Economic Aspects of EU Eastern Enlargements Lecture notes #0 Fall 2005

Lecture notes #0

These lecture notes will not be discussed in class, though they are required. Take them as a reading assignment.

A brief history of European Economic Integration

(See also: “The History of the European Union,” )

Stages of Enlargement

Early stages of Integration

Treaty of Rome

The Single European Act

Treaty of Maastricht

Treaty of Amsterdam

Treaty of Nice

European institutions

Objectives of the Treaty

The purpose of this lecture is not to master the history of European Integration, but to set up the framework for the study of the complex process of economic enlargement.

Stages of enlargement

1951—ECSC: France, Germany, Italy, Benelux

1957—Treaty of Rome – 6 members

1973— UK switched from EFTA to EC (after two failed attempts in 1963 and

1967), Denmark joined because its agricultural exports were critically dependent on UK markets; Ireland joined because of the existing Irish-British FTA and because of the traditional Irish policy of pegging its punt to the pound sterling.

(9 members)

1981— Greece changed its statute of associate to full membership, partly to “lock in” democracy after a period of military dictatorship. (10 members)

1986— Spain and Portugal became EC members. (12 members)

(1990—GDR – East Germany- came into the EC by unification with West Germany)

1995— Austria, Finland and Sweden (a referendum in Norway rejected membership) (15 members)

(2004–– The CzechRepublic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic –– pending on ratification by each of the accession countries) (25 members)

Early stages of Integration

Post WWII European economy was characterized by

  • High tariffs and quotas
  • Inconvertible currencies
  • Supply bottlenecks
  • Dollar shortage
  • Too few trading opportunities

Global approach to market integration (multilateralism), though valuable as a long-term goal, could not address the needs of the post WWII Europe.

Global Institutions: the IMF (for money, exchange rates and balance of payments problems), the World Bank, the International Trade Organization (for Trade, investment, and related economic policies)

Multilateralism proved too ambitious, because

  • It was not generally accepted
  • Some economies, ruined after the war, were too weak to live up to the requirement of global institutions
  • No appropriate response to the challenge of the cold war between the Soviet Union and the USA.

In 1948, the US took the initiative to support European regionalism. The result of this initiative was the Marshall Plan, which was a direct financial aid to Europe conditional on intra-European cooperation.

On the basis of the European Rehabilitation Program (Marshall Plan)  OEEC (Organization for European Economic Cooperation)

Benelux announced customs union in 1948. France proposes to join the Benelux CU, but it is refused.

European Coal and Steel Community (Paris Treaty) in 1951—an attempt to integrate the “war industries” (France, Germany, Italy, Belgium, the Netherlands, Luxembourg)

  • Common market for the two sectors
  • Dedicated to the political goal of providing a framework for Franco-German reconciliation.
  • Strong supranational central institutions, balanced by intergovernmental parliamentary and consultatory institutions.

Treaty of Rome (1957)

(ECC—European Economic Community; EURATOM—European Atomic Energy Commission)

Aims: Balanced and harmonious economic growth (“Economic growth under conditionality”), improved stability, increasing standards of living

Means:

  • Customs Union
  • Free movements of goods, services and capital
  • Common policies on external trade, agriculture, and competition
  • Harmonization of fiscal and economic regulations
  • Approximation of economic policies (e.g. competition, agriculture, transport)
  • Budget (small)
  • Common (supranational) institutions

Institutions:

  • Council of Ministers (legislature)
  • Commission (Government, administration)
  • Parliament (consultative)
  • Court of Justice (judicial review)

A critical assessment of the Treaty of Rome

Positive:

  • An unprecedented achievement
  • Distinctly more market oriented in ideology compared to ECSC and less supranational

Negative:

  • No effective means to ensure convergence, macroeconomic stability and fair distribution
  • Long periods of transition
  • Inefficient decision-making (requirement for unanimity in the Council of Ministers)

The Single European Act (1986, Luxembourg)

The Single European Act reforms the Treaty of Rome with the aim of completing a forntierless internal market by the end of 1992.

  • The internal market is defined as an area without frontiers
  • Addition of provisions concerning environment, R&D, and EMS cooperation
  • Mutual recognition of national product standards, as a regulatory principle
  • More qualified majority voting on internal market matters—avoiding deadlocks
  • Official role for the European Council
  • Greater powers for the European Parliament
  • Established (enlarged) structural funds to promote cohesion (political price to make the Mediterranean countries support the program)

1993 (January 1) The European Single Market becomes reality for the 345 million people in the twelve EC member states. Cessation of border formalities for goods, services, and capital in this area.

Maastricht Treaty on European Union, 1992

1991 In the Dutch town of Maastricht, the European Council agrees on the Treaty on European Union, consisting of Economic and monetary Union (completion by 1999), and Political Union, which proposes a joint internal, Justice, Foreign and Security Policy.

1992 The Treaty was signed by the foreign ministers of the member countries but requires ratification by all 12 members states.

1993The Treaty takes effect (Nov. 1)

  • Establishes the EMU (European Monetary Union)
  • Common macroeconomic policies, based on a new institution, the European Central Bank, established in 1998 in Frankfurt
  • Reformulation of economic aims:
  • Balanced development of economic activities
  • Sustainable and non-inflation growth, respecting the environment.
  • A high degree of convergence of economic performance
  • Promoting convergence of economic performance
  • Raising the standard of living in the member countries
  • Economic and social cohesion
  • Introduction of principle of subsidiary
Treaty of Amsterdam, 1997

Economic Objective: Strengthen the provisions concerning employment.

Means: New or extended competences in areas of consumer protection, employment,

Environment, public health, free movement of persons.

Treaty of Nice, 2002
  • Institutional reform, little value-added from economic point of view.
  • Enhanced cooperation—conditions under which sub-groups of EU members might be allowed to proceed with further integration.

Enhanced Cooperation:

  • Multi-speed Europe (all states moving towards the same objectives but at different speeds) vs. variable geometry (deeper cooperation between some states compared to others.)
  • Variable geometry may lead to two-tier Europe and fragmented decision-making vs. need for flexibility in a more heterogeneous Europe.
  • Enhanced cooperation must further the objectives of the Union, does not undermine the single market or economic and social cohesion, involves a minimum of eight states and remains open to all Member States (Treaty of Nice safeguards)
European Institutions

European Council (Art. 4 of the TEU—Treaty on European Union “the Treaty”)

  • Heads of states or governments of the member States and the President of the Commission.

European Parliament (Art. 189-201)

  • The representatives… shall be elected by direct universal suffrage
  • The number of members… shall not exceed seven hundred (Nice: 732)

Council of Ministers (Art. 201-210) (“the Council”)

  • Ensure coordination of the general economic policies
  • Have the power to take decisions
  • Confer the Commission … powers for the implementation of the rules which the Council lays down
  • Act by a majority of its members or when required, by a qualified majority

European Commission (Art. 211-219)

  • Ensure the proper functioning and development of the Common Market.
  • Exercise the powers conferred to it by the Council for the implementation of the rules laid down by the latter.
  • The Commission shall consist of 20 Members, who shall be chosen on the grounds of general competence and whose independence is beyond doubt. The number of Members of the Commission may be altered by the Council, acting unanimously.
  • The commission must include at least one national of Each Member State, but no more than two.

(Nice: When the Union consists of 27 MS, the number of the Commission

Members shall be less… and chosen accordingly to a rotation system as decided unanimously)

Court of Justice (Art. 220-245)

  • Shall insure that in the interpretation and application of this Treaty the law is observed
The objectives of the European Union

Objectives are listed in the Preamble, Common Provisions, and Final Provisions of the Treaty.

  • End the division of the European continent
  • Confirm the attachment to the principles of liberty, democracy and respect for human rights and fundamental freedoms and the rule of law
  • Deepen the solidarity between the peoples while respecting their history, their culture and their traditions.
  • (Build) an ever-closer union in which the decisions are taken as openly as possible and as closely as possible to the citizen.
  • Respect the national identities of its Member States.
  • Accept application of membership of the union from any European state, which respects the principles set out in Art. 6(1) (human rights, fundamental freedoms, respect of minorities, etc.
  • Promote economic and social progress for their peoples, taking into account the principle of sustainable development and within the context of the internal market and of reinforced cohesion and environmental protection.

The objectives of the EU are not primarily economic. This makes EU to be more than a forum for economic cooperation and the Treaty something similar to a constitution, though, with an emphasis on economic issues.

1