The Integration Imperative

Theory and practice

What is Economic Integration?

• Integration combines parts to make a whole

• Economic integration based on removal of barriers that limit flow of goods, services, capital, labour and communication across borders

• Integration is a process

Stages of integration

• Free trade area

• Customs union

• Common/single market

• Economic integration

Business opportunities and challenges from integration

• greater intensity of domestic competition

• more opportunities in foreign markets

• more diverse sourcing possible

• stimulus to product innovation

• restructuring of production and distribution

• cost and price pressure• economies of scale• specialisation• greater price

transparency• rationalisation of product

lines• Networking opportunities• financing opportunities

through integrated financial markets

The origins, evolution and objectives of the European

Union

What is Europe?

• Many Europes– geographical - extent– political– economic– social/cultural

• Concepts of Europe affect its development and the business environment

Initially several Europes

• Central and Eastern Europe - Soviet satellites until 1989-91

• Western Europe– EEC → EU (expanding)– EFTA (contracting)

• The rest? CONVERGENCE

EU- a growing membership

• 1957 France, Germany, Italy, Holland, Belgium, Luxembourg

• 1973 UK, Denmark, Irish Republic• 1981 Greece• 1986 Spain, Portugal• 1995 Finland, Austria and Sweden• 2004 Cyprus, Estonia, Lithuania, Hungary,

Latvia, Malta, Poland, Slovakia, Slovenia, Czech Rep

• 2007 Bulgaria, Romania?• ? Turkey, Croatia, etc

Concepts/ideas

• Federalism – a form of government in which power is

divided between a central and regional authorities – e.g. US federal government and states.

– concerned with the process of achieving political union within a Federal structure.

Concepts/ideas

• Functionalism The linking of authority to a specific

activity - transport, competition regulation - thereby breaking the link between authority and national boundaries.

• Neo-functionalism Functional and political spillover.

Why did European co-operation flourish after 1945?

• To prevent recurrence of previous mistakes– to open economies to trade and co-operation.

• protectionism of 1920s and 1930s regarded as root cause of instability → growth of pre-war Fascism.

– to include a defeated Germany in post-war reconstruction

• reconciliation of France and Germany regarded as essential pre-requisite of peace in Western Europe.

– to avoid excesses of nationalism and the nation state system.

(continued)• Economic reconstruction

– To rectify economic dislocation caused by wartime destruction.

• Political/security reasons– i.e. the emergence of two superpowers with competing political and

economic ideologies. – to provide a bulwark against Communism

Conclusion: Western security and defence should be based on economic reconstruction and well-being.

European integration motivated by economic, political and security reasons.

Measures to promote post-war integration

• 1948 Council of Europe • 1948 OEEC (now OECD)

– created to administer Marshall Aid (US financial assistance to aid economic reconstruction of post-war Europe).

• 1948 NATO – provided security framework within which economic integration could

flourish.

ABOVE INTERGOVERNMENTAL ORGANISATIONS (do not challenge national sovereignty)

• 1948 BENELUX customs union– Belgium, Netherlands and Luxembourg.– Customs Union – free trade + common external policy (common external

tariff)

European Coal and Steel Community

• 1951 – economic organisation with strong political undertones– France, Germany, Italy and BENELUX– Franco-German reconciliation– National sovereignty sacrificed to achieve

common goals:• Common market for coal and steel

– envisaged as step one of neo-functionalist spillover

– Creation of supra-national institutions such as High Authority and Court of Justice

Towards the European Economic Community (EEC)

• 1955 Messina Conference• 1956 Spaak Report proposes

– Common market– Nuclear energy Community

• 1957 Treaty of Rome (Signatories:France, Germany, Italy and BENELUX) 3 communities:– ECSC– European Economic Community (EEC)– European Atomic Energy Community (EURATOM)

The UK position

• Participates in Spaak Committee until 1955 BUT

• Wanted a loose free trade area• Withdraws after the ‘6’ indicate they want

closer ties.• RESULT: European Free Trade Area (EFTA)

created in 1960.

1957 Treaty of Rome • A strong economic orientation, stressing

economic integration based on economic liberalism (not the CAP).

• Aims:– establish a common market - to stimulate internal free

trade.- ‘ever closer union’- Economic and social progress- Constant improvement of living and working

conditions• No agreement on political objectives

First two decades

• 1960s– failed British

applications– ‘empty chair crisis

and Luxembourg compromise

– customs union complete

– relaunch of integration

• 1970s– first enlargement– limited successes

– E.g. ERDF– few signs of further

integration– first attempt at single

currency failed

Early 1980s - Eurosclerosis

• Integration paralysis – budget and CAP• Concern about Europe’s competitiveness• Above plus international economic crisis →

pressure for change • Single market campaign overcame integration

paralysis– start of policy activism– 1985 Single Market White Paper– 1987 Single European Act - institutional reform

THE SINGLE EUROPEAN MARKET

• 1985 White Paper with nearly 300 measures to establish the SEM.

• 1986 Portugal and Spain become new members• 1987 Single European Act – first Treaty reform

– Institutional reform to facilitate passage of SEM measures • SEM

– removed technical, physical and fiscal barriers to trade

– EC policy into new areas - e.g.environment, R&D– Existing policies strengthened to support SEM – e.g.

competition policy

Controversy• Late 1980s - re-emergence of EMU idea • 1993 Maastricht Treaty

– foreign and security and justice and home affairs pillars– institutional reform and subsidiarity– timetable and conditions for EMU– Union citizenship– extension of competences– Opt-outs

• Ratification problems

Maastricht problems

• very ambitious - ahead of public opinion• fears of loss of national sovereignty and identity

and rise of European Super State• complex, technocratic and incomprehensible• end of Cold War and CEE transformation• German unification• timing - recession• currency crises

Post-Maastricht

• Lower profile to integration but some successes

• 1995 enlargement – Austria, Finland, Sweden

• increasing preparations for Eastern enlargement

• May 1, 1999 - Amsterdam Treaty in force• 1999 – decision to proceed with EMU

Amsterdam Treaty

• Employment Chapter• Anti-discrimination• Schengen into Treaty• Social Chapter into Treaty• Some strengthening of European

Parliament• Some disappointments on institutional

reform

Treaty of Nice - December 2000

• Expressly to prepare for enlargement– number of Commissioners– Weighting of votes in Council– National veto– Charter of Fundamental Rights

• In force 2003• Ongoing convention and future IGC

Why a Consititution?

• Amsterdam and Nice Treaties did not deliver institutional change to make enlargement work.

• December 2001 Convention on the Future of Europe launched. Calls for – a ‘deeper and wider debate about the

future of the European Union’ involving ‘all interested parties’.

Issues for Convention

• All issues on the table and new way of preparing for IGC

• Preparing a European Constitution?• 20.6.03 - Draft Constitution for Europe

presented to the Thessaloniki European Council

• Draft serves as the basis for work of IGC

Future for the constitution

• May/June 2005 – French and Dutch people reject constitution in a referendum

• Ratification process effectively halted• ‘Period of reflection’• Aspects of constitution can be

implemented• Future for the EU?

European institutions

Why is understanding of how EU works important for business?

• Helps understanding of policy• Enables business to prepare for

change• Helps business influence and shape

policy

Current debate

• General questions– purpose and nature of EU?– who does what?– how is it done?

• Institutions reflect and determine the nature of the organisation

• Constitution• Beyond the no votes?

Supranationalism vs Intergovernmentalism

• Supranational = above the nation. – Supranational institution has power or

influence beyond that permitted by national governments. Implies Europeanisation of policy and regulation

• Intergovernmentalism = between nations.• EU - a hybrid?

Types of EU laws• Regulations: have direct effect• Directive: establishes basic principles and

objectives – needs to be interpreted via national law. Bulk of EU law

• Decisions: issued by European Commission on specific issues – directly applicable

• Recommendations and opinions – view of European Commission but not legally binding

The European Commission

• Community’s civil service: 15,000 people• Initiator of legislation – upon request of Council

of Ministers• Legislator in its own right but not major issues• Guardian of EU Treaties- law is applied correctly• Represents EU in WTO, etc • Draws up Budget/ broker/managing policies.

The European Commission1st Sept 2005• 25 Commissioners from 25 countries - nominated

by national governments for a 5 year term. • Subject to approval of European Parliament (EP)• One serves as President. Appointed by Heads of

Governments, subject to approval of EP• Commission split into Directorates General (DG)

+ Services. Each DG headed by a Commissioner

The European CouncilSupreme political decision-making body of the European Union

Composed of the Heads of State or Government of the Member States and the President of the European Commission

At least one major meeting during six-month Presidency. Under UK (2nd half 2005) – one uninspiring Council at Hampton Court but Budget deal in December

The Council Presidency

• Rotates every six months – Finland – H2 2006; Germany – H1 2007; Portugal –

H2 2007.– Constitution would change this

• President arranges and chairs meetings/brokers deals

• Council of Ministers – composed of ministers appropriate for each Council – e.g. agriculture, transport, etc

         

The Council’s functions

• Legislative Powers (with Parliament)• Co-ordinate economic policies • External agreements • Approves EU budget (with Parliament)• Common Foreign and Security Policy

(CFSP)• Justice and Home Affairs (JHA)

Council votingOften a sticking point in Treaty negotiations

Weighted Qualified Majority Voting from 1.11.04

321 votes availableBigger states like France and Germany have 29 votes – down to Malta with 3Qualified majority requires:1. Minimum of 232 votes (72.3% of total)2. Must be backed by majority of states3. States must represent 62% or more of EU population

Unanimity still applies for limited matters – e.g. taxation

European Court of Justicesupreme judicial body of the EU - interprets and enforces EC law

25 judges are appointed for a 6-year term by joint agreement between the governments of the Member States

safeguards EU law in the application and interpretation of the Treaties

sole authority to decide on the interpretation of EU law

European Parliament

• Direct elections since 1979 – from talking shop to co-legislator

• June 2004 – 732 MEPs from 25 states elected

• EP – main beneficiary of Treaty reforms– Under co-decision (most common method),

EP has same status as Council of Ministers and cannot be overruled

EP roles

• Legislator – with Council • Supervisory

– confirms appointment of Commissioners questions Commission

– EP → 1999 Commission resignation• Authority over Budget• But low electoral turn-outs

Institutional Reform

• Nice– Some reforms agreed to help enlargement but

not enough.→ draft Constitutional Treaty

Constitution- relevant points

This is not a comprehensive treatment• puts forward a single text to replace all the

existing treaties to aid clarity• gives the European Union a separate legal

personality • incorporates the Charter of Fundamental

Human Rights

Constitution - distribution of power

• Principle of conferral

• Principle of subsidiarity

• Principle of proportionality

Constitution clarifies competence

• EU exclusive competence– Free movement of persons, goods, services

and capital, establish competition rules within internal market

– customs union– common commercial policy– monetary policy for Eurozone– CFP - preservation of fish stocks

Shared competences:EU and member states

• Internal market• freedom, security and

justice• agriculture and fish• transport• TENs• energy • social policy

• Economic and social cohesion

• environment• public health• consumer protection• R&D

Constitution - legislative procedure

• Ordinary legislative procedure - the renamed co-decision procedure.

• EP and Council of Min viewed as co-legislators• Dual legitimacy: EP (Electors) Council (States) • QMV:

- from 2009, requires a double majority - i.e. 55% of Member states representing at least 65% of EU population

- extended but right of veto remains in sensitive areas like taxation and foreign policy.

Constitution - The Commission and EP

• One Commissioner per member state (NICE) till 2014

• 2014 onwards the number of Commissioners will be reduced to two-thirds the number of member states.

• EP max 750 seats - each member state has a

min of 6 and max of 96 MEPS.

Constitution: The European Council (EC) and Council of Ministers (CM)

• EC to elect its President by QMV for a term of 2.5 years. Maximum 2 terms

• President to chair and push forward work of EC. Also important role representing CFSP.

• CM chaired by country holding 6 month Presidency - to be rotated among groups of 3 members for 18 months.

Other features of Constitution

• Limited role for national parliaments – scrutiny of European legislation to confirm proportionality and subsidiarity principles are satisfied

• Procedures for withdrawal from EU set out

• European Minister for Foreign Affairs

Failure to Ratify

Parliamentary approval in Austria,Germany, Hungary,Malta, Slovenia, Slovakia, Cyprus

Referendum: France 29 May 54.7% 2005 no vote; Holland 1 June 61.7% no vote; Spain 76.7% yes vote; Luxembourg 56.6% vote yes.

Postponed/suspended: UK 6 june 2005;Sweden; Denmark; Ireland.

Challenges for the EU?

• Success of EMU - response to crises?• More enlargement – especially Turkish

challenge• International challenges and obligations -

economic and political • The Constitution• Popular support• Diverging visions of Europe

Global position of EU

• World’s biggest and most successful regional trading bloc

• Powerful voice in world trade and finance• € = major world currency• Major source of and destination for FDI