Will the European Union's new proposal for agricultural policy reform create a new Berlin Wall between farmers in Germany's western and eastern states?

That's the 300,000 euro question on the minds of German politicians as the EU's Agricultural Commissioner, Austrian-born Franz Fischler, prepares to unveil his "mid-term review" of the EU's common agricultural policy (CAP) on Wednesday.

Comprising 40 billion euro ($39.7 billion), or close to half of the European Union's overall annual budget, the common agricultural policy has always been a rocky issue among EU member nations – especially so-called net payer countries like Germany, which puts twice as much into the EU's purse as it gets back.

In his 32-page mid-term report, Fischler will propose eliminating subsidies to farmers based on what they produce. In the past, for example, the EU has provided the equivalent of income insurance for the producers of agricultural products from wheat to beef.

Now, farmers would get a "single income payment per farm" each year that would be tethered to other conditions – like tough standards on the environment and animal welfare – rather than products alone. Additionally, the direct payments would also be reduced by a fifth over a seven-year period. The savings would then be siphoned off into rural development funds.

Putting a lid on direct payments

If approved, it would also put a 300,000 euro ($298,000) cap on direct payments to farms with more than 1,000 hectares (2,500 acres). For farms with more than two employees, a subsidy of 3,000 euro ($2,977) per worker is planned. The smallest farms, with up to two workers, would get 5,000 euro ($4,960) per person.

Fischler has argued that the new policy will encourage farmers to grow or raise agricultural products for which a real market exists rather than depending solely on government subsidies. Several agricultural sectors would initially be excluded from the plan, including dairy producers, wine growers and olive growers.

A tough blow for eastern German farmers?

The proposal would have a disproportionate impact on the eastern German states where, due to agricultural structures put in place under the former communist regime in East Germany, farms are on average seven times as big as those in the western states. More than 1,300 farms would be affected by the change. Officials in the Federal Ministry of Consumer Protection, Food and Agriculture, estimate the ceiling on subsidies could cost eastern German farmers an annual 250 million euro ($248 million).

It has also led to in-fighting within the ministry. While the ministry's head, Renate Künast of the Green party, has said the proposal is a step "in the right direction," her Social Democratic undersecretary, Gerald Thalheim, has argued that the EU reform will lead to a costly loss of jobs in eastern Germany and would destroy existing structures.

A boost for organic farmers

But Künast has said she is pleased with the plan's emphasis on aiding smaller and organic farmers and that the proposal will not lead to any loss for eastern German farmers – the subsidies will simply be redirected to the kinds of agricultural projects she has championed since taking office at the height of the mad cow disease crisis.

German Chancellor Gerhard Schröder has also signaled his support for the proposals – with possible conditions. He says he will look very closely at how the subsidy cuts would impact eastern German agriculture, saying wholesale cuts could create "significant problems" for eastern German farmers.

Nonetheless, negotiations over the agricultural reforms have put Schröder in a difficult position. The Chancellor has recently put his weight behind pressuring the EU to reduce its agricultural subsidies in preparation for the entry of 10 new member states starting, possibly, in 2004. Schröder has said that Germany would be both unwilling and unable to provide subsidies at the current level to the new eastern European members. To do so, he asserts, could add 2 billion euro ($1.9 billion) a year to Germany's annual EU contribution.

Germany and France spar

It's a rift that has split eastern and western as well as northern and southern Europe. It has also planted a wedge between Germany and France – once two of Europe's closest allies. France – whose farmers rely heavily on the common agricultural policy -- supports full subsidies and says it does not want to take up the issue of reforming CAP until the next EU budget is planned in 2006. The EU has proposed providing the new member states with 25 percent of the current EU subsidy rate through 2013.

In an interview with the weekly newspaper Welt am Sonntag over the weekend, Fischler took aim at Schröder and other politicians who allow purse strings to drive their reform motives.

"We can't just limit questions about agricultural reform to how it will be financed," Fischler said. Instead, he said, it is important to address the environmental challenges of agriculture, animal welfare and making products safer for consumers.