The European dairy sector is faced with a period of significant changes. Besides the European Union (EU) enlargement to new Member States, the Luxembourg reform of June 2003 and the WTO international negotiations, more and more countries are in favour of a removal of the milk quota system implemented in 1984. The objective of our research is to explore the impact of potential reforms of the European dairy policy in this new context. In particular, we study the effect of scenarios with gradual and significant increases in European milk quotas on the milk and dairy markets as well as on producers’ income and on the economic welfare of the EU.