Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 14 The European Union: Many Markets into One

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Chapter 14

The European Union: Many Markets into One

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 14-2

Chapter Objectives

• Explore the history of economic integration in Western Europe

• Analyze the impact of European economic integration

• Discuss the various institutions of the European Union (EU)

Introduction: The European Union

• The European Union (EU) is an economic union of twenty-seven nations— It is the largest, oldest, and most integrated of regional agreements

• In 1979 the nine members of what was then called the European Economic Community (EEC) linked their exchange rates in a system designed to eliminate wide fluctuations among currencies



Introduction: The European Union (cont.)

• In 1987, EEC members signed the Single European Act (SEA) aimed at completion of the single market envisioned by the Treaty of Rome

• In 1992, the Treaty on European Union was signed, paving the way for– A common currency, the euro (1999)– A European Union Constitution (2004)– Future EU expansion (2004)

The Size of the European Market

• The EU is the largest integrated market in the world

• Few countries will be able to grow and prosper without selling their goods in the European market, which is a powerful incentive to accept European leadership on international issues


Table 14.1 Population and Income in the European Union, 2007


Table 14.1 (continued) Population and Income in the European Union, 2007


Table 14.1 (continued) Population and Income in the European Union, 2007


Before the Union:The Treaty of Rome

• The European Coal and Steel Community (ECSC) signed in 1951 was the first step in European integration

-Goals: to rebuild European economies after World War II; to foster political cooperation through economic integration

• The European Economic Community (EEC) (or European Community, EC) was launched in 1958 from the Treaty of Rome as a free trade area with the goal to create a single, integrated market for goods, services, labor, and capital



Before the Union:The Treaty of Rome (cont.)

• In 1955 the European Atomic Energy Community (EAEC or Euratom) was created

• The goal was to jointly develop nuclear energy for peaceful purposes

• Two separate treaties were signed in 1957 in Rome, creating the EEC and the Euratom


Institutional Structure of the EEC

• The EU is based on subsidiarity: The relationship between national and EU areas of authority, and between national and EU institutions– EU can tackle only issues that are better handled

through international action than individual nations– EU’s responsibility includes trade, competition, and

environmental policies, regional development, research and technology development, economic and monetary union

– Less clear areas of authority are the labor market, social safety net, health care policies


Institutional Structure of the EEC: Main Governing Bodies

– European Commission: An executive body; each country has one vote; acts as guardian of the treaties

– Council of the European Union: A legislative branch; enacts into law Commission’s proposals; composed of ministers from each EU nation; requires qualified majority

– European Parliament: Is representative of popular interests in the EU with 785 members; three responsibilities- passing laws, supervising institutions, passing final EU budget

-Provides democratic legitimacy to EU


Institutional Structure of the EEC:Other Institutions

– Court of Justice: EU’s supreme court

– Court of Auditors: Monitors EU finances and regulations

– Committee on Regions: Defender of the interests of specific regions in the EU

– Economic and Social Committee: Focuses on broad economic and social issues

– European Investment Bank: Focuses on investment

– European Central Bank: Conducts monetary policy of the EU


TABLE 14.2 Votes in the Main EU Institutions


Financing the European Union

• The total budget of EU for 2008 was 129.1 billion Euros ($190 billion)

• The EU institutions and programs are funded by:– Tariffs and goods entering the European Union– An EU share of national value added taxes– Payment from each member country based on

size of its economy

Financing the European Union (cont.)

• The two largest EU expenditure categories are:

-Agricultural support, both direct payments in subsidies and indirect payments

-Cohesion funds, which are used to support less developed regions within the EU



Deepening and Widening the Community in the 1970’s and 1980’s

• EU’s deepening came from increasing the level of cooperation between member countries

• EU’s widening came from including new members in the union

• Let’s analyze these in greater detail…


Before the Euro

• In 1979, EEC members linked their currencies through the European Monetary System (EMS) with an exchange rate mechanism (ERM)– Each currency was fixed to the European Currency

Unit (ECU)- the weighted average of the other currencies

– Goals: To avoid competitive devaluations—trade and investment determined by comparative advantages and efficient allocation of resources, not exchange rate disparities


The Second Wave of Deepening: The Single European Act (SEA)

• In the 1980s, Europe was hit by a recession and the EC seemed to decline

• However, the EC was reshaped by the Delors Report adopted as the Single European Act (SEA) in 1987– SEA aimed at the freedom of movement for goods,

services, capital, labor – SEA was implemented through the elimination of physical,

technical, and fiscal barriers between EC nations


Forecasts of the Gains from the Single European Act

• SEA created gains in economic efficiency– Removal of customs and passport checks at internal national

borders– Greater economies of scale – Increased competitiveness of European firms– Overall increase in GDP growth across Europe

• However, four issues hampered the achievements of the four freedoms: concerns over the effects of economic restructuring, harmonization of technical standards, value-added taxes, public procurement

Problems in the Implementation of the SEA

• Four issues hampered the achievements of the four freedoms:

-concerns over the effects of economic restructuring

-harmonization of technical standards

-value-added taxes

-public procurement



The Third Wave of Deepening: The Maastricht Treaty

• In 1991, EC members reached the Maastricht Treaty, which aimed at:– Uniform labor laws and worked rights

– Defines rights of all residents to vote regardless of nationality

– Health, education, cultural, and consumer safety issues in hands of European Commission

– Common defense and security policies

– Creation of a monetary union and a common currency under control of a European Central Bank


Monetary Union and the Euro

• There were three stages of the monetary union:– 1990 lifting of controls on the movement of financial

capital within the EU– 1994 creation of the European Monetary Institute in

Frankfurt– 1999 introduction of the common currency, the Euro,

and the creation of the European Central Bank

• To qualify, members had to meet convergence criteria: Monetary and fiscal requirements


TABLE 14.3 Convergence Criteria for Monetary Union


Costs and Benefits of Monetary Union

• Benefits– Eliminates the costs of currency conversions– Reduces the effects of exchange rate uncertainty on

trade and investment

• Costs– Eliminates monetary policy independence– If labor is not fully mobile and business cycles

synchronised between nations, the same monetary policy may not suit all nations


The Political Economy of a Single Currency

• 11 EU members adopted the single currency on 1 January 1999

• Euro coins and notes start circulating in 2002, replacing the national currencies of 12 EU members

• Although the euro declined in value shortly after its introduction, it has since stabilised and facilitated price convergence across Europe


FIGURE 14.1 The U.S. Dollar-EU Euro Exchange Rate, 2000-July,

2009

Implementation of the Single Currency

• The inability of the EU to maintain a set of fixed rates, coupled with the political undesirability of floating rates, made the single-currency option an attractive choice

• Membership in the monetary union, however, is a subset of the EU



Widening the European Union

• Ten countries joined the EU in 2004 and two more joined in 2007— Ten are from central Europe having undergone profound economic and political transformations as they abandoned relatively closed socialist economies in favor of democratic and capitalist systems

• There are three criteria for a country to gain membership in the EU: democracy, market economy, adoption of EU-wide rules (aquis communautaire)


Challenges of Widening the EU

• EU’s Common Agricultural Policy (CAP): The world's most extensive agricultural support program; subsidizing the applicants’ agricultural sectors would be unfeasible

• Immigration and an aging population base

• EU’s governance structure: allocation of voting rights and seats in governing bodies upon expansion is politically contentious

• Income gaps between EU members and applicants: spending on new members would stretch budget

• The relationship between the new members and other Eastern European nations: many have historical and economic ties to Russia

The Demographic Challenge of the Future

• A number of future challenges are visible for the EU:

- In the short-to-medium run, it must continue to create convergence in income and living standards between its poorest and its most well- off members

- It must also prepare for further widening

- Finally, in the long run, it must adapt its economies and social support systems to prepare for a much older population


Table 14.4 Population Forecast, 2010–2040: Twenty-Seven Members of the

European Union

14-32Copyright © 2011 Pearson Addison-Wesley. All rights reserved.


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Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 14 The European Union: Many Markets into One