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The Economics of European Integration*
Chapter 1 ‘Economic Integration in Europe’ Chapter 2 ‘The Traditional Theories of Customs Unions and Single Market’ Chapter 3 ‘New Trade Theories and the Integration of Commodity Markets’ Chapter 4 ‘Common Market Theory’ Chapter 6 ‘Micro Economic Policies’
Sections marked with blue are cursory reading.

*Updated and adapted manuscript from J. D. Hansen and J.U-M. Nielsen, An Economic Analysis of the EU, McGrawHill, 1997.

2

CHAPTER

ONE
ECONOMIC INTEGRATION IN EUROPE
1-1 INTRODUCTION Economic relationships in Europe are changing. Trade, capital flows, migration and technology increasingly link the economies of the countries of Europe. Basically, this trend is due to the general globalization process on world scale which has taken place since mid of 20th century for all market economies but in Europe the process has become much deeper due to the regional integration in the European Union (EU). The EU includes most of the European countries as members, namely: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden, the United Kingdom, Estonia, Latvia, Lithuania, Poland, the Czech Republic, the Slovak Republic Hungary, Slovenia, Malta and Cyprus. These 27 countries have developed a formal system of close co-operation aimed at creating a cohesive economy encompassing the whole of the EU, and within which there is free mobility not merely of goods but also factors of production. In other words it is hoped that in many respects the 27 diverse economies can function as a single economic unit. This process of dissolving the boundaries of the segmented economies illustrates the concept economic integration.

The purpose of this book is to discuss economic integration in the EU within the framework of economic theory. Though economic relationships are examined at a fairly abstract level, the book has its roots in the economy of the EU as it exists today and as it may develop in the future. The first chapter provides a brief survey of the history of the EU, the political decision making process in the EU, its administrative apparatus or legal system. All the remaining chapters focus the analytical economic aspects of the EU.

International trade theory shows the potential for economic benefits of open economies. human rights and common values in general. and these benefits are more readily available as improvements in transport make the movement of goods cheaper and thereby reduce the friction of distance. . which covers the more general matters of the Customs Union. the Common Policies for Agriculture and Industry and the Rules of Competition. it should be kept in mind that the overall goal of establishing the EU is to ensure a peaceful Europe without devastating wars based on democracy. which was both signed in 1957. Market economies bound together by trade and movements of people and capital are less likely to keep alive past enmities. The Lisbon Treaty is a result of an evolutionary process where previous treaties have been transformed to new versions perceived to be a more efficient legal framework to meet the challenges of the EU. The European Atomic Energy Community (EURATOM) covers co-operation on the peaceful use of atomic energy. the Common Market. To integrate the economies economically is in this perspective only a mean or a strategy for securing a more peaceful Europe. The Treaty of Rome established the European Economic Community (EEC). The two treaties together make up the so-called Lisbon Treaty adopted in Lisbon by the Prime Ministers and Head of States of the EU Member States in 2007 and put into force in 2009. The Lisbon Treaty consists of provisions found in previous treaties as well as new provisions. and the Treaty of Rome and the European Atomic Energy Community Treaty. 1-2 THE LEGAL BASIS OF THE EU The legal basis for the European Union is the Treaty on the European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU). signed in 1951.3 Although this book thus concentrates on economic aspects. The founding treaties of the EU are the Treaty of Paris. This overall political motive is the key for the understanding of the development of the EU from the very beginning in the in 1950’s to the last the last enlargements of the EU with countries from Central and Eastern Europe in this century. The Treaty of Paris established the European Coal and Steel Community (ECSC) that regulates coal and steel production and markets.

The need for such changes has been more urgent when a large number of countries with different views become members of the Union. to assert its identity on the international scene.. The Treaty of Rome was amended both in 1986 by the Single European Act. democracy. Table 1-2 summarizes the development of the legal framework of the EU. The more recent treaties are the Nice Treaty.. To quote the most important aims and statements. and to strengthen the protection of the rights and interests of the nationals of its Member States through the introduction of a citizenship of the Union. the recent treaties changed the rules for decision making for the EU institutions in order to increase the capability to make decisions. . which laid down the guidelines for the establishment of the Single Market.. in particular through the implementation of a common foreign and security policy .4 The amendments to the provisions of the original treaties have both expanded and deepened EU integration. These latest three treaties deepened the cooperation between the Member States by introducing foreign policy. The preamble to the TEU proclaims the establishment of the European Union and lists a set of basic values and aims which all Member States share. and respect for human rights and fundamental freedoms and rule of law” “recalling the historic importance of ending the division of the European continent and the need to create a firm bases for construction of the future Europe” showing their determination and the determination: "to promote economic and social progress which is balanced and sustainable .. and in 1993 by the Maastricht Treaty which provides the legal basis for the monetary union. the Amsterdam Treaty and as mentioned above the Lisbon Treaty. Moreover. the Head of States who signed the treaty has: “resolved to mark a new stage in the process of European integration undertaken with the establishment of the European Communities” “confirming their attachment to the principles of liberty. defense police and policies for home and security affairs in the area of cooperation and common policy making. .

5 The overall goal for the European Union goes thus far beyond economic cooperation. which consists of ministers from all the member states. the European Court of Justice. The EU has supra-national elements in that there are institutions which have the power to make commitments which are binding on member states. the European Council of Ministers. The most central of these institutions are the European Commission. 1-3 DIMENSIONS OF EUROPEAN INTEGRATION 1-3-1 The widening and the deepening of the EU cooperation The development of the European Union has been a dynamic process where the political and economic framework has changed over time. and certain matters. The Commission has the "right of initiative". The benefits of economic cooperation should be seen as a lever for these ultimate goals. the European Parliament and the European Central Bank (ECB). require its approval. The European Central Bank conducts the monetary policy for the group of EU-countries which participates in the EMU. The Parliament has a right to be heard. such as the appointment of Commissioners and the annual EU budget. Basically the aim the Union is first and foremost to promote peace and ensure the basic values on democracy. that is it can make proposals for the implementation of EU policy and make plans for the further development of the EU. . human rights etc. To some extent the Council of Ministers can make decisions by majority voting. The Court of Justice is also a supra-national body in that it can pass judgment not only for individuals and firms but also member states. Decisions about the proposals and plans are taken in the Council of Ministers.

Germany. Belgium. for participating countries retain the right to decide individually what tariffs and quotas are imposed on countries outside the free trade area.6 Two dimensions of the integration process may be distinguished. and this is the term used in Table 1-1. The number of member countries has increased from the six founding members in the ninety fifties. This process of an increasing number of member countries is termed widening as the geographical domain of the EU is extended. the Netherlands and Luxembourg. A free trade area is a relatively weak form of economic integration. the North American Free Trade Agreement (NAFTA) and the Asian Free Trade Area (AFTA). France. that is without being restricted by the barriers of tariffs (customs duties) or quotas (quantitative restrictions) on trade. Well known examples of free trade areas are the European Free Trade Association (EFTA). that is all member countries impose the same tariffs on countries outside the customs union. and it is highly likely that Croatia will soon join the EU as the 28´s Member State. In future more countries are expected to join the EU as several countries have applied for membership. but there is a common external tariff. Such barriers are often called visible trade restrictions. A free trade area consists of a group of countries among which trade takes place freely. The other dimension of integration is related to the transfer of competences or policy areas from the national level to decision making at the EU level. . as is illustrated in Table 1-1. This process is termed deepening as the functional scope of the EU cooperation increases. Italy. to now the above mentioned 27 countries. The deepening process will be discussed more explicitly in the following. 1-3-2 A Conceptual Framework for Various Depths of Economic Integration Economic integration may be of varying depth. In a customs union there is not merely free trade between member countries.

This is true of both visible and invisible barriers. fixed exchange rates. A single market.7 Table 1-1 Main Types of Economic Integration No internal visible trade restrictions Common external trade restrictions No internal invisible trade restrictions Free mobility of factors of production and financial assets Free trade area Customs union Single market for commodities Common market Monetary union Economic union x x x X X X x x x X X X x x X x x x X x x Common currency Common economic policy In a single market for commodities (often shortened to single market and also known as an internal commodity market) all restrictions on trade within the market have been abolished. implies some exchange rate costs. A monetary union reflects an even higher degree of integration. has a common external tariff. The latter include such obstacles to trade as product standards that differ from country to country and the tendency of public authorities prefer to buy from domestic suppliers. establish a business and make passive investments in bank accounts or securities in any common market country without approval from any authority. any citizen of a common market country can obtain employment. unless such approval is also required of citizens of the country concerned. for it presupposes a common market and in addition either irrevocably fixed exchange rates or a common currency for all member countries so that economic transactions within the union are not affected by exchange rate uncertainty. like a customs union. However. and in addition has free mobility of factors of production and of financial assets. Thus. A common market presupposes a single market for commodities. the weaker form of monetary union. .

1-3-3 Stages in the Process of Deepening of the Economic Integration in the EU 1 The monetary unions that existed between Ireland and the UK or between France and its former African colonies are examples.K. co-ordination of government expenditures as stabilization policies are now a matter of common concern.S. An economic union is a monetary union in which the economic policy of member countries is extensively coordinated. a single market or a common market are all cases of negative integration. Economic union described in this way represents a lesser degree of economic integration than a monetary union. we distinguish between negative and positive integration. A monetary and economic union on the other hand includes elements of positive integration since it implies common or coordinated monetary. Negative integration consists of the removal of rules discriminating against partner countries in the union. as we see if we compare the integration of the countries of U. . with the looser integration of the provinces of Canada or the states of the U. fiscal and sector policies. a customs union. Since monetary union implies a unified monetary policy. but may be adjusted. Sometimes the term economic union is also used in a broader sense. The completeness of economic unions may of course vary. a high degree of uniformity in transfer payments (such as social benefits). in which case it may refer to a group of countries where economic policy is partly a result of joint decisions or mutual understanding among the members. The creation of a free trade area. In principle. Thus the term monetary union is sometimes used of a group of countries. and also coordination of sector policies such as taxation and subsidy of agriculture and manufacturing.8 The term quasi monetary union is sometimes applied where exchange rates in principle are fixed. for their essence is the removal of restrictions on the mobility of goods or factors of production and financial assets. Conceptually. This book has a structure based on the typology of economic integration shown in Table 1-1. however. Positive integration consists of common efforts to reach a specific objective. which merely have a common currency but do not have a common market or even a customs union1.A. the further integration brought about by an economic union mainly concerns fiscal policy. It must be mentioned. an economic union has uniform or very similar tax rates and procedures. that in the literature on economic integration the meaning of certain terms may vary.

Moreover monetary co-operation has moved forward by establishing of a monetary union. in its present form. Slovakia in 2009 and Estonia in 2011. Slovenia in 2007. Since some sectoral policies are very much the outcome of joint decisions. and since macro-economic policy will be increasingly coordinated with the creation of a monetary union. the Netherlands. when the first oil crisis occurred. to develop at least some elements of an economic union. is a fully developed customs union which already has the most important elements of a single market for commodities and a common market. Later this group was expanded by Greece in 2001. The EU has more or less continually moved towards closer economic integration. and the mid 1980s there was almost no progress. the EU moved downwards in Table 1-1. as the customs union was completed in 1968 and the outline of the common market was completed in 1993. The first plan for an economic and monetary union. As far as the cooperation goes beyond a customs union policy the condition for a well functioning cooperation may make it necessary to establish common policies on specific areas i. Finland. Between 1973. The initial group of EMU countries was Austria. Germany. Roughly speaking.9 According to the definitions of Table 1-1. only a subset of Member States participated in the euro partly because they have obtained the right to stay outside the EMU and partly because countries should fulfill the so-called convergence criteria for membership. the Werner Plan of 1970. The process of integration has however at times been interrupted or even reversed. and Spain.e. Luxembourg. Belgium. Ireland. It is apparent from the reviewing the functional scope of EU-policies. . France. Cyprus and Malta in 2008. Portugal. was never implemented. However. the euro. 1-3-4 The Economic Policy Areas of the EU Table 1-1 provide for an overall classification of various degrees of integration. The Delors plan was incorporated in the Maastrict Treaty and in 1999 the EMU was launched based on the common currency. the EU. Italy. the EU also contains elements of an economic union. but the Delors Plan of 1989 outlined more in details the idea of establishment of an Economic and Monetary Union (EMU) in the EU.

is clear evidence of changed policy priorities. (4) the Common Commercial Policy. the EU economic policy has now developed to include transport. which in principle requires the removal of such hindrances to trade as discrimination in public purchasing and differences in product standards. Apart from the five major areas. The third policy area supplements the second.10 Article 3 in the Treaty on European Union gives an overview of the various policy areas. the environment. while the following areas of major importance: (1) the Common Agricultural Policy (CAP). This ensures that a member country can neither obtain an unfair competitive advantage by importing raw materials or intermediate products more cheaply than other members. nor profit from cheaper imports which are re-exported to other members. The Common Commercial Policy means that there is a common external tariff and a common trade policy towards third party countries. . (5) the Regional Policy and (6) macroeconomic policies especially related to the Economic and Monetary Union (EMU). at least from an economic point of view. some of which have hitherto been relatively insignificant. social conditions. the strengthening of industrial competitiveness. (2) policies concerning the establishment of the Common Market. The CAP has traditionally been regarded as the most important EU policy area. However. The Regional Policy exists primarily to redistribute income from richer to poorer members and thereby promote economic and social cohesion. and the EU concerned itself with reducing not merely tariff and quotas on trade but also other hindrances to the movement of commodities as well as legal barriers to the free movement of labour and capital. The four previous policy areas may to a large extent be justified by considerations of allocative efficiency. research and technology. the developing countries and consumer issues. the labour market. and it still absorbs over half the EU budget. public health. (3) the Competition Rules (which also regulate subsidies). energy. for the Competition Rules are a prerequisite for an open and integrated market in that they limit the misuse of monopoly power and national subsidies in inter-country commerce. the establishment of a well functioning common market became a central matter. education. from the mid 1980s. although the rationale of the CAP is also to secure fair living standards for farmers. The establishment (in 1992) of the Single Market.

The Member States were only bound by the loose commitment to ‘regard their economic policies as a matter of common concern’ (TFEU. such as social policy and labour market policy. However this situation changed dramatically by the establishment of the EMU at least for those EU countries which participated in the monetary union. and others. In the light of this cohesion is a condition for achieving efficiency through integration. in regime optimization between efficiency and distribution more fundamental political dynamics should be taken into account. Moreover fiscal policy of the Member States should respect the principle of sound public finances defined by the Stability and Growth Pact approved by the Europe Council which is the highest level for decision making consisting of the prime ministers or head of states of the Member States. . If the distribution objective is to be sacrificed to efficiency in integration there is the risk that the integration process is derailed. In purely economic analyses a trade-off exists between efficiency and equality. and that economies are segmented again. EU policies build on a balance between efficiency considerations and distributional considerations. 2 In the following we refer to the number of Articles after the renumbering of Treaties in TEU and TFEU. Table 1-2 summarizes the development of the legal framework of the EU and the associated landmarks of European integration. paragraph 12). The centerpiece of this cooperation is the common currency the euro and for the euro area the monetary policy and exchange rate policy is centralized and administered by the new established institution the European Central Bank. Article 121. by both a desire to attain social goals and a belief that large differences in the area concerned will make it difficult to complete the establishment of the common market. Until the establishment of the EMU the EU have had little influence on macro-economic policy.11 Some of these policy areas such as transport are justified by efficiency considerations. However.

Members: As ECSC Non-military utilization of nuclear power. Germany. Austria. Lithuania. Spain. Jan. Belgium. Slovakia in 2009 and Estonia in 2011. Members: As ECSC New members: United Kingdom. Italy. The Slovak Republic. . and Sweden Obligations for increased efforts to improve employment Internal changes in the areas of voting Council judicial reforms and composition of the EUinstitutions New members: Estonia. Ireland.12 Table 1-2 Main historic events of the formation of the European Union Institution European Coal and Steel Community (ECSC) European Economic Community (EEC) Euratom First enlargement Second enlargement Third enlargement The Single Market The European Union (EU) Treaty (year of ratification) Treaty of Paris (1951) Treaty of Rome (1957) Treaty of Rome (1957) Revised Treaty (1972) Revised Treaty (1979) Revised Treaty (1985) Single European Act (1986) Maastricht Treaty (1992) Year of implementation 1951 Landmarks of economic integration Common policy for coal and steel production. Hungary. Greece entered in 2001. Members: France. Free mobility of factors of production. Slovenia. Cyprus and Malta in 2008. the Netherlands. Malta and Cyprus New members: Bulgaria and Romania Institutional reforms to increase the efficiency of the EU-decision making process and to make the EU more democratic and transparent in its decision making 1958 1958 1973 1981 1986 1986-92 1993 Fourth enlargement The European Union (EU) The European Union (EU) Fifth enlargement Revised Treaty (1994) Amsterdam Treaty (1997) Nice Treaty (2001) Revised Treaty (2003) Revised Treaty (2006) Constitutional Treaty (2004) 1995 1998 2004 2004 Sixth enlargement The European Union (EU) 2007 Rejected in referenda in the Netherlands and France . Finland. France. the Netherlands. and Finland. Source: Adapted from Table 1-1 in Hansen and Schröder (2001). Denmark. 2005 Contains essential elements of the Constitutional 2009 The European Union Lisbon Treaty Treaty (2007) (EU) Note (1): The following 11 EU countries participated in the euro from 1999: Germany. Latvia. Jan. Portugal. 1999. 1999 for a subset of EU countries (1) Introduction of euro notes and coins 1. The Czech Republic. Belgium. Poland. and Luxembourg Customs union. and Ireland New member: Greece New members: Spain and Portugal Formation of the Internal Market Plans for establishing the Economic and Monetary Union at the latest from 1. Italy. Jan. 2001 New members: Austria. Formation of the Economic and Monetary Union 1. Slovenia in 2007.

and the four largest EU countries (France. The relevance of this appears from Table 1-3 where GDP per capita is reports at current exchange rates in column 3 but in purchasing power parities (PPS) in column 4. underestimate living standards in the USA and overestimate them in Japan.3 Germany is clearly the dominant EU economy with about 20 per cent of total EU production. Such alternative are published regularly in the source quoted in the table. in purchasing power parity. Table 1-3 shows a set of key economic figures which enable both individual EU countries and the EU as a whole to be compared with the United States and Japan. however.13 1-4 EXTERNAL AND INTERNAL DIMENSIONS OF THE EU The EU forms a considerable part of the world economy. Italy and the United Kingdom) have about 63 percent of total EU production. Germany. What matters for differences in living standards is per capita income adjusted for differences of price levels. The EU's gross domestic product (GDP) is slightly larger than that of the United States for 2010 and about 3 times larger than that of Japan. 3 . represents the same purchasing power everywhere. that the figures for GDP are not adjusted for differences of price levels i. It appears from the table that the population of the EU is more than one and half times larger than that of the United States and nearly 4 times larger than that of Japan. in principle. Purchasing power parity theory can be used to calculate synthetic exchange rates so that one ECU. Comparing the figures in two columns illustrates that GDP per capita at current exchange rates exaggerate considerably differences in living standards within the EU.e. It is important to emphasize.

gross domestic product and gross domestic product per capita in EUcountries.2 73.18 17.4 281.5 5.5 16.2 123.86 121.4 48 56.7 87.7 46.5 132.46 35.051 347.2 39.548 40.5 60.3 114.9 107.248 10.5 0.8 7.5 5.9 42.2 56.5 1.134 118.1 281.2 43.2 398.7 113.9 34.948 2.84 26.9 178.5 71.3 28 28.1 66.4 0.9 5.4 95.5 38.7 171.307 14.8 32.85 6.7 12.3 2.9 156.5 106.5 351.3 111.89 354.4 10 2 0.1 104.6 62.4 130.6 16.4 1.6 101.9 92.1 96.7 48.2 117.3 38.1 127.6 11.4 1. Autumn 2010 1-5 FUTURE PROSPECTS .97 98.5 1.7 70.3 245.694 11.4 10.5 21.3 65.1 9.4 64.4 501.4 104.8 20 86 124.9 107.8 79.8 81.7 146.14 Table 1-3 Population.2 105.2 71.1 17.3 90.9 91.3 56.4 35. the USA and Japan.1 52 76.4 62.7 PPS Source: EU-Commission Statistical Annex of European Economy.490 229.4 1.2 3.7 90.4 112.2 124.9 100 37.7 80.2 10.1 114.4 4.9 232.8 100 57.3 78.923 4.1 148.6 10. 2010 Population (million) Gross domestic product (billion euro) Gross domestic product per capita (index EU-15=100) Current exchange rate Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden UK EU-15 Estonia Latvia Lithuania Poland Czech Republic Slovakia Hungary Slovenia Malta Cyprus Bulgaria Romania EU-27 USA Japan 8.7 310.1 117.29 585.9 95.

“Under the principle of subsidiarity. Article 49 of TEU emphasizes the openness of the EU by stating that "any European State which respect the values referred to in Article 2… may apply to become a member of the Union". The possibility to exit is stated in TEU Article 50.” It should be noted that the article makes it clear that subsidiary applies only to those areas that do not lie within the "exclusive competence" of the Community. the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States. . in areas which do not fall within its exclusive competence. by reason of the scale or effects of the proposed action. it supports it only where there is no clear argument for centralisation. TEU paragraph 3). Article 1 in TEU says that the treaty marks "a new stage in the process of creating an ever closer union of the peoples of Europe".15 Looking back we can see that integration in the EU has continually deepened as co-operation has become closer and closer. paragraph 1: “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements”. The Treaty on European Union therefore now includes as one of their overriding principles the following subsidiarity clause (Article 5. either at the central level or at regional and local level. A major skepticism among many EU-countries has developed on a further deepening of the EU-cooperation. for the members of the EU have different attitudes towards further integration. and it has widened with the successive enlargements of membership. but can rather. be better achieved at the Union level. Subsidiary does not therefore unambiguously support decentralisation. In the treaty on European Union the stage is set for continued development in the form of both deepening and widening. The continuation of these processes of widening and deepening presents many challenges.

A multi-speed Europe is one where all EU members agree on the long term goals of integration. 1-5-1 A Multi-Speed Europe and a Europe à la Carte Possibly the dilemma of the choice between widening and deepening can be avoided by renouncing the principle that the EU must have a homogeneous degree of integration and instead accept either a multi-speed Europe or a Europe à la carte. for it can choose to participate only in those elements of co-operation which it sees as advantageous. Croatia will most likely soon join the EU and a negotiation for membership for other countries is also expected. The possibility of enhanced cooperation may therefore ease the frustration of those Member States which have more ambitious plans for a deeper integration . The recent Treaties have granted the possibility for more Europe a la carte. The dilemma of the choice between widening and deepening is the main political challenge to further integration in the EU. In general more Europe a la carte has been allowed by TEU Article 20 paragraph 1”Member States which wish to establish enhanced cooperation within the framework of the Union’s non-exclusive competences may make use of its institutions and excise those competences by applying the relevant provisions of the Treaties…” A Europe à la carte is easier for an individual country to accept politically. Further widening may therefore block for a further deepening although the recent Treaties to some extent has addressed this problem in Ability to make decisions. In protocols to the TEU. but approach them at different speeds.16 That widening will take place seems as mentioned previously more probable. In other words each country has individual deadlines for solving the problems of adjustment brought about by the implementation of measures providing for integration. Europe à la carte or a Europe with variable geometry refers to an EU where the long term goal of homogeneous integration is abandoned. The widening in 2004 and 2007 from 15 to 27 member-countries and the prospects for further widening has raised a wide spread skepticism that the existing institutional capacity for decision making in the EU is sufficient. the United Kingdom and Denmark have got the option not to participate in the Monetary Union.

Local areas have cultural. If a national state is surrounded by trade barriers. Seen in this light. Integration in the EU reduces the dependence of local areas on the national state. for consumers and producers need access to a larger market and firms must ensure that their interests are protected when trade with other nations is regulated. transfers direct from the EU via. The EU Commission is therefore very reluctant towards such a fragmentation of the Union. manufacturing and services. 1-6 PLAN OF THE BOOK The book is divided into three parts: Part I. integration can give increased local autonomy within a nation state. Such a development would be in harmony the TFEU. and Monetary Union would subject local areas to EU rather than national monetary policy. it is of vital importance for the local area to have close ties to the national state. analyses the various forms of economic integration within the framework of welfare and growth theory. 1-5-2 Local Autonomy versus State Autonomy As emphasized by Alesina and Spolaore (1995). which is made up of Chapter 1. and they are thus to some extent protected against a sudden fall in living standards. especially the monetary integration in Europe. the Structural Funds can by-pass the national state. gives a background to European economic integration. the disadvantage of Europe a la carte is the risk of serious legal. . for example. Every local area has direct access to the Single Market. Local areas are also tied to the national state by the public sector's redistribution of wealth between regions. while Part III analyses macroeconomic issues. it is the EU which increasingly regulates agriculture. for ties between local areas and the national state are loosened as power and responsibilities are transferred from the national to the federal level. Part II. continued integration of the EU suggests a Europe of regions rather than a Europe of countries. economic and political differences which cause them to have their own ideas about the institutional framework of their region and such matters as how taxes are raised and on how money from the public budget should be spent. Article 167 which says that "The Union shall contribute to the flowering of the cultures of the Member States.17 However. which includes Chapters 2-6. political and administrative complications for the institutions and decision making processes of the EU when different policy areas involve different group of participating countries. while respecting their national and regional diversity and at the same time bringing the common cultural heritage to the fore".

Chapter 8 develops a macroeconomic model for a monetary union based on external free float of common currency and free mobility of capital. competition. partly at the abstract level by means of macroeconomic models. Efficiency and distribunal consequences of the agricultural. both visible and invisible. and partly in relation to the factual conditions within the EU. Central to these chapters is thus an analysis of the macroeconomic conditions for the countries who participate in a monetary union. Chapter 9 presents the frame work for the monetary policy in the EMU. as it is not certain that economic growth will distribute evenly in the various countries. Chapter 5 analyses the dynamic effects of economic integration. Chapter 4 deals with some further issues that arise when economic integration is deepened through the establishment of a common market. the basic rationale for establishing a currency union. . Chapter 7 discusses.e. However. first in the light of perfect competition and subsequently under imperfect competition. The mighty institution is here the European Central Bank (ECB) and the competences. Participation in a monetary union may influence the countries' GDP. institutional set up and experiences on monetary policy in the EMU are described in Chapter 9. Chapter 10 analyzes the framework for fiscal policy in the EMU especially the Stability and Growth Pact. Chapters 7-10 deals with macroeconomic issues related to the establishing of the EMU. are analysed. The Maastricht Treaty creates an Economic and Monetary Union (EMU) by 1999 at the latest. i. interest and currency rates. the Chapter will also throw light on the regional economic consequences of integration. the question of whether the setting up of a common market influences the growth rate in the EU member states over time. The possibilities to influence these variables by economic policy are analyzed. the price level. the balance of payments. based on the theory of the optimum currency area.18 In Chapters 2 and 3 the welfare effects of removing internal trade restrictions. subsidy and external trade policies are being discussed in Chapter 6 together with a more fundamental discussion of whether the EU is the right level for pursuing these microeconomic policies.

The own revenue consists of ‘traditional own resources’ which mostly is tariff revenue from imports to the EU and member States contribution which is partly related to the tax base for value added in the Member States and partly the Member States Gross National Income. Nearly half of the total expenditures is used to the common agricultural policy (CAP) while the budget to regional policy (support of least developed countries and regions) makes up about a third of total expenditures. see EUCommission (2008). paragraph 1 which says that ”All items of revenue and expenditures of the Union shall be included in estimates to be drawn up for each financial year and shall be shown in the budget. see Table A. Administrative costs make up about 8 percent of the total budget.e. Revenue consists of so-called ‘own resources’ and for a very little fraction of ‘other revenue’. …The revenue and expenditure shown in the budget shall be in balance” • The basis for establishing the EU-budget is the Financial Framework which is a multi annual budget of the yearly expenditures for a 7 years period. Total expenditures make up just about one percent of total EU Gross National Income throughout all years of the present Financial Framework. the expenditures and revenue of EU-institutions. .19 Appendix: The EU Budget This appendix provides a brief presentation of the EU budget i.1 for 2010. For a detailed description and analysis of the EU-public finance.3. At present the items of expenditures of the EU annual budget follows from the Financial Framework 20072013. see Table A. This principle is outlined in TFEU Article 310. The level and main structure of the expenditures is reported in Table A. The EU Budget is established in accordance to the following principles and guidelines: • Principle of budget balance. • The budget for revenue should be consistent with overall budget balance and commitments given by the Financial Framework.3. This structure of expenditures is quite stable in the present financial framework although the share of expenditures related to agriculture decline slightly while expenditures to support economic growth is on rise.

Table A. Similar to the expenditure structure the structure of sources of revenue is quite stable from year to year. Hence.0 1.9 141. see Table A1.0 10 35 43 1 6 6 100 Notes: 1) Such as expenditure to research and development. (6) Administrative expenditures for EU-institutions Source: http://ec. 4) Expenditures to justice and home affairs. 3) Most of these expenditures are related to the common agricultural policy (CAP). border protection. 2) Support of the least developed countries and regions.eu/budget/prior_future/fin_framework .1 Expenditure of the EU. In the present Financial Framework the ceiling of ‘own resources’ to GNI is 1. freedom. security and justice (4) EU as a global player Administration (5) Total planned expenditures Percent of total expenditure 14. the GNI-based resource is the ‘residual resource’ which is calculated so it closes the gap between total expenditures and the total revenue from the other sources of revenue. This is also the case for VAT-based contribution.20 The tariff revenue depends by and large on external conditions out of control of planner of the budget. • Overall budget constraint.9 7. which is calculated for the individual countries in accordance to a given procedure. The GNI contribution in 2010 covers about 75 percent of the total budget while the VAT contribution and the ‘traditional own resources’ only make up 11. immigration and asylum policy.7 7.4 60.europa. 2010 Billion Euro Sustainable growth • Competitiveness for growth and employment (1) • Cohesion for growth and employment (2) Preservation and management of natural resources (3) Citizenship.12 percent each of the total budget. 5) Expenditures to external actions including pre-accession support. This leaves a small margin between the ceiling of total ‘own resources’ and total planned expenditures in accordance to the Financial Framework. In the Financial Framework impose an overall ceiling on total own contribution to GNI.2 49.24 percent. education and training and trans – European networks.

eu/budget/prior_future/fin_framework 7 36 44 1 5 6 100 1.2: The Financial Framework 2007-2013 Percent of total expenditures 2007 2010 2013 Sustainable growth • Competitiveness for growth and employment • Cohesion for growth and employment Preservation and management of natural resources Citizenship.7 2.18 10 36 40 2 6 6 100 1. fines etc Source: http://ec.europa.9 11 75 2 100 Note: 1) Tax on EU – salaries.eu/budget/prior_future/fin_framework .europa.0 92.1 Percent of total revenue 12 14.14 Table A.21 Table A. 2010 Billion Euro ‘Own resources’ Traditional own resources (customs duties from inputs) Member State contribution related to: • Value added tax revenue (VAT-base) • Gross National Income (GNI-base) Other revenue (1) Total revenue 14.1 122. security and justice EU as a global player Administration As percent of total EU Gross National Income (GNI) Source: http://ec. freedom. proceeds from sales of EU properties.02 10 35 43 1 6 6 100 1.3 Revenue of EU.

Hansen J. 4 ed. and P.22 REFERENCES Alesina.5050.pdf . Oxford University Press. National Bureau of Economic Research. On the Number of Nations. European Integration: An Economic Perspective. Massachusetts. Oxford EU Commission (2008).. European Union Public Finances. Working Paper No. Bruxelles. Schröder (2001) ‘Economic Integration in Europe: Setting the Stage’. Enrico (1995).. H. http://ec.D. D.eu/budget/library/publications/financial_pub/EU_pub_fin_en. Cambridge.europa. (ed). Alberto and Spolaore. chapter 1 in Hansen J.

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