EU’s Common Agricultural Policy and the 2008 Financial Crisis
Common Agricultural Policy (CAP)
CAP is probably one of the most discussed policies because of its implications for developing countries, and because it takes half of the European budget. Firstly, it’s about an integrated market for this kind of goods without barriers. Secondly, there is price support for the majority of agricultural products – we are subsidizing the production.
The Objectives of CAP
The objectives, set out in Article 39 of the Treaty on the Functioning of the European Union, are as follows:
- To increase productivity, by promoting technical progress and ensuring the optimum use of the factors of production, in particular labor;
- To ensure a fair standard of living for the agricultural community;
- To stabilize markets;
- To secure availability of supplies;
- To provide consumers with food at reasonable prices.
Consequences of CAP
Most observers (Lindert and Kindleberger) agree that it brings net losses to most member nations and to the EU as a whole. The governments have to buy the surplus to keep prices high, which implies the use of tax income on this, and it increases prices for consumers.
EU Crisis: The 2008 Financial Crisis and its Aftermath
Needless to say, Europe suffered this latest crisis as other regions in the world. However, its prior situation led to a stronger impact and slower recovery. While it all started in the US with the subprime crisis, it quickly spread across Europe, evidencing some of the underlying malfunctions that were overlooked at that time. The bad investments done by American investment banks were sold to banks in Europe that were unable to cope with it. This led to a credit dry out, since banks would take extreme precautions and were facing severe losses.
For that reason, the governments of many countries had to rescue the banks. But in some cases, this meant that the government would go bankrupt (like in Ireland) so the European Union had to bail out the country. Socializing losses when banks are too big to fail!
From Banking Crisis to Sovereign Debt Crisis
This banking crisis led to a sovereign debt crisis since markets were unsure about the capacity of governments to save their banks. Investors would look at the public finances of the countries and “punish” them if the debt was too high. They were assuming a higher risk of non-payment. That made government bonds’ interest rates skyrocket to unsustainable levels.
That made markets panic! The fact that the Greek debt exceeded $400 billion (over 120% of GDP) and France owned 10% of that debt, struck terror into investors at the word “default”.
What Fueled the Crisis?
Too much focus on deficit instead of debt. Yet a number of countries that had kept to EU rules by running low annual deficits or even surpluses nevertheless found themselves in financial difficulties during the global financial crisis because of high levels of debt.
But Krugman says that, for example, Spain did not have a debt problem. So, is austerity a real solution when the problem is not financial but based on competitiveness and economic strength? The same IMF studies highlight the disastrous effects of spending cuts in depressed economies.
Lack of surveillance of competitiveness and macroeconomic imbalances: Surveillance of EU economies failed to pay enough attention to unsustainable developments in competitiveness and credit growth leading to accumulated private sector debt, weakened financial institutions, and inflated housing markets.
Weak enforcement: For Euro area countries that did not play by the rules, enforcement was not strong enough; a firmer, more credible mechanism of sanctions was needed.
Slow decision-making capacity: Too often, institutional weaknesses meant that tough decisions on worrying macroeconomic developments were postponed. This also meant that insufficient account was taken of the economic situation from the perspective of the Euro area as a whole.
Emergency financing: When the crisis struck there was no mechanism to provide financial support to Euro area countries that suddenly found themselves in financial difficulties. Financial support was needed not only to address country-specific problems but also to provide a ‘firewall’ to prevent problems spreading to other countries that were at risk.
Potential Solutions
- Austerity: There is a discussion, but it does not seem to work.
- Internal devaluation
- Increase taxes/Fiscal devaluation
- Solving the current account imbalances: Krugman and others say that this is not a debt crisis but a balance of payment crisis.