Implications for the United States and European community of harmonized prices under the CAP

Abstract

The Single European Act, amending the 1957 Treaty of Rome and ratified by all member states of the European Community (EC) in 1987, will attempt to remove EC internal economic borders by the end of 1992. The so-called Europe 1992 plan will attempt to harmonize standards and regulations and eliminate nontariff barriers which continue to restrain trade among EC countries.Farm commodity support prices are established each year uniformly for all EC countries in European Currency Units (ECUs). However, within each country, local support prices change as national currency exchange rates change relative to ECUs. So-called green rates of exchange emerged when individual countries established a special real exchange rate relative to the ECU for agriculture in their country. The original rationale for allowing adjustments for agriculture from established ECU-local currency exchange rates was to permit a country to hold steady nominal local farm support prices. Some authors argue that green rates allow countries to set their own unique real support rate.1,2 Regardless of the reason, real agricultural support prices differ substantially among countries of the EC, sacrificing a truly common agricultural policy. Monetary Compensatory Amounts (MCAs), a system of border taxes and subsidies, are interventions designed to avoid market arbitrage by precisely offsetting differences in price supports among countries.