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CHAPTER I.SHORTHYSTORY OF THE EUROPEAN UNION
The first concrete move for regional integration in Europe was made in 1947 with the
establishment of Economic Commission for Europe (ECE). Also, in 1948 the Organization
for European Economic Cooperation (OECC) was formed and was followed a year later by
the Council of Europe. These marked the beginning of the splitting of Western Europe into
two camps, with, on the one hand, the UK and some of the countries that later formed the
European Free Trade Association (EFTA), and, on the other, Belgium, France, West
Germany, Italy, Luxembourg and the Netherlands, usually referred to as the Original Six that
subsequently established the European Economic Community (EEC).
The next step in the economic and political unification of Western Europe was taken
in 1951, when the European Coal and Steel Community was created by the Six and marked
the parting of ways in post-war Western Europe. In June 1955, at Messina, Italy, at the
meeting of the foreign ministers of the Six was considered the memorandum proposed by
Belgium, Netherlands and Luxembourg regarding the establishment of a general common
market and specific measures in the fields of energy and transport. The governments of the
Six established that a general common market and an atomic energy pool should appear. In
the end, after three years of negotiations, the Six agreed that the drafting of two treaties, one
to create a general common market and another to establish an atomic energy community,
should begin. Treaties were subsequently signed in Rome on 25 March 1957. The EEC and
1Euratom came into being on 1 January 1958. Thus, in 1958 the Six belonged to three
separate entities: the ECSC2, EEC3 and Euratom. Later became convenient to consider the
three entities as branches of the same whole, with EEC becoming the dominant partner. The
whole structure was named European Communities, or European Community (EC), whose
main constitutional base was the Treaty of Rome, creating the EEC. The need of institutional
strengthening of EC become more clear by introduction of summit meetings which try to
bring national political leaders more closely into the EC affaires. In 1974 these were
formalized under the name of European Council. The 1969-1972 periods can be described as
one of great activity. In 1970 the Six reached a common position on the development of a
Common Fisheries Policy (CFP). At a Paris summit in 1973 an agreement was reached on the
1
European Atomic Energy Commission2 European Coal and Steel Community3 European Economic Community
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development of new policies in relation to industry and science and research. The summit
envisaged a more active role for the EC in the area of regional policy and decided that a
European Regional Development Fund (ERDF) should be created to channel EC resources
into the development of the backward EC regions.
New members, like Greece (1981), Spain (1986) and Portugal (1986) entered the EC.
On 1 July 1987 the Single European Act (SEA) became operative. The SEA contained policy
development which was based upon the intention of creating a true single market by the end
of 1992 with free movements of goods, services, capital and labour. Even more European
countries applied between 1989-1992. Among them we can name Austria, Finland, Sweden
and Switzerland and Norway shortly followed them. Cyprus and Malta applied in 1990.
Formal negotiations were opened in 1998 with those states most likely to succeed: the Czech
Republic, Estonia, Hungary, Poland and Slovenia. However the instability in Balkans and the
war in Kosovo showed the need to hasten the process and, at 4Helsinki, in December 1999, it
was agreed to open accession talks with Bulgaria, Latvia, Lithuania, Malta, Romania and
Slovakia.
Certainly, an organization with such a large and varied membership would be very
different from the original EEC of the Six. This is one reason why pursuing the questions of
enlargement was made consequent upon the finalizing of the 5Maastricht Treaty and
agreement upon new financial and budgetary arrangements for the existing member states.
The enlargement facing the EU today poses a unique challenge, since it is without
precedent in terms of scope and diversity: the number of candidates, the area (increase of
34%) and population (increase of 105 million), the wealth of different histories and cultures.
A single set of trade rules, a single tariff, and a single set of administrative procedures will
apply not only just across the existing Member States but across the Single Market of the
enlarged Union.
In order to assist the countries that have applied to become members of the European
Union to carry out the reforms required for membership and to equip themselves to benefit
from EU funds on accession, the Union provides financial assistance as part of its Pre-
Accession Strategy.
A new meeting of the European Council took place in December 1991, at Maastricht
and produced a new blueprint for the future. It tried to integrate the EC further through setting
out a time table for full economic and monetary unit (EMU), introducing institutional changes
4 Helsinki European Council; 10, 11 December 19995 Treaty on European Union, 7 February 1992
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and developing political competences, the whole being brought together in the Treaty on
European Union (Maastricht Treaty) of which the EC should form a part of a wider European
Union. The Amsterdam6 conference, which followed in 1997, updated aims and policies, tried
to clarify the position regarding foreign and defense policies and justice and home affaires,
and strengthened the social side. The treaty itself modified the existing treaties, notably those
on the EEC and on the Union, which can be considered together with the acquis communitaire
(legislation deriving from the treaties), as the constitution of the EU.
The Amsterdam treaty gives EU a more coherent structure, a modern statement of its
aims and policies, and brings some necessary improvements in the working of the institutions.
The EU after the Amsterdam treaty has broad objectives but these naturally interfere with
those in the Maastricht treaty. The classic aim is to develop an even closer union. It promotes
economic and social progress, meaning the abolition of internal frontiers, better economic and
social cohesion to assist the less-developed members to catch up with the EU average
(creation of the Cohesion Fund in 1993) and an economic and monetary unit, complete with a
single currency. It wants to create an international identity through a common security and
defense policy. It has introduced a formal citizenship and has also taken steps to strengthen
the commitment to democracy, to individual rights, to promote equality and to combat
discrimination. The treaty has also established the EU, as an area of free movement, security
and justice. Internally, the EU has general economic objectives relating to the single market,
agriculture and transport, the aim of economic and social cohesion and a new emphasis on
policy making in employment, social and environmental matters.
Another important step in the EU development was the Nice Treaty 7, which took place
on 11 December 2000. The treatys main concern was with EU enlargement, especially with
the institutional changes that would be needed to accommodate 12- 15 new members.
6 The Amsterdam Treaty, 2 October 19977 The Nice Treaty, 26 February 2001
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CHAPTER II. THE ECONOMICS OF EUROPEAN INTEGRATION
Fundamental Concepts
A. Purpose and progress of economic integration
The expression 'economic integration' covers a variety of notions. It may refer to the
absorption of a company in a larger concern. It may have a spatial aspect, for instance if it
refers to the integration of regional economies in a national one. In case of EU, economic
integration is always used with respect to international economic relations, to indicate the
combination of the economies of several sovereign states in one entity.
Economic integration is not an objective in itself, but serves higher objectives. The
immediate, economic, objective is to raise the prosperity of all cooperating units. The farther-
reaching objective is one of peace policy; namely, to lessen the chance of armed conflicts
among partners. Polacheck (1980), using data for 30 countries in the 1958-1967 period,
showed that doubling the trade between two countries leads to a 20 per cent decline in the
frequency of hostilities.
Used in a static sense, 'economic integration' represents a situation in which the national
components of a larger economy are no longer separated by economic frontiers but function
together as an entity. Used in a dynamic sense it indicates the gradual elimination of
economic frontiers among member states (that is to say, the abolition of national
discrimination), with the formerly separate national economic entities gradually merging into
a larger whole. Of course, the static meaning of the expression will apply in full once the
integration process has passed through its stages and reached its object.
Objects of integration
Economic integration is basically the integration of markets. Economists make a distinction
between markets of goods and services on the one hand, and markets of production factors
(labour, capital, entrepreneurship) on the other.
Free movement of goods and services is the basic principle of economic integration.As is well known from classical international trade theory the free exchange of goods
promises a positive effect on the prosperity of all concerned. It permits consumers to choose
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the cheapest good, generally widens the choice, and creates the conditions for further gain
through economies of scale, etc.
The obvious welfare gains from the liberalisation of product markets are a good economic
reason to start integration with that object. However, integration schemes tend to follow a
political logic rather than an economic one. The political reasons to begin integration at the
goods market are:
- lasting coalition between sectors demanding protection and sectors and consumers
demanding cheap imports is hard to accomplish;
- substitute instruments (such as industrial policy, non- tariff barriers, and administrative
procedures) can be used to intervene in the economic process;
- vital political issues like growth policy and income redistribution are guaranteed to remain
within national jurisdiction.
Free movement of production factors can be seen as another basic element ofeconomic integration. One argument for it is that it permits optimum allocation of labour and
capital. Sometimes, certain production factors are missing from the spot where otherwise
production would be most economical. To overcome that problem, entrepreneurs are apt to
shift their capital from places of low return to more promising places. The same is true of
labour: employees will migrate to regions where their labour is more needed and therefore
better rewarded. A second argument is that an enlarged market of production factors favours
new production possibilities which in turn permit new, more modern or more efficient uses of
production factors (new forms of credit, new occupations, etc.).
The choice of production factors as the object of the second stage in the integration process is
partly based on the economic advantages that spring from such integration. But here, too, we
have to consider the political logic. The integration of labour markets seems to be the obvious
choice in periods of a general shortage of labour A tangle of national regulations for wages,
social security, etc. seems to leave politicians sufficient opportunities for practical
intervention on the national level for them to accept general principles on the European level.
With capital-market integration the issue of direct investments seems straightforward; many
politicians may hope to attract new foreign investment in that way. For other capital
movements the willingness to integrate is less obvious because integration would imply
giving up the control of sensitive macroeconomic instruments.
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Policy approximation is the next stage of economic integration. In an economy which leaves
production and distribution entirely to the market, the elimination of obstacles to the
movement of goods and production factors among countries would suffice to achieve full
economic integration. Not so in modern economies, which are almost invariably of the mixed
type, the government frequently intervening in the economy. In economies of the mixed type,
integration cannot be achieved without harmonising the policies pursued by the governments
of the individual states. Policy making is on the whole more difficult to integrate than markets
for goods, services and production factors. Politicians are likely to be the more unwilling to
give up their intervention power, the more such elements are involved as employment policy
or budgetary policies (referring to expenditure on schools, subsidies, as well as revenues from
taxes).
Moreover, national civil servants tend to uphold their way of operating interventional schemes
as the most efficient, and since their very existence depends on complicated sets of rules, they
are hardly inclined, in general, to cooperate towards harmonised policy. Thus, the conditions
for a common currency or monetary integration will not readily be met. That is one reason
why currency integration is mostly introduced at a late stage of integration. Even later comes
the integration of points that touch the very heart of a nation's sovereignty, in particular the
acceptance of a common defence policy.
B. Positive and negative integration
With respect to modern mixed economies, Tinbergen (1954) distinguished negative
integration (that is, the elimination of obstacles), andpositive integration (that is, the creation
of equal conditions for the functioning of the integrated parts of the economy). The former's
demand on policy will be relatively simple (deregulation, liberalisation), but the latter will
always involve more complex forms of government policy (harmonisation, coordination). Let
us look somewhat closer at the differences.
Negative-integration measures are often of the simple 'Thou shalt not' type. They can be
clearly defined, and once negotiated and laid down in treaties, they are henceforth binding on
governments, companies and private persons. There is no need for permanent decision-
making machinery. Whether these measures are respected is for the courts to check, to which
individuals may appeal if infringements damage their interests.
Positive integration is more involved. It often takes the form of vaguely defined obligationsrequiring public institutions to take action. Such obligations leave ample room for
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interpretation as to scope and timing. They may, moreover, be reversed if the policy
environment changes. As a consequence, they hold much uncertainty for private economic
agents, who cannot derive any legal rights from them. Positive integration is the domain of
politics and bureaucracy rather than law. No wonder then that positive integration does not
present a built-in stimulus for progress. Because politicians are more likely to opt for positive
rather than negative integration, progress is likely to be slower, the higher the
stage of integration, that is the farther integration proceeds on the path towards a Full
Economic Union.
C. Stages of economic integration
As international trade and investment levels continue to rise, the level of economic integration
between various groups of nations is also deepening. The most obvious example of this is the
European Union, which has evolved from a collection of autarkical nations to become a fully
integrated economic unit. Although it is rare that relationships between countries follow so
precise a pattern, formal economic integration takes place in stages, beginning with the
lowering and removal of barriers to trade and culminating in the creation of an economic
union. These stages are summarized below.
A. FREE TRADE AGREEMENTS
The first level of formal economic integration is the establishment of free trade agreements
(FTAs) or preferential trade agreements (PTAs). FTAs eliminate import tariffs as well as
import quotas between signatory countries. These agreements can be limited to a few sectors
or can encompass all aspects of international trade. FTAs can also include formal
mechanisms to resolve trade disputes. The North American Free Trade Agreement (NAFTA)is an example of such an arrangement.
Aside from a commitment to a reciprocal trade liberalization schedule, FTAs place few
limitations on member states. Although FTAs may contain provisions in these areas if the
signatory countries agree to do so, no further harmonization of regulations, standards or
economic policies is required, nor is the free movement of capital and labour a necessary part
of a free trade agreement. FTA signatory countries also retain independent trade policy with
all countries outside the agreement.
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However, in order for an FTA to function properly, member countries must establish rules of
origin for all third-party goods entering the free trade area. Goods produced within the free
trade area (and subject to the agreement) may cross borders tariff-free, but rules of origin
requirements must be met to prove that the good was in fact produced in the exporting
country. In the absence of rules of origin, third-party countries seeking trade access to the
FTA area will choose the path of least resistance the country where they face the lowest
opposing tariff in order to gain effective entry to the entire FTA region.
B. CUSTOMS UNION
A customs union (CU) builds on a free trade area by, in addition to removing internal barriers
to trade, also requiring participating nations to harmonize their external trade policy. Thisincludes establishing a common external tariff (CET) and import quotas on products entering
the region from third-party countries, as well as possibly establishing common trade remedy
policies such as anti-dumping and countervail measures. A customs union may also preclude
the use of trade remedy mechanisms within the union. Members of a CU also typically
negotiate any multilateral trade initiative (such as at the World Trade Organization) as a
single bloc. Countries with an established customs union no longer require rules of origin,
since any product entering the CU area would be subject to the same tariff rates and/or import
quotas regardless of the point of entry.
The elimination of the need for rules of origin is the chief benefit of a customs union over a
free trade area. To maintain rules of origin requires extensive documentation by all FTA
member countries as well as enforcement of those rules at borders within the free trade area.
This is a costly process and can lead to disputes over interpretation of the rules as well as
other delays. A CU would result in significant administrative cost savings and efficiency
gains.
In order to gain the benefits of a customs union, member countries would have to surrender
some degree of policy freedom specifically the ability to set independent trade policy. By
extension, because of the increased importance of trade and economic measures as foreign
policy tools, customs unions place some limitations on independent foreign policy as well.
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C. COMMON MARKET
A common market represents a major step towards significant economic integration. In
addition to containing the provisions of a customs union, a common market (CM) removes all
barriers to the mobility of people, capital and other resources within the area in question, as
well as eliminating non-tariff barriers to trade, such as the regulatory treatment of product
standards.
Establishing a common market typically requires significant policy harmonization in a
number of areas. Free movement of labour, for example, necessitates agreement on worker
qualifications and certifications. A common market is also typically associated whether by
design or consequence with a broad convergence of fiscal and monetary policies due to theincreased economic interdependence within the region and the effect that one member
countrys policies can have on other member countries. This necessarily places more severe
limitations on member countries ability to pursue independent economic policies.
The principal advantage of establishing a common market is the expected gains in economic
efficiency. With unfettered mobility, labour and capital can more easily respond to economic
signals within the common market, resulting in a more efficient allocation of resources.
D. ECONOMIC UNION (AND MONETARY)
The deepest form of economic integration, an economic union adds to a common market the
need to harmonize a number of key policy areas. Most notably, economic unions require
formally coordinated monetary and fiscal policies as well as labour market, regional
development, transportation and industrial policies. Since all countries would essentially
share the same economic space, it would be counter-productive to operate divergent policies
in those areas.
An economic union frequently includes the use of a common currency and a unified monetary
policy. Eliminating exchange rate uncertainty improves the functioning of an economic union
by allowing trade to follow economically efficient paths without being unduly affected by
exchange rate considerations. The same is true of business location decisions.
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Supranational institutions would be required to regulate commerce within the union to ensure
uniform application of the rules. These laws would still be administered at the national level,
but countries would abdicate individual control in this area.
Basic Elements of the Stages of Economic Integration
Free Trade Agreement
(FTA)
Zero tariffs between member countries and reduced
non-tariff barriers
Customs Union (CU) FTA + common external tariff
Common Market (CM) CU + free movement of capital and labour, some policy
harmonization
Economic Union (EU) CM + common economic policies and institutions
Full economic union (FEU) implies the complete unification of the economies involved, and
a common policy for many important matters. The situation is then virtually the same as that
within one country. Given the many areas integrated, political integration (for example, in the
form of a confederacy) is often implied.
The transitions between the various stages of integration are fluent and cannot always be
clearly defined. The first stages, FTA, CU and CM, seem to refer to market integration in a
classical laissez-faire setting, the higher stages (EU, MU, FEU) to policy integration. In
practice, however, the former three stages are unlikely to stabilise without some form of
policy integration as well (for instance, safety regulations for a FTA, commercial policy for a
CU, or social and monetary policies for a CM (Pelkmans, 1980). between a customs union
and full integration, a variety of practical solutions for concrete integration problems are
likely to occur.
The stages of integration just sketched have two characteristics in common. They abolish
discrimination among actors from partner economies (internal goal). They may thereby
maintain or introduce some form of discrimination with respect to actors from economies of
third countries (external goal).
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D. Degrees of policy integration
Because countries are free to negotiate economic integration agreements as they see fit, in
practice, formal agreements rarely fall neatly into one of the four stages discussed above.
This can lead to some confusion of terminology and also confusion as to the state of economic
integration in some parts of the world. In the case of Canada, for example, the country is part
of a free trade area with the United States and Mexico. However, the North American Free
Trade Agreement also includes provisions that partially liberate the flow of labour and capital
in the region an element of a common market. In addition, Canada has in the past pushed to
curtail the use of trade remedy measures within North America. While this represents a desire
to advance one aspect of North American integration, the next formal step a customs union
does not appear to be a policy priority at this time.
All forms of integration described above require permanent agreements among participating
states with respect to procedures to arrive at resolutions and to the implementation of rules. In
other words, they call for partners to agree on the rules of the game. For an efficient policy
integration, common institutions (international organisations) are created. However, for the
higher forms of integration, such as a common market, the mere creation of an institution is
not sufficient: they require transfer of power from national to union institutions.
All forms of integration diminish the freedom of action of the member states' policy-makers.
The higher the form of integration, the greater the restrictions and loss of national
competences. The following hierarchy of policy cooperation is usually adopted:
- Information: partners agree to inform one another about the aims and instruments of the
policies they (intend to) pursue. This in-formation may be used by partners to change their
policy to achieve a more coherent set of policies., However, partners reserve full freedom to
act as they think fit, and the national competence is virtually unaltered.
- Consultation: partners agree that they are obliged not only to inform but also to seek the
opinion and advice of others about the policies they intend to execute. In mutual analysis and
discussion of proposals the coherence is actively promoted. Although formally the
sovereignty of national governments remains in-tact, in practice their competences are
affected.
- Co-ordination goes beyond this, because it commits partners to agreement on the (sets of)
actions needed to accomplish a coherent policy for the group. If common goals are fixed some
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authors prefer the term cooperation. Coordination often means the adaptation of regulation to
make sure that they are consistent internationally (for example, the social security rights of
migrant labour). It may involve the harmonisation (that is, the limitation of the diversity) of
national laws and administrative rules. It may lead to convergence of the target variables of
policy (for example, the reduction of the differences of national inflation rates). Although
agreements reached by coordination may not always be enforceable (no sanctions), they
nevertheless limit the scope and type of policy actions nations may undertake, and hence
imply limitation of national
competences.
- Unification: either the abolition of national instruments (and their replacement with union
instruments for the whole area) or the adoption of identical instruments for all partners. Here
the national competence to choose instruments is abolished.
E. Goods markets
Advantages
Fully integrated goods markets imply a situation of free trade among member states. People
aim for free trade because they expect economic advantages from it, namely:
- more production and more prosperity through better allocation of production factors, each
country specialising in the products for which they have a comparative advantage;
- more efficient production thanks to scale economies and keener competition;
- improved 'terms of trade' (price level of imported goods with respect to exported goods) for
the whole group in respect of the rest of the world.
Integration of goods markets implies first of all the removal of (all) impediments to free
internal goods trade. In modern mixed economies such negative integration is not sufficient,
however. For the market to function adequately there must be common rules for competition
on the internal market and for trade with third countries.
Obstacles to free trade
The free-trade area has been defined before as a situation where there are neither customs
duties or levies with similar effect, nor quantitative restrictions or indeed any factor impeding
the free internal movement of goods (the latter are often taken together under the heading of
non-tariff barriers, or NTB).
They can be described as follows:
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- Customs duties or import duties are sums levied on imports of goods, making the goods
more expensive on the internal market. Such levies may be based on value or quantity. They
may be indicated in percentages or vary according to the price level aspired to domestically;
- Levies of similar effect are import levies disguised as administrative costs, storage costs or
test costs imposed by the customs;
- Quantitative restrictions (QR) are ceilings put on the volume of imports of a certain good
allowed into a country in a certain period (quota), sometimes expressed in money values. A
special type is the so-called "tariff quota', which is the maximum quantity which may be
imported at a certain tariff, all quantities beyond that coming under a higher tariff;
- Currency restrictions mean that no foreign currency is made available to enable importers to
pay for goods bought abroad;
- Other non-tariff impediments are all those measures or situations (such as fiscal treatment,
legal regulations, safety norms, state monopolies, public tenders, etc.) which ensure a
country's own products' preferential treatment over foreign products on the domestic market.
Motives for obstacles
Obstacles to free trade are mostly meant to protect a country's own trade and industry against
competition from abroad, and therefore come under the heading of protection. Protection can
be combined with free trade. A customs union, for instance, prevents free trade with outside
countries by a common external tariff and/or other protectionist measures, while leaving
internal trade free.
Like individual countries, a customs union may-hope to benefit from protection against third
countries, that is, from import restrictions. From the extensive literature we have distilled the
following arguments in favour of such measures:
- Independence from other countries as far as strategic goods are concerned, a point much
stressed in the past and especially in times of war;
- The possibility of nurturing so-called "infant industries'. The idea is that young companies
and sectors which are not yet competitive should be sheltered in infancy in order to develop
into adult companies holding their own in international competition;
- Defence against dumping. The healthy industrial structure of an economy may be spoiled
when foreign goods are dumped on the market at prices below the cost in the country of
origin. Even if the action is temporary, the economy may be weakened beyond resilience;
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- Defence against social dumping. If wages in the exporting country remain below
productivity, the labour factor is said to be exploited; importation from such a country is held
by some to uphold such practices and is therefore not permissible;
- Employment boosting. If the production factors in the union are not fully occupied,
protection can turn the demand towards domestic goods, so that more labour is put to work
and social costs are avoided;
- Diversification of the economic structure. Countries specialised in one or a few products
tend to be very vulnerable; marketing problems of such products lead to instant loss of
virtually all income from abroad. That argument applies to small developing countries rather
than to large industrialised states;
- Shouldering-off balance-of-payment problems. Import restrictions reduce the amount to be
paid abroad, which helps to avoid adjustments of the industrial structure and accompanying
social costs and societal friction (caused by wage reduction and a restrictive policy, etc.).
Pleas for export restriction have also been heard. The underlying ideas vary considerably. The
arguments most frequently heard are the following:
- Some goods are strategically important and must not fall into the hands of other nations; that
is true not only of military goods (weapons) but also of incorporated knowledge (computers)
or systems;
- Exportation of raw materials means the consolidation of a colonial situation; a levy on
exports will hopefully increase people's inclination to process the materials themselves. If not,
then at any rate the revenues can be used to start other productions;
- If too much of a product is exported, the importing country may be induced to take
protective measures against a series of other products; rather than that, a nation may accept a
'voluntary' restriction of the exports of that one product.
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CHAPTER III. DECISION-MAKING IN THE EUROPEAN UNION
AFTER AMSTERDAM
1 THE DIFFERENT KINDS OF EUROPEAN UNION LAW
There are three different kinds of law in the European Union (EU):
i. Primary legislation, i.e. the Treaties (see Annex 1) and other agreements possessing similar
status;
ii. Secondary legislation, i.e. the regulations, directives, decisions, recommendations and
opinions based upon the Treaties (see below);
iii. Case law, i.e. judgements of the European Court of Justice and of the Court of First
Instance.
Collectively they are known as the Acquis communautaire .
Primary legislation is agreed on the basis of direct negotiations between Member States'
governments. Such agreements are drawn up in the form of treaties which are subject to
ratification in national parliaments (but not by the European Parliament!). The same is true of
any subsequent amendments to them. In some Member States, recourse may be had to a
referendum.
THE TREATIES
The European Union is based upon and governed in accordance with a number of Treaties
between the Member States. These Treaties are the most fundamental part of the acquis
communautaire and in every case have been the subject of (sometimes prolonged)
negotiations leading to unanimous agreement amongst governments and ratification by
national parliaments and, in some cases, by referendumtoo. The Treaties not only serve as the
Unions constitution but are also prescriptive in that several of them set objectives for the
future, usually accompanied by a deadline and sometimes by a precise timetable. Most of the
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Treaties contain provision for their own amendment and, with one exception, were concluded
for an unlimited period. In common with the rest of the acquis communautaire, the Treaties
must be accepted in their entirety by states wishing to join the Union.
The table below lists the main Treaties and Acts in chronological order, together with the date
of entry into force and a brief summary, where relevant, of how each relates to the others. The
first three Treaties, establishing three legally distinct Communities are sometimes referred to
as the founding Treaties.
Treaty In force Summary
European Coal and SteelCommunity(ECSC) Treaty (Treaty
of Paris, 1951)
1952 Concluded for 50 years amongst theSix on the basis of the Schuman Plan
European Economic Community
(EEC) Treaty (Treaty of Rome,
1957)
1958 Concluded on the model of the ECSC
Treaty but with a much broader range
of objectives; the most important of the
Treaties
European Atomic Energy
Community (EAEC or Euratom)
Treaty (also signed in Rome, 1957)
1958 A sector-specific Treaty of limited
application
Treaty establishing a Single Council
and a Single Commission of the
European Communities (Merger
Treaty, 1965)
July 1967 Amended the ECSC, EEC and
Euratom Treaties to create a Council
and a Commission serving all three
Communities
Treaty amending certain Budgetary
Provision of the Treaties establishing
the European Communities (and of
the Merger Treaty) (Treaty of
Luxembourg, 1970)
1971 Laid down a new procedure for settling
the Budget and introduced the system
of own resources
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Treaty amending certain Financial
Provisions of the Treaties
establishing the European
Communities (and of the Merger
Treaty) (1975)
1978 Refined the budgetary procedure to
give the European Parliament more
power and set up the Court of Auditors
Act concerning the election of the
representatives of the European
Parliament by direct universal
suffrage (European Elections Act,
1976)elections
1978 The basis for the first (1979) and
subsequent European elections
Single European Act (1986) July 1987 Amended and expanded the EEC
Treaty (most importantly by extending
the scope of qualified majority voting)
and laid down new procedures for
foreign policy co-operation
Treaty on European Union
(Maastricht Treaty, 1992)
November
1993
Established the European Union;
amended and expanded the EEC
Treaty; created the co- decision
procedure; created pillars of
Common Foreign and Security Policy
(CFSP) and Co-operation in the Fields
of Justice and Home Affairs (JHA)
Treaty of Amsterdam (1997)
1999
Amended the Maastricht Treaty and
the EEC Treaty; extended co-decision;
added new provisions on social policy;
incorporated the Schengen acquis into
EEC Treaty; created constructive
abstention; strengthened transparency
Treaty of Nice (2001) 2003 Istitutional structure changes
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Acquis communautaire:a phrase used to cover all legislation in force including the Treaties in
their entirety, all Directives, Regulations, Decisions, Trade and Association Agreements as
well as the case law of the European Court of Justice and of the Court of First Instance.
Secondary legislation is drawn up using a variety of different procedures, depending upon the
Treaty article chosen by the Commission as the legal base for the proposal in question.
Case law results from judgements of the European Court of Justice and of the Court of First
Instance meeting Luxembourg, normally in response to referrals from national courts or as a
result of actions brought by the Commission in its capacity as the guardian of the Treaties.
The different types of secondary legislation are:
i. Regulations: binding and directly applicable in all Member States without any
implementing national legislation. Management of the day to day aspects of the Common
Agricultural Policy, for example, is by means of regulations.
ii. Directives: binding on the Member States with respect to the result to be achieved and with
respect to the deadline, but with the choice of method left to the Member States. Directives
have to be implemented in national legislation in accordance with each Member State's own
procedures. There can be a substantial delay between the approval of a directive in the
Council of Ministers and its implementation in the national law of the Member States.
Enforcement - by no means even - is normally the responsibility of the national authorities.
iii. Decisions: may be issued either by the Council or by the Commission and are binding
upon those to whom they are addressed, normally a Member State or a commercial enterprise.No national implementing legislation is required.
iv. Recommendations and Opinions: have no binding effect, and may be issued either by the
Council or by the Commission.
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2 THE INSTITUTIONS
2.1 The European Council
At least twice a year, the Heads of State or Government meet as the European Council to
provide the Union with overall direction and to reach decisions on the key issues. European
Council meetings (sometimes known as Summits) are also attended by Member States'
Foreign Ministers and by the President of the Commission and the President of the European
Parliament. European Council agreements have no legislative force, but must first be turned
into legislation on the basis of a proposal from the Commission in the normal way.
The European Council is an institution that stands over the three pillars of the EU, that links
them together and that takes on a central leadership role. If the Council of Ministers has
always been embodied in the European Treaty, the same does not apply for the European
Council. The European Council was established as a result of the summit meetings involving
Heads of State and Governments which have been taking place since 1969. These meetings
used to take place at irregular intervals; a resolution passed at the Paris Summit Conference in
1974 made them a permanent fixture in the shape of the European Council, yet they were not
embodied in the Treaty establishing the European Community. The European Council deals
with the central issues effecting the EU, in particular those connected with European Political
Cooperation (EPC) which is an institution founded in 1970 at intergovernmental level in an
attempt to coordinate foreign policy. Because of its composition, the European Council
developed into the highest decision-making authority - although this was not intended by the
treaties.
Its role was made more explicit with the Single European Act (SEA) in 1986/87. The Treaty
of Maastricht on European Union followed on from this, confirming the Council's function of
driving forward European union as a whole and locking together the different policy areas.
Article D of the Treaty establishing the European Union states: "The European Council shall
provide the Union with the necessary impetus for its development and shall define the general
political guidelines thereof". This applies in particular for the guidelines concerning Common
Foreign and Security Policy, with the Treaty of Amsterdam, which came into force on the 1st
of May 1999, even providing for policy-making power over the Western European Union.
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The European Council is also regularly engaged when the ministers of departments in the
Council of Ministers are unable to reach agreement and package deals which stretch across
policy areas become necessary.
There is no doubt that the European Council as the European Union's dedicated body for
reflecting the intergovernmental components of the Union has gained a great deal of influence
over the past few decades. Indeed, following the introduction of the new constitution, which,
since the "No" votes from the referendums in France and the Netherlands, has failed for the
time being, would have increased even more. Having said this, however, it would be wrong to
conclude that there was a general trend in the EU towards more intergovernmentalism.
2.2 The Council of Ministers
The Council is composed of the Ministerial representatives of the Member States. Ministers
of Agriculture attend Council meetings when agriculture is being discussed, Ministers of
Transport when transport matters are on the agenda, and so on.
The Council, which has its own secretariat of EU civil servants, is the supreme legislative
authority in the Union, although in an increasing number of areas its power is exercised
jointly with the European Parliament. The Council takes decisions: by unanimity, by simple
majority, by qualified majority, each Member State's vote being "weighted" in accordance
with its population.
Member States take turns to hold the Presidency of the Council for a period of six months.
Council meetings are prepared by a Committee of Member States' Permanent Representatives
(i.e. Ambassadors) known as COREPER.
Formally known as the Council of Ministers, the Council of the European Union is the central
decision-making authority in the EC. The Council is responsible for passing laws proposed by
the Commission and with the involvement of the European Parliament. This has been the
Community's fundamental decision-making procedure from the very beginning. The relative
weight of the three institutions involved, however, has changed. The capacity in which
members attend Council meetings changes according to the policy area being discussed for
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example the European Community of Agricultural Ministers or Environmental Ministers
might meet. Moreover, the respective member of the Commission is also present.
Work in the Council would take up a large proportion of the time available to ministers from
member states. Given that they can only spend short periods in Brussels, they need support.
The Committee of Permanent Representatives of the EC (COREPER) in Brussels plays and
important role here. It is made up of the permanent representatives from the member states in
Brussels and their deputies and meets up on a weekly basis. This Committee is responsible for
monitoring and coordinating the work of around 250 committees and working groups, which
are staffed by civil servants from the member states. These, in turn, are responsible for
preparing the dossiers for COREPER and the Council at a technical level. COREPER deals
with most of the decision-making preparations as far as content is concerned.
The Council's Secretariat encompasses a staff of around 2,500 working in six departments. Its
duties are primarily of an administrative nature, meaning that it is responsible for things such
as preparing the agenda for work to done, drawing up reports, translation services, looking
into legal questions etc. The illustration below offers an insight into the structure of the
Council.
All decisions were initially taken using a system of unanimous voting because of the
Luxemburg Compromise. Since the mid 1980s, however, and especially since the Treaty of
Maastricht and the Treaty of Amsterdam there has been an increasing move towards qualified
majority voting as the basis for decision making. This development has continued following
the Treaty of Nice. That being said, however, the expansion of qualified majority voting goes
hand-in-hand with a major obstacle to the ability to apply this procedure brought about by the
triple majority rule (a qualified majority of weighted votes, a majority of states and a qualified
majority of populations (62%), which was also set down in the Treaty of Nice. In addition to
this, the European Parliament's powers of co-decision have been consistently expanded.
2.3 The European Commission
It is currently composed of 25 members (November 2005), who are proposed by the
governments of the member states and appointed for a five-year term; it is now also subject to
a vote of appointment by the European Parliament before it can be sworn in. The
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commissioners are not appointed as negotiators for their respective states, but are supposed to
act completely independently in the best interests of the Community. They are supported by a
staff of around 20,000 officials - less than some large cities! which is split up into 24 so-
called directorates general (such as transport, agriculture, external relations, regional policy
etc.) and nine services, which, in turn, are also split up into directorates and departments.
The Commission's main tasks can be summarized under four headings.
Right of initiative: Every decision taken by Council has to be based on a proposal from the
Commission. The Commission's task is to act as an engine of integration drawing up
proposals for the development of Community policy. This right and authority to determine the
EU's agenda, to submit proposals at a particular juncture and to link differing initiativestogether gives the Commission considerable influence in the legislative procedure.
Guardian of treaties: The Commission is responsible for monitoring the application of treaty
provisions and decisions made by other EC institutions and can appeal to the European Court
of Justice when violations are identified.
Executive authority for the implementation of Community policy: This includes the
administration of finances as well as the implementation of EC policies. Of course, this does
not mean that the Commission is responsible for making sure that the countless number of
decrees and guidelines are implemented in individual member states. Bearing in mind the size
of the Commission's staff, this would be an impossible task. No, this is carried out by the
administrations in the member states or their regional sections. The main task of the
Commission, then, is to monitor and supervise the actions being taken by the member states.
External representation: The Commission represents the EU at the GATT negotiations and
international organisations; this sometimes takes place together with the member states and/or
the respective presidents.
The most important characteristics of the Commission are: Its distinct differentiation at a
functional level and the fact that it represents a multi-national bureaucracy using an extensive
system of committees (commitology) within which very close cooperation takes place both
with the administrations of member states and with national and European associations
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Under the Maastricht Treaty, the Commission's term of office was extended to five years to
coincide with the European Parliament's term. The appointment of the President and other
members of the Commission is subject to the approval of the Parliament.
2.4 The European Parliament
The European Parliament (EP) is our first institution at a supranational level that carries a
name familiar to us from national political systems.
While the EP might sound familiar, it is quite different from national parliaments. If the role
played by and the powers available to the EP in the Community have changed constantly ever
since the foundation of the ECSC, these changes have also steadily increased its influence
within the EU. Important milestones in this regard have been the extension of its budget
powers in (1975), the introduction of the first direct elections (1979), the introduction of the
cooperation procedure (1986) and the introduction of the codecision procedure (1992), as well
as considerable expansion of this codecision procedure into other areas of application since
the Treaty of Amsterdam. Other changes have also been introduced with the Treaty of Nice.
The role of the EP as a co-legislator together with the Council of Ministers were further
expanded and strengthened.
EP is composed of cross-national parties, such as the European People's Party and European
Democrats (EPP-ED), which with 279 MPs currently represents the most powerful grouping
in the Parliament, and the Party of European Socialists (SPE/E) with 199 MPs. This
illustration also shows you the number of MPs sent by each of the member states.
The Parliament's 20 standing committees are incredibly important for the work of the EP and
its influence During their 5 years in office, those members of the European Parliament who
are active in the committees are able to acquire a great deal of specialist knowledge. This
specialist knowledge not only enables them to follow the work being carried out by the
Directorates General, the Commission and the Council of Ministers, it also enables them to
bring more influence to bear than the official description of their responsibilities would
suggest. Another important aspect in this respect is their close cooperation with the respective
Commission departments and with transnational and national associations.
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The main characteristics of the EP can be summarized thus: The European Parliament is a
multi-national chamber undergoing constant change; it features ideological - differing
political groupings from across the member states - and national differences - nationality of
the MPs from the individual member states. As with the other institutions addressed so far, the
European Parliament also demonstrates significant functional differentiation. And, finally, the
incredibly close links and intensive cooperation with the Commission, often against the
Commission, should also be emphasized.
Making an assessment based on a comparison with national parliaments depends on how one
looks at it. From a statistical point of view taken today, it can be said that the importance of
the EP still lags behind that of national parliaments, but goes much further than anything
found in parliamentary chambers or committees in international organisations. View the
development of the European Parliament during the last two decades, however, and it is
strikingly clear that its importance compared to the other institutions has grown enormously:
Another important indication of the "supranationalization" of the EC.
The Parliament and the Council constitute the Union's joint budgetary authority. The
Parliament has to give its assent to any trade, co-operation, association or membership
agreement concluded between the Union and a non-member country.
Under the Maastricht Treaty, the Parliament was given the right to set up committees of
enquiry and to appoint an Ombudsman to investigate allegations of maladministration by the
institutions of the Union.
2.5 The European Court of Justice
The European Court of Justice (ECJ), just like the European Parliament, sounds familiar to
systems existing in national states. Indeed, its power of jurisdiction also corresponds to that
often found in national democratic political systems. The ECJ is responsible for making sure
Community law is upheld. It is responsible for ruling on legal disputes between member
states, on disputes between the EU and member states, on disputes between EU institutions
and authorities as well as on disputes between individual citizens and the Union. In addition
to this, judges in member states can turn to the Court of Justice to rule on pending cases
involving the interpretation of Community law.
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There is also a Court of First Instance that exists alongside the Court of Justice. The Court of
First Instance was established in 1989 to ease the Court of Justice's workload. Its jurisdiction
includes direct actions from citizens and companies against the actions or failure of EU bodies
to act, as well as action for damages against the EU.
Employment conflicts between the EU and its employees have been handled by the Civil
Service Tribunal since the autumn of 2005. There are two ways of calling in the ECJ. The first
is over the preliminary rulings procedure, which permits national courts to apply for an
interpretation of certain aspects of Community law to help these national courts to reach a
decision on a current case. The second way is over direct petitions.
But its actual influence only really becomes clear after taking a look at its work in individualareas. The European Court of Justice has been a major influencing factor in making the
constitution of the EU more supranational by laying down rules such as the principle of direct
effect - which means for every citizen without having to call in national states first - of EU
law and theprimacy of Community law over national law.
Moreover, the European Court of Justice has also had a large bearing on other areas of EU
policy. For example, in a revolutionary ruling it established the principle of mutual
recognition of standards in other member states, which put an end to the extremely slow and
time-consuming process of harmonising standards and, in turn, went a long way to making the
internal market project possible. One of the main reasons for the ECJ's influence came as a
result of a clever, targeted and successful strategy to incorporate the national courts into the
administration of EU justice.
Looking at this, it might be easy to get the impression that these landmark decisions were
made in the past and that they can no longer be taken to reflect the influence of the ECJ today.
A more recent judgement (November 2005), however, demonstrates that it would be quite
wrong to get this impression. This judgement might lead to the Commission gaining influence
in the area of criminal law and has led to heated discussions.
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The European Court of Justice, consisting of 25 judges and 8 Advocates-General, is based in
Luxembourg. So, it is responsible for arbitrating in disputes relating to the interpretation and
application of the Treaties and of legislation based upon them. Its judgements are binding
upon those to whom they are addressed and it has the power to levy fines on firms found to be
in breach of Union law. Under the Maastricht Treaty, the Court also has the power to impose
fines on Member States which fail to carry out their Treaty obligations.
2.6 The Court of First Instance
This Court was established by Article 11 of the 1987 Single European Act and first became
operational in 1989. It consists of 25 judges, one from each Member State. There are no
Advocates-General. It has jurisdiction over a number of fields but of particular importance to
business are its powers in competition and intellectual property law and over the
Commissions anti-dumping procedures.
2.7 The Court of Auditors
The Court of Auditors, composed of one Member from each Member State, is also based in
Luxembourg. It is responsible for overseeing all expenditure from the Budget of the Union.
Its findings are contained in an annual report submitted to the Council and the European
Parliament. The Court, which has no power of sanction, may also undertake special
investigations into particular sectors of the Budget.
2.8 The Economic and Social Committee (ECOSOC)
Set up in 1957 by the Treaty of Rome, members of ECOSOC appointed by the Council on therecommendation of Member States' governments and have a four-year term of office.
ECOSOC consists of representatives of employers (Group 1), workers (Group 2) and various
interest groups (Group 3). It covers areas such as agriculture and fisheries, industry and
commerce, financial and monetary questions, social and cultural affairs, transport and
communications, trade and development policy, nuclear questions and research, regional
development, environment and consumer affairs. On its own initiative it can offer opinions on
other subjects covered by the Treaties. The Treaty of Amsterdam allows the European
Parliament to consult ECOSOC.
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2.9 The Committee of the Regions
The Maastricht Treaty established a new European Union body, the Committee of the
Regions, which is based in Brussels. Composed of representatives of regional and local bodies
and appointed by the Council for a four-year term on a proposal from the Members States, the
Committee has advisory status along the same lines and across broadly the same range of
issues as the Economic and Social Committee. Its nationality composition is identical with
that of the Economic and Social Committee
3 THE LEGISLATIVE PROCESS
Legislation may be adopted under the Consultation Procedure, the Co-operation Procedure or
the Co-Decision Procedure. The choice of procedure depends upon the Treaty article which
the Commission has chosen as the legal base for its proposal.
Until the entry into force of the Single European Act in July 1987, all legislation was adopted
under the simplest of these procedures, known as the Consultation Procedure. This
procedure requires the Council to obtain the opinion of the European Parliament (and
sometimes also the opinions of ECOSOC and the Committee of the Regions) before adopting
legislation. However, neither the Council nor the Commission is obliged to accept the
amendments contained in the Parliaments opinions and it is only by refusing to give an
opinion that the Parliament can exert pressure. Once the Parliament has given its opinion, the
Council can adopt the proposal unamended, adopt it in an amended form, or be unable to
agree. In the last case the proposal remains "on the table".
The Co-operation Procedure, introduced in 1987, allows the Parliament two opportunities to
scrutinise and possibly amend the Commissions proposal. At the first stage, the Parliament,
ECOSOC and the Committee of the Regions give their opinions in the same way as under the
Consultation Procedure. Only the Parliament can propose amendments. The Commission
indicates which amendments it accepts before the proposal is forwarded to the Council, which
then draws up its "common position". Studies have shown that about 40 per cent of the
Parliaments amendments are accepted at this stage. The Councils common position is sent
back to the Parliament which may within three months approve it, reject it, or adopt
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amendments to it. The Council may then adopt the proposal in question, although it can do so
only by unanimous agreement :
i. when it wishes to amend a proposal on its own initiative;
ii. when it decides to take up amendments which have been proposed by the Parliament but
rejected by the Commission;
iii. when it decides to adopt a common position which the Parliament has rejected;
iv. when it wishes to override amendments which the Parliament has adopted by an absolute
majority (314 votes) at second reading and which are supported by the Commission.
The Maastricht Treaty (effective from November 1993) introduced the Co-Decision
Procedure in order to strengthen the Parliaments influence over legislation. Once the Treaty
of Amsterdam comes into effect, the Co-Decision Procedure will replace the Co-operation
Procedure in all but a very few areas and become the normal mode of Council-Parliament
involvement in legislation. The essential difference between the two procedures is that the
Co-Decision Procedure :
allows for the convening of a Conciliation Committee in which at the final stagedifferences between the Council and the Parliament may be resolved;
allows the Parliament, as a last resort, the right to reject the proposal outright by anabsolute majority.
Under the Co-Decision Procedure, the Council and the Parliament are jointly responsible for
the final adoption of legislation. It has been estimated that some 60 per cent of the
Parliaments amendments are incorporated into the legislation.
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5 THE INTER-GOVERNMENTAL PILLARS
The Maastricht Treaty created a European Union which rests upon three "pillars". The central
pillar is the European Community (EC) itself and the decision-making procedures described
here are those which apply to action within the EC pillar, normally known as the "first pillar".
The procedures in the other two pillars (the Common Foreign and Security Policy and Co-
operation in the fields of Justice and Home Affairs) are different, for although the Council of
Ministers plays much the same role, the legislative instruments are not the same. The
Commission is less influential and recourse cannot be had to the Court of Justice. Action in
these fields is essentially intergovernmental in character.
Under both pillars, provision exists for the European Parliament to be kept informed and
consulted. Members of the European Parliament are also entitled in the normal way to put
questions to the Council of Ministers. In so far as action is taken under either heading which
involves a charge to the Budget of the Union, the Parliament's powers with respect to the
Budget (see above) may be brought into play.
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CHAPTER IV. THE BUDGET OF EU
I. The expenses made from the budgetActions and projects funded by the EU budget reflect the priorities set by the EU countries at
a given time. These are grouped under broad spending categories (known as headings) and
thirty-one different policy areas.
The EU budget finances actions and projects in policy domains where all EU countries have
agreed to act at Union level. Such decisions are taken for very practical reasons. Joining
forces in these areas can yield greater results and costs less.
There are other policies, however, where the EU countries decided not to act at Union level.
For example, national social security, pension, health or education systems are all paid for by
national, regional or local governments. The 'subsidiarity principle' ensures that activities
best managed at national, regional or local level are funded at the most appropriate level and
that the Union does not intervene.
a. For growth and jobs
For the next seven years, the EU countries have decided to dedicate a considerable part of
their joint efforts and of the EU budget to creating more economic growth and jobs.
Sustainable growth has become one of the main priorities of the Union. The EU economy
needs to be more competitive and less prosperous regions need to catch up with the others.
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Over the period 200713, out of every euro spent from the EUs annual budget, eight cents
will go to make the EU more competitive.
Achieving long-term growth also depends on tapping and increasing the EUs growth
potential. This priority, known as 'Cohesion', calls for helping especially less advantaged
regions transform their economy to face global competition. Innovation and the knowledge
economy provide an unprecedented window of opportunity to trigger growth in these regions.
Out of every euro spent, 36 cents will go to such cohesion activities.
b. Natural resources
Thanks to their geographic and climatic diversity, the EU countries produce a large variety of
agricultural products, which European consumers can buy at reasonable prices. The EU
efforts in this field have two main goals. First, what is produced must correspond to what
consumers want, including high safety and quality for agricultural products. Second, on the
production side, the farming community should be able to plan and adapt production to
consumers demand while respecting the environment.
In addition, a successful management and protection of our natural resources must also
include direct measures to protect the environment, restructure and diversify the rural
economy and promote sustainable fishing. After all, animal infections, oil spills and air
pollution do not stop at national borders. Such threats require extensive action on many fronts
and in several countries. Over the period 200713, 43 cents out of every euro will be spent
from the EU budget each year in favour of our natural resources.
c. Fundamental freedoms, security and justice
Similarly, the fight against terrorism, organised crime and illegal immigration is much
more effective when EU countries share information and act together. The EU strives for a
better management of migration flows into the Union and extensive cooperation in criminal
and judicial matters as well as secure societies based on the rule of law. About one cent in
every euro from the EU budget will be spent to this end.
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d. Being European: Debate, dialogue and culture
More than 495 million of people live in the EU. They speak many different languages and
have different cultural backgrounds. Together they form the invaluable wealth of the
European Union: cultural diversity built on common values. The EU budget promotes and
protects this cultural heritage and richness, while encouraging active participation in social
debates around us. It also aims to protect public health and consumer interests. About one
cent in every euro will go to such activities under this heading known as Citizenship.
e. Global player
The impact of EU funds does not stop at our external borders. For many, the EU budget
delivers the most needed emergency aid in the aftermath of a natural disaster. For others, it is
a long-term assistance for prosperity, stability and security. About six cents in every euro go
to cooperation with countries about to join the Union, other neighbouring countries, and
indeed to poorer regions and countries around the world.
f. Administrative costs
Around six cents in every euro are spent on running the European Union. This covers the staff
and building costs of all EU institutions, including the European Parliament, Council of
Ministers, European Commission, European Court of Justice and European Court of Auditors.
II. The sources of money
The European Union has its 'own resources' to finance its expenditure. Legally, these
resources belong to the Union. Member States collect them on behalf of the EU and transfer
them to the EU budget.
Own resources are of three kinds (the figures below refer to the forecasts for 2007).
Traditional own resources (TOR) these mainly consist of duties that are chargedon imports of products coming from a non-EU state. They bring in approximately
EUR 3 billion or 15 % of the total revenue.
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Revenue flows into the budget in a way which is roughly proportionate to the wealth of the
Member States. The UK, the Netherlands, Germany, Austria and Sweden, however, benefit
from some adjustments when calculating their contributions.
On the other hand, EU funds flow out to the Member States in accordance with the priorities
that the Union has identified. Less prosperous Member States receive proportionately more
than the richer ones and most countries receive more than they pay in to the budget.
III. The decision procedure of the budget
The Commission, Parliament and Council of Ministers have different roles and powers in
deciding the budget.
As a first step, these three institutions conclude a binding agreement to ensure budgetary
discipline, long-term planning and to enhance cooperation in connection with annual budgets.
This interinstitutional agreement includes the multi-annual financial framework, which
establishes annual upper limits (known as ceilings) per heading. Annual budgets must
respect these ceilings.
The most recent financial frameworks cover the seven-year periods from 2000 to 2006 and
2007 to 2013. The budgetary procedure as established in the EU treaties lasts from 1
September to 31 December. In practice, it begins much earlier. For example, preparations for
the 2007 budget started before the end of 2005.
There are two types of budget expenditure: compulsory and non-compulsory expenditure.
Compulsory expenditure covers all expenditure resulting from international agreements and
the EU treaties. All other expenditure is classified as non-compulsory.
The Council of Ministers has the final word on compulsory expenditure and the European
Parliament on non-compulsory expenditure. The importance of this distinction has declined
with successive interinstitutional agreements as they collaborate closely at all stages.
Commissions preliminary draft budget
All EU institutions and bodies draw up their estimates for the preliminary draft budget
according to their internal procedures.
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The Commission consolidates these estimates and establishes the 'preliminary draft budget',
which takes into account the guidelines or priorities for the coming budget year. The
Commission submits the preliminary draft budget to the Council of the Union in April or
early May before the budget Council meets in July. The Council of Ministers and the
Parliament must work on the basis of this proposal from the Commission.
Council's first reading of the budget
After a conciliation meeting with the Parliament, the Council of Ministers adopts the draft
budget with amendments, if any, which is forwarded to the Parliament in September.
Parliaments first reading
At its first reading in October, the Parliament may decide to amend the Council's draft. It will
discuss controversial matters in 'trialogue' meetings with the Council Presidency and the
Commission beforehand. Parliament's first reading, along with its suggestions, is then referred
back to the Council.
Councils second reading
Before its second reading in November, the Council has a further conciliation meeting with
the Parliament and tries to reach an agreement on the whole of the budget. It then adopts its
second reading.
Parliament adopts or rejects the budget (second reading)
The Parliament may modify the Councils latest text before it votes on the final budget in
December. If approved, the President of the Parliament signs the budget into law. The
Parliament may also reject the budget.
Similar procedures apply to the adoption of letters of amendment to the preliminary draft
budget (presented when new information comes to light before the adoption of the budget)
and ofamending budgets (in the case of inevitable, exceptional or unforeseen circumstances
occurring after the budget has been adopted).
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IV. The structural funds
The Structural Funds are the primary source of European Union funding, with the exception
of support for agriculture. Some 90% of the European Union finance available for projects
goes to the Structural Funds.
Through the Structural Funds, the European Union aims to support those regions which are
less developed or in industrial decline, and to support training schemes for those seeking re-
entry into employment.
The present rules for Structural Funds apply from 2000 to the end of 2006. There are currently
four main Structural Funds. These are:
1. European Regional Development Fund (ERDF): ERDF concentrates on less-favoured regions. The main focus is on productive investment, infrastructure and SME
development. There are also considerable funds available to support infrastructure
development in SIP areas and community based regeneration.
2. European Social Fund (ESF): ESF supports human resource development measures(training and skills development). The main aim is to promote a high level of
employment and social protection, equality between men and women, sustainable
development, and economic and social cohesion.
3. European Agricultural Guidance and Guarantee Fund (EAGGF): The EAGGFfinances the Common Agricultural Policy and rural development.
4. Fisheries Instrument for Fisheries Guidance (FIFG): FIFG supports projectsrelated to fisheries restructuring and marketing.
Objective Programmes
The four Structural Funds combine to fund Objective Programmes. There are currently three
Objectives through which funding is allocated. The Objectives are:
Objective1
The Objective 1 Programme provides support for regions in Europe where development is
lagging behind.
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Objective2
The Objective 2 Programme provides support for areas undergoing economic and social
conversion
Objective3
The Objective 3 Programme provides support to tackle long-term unemployment and social
exclusion.
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CHAPTER V. MONETARY POLICY IN THE EU
1. Role and provisions of the European Monetary System
The European Monetary System is being considered as a first attempt at Economic and
Monetary Union, but it is really more like a mechanism devised for creating a zone of
monetary stability. The idea was floated by German Chancellor, Helmut Schmidt and French
President, Valery Giscard dEstating. The Council had adopted the idea, in the form of a
resolution on the establishment of the European Monetary System (EMS) and related
matters. The objectives were of stabilizing exchange rates, reducing inflation, and preparing
for monetary integration.
The provisions of the EMS were the following:
1. In terms of exchange rate management, the EMS will be at least as strict as the
snake.8 In the initial stages of its operation and for a limited period of time, member
countries currently not participating in the snake may opt for somewhat wider margins
around central rates. In principle, intervention will be in the currencies of participating
countries. Changes in central rates will be subject to mutual consent. Non-member countries
with particularly strong economic and financial ties with the Community may become
associate members of the system. The European Currency Unit9
(ECU) will be at the centre
of the system; it will be used as a means of settlement between European Economic
Communities monetary authorities.
2. An initial supply of ECUs (for use among Community central banks) will be created
against deposits of US dollars and gold on the one hand, and member currencies on the otherhand. The use of ECUs created against Member States currencies will be subject to conditions
varying with the amount and the maturity.
3. Participating countries will coordinate their exchange rates policies vis--vis third
countries. Ways to coordinate dollar interventions should be sought of, avoiding simultaneous
8In 1972, the six Member States-Belgium , France, West Germany, Italy, Luxembourg and Netherlands- set up a
snake in the tunnel mechanism to narrow the fluctuation margins between the Community currencies (thesnake), in relation to fluctuations against the US dollar (the tunnel).9
An abstract currency, a standard legal tender used to calculate the budgetary contributions of each MemberState; it represented a basket of currencies adjusted periodically, to reflect the relative economic power of eachMember State.
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reserve interventions. Central banks buying dollars will deposit a fraction and receive ECUs
in return; likewise, central banks selling dollars will receive a fraction against ECUs.
4. No later than 2 years after the start of the scheme, the existing arrangements and
instructions will be consolidated in a European Monetary Fund.
5. A system of closer monetary cooperation will only be successful if participating
countries pursue policies conductive to greater stability at home and abroad; this applies to
deficit and surplus countries alike.
In essence, the EMS is concerned with the creation of an EC currency zone within
which there is discipline in managing exchange rates. The discipline is known as the
exchange rate mechanism (ERM), which asks a member nation to intervene to reverse a
trend when 75% of the allowed exchange rate variation of 2.25% is reached. The EMS asks
neither for permanently and irrevocably fixed exchange rates between the member nations nor
for complete capital convertibility. Moreover, it does not mention the creation of a common
central bank to be put in charge of the member nations foreign exchange reserves and to be
vested with the appropriate powers. Hence, the EMS was not EMU, although it could be seen
as paving the way for one.
2. The Delors Report
By 1987 the EMS and the ERM within it appeared to have achieved considerable
success in stabilizing exchange rates. This coincided with the legislative progress towards
EMU and other fronts. The EC summit held in Hanover on 27 and 28 June 1988 decided that,
in adopting the Single Act, the EC Member States had confirmed the objective of progressive
realization of economic and monetary union. A committee composed of the central banks
governors and two other experts, chaired by Jaques Delors, was given the task of studying
and proposing concrete stages leading towards this union. The committee reported just before
the Madrid summit, the following year, and its report is referred to as the Delors Report on
EMU.
The committee was of the opinion that the creation of the EMU must be seen as a
single process, but in stages, progressively leading to the ultimate goal. Thus the decision to
enter upon the first stage should commit a Member State to the entire process. Emphasizing
that the creation of the EMU would necessitate a common monetary policy and require a high
degree of compatibility of economic policies and consistency in a number of other policy
areas, particularly in the fiscal field, the Report pointed out that the realization of the EMU
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would require new arrangements which could be established only on the basis of a change in
the Treaty of Rome and consequent changes in national legislations.
According to the Report, the first stage should be concerned with the initiation of the
process of creating the EMU. During this stage there would be a greater convergence of
economic performance through the strengthening of economic and monetary policy
consideration within the existing institutional framework. In the monetary field the emphasis
would be on the removal of all obstacles to financial integration and of the intensification of
cooperation and coordination of monetary policies. Realignment of exchange rates was seen
to be possible, but effort would be made by every Member State to make the functioning of
other adjustment mechanisms more effective. The committee was of the opinion that it would
be important to include all EC currencies in the exchange rate mechanism of the EMS during
this stage. The 1974 Council decision defining the mandate of central bank governors would
be replaced by a new decision indicating that the committee itself should formulate opinions
on the overall orientation of monetary and exchange rate policy.
In the second stage, which would commence only when the Treaty has been amended,
the basic organs and structure of the EMU would be set up. This stage should be seen as a
transition period leading to the final stage; it should constitute a training process leading to
collective decision-making, but the ultimate responsibility for policy decisions would remain
with national authorities during this stage. The procedure established during the first stage
would be further strengthened and extended on the basis of the amended Treaty, and policy
guidelines would be adopted on a majority basis.
In the monetary field, the most significant feature of this stage would be the
establishment of the European System of Central Banks (ESCB) to absorb the previous
institutional monetary arrangements. The ESCB would s