The European agricultural policy is an old one, and should change, but France (and especially France's former president Chirac with agricultural ties) opposed strongly any change.
The policy is not that stupid, however. The idea is that
agriculture in the EU is not competitive with agriculture in the rest of the world, and if we let market forces decide, then agriculture would be strongly reduced, and we'd be importing a lot from third world countries. That would both be beneficial to us (lower prices) and to them (market), but we cannot accept that for 2 good reasons. First of all, agriculture is considered a strategic item. You might want to depend upon other countries for your favorite video games, but not for food. So we want to keep an active agricultural activity within the EU. Next, there's a part of "culture" and also of "security" to it, to oversee and regulate the production rules. So the EU is ready to loose some economical efficiency (and to harm indirectly some third world countries) for the sake of securing its own agriculture.
There's a simple way of doing that: taxes and subsidies. The EU taxes and regulates agricultural import, and gives subsidies to farmers. Now, it's even more severe: in order to keep artificially a high price (the EU doesn't want competition to play too much even within the EU), production needs to be kept down, so the EU distributes subsidies for NON-production. A farmer that DOESN'T produce on part of his land will as such contribute to a higher market price (and as such allow farmers in the EU to have a decent income) ; in order to compensate him for that, he gets a subsidy for non-used land. He gets, if you want, paid for non-production.
This may sound bizarre, but it has been a long-standing tradition in several agricultural branches (such as wine and champagne, for instance, where each "chateau" has a maximum allowed production, in order to keep the prices high).
The main benefitor is France, because of its large agricultural industry.
Now, since the expansion of the EU, this system is becoming more and more expensive, inefficient and criticised, and it will one day be replaced by something hopefully better, but Chirac obtained that this wouldn't happen before 2013.
That said, personally, I'm in favor of a system that costs money and efficiency, but guarantees agriculture within the EU. But probably one has to think of something better than the actual system.
As to the accusation of falsifying competition - which is obviously the case and openly recognized: it is the main goal of the system ! - the EU is not the only one who does things like that. Agriculture (food supply) is simply considered too strategic an item to outsource. Even if that costs a lot of money and generates less wealth than could be obtained through fair trade.
