european economic and monetary union lecturer itir bagdadi

EUROPEAN EUROPEAN ECONOMIC AND ECONOMIC AND

MONETARY MONETARY UNIONUNION

LECTURER LECTURER ITIR BAGDADIITIR BAGDADI

OVERVIEWOVERVIEW

Economic IntegrationEconomic Integration One of the most powerful dynamics of One of the most powerful dynamics of

this era in world politicsthis era in world politics Nations are increasingly driven to Nations are increasingly driven to

unite their economies for greater unite their economies for greater efficiency and growthefficiency and growth

Integrated markets do NOT necessarily Integrated markets do NOT necessarily mean integrated statesmean integrated states

EUROPEAN UNIONEUROPEAN UNION Began life in 1957 as the European Economic Began life in 1957 as the European Economic

Community (EEC) – often called the Common Community (EEC) – often called the Common MarketMarket

1980s - “economic” element in group's name was 1980s - “economic” element in group's name was eliminated – European Community (EC) createdeliminated – European Community (EC) created

1993 – name changed to the European Union 1993 – name changed to the European Union (EU)(EU)

Fundamental question: Is economics more Fundamental question: Is economics more important than politics?important than politics? Does the individualistic motives of the market Does the individualistic motives of the market

matter more than the unifying social values of the matter more than the unifying social values of the nation-state?nation-state?

2020thth Century in Europe Century in Europe

Most violent century in historyMost violent century in history 2 common enemies:2 common enemies:

1.1.External threat of the USSR during the External threat of the USSR during the Cold WarCold War

2.2.Internal threat of a return to divisions Internal threat of a return to divisions and conflicts that created war and and conflicts that created war and instability in Europe in the pastinstability in Europe in the past

Europe has been able to achieve Europe has been able to achieve political cooperation and even unify by political cooperation and even unify by using economics as a political toolusing economics as a political tool

21st Century21st Century Regionalism is a distinctive feature of Regionalism is a distinctive feature of

IPE in the 21st centuryIPE in the 21st century IPE is pulled in 2 directions:IPE is pulled in 2 directions:

On the one hand security concerns make On the one hand security concerns make the state as important now as it has ever the state as important now as it has ever been.been.

At the same time, the forces of economic At the same time, the forces of economic globalization are blurring the distinction globalization are blurring the distinction between home and abroad. From an between home and abroad. From an economic standpoint the world is defined economic standpoint the world is defined by markets – and they are global.by markets – and they are global.

RegionalismRegionalism Refers to the process by which groups of nation-states, Refers to the process by which groups of nation-states,

usually in the same geographic region, agree to usually in the same geographic region, agree to cooperate and share responsibility to achieve common cooperate and share responsibility to achieve common goals.goals.

Regional groups are “clubs” formed by nation-states to Regional groups are “clubs” formed by nation-states to accomplish objectives that require coordinated or accomplish objectives that require coordinated or collective actioncollective action

The goals may be narrow and specific (ex. Ecotourism) The goals may be narrow and specific (ex. Ecotourism) or very broad and ambigous (like the EU)or very broad and ambigous (like the EU)

Regionalism takes many forms in IPERegionalism takes many forms in IPE Regional environmental agreements, regional economic Regional environmental agreements, regional economic

development programs, regional scientific and health regimes, development programs, regional scientific and health regimes, and regional security arrangementsand regional security arrangements

Regionalism is not a new thing but what is new is its Regionalism is not a new thing but what is new is its strength as an organizing force due to the incrasing strength as an organizing force due to the incrasing importance of economic integration and the rise of importance of economic integration and the rise of regional trade blocsregional trade blocs

ECONOMIC ECONOMIC INTEGRATIONINTEGRATION

The process by which a group of nation The process by which a group of nation states agree to ignore their national states agree to ignore their national boundaries for at least some economic boundaries for at least some economic purposes, creating a larger and more purposes, creating a larger and more tightly connected system of marketstightly connected system of markets

Several degrees of economic Several degrees of economic integration:integration: Free Trade Area (FTA)Free Trade Area (FTA) Customs UnionCustoms Union Economic UnionEconomic Union

Free Trade AreaFree Trade Area Involves a relatively minimal degree of Involves a relatively minimal degree of

integrationintegration Nations in FTA agree to eliminate tariff Nations in FTA agree to eliminate tariff

barriers to trade for goods and services they barriers to trade for goods and services they produce themselvesproduce themselves

However, each nation still retains the right to However, each nation still retains the right to set its own tariff barriers with respect to set its own tariff barriers with respect to products from outside the FTAproducts from outside the FTA

In essence, some goods are still subject to In essence, some goods are still subject to differential trade barriers while some goods differential trade barriers while some goods are tariff-fee (for ex. Goods from other are tariff-fee (for ex. Goods from other countries) – this leads to complicationscountries) – this leads to complications

North American Free North American Free Trade Area (NAFTA)Trade Area (NAFTA)

Example of an FTAExample of an FTA Goods from the USA, Canada and Goods from the USA, Canada and

Mexico will be traded freely within Mexico will be traded freely within NAFTA bordersNAFTA borders

Goods from other countries will be Goods from other countries will be subject to differential trade barriers of subject to differential trade barriers of these three countriesthese three countries (ex. Chile has negotiated three separate (ex. Chile has negotiated three separate

bilateral trade agreements with each of bilateral trade agreements with each of the NAFTA members separately) the NAFTA members separately)

NAFTANAFTA

Trade bloc in North America created by the U.S.A, Trade bloc in North America created by the U.S.A, Canada and MexicoCanada and Mexico

Came into effect January 1, 1994Came into effect January 1, 1994 Between 1993 – 2004 trade among NAFTA Between 1993 – 2004 trade among NAFTA

members increased 129.3%members increased 129.3%

Customs Union Customs Union (example: Turkey - EU)(example: Turkey - EU)

A group of nations agree both to tariff free A group of nations agree both to tariff free trade within their collective borders and to a trade within their collective borders and to a common set of external trade barrierscommon set of external trade barriers

If NAFTA were to evolve into a customs union, If NAFTA were to evolve into a customs union, the USA, Canada and Mexico would need to the USA, Canada and Mexico would need to agree to a unified set of tariff barriers that agree to a unified set of tariff barriers that would apply to products from other countrieswould apply to products from other countries

The Treaty of Rome, which created the EEC, The Treaty of Rome, which created the EEC, was based upon the idea of a customs unionwas based upon the idea of a customs union

The movement to a customs union is an The movement to a customs union is an important step in terms of economic and important step in terms of economic and political integrationpolitical integration

Customs Union (cont.)Customs Union (cont.) Nations involved give up some degree of Nations involved give up some degree of

sovereignty or national political economy sovereignty or national political economy since they can no longer set their own trade since they can no longer set their own trade barriers without consulting their economic barriers without consulting their economic partnerspartners

Nations gain a far greater degree of Nations gain a far greater degree of economic integrationeconomic integration

Products flow more easily within a customs Products flow more easily within a customs union without need for border inspections or union without need for border inspections or customs fees because of the unified trade customs fees because of the unified trade structure (however, member nations still structure (however, member nations still retain right to impose some non-tariff retain right to impose some non-tariff barriers such as health and safety standardsbarriers such as health and safety standards

Turkey – EU Customs Turkey – EU Customs UnionUnion

Came into effect on 31 December 1995Came into effect on 31 December 1995 Does not cover essential economic areas Does not cover essential economic areas

like agriculture (bilateral trade concessions like agriculture (bilateral trade concessions still apply) and servicesstill apply) and services

Turkey applied for full EU membership in Turkey applied for full EU membership in 19871987

Helsinki Summit (December 1999) – Turkey Helsinki Summit (December 1999) – Turkey given candidate country statusgiven candidate country status

October 3, 2005 – European Council began October 3, 2005 – European Council began accession negotiations with Turkeyaccession negotiations with Turkey

Turkish ExportsTurkish Exports

Turkey in World Trade in Turkey in World Trade in Regional Perspective in Regional Perspective in

1993, 1996 and 20041993, 1996 and 2004

Turkey’s Foreign Trade Turkey’s Foreign Trade By SectorsBy Sectors

Turkey’s Foreign Trade Turkey’s Foreign Trade by Country Groupsby Country Groups

Direction and Dynamics of Turkey’s Direction and Dynamics of Turkey’s Trade in 1985, 1995 and 2001-2004 Trade in 1985, 1995 and 2001-2004 (in millions of dollars and percent)(in millions of dollars and percent)

Change in shares in EU Change in shares in EU external imports in external imports in

1992-2004 1992-2004

Economic Union Economic Union (example: EU)(example: EU)

The final stage of economic and political The final stage of economic and political integrationintegration

Non-tariff barriers are eliminated along Non-tariff barriers are eliminated along with tariff barriers creating an even with tariff barriers creating an even more fully integrated marketmore fully integrated market

Member nations also agree to four Member nations also agree to four “freedoms” of movement:“freedoms” of movement: GoodsGoods ServicesServices PeoplePeople CapitalCapital

Economic Union (cont.)Economic Union (cont.) Four freedoms represent significant limitations Four freedoms represent significant limitations

on national sovereignty but have significant on national sovereignty but have significant effects on economic activityeffects on economic activity

Free Movement of GoodsFree Movement of Goods:: Goes beyond the elimination of tariff barriers Goes beyond the elimination of tariff barriers Requires a variety of governmental health, safety Requires a variety of governmental health, safety

and other standards and regulations to be and other standards and regulations to be “harmonized” so that a product that can be sold “harmonized” so that a product that can be sold somewhere in the economic union can be sold somewhere in the economic union can be sold everywhere in iteverywhere in it

Free Movement of ServicesFree Movement of Services:: The service sector includes many industries such as The service sector includes many industries such as

banking and finance traditionally subject to heavy banking and finance traditionally subject to heavy regulation that varies considerably among nationsregulation that varies considerably among nations

Economic Union (cont.)Economic Union (cont.) Free Movement of PeopleFree Movement of People::

Requires a unified immigration policy since a Requires a unified immigration policy since a person free to enter and work in one member of person free to enter and work in one member of the economic union would be able to live and the economic union would be able to live and work anywhere in the areawork anywhere in the area

Free Movement of CapitalFree Movement of Capital:: Individual nations give up their ability to Individual nations give up their ability to

regulate investment inflows and outflowsregulate investment inflows and outflows Many nations have traditionally imposed capital Many nations have traditionally imposed capital

controls to encourage domestic investment, controls to encourage domestic investment, promote financial stability or reduce foreign promote financial stability or reduce foreign exchange variationsexchange variations

These controls are not eliminated in an These controls are not eliminated in an economic union but must be “harmonized” so economic union but must be “harmonized” so that national regulations are similar enough to that national regulations are similar enough to not become a barrier to economic activitynot become a barrier to economic activity

Economic Union (cont.)Economic Union (cont.)

If we consider the different state in an If we consider the different state in an alliance, then the US is the most alliance, then the US is the most successful economic union in the worldsuccessful economic union in the world

Economic integration is appealing Economic integration is appealing because it is a way for nations to because it is a way for nations to achieve greater efficieny in their use of achieve greater efficieny in their use of scarce resources and higher rates of scarce resources and higher rates of economic growtheconomic growth

Leads to both static efficiency gains Leads to both static efficiency gains and dynamic efficiency gainsand dynamic efficiency gains

Static Efficieny GainsStatic Efficieny Gains With completely free trade within the area, With completely free trade within the area,

each member nation is able to specialize in each member nation is able to specialize in producing the goods and services in which it is producing the goods and services in which it is most efficientmost efficient

Protective barriers that preserve inefficient Protective barriers that preserve inefficient industries and promote redundancy are industries and promote redundancy are eliminatedeliminated

The creation of a large, integrated market The creation of a large, integrated market promotes efficiency in certain industries where promotes efficiency in certain industries where large scale production or long production runs large scale production or long production runs are possible. These gains from “economies of are possible. These gains from “economies of scale” make products cheaper and more scale” make products cheaper and more competitivecompetitive

Dynamic Efficiency Dynamic Efficiency GainsGains

Promotion of economic growthPromotion of economic growth A larger and more competitive market A larger and more competitive market

is likely to be more innovativeis likely to be more innovative As internal trade barriers are removed, As internal trade barriers are removed,

previously protected firms are forced previously protected firms are forced to compete with one another and this to compete with one another and this makes them more “efficient”makes them more “efficient”

If economic integration is successful, If economic integration is successful, economic growth rates tend to economic growth rates tend to increase, which raises living standardsincrease, which raises living standards

Trade Diversion EffectTrade Diversion Effect Regional Trade Blocs became important and Regional Trade Blocs became important and

controversial in the 1990s because of the trade controversial in the 1990s because of the trade diversion effect of a FTA, customs union or diversion effect of a FTA, customs union or economic unioneconomic union

By dropping internal barriers members create By dropping internal barriers members create more trade between and among member nationsmore trade between and among member nations Some of this is newly created trade but some of it is Some of this is newly created trade but some of it is

trade that is lost from another non-member partnertrade that is lost from another non-member partner Ex. With NAFTA, Mexican trade to the USA Ex. With NAFTA, Mexican trade to the USA

increased while other developing nations’ trade increased while other developing nations’ trade decreaseddecreased

Trade DiversionTrade Diversion Trade diversion is a two-fold problem:Trade diversion is a two-fold problem:

It is an economic problem because it means that It is an economic problem because it means that economic integration is not as efficient as it may economic integration is not as efficient as it may seem. Trade blocs may be economically beneficial seem. Trade blocs may be economically beneficial for the nations that form them but they create for the nations that form them but they create inefficiency and economic loss for other countries inefficiency and economic loss for other countries that suffer the loss. that suffer the loss.

It is also a political problem since as more and It is also a political problem since as more and more countries enter into regional economic more countries enter into regional economic groups non members find themselves locked out groups non members find themselves locked out and vulnerable. They have a strong motivation to and vulnerable. They have a strong motivation to gain membership in an existing bloc to get trade gain membership in an existing bloc to get trade creation effects or to form their own bloc with creation effects or to form their own bloc with other countries in the same boat. other countries in the same boat.

The threat of trade diversion and of being left out has led to The threat of trade diversion and of being left out has led to an expansion in size and number of trade blocsan expansion in size and number of trade blocs

Sovereignty at Risk: Sovereignty at Risk: The Politics of The Politics of

IntegrationIntegration There are many political implications that There are many political implications that should be considered when looking at an should be considered when looking at an economic unioneconomic union Trade-offs between economic benefits and Trade-offs between economic benefits and

political costspolitical costs Cooperation in economic sphere = cooperation Cooperation in economic sphere = cooperation

in political spherein political sphere Example: an economic union requires that a nation Example: an economic union requires that a nation

negotiate a new immigration policy, safety standards, negotiate a new immigration policy, safety standards, methods of financial regulation and adopt a methods of financial regulation and adopt a harmonized system of investment controlsharmonized system of investment controls

Political choices no longer influenced mainly by Political choices no longer influenced mainly by domestic voters and groups – now the wishes of groups domestic voters and groups – now the wishes of groups in other member states must also be consideredin other member states must also be considered

Politics of Integration Politics of Integration (cont.)(cont.)

Fundamental problem: loss of sovereignty that Fundamental problem: loss of sovereignty that occurs when nations form regional trade blocsoccurs when nations form regional trade blocs

At some point each member state risks being At some point each member state risks being forced to ignore national interests as a forced to ignore national interests as a consequence of maintaing its international consequence of maintaing its international obligationsobligations

This tension between national interest and This tension between national interest and international obligations poses a severe international obligations poses a severe dilemma for states which tend to value security dilemma for states which tend to value security and autonomyand autonomy

Another school of thought that does not believe Another school of thought that does not believe that economic integration weakens political that economic integration weakens political power states that integration weakens the hold power states that integration weakens the hold of national interest groups on political of national interest groups on political decisions – specific interest groups are less decisions – specific interest groups are less likely to benefit and resulting policies will likely to benefit and resulting policies will reflect the public interestreflect the public interest

Politics of Integration Politics of Integration (cont.)(cont.)

Another argument states that individual Another argument states that individual nations may actually gain political power, nations may actually gain political power, especially in relations with other nations, by especially in relations with other nations, by being members of a powerful economic being members of a powerful economic alliance.alliance. Example: Belgium – a more powerful political Example: Belgium – a more powerful political

presence as a leading nation of the EU than if it presence as a leading nation of the EU than if it were simply a small but autonomous European were simply a small but autonomous European nationnation

Basically, it is argued that smaller countries Basically, it is argued that smaller countries are far more powerful as members of a are far more powerful as members of a larger group than tney would be as larger group than tney would be as separate, unaffiliated individual nationsseparate, unaffiliated individual nations

European Economic European Economic Community (cont.)Community (cont.)

Movement toward a united Europe was Movement toward a united Europe was founded upon two important ideas:founded upon two important ideas:(1)(1)It is possible for nations to live in a state of It is possible for nations to live in a state of

“perpetual peace” (attributed to Immanuel Kant) “perpetual peace” (attributed to Immanuel Kant) under a federal system of governance, where each under a federal system of governance, where each yields some sovereignty and sacrifies some yields some sovereignty and sacrifies some national interests in return for like actions by national interests in return for like actions by others. However, it was difficult to transform an others. However, it was difficult to transform an environment of nearly perpetual war (Europe from environment of nearly perpetual war (Europe from 1914-1945) into one where Kant's vision of 1914-1945) into one where Kant's vision of perpetual peace would take holdperpetual peace would take hold

(2)(2)Economic cooperation and the gains therefrom Economic cooperation and the gains therefrom would strengthen the cooperative ties that bind would strengthen the cooperative ties that bind European nations together (attributed to David European nations together (attributed to David Ricardo)Ricardo)


More than perpetual internal peace was desired. More than perpetual internal peace was desired. Postwar Western leaders sought to create Postwar Western leaders sought to create strong, democratic, capitalist nations to a firm strong, democratic, capitalist nations to a firm wall of resistance to the spread of communismwall of resistance to the spread of communism

Marshall Plan (1948)Marshall Plan (1948):: The first formal postwar step toward building an The first formal postwar step toward building an

integrated European economyintegrated European economy President Harry S. Truman's Secretary of State, President Harry S. Truman's Secretary of State,

General George Marshall called upon the nations General George Marshall called upon the nations of Europe to form a continentwide economic of Europe to form a continentwide economic market like the USAmarket like the USA

Marshall Plan aid was designed to hasten Marshall Plan aid was designed to hasten economic recovery by providing a resource base economic recovery by providing a resource base on which to build a European communityon which to build a European community

How different states How different states viewed European viewed European

integrationintegration USA – saw European integration as a strong USA – saw European integration as a strong

anticommunist allyanticommunist ally Many Europeans – supported it as a solution to the Many Europeans – supported it as a solution to the

“German problem” – the need to embed German political “German problem” – the need to embed German political and economic power in supranational insitutionsand economic power in supranational insitutions

Germany – wanted to be reintegrated into the Germany – wanted to be reintegrated into the international community after the disaster of Nazisminternational community after the disaster of Nazism

Great Britain – Winston Churchill saw the “United States Great Britain – Winston Churchill saw the “United States of Europe” as a balance to US influence in the postwar of Europe” as a balance to US influence in the postwar eraera

France – President Charles de Gaulle imagined a France – President Charles de Gaulle imagined a “Europe of States” in which the structure of regionalism “Europe of States” in which the structure of regionalism would enhance the sovereignty and status of all its would enhance the sovereignty and status of all its membersmembers


An integrated Europe also needed European An integrated Europe also needed European leadershipleadership

Jean Monnet, a French political economist, Jean Monnet, a French political economist, provided the intellectual guidanceprovided the intellectual guidance He proposed an alliance along functional economic He proposed an alliance along functional economic

lines: a zone of free trade uniting the heavy lines: a zone of free trade uniting the heavy industry regions that spanned the French-German industry regions that spanned the French-German borderborder

This plan for the European Coal and Steel This plan for the European Coal and Steel Community (ECSC) was implemented by Robert Community (ECSC) was implemented by Robert Schuman, a French statesman, in 1950Schuman, a French statesman, in 1950

ECSC was a critical test for Europe and ECSC was a critical test for Europe and provided a model for futher integration in provided a model for futher integration in Western EuropeWestern Europe


1957 – Treaty of Rome1957 – Treaty of Rome:: Created the European Economic Community Created the European Economic Community

(EEC, or the Common Market) – a customs (EEC, or the Common Market) – a customs union that brought together the markets of union that brought together the markets of ItalyItaly, , FranceFrance, , BelgiumBelgium, , LuxembourgLuxembourg, , the the NetherlandsNetherlands and and West GermanyWest Germany

This union of “the six” was a great success This union of “the six” was a great success because these nations were natural trading because these nations were natural trading partnerspartners

Great Britain participated in the negotiations Great Britain participated in the negotiations but decided against it for fear of losing but decided against it for fear of losing political and economic autonomy and political and economic autonomy and preferential trading relations with the preferential trading relations with the Commonwealth nations and the USACommonwealth nations and the USA


European Free Trade AreaEuropean Free Trade Area:: Great Britain did not want to be isolated from the Great Britain did not want to be isolated from the

rest of Europe and organized a weaker alliance of rest of Europe and organized a weaker alliance of trading nations called the European Free Trade trading nations called the European Free Trade Area (EFTA)Area (EFTA)

EFTA brought together EFTA brought together DenmarkDenmark, , SwedenSweden, , AustriaAustria, , SwitzerlandSwitzerland, , PortugalPortugal and the and the United KingdomUnited Kingdom

An FTA, being more restricted than a customs An FTA, being more restricted than a customs union, could never offer these nations the benefit union, could never offer these nations the benefit of a common marketof a common market

Geographic separation, deep cultural divisions, Geographic separation, deep cultural divisions, huge economic gaps between rich and poor huge economic gaps between rich and poor members contributed to limit trade and growthmembers contributed to limit trade and growth

EFTA members soon sought EEC membershipEFTA members soon sought EEC membership


Trade among EEC members was never entirely Trade among EEC members was never entirely free – non-tariff barriers to trade abounded and free – non-tariff barriers to trade abounded and sometimes nations would simply refuse to sometimes nations would simply refuse to accept imports of any items from another accept imports of any items from another member, in violation of the Treaty of Rome member, in violation of the Treaty of Rome because of domestic political or economic because of domestic political or economic concernsconcerns

It was also necessary to create an elaborate It was also necessary to create an elaborate system of agricultural subsidies across the EEC system of agricultural subsidies across the EEC to defuse political opposition from powerful to defuse political opposition from powerful farm groupsfarm groups The The Common Agricultural PolicyCommon Agricultural Policy (CAP) (CAP)

provided for a complex pattern of payments provided for a complex pattern of payments to farmers in all EEC nationsto farmers in all EEC nations


Although a far cry from free trade Although a far cry from free trade and laissez-faire, CAP was the price and laissez-faire, CAP was the price of achieving greater liberalism and of achieving greater liberalism and cooperation in other spheres of cooperation in other spheres of economic life.economic life.

The CAP eventually led to a budget The CAP eventually led to a budget crisis in the 1980scrisis in the 1980s

The EEC changed its name to the The EEC changed its name to the European Community (EC) in 1967 European Community (EC) in 1967 signaling intention to move beyond signaling intention to move beyond purely economic issuespurely economic issues

Common Agricultural Common Agricultural PolicyPolicy

One of the most controversial and divisive One of the most controversial and divisive elements of economic and political elements of economic and political integration in Europeintegration in Europe

An EU-wide system of agricultural An EU-wide system of agricultural subsidies, financed through value-added-subsidies, financed through value-added-taxes imposed by EU member nationstaxes imposed by EU member nations

Largest item of expenditure of the EU and Largest item of expenditure of the EU and has been a point of contention both within has been a point of contention both within the EU and in its relations with other the EU and in its relations with other nationsnations

Perfect example of the use of economic Perfect example of the use of economic means to achieve political endsmeans to achieve political ends

Common Agricultural Common Agricultural PolicyPolicy

Common Agricultural Common Agricultural Policy (cont.)Policy (cont.)

When the EEC was being formed, farm When the EEC was being formed, farm interests were a major political obstacleinterests were a major political obstacle

Farmers feared a more comopetitive market Farmers feared a more comopetitive market would make them suffer to sell their own goodswould make them suffer to sell their own goods

Since farm groups could have potentially Since farm groups could have potentially blocked the European integration the CAP was blocked the European integration the CAP was createdcreated

CAP created a unified system of farm subsidies CAP created a unified system of farm subsidies that insulated farmers from many aspects of that insulated farmers from many aspects of competitive market forcescompetitive market forces

CAP can be thought of as a system that CAP can be thought of as a system that collected some of the economic gains of collected some of the economic gains of European integration in the form of taxes that European integration in the form of taxes that were then paid to farmers in exchange for their were then paid to farmers in exchange for their political supportpolitical support


Provides Europe's farmers with high Provides Europe's farmers with high prices through a system of price supports prices through a system of price supports – the EU purchases excess farm produce – the EU purchases excess farm produce to keep prices from falling and farm to keep prices from falling and farm incomes from declining – a system that incomes from declining – a system that benefits farmers at the expense of the benefits farmers at the expense of the tax-paying publictax-paying public

Over the years the CAP's guarantees Over the years the CAP's guarantees have encouraged European farmers to have encouraged European farmers to over-produceover-produce

CAP is now a source of deep political CAP is now a source of deep political disagreementdisagreement


Problems of CAP:Problems of CAP:(1)(1)As the EU expanded, the cost of maintaining As the EU expanded, the cost of maintaining

agricultural subsidies has grown. Rising costs agricultural subsidies has grown. Rising costs have pitted nations that are net recipients of CAP have pitted nations that are net recipients of CAP funds against nations that are net payers of the funds against nations that are net payers of the taxes that fund the programtaxes that fund the program

(2)(2)The future of the EU's expansion into Central and The future of the EU's expansion into Central and Eastern Europe have created additional Eastern Europe have created additional pressures. The countries that believe they pressures. The countries that believe they unfairly pay the bills are worried that the bills will unfairly pay the bills are worried that the bills will get larger. At the smae time, current EU get larger. At the smae time, current EU members are fearful that more subsidies to new members are fearful that more subsidies to new EU members will come at the expense of EU members will come at the expense of payments to their own farmerspayments to their own farmers

(3)(3)EU is under pressure from the US and other EU is under pressure from the US and other countries to reduce agricultural subsidies countries to reduce agricultural subsidies generally as part of the WTO's process of trade generally as part of the WTO's process of trade liberalizationliberalization

- Plans are in the works to reduce - Plans are in the works to reduce agricultural subsidiesagricultural subsidies

Common Common Agricultural Agricultural

PolicyPolicy

The European The European Community, Community, 1973-19931973-1993

The second stage of development of the EU The second stage of development of the EU lasted from 1973-1993lasted from 1973-1993

Great BritainGreat Britain, , IrelandIreland and and DenmarkDenmark entered the EC in 1973entered the EC in 1973

GreeceGreece entered in 1981, followed by entered in 1981, followed by SpainSpain and and PortugalPortugal in 1986 in 1986 EC membership for these three countries was EC membership for these three countries was

in part a reward for the triumph of democratic in part a reward for the triumph of democratic institutions over authoritarian governments. institutions over authoritarian governments. Free trade and closer economic ties were Free trade and closer economic ties were intended to solidify democracy and protect it intended to solidify democracy and protect it from communist influencefrom communist influence

The European The European Community (cont.)Community (cont.)

The entry of poorer nations of Ireland, The entry of poorer nations of Ireland, Greece, Spain and Portugal magnified Greece, Spain and Portugal magnified a variety of tensions within the ECa variety of tensions within the EC Lower living standards limited the extent Lower living standards limited the extent

of their trade with richer member statesof their trade with richer member states Lower wage structures threatened some Lower wage structures threatened some

jobs in EC industriesjobs in EC industries The entry of four largely agricultural The entry of four largely agricultural

nations to the EC institutions, like the nations to the EC institutions, like the CAP, put severe fiscal strains on the CAP, put severe fiscal strains on the other nationsother nations


These economic and political stresses caused a These economic and political stresses caused a split in the EC. split in the EC.

Jacques Delors, the new president of the Jacques Delors, the new president of the European Commission tried to find a way to European Commission tried to find a way to reunite the EC and he produced a proposal for reunite the EC and he produced a proposal for the creation of a single market by 1992 – the the creation of a single market by 1992 – the Single Market ActSingle Market Act

Although it seemed as if the EC was already a Although it seemed as if the EC was already a single market, it was still far from its goalsingle market, it was still far from its goal

The goals were the “four freedoms”:The goals were the “four freedoms”: Free movement of goodsFree movement of goods Free movement of serviesFree movement of servies Free movment of capitalFree movment of capital Free movement of peopleFree movement of people


National sovereignty and economic growth National sovereignty and economic growth were often in conflictwere often in conflict For example: Germany wanted its stringent For example: Germany wanted its stringent

environmental laws applied to the EC but Portugal environmental laws applied to the EC but Portugal and Greece objected because it was too costlyand Greece objected because it was too costly

The four freedoms required sacrifice of some The four freedoms required sacrifice of some domestic freedoms, such as the right to self-domestic freedoms, such as the right to self-determination of environmental and safety determination of environmental and safety standardsstandards

Not all of the goals of the Single Market were Not all of the goals of the Single Market were achieved by 1/1/1993, the basic thrust of the achieved by 1/1/1993, the basic thrust of the program succeeded, however, Europe did not program succeeded, however, Europe did not immediately experience economic growthimmediately experience economic growth

1995-20031995-2003 1995 – 1995 –

Accession of Austria, Finland and Sweden to the EUAccession of Austria, Finland and Sweden to the EU Schengen Agreement (abolishing border controls) Schengen Agreement (abolishing border controls)

implemented by Germany, France, Benelux states, Spain and implemented by Germany, France, Benelux states, Spain and PortugalPortugal

1997 - European Council agrees on the Treaty of 1997 - European Council agrees on the Treaty of Amsterdam strengthening EU institutionsAmsterdam strengthening EU institutions

1999 – The Euro goes into effect in 11 of the 15 EU 1999 – The Euro goes into effect in 11 of the 15 EU member statesmember states

2000 – European Council agrees on the Treaty of Nice2000 – European Council agrees on the Treaty of Nice 2002 – Euro coins and banknotes enter circulation 2002 – Euro coins and banknotes enter circulation

and replace national currenciesand replace national currencies 2003 – The Draft of a Constitution for Europe 2003 – The Draft of a Constitution for Europe

presentedpresented

EU-27EU-27

EU-27EU-27 2004:2004:

10 new states (Czech Republic, Slovakia, Slovenia, 10 new states (Czech Republic, Slovakia, Slovenia, Hungary, Poland, Cyprus, Malta, Lithuania, Latvia and Hungary, Poland, Cyprus, Malta, Lithuania, Latvia and Estonia) joined the UnionEstonia) joined the Union

The European Council signs the treaty establishing a The European Council signs the treaty establishing a Constitution for EuropeConstitution for Europe

2005 – The treaty for establishing a constitution is 2005 – The treaty for establishing a constitution is rejected in referanda in France and the Netherlandsrejected in referanda in France and the Netherlands

2007:2007: Bulgaria and Romania joinBulgaria and Romania join

Today:Today: Croatia, Turkey and Macedonia await future Croatia, Turkey and Macedonia await future

membershipmembership

Political Institutions of Political Institutions of the EUthe EU

The Treaty of Rome did more than commit The Treaty of Rome did more than commit six nations to economic integration – it also six nations to economic integration – it also began the process of developing a set of began the process of developing a set of political institutions to make policy, settle political institutions to make policy, settle disputes and provide leadership for Europedisputes and provide leadership for Europe

The most important political institutions in The most important political institutions in the EU today are:the EU today are: The European Commission (and its President)The European Commission (and its President) The Council of MinistersThe Council of Ministers The European CouncilThe European Council The European ParliamentThe European Parliament The European Court of JusticeThe European Court of Justice

Political Institutions of Political Institutions of the EU (cont.)the EU (cont.)

Each of these institutions plays a Each of these institutions plays a specific role in setting the delicate specific role in setting the delicate balance between the national balance between the national interests of member nations and the interests of member nations and the collective interest of the EUcollective interest of the EU

President of the President of the European European

CommissionCommission Head of the state of the EUHead of the state of the EU Leads the European CommissionLeads the European Commission Represents EU to other nationsRepresents EU to other nations Jose Manuel Barroso, the former Jose Manuel Barroso, the former

Prime Minister of Portugal, began Prime Minister of Portugal, began his term in 2004, taking over from his term in 2004, taking over from Romano Prodi, the former Prime Romano Prodi, the former Prime Minister of ItalyMinister of Italy

European European CommissionCommission

The executive branch of the EU serving much The executive branch of the EU serving much the same function as the cabinet in the USA or the same function as the cabinet in the USA or UKUK

Proposes legislation to the Council of MinistersProposes legislation to the Council of Ministers Administers EU programsAdministers EU programs Represents the EU in economic relations with Represents the EU in economic relations with

other countries or international organizationsother countries or international organizations Each commissioner has a special “portfolio” of Each commissioner has a special “portfolio” of

responsibilities, such as competition or responsibilities, such as competition or agricultureagriculture

Council of MinistersCouncil of Ministers Main lawmaking body of the EUMain lawmaking body of the EU Composed of a single representative from Composed of a single representative from

each member nationeach member nation The Council can accept or reject legislation The Council can accept or reject legislation

proposed by the European Commission, but proposed by the European Commission, but it cannot draft legislation itselfit cannot draft legislation itself

Intended to provide a balancing forum for Intended to provide a balancing forum for more narrow national interestsmore narrow national interests

The voting rules of the EU allow a minority The voting rules of the EU allow a minority of member states to block action in the of member states to block action in the European Commission when they believe European Commission when they believe their national interests are threatenedtheir national interests are threatened

European CouncilEuropean Council

Meetings of the EU heads of states Meetings of the EU heads of states and governments are called the and governments are called the European CouncilEuropean Council

Meetings are held at least once Meetings are held at least once every six months by the country every six months by the country holding the Presidency of the holding the Presidency of the Council of MinistersCouncil of Ministers

European ParliamentEuropean Parliament The only body of the EU whose members The only body of the EU whose members

are directly elected by the citizens of its are directly elected by the citizens of its member statesmember states

European Parliament committees review European Parliament committees review legislation proposed by the European legislation proposed by the European Commission and may propose Commission and may propose amendments to the legislation before amendments to the legislation before submitting it to the Council of Ministerssubmitting it to the Council of Ministers

May veto a proposal after it reaches the May veto a proposal after it reaches the Council of Ministers if it does not agree Council of Ministers if it does not agree with the Council's positionwith the Council's position

Has 736 members as of 2009Has 736 members as of 2009

European Parliament European Parliament (cont.)(cont.)

Organized along political party lines, not Organized along political party lines, not according to national citizenshipaccording to national citizenship For example: socialists from all EU nations For example: socialists from all EU nations

act together, as do conservatives and other act together, as do conservatives and other groupsgroups

Provides a forum for debate and Provides a forum for debate and discussion from the perspective of discussion from the perspective of political ideology, not national interest political ideology, not national interest (Council of Ministers) or European (Council of Ministers) or European interest (European Commission)interest (European Commission)

Not a legislative body but can have Not a legislative body but can have important influence over EU policiesimportant influence over EU policies

European ParliamentEuropean Parliament

European ParliamentEuropean Parliament

National apportionment of MEP seats National apportionment of MEP seats (2009)(2009) GermanyGermany99 99 FranceFrance72 72 ItalyItaly78 United 78 United Kingdom72 Spain50 Poland50 Romania33 NKingdom72 Spain50 Poland50 Romania33 Netherlands25 Belgium22 CzechRepublic22 Getherlands25 Belgium22 CzechRepublic22 Greece22 Hungary22 Portugal22 Sweden18 Areece22 Hungary22 Portugal22 Sweden18 Austria17 Bulgaria17 Finland13 Denmark13 Sustria17 Bulgaria17 Finland13 Denmark13 Slovakia13 Ireland12 Lithuania12 Latvia8 Slolovakia13 Ireland12 Lithuania12 Latvia8 Slovenia7 Cyprus6 Estonia6 Luxembourg6 Maltvenia7 Cyprus6 Estonia6 Luxembourg6 Malta5a5

Total: 736Total: 736

European Court of European Court of JusticeJustice

““Supreme Court” of EU lawSupreme Court” of EU law Composed of 15 judges who are Composed of 15 judges who are

appointed to six-year termsappointed to six-year terms Deals with disputes between Deals with disputes between

member governments and EU member governments and EU institutions and among EU institutions and among EU institutions and with appeals against institutions and with appeals against EC rulings or decisionsEC rulings or decisions

Made up of one representative from Made up of one representative from each of the EU member nationseach of the EU member nations

EuropeaEuropean n

Central Central BankBank

EU's central bankEU's central bank Created after the decision to adopt the euroCreated after the decision to adopt the euro Executive board, appointed for eight-year terms, and Executive board, appointed for eight-year terms, and

a governing board which includes the executive board a governing board which includes the executive board and the heads of all EU member nation central banksand the heads of all EU member nation central banks

Currently responsible for the monetary policy of the Currently responsible for the monetary policy of the 16 member states of the Eurozone 16 member states of the Eurozone (Austria, Belgium, Cyprus, Finland, France, Germany, (Austria, Belgium, Cyprus, Finland, France, Germany,

Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain)Portugal, Slovakia, Slovenia and Spain)

The 1990'sThe 1990's

The collapse of communism The collapse of communism eliminated the threat of Soviet eliminated the threat of Soviet domination but not the need for domination but not the need for peaceful cooperationpeaceful cooperation

The questions for Europe now are:The questions for Europe now are: Is Europe just a Is Europe just a geographical unitgeographical unit that that

lies north of Africa and west of Asia?lies north of Africa and west of Asia? Will it be Will it be united by moneyunited by money (its common (its common

currency, the euro) alone?currency, the euro) alone? Or will it become more – Europa – a Or will it become more – Europa – a

people with a people with a common willcommon will??

Post-Cold War Issues Post-Cold War Issues Confronting the EUConfronting the EU

The EU was confronted with at least The EU was confronted with at least severalseveral issues at the end of the Cold War:issues at the end of the Cold War:1)1)The Ever-Wider UnionThe Ever-Wider Union::

✗ How to accommodate the new demands for membership How to accommodate the new demands for membership in the EU without hopelessly alienating current EU in the EU without hopelessly alienating current EU membersmembers

✗ How to deal with rising membership applications at the How to deal with rising membership applications at the end of the Cold Warend of the Cold War

✗ 12 countries filed formal membership applications:12 countries filed formal membership applications:✗ Cyprus, the Czech Republic, Estonia, Hungary, Poland and Cyprus, the Czech Republic, Estonia, Hungary, Poland and

Slovenia were given top prioritySlovenia were given top priority – joined in 2004 – joined in 2004✗ Bulgaria, Latvia, Lithuania, Romania and Slovakia were Bulgaria, Latvia, Lithuania, Romania and Slovakia were

given second prioritygiven second priority – joined in 2004 (with the exception of – joined in 2004 (with the exception of Romania and Bulgaria which joined in 2007)Romania and Bulgaria which joined in 2007)

✗ Croatia awaits membership and Macedonia has received Croatia awaits membership and Macedonia has received candidate statuscandidate status

✗ Turkey's application continues to be snubbedTurkey's application continues to be snubbed✗ New members New members were and were and will will continue to continue to be poorer than be poorer than

current members causing tension between member statescurrent members causing tension between member states✗ Like it or not, the EU openLike it or not, the EU openeded its gates to these countries its gates to these countries

to ensure democracy persiststo ensure democracy persists

Post-Cold War Issues Post-Cold War Issues Confronting the EU Confronting the EU

(cont.)(cont.)2)2) The Challenge of the RegionsThe Challenge of the Regions::

✗ What to do about demands for greater regional What to do about demands for greater regional autonomy within the EUautonomy within the EU

✗ As nation-states secede power within the EU, As nation-states secede power within the EU, regions have begun to assume more importanceregions have begun to assume more importance

✗ Sometimes the regional focus is rooted in Sometimes the regional focus is rooted in culture, for ex.: Catalan region in Spainculture, for ex.: Catalan region in Spain

✗ In other places the issue is money and the In other places the issue is money and the perceived need to be free of the shackles of perceived need to be free of the shackles of national government, for ex.: Bavaria in national government, for ex.: Bavaria in Germany and Northern ItalyGermany and Northern Italy

✗ The EU needs to find a way to address the The EU needs to find a way to address the desires of richer regions while trying to desires of richer regions while trying to accommodate newer membersaccommodate newer members

Post-Cold War Issues Post-Cold War Issues Confronting EU (cont.)Confronting EU (cont.)

3)3) The Security IssueThe Security Issue::✗ How to deal effectively with security How to deal effectively with security

issues other than the Soviet threatissues other than the Soviet threat✗ EU is surrounded by conflicts (the EU is surrounded by conflicts (the

Balkans, Middle East, North Africa) and Balkans, Middle East, North Africa) and threats (terrorists, environmental threats (terrorists, environmental dangers, organized crime, illegal dangers, organized crime, illegal immigration)immigration)

✗ Europe needs a common defense policy, Europe needs a common defense policy, however, a collective policy would require however, a collective policy would require a good deal more political unity than the a good deal more political unity than the EU has ever demonstrated in the pastEU has ever demonstrated in the past

Post-Cold War IssuesPost-Cold War IssuesConfronting the EU Confronting the EU

(cont.)(cont.)4)4) The German ProblemThe German Problem::

✗ How to make sure that Germany remains committed How to make sure that Germany remains committed to a united Europe without dominating itto a united Europe without dominating it

✗ The German problem was one of the original The German problem was one of the original problems that the EC was meant to addressproblems that the EC was meant to address

✗ Germany today, a decade and one half after Germany today, a decade and one half after unification of its Eastern and Western sections, finds unification of its Eastern and Western sections, finds itself bound by the EU to the rest of Europe but itself bound by the EU to the rest of Europe but faced with very serious economic, social and political faced with very serious economic, social and political problems at home, both in the poorer Eastern problems at home, both in the poorer Eastern provinces and in the rising tensions between East provinces and in the rising tensions between East and Westand West

✗ Germany has so many domestic problems that it Germany has so many domestic problems that it would be natural for it to put domestic issues above would be natural for it to put domestic issues above those of European unitythose of European unity

✗ RISING NATIONALISM – a new problem??RISING NATIONALISM – a new problem??

Post-Cold War IssuesPost-Cold War IssuesConfronting the EU (cont.)Confronting the EU (cont.)

5.5. The Political Challenge of the EuroThe Political Challenge of the Euro Once the Euro was launched in 2002 the Once the Euro was launched in 2002 the

member nations faced a transformed political member nations faced a transformed political environmentenvironment

Their ability to influence domestic economic Their ability to influence domestic economic conditions was much reduced and interest conditions was much reduced and interest rates were now set by the ECB and not the rates were now set by the ECB and not the policymakers of these states – this left policymakers of these states – this left national leaders in an awkward position.national leaders in an awkward position.

One state’s economic problems also become One state’s economic problems also become problems of other member states (ex. Greek problems of other member states (ex. Greek financial crisis)financial crisis)

Post-Cold War IssuesPost-Cold War IssuesConfronting the EU (cont.)Confronting the EU (cont.)

6.6. The Constitutional ChallengeThe Constitutional Challenge In its movement towards an “ever In its movement towards an “ever

closer union” the EU is aiming at closer union” the EU is aiming at political union and an EU constitution political union and an EU constitution – this raises issues of national – this raises issues of national sovereignty.sovereignty.

The draft of the Constitution was The draft of the Constitution was rejected in referanda in France and rejected in referanda in France and the Netherlands in 2005 the Netherlands in 2005

Monetary UnionMonetary Union Discussed in Maastricht in 1991Discussed in Maastricht in 1991 France proposed a single currencyFrance proposed a single currency In theory, a monetary union was supposed to In theory, a monetary union was supposed to

address the four issues mentioned previouslyaddress the four issues mentioned previously A single currency would make European A single currency would make European

markets more efficient and Europe's markets more efficient and Europe's economies more dynamiceconomies more dynamic

It would provide economic gains to offset the It would provide economic gains to offset the costs of enlargement and boost the prospects costs of enlargement and boost the prospects of the regions; the German problem would be of the regions; the German problem would be soved because Germany would be chained to soved because Germany would be chained to the rest of Europe with moneythe rest of Europe with money

Monetary Union (cont.)Monetary Union (cont.) Finally, political cooperation would be Finally, political cooperation would be

accomplished through an indirect accomplished through an indirect mechanism – with a single currency mechanism – with a single currency EU nations would need to cooperate EU nations would need to cooperate more on political issuesmore on political issues

Germany did not have much interest Germany did not have much interest in a common currency. It saw more in a common currency. It saw more to lose than to gain because of its to lose than to gain because of its strong deutschemark – however strong deutschemark – however Germany wanted a political unionGermany wanted a political union

Monetary Union (cont.)Monetary Union (cont.) A deal was struck – Germany would gets its A deal was struck – Germany would gets its

political union and France would get its political union and France would get its monetary union (before Maastricht)monetary union (before Maastricht)

However, at the end of Maastricht, the However, at the end of Maastricht, the monetary union had been adopted and the monetary union had been adopted and the political union was notpolitical union was not

The criteria for nations to be part of the The criteria for nations to be part of the single currency:single currency: Low government debtLow government debt Low inflation ratesLow inflation rates Low interest ratesLow interest rates

Greece initially failed to qualify on economic Greece initially failed to qualify on economic grounds and the UK and Sweden opted to grounds and the UK and Sweden opted to remain outside the euro zoneremain outside the euro zone

Political Economy of the Political Economy of the EuroEuro

The euro is still a political issueThe euro is still a political issue The name euro was chosen because it The name euro was chosen because it

means nothing in any European language means nothing in any European language (ECU – European Currency Unit was (ECU – European Currency Unit was considered but was rejected because considered but was rejected because France once had such a coin in medieval France once had such a coin in medieval times)times)

Images on any euro currency look like Images on any euro currency look like what appears to be classic Europe but what appears to be classic Europe but none of them are authentic because none of them are authentic because putting any real European scene could putting any real European scene could lead to disagreementslead to disagreements

The euro symbol € means nothingThe euro symbol € means nothing

Political Economy of the Political Economy of the EuroEuro

Three levels of political issues that surround the Three levels of political issues that surround the euro:euro:1)1)The monetary union has created a reason for The monetary union has created a reason for

nations to unify in the absence of a common nations to unify in the absence of a common security threat. Being left out of the euro might security threat. Being left out of the euro might mean being doomed to peripheral status. mean being doomed to peripheral status.

2)2)Qualifying for membership in the monetary Qualifying for membership in the monetary union has forced European nations to make very union has forced European nations to make very difficult political decisions like cutting difficult political decisions like cutting government spending, increasing taxes and government spending, increasing taxes and becoming more laissez-faire. becoming more laissez-faire.

3)3)The single currency changes the domestic The single currency changes the domestic political environment – member nations will not political environment – member nations will not longer be able to spend their way out of a longer be able to spend their way out of a recession or print money to pay for recession or print money to pay for unemployment because fiscal autonomy is unemployment because fiscal autonomy is surrendered.surrendered.

european economic and monetary union lecturer itir bagdadi

Documents

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s economic element

common market

century ipe

groups of nationstates

european community ec

century regionalism

violent century