European Union Central Topic: European Union’s History and Institutuions. Dr. Carsten Lange Dep. of Economics Cal Poly University Read: Gerber, J., Chapter 14

Chapter Objectives Explore the history of economic integration in Western Europe Analyze the impact of European economic integration Discuss the various institutions of the European Union (EU) Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Introduction: The Size of the European Market Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Before the European Union The European Coal and Steel Community (ECSC) signed in 1951 was the first step in European integration –Goals: to rebuild European economies after World War II; to foster political cooperation through economic integration The European Economic Community (EEC) (or European Community, EC) launched in 1958 with the Treaty of Rome Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Treaties Establishing the EU In 1987, EC members signed the Single European Act (SEA) aiming at completion of the single market envisioned by the Treaty of Rome In 1992, the Treaty on European Union was signed, paving the way for –A common currency, the euro (1999) –A European Union Constitution (2004) –Future EU expansion (2004) Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

EU’s Institutional Structure: Subsidiarity EU is based on subsidiarity: relationship between national and EU areas of authority, and between national and EU institutions –EU can tackle only issues that are better handled through international action than individual nations –EU’s authority: environmental and regional policy, research and technology development, economic and monetary union –Less clear areas of authority: labor market, social, competition policies Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

EU’s Institutional Structure: Bodies Decision-making in EU is split between four governmental bodies –European Commission: executive body; 25 commissioners responsible over a policy area –Council of Ministers: legislative branch; enacts into law Commission’s proposals; composed of ministers from each EU nation Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

EU’s Institutional Structure: Bodies (cont.) –European Parliament: representative of popular interests in the EU with 732 members; has power to question the Council of Ministers and Commission The lack of strong legislative clout has given rise to concerns about democratic deficit in EU governance –European Council: four times a year meeting of the heads of state of the member countries; holds primary policymaking –Other institutions: Court of Justice—EU’s supreme court; Committee of the Regions—defender of the interests of specific regions in the EU Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Who Pays? The EU institutions and programs are funded by –Money from import duties (14% of EU budget) –1.2% of each country´s revenue from value added taxes (35%) –Contributions by national governments (50%) Overall budget is small: billion euros or 120 billion U.S. dollars in 2003 Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Deepening and Widening of the EU EU’s deepening: increasing the level of cooperation between member countries EU’s widening: including new members in the union Let’s analyze these in greater detail… Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

First Wave of Deepening: ERM In 1979, EEC members linked their currencies through the European Monetary System (EMS) with an exchange rate mechanism (ERM) –Each currency was fixed to the European Currency Unit (ECU)—the weighted average of the other currencies –Goals: To avoid competitive devaluations—trade and investment determined by comparative advantages and efficient allocation of resources, not exchange rate disparities Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Second Wave of Deepening: The Single European Act (SEA) In the 1980s, Europe was hit by a recession and EC seemed to decline However, EC was reshaped by the Delors Report adopted as the Single European Act (SEA) in 1987 –SEA aimed at the freedom of movement for goods, services, capital, labor –SEA was implemented through the elimination of physical, technical, and fiscal barriers between EC nations Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Second Wave of Deepening: The SEA (cont.) SEA created gains in economic efficiency –Removal of customs and passport checks at internal national borders –Greater economies of scale –Increased competitiveness of European firms –Overall increase in GDP growth across Europe However, four issues hampered the achievements of the four freedoms: concerns over the effects of economic restructuring, harmonization of technical standards, value-added taxes, public procurement Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Third Wave of Deepening: The Maastricht Treaty In 1991, EC members reached the Maastricht Treaty, which aimed at: –Uniform labor laws and worked rights –Common defense and security policies –Creation of a monetary union and a common currency –Establishment of a European Central Bank Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Monetary Union and the Euro Three stages of the monetary union –1990 lifting of controls on the movement of financial capital within the EU –1994 creation of the European Monetary Institute in Frankfurt –1999 introduction of the common currency, the Euro, and the creation of the European Central Bank To qualify, members had to meet convergence criteria — monetary and fiscal requirements Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Convergence Criteria for Monetary Union Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

The Impact of Monetary Union Benefits –Eliminates the costs of currency conversions –Reduces the effects of exchange rate uncertainty on trade and investment Costs –Eliminates monetary policy independence –If labor is not fully mobile and business cycles synchronised between nations, the same monetary policy may not suit all nations Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

The Implementation of the Single Currency 11 EU members adopted the single currency on 1 January 1999 Euro coins and notes start circulating in 2002, replacing the national currencies of 12 EU members Although the euro declined in value shortly after its introduction, it has since stabilised, facilitated price convergence across Europe Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

FIGURE 14.1 Dollars per Euro Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Widening Ten new members joined the European Union on 1 May 2004 –Eight are transition economies in Central Europe and two are small island nations in the Mediterranean Sea –Three criteria for a country to gain membership: democracy, market economy, adoption of EU-wide rules (aquis communautaire) Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Challenges of Widening EU’s Common Agricultural Policy (CAP): the world´s most extensive agricultural support program; subsidizing the applicants’ agricultural sectors would be unfeasible EU’s governance structure: allocation of voting rights and seats in governing bodies upon expansion is politically contentious Income gaps between EU members and applicants: spending on new members would stretch budget The relationship between the new members and other Eastern European nations: many have historical and economic ties to Russia Copyright © 2005 Pearson Addison-Wesley. All rights reserved.