The European Economy: An Introduction
I. The History of European Integration
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."
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
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
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.
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.
1. Cost, magnified by enlargement
3. Subsidies and price supports reduced
V. Monetary Unification
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
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.
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.
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
Provisions of Lisbon Treaty: