1. Chapter 14
European Union: Many Markets into One

2. 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)
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3. Introduction: The Size of the European Market
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4. 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
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5. 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)
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6. 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
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7. 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 the European Union: legislative branch; enacts into law Commission’s proposals; composed of ministers from each EU nation
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8. 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
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9. TABLE 14.2 Votes in the Main EU Institutions
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10. The European Constitution
Signed by heads of state of member countries in 2004
Goals:
To simplify decision making
To guarantee human and civil rights
To better define the separation of powers and responsibilities
Ratification still required
France and Netherlands voted no
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11. Who Pays? The EU institutions and programs are funded by
Money from import duties
Revenue from value added taxes
Contributions by national governments
Overall budget is small: billion euros or 140 billion U.S. dollars in 2006
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12. 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…
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13. 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
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14. 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
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15. 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
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16. 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
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17. 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
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18. TABLE 14.3 Convergence Criteria for Monetary Union
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19. 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
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20. 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
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21. FIGURE 14.1 Dollars per Euro
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22. Widening
Ten new members joined the European Union in 2004 and two more joined in 2007
Ten 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)
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23. 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
Immigration and an aging population base
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24. Chapter 14
Additional Chapter Art

25. TABLE 14.1 Population and Income in the European Union, 2005
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26. TABLE 14.4 Population Forecast, 2010–2040: 27 Members of the European Union
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