�Full speed ahead: a fresh approach to European agricultural policy�

Ladies and gentlemen,

I would like to thank you very warmly for your kind invitation to say a few words ahead of today�s proceedings at the ABARE Outlook Conference. And where better for me to speak on agricultural and rural issues than at the Bush Capital Club?

In the next few minutes I intend to set out some facts and arguments which complement the presentation that I will give later today - and indeed are almost essential for making sense of it.

My comments to ABARE will have the title �EU perspectives on WTO outcomes�. Of course, a perspective is created when you stand in a particular place. Move to another place, and you change the perspective.

This point is obvious. Why am I emphasising it? Because negotiations in the WTO Doha Round often seem to be split by violently different perspectives, especially on agriculture. In such a situation, we have to make a special effort to understand the perspectives of the other people around the table (or else resign ourselves to failure). We have to ask ourselves carefully what factors are leading them to conclusions different from ours.

When I come to Australia I am always deeply struck by the differences between your country and the European Union.

Agriculture is a completely different ball game over here, with very different farm structures and also rural economies. The average farm size in the EU is 16 hectares. I understand in Australia it is over 5,000 hectares for broad acre and dairy farms. Also 87 per cent of your citizens live in urban areas, whereas more than half of the inhabitants of the EU live in the countryside. Finally, Australia has to create policies that will satisfy the people of 6 states and 2 territories; the EU has to get the agreement of 25 �Member States�, each with numerous regions with their own agendas.

With these differences in mind, I certainly hope to gain some fresh insights during my current visit about how things are run in Australia. But of course, my aim for the next few minutes is to explain how EU policy got to where it is, and where it�s headed.

If you want to understand our agricultural policy, you have to understand the historical relationship in Europe between people, food production and the countryside.

Above all, this is an old relationship. For many centuries, most Europeans were involved in some form of agriculture, mainly on a small scale. And although this relationship between the people and the land is not quite the same in the 21st century as in the 15th, you can still see its roots very clearly. Much of the European landscape is formed by picturesque small farms, and more than half of our population lives in rural areas.

A very important consequence flows from this: our agricultural policy has been about much more than agriculture. It has been about social stability and the health of our environment.

This is the key to understanding the EU�s Common Agricultural Policy, or �CAP�.

It�s true that the CAP as conceived in the 1950s and 1960s laid a heavy emphasis on boosting production. In 1957, France, West Germany, Italy, Belgium, the Netherlands and Luxembourg signed the Treaty of Rome and thus created the European Economic Community (EEC) � the forerunner of the EU. The Treaty stated a number of goals for agriculture, among which were:

• to increase agricultural productivity;
• to ensure a secure food supply at reasonable prices; and
• to give the agricultural community a fair income.

Over the next few years, the EEC developed the tools to achieve these aims: a free internal market, and high domestic prices maintained by import tariffs, export subsidies, and intervention buying when markets were weak.

Let�s be honest: this was protectionism. But this protectionism was a logical response to the very particular situation facing western Europe at that time. Of course many other countries had protectionist policies at that time, Australia included.

Essentially, much of Europe had too often lived through the deep trauma of serious food shortages. Many people had gone hungry again and again during the First and Second World Wars.

And at the dawn of the post-war period, national farming sectors were too weakened to meet the food needs of their own people.

Other problems were connected to this. There was a real danger that, if farmers had no financial security and left the land to look for work in the cities, mass unemployment, degeneration of the rural economy and serious environmental problems would result.

In this situation, it made sense to create a protected common agricultural market with powerful incentives to produce. This promised food security and social stability at a time of massive upheaval. It was a genuine attempt by democratically elected governments to prevent serious economic and social breakdown.

And the attempt worked. But of course, the right answer for one period may not be the right answer for another. The financial incentives of the CAP made production increase more quickly than consumption, and by the 1970s and 1980s heavy surpluses had appeared. You could say that the CAP was just too successful. Creating, storing and disposing of these surpluses was expensive. Being in Australia, I should observe that these surpluses also resulted in increasing international tensions at that time.

We first attempted to recover control of the situation in the 1980s. We introduced strict quotas for milk production and also limited intervention buying.

Problems remained, so in 1992 we took further action. We decided that guaranteeing prices did not necessarily guarantee farmers� incomes. We therefore cut guaranteed prices but established compensatory direct payments, and we obliged farmers to �set aside� portions of their arable land.

This all went in the right direction, and was followed by extra disciplines signed up to in the WTO Uruguay Round, such as tariff reductions and caps on export refunds.

As you can see, then, our farm policy has been on the move for a long time. Nevertheless, for several reasons, we have had to ask ourselves again over the last few years whether it has arrived where it needs to be.

The challenge of producing enough food is no longer an issue. The challenge of producing the right quality of food, by contrast, is very real. Richer consumers are demanding that we give them the very best for their money. That means food with excellent taste, often with a local regional identification.

And it quite obviously means safe food. In the EU we have suffered some horrific health scares, such as Mad Cow Disease and Foot and Mouth Disease, and consumers demand assurances that their food is safe to eat.

Then there are environmental issues. These have moved right up the agenda. Agricultural policy has always addressed them to some extent, but nowadays the public wants us to make a more focused effort to provide clean air and water and an attractive, vibrant countryside with diverse habitats.

On the other hand, we have to keep a firm grip on public spending on agriculture � while directing it so as to allow the smooth integration of new Member States into the EU economy.

Finally, we have to live with the ongoing discipline of globalisation. Many countries, like Australia, have a comparative advantage in some agricultural products and want to use it to the full. In this environment, the only future direction for trade-distorting subsidy and import tariffs is downwards.

Faced with these challenges, the European Union has shifted up a gear. Since 2003 we have been creating a new CAP that can meet both our domestic aspirations and our international obligations in the 21st century.

The cornerstone of our reforms is a new type of support payment to farmers, which is no longer linked to current production. We call it the �Single Farm Payment�.

In order to receive this payment, farmers do not have to farm a given product. Instead, they must respect a number of demanding requirements related to environmentally friendly land management, and public and animal health.

In other words the subsidy is �decoupled� from production and is, if at all, minimally trade-distorting.

The Single Farm Payment kills two birds with one stone. It frees farmers to produce what the market wants instead of searching for the best subsidy combination. And it gives them a much stronger incentive to give us the public goods and services we want � an attractive countryside where the environment and animals are well cared for.

We have not yet completely abolished the sorts of tools used in the old-style CAP. Some EU member states have used their right to keep a modest linkage between subsidy and production in some sectors, where there is risk of land abandonment. However, this only represents about 10% of the direct payments to farmers.

Intervention systems still exist in a few Common Market Organisations, and we still use export refunds for the time being, though as you know, we have made a conditional offer to abolish these in the Doha Round. Also, the production of milk and sugar is still restricted by quotas.

But don�t let these points cloud my message to you today. There is absolutely no doubt about our overall direction. I don�t think anyone could accuse us of laziness in our reform programme. In 2003 we laid down the basic principles and established how they should be applied to most products. In 2004 we extended the scope of the reforms to cotton, olive oil and tobacco. Last year, we agreed on similar treatment for sugar � a very controversial sector, domestically and internationally (not least in Australia!). And this year, we are hard at work on proposals for the wine and fruit and vegetables sectors.

But this has been just one prong of a two-pronged attack. While overhauling our system of support for farmers, we�ve also been sharpening our focus on assistance to the wider rural economy.

Agriculture will always be one of the central supports of the countryside and of rural society; but it can�t carry that weight alone. If we want our rural areas to prosper, we have to set the right conditions for a range of businesses to do well. And we have to protect and build on the countryside�s special attractions that draw people to live there.

These points are reflected in three broad priorities which the EU recently has agreed for rural policy in the period 2007 to 2013. These are:

• the competitiveness of farming and forestry;
• managing the land; and
• diversification in the rural economy, and the quality of life in rural areas.

We must have an effective policy for all of these priorities if our rural areas are to fulfil their potential. The people of the EU want to see such a policy in place. The market has a role to play here, but it cannot achieve everything necessary.

*****

Ladies and gentlemen, in response to my explanations of today, perhaps some of you would like to ask, �So what?�. May I make three points founded on the realities that I�ve described.

First, some critics of the CAP base many of their colourful comments on an understanding which is completely out of date. Like Don Quixote, they charge at windmills. The CAP is no longer the engine of over-production that works so powerfully in their mind�s eye. It has moved on; so should they.

To illustrate this: we no longer have the beef and butter mountains of the past, and we make much less use of export subsidies.

Secondly, we should listen with great caution to people who claim loudly that the CAP �needs reform�. It is being reformed, with the full impact of the recent decisions still to work through the system. The time to talk again about possible changes will be the time when the changes currently in progress have bedded down and had a clear effect, one way or the other.

Thirdly, the EU�s stance on agriculture in the Doha Round appears in a different light if one takes recent reforms into account. If there are lines which we are not prepared to cross, that is not because we are seeking to protect a right to over-produce. We have made an enormous effort to make the CAP rational and fair for the 21st century, and we want any deal in the Doha Round to respect that, not demand yet more of us.

Ladies and gentlemen, it really has been �full speed ahead� for the CAP over the last few years. Ask any experienced farmer in the EU: he or she will probably tell you that this is an era of more rapid policy change than any in memory.

However, there are limits. There is a dividing line between healthy speed and damaging haste. It is my job to make sure that we do not cross this line; but I think my job will be much easier when more people understand just how quickly we are already moving.

Thank you for your attention.