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From Nice to Stockholm: One step forward and onestep backGiacomo Vaciago aa Professor of Economics , Catholic University , MilanPublished online: 29 Apr 2008.

To cite this article: Giacomo Vaciago (2001) From Nice to Stockholm: One step forward and one step back, The InternationalSpectator: Italian Journal of International Affairs, 36:2, 19-25, DOI: 10.1080/03932720108456913

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THE INTERNATIONAL SPECTATORVOLUME XXXVI, No. 2, April - June 2001

From Nice to Stockholm:One Step Forward and One Step Back

Giacomo Vaciago

Giacomo Vaciago is Professor of Economics atthe Catholic University, Milan.1

On various occasions in the last fifty years, European integration has been charac-terised by a contrast between the ambitiousness of its objectives and the paucityof its results, between expectations of progress and more or less tactical retreats.The same contrast can be seen today: between the ambitions of the single cur-rency, the euro, and the actual achievement of the conditions that underpin it; be-tween the expectations raised by the predictable - or rather inevitable -enlargement of the European Union (EU) and the need for preliminary adjustmentsin European governance.

This brief article aims to analyse the essential characteristics of each of thesedimensions and, consequently, the problems posed by their linkage. The hope isthat the current difficulties can be overcome and a process of convergencestarted. But what is needed in order to do so are new rules, above all in relationsbetween public and private, to reconcile the interests of both and of all: the individ-ual citizens and the countries as a whole, the individual countries and the Euro-pean Union in its entirety.

Enlargement and new governance

The Nice European Council (7-9 December 2000) served to eliminate all residualdoubt about the launching of the European Union's enlargement process to anumber of Central and Eastern European countries (a total of twelve candidatecountries have been negotiating for years in view of entry into the EU2). The re-lated problems to be solved are mainly of two kinds: on the one hand, the

1 Translation by Gabriele Tonne.2 Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania,

Slovakia, Slovenia.

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continued monitoring of the new members' respect for the political and economiccriteria for entry established in Copenhagen (1993); on the other - and this is whatAmsterdam postponed and Nice was supposed to solve - the adjustment of EU in-stitutions to cope with the enlargement from 15 to 27 countries. The matter wasformally resolved, especially with regard to the composition of the Commission,reform of vote weighting and the extension of qualified majority voting. Thus, onecould claim that Nice has settled Amsterdam's "leftovers",3 that the problems ofenlargement are therefore no longer on the agenda, and that the post-Nice phasecan now or has now already started.

But the fact remains that Nice was a disappointment because the solutionsadopted were poor. This was immediately confirmed at the Stockholm summit(23-24 March 2001), where the prevalent position in Europe today re-emerged -that is, not the advancement of common interests (to that end, majority and qualifiedmajority voting mechanisms, as well as the role of the Commission are what count),but continuous mediation between the interests of the individual countries (a rolethat is typical of the Council, which has in fact gained power in recent years).

At Nice, almost everyone could say they came out a winner, but since un-solved questions de facto increase the powers of the member states, it was basi-cally a "Pyrrhic victory" for the supporters of European integration, where no realprogress was made.4 The launching of the euro and the possibility of enhanced co-operation in new sectors call for continued progress in integration, in making awhole range of essential matters common. And the principle of subsidiarity shouldremind us constantly that we have to help the local communities grow rather thantake competences away from them. Thus, the choice is not between a more fed-eral German vision and a French vision more respectful of the nation state. Thechoice is between going backwards, turning the euro into a fiasco, or movingahead, ensuring that progress - above ail qualitative progress - in markets justi-fies the incredible ambition of common monetary sovereignty (indeed, the cur-rency is the first of the externalities, of the common goods, that explain theresurgence of the American economy in the last decade, obviously along withother externalities such as the quality of scientific research, the completeness offinancial markets and so on). Thus, post-Nice takes us back to the Lisbon pro-gramme, where delays have accumulated.

The problems of the euro

There is one paradox to this story: the Nice-Stockholm retreats come at the mostdelicate moment in the last ten years of the'European Union's history, at a time

3 S. Gozi, F. Mosconi, "Il metodo comunitario al lavoro", il Mulino, vol.L, no. 1, 2001, pp. 23-33; A.Duff, "From Amsterdam Leftovers to Nice Hangovers", The International Spectator, vol. XXXVI, no.1, 2001.

4 It is ironic that the Irish voted against Nice in June, thinking they could block EU expansion.

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when it is printing and coining a new currency, which is to enter into circulation inJanuary 2002; during a crucial phase of the realisation of European Monetary Un-ion, the most ambitious project Europe has ever undertaken. One of the most wor-rying aspects of the weakness of the euro has been the doubt that it could reflect a .lack of confidence of the financial markets and, more generally, of the economicoperators in the process that has led to its launching. That it couid not only reflect,like any good thermometer, the relatively greater economic strength of the USeconomy (and, therefore, the dollar), but also conceal deeper and more deep-seated scepticism about the very feasibility of the process that has, since Maas-tricht, characterised the countries representing the core of the EU. In summary,the following are the strengths and weaknesses of the process leading to the euro:

• GradualismThe entire process has been organised into three distinct and successive

stages, with a system of parameters that measure the extent to which each coun-try deserves to participate in the euro. This has prevented the problems of onecountry from becoming the problems of all, which would have weakened the entireconstruction.

• EmulationCountries have given up their vices, but have received little indication of how

to become virtuous. This is obviously because it is in the interests of each countryto take advantage of the opportunities offered by a large market like that of theeuro: the "best" increase their shares of the market and this results in greater in-come and well being, which in turn consolidates a competitive process maximisingcomparative advantages, which becomes the real engine of further integration.

• Stability vs. growthSince the beginning of the euro project, Europe has been marked by substan-

tial instability (financial, monetary, exchange rate). Thus Europe's main aim -andthis is reflected in the DNA of the European Central Bank (ECB) - is to recover andmaintain stability. Unfortunately, during the nineties, at the very time when theeuro project was being launched, international terms of comparison changed: theAmerican economy revived with new priority being given to growth and to produc-tivity, even more than to production. In recent years, the ECB has continued to re-peat that its main objective is monetary stability because this is an essentialcondition for economic development, almost the opposite of the American FederalReserve, which pursues growth ... also because it produces stability.

• GlobalisationEurope is integrating more and more and launching the euro while the world is

becoming increasingly global and the dollar used more extensively. How canthese two processes be reconciled? And above all, how can they co-exist? In thefirst months of the year 2001, the situation was almost comic. Washington insisted

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that the ECB should do its part and reduce its interest rate to counter the weaknessof the European economy, dragged by the sluggishness of the American economy.The ECB responded that this was not its duty since the American slowdown wouldhave no impact on the euro zone economies. Thus, while the Fed knows that its poli-cies affect the world and these effects, in turn, have partial repercussions on the US(both are more rapid if transmitted not only through world trade - goods - but alsothrough the stock market - capital), the ECB seems to maintain that the euro-zoneis a "closed economy", only slightly conditioned by what happens in the US and, inturn, of little relevance for the American economy. There seems to be some confu-sion between objectives and instruments: while the ECB undoubtedly does not havea global mission and has not been given a mandate by the Treaty of Maastricht(which is, however, starting to be a little out of date) to act outside of the euro zone,this does not mean that Europe is isolated, that it is not completely immersed in theglobal world that has developed in the last ten years.

The fact that Europe is pursuing the dual objective of integrating a number ofcountries by means of a single currency and at the same time contributing to thegrowth of an increasingly global world should not conceal the fact that the two pro-cesses are complementary in some respects , but that they are alternative in oth-ers and therefore require choices. For example, liberalising markets erga omnes,as has often been done in the past ten years, is not a way of favouring the Euro-pean integration process, but of contributing to the growth of global markets di-rected from New York. It would be a whole different story if Europe were to goahead with the effective harmonisation of the rules of the various markets, makingthem integratable from a normative point of view, which is the priority at the mo-ment. The process undertaken in Stockholm as a response to the proposal of theLamfalussy Committee for financial markets5 goes in this direction and could rep-resent the way to strengthen the base on which the euro construction rests. How-ever, this should not be interpreted in a simplistic manner: the single currency, theeuro, is a financial asset and as such calls for financial integration. In reality, thequality of a monetary area depends on the relative characteristics of all of its mar-kets, which all have to be efficient. This is true of the labour market (which could

5 Committee of Wise Men on the Regulation of European Financial Markets. Set up in July 2000 andheaded by Alexandra Lamfalussy, the committee presented its report on 15 February 2001, recom-mending a four-level approach for new EU legislation. At level 1, proposals by the European Com-mission on the legislative framework for financial markets regulation are to be co-decided by theEuropean Parliament and the European Council. At level 2, the technical details are worked outFirst, the European Commission will consult the new European Securities Committee (ESC), madeup of representatives of the European Commission and the member states. This structure impliescertain legislative powers for the ESC. Then the proposals will be discussed with a new committeeof EU Regulators - the European Securities Regulators Committee (ESRC) - comprising the headsOf the competent authorities for securities regulation and supervision designated by each memberstate. After the ESRC's opinion, the Commission will make a proposal to the ESC, which will have totake a decision within a maximum of 3 months. Levels 3 and 4 relate to cooperation at the Europeanand national levels and enforcement of community law, respectively.

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well be the most important, but is also the worst functioning, even without consid-ering the problem of workers coming from outside the EU), but also of other pro-duction factor markets (think of the growing importance of energy and thedifficulties that emerged in Stockholm and afterward) and the product market,which has now begun to be transferred to the internet. How much will remain Euro-pean?

In conclusion, European integration is a process that started many years agoand may almost seem outdated today, in economic terms, given the developmentstending towards ever greater globalisation. The strong points of the euro projectwere gradualism, the emphasis on emulation and stability. But growth in a globalworld - which seems to be greater elsewhere - has now become the euro project'sgreatest weakness ... unless it adapts to the times, as it started to do in Lisbon.

'•',.'•:•-•'?<'.-•• Thb Lisbon ProcessThe Lisbon summit In March 2000 was devoted to economic reform. Lisbon agreed on a strategicgoal for the next decade - "to become the most competitive and dynamic knowledge-basedeconomy in the world capable of sustainable economic growth with more and better jobs andgreater social cohesion" - backed by specific proposals for reform in the areas of innovation, thesingle market, employment and social policy. Following Lisbon, economic reform has become anestablished part of the EU landscape, with annual meetings of the European Council to discussprogress in achieving this strategy and to decide what else needs to be done.

Innovation

• Legal frameworkfor E-commerce

• Fully liberalisedand competitivetelecoms marketin 2001 •

• Internet access foiall schools in 2001

• Community-widepatent in 2001

• Government pro-curement and ac-cess to basicpublic serviceson-line by 2003

-

Frnnomlr Rofnrm

• Faster liberalisa-tion in gas, elec-tricity, transport

• EIB to channel€1bri of venturecapital support toSMEs

• Reduction instate aids

• Financial Serv-ices Action Planimplemented by2005

• Risk Capital Ac-tion Plan Imple-mented by 2003

• Small Firms char-ter by 2000

• . Strategy for re-moval of barriersto services in2oon

Fmplnymont

• Increase EU em-ployment rate to70% overall and60% for women by2010

• Europe-wide database on jobs andtraining

• Benchmark provi-sion of lifelonglearning

• Award for compa-nies that invest inemployees

• More effectiveEmploymentGuidelines (Lux-embourg process)

• Increase per cap-ita Investments inhuman resources

Mnrlnrn RnrJal Agpnria

• National actionplans to combatsocial exclusion

• Halve by 201018-24 years oldsexcluded from la-bour market

• Report on sustain-ability of pensionsin EU

• Set up benchmarkfor improved child-care

_

Source: HM Treasury. European Monetary Reform: Meeting the Challenge, London, March

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How to build Europe

The Lisbon summit (March 2000) was particularly stimulating because it was thefirst time that Europe acknowledged the delays with respect to the new economycaused by its divisions. It was decided in Lisbon that, in the framework of a ten-yearstrategy, the monitoring of progress towards the new economy - of which the mostambitious definition is the "third industrial revolution", but even the most modest isan accelerated development process based on knowledge, innovation and meritoc-racy in universities and finance6 - would be carried out each year at the so-called"spring European Council". Hence the agenda of the Stockholm Council. But that,too, with its ambiguous results, turned out to be a disappointment.

It must be remembered that the current process of innovation, which for con-venience sake will continue to be referred to as "new economy", is based on a verystrong externality, an essential public good, the internet, which everyone can takeadvantage of without undermining the advantages of a competitive system. Past"industrial revolutions" were characterised by the dominant role of economies ofscale: the division of labour, specialisation, large firms - with production costs fal-ling as factories grew. But this is less important today; productivity increases be-cause of external economies, such as the sharing of knowledge and know-howfound on computers around the world. Thus the need to give priority, on the onehand, to establishing rules by which innovation can spread throughout Europeand, on the other, to setting up networks to ensure the sharing of knowledge.

This point of view reveals a particular virtue of subsidiarity: the European Un-ion and its bodies, the Commission and the Council, should be less concerned withthe particular interests of the single member states and should deal more (perhapsexclusively) with matters of common interest, starting with the market. At Stock-holm, (at least) two contrasting views of this process came to the fore: one moreattentive to the needs of the market, which has, by definition, to be built on a Euro-pean basis if it is to achieve the externalities required by the new economy; andthe other more focussed on the requirements of the single countries and the strongand weak points of their economies. With the approval of the proposals of the Lam-falussy Committee, the former line was adopted for financial markets. The latter,on the other hand, prevailed in energy policy, with France, backed by Germany,managing to cancel the commitment to complete the European energy market bythe year 2005.7

The result of Stockholm - one step forward and one step back - was a signthat there is no consensus on the Lisbon strategy. In fact, the main novelty in Lis-bon (in addition to the obvious measures in the fields of innovation, employment

6 E. Vaciago, G. Vaciago, La new economy (Bologna: il Mulino, 2001).7 It should be noted that in the British proposal, realisation of a European energy market was fore-

seen for 2003. See HM Treasury, European Monetary Reform: Meeting the Challenge, London,March 2001.

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and the social agenda) was the emphasis on reform, principally microeconomic,needed to achieve the well functioning European market required by both the euroand the new economy.

The improved functioning of the markets (capital, products and labour) is, infact, an essential part of the process by which the benefits generated by the com-mon currency should exceed the costs (theory of "optimal currency areas"). As al-ready stated, the introduction of the euro has made us give up our past vices(public debt, inflation, devaluations); it is clear that the benefits will accrue in pro-portion to our virtues. But these have yet to be pursued and enhanced through anefficient European market. On the other hand, the euro is the major positive exter-nality fuelling the new economy: the size of individual firms will count less if signifi-cant advantages are gained from the overall size of the economy.

Conclusion

In conclusion, the first important verification of the Lisbon programme was adisappointment, to be added to that of Nice. The disappointment was on aconceptual, even more than a political or technical plane, because no progresshad been made (on the contrary!) in the analysis formalised only one year earlieras the "Lisbon model". The new economy can be reconciled with Europeanintegration only if the latter is strongly and unitarily pursued. In that case, thenetworks and the euro will work together and represent two positive externalitiescontributing to the furthering of integration itself. The danger, on the other hand -should the postponement technique decided upon in Stockholm consolidate - isthat globalisation will continue along its own path to the detriment of integrationand, consequently, that the gap declared in Lisbon will never be bridged.

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