpluses on world markets is critical to these impact analyses and relies heavily on the assumptions concerning world market prices and trade developments over the medium-term. In that respect, the medium-term prospects for world cereal markets on which the FAPRI and SOW-VU studies are based, are rather divergent ⁸.

The FAPRI-Missouri foresees that strengthening world markets, a relatively weak EUR (1EUR = 1.08$) and lower EU market prices should enable the EU to record a growth of around 5 % in wheat exports over the 2000-2005 period as compared to a status quo scenario. FAPRI-Missouri also expects barley and maize exports to increase by 4 % and 1 % respectively by 2005 ⁹. Despite a stronger EUR (1EUR = 1.25$), the FAPRI-Iowa study displays a relatively more optimistic picture with a stronger growth in net exports. However, the impact of Agenda 2000 on net exports is stronger in relative terms under a strong EUR environment owing to the fact that the level of net exports is significantly lower in the FAPRI-Iowa study than in the FAPRI-Missouri.

In contrast, the SOW-VU analysis assumes that world market prices for wheat will remain relatively low, so that unsubsidised exports from the EU will not be possible before 2010. The gap between internal and world market prices for coarse grains is foreseen to be even higher. Consequently, the exportable surplus is expected to increase sharply for wheat whereas it should decline for coarse grain as higher consumption is projected to outweigh the slight rise in production.

Higher domestic demand combined with increased exports generate a sharp reduction in the level of domestic stocks that would fall by more than 30 % by 2005 for wheat and barley and by 9 % for maize in the FAPRI-Missouri analysis (the FAPRI-Iowa study evaluates the fall in ending stocks of those cereals by 2005 at -35 %, -7 %, -22 % respectively) ¹⁰.

Table 1.4 Outlook for cereals exports in 2005 under Agenda 2000

As a consequence, in the FAPRI analysis wheat prices would only fall by 6 EUR/t below baseline levels (or -4 %), whereas barley and maize prices would drop by around 8-7 EUR/t (or 7-5 %), i.e. by less than the reduction in intervention price. These prices would remain well above the new support levels with world prices constituting the new price floor under Agenda 2000.

In contrast, the cut in cereal intervention price is taken to translate fully into a reduction in market prices in the studies of the University of Bonn and the SOW-VU. This price development is in line with a forecasted increase in net cereal surplus (production minus consumption of around 6 % and 2 % respectively, mainly in wheat) under the assumption of cereal exports bound to the URA limits (i.e. no exports without subsidies).

Table 1.5 Outlook for cereal prices in 2005 under Agenda 2000

The outcome of these impact studies appears to be fairly dependent on future prospects for the world cereal markets, the EUR/$ exchange rate and the underlying status quo scenario. They tend to demonstrate that a strong EUR and less favourable world markets (as observed in 1999) would reduce the favourable impact of the cut in intervention prices on the ability of the EU to export cereals beyond the URA limits. Risks would then grow that rising yields and constrained exports could lead to an accumulation of stocks and depressed domestic prices.

3.1.2 Animal sector

Beef

The various policy changes to be implemented in the beef sector are expected to have countervailing effects. On the one hand, the reduction in the current support prices, the removal of the current intervention system and its replacement by a private storage scheme and a new "safety net" intervention system, the adjustment in the suckler cow ceilings and the eligibility of heifers for suckler cow premium (for a maximum of 20 %) should put downward pressure on supply. On the other hand, the increase in the existing direct payments and the introduction of the slaughter premium, combined with lower feed costs and higher milk quotas should support production. Overall the three studies foresee that the former elements would outweigh the latter, resulting in a small decline in beef production as compared to the status quo scenario.

Table 1.6 Outlook for beef balance in 2005 under Agenda 2000

FAPRI-Missouri forecasts that the rise in dairy cows of 0.4 % by 2005 would be more than compensated by the decline in the suckler cow herd of 2.6 %. This would in turn limit calf supplies and lead to a drop in availability in animals of 0.8 %. Combined with a decline in slaughter weight of 1.3 % relatively to the status quo scenario, total beef production is expected to fall by 2.2 %. Beef consumption would benefit from the fall in domestic prices and rise by 2.8 % relatively to the status quo scenario to reach 7.27 mio t. However, after a short-term increase in absolute value supported by lower prices, beef consumption would resume its long-term decline from 2003 onwards. Reduced production levels and increased domestic consumption would lead to a decrease of domestic prices of only 12 % (i.e. less than the cut in the current institutional prices), with total exports maintained well below the URA limits ¹¹. Beef intervention stocks would thus disappear by 2003. Similar findings are given in the FAPRI-Iowa study, although the magnitude of the impact may differ somewhat (owing mainly to an assumed greater potential for unsubsidised beef exports from the EU).

The SOW-VU study exhibits similar results. Lower revenues per head triggered by changes in prices and premiums are foreseen to generate by 2005 a fall of 2.5 % in non-dairy cattle numbers and lead to a reduction in beef production of 1.4 % as compared to the status quo scenario. The 20 % fall in market prices would stimulate domestic consumption, which would rise above status quo levels by more than 6 % by 2005. Assuming constant stock levels, higher internal demand combined with lower supply levels would strongly diminish exportable surplus which would fall by -82.5 % against status quo levels. If the impact of Agenda 2000 on the EU beef market is found to be broadly similar in the University of Bonn analysis, the latter exhibits changes of lower magnitude. However, a modest decrease in production and a rather moderate increase in consumption would combine to generate a dramatic fall in excess supply (more than 60 %).

Pig meat and poultry

Policy changes in the beef and arable crop sectors are expected to have an impact on the pork and poultry sectors. Lower feed prices are foreseen to favour production of white meat whereas more competitive beef prices should put pressure on white meat consumption and, in turn, on domestic prices and production levels. The degree to which both elements will impact the pork and poultry sectors differs across studies, which provide for diverging results.

On the one hand, the FAPRI-Missouri and the University of Bonn expect white meat consumption to suffer from cheaper beef with declines ranging between -0.3 % and -1.2 %. Lower consumption level would put pressure on market prices that would outweigh the impact of lower feed prices and generate a slight fall in pork and poultry production of roughly the same magnitude (cf. table 1.7).

Table 1.7 Outlook for pork and poultry meat balance in 2005 under Agenda 2000

Conversely, the feed cost reduction effect dominates in the FAPRI-Iowa and SOW-VU analyses with a modest rise projected for pork and poultry production ranging between 0.1 % and 0.6 %. Consumption would also develop accordingly, although the SOW-VU foresees some adjustments between internal and external demand.

Lower market prices could generate increased export opportunities, notably for poultry meat.

Milk

Results for the dairy sector in 2005 only reflect the first year of implementation of the reform in the dairy sector (besides the quota increase from 2000 and 2001). The impact of the increase in milk quota on milk production differs across studies, depending on the assumption used regarding the current over-quota production in some EU countries and the impact of reduced market prices on global milk supply. By 2005, FAPRI predicts an increase in milk production of 1.1 % (reaching 1.7 % in 2007, i.e. less than the quota increase), resulting from improved yields (0.3 %) and an increased dairy cow herd (0.8 %) (0.2 % and 1.5 % in 2007 respectively). The SOW-VU and the University of Bonn provide for a more direct and nearly full translation of the milk quota increase into a milk production increase (+1.3 % and 1.6 % in 2005 respectively).

Table 1.8 Outlook for dairy products balance under Agenda 2000

The University of Bonn expects that lower market prices should stimulate internal consumption. However, part of the additional supply would not be captured by the internal consumption and growing excess supply would have to be disposed off either on the external market or in stores. In contrast, the SOW-VU projects that the increase in internal consumption would keep pace with domestic production so that exportable surplus would only rise moderately in absolute terms.

Increased milk production and reduced support prices in 2005 would lead to a fall in the market prices of dairy products. According to the FAPRI analyses, the largest price decline would be observed for skimmed milk powder and butter, whereas the drop in cheese prices is expected to be more moderate. The FAPRI studies project that the growth in milk production would be mainly captured by internal demand for milk and dairy products thanks to lower prices. This is particularly pronounced for cheese (1.2-1.5 % in 2005 and 2.4-2.6 % in 2007) and more moderate for butter (0.3 % and 0.7 % respectively) and skimmed milk powder (0.4 % and -0.9 % respectively).

Yet, FAPRI expects that improved competitiveness should enable exports of some dairy products to rise (notably for cheese, by around 2 to 3 % in 2005), although to a moderate extent since EU domestic prices would remain above international prices (in the assumption of no significant changes in Commission's behaviour regarding exports of subsidised butter). Since the increase in production is forecast to outweigh consumption and export growth, stocks are expected to rise. By 2005, FAPRI forecasts a stock increase ranging between 1 and 3 % for cheese, butter and whole milk powder whereas stocks of skimmed milk powder would rise stronger (17-19 %) ¹².

3.1.3 Agricultural income

Total agricultural income

Among the studies examined, only the University of Bonn and the SOW-VU provided for some impact analysis of the Berlin decisions on income development. According to their results, total agricultural income, measured as net value added at factor cost (i.e. including the direct payments granted in the framework of the common market organisations) and expressed in nominal terms, would be in 2005 some 3 % below the status quo level (i.e. a loss of 3-4 bio EUR) ¹³. However, agricultural income in nominal terms would still remain some 11 to 12 % above the 1992-1996 average.

Table 1.9 Outlook for agricultural income in 2005 in nominal terms in the EU

When expressed in real terms (i.e. after inflation), development in total agricultural income would be less favourable. In the Bonn University analysis, real agricultural income would fall relatively to the 1992-1996 average by around 10 % in the status quo situation ¹⁴ and by some 12 % in the Agenda 2000 scenario. The SOW-VU study displays more favourable prospects with real agricultural income about 4 % and 1% above the base period in the two respective scenarios ¹⁵.

Total agricultural income per labour unit

When measured per unit of labour and expressed in real terms, agricultural income is expected to show a more positive pattern.

The Bonn University exhibits the strongest pattern where agricultural income per unit would be some 34 % higher than the 1992-96 average under Agenda 2000 (37 % under the status quo scenario). This outcome is based on the assumption of a rather high level of labour outflow (-3.7 % per annum). This high rate of decline in agricultural labour reflects the historical trend observed in the EU over the last 25 years. Under the assumption of a more moderate reduction in agricultural labour as observed over the most recent years (-2.5 % per year), agricultural income per worker would still be some 16 % above the 1992-1996 average. The analysis conducted at the SOW-VU tends to show similar results, with real agricultural income per worker around 27 % above the 1995 level (on the basis of a 2.4 % reduction in the agricultural labour force).

These results tend to demonstrate that Agenda 2000 may be expected to generate a slight decrease in agricultural income per worker when compared to a status quo scenario. This fall would range between -1 % and -3 % by 2005. However, it should be acknowledged that maintaining a policy status quo only constitutes a theoretical but, in practice, unsustainable exercise. When analysed in relation with the situation of the mid-1990s, prospects for agricultural income under Agenda 2000 appear rather favourable in the two studies. Furthermore, the 16 %-27 % income level estimated above the base period under a moderate labour outflow may constitute the lower end of the range as market prices may be expected to stabilise above support levels.

3.2 Consequences on the overall economy

The macro-economic impact of the Agenda 2000 decisions for CAP reform is first addressed by analysing the possible consequences for EU consumers. It then focuses on the impact of the reduction in the consumer price index on the pattern of consumption, GDP growth and employment at EU level up to 2030.

Consumer benefits

The benefits for consumers of the reduction in the support prices of some agricultural products have been estimated to reach around 9 bio EUR in 2005/06 and 10.5 bio EUR by 2006/07 for the EU as whole. The magnitude of these benefits, which are measured as the change in consumer surplus, depends mainly on future developments in the market prices of agricultural commodities and in the price transmission between the producer and the consumer stage. In the case where the drop in market prices would be stronger than the cut in support prices, the gains in consumer surplus could be foreseen to reach 11 bio EUR in 2005/06 and 12.5 bio EUR in 2006/07. However, they would be substantially lower, though still significant, in the assumption of a milder fall in agricultural prices (around 7 and 8 bio EUR respectively).

A large proportion of these benefits should reach final consumers, whereas another part can be expected to be absorbed by the food and retailing sectors that would improve their profitability and competitiveness.

Consumer price index

The fall in the support prices of some agricultural products resulting from the implementation of the CAP reform decisions would generate a reduction in the aggregate agricultural price index which would translate into a drop in the consumer price index of 0.25 % in 2005 and 0.33 % in 2010 according to the SOW-VU.

The reduction in the consumer price index would in turn generate significant and permanent positive macro-economic effects. These impacts would come from two sources: on the one hand, from an increase in real private consumption and, on the other hand, from the positive supply response resulting from the reduction in wage costs faced by firms.

However, this latter source of output growth is dependent on the wage behaviour of the labour market. In that perspective, two versions of the Agenda 2000 scenarios are given in order to reflect alternative wage behaviour. Version (1) is based on the assumption that workers would fully pass on the fall in consumer prices onto wages initially and wages would only respond to an increase in employment and productivity that could emerge from this price shock. The decline in consumer prices would then fully translate into a reduction of wage costs for firms. A more standard wage rule, where workers pass on only about 50 % of the consumer price reduction initially, is examined in version (2).

A lesser growth in wages following the reduction in consumer prices is foreseen to generate a virtuous cycle in which the CAP reform may lead to an expansion in investment, output and employment. Conversely, if the benefits from the reduction in consumer prices were not to be translated in lesser wage demand, the macro-economic benefits from the CAP reform could be largely limited to an increase in private consumption, without substantial lasting effect on the supply side of the economy.

Private consumption

According to the Quest II results, real private consumption at EU level would increase by 0.21 % to 0.40 % in 2005 depending on the price and wage scenarios. It would then permanently stabilise slightly above that level over the long run.

Table 1.10 Impact of CAP reform on private consumption, Quest II simulations

GDP growth

The impact on GDP growth would be significant, though more gradual ¹⁶. In the assumption that the price reductions are fully translated into lower wage costs, Quest II results show that GDP would grow by an additional 0.12 % in 2005. It would then increase regularly to reach around 0.25 % in the long-term. The gradual response in GDP growth would mainly result from the slow adjustment process to increased investment (about 0.3 %) and its impact on potential output.

Table 1.11 Impact of CAP reform on GDP, Quest II simulations

However, in the case of a slower adjustment of real wages (version 2), macro-economic benefits could be largely limited and additional GDP growth substantially smaller. The effect of the CAP reform could be mainly limited to an increase in private consumption without lasting effects on the supply side of the economy. Additional GDP growth would reach between 0.06 % in the short-term and 0.12 % over the long run.

Employment

Total employment would significantly benefit from the reduction in consumer prices. As for GDP, employment would only gradually increase due to the adjustment lags in the firms' labour demand. Quest II results indicate that employment would increase by 0.14 % in 2005, then rising up to 0.24 % by 2030. Nevertheless, as for GDP, a slower rapid wage adjustment would significantly alter this positive outlook with additional potential growth in employment limited to less 0.1 %.

Table 1.12 Impact of CAP reform on employment, Quest II simulations

4. Overall evaluation of the CAP reform decisions

Despite some watering down of the Commission's initial proposals by the European Council at the Berlin summit in March 1999, the Agenda 2000 decisions are globally viewed as a further positive contribution to the ongoing process of reform of the CAP, which started in 1992. They are considered as a renewed attempt to proceed further in the direction towards:

• An improved market orientation of the CAP that should enhance the competitiveness of European agriculture and improve the long-term prospects for further participation to the expansion of world markets, in view of the growing concerns regarding the outlook for EU domestic agricultural markets;

• A greater integration of European agriculture in the world economy that should contribute to the fulfilment of its international commitments (e.g. WTO) and facilitate the enlargement of the EU to Central and Eastern European Countries candidate for accession;

• Greater consideration of environmental concerns and the enhancement of an integrated rural development.

Yet, some deficiencies have been identified. They can be summarised as follows:

• In view of the recent developments on world markets, the magnitude of the reduction in price support may not be sufficient for guaranteeing greater access to world markets and facilitating the enlargement to CEECs;

• A move towards further decoupling of internal support and its extension to other sectors are seen as a necessary step to improve the competitiveness of European agriculture and to prepare the EU for the next multilateral trade negotiations. Moreover, the magnitude, permanence and economic/social justifications for direct payments are still considered as a matter of debate;

• Some sectors and instruments of supply control are still excluded from the current reform process (e.g. sugar and milk quotas);

• The generalisation of the remuneration of well-specified and monitored ecological services is considered as a more efficient instrument for the protection of the environment than the mere application of cross-compliance conditions.

Comparison between the Commission proposal and the Council decision
Main differences

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