The Economic Principles of European Integration

By Stephen Frank Overturf | Go to book overview

do not warrant, or perhaps more likely, by failing to revalue its green rate when its overall equilibrium rate is being revalued. In either case the green rate is "undervalued" because it takes more units of domestic currency to purchase foreign currency than it "should," but this is an inducement to farm producers because they are then paid more units of domestic currency for any support measured in foreign currency (or unit of account) terms.

Figure 7.5 is pertinent here, because it shows the increased subsidy possible upon undervaluations, and the increased food costs thus created. Undervaluation of the green rate then gives a country high food prices, an incentive to remain on the land and produce (since the inherent subsidy is based on production), and high farm incomes.

That these conditions are not merely theoretical niceties is apparent when one examines the green rates of Britain and West Germany. Britain has a preference for low food costs and, therefore, has kept its green pound relatively overvalued. West Germany, on the other hand, feels it necessary to protect its high-cost but politically sensitive farm sector, and therefore maintains a relatively undervalued green mark. The result has been a divergence in equivalent food prices between the two countries of fully 40 percent, and serious concern by Britain over its proportionate contribution to Community revenues.


CONCLUSION

In conclusion, it has been difficult for anyone to suggest that the CAP has served any of its functions particularly well. It has, by application of high support prices, sacrificed entirely some of the goals of farm policy and the Community as a whole. Some other goals are not being served in an efficient manner. Furthermore, the entire issue takes up entirely too much Community time and effort, and, worse, has added a significant centrifugal force against further unification.

What can be done? Actually, it is not difficult at all to design a better policy, and there have been a multitude of proposals. Most tend toward the concept of direct subsidies to farmers to bring farm income (perhaps more equitably) up to some standard without great interference with the price system. Price stability and adequate supplies, if these are really all that important, could be achieved by some buffer stock (and stabilization) buying and selling, although that always runs the risk of allowing for escalation in the established

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