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 ($150 billion in today's prices) to support 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).

1961 and 1969 The UK applies for EEC membership, but vetoed by French President de Gaulle both times before his death in 1970.

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.

2009    Lisbon Treaty came into force, reforming EU institutions and creating an EU President and Foreign Minister.

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

2016 (June) Brexit vote, calling for In a national referendum in the UK, 51.9% supported leaving the EU. This was scheduled to happen on March 29, 2019, but finally led to UK departure (with a "deal") on December 31, 2020. 

2020 (March) Even as Covid was spreading across Europe, all 27 of the EU member states agreed that the EU could open negotiations with North Macedonia and Albania on those countries’ potential membership. In 2019, both countries were prevented from opening these negotiations by France and a small number of other EU member states that wanted to see major reforms within the European Union before it began to add new members. 

2021-2022: A Council on the Future of Europe began in 2021 and is supposed to complete its work by May 9, 2022, providing an opportunity for individual Europeans and social groups to debate the EU actions on the environment, health, immigration, etc, etc. At a meeting a few days ago, participants called on Europe to take an even tougher stance against Russia's invasion of Ukraine. See national citizen panel reports here.

2022 A few days ago, the European leaders gathered in Versailles and declared that they would strengthen defenses and reduce dependency on Russian energy.



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II.  European Institutions

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

European Commission: The principal executive body of the European Union with 27 members (since Brexit), one appointed by each member country) for four-year terms, overseeing the work of about 25,000 civil servants. Proposes new European legislation enacted by the European Parliament and the Council of the European Union.

Council of the European Union (formerly known as EU Council of Ministers): One minister-level official from each country (27 now) attends each meeting according to subject. Together with Parliament, the Council adopts EU legislation through regulations and directives and prepares decisions and non-binding recommendations.

European Parliament: 705 elected Members
Enacts new European legislation (more information).

European Court of Justice: Reviews the legality of acts of the EU institutions and decides whether Member States have fulfilled their obligations.

EU Economic and Social Committee: 329 advisory members, representing employers, workers (unions), and other interest groups, calls itself "the Home of Europe's Organized Civil Society." (more information)

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.  Launched in 1962, creation was based on national interests.

B.  Essentials

1.   For many years, farmer's incomes were supported by holding agricultural prices at high levels.

2.   Opened internal markets and maintained uniform internal prices.

3.   Protected 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

2.   GATT/WTO

3.   Beginning in 1992, price supports were gradually replaced by direct income support for farmers (€41 billion in 2019). CAP also finances investments in agricultural infrastructure (€14 billion in 2019), so, overall, it absorbs more than1/3 of the total EU budget.

 

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

Pro:

Seigniorage

Trade efficiency

Depth of capital markets

Diversification of reserve currencies

 

Con:

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 closer to its starting point since then.

 

Euro Ex Rate

 

VI.     EU Enlargement and the Future of Europe

A.  Changing nature of EU

B.  Now, 27 members (see list above)

C.  Politics versus economics

D.  Importance of CAP

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

 

Road to the Lisbon Treaty   
 

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, calling for a stronger EU President and Minister of Foreign Affairs, expanded breadth of QMV, primacy of European law over national law, and a Charter of Human Rights.

  

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 pressed for new treaty to replace the failed Constitution. The resulting European Reform Treaty included some provisions of the failed Constitution, but cut it from 63,000 words in 448 articles to 12,800 in 70 articles, removing many of the symbols of European nationhood.

 

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. 

 

2009: Ireland ratifies the Treaty in its 2nd attempt. Czechs were last to ratify, 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 (2020) Charles Michel, former prime minister of Belgium.

  • Created a Foreign Minister ("High Representative of the Union for Foreign Affairs and Security Policy"), combining two existing positions. Currently (2020) Josep Borrell, a former Minister of Foreign Affairs in Spain.

  • The Fundamental Rights Charter was made legally binding, but not included directly in the Treaty, and members (insisted by the UK) were able to opt out.

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

  • The Commission and the European Parliament were reduced in size, and the Parliament assumed authority in many areas equal to that of the Council.


  • Road to Brexit

    1961 and 1969 The UK applies for EEC membership, but vetoed by French President de Gaulle both times before his death in 1970.

    1973: UK joins EEC under Conservative Prime Minister, Edward Heath. 

    1975: Just two years after joining, Labour PM Harold Wilson held a referendum on the question: “Do you think the UK should stay in the European Community?” 67 percent voted “Yes,” but Labour Party split over the issue, with the pro-Europe wing splitting from the rest of the party to form the Social Democratic Party (SDP). 

    1988: Margaret Thatcher "Bruges Speech": On one hand, "Britain does not dream of some cosy, isolated existence on the fringes of the European Community. Our destiny is in Europe, as part of the Community."
    On the other hand, "My first guiding principle is this: willing and active cooperation between independent sovereign states is the best way to build a successful European Community... Europe will be stronger precisely because it has France as France, Spain as Spain, Britain as Britain, each with its own customs, traditions and identity... Some of the founding fathers of the Community thought that the United States of America might be its model. But the whole history of America is quite different from Europe." 

    2016: Fulfilling a promise to members of his own party, Conservative PM David Cameron negotiates new terms for UK/EU relationship (hoping this would convince voters to vote for "stay"), but 51.9% supported leaving the EU. Cameron stepped down and Theresa May (who had also opposed Brexit) became PM.

    2018 (November) PM May reaches an agreement with EU on terms for Brexit, but quickly runs into opposition in both Conservative and Labour parties. Biggest issue was/is the "Northern Ireland Backstop"
    The Challenge
    1. No hard border in Ireland  
    2. Agreement that avoids a hard Brexit
    3. Gaining independence from EU product quality and safety standards. 
    Theresa May Deal
    All of UK remains temporarily in EU customs union
    Northern Ireland remains temporarily under EU product standards.
    But this was unacceptable to Brexiteers, and especially to members of the Democratic Unionist Party (DUP) of Northern Ireland.

  • 2019 Boris Johnson became Prime Minister in July, and started renogotiating the agreement. Brexit officially happened on January 31, 2020, but it was agreed that negotiations would continue during the following year during the planned transition period. It started looking like there might be a damaging no-deal conclusion at the end of 2020, but a last-minute agreement was reached on Christmas Eve that entered force in 2021. Here are a few of the key provisions:

      • *   Goods will move without tariffs or quotas between the UK and EU, but will require new inspections and paperwork, because the UK will not respect all of the EU quality/safety requirements. Also, sales of services will be more complicated, because professional qualifications will no longer be mutually respected.

        *    There will continue to be no hard border between Northern Ireland and the Irish Republic, but, to avoid that, Northern Ireland have to continue following many of the EU rules, and new checks will be introduced on goods entering Northern Ireland from the rest of the UK. The DUP and other unionist groups declared that Boris Johnson had betrayed them, and this raises the possibility that the two parts of Ireland may be united in the future.

        *    Freedom to work and live between the UK and the EU comes to an end, and UK nationals now need a visa to stay in the EU more than 90 days in a 180-day period.

      • *   The UK will now be free to negotiate its own trade deals with the U.S. and other countries.


    • Immigration and Employment Issues   
       

      Many of the major European countries have been coping with labor shortages, caused by aging of their populations and low birth rates. In Germany, for example, Angela Merkel has warned that the country risks losing some of its advanced companies if the shortage of skilled labor is not addressed.  Some of that has been remedied by immigration from Eastern Europe, but that has caused even more serious labor shortages in those countries.   Europe has been receiving large numbers of asylum-seeking immigrants from the Middle East and North Africa, but few of those have the high-level skills that are needed. Still, during the Covid crisis, many of them have been "essential workers" in cleaning, food services, and domestic work.  See statistics on categories of immigration here.

Employment Rates in Europe

Employment Rates in the US


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EU Country List

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