Providing Drought Relief Creates False Incentives

Both the federal and state governments in Germany have pledged 340 million euros in aid for German farmers affected by drought. These funds are primarily intended to support those farmers whose livelihoods are under threat. Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW) in Mannheim, explains:

“Providing additional subsidies for farmers in Germany is the wrong move. German agriculture already receives over five billion euros from the EU every year in the form of lump-sum payments for which farmers are required to do little in return. These funds should be more than enough to cushion the effects of fluctuating harvests. Decades of receiving such a high level of subsidies has, however, created a sense of entitlement that is unique to the agricultural sector. There are many other sectors of the economy that have to deal with considerable sales and price fluctuations or lasting structural changes without the help of transfers. From a business point of view, damages resulting from drought are also the result of business decisions such as cropping strategies or taking out an insurance policy.

Providing drought relief sends out the wrong message that profits in good years can be internalised by businesses, while losses in bad years are socialised. This policy therefore creates false incentives. Legislators should use the drought of 2018 as an opportunity to finally pluck up the courage to introduce real reforms to EU agricultural policy. Farmers should no longer be allowed to receive such large subsidies without contributing to public welfare in return. Each subsidy must be paired with an easily measurable public good provision on the part of agriculture-based enterprises, such as a reduction in greenhouse gas emissions or the implementation of animal welfare standards above the minimum legal requirements. In its resistance to cutting EU farming subsidies, the German government’s agricultural policy is currently much too focused on maintaining the status quo. The Federal Ministry of Food and Agriculture needs to come up with some new ideas for reform.”

For further information please contact:

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail friedrich.heinemann@zew.de