EC AGRICULTURAL POLICY: IMPACT OF GERMAN UNIFICATION, EAST EUROPEAN REFORMS

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 06345911
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 12
• Document Creation Date: December 28, 2022
• Document Release Date: August 28, 2018
• Case Number: F-2017-01874
• Publication Date: April 30, 1990

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Central Intelligence Agency
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Washinon.D.C2OSOS
DATE
DOG NO
OIR
P&PD
DIRECTORATE OF INTELLIGENCE
30 April 1990
EC Agricultural Policy: Impact of German Unification,
East European Reforms
Summary
German unification and East European economic
reforms are unlikely to alter the European Community's
(EC) protectionist Common Agricultural Policy (CAP). At
least in the GDR, increased demand for food is expected
to outstrip any rise in agricultural output in 1990.
Thus, the EC is unlikely to reassess its position on
agricultural trade in response to.East European
developments in the GATT Uruguay Round. The Community
will remain wedded to a gradualist approach to
liberalization and will oppose US efforts to eliminate
subsidies.
By the late 1990s, however, revitalization of East
European agriculture may force fundamental reform of the
CAP. Some leading European agricultural experts
anticipate a 20 percent rise in East German farm output.
If such an increase materializes, CAP spending will have
to rise to deal with mounting surpluses in such
commodities as grain. Eastern Europe's expected
transformation from a net importer of agricultural goods
to a net exporter by the end of the decade is likely to
This typescript was prepared by the Regional
Economics Issues Branch, and
Group, Office of European Analysis. Comments and queries are
welcome and may directed to the Chief, Issues and Applications
Division, EURA,
the German Working
EUR M 90-20095
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add to the CAP's budget woes by pushing down global food
prices. Such a development would put further pressure on
the EC to scale-back agricultural subsidies dramatically.
Nonetheless, member state demands for some continued
protection of agriculture might-lead the Community to
contemplate policies troublesome to the United States.
We believe the influential Germans may push for market-
sharing arrangements that could limit access of US
agricultural products to the Community. Soybeans and
non-grain feedstuffs are obvious targets, although we
believe the EC--fearing US retaliation--would not support
measures directly limiting US exports. Rather, it may
indirectly reduce US exports by granting East European
products larger access to the EC market.
* * * * *
DISCUSSION
We expect Eastern Europe's transition to market economies to
pose two challenges to the EC's Common Agricultural Policy (CAP).
The CAP uses price supports, export subsidies, and variable levies
to provide preferential treatment for EC farmers' output. This
protection is costly; it claimed 60 percent--or $30 billion--of the
EC budget last year. As market reforms boost Eastern Europe's
capacity to export food, the CAP is likely to become even more
expensive. The immediate "challenge" for the EC will be East
Germany's absorption into the Community and hence the CAP. In
addition, a surge in agricultural output from other East European
countries--viewed as likely by many experts--will eventually
increase pressure on the EC to improve market access for Eastern
foodstuffs and may lower world agricultural prices enough to push
up CAP subsidies to prohibitive levels.
German Unification: Limited Near-Term Impact on Agriculture
Over the next year or two, we expect German unification to
provide more opportunities than problems for Western farmers. East
Germany's demand for more varied and better quality food products
almost certainly will surge with economic recovery. The GDR's
desire to strengthen its domestic food processing sector is viewed
by many observers as indicative of this pent-up demand. Eastern
Germany has little capacity to respond quickly to a sizeable
increase in demand; last year's wheat harvest was substandard and
this year's crop has already been planted. Moreover, the US
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Embassy reports the GDR cannot currently produce adequate
quantities of high value products like fresh fruits and vegetables.
Greater demand in conjunction with limited scope for boosting
supply in the short-term probably will create greater sales
possibilities for European and US food producers and widen the
GDR's $1.2 billion deficit in agricultural trade, already one of
the highest in Eastern Europe.
The likelihood that East Germany will remain a net
agricultural importer in the near-term should ease the GDR's
absorption int9 the CAP, especially in the important dairy and
grain sectors.1 These two sectors, along with meat and oilseeds,
account for the bulk of CAP spending at present (see Figure). To
keep spending in check, the EC instituted dairy quotas and grain
production stabilizers in 1984 and 1988, respectively. The
Community must decide how to adjust the existing production limits
to take account of the GDR's entry.
We expect the EC to be generous when making these decisions,
in part to avoid antagonizing Bonn at a time when most Europeans
want to "anchor" Germany more firmly in the Community.
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With Europe's famous butter and cheese mountains now
virtually eliminated, the EC probably will decide
that it has scope to raise the milk quota to
accommodate the full level of East German milk
production--an estimated 8 percent of present EC
production.
Similarly, the EC probably will have little trouble
expanding the grain production limit because the GDR
at present is a large net�grain importer.
Nonetheless, the Community is unlikely to agree to
any German demands to suspend the rules mandating
automatic price cuts if the new production limits are
breached.
Counterbalancing these increased costs will be the likely expanded
sales to the GDR of EC surplus products, such as fruit, vegetables
and wine.
German unification is unlikely to have a significant impact on
the EC position on agriculture in the GATT Uruguay Round talks.
The EC already has submitted its proposal for the talks, which are
scheduled to end in December. The Community feels it has already
made a major concession by accepting partial tariffication--an idea
favored by Washington whereby non-tariff barriers such as import
quotas are converted into tariffs and then reduced. While the EC
may be reluctant to make major concessions because of the
1 East Germany's absorption into the CAP is likely to come in
phases. East German farmers will receive increasing benefits and
responsibilities for adhering to EC rules at each stage, but no
schedule has yet been set by the Community.
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1989 EC CAP Budget, by Product
Fruits/
Vegetables
4.3%
Wine
5.1%
Sugar
8.0%
Cerals/
Rice
13.0%
Other
15.3%
Meat
17.6%
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uncertainty of incorporating the GDR into the CAP, we believe the
Community still places a high value on successfully completing the
GATT talks and will give the high-level political attention
necessary to make last-minute concessions when negotiations enter
the homestretch in December.
The Medium Term Impact: Competitive Challenge Likely
By the mid-1990s, East German agriculture could pose a major
competitive challenge to West German farmers. West German
agricultural specialists note that parts of the GDR were once
considered the "granary of Germany" and that some of its land is
still the most productive in Germany. Soil around Leipzig, for
example, scores close to 100 on West Germany's 100 point scale.
The GDR also enjoys better climatic conditions. Even more
important, the economies of scale made possible by East Germany's
large farm cooperatives confer significant advantages (see Table
1). Many of the collectives' component farms are likely to be
reprivatized as part of the reform effort in the GDR, but we expect
East German farms to remain much larger than those in West Germany.
Economic reforms and modernization accompanying unification
will allow East German farmers to exploit these advantages.
Market-determined prices will strengthen incentives for the
production of goods in which East Germany is most efficient. East
German farmers will be able to apply Western know-how to improve
yields on their superior land; at present, crop yields are roughly
20 percent below West German levels. Moreover, investments in
transportation, storage, and distribution systems will remove
bottlenecks that currently limit production and raise costs in the
GDR farm sector. Analysis by Agra:-Europe, a leading European
journal on agricultural issues, projects increases in GDR
production of 20-30 percent within a few years as a result of such
reforms, with the greatest gains in grain, meat and milk output.
Embassy reporting, however, indicates the East German Foreign Trade
Director specializing in EC relations, Hans-Heinrich Beyer,
believes Western analysts are overstating the GDR's potential to
expand agricultural output.
The Kohl government is committed to aiding East Germany's
agriculture in order to avoid economic dislocation and emigration,
even thRugh enhanced competition for West German agriculture may
result. West German Agricultural Minister Kiechle is focusing on
the modernization of the GDR food industry, rationalization of
agricultural production, and conversion to environmentally sound
practices. Admittedly, the emphasis placed on the environment
2 Regional farm associations in West Germany are pitching in as
well. The Bavarian Fafmers' Association is organizing seminars and
providing information to GDR farmers as well as providing
assistance to the newly-organized Saxon farmers' association.
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Table 1
West and East German Agricultural Sectors: !N Snapshot*
FRG GDR
Size
Hectares (million) 12.0 6.0
Farms 685,000 4,000
Employment (million) 1.5 0.9
Average Farm Size (hectares)
Grain Production (million tons)
Wheat
Barley
Rye
17
12.0
8.4
1.6
1,500
4.0
4.2
2.2
Yields
Grains
50.6
45.6
Winter
Wheat
60.0
54.2
Barley
49.9
47.1
Potatoes
332.0
272.7
Sugar Beets
507.1
350.2
Producer Prices
Wheat
36.6
(DM)
66.5
(OM)
Feed Barley
33.15
60.3
Rapeseed
89.0
149.0
Potatoes
26.0
48.67
Milk
69.35
163.03
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tf
Data is from 1987.
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could limit GDR yield increases and dampen the anticipated
competitive challenge. For example, the Agricultural Ministry in
Bonn is likely to urge the GDR to pursue extensification--
substituting less potent natural fertilizers for chemicals.
Should Bonn's help allow East Germany's agricultural output to
significantly outstrip its demand for food, a surge in CAP spending
by the mid-to-late 1990s is probable. Surpluses in commodities
such as grain would accumulate, forcing the EC to spend vast sums
to subsidize exports--if still lormissible under post-Uruguay Round
GATT rules--or store the excess. The size of the increase in CAP
outlays will depend on world agricultural prices and the health of
EC economies. The greater the decline in world food prices, the
more untenable high EC support prices are in the face of rising
production surpluses. Increases in outlays for the CAP are
restricted under a February 1988 agreement to 74 percent of the
Community's GNP growth rate; hence the importance of European
economic health.
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A similar, if less speedy transformation of other East
European countries into substantial agricultural exporters would
add to the pressure on the CAP, even if the EC does not open its
doors to Eastern agricultural produce (see Box). Poland and
Czechoslovakia have abundant pasture and meadow land that is ideal
for animal husbandry, especially dairying, and orchard production.
Hungary, Romania, Yugoslavia, and Bulgaria already are relatively
important food exporters and have broad, fertile land conducive to
grain and oilseed crops. These in turn can support intensive hog
and poultry feeding complexes. We project that Eastern Europe
could increase the value of agricultural exports by pas much as 11
percent, to $14.8 billion, over the next five years J According to (b)(3)
a USDA study, the region has the capability to become self-
sufficient in most foods, at higher consumption levels than at
present, and to become a substantial overall net exporter of
agricultural products by the end of the decade. Should the region
close its agricultural productivity gap with the West by even half,
for example, the USDA believes it would become a net grain exporter
(see Table 2). This could put downward pressure on world grain
prices, increasing CAP costs. (b)(3)
The magnitude of Eastern Europe's competitive challenge to
West European agriculture may depend on the development of East
European trade with the USSR. For the foreseeable future, the
region will continue to obtain most of its energy and raw material
imports from the Soviet Union in exchange, in part, for food and
agriculture products. Many East European officials fear that, at
3 The USDA estimates that bringing East German yields up, and feed
use levels down, to West German levels would make approximately 3-4
million tons of wheat and barley available for export each year.
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Table 2
EASTERN EUROPE: SUPPLY AND DEMAND OF WHEAT AND COARSE GRAINS
Area
Harvested
(hectares)
Wheat and Coarse Grains
Yield
Million Metric
Tons per Hectare
Production
Net
Imports
1979/80
29.0
3.14
91.1
14.7
1980/81
29.0
3.35
96.9
11.5
1981/82
28.8
3.31
95.1
8.2
1982/83
28.8
3.70
106.5
3.9
1983/84
28.9
3.54
102.3
2.4
1984/85
29.0
3.96
114.8
-0.6
1985/86
28.7
3.56
102.1
4.6
1986/87
29.1
3.86
112.3
2.4
1987/88
28.5
3.61
102.7
4.3
1988/89
29.1
3.59
104.3
3.0
1989/90
29.2
3.73
108.9
4.7
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least for the next several years, the region's terms of trade with
the USSR may well deteriorate as more and more of their trade is
put on a hard currency basis at world prices. If these concerns
prove true, the volume of Eastern Europe's exportable surplus in
agriculture going to the USSR almost certainly will not diminish
and may well increase. This, in turn, may well limit the increase
in East European food exports to the world market.
Agricultural Surpluses: Sowing the Seeds of CAP Reform
The Germans, who have been among the most determined defenders
of the CAP, would probably respond constructively to pressures for
CAP refprm that we expect to emerge during the latter half of the
1990's.3 The impact of unification on Germany's complicated
balance of regional power, even more than economic forces, is
likely to be decisive in changing Bonn's traditionally hard-line
agricultural policy. At present, West German policy is shaped by
the politically influential south--Bavarians have held the
Agriculture Ministry for over twenty years--rather than the more
efficient north. The addition of more efficient farmers in eastern
Germany will eventually dilute Bavaria's influence on agricultural
policy and probably tip the balance in favor of greater market
liberalization. Northern farmers are likely to find common cause
with their eastern counterparts and be more supportive of a more
market-oriented agriculture regime.
Other Community members are also likely to view more favorably
fundamental reform of the CAP--that is, increased production
quotas, and virtual elimination of the dual-price system--by the
end of the decade. Indeed, Paris--a frequent hardliner--already is
indicating that it believes French-grains are competitive in a free
market and occasionally espouses making the CAP more market-
oriented. Other factors will probably work to weaken political
support for subsidization of agriculture in Europe:
-- Concerns over the environmental effects of
agricultural overproduction are likely to grow in
coming years, pushing the EC to implement reforms
that would reduce its agricultural surpluses.
5 Bonn's troublesome stance on agriculture is influenced by a mix
of political, social, historical, and economic factors, including
the homage paid to small family farms as an integral part of West
German rural society. At least half of West German payments to
farmers are social security payments designed to limit pressures on
them to leave farming,/even if they are no longer competitive.
These policies have been followed by German governments through the
years; indeed, German agricultural trade has been tightly
controlled since Bismarck's chancellorship a century ago.
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Demographic trends--especially the expected
retirement of the majority of farmers during the next
decade in both Germany and France--will reduce the
farm lobby's political influence.
Over time, the EC-92 program of deregulation is
likely to help liberalize the agricultural sector as
the European food industry is changed because of the
resulting increased investment in the sector. This
could build demand for more specialized agricultural
products and divert resources away from traditional
agricultural goods that currently are in surplus.
Cheaper Eastern products in these traditional
might, in turn, find a larger EC market.
areas
Nonetheless, the EC will remain committed to some residual
protection for agriculture. Over the next several years, as the
scope of Eastern Europe's challenge to the CAP and world
agriculture trade becomes clearer, we expect to see discussion of
options ranging from retargetting subsidy policies to market-
sharing arrangements. This debate may move Community agricultural
policy closer to US preferences; however, at least one option that
may appeal to the highly influential Germans could pose a major
obstacle to US exports to Western Europe.
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One possibility is greater regionalization of the
CAP. This idea, which is opposed by many Europeans
as a step away from a "common agricultural policy,"
would grant national governments more latitude in
providing aid. We believe Bonn is likely to stop
short of embracing regionalization, as a concept, but
that it would be likely to boost direct subsidies to
its farmers.
Alternatively, the Commission and member states might
opt to substitute direct income supports to farmers
for price supports to farmers--a policy long
supported by Washington, although strongly resisted
by the EC in the past.
The German government may be increasingly attracted
to the idea of the United States and the EC carving
out markets for themselves. In this vein, proposals
to limit the access of US agricultural products to
the Community--particularly soybeans and non-grain
feedstuffs--could receive increasingly serious
attention. Although this policy choice has been
primarily pushed by southern German farmers,
conservative leaders in the north have backed it as
part of a global market sharing arrangement.
Although this/idea probably would find favor among
several of the member states, we believe the EC would
be reluctant to push openly for direct limits on US
agricultural products out of fear of retaliation.
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But EC liberalization targeted at East European
products may leave US farmers with a smaller share of
the European market.
East European Food Exports: Knocking on the EC's Door
East European countries view agriculture as an important
sector of their economies, and will emphasize it in their reform
programs. It accounts for about 20 percent of the region's GNP
and employs nearly 22 percent of the labor force. This compares
with 2.3 percent of GDP and 8 percent of the labor force for the
EC. Moreover, exports of food and raw agricultural products have
been both a major earner of hard currency on Western markets and
important in barter trade with the USSR to acquire energy and raw
materials.
The East Europeans are pressing for increased access to the
EC market--particularly in the meat, dairy, and grain sectors--in
order to earn badly needed hard currency to modernize their
economies. A Hungarian economic official, for example, has
expressed concerns over EC protectionist tendencies, arguing that
the EC needs to open its agricultural markets and abandon its
agriculture subsidies if it is serious about aiding the East.
The EC has always been a key market for East European
agricultural goods, taking around a third of the region's
agricultural exports. In fact, Eastern Europe is a net exporter
of foodstuffs to the Community despite protectionist EC policies,
such as quotas on East European beef that were imposed in 1974.
The EC probably realizes that it will have to make
concessions to the region in agriculture or face the anomaly of
supporting liberalizing economic reforms in the East European
countries while still protecting the EC's own highly managed
agricultural system. In our view, the EC is likely to grant the
East Europeans "controlled access" to its agriculture market--
potential East European food exports are in sensitive EC sectors-
-working out new voluntary restraint-type agreements with the
individual East European countries or expanding old ones. These
would most likely be in the meat and dairy sectors, along with
some grains. It already has increased the beef quotas granted to
Hungary, Romania, Poland and Yugoslavia, and suspended import
levies for sheep-meat and goat-meat for all the East European
countries except Romania.
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