Ifo Viewpoint No. 24: Back to Nature

Hans-Werner Sinn
Munich, 27 April 2001

After the first BSE cases in Germany, where entire herds of animals were slaughtered, there were loud cries of protest from the affected farmers. Yet when the EU demanded the culling of 400,000 cattle to buttress meat prices, only a few animal rights defenders dissented. They too fell silent as the mass slaughtering to curb foot and mouth disease began, which fortunately for the EU has incidentally also stopped the decline in prices.

It was clear once again that the European Union is primarily concerned with the interests and profits of agriculture. EU consumers have no lobby in Brussels. The horrifying pictures of burning animal carcasses show, in heightened form, how European agricultural policy has failed. Anti-market interventions in the price-formation process have a long tradition in Brussels, leading to immense welfare losses over many years. The European agricultural market is now characterised less by the free play of market forces than by massive state intervention, which results in an artificial increase in market prices for the benefit of the farmers and the detriment of consumers. Flexible import equalisation levies eliminate any price advantage that foreign suppliers may have, minimum prices force consumers to pay considerable mark-ups on production costs, volume quotas linked with slaughter and land-retirement premiums accompany the high-price polices. When all else fails, the EU buys up the excess supply to drive up prices, sells the products at dumping prices on the world market, downgrades them into substandard products, or destroys the whole lot. These are absurd interventions that have no place in a market economy. Such an agricultural policy consumes huge amounts of tax revenues, but that is not all. Much worse are the enormous welfare losses that result. EU agricultural policy robs the poor - who pay a high proportion of their earnings for food - of a good portion of their real income. In other words, high-price policies diverts quite a lot of money from pension and social welfare funds into the pockets of land owners, many of whom are not even farmers.

At the same time these polices lead to an undue intensification of agriculture. The higher the prices, the more profitable mechanisation is, the greater the number of cattle per hectare fed on imported feed, the more fertiliser is used, and all the greater is the environmental damage caused by agriculture. Many fields have become dumping grounds for liquid manure, dangerous nitrates filter down and concentrate in the groundwater, and a Sunday walk is not possible unless you first check the wind direction.

To reverse all this, or at least to prevent it in future, there is only one solution: European agriculture must become a market economy again. The whole intervention apparatus should be abolished, and international trade in agricultural products must be liberalised. As a result, prices for agricultural products would fall rapidly throughout Europe. Consumers would profit from such policies, especially low-income groups who would have more money for other important expenditures. And agriculture itself would return to the less intensive and more environmentally friendly production methods of the past. Also the developing countries would finally have the chance to supply Europe with those goods, at fair conditions, where they have a comparative cost advantage. Back to nature is now the motto, and this is only possible with lower prices for agricultural products, which means: back to the market.

This does not mean that farmers should no longer receive government support. But this should not be the result of high-price policies. It would make much more sense to give farmers targeted payments for rural and cultural conservation. Modern, mechanised agriculture has little in common with original farming culture. Yet the cultural assets of farming deserve to be protected, since they are the very foundation of national culture, and provide an important bridge to the values and knowledge of past epochs. If this is to be preserved in an intact natural surrounding, Brussels' agricultural policies must undergo a complete turnaround.

Hans-Werner Sinn
President of the Ifo Institute

German original published as "Marktpreis statt Massentötung" in Die Zeit (26 April 2001, p.23).