The Common Agricultural Policy (CAP) and EU membership have undergone big changes under the 2003 reforms. This has changed the incentives faced by farmers in the EU and around the world. This study provides estimates of the contributions of the CAP to the farm and food sectors and of some of the costs associated with reallocating resources to these sectors. The study concentrates on the effects of direct payments, border protection and exports ubsidies (components of Pillar I funding) in 2007. Despite attempts to cut the link between support and production, the CAP contributes to maintaining farm and food sectors up to 8 per cent larger in the EU than if the CAP did not exist.
The economic efficiency costs of allocating additional resources to the farm and food sectors amount to some €38 billion, with the EU15 supporting more than €34 billion in allocative efficiency costs. Although the costs of distortions in the new member states (NMS) is smaller, they are expected to increase as direct payments are phased in. Part of the costs suffered by the EU are compensated by an improvement in its terms of trade in the order of €17 billion, at the expense of the EU’s trading partners. The benefits of the CAP are allocated very unevenly across the farm and food sectors, depending on the effective rate of protection that affects each operation. In France, allocative losses are estimated to exceed €3.5 billion.