The European Union

Current State-Members• Current State: The European Union (EU) and the Euro-zone:

27members in EU and 15 members in the euro-zone excluding U.K., Sweden and Denmark but including Malta, Cyprus and Slovenia. 27 members are Germany, France, Italy, Belgium, Netherlands, Luxembourg, Ireland, UK, Denmark, Greece, Portugal, Spain, Austria, Finland, Sweden, Czech Rep., Estonia, Hungary, Poland, Slovenia, Latvia, Lithuania, Slovak Rep., Cyprus, Malta, Bulgaria (2007), Romania (2007).

• Hence, there are currently 16 European Monetary Union (EMU) members, Denmark and the UK negotiated opt-out clauses while Sweden postponed entry into the Euroland. Slovenia adopted the Euro on January 1st, 2007 and Malta and Cyprus on 2008. Slovakia adopted the Euro on January 1st, 2009.

• 3 countries in the pre-accession state: These are Croatia, Turkey and Macedonia.

SpainPortugal

France

Germany

EnglandIreland

Sweden

Finland

Denmark

Italy

Greece

Austria

BelgiumNetherlands

The ‘EURO’ area

History of European Union I

• Organization for European Economic Cooperation (OEEC) was founded in 1948 to administer US Marshall Plan aid to reconstruct postwar Europe. Europe sought to avoid fascism, Nazism and protectionism and establish peace and prosperity through trade kinks. Communism was feared to encroach Europe.

• The Breakthrough into supranationalism: The Schuman Plan (1950) foresaw limited sectoral integration but on a supranational basis to place war-making sectors of coal and steel under one authority (The High Authority).

• It was an explicitly political proposal but followed a functional approach of economic integration but with wider political objectives.

History of European Union II

• Treaty of Paris (1951)-European Coal and Steel Community (ECSC) founded in 1952 to realize a common market for coal, steel and iron ore for the six member countries (West Germany, France, Italy, Belgium, the Netherlands and Luxembourg)-Nascent political integration through sectoral integration to avoid another French-German war.

• “Numero uno” problem at the time was governmental failure. Twice in the 20th century governments failed to deliver peace and this led to ruin in Europe. By 1950s, a middle aged man had seen two incredibly destructive wars!

WHY EUROPEANCOOPERATION and

INTEGRATION?• Propelled by a distinctive set of historical circumstances and

impulses and motivated by political, economic and security considerations.

• 1. Wish to avoid a repeat of governmental failures culminated in two World Wars in the 20th century and expansionist nationalism (Nazi Germany).

• 2. Economic devastation caused by wartime destruction.• 3. Emergence of two superpowers, the USA and the Soviet Union

with competing economic and political ideologies.• 4. Division of Europe (East and West) and the need for security

from Soviet threat and expansionism.• 5. Need for rapid development in standards of living and economic

performance to establish long-lasting peace and security. Poor economic performance was perceived as providing a climate of political instability conducive to the growth of Fascism and Communism as the extreme ideologies.

• 6. Franco-German reconciliation as the bedrock of stability within Western Europe.

History of European Union III

• Failure: The European Defense Community proposed by the Pleven Plan (another French!) failed in the French parliament (1954). The issue was German remilitarization-less need after Korean war. Germany became a member of NATO in 1955 through the intergovernmental Western European Union.

• DeGaulle and rising French nationalism obstructed a nascent political integration based on a common defense program.

• The Relaunch: The Messina Conference (1955): Proposals for the creation of a common market beyond the ECSC, a common transport and energy policies. The negotiations proposed a customs union and a commitment to deeper integration.

• The UK withdrew because of outright opposition to the supranational form of integration proposed in Messina.

• The Suez crisis made economic integration a necessity as it signaled the end of French-British status as global powers. Soviet invasion of Hungary was menacing.

History of European Union IV • Treaty of Rome formally established the European

Economic Community (EEC) and European Atomic Energy Community (EURATOM) in 1957 and the European Community (EC) consisted of ECSC, EEC and EURATOM. [In 1967, ECSC and EEC merged with the (EURATOM) to form the European Community (EC)-called the Merger Treaty].

• Based on “The Community Model” to forge “ an ever closer union among the peoples of Europe.’ Deadline for the removal of interstate tariffs were set at 1969 but achieved in 1968. (Deeper integration towards a common market in 1985 with the Single Market Program.)

• At this time, the EC was more than a customs union (CU) but less than an economic union (EU): More than a CU because of common policies in coal/steel and agriculture (CAP), attempts to unify transport and energy sectors. But less than an EU with free circulation of goods, services and only to some extent free movement in capital and no common macroeconomic and other sectoral policies.

Main notions of economic integration

• Free trade area – Eliminates tariffs within the area only. Each country retains

its own policy towards non-members.

• Custom union – Add a common external policy to the free trade area.

• Common market– Factors of production can flow freely within a custom union.

Free movement of capital, labor and goods/services.

• Economic union– Common market with common determination of some

structural and macroeconomic policies.

• Massive extension of the “Community Model” to forge “an

ever closer union among the peoples of Europe.”

• The EEC as a “Customs Union”.

– Progressive elimination of internal tariffs by 1969- Formation of a free

trade area (FTA) for the EEC with the gradual elimination of tariffs,

quotas and other barriers to trade among members.

– Common external tariffs of 15 percent (members’ average)-the

creation of a uniform tariff schedule applicable to the imports from the

rest of the world. The Goal was the formation of a common market (CM):

the removal of all barriers to the movement of labor, capital and business

enterprises. And coordination of economic policies (a distant goal at the time.)

Treaty of Rome (1957)

• The Adoption of the Common Agricultural Policies (CAP)-French pushed for this as a tilt of balance against the industrial Germany.It was a vital instrument of Community solidarity and helped restructure the declining Western European agriculture.

• The creation of an investment fund (European Investment Bank) to channel capital from the more advanced to the less developed regions of the community.

• Tax and social policy harmonization.• Coordination of fiscal, monetary and exchange rate policies.

• Institutionalize the virtuous circle of export-led growth.

– The elimination of tariffs would create trade (trade creation).

– The imposition of external tariffs would reduce dependence from the

United States, Soviet Union, etc. (trade diversion).

The Treaty of Rome (1957)

History of European Union V• British subservient to American foreign policy, but not

France! UK did not apply for EEC until 1961 for several reasons.

• Hence, despite entrenched protectionism in the French industry, France agreed to economic integration through common trade policies and a customs union in the Treaty of Rome but made common agricultural policy (CAP) a sine qua non for signing the Treaty. common agricultural policy (CAP)- a condition insisted by DeGaulle for signing the Treaty.

• France opposed US domination both in foreign policy and international monetary policy (Bretton Woods(1944) with a fixed exchange rate regime with dollar as the reserve currency convertible to gold.).

History of European UnionVI

• European Free Trade Association (EFTA) started in 1960 for those not willing to move to degree of integration in the Treaty of Rome (UK, Norway, Denmark, Sweden, Austria, Finland(1961), Iceland (1970), Portugal and Switzerland.) No threat to national sovereignty!

• EFTA would allow the UK to set its own external tariffs, maintain its special relationship with the Commonwealth countries and avoid participation in the common agricultural program (CAP) of the Rome Treaty (1957) which would raise the cost of imported food stuff for UK. Also, the UK did not want to relinquish national power, a precondition of the Schuman Plan and preferred a free trade area.

• A Note: Since 1994, the European Economic Area (EEA) allows free movement of people, products, services and capital in the EU and EFTA. EFTA today consists of Iceland, Liechtenstein, Switzerland and Norway. Except Switzerland, the rest is part of the European Union’s Internal Market EEA (1994). Switzerland, opted to conclude

bilateral agreements with the EU.

BRITISH ENTRY

• For UK under MacMillan-merits of entry.---Special Anglo-American relationship was becoming less

important (Macmillan-Kennedy meeting in 1962).---UK risked political isolation by remaining outside the EEC.---Rapid growth in the EEC market and lack of any free trade

links with EFTA.---However, UK had missed the boat! Suspicious of UK entry,

DeGaulle vetoed twice (1963, and 1967) the British requests for membership for fear that this would dilute the EEC into a free trade area and make it subservient to American foreign policy interests. Only after DeGaulle, Pompidou allowed it to join as a counterweight to Germany’s inevitable future political and economic domination in the Community (1973 British, Irish and Danish entry).

History of European Union VII

• A climate of consolidation and challenge: Between Progress and Conflict in the era of DeGaulle (1958-1969)

• DeGaulle’s attempt to reestablish the prestige of the French state by strengthening the French grandeur.

• Primacy of EU Law over national law established in the 1960s reinforcing the supranationalism of the EEC

• Paradoxically, this was also a period of resurgence in national interests. DeGaulle believed that an equitable transatlantic was impossible as long as Western Europe remained subservient to the US. This was one of the major reasons why he vetoed British entry twice! France was against the supremacy of the US in foreign affairs.

• DeGaulle’s concept of a “Europe of the nation-states” bluntly emphasized intergovernmentalism and epitomized hostility to supranationalism. Against some stateless construction, (“quelque construction apatride”). Fouchet Plan of political cooperation failed in 1962, and later, in 1963, bilateral Treaty between Germany and France on permanent cooperation failed. A punch in the stomach for France: Germany refrained from siding with France against NATO and the US.

• By 1968, the EEC was a duty-free zone but intra-community trade was far from free due to the existence of non-tariff barriers to trade.

History of European Union VIII

• A climate of consolidation and challenge (1958-1969)• “Empty Chair Crisis”– 1. Hallstein (1st President of the European

Commission) wished to create “self-financing” or “own sources” EEC budget autonomous of the national budgets. 2. the 1966 introduction of the qualified majority voting in the Council of Ministers. Both of these were perceived as a major threat to national sovereignty and a reinforcement of supranationalism by DeGaulle. Hence, France withdrew from the meetings of the Council of Ministers from June 1965 to January 1966 until the adoption of the Luxembourg Compromise.

• The compromise was: On matters of “vital national interest” to one or more member states, unanimity would be required. This meant the integration would be dictated by the pace of the most reluctant member state. A change in the ethos from Community spirit to a calculated, selfish and pragmatic cost-benefit attitude of the member states.This slowed down the decision making process and brought a decline in supranationalism till the 1980s.

• Revival would take place only after the departure of DeGaulle’s resignation

in 1969.

History of European Union IX

• Commission’s President Hallstein: “The notion of Economic and Political Union was closer to that of a Political Union, federation or a confederation, than to the notion of a customs union. Practically identical, in fact, to a political union, it would have to include a European political power, a Community budget, and integrated system of central banks. All these would require profound changes for which the member states were not ready.”

History of European Union X

• The First enlargement and the Hague Summit (1969)• A joint initiative of Brandt and Pompidou symbolizing the optimism

of the post-De Gaulle era. Barre plan (1968) formed the basis of the summit.

• Idea of creating an economic and monetary union for the first time. • Greater monetary solidarity needed (Widely uneven economic

performances of the member states in the late 1960s and early 1970s.) The Werner Report (1970):First blueprint for a single currency, stages of economic and monetary union with a single currency were laid out (by 1980!), a large dose of centralization of policies, monetary and fiscal.

• Pompidou allowed British entry to limit German potential to displace France as the center of gravity in the EC. British accession could bolster French leadership as a bulwark against German economic and political resurgence. Germany: “an economy in search of a political purpose.”

• French devaluation and the strength of Mark-threatening the economic balance of power between the two “core” countries. The oil price shocks, economic recession, bloated CAP and recalcitrant British severely tested EC solidarity. Yet, the EC survived the 1970s- the decade of “Eurosclerosis.”

History of European Union XI

• The Decade of Eurosclerosis (1973-1983)---- “German Ostpolitik”-normalization of relations with Eastern

Europe. Goal: reunification, unachievable without the collapse of the Soviet Union. But by agreeing to a single currency (Werner Report), Brandt of Germany demonstrated that it did not ask for supremacy in Europe. Balancing of aspirations towards East Germany “with a renewed dynamism in West Europe.”

--- Enlargement in 1973, creation of a more financially independent Community achieved through “own sources” consisting of custom duties, agricultural levies and a % of VAT tax.

History of European Union XII

• The Decade of Eurosclerosis (1973-1983) and Post-1973 Blues..

-- Failure of monetary integration and failure of deeper trade integration.

-- Break-down of the Bretton Woods Exchange Rate System (1958-1971).-- Community in a Flux: Euro-pessimism due to 1) Failure of monetary

integration, and 2) failure of deeper trade integration.-- Major differences in economic performances and policies and general level

of stagnation, failure to develop a common energy policy towards Arab countries and failure to develop common set of economic policies to deal with the stagflation which wrecked the possibility of a common monetary union by 1980 despite the projection of the Werner Report (1970).

-- Resurgence of protectionism-took the form of non-tariff barriers mostly directed against Japan and NICs, especially in agriculture and textiles.

-- Increasing recourse to government aid, and technical barriers to trade were key elements of this new tide of protectionism due to strong social resistance to economic adjustment. “Creation of national champions.”

History of European UnionXIII

• Early 1970s: Monetary developments..• The Collapse of the Bretton Woods and the

suspension of the convertibility of dollar against gold announced by Nixon in 1971 along with restrictive trade measures.

• The Smithsonian talks of December 1971 sought to repair the regime and called for action among the Six for closer coordination of economic policies.

• Basle Agreement (April 1972), the Six hatched the “Snake”- a regimen to keep EC currency fluctuations within 2% (1%) margin inside the “tunnel” against the dollar (2.25%) established during the Smithsonian talks.

History of European UnionXIV

• Early 1970s: Political Developments• Nixon’s frustration with the EC’s foreign policy

measures: lifting of oil embargo in return for EC support for Arab cause. The US bitterly resented EC’s unwillingness to relieve pressure on the dollar and share more of the expense of keeping troops the US overseas.

• Kissenger’s legendary question: “Who speaks for Europe?” in 1973.

• His calls for a coordinated Western response exposed deep transatlantic tensions and considerable disarray in the EC.

History of European UnionXV

• Post-1973 Blues..• 1973 British entry along with Denmark and Ireland• Helmut Schmidt and Giscard D’Estaing- New Chancellor of Germany and

President of France in 1974. Both spoke the languages of Economics and English! Non-tariff barriers, protectionism and stagflation in the EC impeded the emergence of a single market, an objective cherished by both leaders.

• Dubious benefit of CAP and The British Budgetary Question: BBQ or “the Bloody British Question”: Britain paid too much into the EC budget, it imported far more agricultural products and industrial goods from outside the EC. A net contributor to the budget like Germany.

• Britain demanded CAP reform, protection of Commonwealth interests and retention of Parliamentary sovereignty.

• In 1975, discussions on the size of the Britain’s refund (Dublin agreement) for an acceptable rebate flopped. The issue would be settled only in 1984 when Thatcher aggressively demanded: “We want our money back!” after 15 summits!

• Only after the BBQ was resolved in 1984, the EC gained momentum.• Another important decision: Direct election of the European Parliament by

1979 and holding of regular summits known as European Councils! (attended by heads of state and government).

History of European UnionXVI

• Turning the Corner (1979-1984)- A sense of alarm and urgency. Conviction that the EC was under serious threat of disintegration.

• CAP out of control, BBQ, a paralyzed decision making process etc. BUT favorable developments in the following areas:

• Accession Treaty with Greece in 1979.• Launch of the EMS (European Monetary System).• Deregulation and Liberalization sweeping Europe from the US• Increasing Cooperation between the Commission and the leading

EC industrialists to boost competitiveness, esp. in high-tech sector.

• Growing business interests in the realization of the Single Market (to be completed by 1992).

• Direct elections of EP (Both Britain and France feared it would undermine national supremacy).

History of European UnionXII

• Norway was to join in 1995 but its citizens rejected membership via a referendum (as they did in 1973) Twice! Switzerland’s decision to stay out of the EEA stalled negotiations over EU membership.

Euro-pessimism, 1975-1986• Political shocks:

– ‘Luxembourg Compromise’ (1966) + enlargement leads to decision-making jam.

• Economic shocks:– Bretton Woods falls apart, 1971-1973.

• Failed monetary integration schemes (except within DM bloc).

– 1973 and 1979 oil shocks with stagflation.– Failure of Deeper Trade Integration.– Growing cost of Common Agricultural Policy

creates frictions over budget.

Bright spots

• Democracy in Spain, Portugal and Greece• Greece joins in 1981• Spain and Portugal join in 1986 after long a

difficult accession talks• EMS set up in 1979 works well• Budget Treaties• 1979 Cassis de Dijon decision built on 1974

Dassonville ruling– Challenged validity of national rules that introduce

non-tariff barriers to trade.– Mutual Recognition Principle introduced.

Deeper circles: single market programme

• Mutual recognition as threat to national regulatory control; race to bottom?

• How to put member gov’t back in charge?• Delors launches completion of the internal market with

Single European Act– create "an area without internal frontiers in which the free

movement of goods, persons, services and capital is ensured".

• Important institutional changes, especially move to majority voting on Single Market issues.– Mutual recognition is disciplined by minimum harmonisation– More efficient decision making procedures allow agreement

on min. standards “New Approach” Directives.

Single Market Programme, EC92

• Basic elements– Goods Trade Liberalisation

• Streamlining or elimination of border formalities, • Harmonisation of VAT rates within wide bands• Liberalisation of government procurement• Harmonisation and mutual recognition of technical

standards in production, packaging and marketing

– Factor Trade Liberalisation • Removal of all capital controls (!!!), and deeper

capital market integration• Liberalisation of cross-border market-entry policies,

Fourth enlargement• 1994, Austria,

Finland, Norway and Sweden admitted (Norwegians again vote no).

Cyprus

Malta

1958

1973

1994

2004

197319811981

Communism’s creeping failure and spectacular collapse

• By the 1980s, Western European system clearly superior due to the creeping failure of planned economies.

• Up to 1980s, Soviets thwarted reform efforts (economic & military pressure).

• Changes in USSR due to inadequacy economic system. – timid pro-market reforms (perestroika). – openness (glasnost).

Velvet revolutions in CEECs – June 1989 Polish labour movement ‘Solidarity’

forced free parliamentary elections & communists lost

• Moscow accepted new Polish government.

– Moscow’s hands-off approach to the Polish election triggered a chain of events.

• Reformist in Hungarian communist party pressed for democracy & Hungary opened its border with Austria, 1000s East Germans moved to West Germany via Hungary and Austria.

• Mass protests in East Germany; Wall falls 9th November 1989.

• End of 1989: democracy in Poland, Hungary, Czechoslovakia and East Germany (unification in 1990).

USSR collapses

• 1990, Estonia, Latvia and Lithuania – declared their independence from the USSR.

• End of 1991, the Soviet Union itself breaks up.

• Cold War ends without a shot.

• Military division of Europe ended.

EU reacts

• The European Union reacted swiftly to this geopolitical earthquake by providing emergency aid and loans to the fledgling democracies.

• Signing of ‘Europe Agreements’ with newly free nations in Central and Eastern Europe– These are free trade agreements with

promises of deeper integration and some aid

From Copenhagen to Copenhagen• EU says CEECs can join the EU (June 1993).

– Set out famous Copenhagen criteria for membership.• stability of institutions guaranteeing democracy,

• the rule of law,

• human rights and respect for and, protection of minorities,

• the existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the Union.

• Copenhagen summit December 2002 says 10 CEECs can join in 2004.

• 5th enlargement in May 2004

German unification and Maastricht• Pending 1990 unification of Germany opens door to a

‘grand bargain’ (Mitterrand, Kohl).– Germany gives up DM for European Monetary Union & East

Germany joins the EU without negotiation.

• Jacques Delors proposes 2nd radical increase in European economic integration. – the formation of a monetary union.– Idea championed by French President Francois Mitterrand and

German Chancellor Helmut Kohl.

• Maastricht Treaty, signed 1992– a monetary union by 1999, single currency by 2002.– Also, sets up EU’s ‘three pillar’ structure to reduce EU’s

‘competency creep;’

• ERM exchange rate crises, 1992-1994.

Preparing for Eastern Enlargement

• Impending enlargement required EU to reform its institutions

• Four tries:– Amsterdam Treaty, 1997– Nice treaty, 2000– draft Constitutional Treaty, 2003

• Reconsidered by IGC 2003

– Constitutional Treaty, June 2004.

Amsterdam Treaty• Failed to reform main institutions• Tidied up of the Maastricht Treaty

– More social policy, Parliament powers modestly boosted,

– flexible integration, ‘closer cooperation introduced

• Amsterdam leftovers– voting rules in the Council of Ministers, – number of Commissioners, – Extension of issue covered by majority voting

Nice Treaty• Reforms of main institutions agreed, but

poorly done– Council voting rules highly complex and

reduce EU’s ability to act with more members– No important extension of majority voting– Make shift solution for Commissioners– No reform of decision making in ECB

• Generally viewed as a failure• Main changes re-visited in draft

Constitutional Treaty, 2003

Constitutional Treaty• Improved decision-making rules for Council

of Ministers and slightly more majority voting.

• Inclusion of Charter of Fundamental Rights.

• Other things where CT not strictly required: – Many ‘gestures’ and tidying up.– Moves towards more coherent foreign policy

decision making.– Many de facto points turned into de jure.

Constitutional Treaty’s Problems• France and Netherlands reject the Constitutional

Treaty in referendums in Summer 2005.

• EU leaders suspend the ratification deadline. Next steps uncertain as of early 2006.