Will Europe Finally Take A Scythe To Farm Subsidies?

For decades, European unity has been built on cold, hard cash. The European Union's bureaucrats in Brussels extracted huge subsidies from such rich northern members as Germany and the Netherlands, then ladled the money out to the poorer south and to special-interest groups such as France's farmers. The more Europe's nations cooperated, the more the bureaucrats depended on aid to keep up the harmony.

But now the EU's costs are growing overwhelming, a mutiny is brewing among the donor states, and policymakers are finally questioning the wisdom of building unity on unending streams of subsidies. The result may be the first serious effort to rethink how the EU operates and a new determination to break the addiction to handouts.

What's highlighting the issue is a Mar. 24 meeting in Berlin of EU leaders to discuss its budget, including the politically explosive issue of farm subsidies. Normally, delegates at these meetings just rubber-stamp new proposals to increase the ruinous farm subsidies, which eat up $45 billion--or half of the EU's budget. But German Chancellor Gerhard Schroder has said he wants to cut farm price supports by as much as 30%. Aid to poor regions in Mediterranean countries such as Spain and Portugal could be slashed by about a quarter under the plan.

FRANCE PRESSURED. For Europe's tax-and-spend leaders, this would mark an amazing turnaround. But plenty is happening to make the Europeans rethink their old ways. With the advent of monetary union and the installation of a European Central Bank, Europe's economies are more intertwined than ever. There's a growing perception that the Continent's unity depends less on aid programs and more on deregulation, free competition, and genuine economic prosperity. This shift is emboldening the reformers to go after the subsidies.

Both farmers and southern aid recipients are protesting, so the planned cuts could still be watered down. But newer entrants from Scandinavia don't want to play the subsidies game. And the Germans, with their economy slowing down, are fed up with serving as Europe's indulgent paymaster. The Social Democrats, who won office last fall, have limited rural constituencies: They are not hesitating to attack the farm lobby to cut Germany's donation to the EU. And the Germans are pushing France, desperate to keep the endangered Franco-German alliance alive, to consider once unthinkable subsidy cuts. "When the French heard the German demands, they started saying for the first time that agricultural reform was inevitable," reports Helene Cuisinier, a researcher for a Brussels-based agricultural newsletter, AGRA.

ONE WAY OUT. A vital consideration is the EU's ambitions to grow. The big plan is to usher the nations of Central Europe into the club, thus boosting the EU's power in the global economy. But if Poland and the rest of Mittel Europa came in, they could join the soup line for EU subsidies. Adding 10 Central European members would double the number of EU farmers and cost up to $16 billion more just in agricultural subsidies alone, under current policies. No one knows where that money could come from except through crushingly high levies on Germany and other rich nations.

The only way out is to cut the subsidies. If the reformers carry the day and do cut the handouts dramatically, the result could be a big change in how the EU is run. It would no longer be Europe's ultimate welfare agency but a tougher, more realistic force for deregulation and competition. There's a lot riding on that Berlin meeting.

Before it's here, it's on the Bloomberg Terminal.