The European Economy: An Introduction

I.    The History of European Integration

A.  Prehistory:-

1.   1834, Prussia unites Germany with customs union, Zollverein.

2.   1897, Austrian Count Guluchowski proposes European protectionism.

3.   1929-30, Aristide Briand of France, after WWI, proposed a “federal link” and a "common market."

B.  Postwar

1944    Benelux customs union

1945    Gaullist "Europe of sovereign states" vs Federalist (led by Jean Monnet) “United States of Europe.” Robert Marjolin: Europe must "adopt American methods of production and organization, duplicate American economies of scale," and create "a vast European market, comparable to the American market."

1948-1952, Marshall Plan provided about $14 billion ($180 billion in 1995 prices) to support for reconstruction, requiring European cooperation. OEEC created.

1951    European Coal and Steel Community (ECSC) among the Six.  Members quickly increased steel production by 50 percent.

1957-58 Treaties of Rome created European Economic Community (EEC) to develop a customs union for industrial products and Common Agricultural Policy (CAP).

1960    UK, Austria, Denmark, Norway, Portugal, Sweden, and Switzerland (and later with Finland and Iceland) establish European Free Trade Association (EFTA).

1973    EEC enlargement begins with UK, Denmark and Ireland

1974    Creation of European Council and elections for European Parliament

1980-84, "Europessimism"

1985    White Paper, "Completing the Internal Market" with goals for 1992

1987-1988, Single European Act (SEA) and       Cecchini Report

1991    Maastricht Treaty adopted Delors Report, established a timetable for implementation, and called for adoption of single currency

1993    Maastricht ratified by members, European Union (EU) established on three "pillars": (1) economic and social, supranational (2) foreign policy and regional security, intergovernmental (3) justice and home affairs, intergovernmental.

1995    Austria, Finland, and Sweden become members. Norway declines.

1998-1999  Accession negotiations began with the Czech Republic, Estonia, Hungary, Poland, Slovenia, and Cyprus; and then with  Bulgaria, Latvia, Lithuania, Romania, Slovak Republic, and Malta, and Turkey was accepted as a full candidate.

2000    Intergovernmental Conference (IGC) in Nice outlined a new structure of governance for the enlarged EU

2002    Euro introduced

2004    Ten countries joined EU (Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia) and Turkey became a candidate. National leaders agreed on Constitution draft, requires approval in national referenda.

2007    Bulgaria and Romania are members.

2013 In July, Croatia became 28th member. Albania, Iceland, Macedonia,  Montenegro, Serbia, and Turkey are official candidates. 

II.  European Institutions

European Council: Heads of state, chaired by the President of the European Council. Meets at least 4 times/year.

European Commission: 28 members (one appointed by each member country), four-year terms, overseeing the work of about 25,000 civil servants

Council of the European Union (formerly known as EU Council of Ministers): Ministers attend each meeting according to subject

European Parliament: 751 elected Members

EU Economic and Social Committee: 350 advisory members from interest groups

III. The Economics of the Single European Market

A.  Trade creation and diversion (review Chapter 3). Evidence of net trade creation; trade diversion was primarily caused by the Common Agricultural Policy.

B.  Physical Barriers

Cecchini Report - border delays and paperwork impose a direct cost of some $10 billion.

1985 Schengen Group, slowly expanded borderless travel. Now includes all existing EU countries except UK and Ireland, and will include all new countries.

C.  Technical Barriers

1.   Harmonization of standards. That is, the EC would attempt to formulate

2.   1985 White Paper - "new approach" - mutual recognition and harmonization of "essential health and safety requirements which will be obligatory in all Member States."

3.   1987 SEA - qualified majority vote

D.  Fiscal Barriers - VAT Harmonization

E.   Benefits and Costs of a Single Market

1.   direct cost reductions

2.   competitive cost reduction.

3.   economies of scale.

4.   transitional unemployment and other adjustment costs

5.   Influence on external countries.


IV.  Common Agricultural Policy

A.  Creation based on national interests.

B.  Essentials

1.   Fixes EU agricultural prices at high levels.

2.   Opens internal markets and by maintains uniform internal prices.

3.   Protects European agricultural market from import competition with a system of variable levies.

4.   Export subsidies to ensure that European farmers can compete on external markets.

C.  Was more difficult to administer before single currency -- one of the reasons for the Euro.

D.  Reform

1.   Cost, magnified by enlargement


3.   Subsidies and price supports reduced

4.   Information sharing-
"FARMERS last night declared they had "nothing to hide" as the details of EU payments to tens of thousands of individuals were published on the internet for the first time."


V. Monetary Unification

A.                     History

1958    Jean Monnet proposed creation of a European Bank and Reserve Fund, a "common financial policy." EC formed a Monetary Committee

1969    Werner Report called for gradual reduction of exchange rate fluctuations among member countries, leading to full monetary union.

1972    Joint Float Agreement, created European Snake

1979    The European Monetary System (EMS) introduced European Currency Unit (ECU) and Exchange Rate Mechanism (ERM), to enable its members to fulfill the region's monetary goals. Monetary growth rates and inflation rates converged toward low German levels, less variable, but with higher unemployment rate.

1989    Delors Report - three-stage program for monetary union. Stage one, it said, would begin in 1990, and would include three major objectives: (1) efforts would be made to include all the Community currencies in the ERM, (2) EU members would remove all restrictions on international movements of capital, and (3) central bank governors would play a more active role in coordination of economic policies, devoting special attention to harmonization of inflation rates.

1991-1993 - Maastricht Treaty negotiated and ratified. Adopted three-stages of Delors report, but added details. Stage two, it said, would begin in 1994, and member states expected to (1) give independence to their individual central banks, and (2) create European Monetary Institute (EMI). In third and final stage: (1) EMS transformed into European Monetary Union (EMU), based on irrevocably fixed exchange rates and eventual adoption of a single currency; and (2) EMI becomes supranational European Central Bank (ECB. Timing dependent on convergence criteria.

April 1998 Eleven certified for adoption of Euro.  The Six plus Austria, Finland, Ireland, Portugal, Spain (Fifteen minus Denmark, Greece, Sweden, UK).

January 1999   Irrevocable bilateral conversion rates; Euro used in bank operations; prices in stores quoted in both Euro and national currency; individuals have checking accounts in Euros, and used for payments between countries w/o conversion fee.

2002     Introduced Euro currency and withdrawal of national currencies

B.        Issues



Trade efficiency

Depth of capital markets

Diversification of reserve currencies



National sovereignty—no independent monetary policy; limits on fiscal policy

Optimal currency area? Labor mobility, interest rates, and asymmetric shocks.

Stability of the Euro—The Euro exchange rate dropped immediately after its issue, appreciated until the Great Recession of 2008, and has returned to its starting point since then.


Euro exchange rate


VI.     EU Enlargement and the Future of Europe

A.  Changing nature of EU

B.  Now, 28 members (see below)

C.  Politics versus economics

D.  Importance of CAP

E.   New federal structure? “Two speed” or "Concentric circles" versus "single-track."



December 2000:  Initial agreement on Nice Treaty, which was ratified by national parliaments, and entered force in 2003. Adjusted representation of old and new members on Commission and Parliament. Called for qualified majority voting (QMV) to be expanded to include appointments of EU leaders and some other internal institutional issues.  France wanted to expand QMV further to cover social security, taxation, and security issues, but the U.K. and others refused.


2001-2003 Convention on the Future of Europe, chaired by former French president Valéry Giscard d'Estaing, drafted a European Constitution, would have created a stronger EU President and Minister of Foreign Affairs, would have expanded breadth of QMV, would have given European law primacy over national law, and would have included a Charter of Human Rights (but Britain insisted that the charter would not override national laws on sensitive issues such as employment legislation).


2005: Referenda on new constitution.  Spain (with 77% majority) was the first of 15 countries to ratify the Constitution, but it was rejected by France and the Netherlands. Approval required unanimity, so this created a "crisis."


June 2007: Germany, headed by Chancellor Angela Merkel, assumed European Presidency and presses for new treaty to replace the failed Constitution. The Action Committee for European Democracy, released the draft of a European Reform Treaty, including some provisions of the failed Constitution, but cutting it from 63,000 words in 448 articles to 12,800 in 70 articles.


October and December, 2007: Treaty approved by European Council and signed by heads of state, both in Lisbon (so now it's known as the Lisbon Treaty). Poland won a right for small groups of countries to delay EU decisions on which they are narrowly outvoted. To enter force, the Treaty had to be ratified by all Member States. 


June 2008 - Ireland, the only country to require a referendum, rejected Treaty by 53% vote. However, UK parliament ratifies it one week later, signaling continuation of ratification process.


2009: Ireland ratifies the Treaty in its 2nd attempt. Czechs were last to ratify (after ruling of Constitutional Court) in 11/2009, so the Lisbon Treaty entered force in 12/2009. 


Provisions of Lisbon Treaty:

  • Similar in some ways to the failed Constitution, but drops much of the state-related language, such as "constitution" and references to flags and other symbols.

  • Created a permanent Presidency of the European Council with 2.5-year renewable term. Presides over other heads of state on Council and serves as external representative for EU. Currently (2011) Herman Van Rompuy (Belgium).

  • Created a Foreign Minister ("High Representative of the Union for Foreign Affairs and Security Policy"), combining two existing positions. Currently (2011) Catherine Ashton (UK).

  • The Fundamental Rights Charter would be made legally binding, but would not be included directly in the Treaty, and members (particularly the UK) would be able to opt out.

  • The Council will make more of its decisions based on QMV, but requiring a "double majority" (55% of member states and 65% of the EU's population)

  • The Commission and the European Parliament would be reduced in size, and the Parliament would assume authority in most areas power equal to that of the Council.

  •  Despite all of this institutional development, the sovereign debt crisis that began in 2011 raises the question, "is stable monetary union feasible without fiscal union, and does that require farther institutional development"?

  •  In January 2012, an treaty brokered by France and Germany established a new fiscal framework for the Eurozone, requiring that national deficits "do not exceed 3% of their gross domestic product at market prices and that government debt does not exceed, or is sufficiently declining towards, 60% of their gross domestic product at market prices." Thus, a policy of austerity was adopted, but was rejected in the recent election in France, returning a socialist government to power, and elsewhere. One side says the austerity is necessary for long-term stability. The other says that this is the wrong time for excessive austerity.

  •  2015-2016 The Refugee Crisis.
    June 23, 2017 - Brexit vote.

    March 15, 2017 - Netherlands vote - Right now, the party of far-right Dutch candidate Geert Wilders is slightly behind the conservative VVD party of Prime Minister Mark Rutte. But this will be watched closely.

    April 23, 2017 - first round of French elections, which may be won by Marine Le Pen and the National Front, but the Republican candidate Francois Fillon is expected to win the 2nd round on May 7.

    September 2017 - German elections. Angela Merkel is expected to defeat the anti-EU Alternative for Germany (AfD)

    May 2018 - deadline for next Italian general election, but an earlier election is probable. The current prime minister, Paolo Gentiloni, entered office in December 2016 when the referendum for constitutional reform championed by Matteo Renzi failed. The Italian populists are the Five Star movement, led by rock musician, Beppe Grillo.

    From Eurobarometer 451, "The Future of Europe," December 2016:

    Europe assets   

  • Europe Problems