The European Commission and European Parliament cannot agree on a 2013 EU budget, but also need to develop a framework for the 2014-2020 budgets.  The Common Agricultural Policy (CAP) has usually taken about 40 percent of the EU budget and there are proposals to reduce that amount.  This is especially important for U.S. farmers and ranchers as officials of the U.S. and EU in the High-Level Working Group appointed last November by U.S. President Obama and EU Commission President Barosso explore ways to more closely align the world’s two largest economies.

The EU countries are preparing for a heads-of-state meeting on November 22-23 to determine the budget framework for 2014-2020.  There is general agreement among the countries that spending limits must be part of the next EU budget, but the details are highly controversial. The current budget covered the years of 2007-2013 and some analysts are already speculating that the new framework will be delayed and take effect in 2015.   Spending in 2014 would be based on the 2013 budget.

The United Kingdom, an EU member but not part of the Eurozone, has traditionally been one of the vocal critics of the EU budget and CAP spending and is again calling for reductions.   France, the largest recipient of CAP funding at over 25 percent of the total, is already threatening to veto a CAP plan if it reduces funding to agriculture.  Germany, which is a smaller recipient of CAP funding, has agreed with France to minimize reductions in CAP funding, as have Spain and Italy.  Germany has become the unofficial leader of the EU and needs the support of France to help maintain stability.

Cyprus, the current holder for six months of the rotating EU presidency, proposed to cut $64.5 billion in funding from the EU budget over the seven years as a starting point in bringing spending under control.  If the CAP funding is not reduced, the only alternative would be to slash the budget for the Cohesion Funds, the other main component of the budget which primarily benefits newer and poorer  members of the EU.  This sets up a clash between the two of the original six members and the latest entrants to the EU led by Poland, the largest net recipient of aid.  Cutting the Cohesion Funds would likely widen the gap in economic development between the two groups.

The original proposal from the EU Commission left the CAP budget unchanged at about $525 billion over the seven years.  The Commission did propose a payment limit based on farm size.  The Cyprus proposal would cut direct payments to producers by a total of 1.3 percent over seven years, less than the average 3.7 percent reduction proposed for the total EU budget.  According to an article in Bridges Weekly Trade News Digest, Professor Alan Matthews of Trinity College Dublin in a blog post on the new numbers noted, “However, the idea of including an annual degressive element opens the door, for the first time, to the perspective that these payments are not guaranteed forever.”

While the current CAP is much more market oriented then 20-30 years ago, it still shields agricultural countries like France from outside competition while providing preferential access to over 500 million consumers in the EU.  According to analysis by the Organization for Economic Co-operation and Development (OECD), in 2008-10 EU farmers received 22 percent of their annual receipts from government producer supports – down from 34 percent in 1995-97.  Over that same time, the U.S. percentage declined from 12 percent to 9 percent.

If the economies of the U.S. and EU are to be more closely aligned through a new trade agreement, U.S. producers will likely demand an unwinding of protection now afforded to France and other major agricultural countries, including the countries that joined most recently.  The EU is already facing a mini version of that debate in working with Canada on an EU-Canada trade agreement, with some of those issues likely to be settled by the end of the year.

Any U.S.-EU trade agreement would involve more than just payments to farmers.  Agricultural tariffs and sanitary and phyto-sanitary issues would also have to be addressed.  Artificial growth hormones in beef production and chlorinated washes for poultry processing would undoubtedly be on this agenda.  In response to a request by the U.S. government and the EU Commission for proposals to promote “greater transatlantic regulatory compatibility” to eliminate “unnecessary burdens” on trade, U.S. meat industry associations have presented a list of unscientific  EU trade barriers that restrict exports and have a chance of being solved in an agreement.

Whatever happens on November 22-23, it will not be the end of the CAP debate.   After the European Parliament’s Agriculture and Rural Development Committee votes on January 23-24, the entire parliament is due to debate the reform proposals during a March 11-14 session.  Bridges also noted that 7400 amendments have been offered to change the Commission’s proposal.  Many of those would impose more environmental requirements in return for receiving government payments.

The European Council (representatives of each country) and the EU Commission will then negotiate with Parliament on the reforms.  Informal talks on some issues could begin following the agriculture committee vote.  This is a more complex process than for previous budgets.  The seven-year budget will not likely last seven years as austerity becomes a repeating theme.  EU agriculture will have to learn to live with fewer subsidies, which should be good news for U.S. farmers and ranchers and those from other export-oriented countries.

Karel De Gucht, European Trade Commissioner, speaking on November 9 said the U.S.-EU economic relationship is the most important in the world accounting for half of GDP, one third of trade and $2.5 billion of trade in goods and services each day.  He said a comprehensive agreement would include tariff elimination, regulatory cooperation in food and non-food items and trade facilitation.  The High Level Working Group plans to issue a final report by the end of the year, and De Gucht hopes talks start shortly after that.  Reducing outlays for CAP for 2014-2020 would be a signal the time is right to open discussions on an U.S.-EU trade agreement.

Ross Korves is an Economic Policy Analyst with Truth About Trade and Technology