Top Down, and a little Bottom Up: Modelling EU Agricultural Policy Liberalization with LEITAP and ESIM

This paper presents a simulation analysis for EU agricultural policy scenarios based on the combined use of a PE (partial equilibrium) and a GE (general equilibrium) model. In order to draw upon the strengths of both model types, the PE model ESIM (European Simulation Model) and the GE model LEITAP are combined to analyze four agricultural policy scenarios until the year 2020, including a baseline with moderate reforms as well as a full liberalization of EU agriculture. Compared to the pronounced developments of the agri-food sectors under the baseline, the impact of policy scenarios is rather small. Real agricultural prices in the EU fall by about 20% under the baseline, whereas the additional price decrease in case of full liberalization is only 14%. Agricultural supply in the EU is rather stable. Even under full liberalization, agricultural supply will not decline dramatically: it falls by about 10% if compared to the baseline. The contribution of the agricultural and food sector to the overall economy of the EU is rather limited. The full liberalization of the EU agricultural sector results in a decline of the shares of the agri-food sectors in total GDP by 0.11 percentage points and in total employment by 0.08 percentage points. The consideration of a decline of agricultural factor prices for capital and labor matters for the supply response, but not too much. Farm supply for the EU-25 is 0.5% higher when taking into account lower factor prices after liberalization.