The Economics of the European Union

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1 Fletcher School of Law and Diplomacy, Tufts University The Economics of the European Union Professor George Alogoskoufis Lecture 1: From the European Economic Community to the European Union

2 Europe After World War II and the Seeds of Economic Cooperation By the end of World War II, the economies of Europe were almost completely destroyed. In the initial phase of the reconstruction the Marshall Plan played an important role. In addition to the transfer of resources from the other side of the Atlantic, the Marshall Plan induced the countries of western Europe to collaborate economically through the Organization for European Economic Cooperation, the precursor of the Organization for Economic Cooperation and Development (OECD), and the European Payments Union. In the initial phase of reconstruction restrictions on free trade and capital movements were maintained. However, a new spirit of economic cooperation began to develop among the European nations, and the French inspired Schuman Plan, laid the foundations for deeper Franco-German and wider European economic cooperation. 2

3 Dresden,

4 The Schumann Plan The Schumann Plan proposed a progressive integration of western Europe, with a first stage focused on economic integration. The first step of this stage was the joint management of the Franco-German coal and steel production. This plan proposed the creation of an agency that would also be open to the participation of other European countries. The purpose was to strengthen collective security, the request of which remained paramount, especially because of the longstanding rivalry between France and Germany, which had led to two devastating wars. The Treaty establishing the European Coal and Steel Community (ECSC), was signed in Paris in 1951 and came into force in In addition to France and Germany, the treaty was signed by Italy, Belgium, the Netherlands and Luxembourg, creating a community of Six. 4

5 From Coal and Steel to the European Economic Community One of the purposes of the ECSC Treaty was to consolidate peace between European countries, through the creation of a common market for the main raw material of the arms industry, coal and steel. So countries which had fought on opposite sides during WW II, were to share and co-manage the production of coal and steel. The European Economic Community (EEC) was established by the Treaty of Rome in March 1957, and included the same six countries, France, Germany, Italy, Belgium, the Netherlands and Luxembourg. 5

6 The Objectives of the European Economic Community (EEC) With the creation of the EEC and the creation of the common market, two objectives were pursued. One economic and one political. The economic objective was to further strengthen economic and trade cooperation between the countries of the Community, to remove barriers to trade between them and to adopt a common commercial policy towards the rest of the world. The political objective was the complete political unification of Europe to secure peace. The EEC has evolved from a community of six to the current European Union of Twenty-eight. From a common market and a customs union, it has evolved into a single market in which twenty eight Members have adopted common rules and nineteen have adopted a single currency, the euro. 6

7 The Treaty of Rome The EEC Treaty, known as the Treaty of Rome, originally envisaged the creation of a common market, a customs union and common policies. The Treaty did not only create a customs union, but a wider single economic space. The articles of the Treaty concerning the three themes of 1. the common market, 2. the customs union and 3. common policies, defined the creation of a common market as the Community's primary mission, and set out in detail the actions to be taken to fulfil this mission. 7

8 The signing ceremony of the Treaty of Rome at the Palazzo dei Conservatori on the Capitoline Hill, March 25,

9 The Mission of the EEC Article 2 of the Treaty stipulated that: The Community shall have as its task, by establishing a common market and progressively approximating the economic policies of Member States, to promote throughout the Community a harmonious development of economic activities, a continuous and balanced expansion, an increase in stability, an accelerated raising of the standard of living and closer relations between the States belonging to it. 9

10 The Common Market The Common Market was based on four fundamental freedoms: free movement of persons, services, goods and capital. The EEC Treaty established a single economic space, which introduced free competition between companies. This laid the foundations for the convergence of the conditions governing the marketing of products and services, other than those already covered by the other two treaties: The Treaty establishing the European Coal and Steel Community (ECSC) (Treaty of Paris, 1952), and the second Treaty of Rome, which created the European Atomic Energy Community (EURATOM). 10

11 The Implementation of the Common Market Article 8 of the EEC Treaty provided that the implementation of the common market would proceed gradually, during a transitional period of twelve years, which was divided into three stages of four years each. A set of measures to be taken and executed simultaneously corresponded to each stage. Subject to exceptions and derogations provided for in the Treaty, the expiry of the transitional period was the ultimate time limit for the entry into force of all the prescribed rules that entailed the establishment of the common market. Since the common market was based on the principle of free competition, the Treaty prohibited agreements between firms as well as state aid, as these could affect trade between Member States and and lead to the prevention, restriction or distortion of competition within the common market. Permissible derogations were provided for in the Treaty itself. The overseas countries and territories were associated with the common market and with the customs union, in order to increase trade and promote joint economic and social development. 11

12 The Customs Union The EEC Treaty abolished customs duties between Member States and quotas and other restrictions in their commercial transactions. Moreover it established a common external tariff, a sort of external borders, against third country products, which replaced the previous duties charged by the various states. The customs union was completed with a common commercial policy. This policy, which was implemented at the Community rather than the national level, distinguished the EEC as a customs union from a mere free trade area. The results of the progressive abolition of customs duties and the abolition of quantitative restrictions to trade during the transitional period were very positive, as they enabled the substantial development of intra-community trade, and EEC trade with third countries. 12

13 Common Policies The Treaty also provided for a range of common policies. Some policies such as the common agricultural policy (Articles 38-47) the common commercial policy (Articles ) and the common transport policy (Articles 74-84) were specifically described in the Treaty of Rome. Article 235 envisaged the possibility for introducing other common policies, as the situation evolved. The article stated that "If action by the Community should prove necessary to attain, in the course of the operation of the common market, one of the objectives of the Community, and this Treaty has not provided the necessary powers, the Council shall, acting unanimously on a proposal from the Commission, and after consulting the Assembly [European Parliament], take the appropriate measures. " After the Paris Summit, in October 1972, the Community, acting under this article, developed initiatives in the areas of environmental policy, regional policy, social policy and industrial policy. 13

14 The European Social Fund and the European Investment Bank The development of these common policies was accompanied by the establishment of two special institutions. First, the European Social Fund, (ESF), which aims to improve employment opportunities for workers and raising living standards.while the ESF has always taken higher employment as its objective, it has adapted its focus over the years to meet the challenges of the times. In the early years, it concentrated on managing the migration of workers within Europe. Later it moved on to combating unemployment among the young and poorly qualified. Second, the European Investment Bank, (EIB), which has the mission of contributing to the Community's economic growth by mobilising additional resources.as a "policy-driven bank, whose shareholders are the member states, the EIB uses its financing operations to bring about European integration and social cohesion. 14

15 The Institutional Setup of the EEC The institutional balance of the EEC was based on a "triangle" consisting of the Council, the Commission and the European Parliament, which were asked to cooperate. The Council were to adopt the rules, the Commission to draw up proposals for adoption by the Council, while the Parliament had a consultative role. Also, in the decision-making process there was room for the European Economic and Social Committee, which had a purely advisory role. This institutional set-up, with some amendments which have strengthened the role of Parliament, is in force until today. 15

16 Role of the Different Institutions The Commission, a collective body independent of the governments of the Member States, appointed by common agreement, represents the common European interest. It has an exclusive right to take legislative initiatives and propose Community legislation to the Council. As guardian of the Treaties, it ensures the implementation of the Treaties and secondary legislation. To this end, it has a wide range of instruments to monitor both Member States and business firms. For the implementation of common policies, in the context of its mission, the Commission has executive power. The Ministerial Council, which comprises representatives of the governments of the Member States, has effective decision-making powers. It is assisted by the Committee of Permanent Representatives (COREPER), which prepares the work and execute the commands assigned to it. The Ministerial Council functions at different levels, Heads of State, Foreign Ministers, and Finance Ministers, and, less regularly, other ministers. The Parliamentary Assembly originally had only advisory powers and its members were not yet elected by direct universal suffrage. The treaty also provided for the establishment of the European Court of Justice. 16

17 From the EEC to the European Union The EEC evolved in two directions. First, in the direction of deepening economic and political cooperation, culminating in the creation of the European Union. Secondly, in the direction of enlargement with new members. Progress in both these directions was not smooth, and particularly in the 1970s, with the collapse of the Bretton Woods system of fixed exchange rates and the stagflation caused by the two oil crises, the progress of the community was tested. However, in the 1980s there was significant progress in both of these directions. 17

18 The Enlargement Process The enlargement process has led the EEC from a community of six (6) countries of Western Europe, to a union comprising twenty-eight (28) states, almost all the countries of western, central, northern and southern Europe. In 1973, the original six (6) became nine (9) with the addition of Britain, Denmark and Ireland. Greece joined in 1981 (EC-10). Spain and Portugal joined in 1986 (EC 12). Austria, Finland and Sweden joined in 1995, leading to a European Union of fifteen (15). In 2004, ten new Member States (Estonia, Cyprus, Latvia, Lithuania, Malta, Hungary, Poland, Slovakia, Slovenia and the Czech Republic) joined the EU. In 2007, Bulgaria and Romania joined the EU, and in 2013 Croatia. This way we have arrived at today's EU of twenty-eight (28) Member States. 18

19 The Deepening Process As the EEC evolved, economic and political cooperation was becoming closer and deeper, with new areas of cooperation and new policies. The original Treaty of Rome underwent a series of modifications in order to provide for a more functional and effective economic and monetary union. These modifications describe the deepening of economic and political cooperation. 19

20 The Merger Treaty The Brussels Treaty (1965), known as the Merger Treaty. This Treaty replaced the three Councils of Ministers (EEC, ECSC and Euratom) on the one hand and the two Commissions (EEC, Euratom) and the High Authority (ECSC) on the other, with a single Council and a single Commission. In this administrative merger a single operating budget was added. The treaty was signed in Brussels on 8 April 1965 and came into force on 1 July It set out that the Commission of the EEC and the Council of the EEC should replace the Commission and Council of Euratom and the High Authority and Council of the ECSC. Although each Community remained legally independent, they shared common institutions (prior to this treaty, they already shared a Parliamentary Assembly and Court of Justice) and were together known as the European Communities. This treaty is regarded by some as the real beginning of the modern European Union. 20

21 The Budgetary Treaties of the 1970s Treaty to amend certain financial provisions (1970). This treaty replaced the Community financing system of national contributions with a system of own resources. It also established a single budget for the Communities. It also gave the European Parliament the last word on what is known as "non-compulsory expenditure" (compulsory spending is that resulting from EC treaties (including agriculture) and international agreements; the rest is non-compulsory). Treaty to amend certain financial provisions (1975). This treaty gave gave Parliament the power to reject the budget as a whole and created the European Court of Auditors. However, the Council still has the last word on compulsory spending while Parliament has the last word on non-compulsory spending. As a result of these treaties, the budgetary authority of what is now the European Union is held jointly by the Council of the European Union and the European Parliament. Parliament is responsible for discharging the implementation of previous budgets, on the basis of the annual report of the European Court of Auditors. It has refused to approve the budget only twice, in 1984 and in On the latter occasion it led to the resignation of the Santer Commission. 21

22 The Single European Act (1986) The Single European Act (SEA) was the first major revision of the 1957 Treaty of Rome. The Single European Act broadened the cases for which qualified majority voting in the Council applies, it strengthened the role of the European Parliament (cooperation procedure) and expanded Community powers. The Act set the European Community an objective of establishing a single market by 31 December 1992, and codified European Political Cooperation, the forerunner of the European Union's Common Foreign and Security Policy. It was signed at Luxembourg on 17 February 1986, and at The Hague on 28 February It came into effect on 1 July 1987, under the Delors Commission. 22

23 The Establishment of the European Union Through the Treaty on the European Union, known as "Maastricht Treaty" (1992), the EEC evolved into the European Union. The Treaty brings together in a single text the European Union, the three Communities (Euratom, ECSC, EEC) and institutional cooperation in the fields of foreign policy, civil protection, law enforcement and justice. It renames the EEC as the EU. Also, this Treaty establishes the conditions for economic and monetary union, as well as new Community policies (education, culture) and expands the powers of the European Parliament (co-decision). 23

24 European leaders after agreeing the Maastricht Treaty, establishing the European Union, December 10,

25 Key Treaties after 1992 Treaty of Amsterdam (2 October 1997, entered into force 1 May 1999): Its purpose was to reform the EU institutions in preparation for the arrival of future member countries. The main changes brought about was the amendment, renumbering and consolidation of EU and EEC treaties and more transparent decision-making (increased use of the ordinary legislative procedure). Treaty of Nice (26 February 2001, entered into force 1 February 2003): Purpose was to reform the institutions so that the EU could function efficiently after reaching 25 member countries. Main changes related to methods for changing the composition of the Commission and redefining the voting system in the Council. Treaty of Lisbon (13 December 2007, entered into force 1 December 2009): It was negotiated after a 2004 Treaty establishing a Constitution for Europe was signed but not ratified. Purpose was to make the EU more democratic, more efficient and better able to address global problems, such as climate change, with one voice. Main changes were to give more power for the European Parliament, change of voting procedures in the Council, citizens' initiative, a permanent president of the European Council, a new High Representative for Foreign Affairs, a new EU diplomatic service. The Lisbon treaty clarifies the division and the sharing of powers between the EU and the EU member countries. 25