European Business Environement-Despre UE

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EUROPEAN BUSINESS ENVIRONMENT

Lecturing notes

Introduction

More and more frequently you can hear people wondering what is all about with the

economic integration and European Union, what these things mean and in what way they are

going to influence their lives. In the past, prior to 19!, the term of economic integration was

used to refer to almost any area of international economic relations. "fter 19!, the

economists speciali#ing in international trade adopted a new, more elaborate definition. More

specifically, economic integration means the discriminatory removal of all trade impediments

between al least two participating nations and with the establishment of certain elements of

cooperation and coordination between them. $here are different forms of economic

integration and the European Union is one of them.

$he idea of European unity goes bac% to the fourteenth century when &ierre 'ubois

proposed a European (onfederation to be ruled by a European (ouncil of wise, e)pert and

faithful men. In 1*9+, illiam &enn, the English -ua%er, wanted the creation of "n Imperial

'yet, &arliament or tate of Europe in his Essay /$owards the &resent and 0uture &eace ofEurope. 2owever after the 0irst orld ar politicians began to give serious consideration to

the concept of European unity. In 193+ (ount (oundenhove 4alergi, the "ustrian founder5

leader of &an5European Movement, called for the formation of a United tates of Europe. 6n

eptember 1939, the 0rench foreign minister, "ristide 7riand, with the bac%ing of his

8erman counterpart, 8ustav tresemann, proposed the creation of a European Union within

the framewor% of the eague of :ations, and reiterated this later, when prime minister, by

declaring that part of his manifesto was the building of a United tates of Europe.

$he main reason for the pursuit of European Unity was the achievement of lasting

peace in Europe. 2owever, economic reasons were also a contributing factor.

'espite the fact that there was no shortage of plans for creating a united Europe,

nevertheless it was not until 19; that action was prompted.

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CHAPTER I.SHORTHYSTORY OF THE EUROPEAN UNION

$he first concrete move for regional integration in Europe was made in 19;< with the

establishment of Economic (ommission for Europe =E(E>. "lso, in 19;? the 6rgani#ation

for European Economic (ooperation =6E((> was formed and was followed a year later by

the (ouncil of Europe. $hese mar%ed the beginning of the splitting of estern Europe into

two camps, with, on the one hand, the U4 and some of the countries that later formed the

European 0ree $rade "ssociation =E0$">, and, on the other, 7elgium, 0rance, est

8ermany, Italy, u)embourg and the :etherlands, usually referred to as the 6riginal i) that

subsequently established the European Economic (ommunity =EE(>.

$he net ste!in the economic and political unification of estern Europe was ta%en

in 191, when the European (oal and teel (ommunity was created by the i) and mar%ed

the parting of ways in post5war estern Europe. In @une 19, at Messina, Italy, at the

meeting of the foreign ministers of the i) was considered the memorandum proposed by

7elgium, :etherlands and u)embourg regarding the establishment of a general common

mar%et and specific measures in the fields of energy and transport. $he governments of thei) established that a general common mar%et and an atomic energy pool should appear. In

the end, after three years of negotiations, the i) agreed that the drafting of two treaties, one

to create a general common mar%et and another to establish an atomic energy community,

should begin. $reaties were subsequently signed in Aome on 3 March 19, whose main

constitutional base was the $reaty of Aome, creating the EE(. $he need of institutional

strengthening of E( become more clear by introduction of summit meetings which try to

bring national political leaders more closely into the E( affaires. In 19


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(ommon 0isheries &olicy =(0&>. "t a &aris summit in 19 should be created to channel E( resources

into the development of the bac%ward E( regions.

:ew members, li%e 8reece =19?1>, pain =19?*> and &ortugal =19?*> entered the E(.

6n 1 @uly 19?< the ingle European "ct =E"> became operative. $he E" contained policy

development which was based upon the intention of creating a true single mar%et by the end

of 1993 with free movements of goods, services, capital and labour. Even more European

countries applied between 19?951993. "mong them we can name "ustria, 0inland, weden

and wit#erland and :orway shortly followed them. (yprus and Malta applied in 199!.

0ormal negotiations were opened in 199? with those states most li%ely to succeedB the (#ech

Aepublic, Estonia, 2ungary, &oland and lovenia. 2owever the instability in 7al%ans and the

war in 4osovo showed the need to hasten the process and, at ;2elsin%i, in 'ecember 1999, it

was agreed to open accession tal%s with 7ulgaria, atvia, ithuania, Malta, Aomania and

lova%ia.

(ertainly, an organi#ation with such a large and varied membership would be very

different from the original EE( of the i). $his is one reason why pursuing the questions of

enlargement was made consequent upon the finali#ing of the Maastricht $reaty and

agreement upon new financial and budgetary arrangements for the e)isting member states.

$he enlargement facing the EU today poses a unique challenge, since it is without

precedent in terms of scope and diversityB the number of candidates, the area =increase of

+;C> and population =increase of 1! million>, the wealth of different histories and cultures.

" single set of trade rules, a single tariff, and a single set of administrative procedures will

apply not only Dust across the e)isting Member tates but across the ingle Mar%et of the

enlarged Union.

In order to assist the countries that have applied to become members of the European

Union to carry out the reforms required for membership and to equip themselves to benefit

from EU funds on accession, the Union provides financial assistance as part of its &re5

"ccession trategy.

" new meeting of the European (ouncil too% place in 'ecember 1991, at Maastricht

and produced a new blueprint for the future. It tried to integrate the E( further through setting

;2elsin%i European (ouncil 1!, 11 'ecember 1999$reaty on European Union, < 0ebruary 1993

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out a time table for full economic and monetary unit =EMU>, introducing institutional changes

and developing political competences, the whole being brought together in the $reaty on

European Union =Maastricht $reaty> of which the E( should form a part of a wider European

Union. $he "msterdam*conference, which followed in 199, as the constitution of the EU.

$he "msterdam treaty gives EU a more coherent structure, a modern statement of its

aims and policies, and brings some necessary improvements in the wor%ing of the institutions.

$he EU after the "msterdam treaty has broad obDectives but these naturally interfere with

those in the Maastricht treaty. $he classic aim is to develop an even closer union. It promotes

economic and social progress, meaning the abolition of internal frontiers, better economic and

social cohesion to assist the less5developed members to catch up with the EU average

=creation of the (ohesion 0und in 199+> and an economic and monetary unit, complete with a

single currency. It wants to create an international identity through a common security and

defense policy. It has introduced a formal citi#enship and has also ta%en steps to strengthen

the commitment to democracy, to individual rights, to promote equality and to combat

discrimination. $he treaty has also established the EU, as an area of free movement, security

and Dustice. Internally, the EU has general economic obDectives relating to the single mar%et,

agriculture and transport, the aim of economic and social cohesion and a new emphasis on

policy ma%ing in employment, social and environmental matters.

"nother important step in the EU development was the :ice $reaty


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CHAPTER II. THE ECONOMICS OF EUROPEAN INTE"RATION

Fund#$ent#% Conce!ts

A. Pur!ose #nd !rogress o& econo$ic integr#tion

$he e)pression Geconomic integrationG covers a variety of notions. It may refer to the

absorption of a company in a larger concern. It may have a spatial aspect, for instance if it

refers to the integration of regional economies in a national one. In case of EU, economic

integration is always used with respect to international economic relations, to indicate the

combination of the economies of several sovereign states in one entity.

Economic integration is not an obDective in itself, but serves higher obDectives. $he

immediate, economic, obDective is to raise the prosperity of all cooperating units. $he farther5

reaching obDective is one of peace policy namely, to lessen the chance of armed conflicts

among partners. &olachec% =19?!>, using data for +! countries in the 19?519*< period,

showed that doubling the trade between two countries leads to a 3! per cent decline in the

frequency of hostilities.

Used in a static sense, Geconomic integrationG represents a situation in which the national

components of a larger economy are no longer separated by economic frontiers but function

together as an entity. Used in a dynamic sense it indicates the gradual elimination of

economic frontiers among member states =that is to say, the abolition of national

discrimination>, with the formerly separate national economic entities gradually merging into

a larger whole. 6f course, the static meaning of the e)pression will apply in full once the

integration process has passed through its stages and reached its obDect.

O'(ects o& integr#tion

Economic integration is basically the integration of mar%ets. Economists ma%e a distinction

between mar%ets of goods and services on the one hand, and mar%ets of production factors

=labour, capital, entrepreneurship> on the other.

Free $o)e$ent o& goods #nd ser)icesis the basic principle of economic integration. "s

is well %nown from classical international trade theory the free e)change of goods promises a

positive effect on the prosperity of all concerned. It permits consumers to choose the cheapest


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good, generally widens the choice, and creates the conditions for further gain through

economies of scale, etc.

$he obvious welfare gains from the liberalisation of product mar%ets are a good economic

reason to start integration with that obDect. 2owever, integration schemes tend to follow a

political logic rather than an economic one. $he political reasons to begin integration at the

goods mar%et areB

5 lasting coalition between sectors demanding protection and sectors and consumers

demanding cheap imports is hard to accomplish

5 substitute instruments =such as industrial policy, non5 tariff barriers, and administrative

procedures> can be used to intervene in the economic process

5 vital political issues li%e growth policy and income redistribution are guaranteed to remain

within national Durisdiction.

Free $o)e$ent o& !roduction ctors can be seen as another basic element of

economic integration. 6ne argument for it is that it permits optimum allocation of labour and

capital. ometimes, certain production factors are missing from the spot where otherwise

production would be most economical. $o overcome that problem, entrepreneurs are apt to

shift their capital from places of low return to more promising places. $he same is true of

labourB employees will migrate to regions where their labour is more needed and therefore

better rewarded. " second argument is that an enlarged mar%et of production factors favours

new production possibilities which in turn permit new, more modern or more efficient uses of

production factors =new forms of credit, new occupations, etc.>.

$he choice of production factors as the obDect of the second stage in the integration process is

partly based on the economic advantages that spring from such integration. 7ut here, too, we

have to consider the political logic. $he integration of labour mar%ets seems to be the obvious

choice in periods of a general shortage of labour " tangle of national regulations for wages,

social security, etc. seems to leave politicians sufficient opportunities for practical

intervention on the national level for them to accept general principles on the European level.

ith capital5mar%et integration the issue of direct investments seems straightforward many

politicians may hope to attract new foreign investment in that way. 0or other capital

movements the willingness to integrate is less obvious because integration would imply

giving up the control of sensitive macroeconomic instruments.

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&olicy appro)imation is the ne)t stage of economic integration. In an economy which leaves

production and distribution entirely to the mar%et, the elimination of obstacles to the

movement of goods and production factors among countries would suffice to achieve full

economic integration. :ot so in modern economies, which are almost invariably of the mi)ed

type, the government frequently intervening in the economy. In economies of the mi)ed type,

integration cannot be achieved without harmonising the policies pursued by the governments

of the individual states. &olicy ma%ing is on the whole more difficult to integrate than mar%ets

for goods, services and production factors. &oliticians are li%ely to be the more unwilling to

give up their intervention power, the more such elements are involved as employment policy

or budgetary policies =referring to e)penditure on schools, subsidies, as well as revenues from

ta)es>.

Moreover, national civil servants tend to uphold their way of operating interventional schemes

as the most efficient, and since their very e)istence depends on complicated sets of rules, they

are hardly inclined, in general, to cooperate towards harmonised policy. $hus, the conditions

for a common currency or monetary integration will not readily be met. $hat is one reason

why currency integration is mostly introduced at a late stage of integration. Even later comes

the integration of points that touch the very heart of a nationGs sovereignty, in particular the

acceptance of a common defence policy.

B. Positi)e #nd neg#ti)e integr#tion

ith respect to modern mi)ed economies, $inbergen =19;> distinguished negative

integration=that is, the elimination of obstacles>, andpositive integration=that is, the creation

of equal conditions for the functioning of the integrated parts of the economy>. $he formerGs

demand on policy will be relatively simple =deregulation, liberalisation>, but the latter will

always involve more comple) forms of government policy =harmonisation, coordination>. et

us loo% somewhat closer at the differences.

:egative5integration measures are often of the simple G$hou shalt notG type. $hey can be

clearly defined, and once negotiated and laid down in treaties, they are henceforth binding on

governments, companies and private persons. $here is no need for permanent decision5

ma%ing machinery. hether these measures are respected is for the courts to chec%, to which

individuals may appeal if infringements damage their interests.

&ositive integration is more involved. It often ta%es the form of vaguely defined obligations

requiring public institutions to ta%e action. uch obligations leave ample room for


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interpretation as to scope and timing. $hey may, moreover, be reversed if the policy

environment changes. "s a consequence, they hold much uncertainty for private economic

agents, who cannot derive any legal rights from them. &ositive integration is the domain of

politics and bureaucracy rather than law. :o wonder then that positive integration does not

present a built5in stimulus for progress. 7ecause politicians are more li%ely to opt for positive

rather than negative integration, progress is li%ely to be slower, the higher the

stage of integration, that is the farther integration proceeds on the path towards a 0ull

Economic Union.

C. St#ges o& econo$ic integr#tion

"s international trade and investment levels continue to rise, the level of economic integration

between various groups of nations is also deepening. $he most obvious e)ample of this is the

European Union, which has evolved from a collection of autar%ical nations to become a fully

integrated economic unit. "lthough it is rare that relationships between countries follow so

precise a pattern, formal economic integration ta%es place in stages, beginning with the

lowering and removal of barriers to trade and culminating in the creation of an economic

union. $hese stages are summari#ed below.

A.FREE TRA*E A"REEMENTS

$he first level of formal economic integration is the establishment of free trade agreements

=0$"s> or preferential trade agreements =&$"s>. 0$"s eliminate import tariffs as well as

import quotas between signatory countries. $hese agreements can be limited to a few sectors

or can encompass all aspects of international trade. 0$"s can also include formal

mechanisms to resolve trade disputes. $he :orth "merican 0ree $rade "greement =:"0$">

is an e)ample of such an arrangement.

"side from a commitment to a reciprocal trade liberali#ation schedule, 0$"s place few

limitations on member states. "lthough 0$"s may contain provisions in these areas if the

signatory countries agree to do so, no further harmoni#ation of regulations, standards or

economic policies is required, nor is the free movement of capital and labour a necessary part

of a free trade agreement. 0$" signatory countries also retain independent trade policy with

all countries outside the agreement.

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2owever, in order for an 0$" to function properly, member countries must establish rules of

origin for all third5party goods entering the free trade area. 8oods produced within the free

trade area =and subDect to the agreement> may cross borders tariff5free, but rules of origin

requirements must be met to prove that the good was in fact produced in the e)porting

country. In the absence of rules of origin, third5party countries see%ing trade access to the

0$" area will choose the path of least resistance H the country where they face the lowest

opposing tariff H in order to gain effective entry to the entire 0$" region.

B. CUSTOMS UNION

" customs union =(U> builds on a free trade area by, in addition to removing internal barriers

to trade, also requiring participating nations to harmoni#e their e)ternal trade policy. $hisincludes establishing a common e)ternal tariff =(E$> and import quotas on products entering

the region from third5party countries, as well as possibly establishing common trade remedy

policies such as anti5dumping and countervail measures. " customs union may also preclude

the use of trade remedy mechanisms within the union. Members of a (U also typically

negotiate any multilateral trade initiative =such as at the orld $rade 6rgani#ation> as a

single bloc. (ountries with an established customs union no longer require rules of origin,

since any product entering the (U area would be subDect to the same tariff rates andor import

quotas regardless of the point of entry.

$he elimination of the need for rules of origin is the chief benefit of a customs union over a

free trade area. $o maintain rules of origin requires e)tensive documentation by all 0$"

member countries as well as enforcement of those rules at borders within the free trade area.

$his is a costly process and can lead to disputes over interpretation of the rules as well as

other delays. " (U would result in significant administrative cost savings and efficiency

gains.

In order to gain the benefits of a customs union, member countries would have to surrender

some degree of policy freedom H specifically the ability to set independent trade policy. 7y

e)tension, because of the increased importance of trade and economic measures as foreign

policy tools, customs unions place some limitations on independent foreign policy as well.

C.COMMON MAR+ET

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" common mar%et represents a maDor step towards significant economic integration. In

addition to containing the provisions of a customs union, a common mar%et =(M> removes all

barriers to the mobility of people, capital and other resources within the area in question, as

well as eliminating non5tariff barriers to trade, such as the regulatory treatment of product

standards.

Establishing a common mar%et typically requires significant policy harmoni#ation in a

number of areas. 0ree movement of labour, for e)ample, necessitates agreement on wor%er

qualifications and certifications. " common mar%et is also typically associated H whether by

design or consequence H with a broad convergence of fiscal and monetary policies due to the

increased economic interdependence within the region and the effect that one member

countryFs policies can have on other member countries. $his necessarily places more severe

limitations on member countriesF ability to pursue independent economic policies.

$he principal advantage of establishing a common mar%et is the e)pected gains in economic

efficiency. ith unfettered mobility, labour and capital can more easily respond to economic

signals within the common mar%et, resulting in a more efficient allocation of resources.

*.ECONOMIC UNION,AN* MONETARY-

$he deepest form of economic integration, an economic union adds to a common mar%et the

need to harmoni#e a number of %ey policy areas. Most notably, economic unions require

formally coordinated monetary and fiscal policies as well as labour mar%et, regional

development, transportation and industrial policies. ince all countries would essentially

share the same economic space, it would be counter5productive to operate divergent policies

in those areas.

"n economic union frequently includes the use of a common currency and a unified monetary

policy. Eliminating e)change rate uncertainty improves the functioning of an economic union

by allowing trade to follow economically efficient paths without being unduly affected by

e)change rate considerations. $he same is true of business location decisions.

upranational institutions would be required to regulate commerce within the union to ensure

uniform application of the rules. $hese laws would still be administered at the national level,

but countries would abdicate individual control in this area.

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7ecause countries are free to negotiate economic integration agreements as they see fit, in

practice, formal agreements rarely fall neatly into one of the four stages discussed above.

$his can lead to some confusion of terminology and also confusion as to the state of economic

integration in some parts of the world. In the case of (anada, for e)ample, the country is part

of a free trade area with the United tates and Me)ico. 2owever, the :orth "merican 0ree

$rade "greement also includes provisions that partially liberate the flow of labour and capital

in the region H an element of a common mar%et. In addition, (anada has in the past pushed to

curtail the use of trade remedy measures within :orth "merica. hile this represents a desire

to advance one aspect of :orth "merican integration, the ne)t formal step H a customs union

H does not appear to be a policy priority at this time.

"ll forms of integration described above require permanent agreements among participating

states with respect to procedures to arrive at resolutions and to the implementation of rules. In

other words, they call for partners to agree on the rules of the game. 0or an efficient policy

integration, common institutions =international organisations> are created. 2owever, for the

higher forms of integration, such as a common mar%et, the mere creation of an institution is

not sufficientB they require transfer of power from national to union institutions.

"ll forms of integration diminish the freedom of action of the member statesG policy5ma%ers.

$he higher the form of integration, the greater the restrictions and loss of national

competences. $he following hierarchy of policy cooperation is usually adoptedB

5 InformationB partners agree to inform one another about the aims and instruments of the

policies they =intend to> pursue. $his in5formation may be used by partners to change their

policy to achieve a more coherent set of policies., 2owever, partners reserve full freedom to

act as they thin% fit, and the national competence is virtually unaltered.

- ConsultationB partners agree that they are obliged not only to inform but also to see% theopinion and advice of others about the policies they intend to e)ecute. In mutual analysis and

discussion of proposals the coherence is actively promoted. "lthough formally the

sovereignty of national governments remains in5tact, in practice their competences are

affected.

5 Co-ordinationgoes beyond this, because it commits partners to agreement on the =sets of>

actions needed to accomplish a coherent policy for the group. If common goals are fi)ed some

authors prefer the term cooperation. (oordination often means the adaptation of regulation to

ma%e sure that they are consistent internationally =for e)ample, the social security rights of

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migrant labour>. It may involve the harmonisation =that is, the limitation of the diversity> of

national laws and administrative rules. It may lead to convergence of the target variables of

policy =for e)ample, the reduction of the differences of national inflation rates>. "lthough

agreements reached by coordination may not always be enforceable =no sanctions>, they

nevertheless limit the scope and type of policy actions nations may underta%e, and hence

imply limitation of national

competences.

5 UnificationB either the abolition of national instruments =and their replacement with union

instruments for the whole area> or the adoption of identical instruments for all partners. 2ere

the national competence to choose instruments is abolished.

E. "oods $#r/ets

Ad)#nt#ges

0ully integrated goods mar%ets imply a situation of free trade among member states. &eople

aim for free trade because they e)pect economic advantages from it, namelyB

5 more production and more prosperity through better allocation of production factors, each

country specialising in the products for which they have a comparative advantage

5 more efficient production than%s to scale economies and %eener competition

5 improved Gterms of tradeG =price level of imported goods with respect to e)ported goods> for

the whole group in respect of the rest of the world.

Integration of goods mar%ets implies first of all the removal of =all> impediments to free

internal goods trade. In modern mi)ed economies such negative integration is not sufficient,

however. 0or the mar%et to function adequately there must be common rules for competition

on the internal mar%et and for trade with third countries.

O'st#c%es to &ree tr#de

$he free5trade area has been defined before as a situation where there are neither customs

duties or levies with similar effect, nor quantitative restrictions or indeed any factor impeding

the free internal movement of goods =the latter are often ta%en together under the heading of

non5tariff barriers, or :$7>.

$hey can be described as followsB

5 (ustoms duties or import duties are sums levied on imports of goods, ma%ing the goods

more e)pensive on the internal mar%et. uch levies may be based on value or quantity. $hey

may be indicated in percentages or vary according to the price level aspired to domestically

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5 evies of similar effect are import levies disguised as administrative costs, storage costs or

test costs imposed by the customs

5 -uantitative restrictions =-A> are ceilings put on the volume of imports of a certain good

allowed into a country in a certain period =quota>, sometimes e)pressed in money values. "

special type is the so5called Jtariff quotaG, which is the ma)imum quantity which may be

imported at a certain tariff, all quantities beyond that coming under a higher tariff

5 (urrency restrictions mean that no foreign currency is made available to enable importers to

pay for goods bought abroad

5 6ther non5tariff impediments are all those measures or situations =such as fiscal treatment,

legal regulations, safety norms, state monopolies, public tenders, etc.> which ensure a

countryGs own productsG preferential treatment over foreign products on the domestic mar%et.

Moti)es &or o'st#c%es

6bstacles to free trade are mostly meant to protect a countryGs own trade and industry against

competition from abroad, and therefore come under the heading of protection. &rotection can

be combined with free trade. " customs union, for instance, prevents free trade with outside

countries by a common e)ternal tariff andor other protectionist measures, while leaving

internal trade free.

i%e individual countries, a customs union may5hope to benefit from protection against third

countries, that is, from import restrictions. 0rom the e)tensive literature we have distilled the

following arguments in favour of such measuresB

5 Independence from other countries as far as strategic goods are concerned, a point much

stressed in the past and especially in times of war

5 $he possibility of nurturing so5called Jinfant industriesG. $he idea is that young companies

and sectors which are not yet competitive should be sheltered in infancy in order to develop

into adult companies holding their own in international competition

5 'efence against dumping. $he healthy industrial structure of an economy may be spoiled

when foreign goods are dumped on the mar%et at prices below the cost in the country of

origin. Even if the action is temporary, the economy may be wea%ened beyond resilience

5 'efence against social dumping. If wages in the e)porting country remain below

productivity, the labour factor is said to be e)ploited importation from such a country is held

by some to uphold such practices and is therefore not permissible

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5 Employment boosting. If the production factors in the union are not fully occupied,

protection can turn the demand towards domestic goods, so that more labour is put to wor%

and social costs are avoided

5 'iversification of the economic structure. (ountries specialised in one or a few products

tend to be very vulnerable mar%eting problems of such products lead to instant loss of

virtually all income from abroad. $hat argument applies to small developing countries rather

than to large industrialised states

5 houldering5off balance5of5payment problems. Import restrictions reduce the amount to be

paid abroad, which helps to avoid adDustments of the industrial structure and accompanying

social costs and societal friction =caused by wage reduction and a restrictive policy, etc.>.

&leas for e)port restriction have also been heard. $he underlying ideas vary considerably. $he

arguments most frequently heard are the followingB

5 ome goods are strategically important and must not fall into the hands of other nations that

is true not only of military goods =weapons> but also of incorporated %nowledge =computers>

or systems

5 E)portation of raw materials means the consolidation of a colonial situation a levy on

e)ports will hopefully increase peopleGs inclination to process the materials themselves. If not,

then at any rate the revenues can be used to start other productions

5 If too much of a product is e)ported, the importing country may be induced to ta%e

protective measures against a series of other products rather than that, a nation may accept a

GvoluntaryG restriction of the e)ports of that one product.

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CHAPTER III. *ECISION1MA+IN" IN THE EUROPEAN UNION

AFTER AMSTER*AM

2 THE *IFFERENT +IN*S OF EUROPEAN UNION LA3

$here are three different %inds of law in the European Union =EU>B

i. &rimary legislation, i.e. the $reaties =see "nne) 1> and other agreements possessing similar

status

ii. econdary legislation, i.e. the regulations, directives, decisions, recommendations and

opinions based upon the $reaties =see below>

iii. (ase law, i.e. Dudgements of the European (ourt of @ustice and of the (ourt of 0irst

Instance.

(ollectively they are %nown as the KAc#uis communautaireF .

&rimary legislation is agreed on the basis of direct negotiations between Member tatesG

governments. uch agreements are drawn up in the form of treaties which are subDect to

ratification in national parliaments =but not by the European &arliamentL>. $he same is true of

any subsequent amendments to them. In some Member tates, recourse may be had to a

referendum.

THE TREATIES

$he European Union is based upon and governed in accordance with a number of $reaties

between the Member tates. $hese $reaties are the most fundamental part of the ac#uiscommunautaire and in every case have been the subDect of =sometimes prolonged>

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negotiations leading to unanimous agreement amongst governments and ratification by

national parliaments and, in some cases, by referendumtoo. $he $reaties not only serve as the

UnionFs constitution but are also prescriptive in that several of them set obDectives for the

future, usually accompanied by a deadline and sometimes by a precise timetable. Most of the

$reaties contain provision for their own amendment and, with one e)ception, were concluded

for an unlimited period. In common with the rest of the ac#uis communautaire, the $reaties

must be accepted in their entirety by states wishing to Doin the Union.

$he table below lists the main $reaties and "cts in chronological order, together with the date

of entry into force and a brief summary, where relevant, of how each relates to the others. $he

first three $reaties, establishing three legally distinct (ommunities are sometimes referred to

as the Kfounding $reatiesF.

Tre#t0 In &orce Su$$#r0

European (oal and teel (ommunity=E((> $reaty

=$reaty of &aris, 191>

193 (oncluded for ! years amongst the i) on the basis of

the chuman &lan

European Economic (ommunity =EE(> $reaty=$reaty of Aome, 19

19? (oncluded on the model of the E(( $reaty but with amuch broader range of obDectives the most important of

the $reaties

European "tomic Energy (ommunity =E"E( or

Euratom> $reaty =also signed in Aome, 19

19? " sector5specific $reaty of limited application

$reaty establishing a ingle (ouncil and a ingle

(ommission of the European (ommunities =Merger

$reaty, 19*>

@uly 19*< "mended the E((, EE( and Euratom $reaties to

create a (ouncil and a (ommission serving all three

(ommunities

$reaty amending certain 7udgetary &rovision of the

$reaties establishing the European (ommunities =and

of the Merger $reaty> =$reaty of u)embourg, 19

19 =19

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the European &arliament by direct universal suffrage

=European Elections "ct, 19elections

elections

ingle European "ct =19?*> @uly 19?< "mended and e)panded the EE( $reaty =most

importantly by e)tending the scope of qualified maDority

voting> and laid down new procedures for foreign policy

co5operation

$reaty on European Union =Maastricht $reaty, 1993> :ovember

199+

Established the European Union amended and e)panded

the EE( $reaty created the co5 decision procedure

created KpillarsF of (ommon 0oreign and ecurity &olicy

=(0&> and (o5operation in the 0ields of @ustice and

2ome "ffairs =@2">

$reaty of "msterdam =199

1999 "mended the Maastricht $reaty and the EE( $reaty

e)tended co5decision added new provisions on social

policy incorporated the chengen ac#uis into EE(

$reaty created Kconstructive abstentionF strengthened

transparency

$reaty of :ice =3!!1>

3!!+

Istitutional structure changes

Ac#uis communautaireBa phrase used to cover all legislation in force including the $reaties in

their entirety, all 'irectives, Aegulations, 'ecisions, $rade and "ssociation "greements as

well as the case law of the European (ourt of @ustice and of the (ourt of 0irst Instance.

econdary legislation is drawn up using a variety of different procedures, depending upon the

$reaty article chosen by the (ommission as the legal base for the proposal in question.

(ase law results from Dudgements of the European (ourt of @ustice and of the (ourt of 0irst

Instance meeting u)embourg, normally in response to referrals from national courts or as a

result of actions brought by the (ommission in its capacity as the guardian of the $reaties.

$he different types of secondary legislation areB

i. Regu%#tionsB binding and directly applicable in all Member tates without any

implementing national legislation. Management of the day to day aspects of the (ommon

"gricultural &olicy, for e)ample, is by means of regulations.

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ii. *irecti)esB binding on the Member tates with respect to the result to be achieved and with

respect to the deadline, but with the choice of method left to the Member tates. 'irectives

have to be implemented in national legislation in accordance with each Member tateGs own

procedures. $here can be a substantial delay between the approval of a directive in the

(ouncil of Ministers and its implementation in the national law of the Member tates.

Enforcement 5 by no means even 5 is normally the responsibility of the national authorities.

iii. *ecisionsB may be issued either by the (ouncil or by the (ommission and are binding

upon those to whom they are addressed, normally a Member tate or a commercial enterprise.

:o national implementing legislation is required.

iv. Reco$$end#tions and O!inionsB have no binding effect, and may be issued either by the(ouncil or by the (ommission.

4 THE INSTITUTIONS

3.1 The European Council

"t least twice a year, the 2eads of tate or 8overnment meet as the European (ouncil to

provide the Union with overall direction and to reach decisions on the %ey issues. European

(ouncil meetings =sometimes %nown as ummits> are also attended by Member tatesG

0oreign Ministers and by the &resident of the (ommission and the &resident of the European

&arliament. European (ouncil agreements have no legislative force, but must first be turned

into legislation on the basis of a proposal from the (ommission in the normal way.

$he European (ouncil is an institution that stands over the three pillars of the EU, that lin%sthem together and that ta%es on a central leadership role. If the (ouncil of Ministers has

always been embodied in the European $reaty, the same does not apply for the European

(ouncil. $he European (ouncil was established as a result of the summit meetings involving

2eads of tate and 8overnments which have been ta%ing place since 19*9. $hese meetings

used to ta%e place at irregular intervals a resolution passed at the &aris ummit (onference in

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(ooperation =E&(> which is an institution founded in 19

attempt to coordinate foreign policy. 7ecause of its composition, the European (ouncil

developed into the highest decision5ma%ing authority 5 although this was not intended by the

treaties.

Its role was made more e)plicit with the ingle European "ct =E"> in 19?*?


21/90

maDority, by qualified maDority, each Member tateGs vote being JweightedJ in accordance

with its population.

Member tates ta%e turns to hold the &residency of the (ouncil for a period of si) months.

(ouncil meetings are prepared by a (ommittee of Member tatesG &ermanent Aepresentatives

=i.e. "mbassadors> %nown as (6AE&EA.

0ormally %nown as the (ouncil of Ministers, the (ouncil of the European Union is the central

decision5ma%ing authority in the E(. $he (ouncil is responsible for passing laws proposed by

the (ommission and with the involvement of the European &arliament. $his has been the

(ommunityGs fundamental decision5ma%ing procedure from the very beginning. $he relative

weight of the three institutions involved, however, has changed. $he capacity in whichmembers attend (ouncil meetings changes according to the policy area being discussed for

e)ample the European (ommunity of "gricultural Ministers or Environmental Ministers

might meet. Moreover, the respective member of the (ommission is also present.

or% in the (ouncil would ta%e up a large proportion of the time available to ministers from

member states. 8iven that they can only spend short periods in 7russels, they need support.

$he (ommittee of &ermanent Aepresentatives of the E( =(6AE&EA> in 7russels plays and

important role here. It is made up of the permanent representatives from the member states in

7russels and their deputies and meets up on a wee%ly basis. $his (ommittee is responsible for

monitoring and coordinating the wor% of around 3! committees and wor%ing groups, which

are staffed by civil servants from the member states. $hese, in turn, are responsible for

preparing the dossiers for (6AE&EA and the (ouncil at a technical level. (6AE&EA deals

with most of the decision5ma%ing preparations as far as content is concerned.

$he (ouncilGs ecretariat encompasses a staff of around 3,!! wor%ing in si) departments. Itsduties are primarily of an administrative nature, meaning that it is responsible for things such

as preparing the agenda for wor% to done, drawing up reports, translation services, loo%ing

into legal questions etc. $he illustration below offers an insight into the structure of the

(ouncil.

"ll decisions were initially ta%en using a system of unanimous voting because of the

Lue$'urg Co$!ro$ise. ince the mid 19?!s, however, and especially since the $reaty of

Maastricht and the $reaty of "msterdam there has been an increasing move towards qualified

maDority voting as the basis for decision ma%ing. $his development has continued following

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the Tre#t0 o& Nice.$hat being said, however, the e)pansion of qualified maDority voting goes

hand5in5hand with a maDor obstacle to the ability to apply this procedure brought about by the

triple maDority rule =a qualified maDority of weighted votes, a maDority of states and a qualified

maDority of populations =*3C>, which was also set down in the $reaty of :ice. In addition to

this, the European &arliamentGs powers of co5decision have been consistently e)panded.

3.+ The European Commission

It is currently composed of 3 members =:ovember 3!!>, who are proposed by the

governments of the member states and appointed for a five5year term it is now also subDect to

a vote of appointment by the European &arliament before it can be sworn in. $he

commissioners are not appointed as negotiators for their respective states, but are supposed to

act completely independently in the best interests of the (ommunity. $hey are supported by a

staff of around 3!,!!! officials 5 less than some large citiesL which is split up into 3; so5

called directorates general =such as transport, agriculture, e)ternal relations, regional policy

etc.> and nine services, which, in turn, are also split up into directorates and departments.

$he (ommissionGs main tas%s can be summari#ed under four headings.

Aight of initiativeB Every decision ta%en by (ouncil has to be based on a proposal from the

(ommission. $he (ommissionGs tas% is to act as an engine of integration drawing up

proposals for the development of (ommunity policy. $his right and authority to determine the

EUGs agenda, to submit proposals at a particular Duncture and to lin% differing initiatives

together gives the (ommission considerable influence in the legislative procedure.

8uardian of treatiesB $he (ommission is responsible for monitoring the application of treaty

provisions and decisions made by other E( institutions and can appeal to the European (ourt

of @ustice when violations are identified.

E)ecutive authority for the implementation of (ommunity policyB $his includes the

administration of finances as well as the implementation of E( policies. 6f course, this does

not mean that the (ommission is responsible for ma%ing sure that the countless number of

decrees and guidelines are implemented in individual member states. 7earing in mind the si#e

of the (ommissionGs staff, this would be an impossible tas%. :o, this is carried out by the

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administrations in the member states or their regional sections. $he main tas% of the

(ommission, then, is to monitor and supervise the actions being ta%en by the member states.

E)ternal representationB $he (ommission represents the EU at the 8"$$ negotiations and

international organisations this sometimes ta%es place together with the member states andor

the respective presidents.

$he most important characteristics of the (ommission areB Its distinct differentiation at a

functional level and the fact that it represents a multi5national bureaucracy using an e)tensive

system of committees =commitology> within which very close cooperation ta%es place both

with the administrations of member states and with national and European associations

Under the Maastricht $reaty, the (ommissionGs term of office was e)tended to five years to

coincide with the European &arliamentGs term. $he appointment of the &resident and other

members of the (ommission is subDect to the approval of the &arliament.

3.; The European Parliament

$he European &arliament =E&> is our first institution at a supranational level that carries a

name familiar to us from national political systems.

hile the E& might sound familiar, it is quite different from national parliaments. If the role

played by and the powers available to the E& in the (ommunity have changed constantly ever

since the foundation of the E((, these changes have also steadily increased its influence

within the EU. Important milestones in this regard have been the e)tension of its budget

powers in =19, the introduction of the first direct elections =19, the introduction of the

cooperation procedure =19?*> and the introduction of the codecision procedure =1993>, as well

as considerable e)pansion of this codecision procedure into other areas of application since

the $reaty of "msterdam. 6ther changes have also been introduced with the $reaty of :ice.

$he role of the E& as a co5legislator together with the (ouncil of Ministers were further

e)panded and strengthened.

E& is composed of cross5national parties, such as the European &eopleGs &arty and European

'emocrats =E&&5E'>, which with 3 with 199 M&s. $his

illustration also shows you the number of M&s sent by each of the member states.

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$he &arliamentGs 3! standing committees are incredibly important for the wor% of the E& and

its influence 'uring their years in office, those members of the European &arliament who

are active in the committees are able to acquire a great deal of specialist %nowledge. $his

specialist %nowledge not only enables them to follow the wor% being carried out by the

'irectorates 8eneral, the (ommission and the (ouncil of Ministers, it also enables them to

bring more influence to bear than the official description of their responsibilities would

suggest. "nother important aspect in this respect is their close cooperation with the respective

(ommission departments and with transnational and national associations.

$he main characteristics of the E& can be summari#ed thusB $he European &arliament is a

multi5national chamber undergoing constant change it features ideological 5 differing

political groupings from across the member states 5 and national differences 5 nationality of

the M&s from the individual member states. "s with the other institutions addressed so far, the

European &arliament also demonstrates significant functional differentiation. "nd, finally, the

incredibly close lin%s and intensive cooperation with the (ommission, often against the

(ommission, should also be emphasi#ed.

Ma%ing an assessment based on a comparison with national parliaments depends on how one

loo%s at it. 0rom a statistical point of view ta%en today, it can be said that the importance of

the E& still lags behind that of national parliaments, but goes much further than anything

found in parliamentary chambers or committees in international organisations. Niew the

development of the European &arliament during the last two decades, however, and it is

stri%ingly clear that its importance compared to the other institutions has grown enormouslyB

"nother important indication of the Jsupranationali#ationJ of the E(.

$he &arliament and the (ouncil constitute the UnionGs Doint budgetary authority. $he

&arliament has to give its assent to any trade, co5operation, association or membership

agreement concluded between the Union and a non5member country.

Under the Maastricht $reaty, the &arliament was given the right to set up committees of

enquiry and to appoint an O$'uds$#nto investigate allegations of maladministration by the

institutions of the Union.

3. The European Court of Justice

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$he European (ourt of @ustice =E(@>, Dust li%e the European &arliament, sounds familiar to

systems e)isting in national states. Indeed, its power of Durisdiction also corresponds to that

often found in national democratic political systems. $he E(@ is responsible for ma%ing sure

(ommunity law is upheld. It is responsible for ruling on legal disputes between member

states, on disputes between the EU and member states, on disputes between EU institutions

and authorities as well as on disputes between individual citi#ens and the Union. In addition

to this, Dudges in member states can turn to the (ourt of @ustice to rule on pending cases

involving the interpretation of (ommunity law.

$here is also a (ourt of 0irst Instance that e)ists alongside the (ourt of @ustice. $he (ourt of

0irst Instance was established in 19?9 to ease the (ourt of @usticeGs wor%load. Its Durisdiction

includes direct actions from citi#ens and companies against the actions or failure of EU bodies

to act, as well as action for damages against the EU.

Employment conflicts between the EU and its employees have been handled by the (ivil

ervice $ribunal since the autumn of 3!!. $here are two ways of calling in the E(@. $he first

is over the preliminary rulings procedure, which permits national courts to apply for an

interpretation of certain aspects of (ommunity law to help these national courts to reach a

decision on a current case. $he second way is over direct petitions.

7ut its actual influence only really becomes clear after ta%ing a loo% at its wor% in individual

areas. $he European (ourt of @ustice has been a maDor influencing factor in ma%ing the

constitution of the EU more supranational by laying down rules such as theprinciple of direct

effect5 which means for every citi#en without having to call in national states first 5 of EU

law and the primacy of Community law over national law.

Moreover, the European (ourt of @ustice has also had a large bearing on other areas of EU

policy. 0or e)ample, in a revolutionary ruling it established the principle of mutual

recognition of standards in other member states, which put an end to the e)tremely slow and

time5consuming process of harmonising standards and, in turn, went a long way to ma%ing the

internal mar%et proDect possible. 6ne of the main reasons for the E(@Gs influence came as a

result of a clever, targeted and successful strategy to incorporate the national courts into the

administration of EU Dustice.

oo%ing at this, it might be easy to get the impression that these landmar% decisions were

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made in the past and that they can no longer be ta%en to reflect the influence of the E(@ today.

" more recent judgement ,:ovember 3!!>, however, demonstrates that it would be quite wrong

to get this impression. $his Dudgement might lead to the (ommission gaining influence in the

area of criminal law and has led to heated discussions.

$he European (ourt of @ustice, consisting of 3 Dudges and ? "dvocates58eneral, is based in

u)embourg. o, it is responsible for arbitrating in disputes relating to the interpretation and

application of the $reaties and of legislation based upon them. Its Dudgements are binding

upon those to whom they are addressed and it has the power to levy fines on firms found to be

in breach of Union law. Under the Maastricht $reaty, the (ourt also has the power to impose

fines on Member tates which fail to carry out their $reaty obligations.

3.* The Court of First Instance

$his (ourt was established by "rticle 11 of the 19?< ingle European "ct and first became

operational in 19?9. It consists of 3 Dudges, one from each Member tate. $here are no

"dvocates58eneral. It has Durisdiction over a number of fields but of particular importance to

business are its powers in competition and intellectual property law and over the

(ommissionFs anti5dumping procedures.

3.< The Court of Auditors

$he (ourt of "uditors, composed of one Member from each Member tate, is also based in

u)embourg. It is responsible for overseeing all e)penditure from the 7udget of the Union.

Its findings are contained in an annual report submitted to the (ouncil and the European

&arliament. $he (ourt, which has no power of sanction, may also underta%e special

investigations into particular sectors of the 7udget.

3.? The Economic and Social Committee EC!S!C>

et up in 19< by the $reaty of Aome, members of E(66( appointed by the (ouncil on the

recommendation of Member tatesG governments and have a four5year term of office.

E(66( consists of representatives of employers =8roup 1>, wor%ers =8roup 3> and various

interest groups =8roup +>. It covers areas such as agriculture and fisheries, industry and

commerce, financial and monetary questions, social and cultural affairs, transport and

communications, trade and development policy, nuclear questions and research, regional

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then draws up its Jcommon positionJ. tudies have shown that about ;! per cent of the

&arliamentFs amendments are accepted at this stage. $he (ouncilFs common position is sent

bac% to the &arliament which may within three months approve it, reDect it, or adopt

amendments to it. $he (ouncil may then adopt the proposal in question, although it can do so

only by unanimous agreement B

i. when it wishes to amend a proposal on its own initiative

ii. when it decides to ta%e up amendments which have been proposed by the &arliament but

reDected by the (ommission

iii. when it decides to adopt a common position which the &arliament has reDected

iv. when it wishes to override amendments which the &arliament has adopted by an absolute

maDority =+1; votes> at second reading and which are supported by the (ommission.

$he Maastricht $reaty =effective from :ovember 199+> introduced the Co1*ecision

Procedurein order to strengthen the &arliamentFs influence over legislation. 6nce the $reaty

of "msterdam comes into effect, the (o5'ecision &rocedure will replace the (o5operation

&rocedure in all but a very few areas and become the normal mode of (ouncil5&arliament

involvement in legislation. $he essential difference between the two procedures is that the

(o5'ecision &rocedure B

allows for the convening of a K(onciliation (ommitteeF in which at the final stage

differences between the (ouncil and the &arliament may be resolved

allows the &arliament, as a last resort, the right to reDect the proposal outright by an

absolute maDority.

Under the (o5'ecision &rocedure, the (ouncil and the &arliament are Dointly responsible for

the final adoption of legislation. It has been estimated that some *! per cent of the

&arliamentFs amendments are incorporated into the legislation.

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6 THE INTER1"OVERNMENTAL PILLARS

$he Maastricht $reaty created a European Union which rests upon three JpillarsJ. $he central

pillar is the European (ommunity =E(> itself and the decision5ma%ing procedures described

here are those which apply to action within the E( pillar, normally %nown as the Jfirst pillarJ.

$he procedures in the other two pillars =the (ommon 0oreign and ecurity &olicy and (o5

operation in the fields of @ustice and 2ome "ffairs> are different, for although the (ouncil of

Ministers plays much the same role, the legislative instruments are not the same. $he

(ommission is less influential and recourse cannot be had to the (ourt of @ustice. "ction in

these fields is essentially intergovernmental in character.

Under both pillars, provision e)ists for the European &arliament to be %ept informed and

consulted. Members of the European &arliament are also entitled in the normal way to put

questions to the (ouncil of Ministers. In so far as action is ta%en under either heading which

involves a charge to the 7udget of the Union, the &arliamentGs powers with respect to the

7udget =see above> may be brought into play.

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CHAPTER IV. THE BU*"ET OF EU

I. Te e!enses $#de &ro$ te 'udget

"ctions and proDects funded by the EU budget reflect the priorities set by the EU countries at

a given time. $hese are grouped under broad spending categories =%nown as KheadingsF> and

thirty5one different policy areas.

$he EU budget finances actions and proDects in policy domains where all EU countries have

agreed to act at Union level. uch decisions are ta%en for very practical reasons. @oining

forces in these areas can yield greater results and costs less.

$here are other policies, however, where the EU countries decided not to act at Union level.

0or e)ample, national social security, pension, health or education systems are all paid for by

national, regional or local governments. $he Gsu'sidi#rit0 !rinci!%eG ensures that activities

best managed at national, regional or local level are funded at the most appropriate level and

that the Union does not intervene.

#. For gro7t #nd (o's

0or the ne)t seven years, the EU countries have decided to dedicate a considerable part of

their Doint efforts and of the EU budget to creating more econo$ic gro7t and Dobs.

ustainable growth has become one of the main priorities of the Union. $he EU economy

needs to be more competitive and less prosperous regions need to catch up with the others.

6ver the period 3!!


31/90

"chieving long5term growth also depends on tapping and increasing the EUFs growth

potential. $his priority, %nown as 8Coesion8, calls for helping especially less advantaged

regions transform their economy to face global competition. Innovation and the %nowledge

economy provide an unprecedented window of opportunity to trigger growth in these regions.

6ut of every euro spent, 59 centswill go to such cohesion activities.

'. N#tur#% resources

$han%s to their geographic and climatic diversity, the EU countries produce a large variety of

agricultural products, which European consumers can buy at reasonable prices. $he EU

efforts in this field have two main goals. 0irst, what is produced must correspond to what

consumers want, including ig s#&et0 #nd :u#%it0for agricultural products. econd, on the

production side, the farming community should be able to plan and adapt production to

consumersF demand while respecting the environment.

In addition, a successful management and protection of our natural resources must also

include direct measures to protect the en)iron$ent, restructure and diversify the rur#%

econo$0 and promote sust#in#'%e &ising. "fter all, animal infections, oil spills and airpollution do not stop at national borders. uch threats require e)tensive action on many fronts

and in several countries. 6ver the period 3!!


32/90

protects this cu%tur#% erit#geand richness, while encouraging #cti)e !#rtici!#tionin social

debates around us. It also aims to protect !u'%ic e#%tand consu$er interests. "bout one

centin every euro will go to such activities under this heading %nown as K(iti#enshipF.

e. "%o'#% !%#0er

$he impact of EU funds does not stop at our e)ternal borders. 0or many, the EU budget

delivers the most needed e$ergenc0 #idin the aftermath of a natural disaster. 0or others, it is

a %ong1ter$ #ssist#ncefor prosperity, stability and security. "bout si centsin every euro go

to cooperation with countries about to Doin the Union, other neighbouring countries, and

indeed to poorer regions and countries around the world.

&. Ad$inistr#ti)e costs

"round si centsin every euro are spent on running the European Union. $his covers the staff

and building costs of all EU institutions, including the European &arliament, (ouncil of

Ministers, European (ommission, European (ourt of @ustice and European (ourt of "uditors.

II. Te sources o& $one0

$he European Union has its Gown resourcesG to finance its e)penditure. egally, these

resources belong to the Union. Member tates collect them on behalf of the EU and transfer

them to the EU budget.

6wn resources are of three %inds =the figures below refer to the forecasts for 3!!.

Tr#dition#% o7n resources=$6A> these mainly consist of duties that are charged

on imports of products coming from a non5EU state. $hey bring in appro)imately

EUA + billion or 1 C of the total revenue.

$he resource based on )#%ue #dded t#=N"$> is a uniform percentage rate that is

applied to each Member tateFs harmonised N"$ revenue. $he N"$5based resource

accounts for 1 C of total revenue, or some EUA 1 is a uniform percentage rate

=!. applied to the 8:I of each Member tate. "lthough it is a balancing item, it

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has become the largest source of revenue and today accounts for *9 C of total revenue

or EUA ?! billion.

$he budget also receives other revenue, such as ta)es paid by EU staff on their salaries,

contributions from non5EU countries to certain EU programmes and fines on companies that

breach competition or other laws. $hese miscellaneous resources add up to around EUA 1.+

billion, i.e. about 1 C of the budget.

$he total EU revenue for 3!!< amounts to some EUA 11*.; billion, while the total of the

funds committed under different policies is slightly higher. $he difference mainly results from

the budgetary practice of the EU, where the European (ommission commits, i.e. bloc%s, the

total amount required for a multi5annual proDect in the first year of the proDect. $he actual

payments, however, are made in several instalments during the proDect period.

Aevenue flows into the budget in a way which is roughly proportionate to the wealth of the

Member tates. $he U4, the :etherlands, 8ermany, "ustria and weden, however, benefit

from some adDustments when calculating their contributions.

6n the other hand, EU funds flow out to the Member tates in accordance with the priorities

that the Union has identified. ess prosperous Member tates receive proportionately more

than the richer ones and most countries receive more than they pay in to the budget.

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"fter a conciliation meeting with the &arliament, the (ouncil of Ministers adopts the dr#&t

'udgetwith amendments, if any, which is forwarded to the &arliament in eptember.

P#r%i#$ent>s &irst re#ding

"t its first reading in 6ctober, the &arliament may decide to amend the (ouncilGs draft. It will

discuss controversial matters in Gtri#%ogueG meetings with the (ouncil &residency and the

(ommission beforehand. &arliamentGs first reading, along with its suggestions, is then referred

bac% to the (ouncil.

Counci%>s second re#ding

7efore its second reading in :ovember, the (ouncil has a further conciliation meeting with

the &arliament and tries to reach an agreement on the whole of the budget. It then adopts its

second reading.

P#r%i#$ent #do!ts or re(ects te 'udget ,second re#ding-

$he &arliament may modify the (ouncilFs latest te)t before it votes on the final budget in

'ecember. If approved, the &resident of the &arliament signs the budget into law. $he

&arliament may also reDect the budget.

imilar procedures apply to the adoption of %etters o& #$end$entto the preliminary draft

budget =presented when new information comes to light before the adoption of the budget>

and of #$ending 'udgets=in the case of inevitable, e)ceptional or unforeseen circumstances

occurring after the budget has been adopted>.

IV. Te structur#% &unds

$he tructural 0unds are the primary source of European Union funding, with the e)ception

of support for agriculture. ome 9!C of the European Union finance available for proDects

goes to the tructural 0unds.

$hrough the tructural 0unds, the European Union aims to support those regions which are

less developed or in industrial decline, and to support training schemes for those see%ing re5

entry into employment.

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$he present rules for tructural 0unds apply from 3!!! to the end of 3!!*. $here are currently

four main tructural 0unds. $hese areB

1. Euro!e#n Region#% *e)e%o!$ent Fund ,ER*F-= EA'0 concentrates on less5

favoured regions. $he main focus is on productive investment, infrastructure and ME

development. $here are also considerable funds available to support infrastructure

development in I& areas and community based regeneration.

3. Euro!e#n Soci#% Fund ,ESF-= E0 supports human resource development measures

=training and s%ills development>. $he main aim is to promote a high level of

employment and social protection, equality between men and women, sustainable

development, and economic and social cohesion.

+. Euro!e#n Agricu%tur#% "uid#nce #nd "u#r#ntee Fund ,EA""F-= $he E"880

finances the (ommon "gricultural &olicy and rural development.

;. Fiseries Instru$ent &or Fiseries "uid#nce ,FIF"-= 0I08 supports proDects

related to fisheries restructuring and mar%eting.

O'(ecti)e Progr#$$es

$he four tructural 0unds combine to fund 6bDective &rogrammes. $here are currently three

6bDectives through which funding is allocated. $he 6bDectives areB

O'(ecti)e2

$he 6bDective 1 &rogramme provides support for regions in Europe where development is

lagging behind.

O'(ecti)e4

$he 6bDective 3 &rogramme provides support for areas undergoing economic and social

conversion

O'(ecti)e5

$he 6bDective + &rogramme provides support to tac%le long5term unemployment and social

e)clusion.

CHAPTER V. MONETARY POLICY IN THE EU

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2. Ro%e #nd !ro)isions o& te Euro!e#n Monet#r0 S0ste$

$he European Monetary ystem is being considered as a first attempt at Economic and

Monetary Union, but it is really more li%e a mechanism devised for creating a K#one of

monetary stabilityF. $he idea was floated by 8erman (hancellor, 2elmut chmidt and 0rench

&resident, Nalery 8iscard dFEstating. $he (ouncil had adopted the idea, in the form of a

resolution Kon the establishment of the European Monetary System EMS$ and related

mattersF. $he obDectives were of stabili#ing e)change rates, reducing inflation, and preparing

for monetary integration.

$he provisions of the EM were the followingB

1. In terms of e)change rate management, the EM will be at least as strict as the

Ksna%eF.? In the initial stages of its operation and for a limited period of time, member

countries currently not participating in the Ksna%eF may opt for somewhat wider margins

around central rates. In principle, intervention will be in the currencies of participating

countries. (hanges in central rates will be subDect to mutual consent. :on5member countries

with particularly strong economic and financial ties with the (ommunity may become

associate members of the system. The European Currency Unit%ECU> will be at the centre

of the system it will be used as a means of settlement between European Economic

(ommunities monetary authorities.

3. "n initial supply of E(Us =for use among (ommunity central ban%s> will be created

against deposits of U dollars and gold on the one hand, and member currencies on the other

hand. $he use of E(Us created against Member tates currencies will be subDect to conditions

varying with the amount and the maturity.

+. &articipating countries will coordinate their e)change rates policies vis5O5vis third

countries. ays to coordinate dollar interventions should be sought of, avoiding simultaneous

reserve interventions. (entral ban%s buying dollars will deposit a fraction and receive E(Usin return li%ewise, central ban%s selling dollars will receive a fraction against E(Us.

;. :o later than 3 years after the start of the scheme, the e)isting arrangements and

instructions will be consolidated in a European Monetary 0und.

?In 19, in relation to fluctuations against the U dollar =the tunnel>.

9"n abstract currency, a standard legal tender used to calculate the budgetary contributions of each Membertate it represented a bas%et of currencies adDusted periodically, to reflect the relative economic power of each

Member tate.

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. " system of closer monetary cooperation will only be successful if participating

countries pursue policies conductive to greater stability at home and abroad this applies to

deficit and surplus countries ali%e.

In essence, the EM is concerned with the creation of an E( currency #one within

which there is discipline in mana#in# e&chan#e rates. $he discipline is %nown as the

Ke)change rate mechanismF =EAM>, which as%s a member nation to intervene to reverse a

trend when


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economic performance through the strengthening of economic and monetary policy

consideration within the e)isting institutional framewor%. In the monetary field the emphasis

would be on the removal of all obstacles to financial integration and of the intensification of

cooperation and coordination of monetary policies. Aealignment of e)change rates was seen

to be possible, but effort would be made by every Member tate to ma%e the functioning of

other adDustment mechanisms more effective. $he committee was of the opinion that it would

be important to include all E( currencies in the e)change rate mechanism of the EM during

this stage. $he 19 to absorb the previous

institutional monetary arrangements. $he E(7 would start the transition with a first stage in

which the coordination of independent monetary policies would be carried out by the

(ommittee of (entral 7an% 8overnors. It was envisaged that the formulation and

implementation of a common monetary policy would ta%e place in the final stage during this

stage e)change rates realignments would not be allowed barring e)ceptional circumstances.

$he final stage would begin with the irrevocable fi)ing of Member tatesF e)change

rates and the attribution to the E( institutions of the full monetary and economic

consequences. It is envisaged that during this stage the national currencies would eventually

be replaced by a single E( currency. In the economic field, the transition to this stage is seen

to be mar%ed by three developmentsB E( structural and regional policies may have to be

further strengthened E( macroeconomic and budgetary rules and procedures would have to

become binding and the E( role in the process of international policy cooperation would

have to become fuller and more positive.

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In the monetary field, the irrevocable fi)ing of e)change rates would come into effect

and the transition to a single monetary policy and a single currency would be made. $he

E(7 would assume full responsibility, especially in four specific areasB

1. $he formulation and implementation of monetary policy.

3. E)change5mar%et intervention in third currencies.

+. $he pooling and management of all foreign e)change reserves.

;. $echnical and regulatory preparations necessary for the transition to a single E(

currency.

$he Aeport was the main item for discussion in the E( summit in Madrid on 3; @une

19?9. In that meeting, member nations agreed to call a conference which would decide the

route to be ta%en to EMU. Instead of insisting that the United 4ingdom would Doin the

e)change rate mechanism of the E( Kwhen the time is ripeF, a surprisingly conciliatory

Margaret $hatcher, the 7ritish &rime Minster, set out five conditions for DoiningB a lower

inflation rate in the U4, and in the E( as a whole, abolition of all e)change controls =at the

time and for two year after, Italy , 0rance and pain had them>, progress towards the single

E( mar%et, liberali#ation of financial reserves and agreement on competition policy. "ll

member nations endorsed the Aeport and agreed on 1 @uly 199! as the deadline for the

commencement of the first stage.

5. Te M##strict Tre#t0

$he three stage timetable for EMU did start on 1 @uly 199! with the launching of the

first phase of intensified economic cooperation during which all Member tates were to

submit their currencies to the EM e)change rate mechanism.

$he second stage is clarified in the Maastricht $reaty. It was to start in 199;. 'uring

this stage the EU was to create the European Monetary Institute =EMI> to prepare the way for

a European (entral 7an% =E(7> which would start operating on 1 @anuary 199


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" single currency, to be managed by an independent E(7, was to be introduced as

early as 199


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$he important requirements for a stable system are that no member should be able to

run their economy in a way that increases the costs for the others. &rovided that the minimum

standard set is high enough, then the euro area as a whole will get the finest credit

ratingslowest interest costs.

$he timing of these convergence tests has been crucial. If they had occurred in 1993,

only 0rance and u)embourg would have scored full mar%s, meaning five points. $he others

would have scored as followsB 'enmar% and the United 4ingdom ; points each 7elgium,

8ermany and Ireland + points each the :etherlands 3 points Italy and pain 1 point each

8reece and &ortugal #ero points each. 2ence, the EMU could not have been introduced. $he

position at the end of 199* was even worse, since only u)embourg qualified. 2ence the third

stage of EMU began in 199


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ourceB EiDffinger de 2aan =3!!!>

0ourteen Member tates had government deficits of +C on 8'& or less in 199


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iv> e)ercise certain powers delegated to it by the 8overning (ouncil.

$he top decision ma%ing body of the E(7 is the o'ernin# Council, which comprises

the si) members of the e)ecutive board and the 13 governors of the euro area central ban%s.

$he president of the E(7 acts as its chairperson. Its main responsibilities areB

i> adopt the guidelines and ta%e decisions to ensure the performance of the tas%s

entrusted to the Eurosystem

ii> formulate the monetary policy in the Euro area, including, as appropriate, decisions

related to immediate monetary obDectives, %ey interest rates and the supply of reserves in the

Eurosystem

iii> establish the necessary guidelines for their implementation.

$he 8overning (ouncil meets twice a month at the Eurotower in 0ran%furt am Main,

8ermany. "t its first meeting each month, the 8overning (ouncil assesses monetary and

economic developments and ta%es its monthly monetary policy decisions. "t its second

meeting, the council discusses mainly issues related to other tas%s and responsibilities of the

E(7 and the Eurosystem. $he minutes of the meetings are not published, but the monetary

policy decision is announced at a press conference held shortly after the first meeting each

month. $he &resident, assisted by the Nice5&resident, chairs the press conference.

$here is also the eneral Council, consisting of the &resident and Nice5&resident of

the E(7 as well as the governors of the national central ban%s of all EU nations5 39

members11.It carries out the tas%s ta%en over from the European Monetary Institute which the

E(7 is required to perform in tage $hree of Economic and Monetary Union =EMU> on

account of the fact that not all EU Member tates have adopted the euro yet. $he 8eneral

(ouncil also contributes toB

i> the E(7Fs advisory functions

ii> collection of statistical information

iii> preparation of the E(7Gs annual reports

iv> establishment of the necessary rules for standardising the accounting and reporting

of operations underta%en by the national central ban%s

v> ta%ing of measures relating to the establishment of the %ey for the E(7Gs capital

subscription other than those already laid down in the $reaty

vi> laying5down of the conditions of employment of the members of staff of the E(7

vii> the necessary preparations for irrevocably fi)ing the e)change rates of the

currencies of the Member tates with a derogation against the euro. In accordance with the

113< governorsV3

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tatute, the 8eneral (ouncil will be dissolved once all EU Member tates have introduced the

single currency.

$he E(7Fs capital amounts to EUA . billion. $he :(7s are the sole subscribers and

holders of the capital of the E(7. $he subscription of the capital is based on the basis of the

EU Member tatesF respective shares in the 8'& and population of the (ommunity. $he fully

paid5up subscriptions of euro area national central ban%s =:(7s> to the capital of the E(7

amount to a total of +.9bn euro. $he EU non5euro area :(7s are required to contribute to the

operational costs incurred by the E(7 in relation to their participation in the European ystem

of (entral 7an%s by paying up a minimal percentage of their subscribed capital. 0rom May

3!!; these contributions represent


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the imbalance can only grow worse, once candidate countries and perhaps todayFs KoutsF Doin

the euro.

$here is also a fundamental problem in the Eurosystem of Kone si#e fits allF and there

has been a debate on the technical virtues of inflation5targeting versus monetary targeting.

6. Te Euros0ste$

$he institutional system behind the single monetary policy is quite comple), because it

has to deal with the fact that some EU members are not participants in tage + of EMU =yet>.

$he $reaty sets up the European ystem of (entral 7an%s =E(7>, the E(7 and the

participating :(7s form the Eurosystem, which is what is running the monetary side of the

euro area. $he term KEurosystemF has only been coined by its members, in order to ma%e theset up clearer.

Te 'urosystem is relatively decentrali!ed. It operates through a networ% of

committees, where each national central ban% and the E(7 have a member. $he E(7

normally provides the chairman and the secretariat. $he 8overning (ouncil ta%es the

decisions but the E)ecutive 7oard coordinates the wor% of the committees and prepares the

agenda for the 8overning (ouncil. $he Eurosystem also has a Monetary &olicy (ommittee,

but unli%e the U4 and many other central ban%s round the world, this is not the decision

ma%ing body on monetary policy. It organi#es and discusses the main evidence and discussion

papers to be put before the 8overning (ouncil on monetary matters.

Te 'urosystem ban. as a ig degree of independence from political influence in

e)ercising its responsibility. :ot only is the ta%ing or see%ing of such advice e)plicitly

prohibited, but the 8overning (ouncil members are protected in a number of ways in order to

shield the

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