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Chapter7: The European Union (latest revision 2009)
1. Development of the European Union
The first half of the 20th century saw two World Wars in Europe fueled by the hostilities between France and Germany. At the end of World War II, there was a new “dream” on the part of many Europeans --- a united Europe. It was hoped that a united Europe would never again see the scourge of war. This dream of unity got its initial impetus when the United States embarked on the Marshall Plan (named for the American Secretary of State George Marshall). The Marshall Plan was a very large aid plan for Europe, given to both the victorious countries such as France and to the defeated countries such as Germany. This large aid plan required an organization to administer the aid money. So in 1948, the Organization for European Economic Cooperation (OEEC) was created and headquartered in Paris.
A more significant step in the creation of a European Union came in 1951 with the creation of the European Coal and Steel Community (ECSC). This was created because of the fear that the recovery of the German economy might lead to the revival of German militarism. In the ECSC, coal (the main fuel of the time) and steel could be sold without restriction in any of the member countries.In addition, there was a central authority (not controlled by the member countries) to make all decisions regarding coal and steel. Originally, the members of the ECSC wereFrance, Germany, Belgium, the Netherlands, Luxembourg, and Italy.
The next major step in the creation of a European Union came in 1955 with the Treaty of Rome. This treaty established the European Economic Community (the EEC). To understand the EEC, we need to understand the various levels of economic integration. The lowest level of economic integration is called a Free Trade Area. In a Free Trade Area, goods and services can move freely between the countries with no tariffs or quotas. We will see severalexamples of free trade areas in this course. The next higher level of economic integration is called a customs union. A customs union is a Free Trade Area in which the member countries agree to have a common external tariff against the products of countries that are not members. So, for example, France and Germany would have the same tariff on products made in the United States. The next level of economic integration is called a common market. A common market is a customs union in which workers can move without restriction between the member countries and in which businesses can operate production facilities in any of the member countries. The highest level of economic integration is called an economic union. An economic union is a common market that also has a common currency. The United States is therefore an economic union of the 50 states. In Europe, the EEC, comprised of the six original members of the ECSC, completed the creation of a customs union by 1968 butdid not complete the creation of a common market until 1993.
Notice that the European Economic Community (EEC) did not include Britain. Originally, Britain chose not to become a member. Instead, it led a rival organization, the European Free Trade Area (EFTA) that included itself, Sweden, Norway, Denmark, Austria, Switzerland, and Portugal.When Britain changed its mind and tried to join the EEC in 1961, it was vetoed by France. Finally, Britain was admitted in 1969. At that time, Ireland and Denmark also became members. In 1981, Greece became a member. And in 1986, Spain and Portugal were added as members. So by the early 1990s, there were 12 member countries in the European Economic Community. This means that there were no tariffs or quotas among these 12 countries and that the tariff for each of these countries against products from non-members was identical.
The next major step in the creation of the European Union was the Single European Act of 1987. This created a project to move to a full common market. As noted above, a common market requires the free movement of all goods and services, workers, and capital goods between the member countries. The Single European Act took until 1993 to implement. It brought about the elimination of all customs barriers at the borders of each member country. As of 1993, citizens of member countries would no longer need passports to enter other member countries, much as citizens of California do not need passports to enter Nevada. And goods could move between the countries without being stopped at the border. The Single European Act also brought some standardization of technical regulations between the member countries. Differences in these regulations had previously made it difficult to sell products outside one’s own country. Finally, the Single European Act brought about controls on the purchases of national and local governments. In the past, the national and local governments had tended to give preference to local companies in their purchases (only 2% of all government purchases had been made from companies in a different country.) This could no longer occur.
The creation of the common market expanded trade between the member countries considerably. But it did not lead to much internal migration. Most migration into the original 12 countries has come from Eastern Europe, Turkey, Pakistan, and North Africa. On the other hand, the creation of a common market did lead to a large amount of foreign direct investment within these 12 countries. Foreign direct investment is the owning and controlling of a company in another country. It has also led to a large number of mergers.Companies have merged to become larger in order to take advantage of the larger European market (see below).
In December, 1989, the European Union established the Social Charter, designed to create consistent labor laws in all member countries. Labor unions were protected by law and their right to engage in collective bargaining was guaranteed. (See Chapter 4 for a discussion of European labor unions.) Workers were given the right to be represented on the board of directors of companies and therefore to participate in decisions regarding the operation of the company. (For this reason, Britain did not sign the Social Charter.) This is called co-determination and was also discussed in Chapter 4. And finally, equal rights were guaranteed for men and women, including comparable pay for comparable work.
In 1991, the members signed the Treaty on European Union, known as the Maastricht Treaty (Maastricht is a small town in the Netherlands, near both Belgium and Germany). At that time, the name was changed from the European Economic Communityto the European Union. The Maastricht Treaty created the conditions by which the member countries could move to a fullEconomic Union. An economic union is a common market in which there is also a common currency. We will discuss these conditions below. The treaty did not resolve a major political question: how much authority should go to the European Union and how much should be retained by the member countries? Europe is still wrestling with this question.(This question has also been a major one in the United States: how much authority should go to the federal government and how much should be reserved for the various states?)
In 1993, the European Union was expanded to 15 members as Austria, Sweden, and Finland joined. Then, in 2002, it was decided to expand the European Union again. Ten new members were admitted in 2004 --- Hungary, Poland, Estonia, the CzechRepublic, Slovenia, Latvia, Lithuania, Slovakia, Cyprus, and Malta --- bringing the total to 25. Two more members were admitted in 2007 – Bulgaria and Rumania. There is still a debate about admitting Turkey. As of now, both the population and the land area of the European Union are considerably greater than those of the United States. The new European Union has 455 million citizens compared to 305 million for the United States. And the total Gross Domestic Product of the European Union is similar to that of the United States.
2. The Institutions of the European Union
Before analyzing the economic effects of the integration of Europe, we need to describe the basic institutions of the European Union. The main bureaucracy of the European Union is the European Commission. (For the United States, this would be the executive branch of government.) The Commission drafts proposals, sees that policies are implemented, manages the common policies of the European Union (in agriculture, fishing, energy, the environment, competition policy, and so forth – see below), controls the European Union’s budget (collecting and spending the funds – see below), enforces European Union law, and negotiates agreements on behalf of the entire European Union. Despite being sent by the member nations, the Commissioners are supposed to act independently of the governments of their nations. A new commission is appointed every five years. There is one commissioner from each member country. The President is presently Jose Manuel Barrosa of Portugal. His term (and the terms of the other current commissioners) runs until October 31, 2009. The 25,000 other people who work for the European Commission are permanent officials (bureaucrats -- but called functionaries).
The overall agenda of the European Union are determined by the Council of Ministers. This is composed of the President of the European Commission and the heads of government of the member nations, with each member country presiding as for a six month period. They meet up to four times a year. One might consider this analogous to a Board of Directors! In the new Constitution that was proposed, the six month rotation was to be eliminated. Instead, the 25 heads of state would choose a “president of Europe” to serve a 2 1/2 year term. But this Constitution was not ratified (see below).
Most day to day decisions are made byThe European Council. This is the de facto legislature. Each member government sends one Minister to BrusselsBelgium. The Minister chosen will be different depending on the issue to be discussed.This Minister has the authority to commit his or her home government. Much legislation must be approved by both the European Council and the European Parliament. But the European Council can also issue some regulations and directives that are binding on all citizens within the European Union. There are 321 votes possible in the European council. Countries with larger populations are accorded more votes. On some matters, 232 votes are required for a vote to be passed (72.3%). As this is constituted now, winning 232 votes requires at least 12 countries (and at least 62% of the population of the European Union). On other matters, votes must be unanimous. The Council has been set up so that the small countries have a disproportionate influence.
The European Union has a directly elected parliament called the European Parliament(in StrasbourgFrance, Brussels, and Luxembourg). With expansion, there are 732 members of the European Parliament who are directly elected in elections held every five years. This was a symbolic group in the past. But more recently, this has become more of a legislative body as is the United States Congress. At present, there are nearly 100 different political parties represented in the European Parliament. The European People’s Party – Christian Democrats and the European Democrats hold 267 seats (they would be considered the “center-right”) while the Socialist Group holds 201 of the 732 seats. The European Parliament is involved in legislation along with the European Council (on an equal basis). This is called “co-decision”. The European Parliament approves the European Union’s budget (see below) and provides supervision of the European Commission and the Council of Ministers.
It is typical that proposals begin with the European Commission. These will then be discussed with the European Parliament before being referred to the European Council. The European Council then accepts the proposals, amends them, or defeats them according to the voting scheme mentioned above.
The creation of a single currency also led to the creation of a European Central Bank.This went into operation in 1999 based in Frankfurt Germany. Like the Federal Reserve System in the United States, this has been designed to be relatively free of political pressures. The 6-person Executive Board of the European Central Bank and its President and Vice President (included among the six) are appointed for non-renewable eight year terms.The Governing Council includes the six Executive Board members as well as the governors of the national central banks of the twelve countries that are presently members of the European Monetary System (see below). These people meet in FrankfurtGermanyevery two weeks for the purpose of making policies concerning the money supply and interest rates. The European Central Bank is not under the control of either the European Parliament or the European Commission. This gives it an even greater degree of independence than the American Federal Reserve. The national central banks, such as the Bundesbank (Germany) and the Bank of France, still remain. But they no longer make monetary policy alone. The European Central Bank and the national central banks together are called the Eurosystem.
The European Central Bank has stated that its overall goal is price stability (an inflation rate of no more than 2% per year). The European Central Bank has accepted no responsibility for maintaining low unemployment rates in Europe. Despite this single stated goal, inflation rates within the European Union were higher than the 2% goal most of the time between 1999 and 2004. The money supply seems to have grown faster than the European Central Bank said that it would.This indicates that, despite itsstatements, the European Central Bank has indeed acted to reduce the high unemployment rates and to try to increase the slow rates of economic growth.
In 2004, the next step in European integration was attempted with the creation of a European Constitution. The passage of the Constitution required the unanimous vote of all member nations. In 2005, France and the Netherlands rejected the new constitution. A revised version was attempted. In 2008, this revised version was rejected by Ireland (the only country required to have a vote of the people). At this writing (2009), there is no European constitution.
3. The Budget of the European Union
The budget of the European Union is small. It typicallyamounts to about 1% of the GDP of the member states (and about 2 ½ % of the government spending of the member states). About 45% of the budget goes to the Common Agricultural Policy (described below). An additional third of the budget goes to what are called “Structural Measures” --- regional development programs and some income transfer programs. Some of these were mentioned in Chapter 6 as one of the ways that Ireland benefited from joining the European Union.
The money for this spending by the European Union comes from few sources. About 1/6 of the revenues come from the common external tariff on goods from countries outside the European Union. Another 40% of the revenues come from a surcharge on the value added tax. The value added tax (VAT) is common in European countries and is like a sales tax. 1.4% is added on to each country’s value added tax and that money is sent to the European Union. The rest of the money comes from what is called the “Fourth Resource”. This is a contribution from each member country so that every member country is contributing 1.27% of its GDP to the European Union.Today, the money is collected in Euros.
It is required that the European Union budget be balanced.The European Union does not issue debt on its own and therefore cannot borrow to finance a budget deficit.
4. The Economic Effects of European Integration --- Increased Trade
Most economists have long been supporters of free trade, a major aspect of liberal market capitalism. Accordingly, most economists supported the integration of Europe. Free trade has many beneficial effects. First, free trade forces a country to specialize in those goods or services for which it has a comparative advantage. This was discussed in Chapter 2. In being forced to specialize, people and capital goods move from production of goods and services for which productivity is relatively low to production of goods and services for which productivity is relatively high. The resulting increase in overall productivity causes the standard of living to increase. Second, by allowing the goods and services of other countries to be sold in a country, the supply of the goods and services increases. For example, there are more automobiles in both Germany and France when German automobiles can be sold in France and French automobiles can be sold in Germany. The increase in the supply causes the prices of these goods and services to be lower. Third, and related to the second point, opening to trade increases the amount of competition. Again German automobiles and French automobiles must compete with each other in all markets. More competition forces companies to make better products and to charge lower prices. Fourth, the opening of trade means that companies can often sell their products in a larger market. The larger market allows them to produce more goods or services. When they produce more goods or services, companies often are able to produce at a lower cost (a phenomenon known as economies of scale and mentioned in Chapter 3 as part of the increasing concentration of capital). Lower costs of production allow prices to be lower. This is the reason that the creation of a large European market led to so many mergers (companies combining to become larger).The net result of trade is that more goods and services are available, prices are lower, and the standard of living in the country is greater. Indeed, one recent study shows that if the European Union eliminated all of its tariffs against outsiders, its prices would be 20% lower and its GDP would be 6% greater than they are at the present time.