Time to end West’s farm subsidy as a condition for funding European bailouts

The IMF wants to increase its lending capacity by $1 trillion, to rescue distressed countries in the eurozone plus those hit by aftershocks from the eurozone.

But US is struggling with fiscal problems of its own, Japan now has the highest debt/GDP ratio in the world (over 200%), and Europe is moving into an austerity phase. Clearly, a significant chunk of the new trillion will have to come from the Brics, above all, China.

But why should China, India or the other Brics shell out hard currency to rescue Europeans from a folly of their own making? If Germany and Holland are not willing to rescue their southern neighbours, why should the Brics do so?

At the very least, they must demand something in return, and not just some additional voting power in the IMF. They could, for instance, demand reforms in the huge agricultural subsidies enjoyed by farmers in the US and Europe. This will attain some of the Doha Round aims by other means, and help cut fiscal deficits in Europe and the US, which are needed anyway.

The US enacts a farm bill every five years, and the next one is due in 2013. The European Common Agricultural Policy is reformulated every seven years, and the current version is also due to end in 2013. That means the time is ripe to ask both these regions to slash their agricultural subsidies. The chances of this happening will improve greatly if presented as part of a global compact to increase IMF funding and improve global fiscal balances.

Because of booming farm prices, US agricultural income exceeded $100 billion for the first time last year. Yet,farmers got an additional $25 billion through federal subsidies. Some liberals may hail this as a ‘stimulus’ but it is better called a gross, unfair distortion.

One feature of the US farm system is direct payments of$5 billion to a select slice offarmers, many of whom are giant agribusinesses. The US department of agriculture says that 20% of all direct payments go to just 1% of farm businesses.

Last year, President Barack Obama proposed ending direct payments, arguing that half the benefits went to recipients earning more than $100,000 per year. His proposal did not go through, but remains on the table as a possible spending cut.

Farmers have counter-attacked by demanding a quid pro quo in the form of higher crop insurance subsidies, which have already risen from $1 billion in 2000 to $7 billion in 2011. Beyond a point, crop insurance subsidies become a crop support system: the farmer gets a semi-guaranteed income. US farmers also benefit from cheap crop loans with a substantial inbuilt grant element.

Farm support prices in the US started in 1936 as part of President Franklin D Roosevelt’s antidotes for the Great Depression. They remain intact 70 years after the Depression ended. Farm lobbies are powerful in all countries but especially in the US, where all 50 states contribute two senators each to the senate. This means small farming states such as North and South Dakota have as much electoral clout as California or Texas.

The European Common Market, created in the 1950s, brought in a Common Agricultural Policy aiming at self-sufficiency in food as a security measure. Generous price supports kept European prices well above global rates and encouraged overproduction. This led to chronic overproduction, with mountains of beef and butter and lakes of milk. Ironically, much of the surplus food was sold at subsidised rates to the Soviet Union and its Warsaw Pact allies, improving the security of the EU’s Cold War foes rather than its own security. In Europe, as in the US, reforms in earlier years replaced crop subsidies with direct payments to farmers, based on their acreage and not production. But while this may have checked overproduction, it means that biggest European grants go to the biggest landholders.

Journalist Pallavi Aiyar wrote recently that the Queen of England, believe it or not, is the biggest beneficiary of EU subsidies, since she is the largest landowner! Many so-called ‘farmers’ do no farming at all, and simply collect cash as owners of uncultivated land. European farmers have a strong tradition of taking to the streets to protect their subsidies and cow down politicians. In 2009, when the EU attempted to abolish milk quotas, angry dairy producers doused hapless EU officials with milk from buckets, and paralysed traffic in Brussels by blocking roads with their tractors. “Small wonder that EU’s leaders appear to find it less daunting to ask China for money than irate European farmers.”

Yes, but why should China or India or any of the Brics oblige? The leaders of Europe are currently finalising a new fiscal compact that will oblige all member countries to ‘balance their budgets’, which actually means limiting their deficits to 0.5% of GDP adjusted for the business cycle. Some have criticised this as excessive austerity. But if indeed there is to be grave austerity, surely farmers must share in it.

Alas, such cold logic has never driven policy in European countries where farmers constitute powerful vote banks. European finance ministers may actually welcome pressure from the Brics on this score. If the Brics and others offer additional rescue funds provided Europe gets its agricultural house in order, that will give European finance ministers additional ammunition to fight their own farm lobbies.

What do you think?