Consumers will bear brunt of European currency chaos: Farm subsidies will bring bigger food bills, writes Leonard Doyle

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CONSUMERS are among the first victims of the chaos in the exchange rate mechanism, as subsidies to European farmers are expected to increase dramatically to offset losses caused by currency changes.

The average family of four already pays a hidden cost of more than pounds 1,000 a year to Europe's farmers, according to the Organisation for Economic Co-operation and Development (OECD). Now that food bill is set to increase, because the European Community protects the incomes of farmers from currency fluctuations by paying them over the odds when it underpins the prices of a range of farm products and pays income subsidies.

The EC's 'green money' system, which it uses to pay farmers, ensures that even with fluctuating currencies, agricultural produce can be traded freely in the EC. Any interference with the system quickly brings demonstrating farmers into the streets and can threaten political instability.

But because of the peculiarities of the green money, the more the strongest currency - the German mark - appreciates in coming months, the more European consumers will have to pay, both directly in higher food prices and indirectly through a higher EC farm budget.

Officials in Brussels strongly denied yesterday that farm spending is set to spiral out of control. The cost of the Common Agricultural Policy (CAP) will increase, a spokesman said, but he could give no estimate of by how much the pounds 27bn budget would rise. This would depend on the volatility of currencies in the coming months.

In a far-reaching report published in June, the OECD said 'consumers continue to be penalised by agricultural policies that keep prices high'. The EC subsidies already amount to more than pounds 10,000 for every full- time farmer, almost four times the average level of subsidy in the OECD.

Throughout last year, while the major EC currencies were locked within the narrow 2.5 per cent band of the ERM, the subsidies paid by the EC amounted to pounds 88bn, an increase of 6 per cent on the previous year. Now that figure is set to increase under a scheme which pegs the green money, used to maintain stable farm prices to the strongest EC currency rather than to the average value of EC currencies.

The system is effectively rigged to protect the incomes of the politically powerful farmers in Germany, whose incomes are protected when the mark increases in value. They also get to keep the subsidy if the value of the mark subsequently falls. 'It's a 'win-win' situation for farmers whatever way the currencies go,' said Jim Murray of BEUC, a consortium of European consumer groups.

The Community's green money system for floating currencies will now come into operation for all EC currencies, with the result that instead of farm prices being constantly adjusted towards the average, with those with strong currencies falling somewhat and those with weak currencies gaining, they are adjusted to the highest level. The result for consumers could be catastrophic, with food prices being raised in weaker currency countries whenever the mark rises. The system of protecting German farmers from currency swings now adds 20 per cent to the cost of the CAP.

Consumers in devaluing countries see the effects in shops almost immediately. In Britain, farm prices increased by around 22 per cent since Black Thursday last year when the pound left the ERM, causing an approximate 3 per cent increase in British food prices.

British agriculture gets an estimated 60 per cent of its income through subsidies and farmers are being given subsidies of pounds 125 per ton of cereals this year. They get another pounds 142 per hectare of cereals in return for setting aside land from production.

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